What Does Solazyme's 500,000-Liter Fermenter Really Mean?

At the end of 2012, renewable-oils manufacturer Solazyme (NASDAQ: SZYM  ) announced that it had performed two upstream process runs in 500,000-liter fermenters. If the reports of linear scale-up are true, then Solazyme will go down in history as the first next-generation platform to reach such a volume. And while two half-runs are hardly enough to reach the company's ultimate goals, the news could lead to much bigger and better things.

This is just a small piece of the puzzle on the way to a disruptive future that doesn't account for selling prices, off-take agreements, production costs, and market adoption -- all things that will be crucial for a successful investment that I will delve into in future articles. Nevertheless, let's look into the story and discuss what 500,000 L means for the company and investors. But first, let's take a quick detour to discuss the dangers of only looking at the reward side of an investment.

You can't afford to speculate
The public darling of the industrial biotechnology industry has inspired plenty of speculation, especially from those who don't fully understand the industry. If 2012 taught us anything, I hope it was that speculation can be very dangerous in this industry. Consider how the following companies fared on their 400th day on the market compared with their overhyped IPO closing prices:

Company

IPO Closing Price

400th Trading Day Closing Price, % Difference

Codexis (NASDAQ: CDXS  )

$13.26

$4.98, (62.4%)

Amyris (NASDAQ: AMRS  )

$17.23

$2.83, (83.6%)

Gevo (NASDAQ: GEVO  )

$17.10

$3.27, (80.9%)

Solazyme

$20.71

$7.75, (62.6%)

Source: Historical data provided by Google Finance.   

Dozens of red flags were visible when each company went public and remained in place last year, but horrendous projections from wishful bloggers, writers, and analysts (with skin in the game) got in the way.

De-risking or premature jubilation?
As a bioprocess engineer, I find it disappointing to see a lack of discussion about the risks involved. Don't get me wrong -- steady progress is being made, and Solazyme's announcement in December only enhanced the industry's commercial prospects. Let's just not forget that there were only two partial runs to brag about -- a questionably small amount of data points to throw around words like "de-risking." Celebrating too early has doomed other companies in the recent past.

Last July, Gevo CEO Dr. Patrick Gruber announced the company had shown it could "successfully ferment isobutanol in large (about 950,000 L) commercial fermenters, isolate the product, and get it into tanks and railcars." Just four months later, the company admitted that production at its Luverne, Minn., facility would switch to ethanol production as engineers worked on increasing yields of isobutanol. Spin or not, the market didn't like it.

In 2011, slow-motion train wreck Amyris hit snags at 200,000 L fermenters, which eventually knocked the company's timeline back considerably. The company is now focusing solely on its Paraiso biorefinery and should announce important updates when it reports earnings Feb. 19. With corrections to initial expectations, management team turmoil, and ballooning costs behind it, Amyris will attempt to gain traction in 2013.

Troubles at Codexis and LS9 have little to do with scale (so far), as the companies have demonstrated the ability to operate at 150,000 L and 135,000 L, respectively. Codexis suffered a massive blow when Royal Dutch Shell decided to leave for more immediate returns on the thermocatalytic platform of Virent. Now on its own with a new management team in place, the company faces a make-or-break year in 2013 as it desperately seeks partners for its cellulase enzymes. Meanwhile, LS9 has completed multiple runs producing fatty alcohols in its recently opened demonstration-scale facility in Florida. The company, in need of cash, may be thinking twice about its original plans to forgo an IPO.

What's in a number?
Now, what does 500,000 L really mean? I've read some pretty spectacular calculations since the announcement was made from people trying to determine how much oil the company could produce per run. Unfortunately, the numbers are pretty useless. Why? Investors won't know the process metrics (things like yield, efficiency, on-stream factors, and so on) for Solazyme's heterotrophic algae platform anytime soon, if ever.

The following simplified engineering principles should help investors realize just how little is actually known.

Bioreactors operate at working volume, which is usually 80% of tank volume. That's because the tank needs empty space for fermentation broth (an annoying byproduct), air, and a safeguard against interns who add too much of anything. That immediately sets the maximum production level of a 500,000 L tank to 400,000 L of product -- and we haven't even begun fermentation. Next, knowing that the company's algae contains 80% oil further lowers the bar to just 320,000 L of maximum product per run.   

The 320,000 L figure will be reduced further by fermentation yield (the tank contains more than just crowded algae cells), instrument displacement (agitator blades, temperature probes, and internal piping take up room, too!), success factor (inevitably, some runs do not meet the standard and must be thrown out), and downstream efficiency (separation loss, refining loss, and the like). Nonetheless, we can deduce that less than 64% of total tank volume will actually go to product for the company.

That may sound depressing at first, but all sustainable chemical companies will face similar constraints. In fact, biopharmaceutical manufacturing platforms can often have total product yields well below 50% because of strict purity guidelines. I just want to help investors understand the ins and outs, no matter how big or small, of the companies they own.

The fact remains that Solazyme is in rarefied air at 500,000 L. 

Foolish bottom line
I admit that I don't have all of the answers, but I do want to help the world invest better. I hope what I've shown you illustrates why it's dangerous to read too much into speculations and gives a brief inside glimpse into the engineering aspects facing the industry. The "coolness" of a technology means little in terms of financial opportunity: I still want investors to acknowledge the risks that lie ahead.

Nevertheless, I remain cautiously optimistic that Solazyme will successfully reach the 750,000 L fermenters needed to meet economic production of its renewable oils. The potential markets are huge, and the message it would send to the world would be profound. Solazyme's great relationship with its partners and track record for hitting milestones on time should comfort investors as well. Do you think Solazyme can grow into the disruptive game-changer it has set out to be? Let me know in the comments section below.  

Solayzme's specialty oils could make a huge splash, but dinosaur sauce will continue to run the world for the foreseeable future. If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.


Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2013, at 4:24 PM, sampson01 wrote:

    This is a three headed monster.....it's not all about just fuel.

  • Report this Comment On February 17, 2013, at 4:49 PM, TheDinger wrote:

    Maxx,

    Kudos for the informative article! I enjoyed your review of the the biotechnology sector and the companies involved, and the risks involved. And I was not aware of the significant disparity between manufacturing capacity and the true end-volume production quantities -- you point out factors that I did not account for nor anticipated.

    I look forward to your future articles, and your commentary on Solazyme.

    Best regards,

    Dinger

  • Report this Comment On February 17, 2013, at 8:04 PM, TMFBlacknGold wrote:

    @sampson01

    Correct, but we need to see some major off-take agreements for higher-value oils/products. They're certainly coming though and it will be exciting to see which big partners the company will bring on-board.

    Thanks for your comment,

    --Maxxwell

  • Report this Comment On February 17, 2013, at 8:06 PM, TMFBlacknGold wrote:

    @TheDinger

    Thanks for reading. I have a series of articles on Solazyme coming out over the next several weeks, so be sure to keep an eye out for them.

    --Maxxwell

  • Report this Comment On February 18, 2013, at 12:54 AM, seattle1115 wrote:

    Thank you for this article. Most of the analysis I see of the company and its potential seem to fall into two categories: wildly optimistic discussions based on a shallow understanding of the processes involved, and wildly pessimistic discussions based on a similarly shallow understanding of the processes involved. Neither of these is particularly helpful, of course. I have seen only a handful of articles written by people who seem to know what they're talking about, and I find all of them - optimistic, pessimistic, or somewhere in between - immensely valuable.

  • Report this Comment On February 19, 2013, at 1:10 PM, peteyguy wrote:

    Great article, Maxx, which I read the day you first posted... I took the opportunity to read it again.

    I look forward to the rest of your series!

  • Report this Comment On February 19, 2013, at 5:29 PM, MayaPinion wrote:

    Whether or not Solazyme neglected to notify us that they had to account for the volume of temperature probes in their reactors (2 of them account for about .5 l), the big news remains: They had a successful 4X scale-up.

  • Report this Comment On February 27, 2014, at 1:20 PM, TMFBlacknGold wrote:

    All,

    Just a note, Solazyme has since stated that the final volume needed for economic production will be 625,000 L fermenters, down from the 750,000 L figure stated in the S-1 filing.

    Maxxwell

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