I have a bit of bad news for European consumers looking for clean laundry with the smallest environmental footprint possible. It may not be great news for Solazyme (NASDAQ: SZYM ) investors, either. After taking some heat from activist groups, Ecover UK quietly decided to halt its use of renewable algal oils from Solazyme at the beginning of June to engage in discussions with non-governmental organizations, or NGOs, and scientists to fully address any concerns raised by either party. Ecover will decide its future plans for algal oils only after the review process is complete, which expected to take six months starting from early June.
Ecover hasn't yet become a major customer for Solazyme in terms of volume: it tested algal oils in just 6,000 bottles of clearly labeled laundry detergent earlier this year. Either way, it would appear that Ecover has a pretty easy decision to make. After all, I pointed out seven reasons why the NGOs causing problems for synthetic biology companies weren't arguing with the facts on their side. However, the world's largest green cleaning company must also take consumer opinions into account. In a worst case scenario, Solazyme investors would be forgiven for writing off the impact of losing a customer that sported just $200 million in revenue in 2012. But what are the chances larger consumer products companies such as The Procter & Gamble Company (NYSE: PG ) and The Clorox Co (NYSE: CLX ) follow consumer opinions to a similar conclusion?
Two poorly defined terms, one big mess
Ecover responded to a misleading article written in The Ecologist by Jim Thomas, Program Director at ETC Group, with an article of its own. It was a good response, but Ecover may have gone a little too far by asserting "any allegations that we are using synthetic biology are untrue." To be fair, Ecover refuted the definition of synthetic biology from Thomas ("the ground-up redesign of life" isn't occurring commercially ... yet), but the oils sourced from Solazyme are most certainly created with synthetic biology. Sure, the company uses natural strains and less precise tools from time to time, but optimizing metabolic pathways to create high concentrations of lauric oils with next-generation molecular biology tools is called synthetic biology. Apparently, the easiest way to distance yourself from synthetic biology is to say you aren't using it in the first place.
Ecover can't have it both ways. The company wants all of the benefits of using synthetic biology ingredients (sustainability, pricing, sourcing) while telling its customers that it isn't using synthetic biology to avoid answering the looming question of "is this natural?" This could backfire if consumers feel they are being lied to or question why Ecover is going back and forth with definitions, which could ultimately force the company's hand to halt its use of renewable algal oils for good.
That presents an early potential problem for Solazyme and the synthetic biology industry. If consumers don't think products created by engineered organisms via industrial fermentation are natural, then companies may be more inclined to stick with products that are readily available and readily accepted as natural. Then again, fermentation is a natural process and DNA is a natural molecule. No one organism owns a gene (genes are often shared by many species across all kingdoms) and no one gene is immune from evolutionary alterations. Why should one ingredient produced from an organism with continuously changing DNA be considered natural if an ingredient produced from a fine-tuned organism is shunned?
Of course, when Cheetos can be labeled natural, I don't see why the argument only centers on the use of biotechnology.
Naturally, this might matter
You could argue that Ecover is a relatively small company and any decision to discontinue using renewable algal oils wouldn't be a death blow to Solazyme. That is true. In 2012 the European consumer products company extended its reach to acquire United States-based Method, which doubled its top line potential to over $200 million for the year. Despite playing David to Procter & Gamble and Clorox's Goliath, Method managed to grow its revenue 194% from 2005 to 2012. It's undeniable that the ultra-identifiable brand has piggybacked on -- and even spurred -- the growing popularity of green cleaning products and natural personal care products.
So, how could this question of "natural" affect Solazyme and synthetic biology? Consider that Burt's Bees, owned by Clorox, prides itself on using all natural ingredients and is often referred to as "the most natural" personal care brand. Some of the ingredients used by the brand include coconut, cocoa butter, shea butter, and kokum butter -- all conceivably within reach of Solazyme's platform. Would Clorox use renewable algal oils in its products?
Burt's Bees takes its products -- and sourcing -- seriously. Source: Burt's Bees website.
Meanwhile, Procter & Gamble is going all-in on palm oil. That doesn't mean it won't consider using renewable oils from Solazyme in the future -- it only makes sense -- but a completely sustainable palm oil supply chain may delay that inevitable partnership. Similar to Solazyme's commitment to sourcing sustainable sugar cane in Brazil certified by Bonsucro, Procter & Gamble is a member of the Roundtable for Sustainable Palm Oil. While 100% of the palm oil it purchases is certified, the company is taking it one step further by ensuring no deforestation in its supply chain by 2020. (Yes, apparently certified palm oil can still contribute to deforestation). If Procter & Gamble can source all of its palm oil requirements from sustainable (albeit inefficient) sources and keep consumers happy, then it may be difficult to sell the company on oils created with synthetic biology should consumers reject the technology.
What to expect
If the decision on using Solazyme's renewable oils is left to the facts, then Ecover should have a pretty easy decision to make. Solazyme's renewable oils are hands-down more sustainable and have a smaller environmental impact than the ingredients they replace, such as coconut, palm, and palm kernel oils. Even when those ingredients are sourced sustainably or without deforestation, they require a much larger footprint than Solazyme's renewable oils -- and come with the added headaches of variable quality and centralized production.
However, Solazyme investors must also consider that the consumer plays a critical role in the adoption of its technology. It's one thing to sell an engineered plant to a farmer who needs that plant to make a living, but it's another thing entirely when your customers are consumer-facing personal care companies with established and reliable alternatives (determined on a case-by-case basis, since reliable alternatives don't always exist). If synthetic biology ingredients don't fit the consumer's definition of "natural" it may take considerably longer to sell products into personal care markets. There are other markets for Solazyme to penetrate, of course, but consumer rejection is a very real risk.
Will synthetic biology pay dividends?
Procter & Gamble is looking into synthetic biology ingredients on a case-by-case basis, but the lauric acids it needs can be sourced quite easily from palm and palm kernel oils. That may not bode well for Solazyme in the immediate future, but a partnership between the two could pay dividends down the road. Rather than wait that out, 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.