3 Takeaways From My Recent Visit to Solazyme Inc

I recently made a trip to San Francisco for a small conference on synthetic biology and decided to linger around the city for an extra day to meet with Glowing Plant, TeselaGen Biotechnology, Solazyme (NASDAQ: SZYM  ) , and REG Life Sciences. While it's great to research companies and correspond with entrepreneurs, investors, and executives by email and phone, nothing beats a face-to-face meeting and tour. You get to ask pointed questions, see steel on the ground (and glass on the bench) with your own eyes, get critical feedback on your writing, and discuss your thoughts on the industry with, well, the ones building the industry.

Even more advantageous is the fact that I visited Solazyme HQ the day after first quarter earnings were announced, which allowed me to inquire about the latest developments. Here are a few things I learned from my meeting with Graham Ellis, Vice President of Business Development, who helped develop the joint venture between Solazyme and Bunge (NYSE: BG  ) and the 100,000 metric-ton-per-year facility in Moema, Brazil.

We aren't giving Encapso enough credit

Ellis was quick to point out that Encapso is a family of encapsulated oil products, not a single encapsulated lubricant serving the oil field services market. When we speak about the first product sporting the brand name we need to remember to call it an Encapso lubricant, rather than using the blanket term "Encapso". The distinction may not be so obvious in the early days, but there are multiple encapsulated oil products in development that target various markets. It makes sense, too, considering the advantages such products have.

Source: Solazyme.

First, and of particular interest to investors, Encapso products will generally have higher margins than non-encapsulated oil products. That's because they get to skip a few downstream processing steps (Solazyme wants the oil locked into the algal cells). Second, the targeted delivery mechanism utilized by Encapso lubricants in the oil field services markets can be leveraged for other products in unrelated industries. Some may be additional lubricants, some may be oil products for delivering more specialized payloads. Nutrients, perhaps?

Big opportunity in food emerging

I was invited to taste chocolate chip cookies (my favorite) and vanilla ice cream (Ellis' favorite) made with Whole Algal Flour and Whole Algal Protein -- now the AlgaVia brand, after the Roquette joint-venture dissolution -- as well as the dried and purified powdered ingredients (hint: glass of water required). The cookies and ice cream were amazing, and the powdered ingredients were more enjoyable than they appeared, although I passed on the chocolate milk. However, it's important to remind myself that highly trained foodies at Solazyme HQ made the delicious concoctions. Will mass-produced branded products taste as amazing?

It's quite possible algal ingredients will make America's food tastier, but even if there is no advantage in taste there is a substantial advantage in nutrition. That's what makes the opportunity in nutrition so substantial, and that's where I believe the value resides. Solazyme's food products don't just offer ingredient replacement; they offer replacement and enhancement. I'll be writing specifically about the newest and most up to date nutritional opportunities and risks in the coming weeks.

These could become much healthier soon, but you still shouldn't eat them by the sleeve. Source: Kimberly Vardeman/ Wikimedia Commons.

The good news is that, so far, Solazyme has not received any pushback from potential customers fearing consumer rejection due to the industrial biotech processes used to create the ingredients. You may not think that matters since all cell debris is removed from the final product, but activist groups are already raising questions about flavor products created via fermentation by Evolva. That's despite cell debris being removed from the final product and the fact that 90% of vanillin (used in vanilla flavoring) consumed today comes from petrochemicals. Unfortunately, it's highly likely that Solazyme will be targeted in a similar manner in the future.

And that brings us to the bad news. An upcoming article in the New York Times will question the renewable oil manufacturer's environmental impact and may increase the pressure on Solazyme's product portfolio, especially nutritionals, although I don't see how algal oils aren't a major improvement over unsustainable palm oil. We'll have to wait for the article to be published to discuss the details.

Executives traveled to Moema

A few executives traveled to Brazil immediately following the first quarter conference call and were unable to meet with me at Solazyme HQ. To recap, Moema was delayed yet another quarter due to intermittent utilities delivered from the adjacent cogeneration facility operated by Bunge, which itself was starting up. That could really be the only problem at Moema, and would likely have interrupted commissioning of the downstream oil processing equipment. It just seems a bit odd that executives would need to fly to the facility if intermittent steam and power was the culprit for the delay of first quarter production.

My cross-country flight paled in comparison to the trip from San Francisco to Brazil. Source: Author image.

In addition, Solazyme and Bunge claim that downstream processing equipment is the only hold up, stating that recovery through Encapso lubricants is operational and that oil extraction commissioning is still under way. After touring the pilot plant in South San Francisco with Ellis, it's difficult to believe that the standard press rollers (extraction equipment) used throughout the oil crushing industry would be the holdup. Besides, wouldn't intermittent utility supply have been known at the time of the debt offering?

If the company was hoping to report its first commercial product from Moema "right up to the wire", as CEO Jonathan Wolfson noted, then the announcement should be rolling in any day now. Why use the entire second quarter as a cushion? The executives in Moema, the perceived problem with some of the most standard equipment in the process, the timing of the debt offering, and the hope to have initiated start-up by the May 5 conference call while simply stating that production will occur in the second quarter may not add up quite like investors want. Then again, algae naturally produce oil while residing in ponds, puddles, and oceans full of predators and competitors, so stuffing them into a bioreactor with optimal growth conditions is pretty favorable indeed. I would just remain aware that the facts may lean toward larger problems at Moema.

Foolish bottom line

Having access to Solazyme HQ and a conversation and tour with Graham Ellis was a great opportunity, especially immediately following the first quarter earnings call. I acquired a broader understanding of the Encapso family of products, was able to taste the food products that represent a major market for Solazyme and Bunge, and learned some valuable details regarding the company's largest commercial scale facility in Moema.

The long term opportunity for investors is probably one of the best on the market. While any short term surprises or hiccups regarding production could affect and slightly delay long term value creation, investors can buy a company sporting a market cap hovering near $700 million and over $300 million in cash. The value created by burning that cash will likely be worth several multiples more. I still believe Solazyme will push through commissioning, start-up, and ramp-up successfully -- it just might take a little longer than investors want.

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Read/Post Comments (16) | Recommend This Article (24)

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 14, 2014, at 9:25 PM, molecularry wrote:

    Thank you Maxx

    I'm confused with Solazyme whether they are just using regular conventional algae or using strains developed via synthetic biology techniques and what i've read suggests they are doing both.

    With products like the Encapso or the food products that you tasted (ice cream!) were those oils from regular (ie conventional) algae or is that synthetic biology know-how hitting the market providing the value?

    Given your synbiobeta background maybe you can give us some insight: Are we talking about a synthetic biology success story here or just a company thats figured a new way to use conventional algae beyond the usual food supplements, fuels and feed markets.

    Thank you for your insights.

  • Report this Comment On May 14, 2014, at 10:53 PM, TMFBlacknGold wrote:

    @molecularry

    Solazyme is using both transgenic (engineered) and natural strains for its food products portfolio. Whole Algal Flour and Whole Algal Protein are actually produced from natural strains found by the company, while the oils are from strains that were engineered to achieve optimal metrics such as titer, yield, and productivity as well as finished product specifications and functionality.

    Hope that helps!

    Maxxwell

  • Report this Comment On May 15, 2014, at 3:40 PM, molecularry wrote:

    So Encapso is engineered? (since that is oils?)

    Is there anywhere where they disclose this?

    Thank you.

  • Report this Comment On May 15, 2014, at 4:33 PM, TMFBlacknGold wrote:

    @molecularry

    Yes, the lubricant oil for Encapso appears to be engineered. Some of the information about nutritional ingredients being engineered or not is included in the company's 10-K filings with the SEC:

    http://www.sec.gov/cgi-bin/browse-edgar?CIK=szym&Find=Se...

    The company doesn't typically go into detail about which oils are engineered and which are not, but almost all oils are produced from strains that are engineered in some form or another. They need to be to reach commercial targets for economical production. I wrote about it some time ago:

    http://www.fool.com/investing/general/2013/07/02/3-terms-sol...

    Thanks for writing,

    Maxxwell

  • Report this Comment On May 16, 2014, at 12:48 AM, RogerKnights wrote:

    Is it possible the NYT article will object to the release of a GMO item like Encapso into the wild? Is it possible some environmental organization will sue about that release? If so, that would explain the otherwise strange confidence the shorts have shown in continuing to short at this low level.

  • Report this Comment On May 16, 2014, at 11:35 AM, TMFBlacknGold wrote:

    @RogerKnights

    My understanding is that the New York Times article being researched will question the sustainability of Solazyme's algal oils; probably looking through a negative lens at sugarcane harvesting and production. That seems ridiculous to me. That being said, I'm not sure why investors think the potential article will have any bearing on share price.

    And I don't understand your question. The New York Times is separate from any environmental activist group, and such groups typically don't sue corporations. The flamboyant ones just make things up in an attempt to sway public opinion -- and I'm quite ready to inject facts into the discussion in response.

    Don't read too much into the upcoming article. We'll have to wait for it to be published (if it is published) to discuss the details.

    Maxxwell

  • Report this Comment On May 21, 2014, at 3:47 PM, yogert909 wrote:

    Hi Max, Thank you for your continuing coverage of Solazyme.

    I was wondering if you could help us understand a little more what is involved in ramping a commercial bio-processing plant. Will they be running test batches and making modifications to their equipment based on the results? I imagine they will run into a few contaminated batches along the way. What will they be doing for the next year and a half?

    Do you believe their 12-18 month estimate to full capacity is realistic, conservative, or optimistic? What are the potential pitfalls that may lead to not hitting their schedule?

  • Report this Comment On May 21, 2014, at 3:53 PM, TMFBlacknGold wrote:

    @yogert909

    Thanks for your comment. A few people have asked this recently so perhaps I'll address it in an upcoming article. I'm working on a series right now explaining the commercial equipment at Moema, which will partially answer your questions.

    Maxxwell

  • Report this Comment On May 23, 2014, at 3:57 AM, jodigal wrote:

    Hai ,

    One thing surprises me really

    Be it the "Baird conference " , earnings report conference call , including the author who visited SOLAZYME , fail to ask the million dollar question as follows

    1) Does the management wants all of us to be convinced that the Intermittent steam power supply happened on one fine Monday morning after they filled up their cash box through Rights issue ?????

    Let us hypothecally assume the answer is YES

    If so , it becomes clear that they had started to commission the plant very late , and hence were not true on their earlier statements " On the wire"

    If answer is NO ,

    The management has suppressed well known information of the inherent delay that was known to them before the RIGHTS ISSUE

    I even managed to talk to their Communication company in Ney york ( SOLAZYME Personnel directed me to talk to them after a intensive follow up) and urged them to drive home the message to SOLAZYME to be more transparent here

    I only wish I had the time and opportunity to ask this burning question FACE TO FACE to the management

    Will you guys at MOTLEY do this on behalf of us the investors ???

  • Report this Comment On May 23, 2014, at 9:34 AM, TMFBlacknGold wrote:

    @jodigal

    Asking is one thing, getting an answer is another. Like it or not, management and investor relations can claim confidentiality under SEC rules to refrain from answering such questions. Calling/emailing Solazyme personnel and expecting them to answer your questions on Moema or anything else they haven't disclosed is extremely wishful thinking and a complete waste of time.

    We'll have to wait for management to provide official updates. Even if production starts in 2Q14, I'd remain cautious that whatever problems they are having now don't crop up again as they ramp. See former operations at Amyris, or former and current operations at Gevo. Or this:

    http://www.fool.com/investing/general/2014/02/03/can-solazym...

    Maxxwell

  • Report this Comment On May 23, 2014, at 10:29 AM, jodigal wrote:

    Max,

    I could very well guess that Investor relations department can act no more than a mouth piece for the company . I contacted their IR only to be directed by SOLAZYME and I just did that.

    But people like you who visited their place , could have very well asked the management the question

    " When did you come to know of the intermittent steam supply problem , before the Rights issue or after"

    Nothing prevents any body asking this direct question.

    Rather, from the type of response they give it may be possible to infer the truth .

    Having gone there physically , it was a waste of time , not even having attempted to ask a direct question in an attempt to get the answer that is appropriate at this juncture

    Sorry If I sound blunt

  • Report this Comment On May 23, 2014, at 10:37 PM, TMFBlacknGold wrote:

    @jodigal

    Your mistake is thinking that I didn't ask such questions...

    Maxxwell

  • Report this Comment On May 24, 2014, at 2:04 AM, jodigal wrote:

    Thanks Maxxwell

    I am happy to come to know I erred.

    But your article doesn't seem to capture that Million dollar question and the management's answer.

    Please educate me whether this is also because of SEC or "Safe harbour " or whatever harbour , so that I can get enlightened.

    Could you please?

    Thanks and Regards

  • Report this Comment On May 24, 2014, at 2:06 AM, jodigal wrote:

    Folks

    Let me clearly spell out

    As of date my spouse is LONG ( Yes I repeat it is LONG) on Solazyme with 1252 shares in record

    Regards

    Ravi Srinivasan

  • Report this Comment On May 24, 2014, at 2:34 AM, jodigal wrote:

    Max,

    I have experience in my home country about companies coming out with "Rights issues etc.

    Whenever companies do come out , enough time is given for the same to be published in all "Investment magazines " , press conferences would be organized to grill the promotors on

    1) Progress on projects

    2) Exact reason for coming out with the Rights , Is it for CAPEX ( Which is a sweet news for Investors)

    3) Or whether it is for compensating for any SPECIFIC Delays ( Forget about the Safe harbour statements , like " Every biotech project has risks during RAMP UP , etc etc ) . Had it been there , the intelligentia of the Investment circles would have pumped questions on the LONG AWAITED Moema Ramp up

    4) In case of SOLAZYME , Except GOLD MAN SACHS and SOLAZYME No body in the investment circles were given time to , Read , assimilate , think and analyse and then act

    If the So called SAFE HARBOUR , acts as a good HARBOUR For any thing including Suppression of facts , then it has to be construed that

    It is a SAFE HARBOUR For Promotors or COMPANY

    But a very UNSAFE HARBOUR For investors ( People who have no choice in North America to get a good interest rates in SAFE ( Not SAFE HARBOUR ) investments like Fixed deposits or DEBT Instruments.

    I pity the public ( Common man ) of North America and pray for their safe Retirements and safety from SAFE HARBOURS.

    That's the best a common man like me can afford to do.

    Regards

  • Report this Comment On May 30, 2014, at 3:47 PM, TMFBlacknGold wrote:

    The NYT article discussing consumer products created with synthetic biology components:

    http://www.nytimes.com/2014/05/31/business/biofuel-tools-app...

    Maxxwell

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