Solazyme Follows Amyris Results With Impressive Developments of Its Own

This will be a busy year for next-generation industrial biotech platforms enabled by synthetic biology. Things started with a bang earlier this week when synthetic biology pioneer Amyris (NASDAQ: AMRS  ) announced that it had achieved impressive progress exiting 2013 and provided guidance on operational goals for 2014. In addition to scaling its second commercial molecule, a high value flavor and fragrance molecule, Amyris expects to grow product sales by at least 153% and become cash-flow positive later this year. Impressive, but investors were wondering how renewable oils manufacturer Solazyme (NASDAQ: SZYM  ) would respond Wednesday afternoon.

Luckily, the company didn't disappoint. Last year Solazyme positioned itself to experience tremendous growth in 2014 -- and even bigger growth in 2015 -- pending the results of ramp-up at its first two commercial scale facilities in Clinton, Iowa and Moema, Brazil, which represent a combined annual nameplate capacity of 120,000 metric tons of renewable oils and products. That's markedly higher than the initial capacity of Amyris and will allow much higher product revenue as well. What were the major developments for Solazyme in 2013, and what can investors expect going forward?

The quick and dirty on 2013
Solazyme may have missed its prior revenue guidance for 2013 (by a paltry $200,000 on the low end), but similar to Amyris, investors shouldn't be focusing on sales when evaluating progress last year. Allow me to stress that. You shouldn't have blinked if the companies generated $0 in revenue. What mattered in 2013 was making progress in building the business and technology platforms -- and Solazyme (and Amyris) performed. Nonetheless, here are the important numbers disclosed in the presentation that accompanied the conference call.

 

2013

2012

% Change

Product revenue

$20 million

$16.5 million

21.2%

Collaboration revenue*

$19.6 million

$13.2 million

48.5%

Non-GAAP Costs and Operating Expenses

$117.2 million

$113.8 million

3%

Cash balance

$168 million

$149 million

12.8%

*Excludes government grants and funding. Source: Solazyme presentation, Google Finance

The company hit all targets within its various Joint Development Agreements, or JDAs. That includes deals with customers, development partners, and distribution partners such as personal care giant Unilever, textile lubricants leader Goulston, and KODA Distribution Group. Solazyme introduced four new high-value oil families, including those rich in valuable fatty acids -- C8-C10 compounds -- for the oleochemical industry. Meanwhile, Solazyme's Algenist cosmetic brand grew 21% in 2013, expanded into Mexico and Asia, and was the unanimous 2014 Marie Claire Prix D'Excellence award recipient. It also accounted for essentially all of the company's $20 million in product sales.

What to expect in 2014 (and beyond)
While continuing to make progress in building the business and technology platforms will be critical again, 2014 is all about execution. Simply put, Solazyme needs to prove reliable and consistent operations of its technology platform. Revenue will play a bigger role in 2014 than in 2013, but due to the unpredictability of early operations for Solazyme it will be difficult to predict full-year product sales at this time (Good luck, Wall Street!). However, unlike Amyris, Solazyme is refraining from providing guidance on revenue for the year as it steps into commercial operations and ramps its first two facilities. There are good reasons for that.

Source: Solazyme presentation.

Since ramp-up is not linear and will be completed 12-18 months after start-up, there's a bit of wiggle room for production in the early stages that will affect the final revenue targets for the fiscal year. 

Management did state that Clinton has produced roughly 500 MT of oils thus far in 2014 with an average selling price of $2,600 per MT. That represents about $1.3 million in revenue and an annualized run rate of 3,000 MT, or about 15% of Clinton's nameplate capacity. No one -- not even management -- knows the exact volume of products that will be produced at Clinton this year. Additionally, the average selling prices achieved are above the long-stated $2,000 per MT target stated by the company. It's good to see, just remember that the average at nameplate capacity will drift closer to the original target as lower-valued oil profiles increase their share of the product mix. As CEO Jonathan Wolfson noted:

"[T]he numbers initially that we are seeing out of Clinton, although we are very encouraged because they give us a lot of confidence as we look at our margin targets that we will be reaching as we hit nameplate capacity at these facilities, I wouldn't actually plan in the average selling price we are targeting is above that $2,000 per metric ton that we have said."

It's also important to note that costs will exceed selling prices until ramp-up begins to accelerate in the second half of 2014 or early 2015.

Source: Solazyme presentation.

That's also true for Moema, although start-up of commercial production of renewable oils won't occur until March or April. You can consider that a small setback from initial expectations for product in the fourth quarter of 2013, and subsequent expectations for product in the current quarter, but barring any setbacks the facility will still be running at nameplate capacity by the end of 2015 at the latest. Also, the facility will utilize 625,000 liter fermenters -- the final volume needed to achieve margin targets.

Source: Solazyme presentation.

With commercial operations underway at Clinton -- and soon to be underway at Moema -- Solazyme will regain its demonstration scale facility in Peoria, Illinois. It will still be used for demonstrating scale of renewable oils and producing the limited quantities of Algenist, but it has been retrofitted to produce the company's two food ingredients: High Lipid and High Protein Whole Algal Flours. The company has shipped 40% of the more than 160 customer samples requested, and, while larger scale capacity will be added to accommodate growth and demand for the company's food products, Peoria provides an important leveraging opportunity in the early stages.

Foolish bottom line
While setbacks are always a distinct possibility when pioneering a disruptive technology, there's no reason to believe Solazyme is not poised for long-term success. In the scenario that ramp-up encounters obstacles initially and delays the timeline for reaching nameplate capacity of either facility, the company will be able to generate over $1 billion in revenue by the end of the decade with planned (and yet to be announced) capacity additions. Considering that 2013 revenue was just $40 million, there's not much to argue about in the long term.

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