Commercial Life Catches up With Solazyme

Throw all of your revenue projections out the window for now. Renewable oils manufacturer Solazyme (NASDAQ: SZYM  ) started out the week with some bad news. The company announced that it was dissolving its joint venturewith Roquette Freres -- a mutual agreement -- after the two had "divergent views on an acceptable commercial strategy, timelines for manufacturing, and the marketing of joint venture products". Roquette remains committed to microalgae as a raw material and plans on continue developing non-genetically modified microalgae ingredients.

It marks the first time that the company has had a major setback and serves as a reminder to stay on your toes when investing in the turbulent industrial biotech industry. While it certainly isn't good news in the short or long terms, it isn't all bad news, either. I know that sounds hard to believe given the dismal view investors got of the inner workings of the joint venture Monday morning. However, there are several things investors and potential investors need to know after the change in circumstances.

The bad news
Well, Solazyme Roquette Nutritionals (SRN) is no more. What does that mean? The commercial facility being developed in Europe -- which was owned 100% by Roquette, anyway -- is no longer going to contribute oils for the company's top and bottom lines. A phase-two expansion of the facility to 5,000 metric tons (MT) of annual capacity was under way and expected to be ready for ramp-up this month. A phase-three expansion could have boosted total annual nutritional oils capacity to 50,000 MT in later years.

That missing production is a slight blow in the short term. SRN was only going to contribute 2,500 MT of oils by the end of 2014 and, if expanded further, only 25,000 MT. By contrast, Solazyme will capture much larger production volumes with its partner Archer Daniels Midland (NYSE: ADM  ) and in its joint venture with Bunge (NYSE: BG  )

Biorefinery

Nameplate Capacity

Nameplate Operations By

Solazyme Capacity

Clinton, Iowa

20,000 MT

Mid-2015

20,000 MT

Moema, Brazil

100,000 MT

Early to mid-2015

50,000 MT

Source: SEC filings

The Clinton facility will eventually be expanded to 40,000 MT and 100,000 MT -- all of which will be owned by Solazyme. The Moema facility, being jointly developed with Bunge, will not be expanded under current agreements. However, the two are expected to add an additional 200,000 MT of capacity at other locations (half-owned by Solazyme) to their venture by 2016, meaning that it would be operating at full nameplate capacity by mid-2017 at the latest.

Total annual nameplate production without SRN will only drop from 72,500 MT to 70,000 MT by the time the middle of 2015 rolls around. Longer-term production, including planned but uncommitted capacity with Bunge, will be axed from 275,000 MT to 250,000 MT. That represents about $75 million-$125 million in annual revenue in the long term (2013 revenue will not be affected). 

The good news
There is some good news to go around. The decision to dissolve the joint venture is not related to technological setbacks, but rather timelines that could be made to satisfy both companies. Additionally, Solazyme still retains the nutritional oil profiles it has developed. Depending on regulatory hurdles in South America and the United States (the FDA recently granted regulatory approval for another nutritional product), the company can manufacture nutritional oils at Clinton and Moema with upgrades to downstream processing equipment. It would require Bunge's approval in Brazil, but the firm has expressed interest in food oils in the past.

What I find interesting is that the company may actually find it easier to fulfill initial volumes at its larger facilities. Whether or not management has major off-take agreements for specialty chemicals ready to go remains to be seen, but adding nutritional oils to the mix could alleviate some of that pressure by expanding the potential customer base. It also isn't out of the question that another food partner would be brought in to build a new facility for nutritional oils. 

Foolish bottom line
This was surprising news for investors, but it isn't necessarily all bad news. Solazyme will now miss out on $75 million-$125 million in future revenue per year from the facility. However, this will allow it to perhaps expedite commercialization of nutritional oils and focus on manufacturing operations in Brazil and the United States. If you can see the company's amazing long-term potential, then perhaps you will see this as a buying opportunity. I still have concerns about analysts' projections for the company's revenue that need to be settled, although I will certainly look to buy shares if shares slip much further. 

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Read/Post Comments (12) | Recommend This Article (4)

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 June 24, 2013, at 5:55 PM, EmFetch267 wrote:

    For the first time in a very long time, bravo. Well explained, max.

  • Report this Comment On June 24, 2013, at 6:18 PM, TMFBlacknGold wrote:

    @EmFetch267,

    Nah, you praised my article about Exxon and SGI. But it is few and far between from you =P. To each his own.

    --Maxxwell

  • Report this Comment On June 24, 2013, at 7:38 PM, EmFetch267 wrote:

    I concede it is hard to keep up when you spam my news with all your reporting about my favorite company. You write about this company a lot for someone who supposedly has no interest in it.

    You also get quite a bit wrong and make some foolish accusations. But then again I should expect nothing less from the fool.

  • Report this Comment On June 24, 2013, at 7:45 PM, TMFBlacknGold wrote:

    @EmFetch267

    I welcome you to point out all of my errors and false accusations. You could be a bit more open-minded to the risk side of the equation in my opinion. Until then I don't think we will see eye-to-eye on the immediate state of affairs at the company.

    --Maxxwell

  • Report this Comment On June 24, 2013, at 9:39 PM, EmFetch267 wrote:

    Sure! Why are you even talking about anything GMO related???

    Heres your quote:

    "Apparently, Roquette -- along with the rest of Europe -- is not too thrilled about using genetically modified organisms in its food."

    Whoooooooooops! Someone doesn't even know what srn was created for.

    Way to go, fool. Was going to let it slide before your ego got ahead of yourself again.

  • Report this Comment On June 24, 2013, at 9:50 PM, TMFBlacknGold wrote:

    @EmFetch267

    Funny thing about that:

    "Roquette has been a believer in microalgae as a raw material since 2008, and it is well positioned to independently continue with the development of non-genetically modified, innovative microalgae-sourced ingredients for nutritional applications. Roquette has invested significant resources and know-how in the commercialization of the microalgae-based food ingredients and remains committed to meeting market demands, while aligning the timing of its market launch and financial resources with its overall business objectives."

    That is Roquette's response to the news.

    --Maxxwell

  • Report this Comment On June 25, 2013, at 7:44 AM, tradergcb wrote:

    Funny thing about that:

    "Roquette has been a believer in microalgae as a raw material since 2008, and it is well positioned to independently continue with the development of non-genetically modified, innovative microalgae-sourced ingredients for nutritional applications. Roquette has invested significant resources and know-how in the commercialization of the microalgae-based food ingredients and remains committed to meeting market demands, while aligning the timing of its market launch and financial resources with its overall business objectives."

    That is Roquette's response to the news.

    --Maxxwell

    ----

    Ummm,..okay, but does Roquette say that SRN was going to produce genetically modified food???

    I'll help you out here...the answer is NO.

    If I were Solazyme management I would consider legal action.

  • Report this Comment On June 25, 2013, at 8:54 AM, TMFBlacknGold wrote:

    @tradergcb

    I realize that not all of the nutritional oils being developed were from genetically modified strains, but to my understanding any tailored oils developed by the two would have to come from such a strain. The whole point of tailoring an oil is having control over the micobial pathway. Wild-type algae aren't going around churning out commercial quantities of tailored oils.

    --Maxxwell

  • Report this Comment On June 25, 2013, at 9:05 AM, EmFetch267 wrote:

    You just dont get it do you? There were no tailored oils with SRN. Terrible research, Maxxwell.

    You should get your story straight before you pretend to be an expert on it.

  • Report this Comment On June 25, 2013, at 9:32 AM, tradergcb wrote:

    I sent your article to Solazyme's general counsel to review.

  • Report this Comment On June 26, 2013, at 9:45 PM, TMFBlacknGold wrote:

    @EmFetch

    "You just dont get it do you? There were no tailored oils with SRN."

    Yes I understand, but not wanting to commercialize tailored oils going forward could have been a reason for the dissolution. It certainly fits under "divergent views for commercial strategy".

    Maxxwell

  • Report this Comment On June 27, 2013, at 7:59 PM, EmFetch267 wrote:

    There were no tailored oils on the table, Maxx. It was never on the agenda nor was it covered under the deal. SRN was a non-GMO effort. How can I say it any clearer??

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