What Does This New Nutritional Agreement Mean for Solazyme?

The more valuable the opportunity, the more likely it is that multiple companies and technologies will compete for market share. That doesn't mean a particular market cannot support multiple players, but it may mean investors need to accept that their favorite company won't go unchallenged for dominance. An example of this is beginning to emerge for renewable oils and bioproducts manufacturer Solazyme (NASDAQ: SZYM  ) in the nutritional ingredients space, which may become the company's largest market opportunity. It will certainly be among the most profitable.

Where's the newly identified potential competition? A new partnership between Synthetic Genomics and Archer Daniels Midland (NYSE: ADM  ) will commercialize omega3 DHA for human and animal feed applications. That sounds pretty innocent, but the pair will commercialize a heterotrophic algae platform and seek to expand their agreement to additional ingredients in the coming years. That type of platform should sound familiar, as should Archer Daniels Midland. After all, Solazyme is using the company's fermentation facility in Clinton, Iowa, to produce commercial quantities of products.

While it sounds worrisome at first glance, and competition may be emerging, I don't think Solazyme investors should necessarily be worried. However, the partnership with Synthetic Genomics may be something to keep an eye on. Here's why. 

Why Solazyme is safe for now
For starters, I don't see any overlap between omega3 DHA and any of Solazyme's nutritional products, which includes at least three powders and several tailored oils. As Synthetic Genomics stated in its press release (emphasis added for discussion below):

DHA is a long-chain omega3 fatty acid that has been studied for its role in brain, heart and eye health. While it is typically found in fish and seafood products, extracting DHA directly from algae grown in fermentation tanks yields a highly purified form of DHA, which can then be used as a dietary supplement for humans and in animal feed.

Solazyme's tailored oils, Whole Algal Flour, Whole Algal Protein, and Golden Chlorella High Protein products aren't threatened by omega3 DHA. Additionally, it appears that Synthetic Genomics is partnering with Archer Daniels Midland to produce and market its products, while Solazyme is attempting to handle everything from production to marketing on its own after the Roquette fiasco. So there's a difference of commercialization strategy, too, which may also explain why Archer Daniels Midland and Solazyme haven't formed a nutritional ingredients partnership. 

That doesn't mean future products won't overlap or that Archer Daniels Midland and Solazyme won't go head-to-head with their nutritional products. The bigger picture is what should get the wheels turning.

Digging deeper
The partnership raises a few questions in my mind. Remember, these are harmless questions that informed shareholders should ask, not questions designed to spook you out of your position. The opportunity for Solazyme remains massive with or without food products or direct competition in the space. The following statement from J. Craig Venter, founder and CEO of Synthetic Genomics, should get you thinking:

This agreement is a major accomplishment for SGI as it represents commercial validation of our science and technology. We are eager to continue to work with ADM to develop other unique and nutritionally sound food and nutraceutical ingredients.

There are plenty of food and nutraceutical ingredients to choose from, but a quick look at Archer Daniels Midland's foods and wellness business could provide a short list of targets.

Source: Archer Daniels Midland.

A number of the listed ingredients are already produced from fermentation and could probably stand to have their processes further optimized by a synthetic biology powerhouse such as Synthetic Genomics. However, if the company decides to produce proteins through fermentation, there could be some tension between Solazyme and Archer Daniels Midland. Similarly, there are numerous other food ingredients (link opens PDF) offered by the agricultural giant that could be produced by Synthetic Genomics and step on the toes of Solazyme, such as cocoa products and high oleic oils (link opens PDF).

Will the new partners target unique markets or simply those representing the most value (high oleic oils)? Will they seek to do so with heterotrophic algae (Solazyme hasn't patented or engineered them all) or other host organisms? Will this lead to friction between Solazyme and Archer Daniels Midland?

Foolish takeaway
Let's be clear: this is far from Threat Level Roquette. Synthetic Genomics not close to challenging Solazyme in terms of development, but I certainly wouldn't underestimate the company's technological capabilities or Venter's brazenness. He did, after all, directly challenge Google in the race to pioneer products to increase human longevity. But there's no guarantee that Archer Daniels Midland will seek to commercialize other food ingredients with Synthetic Genomics or ingredients that overlap with Solazyme's product portfolio.

Additionally, investors should realize that companies often share services and know-how, which makes it quite possible that individuals working at Synthetic Genomics aided Solazyme in scaling its heterotrophic algae platform. Either way, I think the market opportunity for novel and more sustainable food ingredients is large enough to support multiple major players, even if they have overlapping platforms and ingredients. This is simply something for Solazyme investors to put on their radars.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (6) | Recommend This Article (8)

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 28, 2014, at 2:27 PM, abigchocoholic wrote:

    The only thing that's surprising here is that an ADM or Unilver or a big oil company doesn't look at SZYM's market cap at 700m and chuckle and call a quick board meeting and start a take-over at about $16 a share.

    The patents and products SZYM is putting out make it a no-brainer for a large company to buy and put about 10 times the resources into. The investment will be paid back 100 fold.

  • Report this Comment On May 28, 2014, at 3:15 PM, TMFBlacknGold wrote:

    @abigchocoholic

    Any buyout has to be approved by Solazyme's CEO, then the board, then shareholders. I don't see why Jonathan Wolfson would want to sell his baby at this critical point in the company's growth. It wouldn't represent the best case scenario for investors.

    Maxxwell

  • Report this Comment On May 28, 2014, at 5:49 PM, mebrownj wrote:

    One way to look at competition is as validation of your process and/or products.

    And this completely off the main subject here, but I've been wondering if the heterotrophic algae process requirement for sugar input may divert some of the over selling into food stuffs that are creating the obesity epidemic in some countries. The outrage at the obesity and diabetes stats in our children is creating a social push towards fewer sugar enhanced products, and leaving more for the bioproducts industry using it as an input. Time to watch Burn again.

    Mack

  • Report this Comment On May 28, 2014, at 10:12 PM, RogerKnights wrote:

    A beneficial side-effect of algae-grown DHA should be a reduction in over-fishing.

  • Report this Comment On May 29, 2014, at 9:02 AM, TMFBlacknGold wrote:

    @RogerKnights

    "A beneficial side-effect of algae-grown DHA should be a reduction in over-fishing."

    That's right. It's similar to the sourcing concerns of growing oils in agricultural crops.

    Maxxwell

  • Report this Comment On May 30, 2014, at 2:52 PM, Hansen wrote:

    Solazyme Briefly Hits 2-Month High After Production Commences In Brazil http://goo.gl/hcAl7A

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: 2973778, ~/Articles/ArticleHandler.aspx, 11/29/2014 2:52:29 AM

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