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$SZYM - Solazyme: Plastics? Paper? New Value In Co-Product Concepts Derived From Algae

http://seekingalpha.com/article/1544942-solazyme-plastics-paper-new-value-in-co-product-concepts-derived-from-algae?source=email_rt_article_readmore

Disclosure: I am long SZYM. (More...)

As a leading innovator in designed oil technology, Solazyme (SZYM) is beginning to show the world that significant value can be extracted out of the most humble of sources. The San Francisco-based biotechnology company has spent much of the past decade proving a platform that utilizes heterotrophic algae in order to create a customized suite of tailored oil profiles. This is accomplished by feeding a fixed carbon source to modified microalgae capable of producing oils within the darkness of industrial fermentation tanks.

For the first time in history, the technology has created a unique level of control and flexibility to produce at scale an array of never-before-seen oils. By doing this, the company significantly improves upon the value of the input resources (i.e., sugar) in order to create products of greater worth (i.e., soaps that clean better) and utility to society. The company now faces a reality in which it can enable next-generation products used for everyday life while addressing issues varying from supply chain logistics to environmental concerns.

But alongside the way of utilizing algae as a tool to create oils, Solazyme also began to pursue efficiencies that will allow it to maximize profitability while preventing unwanted problems found in waste material. For a company that specializes in an organism most people wouldn't hesitate to throw away, Solazyme appears to be approaching the question of what to do with its leftover algae biomass with a rather innovative fervor. The results appear promising.

Developing Secondary Product Lines

In a recently filed international application, some information is beginning to arise concerning the rather hazy subject of Solazyme's future secondary product markets. The international application is broadly titled "Algal Thermoplastics, Thermosets, Paper, Adsorbants and Absorbants." The application is protected under the Patent Cooperation Treaty, which allows for the company to establish a filing date across the 147 contracting states adhering to the treaty. However, the company must eventually file a patent in each of the respective national offices in order to secure the protection of this intellectual property in that country.

Included within the details of this international application are descriptions for products derived from biomass which also include the cell wall remains of heterotrophically cultivated cells. In short, these are some possible uses of the leftover biomass remaining after the oil within it has been extracted. Yet in some instances, there are also details for products that utilize the entire microorganism. For those products, the microbial biomass optionally comprises anywhere between 0.25% to 90% triglyceride by dry well weight. While the details are much too extensive to be listed in full, here are some of my notes concerning the filed application:

Through thermoplastics and thermosets, Solazyme appears capable of creating a wide range of materials that are pliable and moldable. These include materials that can be reshaped and those that are irreversibly set upon being heated and cooled. These compositions appear to utilize the whole microbe and may include additional plant polymers.
Solazyme is also able to create an absorbent composition by modifying their microbe with a hydrophilic moiety. Rather impressively, the composition appears capable of absorbing anywhere between five times its weight to more than 100 times its weight in liquid. The application also lists possible liquids as water, saline, oil, urine, or blood. This suggests a wide variety of possible application environments varying from the oil fields to the hospital.
By hydrothermally carbonizing the biomass, Solazyme also appears capable of creating effective adsorbents. Adsorbents are regularly used in a broad spectrum of applications for industries such as refining, petrochemical, chemical, and gas processing. The microbes here appear to be lysed, suggesting that the process utilizes biomass in which the oil has already been extracted. One of the advantages of using a hydrothermal carbonization process is that it is a wet process. As a result, the biomass can be used without an expensive pre-drying stage.
As is the case with the absorbents and the adsorbents, Solazyme's use of biomass to create paper first begins with lysed microbes. The product is comprised of anywhere between 0.1% to 50% of heterotrophic microalgal biomass. The use of microalgal biomass can "replace more expensive pulp" while having the additional benefit of "increased wet-strength" in comparison to conventional paper.

Understanding the Implied Value

The implications of these innovations are actually quite profound. It's important to first recall that most of these claims revolve around the byproduct of Solazyme's process found in the leftover biomass. This is an additional benefit. Yet on its own, the value contained within that biomass can significantly offset the cost of the process itself. Consider the following quote from within the same patent application:

The present invention is based on the realization that biomass, particularly residual biomass that remains after cell lysis, especially of microalgae cultured heterotrophically, is a valuable product, the utilization of which confers substantial overall economic advantage to using the cells as production organisms for making fatty acids or other high value products. Indeed the economic advantage gained may outweigh the expense associated with the lysis of the cell walls. Judicious use of the residual biomass may compensate for loss of efficiency in the process resulting from conversion of sugar and cell-energy to cell wall synthesis rather than toward production of the desired product.

Read another way, the value of these co-products may convey enough economic benefit to offset the costs associated with producing oil. Whether those costs are in the extraction of oil or in the loss of carbon due to cell-creation, it is clear that microalgae biomass has a wide range of function for our world. Indeed, the biomass can be put to use in a wide range of applications and industries.

Within the patent application, the inventors allude to several possible uses of these inventions. Adsorbents can be used to purify substances such as air, water, and chemicals by adsorbing contaminants. Likewise, the absorbent compositions may also find an applicable use in "oil-field drilling fluids." According to the listed uses of biomass for thermoplastic properties, these can vary anywhere from biodegradable objects, to bottles, to luggage, to computer elements, and even airplane parts to mention a few.

A Look at Solazyme Now

Now trading at $11.07 as of July 10, Solazyme carries a market capitalization of $684 million. Armed with a robust balance sheet, Solazyme leads the industrial biotechnology space when it comes to publicly traded companies. As of March 2013, the company had a little over $239 million in cash and cash equivalents.

SZYM Chart

As of now, Solazyme's income statement fails to represent the company under a normalized operation. The company continues to await the completion of its first large commercial scale facilities, which are presently under construction. When finished, the amount of production capacity added will be more than 65 times that of which is currently owned now. Analysts currently peg Solazyme for $270.96 million in revenues for 2014, up from the expected figure of $52.99 million in 2013. Such triple-digit revenue growth remains a future catalyst for the company looking forward.

Final Thoughts

Solazyme is beginning to gain an increasing awareness when it comes to its ability to uniquely tailor oil profiles. However, a fuller picture of the company is only drawn out when one begins to consider the co-product channels of production yet to be announced. As I previously asserted in my article found here, the company's development of co-products may have a significant impact in reducing waste material and improving operating margins. As such, this is why the detailed uses of biomass for thermosets, thermoplastics, absorbents, adsorbents, and paper remain exciting avenues of future growth.

The inventors themselves appear to realize the significant value at hand as noted in the quote previously shown. As for myself, the most intriguing application that captured my attention comes from the filing's subtle mention of using the invention to make diapers. Imagine that. While listed as an application under absorbents, it's not difficult to believe that the company could also find use of thermoplastics and paper as well. Likewise, the product may be biodegradable and could command additional value. Such universal applications continue to prove that Solazyme retains a strong advantage through its market versatility.

Altogether, this recently filed application continues to show the innovative spirit still at work for this decade-old company. Solazyme continues to prove that value can still be found in the most unexpected of sources, even in spent biomass. Ultimately, Solazyme appears poised to play a significant role in supplementing world supply chains through new and innovative materials. For shareholders in the company, clearly not all of the company's cards are out on the table just yet. More importantly, the value proposition continues to improve with every new find.