Earlier this week I described three things I learned from a visit to Solazyme (TVIA) the day after the company's first-quarter conference call. The fourth thing I learned was how close it was to the headquarters of the REG Life Sciences division of Renewable Energy Group (REGI) (it's 0.3 miles away, or just an eight-minute walk). The two companies are different in many ways, including access to capital, developmental progress, and the number of commercial-scale facilities. Development is one thing; opportunity is another -- and I believe investors should look deeper into the opportunity presented by Renewable Energy Group's entrance into industrial biotechnology. In fact, Solazyme provides an excellent example to describe the robust product portfolio under development at REG Life Sciences. It all comes down to tailored products.
Tailored oils from Solazyme
A little over one year ago, Solazyme announced that it had developed the ability to control the positioning of functional groups at the end of the fatty acid chains that make up its triglyceride oils. Whoa, whoa, whoa! What's that? Triglyceride oils consist of three fatty acid chains attached to a glycerol backbone and are traditionally sourced from plant oils and animal fats. Algal oils should improve on purity, concentration, and sustainability metrics compared with current sources -- major improvements indeed.
Source: Solazyme.
So what does Solazyme mean when it talks about tailored oils? Engineers at the company have the ability to specify chain length, or the amount of carbon atoms in each fatty acid.
Each intersection of two black lines represents a single carbon atom with two hydrogen atoms bonded to it. Source: Solazyme.
Engineers have the ability to control saturation along each fatty acid chain, or the number of hydrogen atoms bonded to each carbon. A double bond between two carbon atoms replaces two hydrogen atoms -- yielding different characteristics for the finished oil product.
Source: Solazyme.
And finally, Solazyme can control the positioning of functional groups that cap the end of each fatty acid chain, which again yields specific characteristics.
Source: Solazyme.
Algae naturally produce oil, so understanding how specific genes and environmental conditions affect production gives Solazyme an advantage in strain development compared with industrial biotech companies engineering novel metabolic pathways into their host organisms. Renewable Energy Group has a similar advantage when it comes to tailoring fatty acid production in E. coli.
Tailored fatty acids from Renewable Energy Group
The platform of REG Life Sciences (formerly LS9) is built on the backs of E. coli cells -- the organism that gave rise to biotechnology decades ago by producing human insulin -- and their ability to produce fatty acids. In fact, it's the primary metabolism for the bacterium and sports a 90% energetic efficiency. The platform can use C5 and C6 (five and six carbon) sugars and glycerol, the most abundant byproduct of biodiesel production, as feedstock, while engineers can leverage the deep understanding of E. coli to quickly and simply engineer new strains. Similar to Solazyme, Renewable Energy Group has developed numerous ways to tailor fatty acid molecules for cost-advantaged products.
Source: Renewable Energy Group.
The ability to tailor saturation, branching, chain length, hydroxyl groups, and functionality will allow Renewable Energy Group to cash in on a diverse range of products including surfactants (similar to Lux bar soap made with Solazyme algal oils), flavors, fragrances, plastics (similar to Solazyme's waste product stream), lubricants, fuels, and more. Molecules can be made with as few as eight and as many as 33 carbon atoms -- offering various value opportunities. Additionally, tailoring products within the same metabolic range requires less and less work each time. Consider the time required to develop the first three fatty alcohols (products 2-4 represented by the red, purple, and green boxes).
Source: Renewable Energy Group.
There's an enormous opportunity for product development, too. Each product family has over 100 possible structures. Not every structure will have commercial potential, but it's good to have options.
Source: Renewable Energy Group.
Speaking of options, engineers have demonstrated over 1,000 unique products with the fatty acid platform.
Source: Renewable Energy Group.
Of course, Renewable Energy Group has yet to announce commercial plans for REG Life Sciences and its disruptive industrial biotech platform, although management plans to announce formal development plans and partnerships in the next 12-18 months. The company believes it can leverage its extensive transportation, logistics, and feedstock sourcing networks to aid in developing its new assets. It may be challenging to utilize a full commercial scale facility with just a handful of products, but management is quick to note the advantages of co-locating a new facility with one of its existing biodiesel facilities in the Corn Belt. The company may also seek to lease production capacity to other companies as a toll manufacturer to offset costs and minimize downtime. We'll have to wait for more details before we speculate too much.
Foolish bottom line
Is Solazyme well ahead of Renewable Energy Group in terms of commercialization and development of its industrial biotech platform? Yes, but that doesn't make the opportunity for REG Life Sciences any less significant. The company's ability to tailor fatty acids, similar to the way Solazyme tailors the fatty acid chains that comprise its triglyceride oils, has great potential to create long-term value for investors. There's a long road ahead, but Renewable Energy Group is well positioned to turn industrial biotech into an avenue for growth.
