3 Terms Solazyme Investors Absolutely Must Know

Synthetic biology and renewable oils manufacturer Solazyme  (NASDAQ: SZYM  ) announced that it successfully conducted multiple initial fermentations in 500,000 liter fermentors in December 2012. While it was a big step forward in the right direction, I think the announcement was a bit premature. By "multiple," the company meant two and by "commercial scale production metrics," the company meant that only partial data had been collected. By reading SEC filings, investors can learn that the company has yet to prove microbial productivity at volumes greater than 128,000 liters. Not at all a nail in the coffin, but since the company believes it needs to reach 625,000 liter fermentors to be profitable, it is clear that engineers have plenty of work ahead of them.

I imagine the company has made headway since its initial press release, especially with commissioning for its Moema, Brazil, biorefinery looming. When updates are given on commercial achievements in the months ahead, will you be able to digest the important information that affects your investments? Heading into the homestretch of the first wave of commercial buildout, it is crucially important to understand what Solazyme, Gevo (NASDAQ: GEVO  ) , and Amyris  (NASDAQ: AMRS  ) spill in press releases -- and the greater detail given in SEC filings.

In the next few weeks, I will try to give you more tools for your investing toolbox by explaining the basics of the industry. First up is a brief guide of how industrial biotech companies approach product commercialization and three terms you need to know.

Step 1: Find market. Step 2: Disrupt.
If only it were that easy. What exactly does product commercialization entail? A brief rundown in chronological order from whiteboard to fermentation scale up.

  1. Identify suitable commercial products with defined markets.
  2. Identify and manipulate biological pathways of microbes to create the product (molecule).
  3. Optimize new microbe strains at lab and pilot scale to maximize product yield, microbe productivity, and titer (see below).
  4. If preliminary operating metrics look favorable, then engineers move the project to larger volumes until ultimately reaching commercial scale.

Whether or not the fermentation product created in the final step is the end product depends on the application. Solazyme can create tailored oils during fermentation, which require minimal downstream processing and separation. Therefore, tailored oil commercialization would incorporate end-product specifications into the four steps above. Amyris, on the other hand, will initially create a building block molecule called Biofene (farnesene) during fermentation, which can then be chemically synthesized into any number of end products independent of the platform. Gevo's isobutanol will also be modified independently of its platform, although it doesn't have quite the reach of Biofene. That is quite all right, as I believe the company has drawn up a formidable business strategy

When Solazyme talks about product development with partners such as Mitsui, it takes care of the steps outlined above, while Mitsui helps define product specifications that are desired by customers. The same goes for Amyris and Total (NYSE: TOT  ) and Gevo and Toray as well as other commercialization partners for the companies. Additionally, Solazyme gets fermentation help from partner Archer Daniels Midland (NYSE: ADM  ) , an important mentor for the developing company. The company is one of the leading ethanol producers in the country, so it has a wealth of knowledge in coaxing microbes into fermentation machines. 

Know these terms!
Creating an economical process at commercial scale requires the optimization of three important metrics:

  1. Yield: The amount of fermentation product created with a given amount of sugar. Simply put, efficient microbes reduce input costs.
  2. Productivity: The rate at which product is created by microbes. Faster fermentation allows for enhanced process scheduling and more batches of product per year.
  3. Titer: The concentration of product in the bioreactor. Filling up a 10,000 bioreactor every two weeks to only produce 100 liters of product won't keep the lights on.

Additionally, engineers need to minimize the amount of product lost during recovery and synthesis (if needed) and process scheduling time. The latter can significantly improve a biorefinery's capacity. Consider how slashing two to four days off of a bioreactor's operating time -- through microbial or mechanical improvements -- can impact annual production.

Engineering Year

Bioreactor Turnaround Time

Batches Per Year

325 days

16 days

20

325 days

14 days

23

325 days

12 days

27

In the best-case scenario above an additional seven batches could be squeezed out of each bioreactor in a facility. For instance, a facility with six 500,000 liter bioreactors would see batch capacity increase by an extra 21 million liters per year -- enough to increase a Solazyme biorefinery's capacity by nearly 20,000 metric tons. It may seem like a long shot to cut production time by 25%, but I wouldn't bet against advances in synthetic biology, creative young engineers entering the industry, or the evolution to continuous processes.  

Thanks to selling prices, not all products are created equally. For instance, Solazyme announced that it has increased the level of myristic acid in its myristic oil profile to 60%. That may not seem like an incredible feat of science, but consider that that is 400% more than "natural" sources of the compound. Additionally, selling prices for myristic acid averaged $3,700 per metric ton in 2012. Here's a quick sketch showing how selling prices can absorb less-than-stellar product yields. 

Source: Solazyme.

I explained the difference between bioreactor volumes and realized product volumes earlier this year, so I won't bludgeon you with the details again. But you can see the general trend from the visual above. Increasing the level of a target fatty acid in an oil profile will lead to greater economics, while the opposite will result in tighter margins. Such improvements can have a big compounding effect when combined with falling production costs. You can also see that high-volume, low-margin products such as fuels will need to be highly concentrated to be economically feasible.

Foolish bottom line
The three terms highlighted above should help in reading future press releases or SEC filings when companies choose to disclose such production metrics. They should also help provide a more complete picture of the industrial biotech industry for investors. The next several quarters are especially critical for Solazyme, Amyris, and Gevo -- all of which are ramping production at key facilities, building new facilities, and on the verge of launching new bio-based products to the market. There is plenty more ground to cover, however, so next week we will break down commissioning and ramp up schedules for the industry. As always, let me know if you have questions in the comments section below.

Taking a break from the volatile industrial biotech industry? Looking for ways to diversify into dividend-paying stocks? The Motley Fool's special report "Secure Your Future With 9 Rock-Solid Dividend Stocks" is a great way to kick-start your search. Just click here to get your free copy today.


Read/Post Comments (4) | Recommend This Article (16)

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 July 03, 2013, at 11:00 AM, Lachplesis wrote:

    Maxx, please share with us information with regards to where we can locate confirmation that "multiple runs at ADM" mean exactly two runs.

    Also, please clarify what do you mean by "microbial productivity", and how's is that specifically different from SZYM statement: "[we] have achieved scaled yields at fermenters with a capacity of approximately 500,000 liters".

    Yes, they still need to reproduce "commercial productivity at fermenters with a capacity of 500,000 liters". However, to me this means that they need the access to facilities to do that, and not because the facilities are there and their technology doesn't work. One can't have a proof of commercial productivity without having a factory to do that.

    They have a proof of 500Kl fermenter scale. They don't have a proof of running a commercial operation with 500Kl fermenters. This is expected to be achieved with commissioning of the ADM plant.

    Furthermore, where did you come up with the term "Engineering Year" as applicable to SZYM? The ADM facility is kind of expected to operate 24/7 365. Algae can't just take a break for the holidays or weekends. Please point to your source for the 325 days in a year.

    I don't expect to right every time, and do appreciate any new info that can be material to my interests. However, when I do see a statement presented as factual then I'd really like to see a reference made to the source of the claim especially if the data presented has not been discussed before.

  • Report this Comment On July 03, 2013, at 1:30 PM, TMFBlacknGold wrote:

    @Lachplesis

    Thanks for asking away with some great points here. In chronological order:

    "please share with us information with regards to where we can locate confirmation that 'multiple runs at ADM' mean exactly two runs"

    This was announced, perhaps in error, by Solazyme's VP of Communications Genet Garamendi on Twitter in a congratulatory tweet to the team. Not surprisingly, the tweet has since been deleted.

    "Also, please clarify what do you mean by 'microbial productivity'"

    The commercial yield and commercial productivity stated by the company are the same as microbial yield and microbial productivity, to my knowledge. I believe they use the term "commercial" to differentiate between the differences in yield and productivity at previous stages of scale (lab, pilot, etc.). If you see the SEC filings then you'll notice that yield and productivity are used in conjunction, both referring to biological terms.

    I will be explaining commissioning and ramp-up in detail next week, which also fits into the answer to your question. Be sure to ask again if you have another question or think something is amiss.

    "where did you come up with the term "Engineering Year" as applicable to SZYM?"

    The engineering year used above is a general assumption used in the industry. It accounts for planned downtime each year to repair and upgrade equipment, unplanned downtime due to "oopsies", failed batches that do not meet product specifications, and downtime for other various reasons. It sure doesn't seem as if algae need time off, but I can assure you that no biorefinery in the industry will run for 365 days a year. You should know that a facility's capacity is already factored into this figure, so it doesn't really affect anything in the end.

    Thanks for being civil.

    --Maxxwell

  • Report this Comment On July 03, 2013, at 2:28 PM, Lachplesis wrote:

    Thank you for your clarifications. I was not aware about the deleted tweet from VP.

    I think an engineering year term implies a fixed period from which all other calculations can be done. Unfortunately, this is not a constant as investors can and should expect this to be a very variable number.

    The efficiencies should see the growth of days in this Engineering Year number. Therefore, I'd (personally) rather use something like facility utilization ratio instead. The utilization ratio (something that can't exceed 1.0) would then indicate how close to ideal capacity the factory operates at. This would also allow YOY comparison. On the other hand utilization ratio based on the Engineering Year can be misleading because one calendar year the Engineering Year can be 325 days long, and another 333 days, and then some other year the ratio can exceed 1.0.

    As we're essentially establishing a new industry and you're one of a few analysts covering this sector, I think, you can come up with any terms and ratios that you feel like using. Just please ensure you clearly define them, and that they can be used for measuring changes over time with no necessity for adjustments.

    For example:

    The Chatsko Efficiency Ratio: the actual number of useful batches produced in a year vs theoretical maximum possible based on best available test results announced by the company for their technology. This ratio can then be applied to future capacities to estimate the additional possible revenues.

  • Report this Comment On July 03, 2013, at 3:37 PM, TMFBlacknGold wrote:

    @Lachplesis

    The engineering year is more of an estimate used to model during the planning and construction of a facility rather than a hard number. I included it to show how I calculated batches per year.

    It may be a new industry, but we will still see biorefineries use familiar terms such as utilization ratio, onstream factor, and the like. The brewing industry, biologics manufacturing facilities, and ethanol plants all use the standard reporting metrics to express efficiency of fermentation equipment. Industrial biotech will (should) be no different. In fact, I may be wary of companies making up their own metrics if it doesn't stack up. I think a simple "we increased the efficiency of our process by X%" will do just fine.

    --Maxxwell

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2521731, ~/Articles/ArticleHandler.aspx, 12/21/2014 12:22:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement