Solazyme and the Year of Living Dangerously

March 3, 2014 |

moemaSo, Solazyme steps up to slay the scale-up dragon.

Will the company stay on its scale-up schedule, at the final step where Amyris, Gevo and KiOR ran into crushing delays?

In California, Solazyme announced results for the fourth quarter and full year ended December 31, 2013.

The Results

Q4 Revenue (vs Q4 2012): $11.3M (+34%)
Q4 Net (vs Q4 2012): -$33.3M (+35%)
2013 Revenue (vs 2012): $39.8M (-10%)
2013 Net (vs 2012): -$116.4M (+40%)

So — widening losses, falling annual revenue. So, why the excitement amongst most of the analysts?

2013 Highlights

Scale-up: Completed construction at 20,000 MT Archer-Daniels-Midland Company facility in Clinton, IA; downstream companion facility operated by American Natural Products in Galva, IA; neared completion of 100,000 MT SB Oils facility in Brazil.

R&D Partnerships: Partnership inked with Mitsui & Co., new JDA with AkzoNobel, and extension of JDA agreements with Bunge Limited and Unilever.

Offtake: 10,000 MT supply agreement inked with iUnilever; also, agreements with Goulston Technologies and Koda Distribution Group.

New platforms: Development announced with myristic, oleic, erucic, capric and caprylic Tailored oils.

Algenist Sales Growth: Algenist revenues totaled $19.9 million in 2013, a 21% increase versus 2012. The Algenist brand also won the 2014 Marie Claire Prix d’Excellence de la Beauté in France. Algenist was unanimously selected by the judging panel.

Bunge's Moema sugar mill

Bunge’s Moema sugar mill

The analyst bulls speak:

Pavel Molchanov, Raymond James

Price target: $12.50. The versatility of Solazyme’s algae-produced oils opens the door to wide-ranging opportunities across the fuel, chemical, personal care, and nutrition markets. While fully recognizing the inherent execution risks in early-stage industrial biotech, we are bullish on the roadmap to commercialization, with two major proof points during 1H14. The balance sheet is also in great shape, with the largest cash balance in the peer group, virtually eliminating equity dilution risk over the next 12 months. We reiterate our Outperform rating.

Ben Kallo, Tyler Frank, Baird

Price target: $18. We reiterate our Outperform rating and are increasing our price target to $18 following SZYM’s Q4 earnings. SZYM made critical strides during Q4 and the first part of 2014 in commercializing its Clinton, IA factory and began commissioning its factory in Brazil. Although scale-up risk remains, early runs show that SZYM can produce and sell several types of oils at commercial scale. We will continue to follow its production ramp and would be buyers of the stock at current levels.

Rob Stone, James Medvedeff, Cowen & Co

Price target: $17.00. The Q4:13 loss per share of 49c was wider than St. (38c), but essentially in-line with our (48c) estimate on higher expenses, mainly Clinton startup costs. Clinton is in production. Moema has begun fermentation at 125K liter scale; full production is expected in March/April. We cut estimates to a more conservative ramp/ASP/GM profile, but raise our PT to $17 (vs. $14) as startup risks are easing.

The Bear: Mike Ritzenthaler, Piper Jaffray

Price target: $4.00. We maintain our Underweight rating and $4 price target on shares of SZYM following a 4Q print that included a GAAP EPS loss of ($0.40) on revenues of $11.3 million versus PJC estimates of ($0.28) on $11.8 million. Looking past the shortfall in sales relative to our estimate and the company’s guidance, our main takeaways from the results and the call last evening are that product prices will not likely be above $2k per MT this year, that Solazyme likely lacks sufficient liquidity to ramp both Clinton and Moema to full rates, and that the Moema startup is likely a 2Q event (versus management’s previous target of 1Q).

In the Outlook

Scale-up

Molchanov notes: “Clinton producing, Moema is next. On December 23, we noted that Solazyme is on the cusp of two major milestones along its commercialization roadmap. The first of these materialized on January 30, as commercial-scale production began at the Clinton, Iowa plant, a project built in collaboration with Archer Daniels Midland.

“Consistent with past commentary, production at the Clinton facility will ramp over 12 to 18 months – along a back-end-loaded “S curve” – until reaching nameplate capacity of 20,000 metric tons per year. (Year-to-date, 500 metric tons among three distinct products have been produced, with selling prices averaging $2,600/ton and the high end at $3,700/ton.) Over time, there is room to expand capacity to 100,000 metric tons per year.

“This also happens to be the capacity of the Moema plant in Brazil (a joint venture with Bunge), which is currently being commissioned, with fermentation set to start in March and product recovery in April. At that point, Solazyme will be the first player in the algae bioindustrial arena to have achieved commercial-scale production in both North and South America.”

Ritzenthaler cautions: “Notables from the call include pricing pressure and further delays at Moema. Management stated on the call that they do not expect initial ASPs to be above $2k per MT – a harbinger, in our opinion, of the effects of building capacity ahead of demand. We do not share management’s confidence in their long-term margin targets, with straight-forward production economics combining with what we believe to be a lower level of pricing power to paint a very different picture. With the Recovery area still under construction, and four weeks to the end of 1Q14, the startup of Moema on an integrated basis will almost certainly be a 2Q event.

Positive cash flow

Molchanov says: “Positive cash flow on tap for 2015. While the ramp-up of production will certainly not be linear – as is always the case in industrial biotech – we anticipate utilization rising to 50% in 4Q14. This translates to a nearly four-fold increase in total revenue from 4Q13 to 4Q14. To be clear, Solazyme can get to positive cash flow at the corporate level (in 2015) even before full utilization at either Clinton or Moema.”

Kallo & Frank add: “Two commercial factories ramping in 2014. Clinton is currently producing ~500 MT per month and Moema is on track to begin commercial production by Q2:14. Importantly, SZYM scaled three different oil-based products at Clinton and has a fourth underway. Management believes the ramp of both (Clinton and Moema) facilities will take 12-18 months and expects to be cash flow positive by 2015.

Averaged price target (4 analysts)

$12.87. Feb 28 closing price: $12.27.

Reaction from Solazyme

“2013 was a year of great progress for Solazyme as we readied our first major capacity projects, signed new commercial supply agreements, added important joint development partners, and further expanded our portfolio of Tailored oils,” said Jonathan Wolfson, CEO of Solazyme. “In the first half of 2014, we are focused on successfully executing Solazyme’s entry into broad commercial operations. We have begun shipping multiple products from the Clinton/Galva, Iowa facilities and are deep into commissioning in Brazil as we complete the first-of-its-kind 100,000 MT Solazyme Bunge Renewable Oils (SB Oils) facility at Moema. In these early days we are focused on generating consistent and reliable production for our partners, ahead of accelerating our production ramp later this year.”

“Solazyme’s 2013 results included 21% growth in our most commercially mature business, as our Algenist skin care line expanded its product offerings and geographic footprint. We also delivered on all of our joint development milestones for our partners,” said Tyler Painter, CFO of Solazyme. “We anticipate continued growth in these revenue streams in 2014 and look forward to growing product revenues from commercial supply of our products later this year as we ramp commercial production. In the meantime, Solazyme remains in a healthy financial position as we complete our first plants and prepare to broadly scale operations.”

The Digest’s Take: The Year of Living Dangerously

2014 is Solazyme’s take-off year. After more than a decade as a development-stage company, now begins the real-scale up of operations and revenues.

We’ll know about scale-up by year-end — by then, SZYM will be past the Hillary Step where AMRS, KIOR and GEVO stumbled…or not. We also should know if the product demand is there at prices that meet the market’s anticipations.

Incremental steps along the way. Mechanical completion on all aspects in Q2. And look for any warnings on the commissioning process in Q3, plus news on the customer front.

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