1 Thing Investors Overlooked in Solazyme's Breakthrough

Last week, synthetic biology and industrial biotechnology company Solazyme (NASDAQ: SZYM  ) announced first-quarter earnings. The developmental-stage company didn't have much to report in terms of revenue as it builds out the initial wave of commercial capacity, but it did update investors on a new ability to tailor its portfolio of renewable oils. Since the company missed on revenues and beat on EPS, investors have to figure that some of the pop in share price in the days following the announcement is directly attributable to the latest tailoring capability.

However, investors may be getting a little carried away with the news. One thing the market seems to have overlooked about the latest scientific breakthrough is that it will have the biggest impact initially on nutritional oils. Unfortunately, the regulatory atmosphere surrounding novel nutritional oils is still up in the air on multiple continents.

Does tailored equal novel?
Solazyme Roquette Nutritionals, or SRN, currently sells two products: Almagine HL Whole Algalin Flour and Almagine HP Whole Algalin Protein. European regulatory agencies consider neither product novel, and it's allowed to be sold right now. In the United States, Solazyme classified each item as Generally Recognized As Safe, or GRAS, through a self-affirmation process, and the Food and Drug Administration issued its own GRAS, no questions asked, about 12 months later.  

The company is going through a similar process for newly developed oils in the United States and hopes to attain an FDA GRAS, no questions asked, for each product. Currently, companies aren't allowed to sell commercial quantities of products based solely on a GRAS self-affirmation, although millions of tons of oils are sold as such each year. The problem arises with the FDA's answer to the question, What is novel? 

Should the FDA consider any of Solazyme's nutritional oils as novel oils, the company may expect some questions to be stapled to the back of each issued GRAS. That could lengthen the costs and timeline associated with regulatory approvals and delay the launch and sale of products from commercial facilities. Solazyme is looking to nutritional oils to fill an important part of initial capacity next year, so any delays could set back revenue expectations.

The question of novelty is even more uncertain in Europe. CEO Jonathan Wolfson has already stated that should a nutritional oil be classified as novel on the continent, regulatory approval could take years. Why is that a big deal? The SRN facility in Europe is currently undergoing a phase 2 upgrade to 5,000 metric tons of annual capacity. The company could probably easily fill that capacity without the products currently in development, but a future phase 3 upgrade to true commercial scale -- 50,000 metric tons of annual capacity -- is certainly caught in the crosshairs.

Foolish bottom line
Whether investors are just excited about a smaller loss than expected is unknown. But if the market is pricing in the latest tailoring capability, I think it's doing so prematurely. Nutrition segment margins are expected to be north of 40% once the biomanufacturing process is optimized -- and that could take more than the 12 to 18 months needed to reach nameplate capacity after each biorefinery opens. Just remember to keep a watchful eye on updates from Solazyme management about the regulatory uncertainty facing these products. It's one of the biggest immediate risks facing the developmental-stage company.

Be on the lookout for further coverage on Solazyme from The Motley Fool in the next several weeks. If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For free access to this special report, simply click here now.

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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 May 13, 2013, at 7:48 PM, EmFetch267 wrote:

    Back to your old self again. Skepticism with no value attached. Just warnings. Worse than pumpers, maxx.

  • Report this Comment On May 13, 2013, at 8:27 PM, TMFBlacknGold wrote:

    @EmFetch

    It's called balance. Also, reality.

    --Maxxwell

  • Report this Comment On May 13, 2013, at 8:55 PM, lntwo wrote:

    How did you conclude that a SRN III construction is "certainly caught" by the development of novel edible oils? I've followed the CCs and I've not heard a causal relationship drawn between these two. Are you saying they can't sell <=50,000MT of non-GMO in Europe? What do you see as their non-GMO market capacity in Europe?

    You seem to be saying that just b/c they have these novel oils the production of all their edible oils is in question. They simply would not run that new strain.

  • Report this Comment On May 13, 2013, at 9:18 PM, TMFBlacknGold wrote:

    @Intwo

    Remember that oil profiles under development are definitely factored into future expansion. SRN likely can support more than 5,000 MT of non-novel products in Europe each year, but the economics might not work out to expand the facility to 50,000 MT. If they can comfortably sell, say, 25,000 MT of non-novel products that is a big step up from phase 2 capacity, but the JV still may not want to pull the trigger on phase 3.

    The regulatory issues surrounding oils in development were discussed in the year-end 2012 conference call. Margins are generally higher on oils that could be caught in this grey area, so revenues would certainly be affected depending on the determination of novelty.

    --Maxxwell

  • Report this Comment On May 13, 2013, at 10:13 PM, EmFetch267 wrote:

    You seem to be balancing your lack of a stance quite well, but not too well, but somewhat well.....

    That reality hasn't realistically been to useful though.

    So should I sell now because a possible plant may face delays? Should I neglect the future of this company that has multiple product lines out from underneath the fda's scary eye? You warn of nutritionals and make no mention of chemicals or personal care. Why not? Not enough of a fear factor?

  • Report this Comment On May 13, 2013, at 10:31 PM, lntwo wrote:

    Yes they were discussed but where in the discussion was it stated that there would be an impact on expansion?

    Arguably the margins are the highest on non-GMO food production. They basically just sonicate the algae, filter, dry and serve with no byproduct to process; I'll bet the lowest production value of all their lines.

    For all we know the separation and growth costs for the novel oils may limit margins and market to low volume high cost applications such that the weighted contribution to revs and margins is minimal. So how can you be certain that revs/margins would be affected.

    Your articles are strange in that you phrase your premises in the subjunctive and conclusions in the declarative. I don't see any meaningful attribution or analysis, just hand waving.

    nrn

  • Report this Comment On May 14, 2013, at 1:33 AM, seattle1115 wrote:

    Hmmm. This is an issue I hadn't considered. Given the enormous pressure to cut back on palm oil and other tropical oils I still think that there will be a lot of pressure to get SZYM's products into those market spaces as quickly as possible, but you've certainly given me some food for thought here.

  • Report this Comment On May 15, 2013, at 10:54 AM, TMFBlacknGold wrote:

    @seattle1115

    No problem. It's all there in Solazyme's SEC filings under Risk Factors.

    --Maxxwell

  • Report this Comment On May 18, 2013, at 10:40 PM, lanceim59 wrote:

    "Be on the lookout for further coverage on Solazyme from The Motley Fool in the next several weeks."

    This is so funny! The Motley Fool has proven to be the least credible source of factual information.

  • Report this Comment On May 22, 2013, at 10:09 AM, lntwo wrote:

    Just a peek a the implications of designability:

    "Human milk fat substitutes. Human milk fat (HMF) contains L, namely oleic (30-35%), palmitic (20-30%), linoleic (7-14%) and stearic acids (5.7-8%). Unlike in vegetable oils and in cow’s milk fat, in HMF, palmitic acid, the major saturated fatty acid, is mostly esterified at the sn-2 position of the TAGs, while unsaturated fatty acids are at the external positions. The fatty acid profile of HMF has a crucial effect on its digestibility and intestinal absorption in infants. In fact, the presence of palmitic acid at the sn-2 position provides a more efficient absorption of palmitic acid as sn-2 monoacylpalmitate (López-López et al. 2001). The use of vegetable oils and cow’s milk fat as a substitute of HMF in infant formulas may cause a deficient calcium and fatty acid absorption, due to the formation of insoluble calcium soaps with saturated fatty acids released by the action of the sn-1,3 specific pancreatic lipase (Sahín et al. 2005a). Therefore, the production of SLs resembling human milk fat has been a challenge for the food industry".

    SLs = Structured Lipids

    The potential use of lipases in the production of fatty acid derivatives for the food and nutraceutical industries

    Suzana Ferreira-Dias1 · Georgina Sandoval2 · Francisco Plou3 · Francisco Valero*4

    For the few that waste their time on the MF posts (I'm taking a shower after this), read the literature. The food and polymer industries crave the ability to produce at scale structural enantiomers. yep, that's right, the polymer industry too.

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