A reinvigorated consumer pursuit towards sustainability has placed companies on the pathway to find alternatives to palm oil. One such option that is beginning to emerge is the use of algal oil to replace the base materials… found within the supply chains of everyday household products. Leading the way to this transition is a renewable oils and bioproducts company named Solazyme (SZYM). By customizing the oil composition of heterotrophic microalgae, the biotechnology company has unlocked the ability to design tailored oils which can compete and improve upon their vegetable-based and petroleum-based oil predecessors.
To date, Solazyme has developed a line of oils which can be used in a wide range of product applications. This includes markets for food, home & personal care products, cosmetics, chemicals, functional fluids, biofuels, and even drilling lubricants. In a previous article found here, I showed there was a particular interest in replacing palm oil for soaps and detergents. This could be seen in the establishment of separate partnerships betweenUnilever (UL) and Ecover with Solazyme.
A New Supply Agreement
Yet in an example of growing demand, Solazyme has recently made additional headway with another partnership for soap and lotion bases. While not announced by Solazyme itself (likely to respect existing relationships), Stephenson Group Limited was more then willing to announce the development on its own. On August 12, the company’s division of Stephenson Personal Care proudly announced on its company blog that it has established a supply agreement and development project with Solazyme.
The agreements are set to revolve around the production of algae-based oils for specialty soap base ingredients. According to the blog post, this could specifically include ingredients used to make extruded soap bases, glycerin soap bases, liquid soap bases, lotion bases, emulsifiers, and liquid concentrates. Combined, these products address bar soap production, personal care applications, and household applications.
Stephenson Group Ltd. is a company with a rich history. The United Kingdom-based soap supplier has been selling soap and soap based products to the textile, paper, and rubber industries since its founding in 1856. The company twice received the Queen’s Award for Enterprise, the highest official UK award for British businesses. The company has also been on the forefront of sustainability having joined the Roundtable on Sustainable Palm Oil in late 2010. In 2010, the company became the world’s first soap maker to offer 100% RSPO Sustainable Palm Oil soap bases as a testament to its environmental stewardship.
Interestingly enough, the company has managed to develop an admirable reputation in the industry for its soap-making craft. Stephenson Group, Ltd. takes credit for developing the original ‘Crystal’ Melt & Pour Soap Base. One favorable characteristic for melt and pour soap bases is that it doesn’t require the use of caustic lye for soap manufacturing. As another demonstration of its leading reputation, Stephenson also served as the consultant and advisor for the 1999 film, ‘Fight Club,’ for all of its notorious soap-manufacturing references.
Stephenson Personal Care now serves hundreds of clients in over 50 countries. As a result of its industry influence, the company looks to provide Solazyme’s products with a global gateway into the world of specialty soap bases. Concerning the introduction of algal oils into its product line, it’s also clear that Stephenson also moved quickly to adopt the new materials. Already shown on the company website and in the graphics below, Stephenson’s extruded opaque soap noodles now include the use of renewable Algae Oils. The product “Liquid Alg – Algae Oil” is also prominently displayed on its website.
Adding to the company’s excitement over this new product line, Stephenson Group CEO Jamie Bentley stated the following about the product’s introduction:
“We are now producing commercial runs of these products, which is exciting. This is a fantastic step for our Product Development and Innovation team and illustrates our real and positive intent to offer tailored Renewable oils and specialty soap bases into the Personal Care market”
-Jamie Bentley, CEO
A Few Implications for Solazyme:
- Adding To A Limited Client Base. According to the last quarter’s earnings call, Solazyme only had a mere 15 clients spanning across the entire spectrum of its target markets. As one of the early adopters of the company’s technology, Stephenson likely stands as a key partner to Solazyme for its specific industry role. Currently, Solazyme is establishing long-term relationships with like-minded companies that can both share Solazyme’s long-term vision and increase the market’s acceptance of the company’s products.
- Addressing The Most Valuable Market Segment. Based on prior guidance, the market for skin and personal care products remains the most lucrative target market for Solazyme. With expected gross margins in excess of 60%, Solazyme’s new partnership with Stephenson places additional emphasis and serves as a further development of the company’s most valuable market segment.
- Complementary Market Space. While Solazyme is already supplying oils for major retail soap brands through its partnership with Unilever, the new partnership with Stephenson Group appears to target a more niche soap-making sector. The company appears to address specialty soap makers. As such, Solazyme continues to broaden their market scope by addressing multiple tiers of the same supply chain.
- Ongoing Development Project. One key point that investors should also pay attention to is that Stephenson also entered into a development project with Solazyme. This suggests the supplier’s willingness to further expand their product offering in the future. It also underscores that the company understands Solazyme’s technology platform and has a desire to leverage its potential. Above all, this could also result in a tangible increase to research and development revenue going forward.
Is This Just The Beginning?
While Solazyme’s oils are now being utilized as an immediate replacement for palm oil in soap production, it remains much too early to believe that the company’s potential has already been tapped. One reason for investors to remain intrigued going forward can be found in Solazyme’s ongoing intellectual property filings. For example, investors should consider the recent patent application found here named “Cosmetic Compositions Comprising Microalgal Components.”
In this patent application, we see that the company intends to expand its offering of cosmetic and personal care applications with some rather unique developments. One example includes the saponification of microalgal biomass which would directly prepare a liquid cellular soap made from the whole algal cell itself. In another instance in the same application, there is the theory of a delayed release process utilizing the enzymes already present on human. The following is quoted from the same patent application:
” Without intending to be bound by any particular theory, it is believed that enzymes present on human skin will slowly degrade the intact microalgal cells, thereby releasing the intracellular contents, including microalgal oil, over a period of time. In some embodiments, the microalgal biomass composition is retained in contact with the skin for at least 15 minutes, for at least 30 minutes, for at least 45 minutes, for at least 1 hour, for at least 2 hours, for at least 3 hours, or for at least 4 hours or more.”
Regardless of what comes about, it remains clear that Solazyme expects to make a difference in the field of personal care products and particularly in soap production. The new agreements with Stephenson Group, Ltd. only serve to reinforce this concept. In the very least, it should further prove to investors that the market demand is present even as the company continues to build out its production capacity.
A Brief Look At The Company Now
Solazyme now trades with a market capitalization of $741 million based on the closing price of $9.41 on August 18. The company has completed construction on its first two large-scale manufacturing facilities based in Iowa and Brazil, and it is now in the process of ramping production at these locations. These two locations have a combined nameplate capacity of 120,000 metric tons [MT]. Presuming upon a the minimum target selling price of $2,000/MT (as anticipated by the company), these two facilities will have the capacity to support more than $240 million of revenue annually.
Solazyme also currently has in place agreements capable of expanding its existing production out to 400,000 MT annually. While this would take time and additional capital, such capacity would be able to support nearly $800 million of revenue annually once constructed and ramped. According to Solazyme’s Senior VP, Charles Dimmler, the company also expects to support average operating margins in excess of 20% according to his interview at thePacific Crest 16th Annual Global Technology Leadership Forum.
As of June 30, Solazyme maintained a healthy balance sheet of $403.78 million in total assets. This was largely exclusive of the $212.66 million in total assets which will eventually be included when the company consolidates its joint venture in 2015. As of June, Solazyme maintained cash equivalents and short-term investments of approximately $285 million. The company currently operates with a quarterly operating loss of $32.23 million, although this amount is expected to decline as production continues to ramp in the coming quarters.
It remains early days for Solazyme as a commercial enterprise as the company continues to ramp production at its first large-scale facilities. Solazyme expects manufacturing at full nameplate capacity to be achieved over the next 12-18 months. This will follow an S-curve schedule which makes it difficult to accurately predict in the present whether the company is in front of or behind of its expected progress.
As a result of this, investors should continue to evaluate Solazyme through a wider perspective rather than solely focusing on its product revenue generation. One part of this can be found in the evaluation of its partnership base which will be responsible for driving market development. We see that Solazyme continues to round out its client portfolio with a list of reputable names capable of providing leadership.
The addition of Stephenson Personal Care as a partner appears to offers a good fit when it comes to aligning the mission of each party. While Stephenson gains an environmental advantage through the use of algal oils in its product formulations, Solazyme gains access to a global market from the wide distribution network of an established market player.
Solazyme continues to position itself with a strong foundation. The company has proven its technology, penetrated established markets, and constructed its manufacturing base. Solazyme is now tasked in developing its marketing infrastructure as its manufacturing capacity begins to come online. The commercialization process is slow, but steadily gaining momentum. Investors looking for a disruptive technology capable of addressing multiple markets should consider Solazyme as a long-term hold.
View original article at: Solazyme Gains A Partner For Specialty Soap Production