Did Solazyme Just Get Riskier?

Alternative oils play Solazyme (NASDAQ: SZYM  ) may have just gotten riskier; apparently, many investors think so. Unlike many stocks today, Solazyme's trip to the woodshed is hinged on actual news and, unfortunately, it's one of the market's biggest decliners as of this writing. Today we learned that one of its partnerships will be dissolved within weeks.

Solazyme and France's Roquette Freres will no longer work together on creating food additives. Solazyme cited "divergent views on an acceptable commercial strategy and timeline for the manufacturing and marketing of joint venture products" as the cause.

Solazyme is more than a biofuels play like fellow biofuels upstarts like Amyris (NASDAQ: AMRS  ) and Gevo (NASDAQ: GEVO  ) . I purchased shares of Solazyme for the Prosocial Portfolio (I hold shares in my personal portfolio, too) not only for its impressive foray into a nascent field, but also because it had already inked some impressive partnerships. Meanwhile, its alternative oils go much further than simply trying to provide alternatives to fossil fuels. Its microalgae-derived oils can also be used in skin care and food.

The Roquette Freres deal was a clear example of that differentiation. Under the agreement, Roquette would shell out the capital for manufacturing facilities and Solazyme would have provided its cutting-edge technology. The resulting oils were supposed to increase foods' nutritional content.

Furthermore, Roquette isn't Solazyme's only big partner for the nutritional additives market. It also has active partnerships or joint ventures with Unilever, Bunge, and Archer Daniels Midland.

Maybe investors shoudn't freak out too badly, though. The potential for situations like this one is outlined in the company's Form 10-K, so speed bumps aren't particularly surprising. Solazyme's risk factors clearly state the potential challenges due to its dependence on its partners.

Among the previously disclosed risks: Solazyme's lack of control over how quickly its partners can move on commercialization. For example: "Further, we may have limited control over the amount or timing of resources that any partner is able or willing to devote to production and processing of our products." That seems to echo this very situation. In addition, Solazyme got specific, stating that its relationship with Roquette might not be successful, so a dissolution wasn't out of the question.

This isn't exactly comforting news -- there's a lot of "wait and see" here -- but I'm not a proponent of the kind of panic selling going on today. Granted, a nearly 20% fall feels dreadful, but we shouldn't rule out that the partnership's dissolution may actually end up being better for the long term, not worse. Solazyme said that the failed partnership will not affect this year's revenue; if it can accelerate ramping up its business, then it could be a strategic positive for its shareholders.

Meanwhile, compare Solazyme to some of the other biofuels companies. Amyris is currently in legal hot water due to its consistent inability to get its fuel production up and running at all. News of lawsuits has overshadowed any sign of good news.

Several days ago, another rival, Gevo, which enjoys the backing of France's Total, finally restarted its isobutanol plant that it shut down in September due to contamination issues. The shutdown had resulted in a scary 92% decrease in revenue in the third quarter, and while Gevo's now getting back into the game, it's obviously lost traction and time, and the plant isn't even back to full production capacity yet.

Solazyme isn't for those averse to risk, but it's still ahead of the game as many other similar companies have struggled to get their technologies into the commercial phase. Let's acknowledge Solazyme's risks, but shut down the temptation to panic with all the others. Personally, I'm holding on and watching with interest.

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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 June 24, 2013, at 4:28 PM, KiwiPatriot wrote:

    Solazyme needs some adult supervision. I listened to Jonathon Wolfson’s conf call this morning. He was unprepared, nervous (in answers to many questions) and sounded a bit incompetent. A true leader brings parties together, resolves differences and hires competent managers to run these businesses. He should know every detail of this company including how many SRN staff were brought into Solazyme and what the short term financial impact of this is. Time for the board to oust the kids and bring in some professionals.

  • Report this Comment On June 24, 2013, at 5:30 PM, TMFBlacknGold wrote:

    @KiwiPatriot

    I couldn't really disagree more. Solazyme has a solid management team, especially CEO Jonathan Wolfson. Things don't always work out and if you consider the attitude in Europe toward GM foods then it is easy to see that adding to friction with Roquette. The company issued a press release stating it was moving forward with non-genetically modified microalgae strains, apparently trying to distance itself from GM oils.

    --Maxxwell

  • Report this Comment On June 24, 2013, at 8:48 PM, csqrd wrote:

    I listened to a replay of the call and also have to disagree with KiwiPatriot's interpretation. I have been continually impressed by the management calls because there has been a real hesitation to guess. If they don't have the facts, they have said so. I heard the same approach this morning. If the decision was taken Friday, as stated on the call, I don't find it strange that there is still some uncertainty about who has accepted job offers from the JV. The short term financial impact was addressed a couple of times. One characteristic in business leaders I have always admired is the ability and willingness to make a decision. We'll see how it plays out. In the meantime, I'm grabbing a few more shares to add to my collection.

  • Report this Comment On June 25, 2013, at 12:06 PM, TMFLomax wrote:

    An extremely in-depth piece by one of my colleagues, FYI:

    http://www.fool.com/investing/general/2013/06/24/commercial-...

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