Solazyme Bets on Cosmetics Now, But Still Sees Biofuel Future
For a long time—even as recently as 2011, the year it went public—Solazyme (NASDAQ: SZYM) described itself as a renewable biofuels company. The South San Francisco firm said it wanted to use its secret, heavily engineered strain of microalgae to convert feedstocks like sugarcane into oils inside huge industrial fermentation vats. It boasted of producing tens of thousands of gallons of algae-derived diesel and jet fuel for test customers like the U.S. Navy.
These days, not so much. Today the company calls itself a “renewable oils” company, and sells algal oils for products like sunscreen, anti-aging moisturizers, and veggie protein powder. The hope, eventually, is that it will be possible to use the same strains of algae to make petroleum substitutes at industrial scale. But that plan is on the back burner.
At the moment, says co-founder and CEO Jonathan Wolfson, Solazyme is focused on gaining a life-sustaining foothold in niche markets where profit margins are higher and the cost of entry is lower. One of those is cosmetics; another is nutritional supplements.
It’s a refocusing effort that Wolfson described in detail in a long interview with Xconomy on June 14, and also in a New York Times feature article that appeared June 22. While it may sound like there’s a big gap between cosmetics (Solazyme introduced its Algenist line of skin care products in 2011) and renewable diesel fuel, Wolfson objects to the idea that the company has pivoted away from the biofuels market. He says the company began developing cosmetics and nutritional supplements as early as 2005, and that “it was always part of our strategy” to explore these related markets on the way to making biofuels.
Indeed, Xconomy’s national life sciences editor Luke Timmerman taste-tested some of the foods Solazyme was developing back in 2010. And investors seem to be willing to give Solazyme the time it needs to build a reliable revenue stream before it takes on bigger challenges. The company’s IPO debut in May 2011 at $18 per share earned it a cool $197 million; after a three-month trading frenzy pushed the share price as high as $25, it later settled into the $12 range and has mostly stayed there. Like most developmental-stage companies, it’s burning cash fast (net losses totaled $25.8 million in the second quarter of 2013), but it’s also adding making measurable progress, hitting almost $5 million in product revenue in the second quarter and adding production capacity in collaboration with partners like agribusiness giants ADM in Iowa and Bunge in Brazil.
But exactly when Solazyme will be ready to steer back toward its biofuel dreams is unclear. (The “Sola” part of its name reflects the company’s original, long-since-abandoned goal of using photosynthesis to power algal growth.) Wolfson says cosmetics, specialty chemicals, and nutrition could be come big businesses all on their own—but he thinks stopping there would be a disappointment.
“We could build a very big company without being in fuel, but we have no intention of doing that,” Wolfson says. “Fuel is very important to us. It was the reason we started the company, and it will be a critical focus for us, because it provides an amazing market opportunity.”
An abridged version of our conversation is presented here.
Xconomy: Is Solazyme still a biofuels company?
Jonathan Wolfson: Fuels is the reason we started this company. Fuels is still an enormous part of the focus of this company, and that hasn’t changed. What has changed is a deeper understanding about what we do.
A few years after we started the company, we had a couple of technology fits and starts. We had to modify the technology substantially from what we originally envisioned, and we had to go back to our investors and get the support to try another technology path with microalgae. Anyway, there is a point at which you realize it’s not about the technology, it’s about the product.
We are not an algae company, we are a renewable oils production company, and our goal is to drive the produce cost and the scale of renewable oils down to a place where it makes sense for fuel. Once you start to redefine yourself as an oil company, you start to say, this is going to take real time. We make triglyceride oils, which are the fourth most abundant liquid on the planet, and they go into multiple markets: they are used to make biodiesel but also pharmaceuticals, cosmetics, nutritional supplements, specialty chemicals, specialty foods, bulk chemicals, and bulk foods. If you really care about fuel economics and you want to still exist as you come down the cost curve, you have to get into other markets.
X: Why cosmetics, rather than pharmaceuticals or something else?
JW: We dismissed pharma very quickly because it takes a whole set of competencies. It’s very hard to be a pharma company and something else at the same time. What is the antithesis of fuel on the economic side, but is still something we can tackle? The answer was cosmetics and nutritional supplements.
If you want to be around to make fuels, you have to start to look at the specifics of other markets. [At this point Wolfson drew a table on the whiteboard with fuel and cosmetics on one axis, and market measures---market size, market risk, profit margin, and capital requirements---on the other axis.]
|Market Size||Market Risk||Profit Margin||Capital Expenditure|
Take fuels. It’s the biggest market on the planet, so it gets a big “check” for market size. Because fuel is a commodity, there is zero market risk—another check. But for margin, you are going to sell it for the same prices as everyone else’s fuel, so it’s not your best margin. So that’s a minus. And you have to build a big, dedicated plant, so it has significant capex [capital expenditure] requirements. Another minus.
Then take cosmetics. The market size compared to fuels is tiny, so it gets a minus there. The market risk in cosmetics is huge—I have to convince you to buy this product on the shelf versus the thing right next to it. So that gets a minus also. But guess what? The margins in cosmetics are great. So it gets a check. And at a high level, we do industrial-scale fermentation, almost the way biopharma drugs are made—you put a microbe in a stainless steel tank with a carbon source, the microbe eats the carbon source and produces a material, then we take the algae out and use standard extraction equipment to get the oil out. We could do all of that by renting fermentation capacity, even at a high rental fee, and still make money. So the capex is fantastic for cosmetics. That’s a check.
So you realize that for fuels and chemicals, the checks and minuses are completely inverted. High margin, small market, low capex is where you start if you are going to be around at the end. Small market because you are not going to be able to produce much and it’s going to cost you more. Low capex because if you don’t have a lot of money, you can still rent a facility.
It took a couple of years of thought to work this all out, but we were executing on this plan by 2005. So when people say that we pivoted to all these other things because fuels were too hard, it’s really inaccurate. It takes many years to go from concept to product on the shelf. We started doing work on cosmetics and nutritional supplements in 2005. We launched Algenist in 2011, and our nutritional supplements in 2010. This was always part of our strategy.
X: Okay, so what have you learned along the way about making oils?
JW: We hoped that we would get good enough with this platform to make some modest changes to the profile of oils along the way—something the big agricultural biotech companies have been trying to do for a couple of decades now, to make healthier soy and better vegetable oils, with very limited success. What happened for us, along the way, is that we ended up developing a platform that allows us to tailor oils in a way that has never been done before.
A triglyceride is a glycerol molecule with three fatty acids coming off it that make it look like a capital E. There are many triglycerides—palm oil, canola oil, cashew oil, primrose oil—but they are all made from the same kinds of fatty acids like capric acid, lauric acid, and oleic acid. We have developed the ability to optimize which fatty acids are attached, at what percentage, and even where they sit.
X: How does that help you?
JW: The reason it matters is—for instance, when you eat chocolate, it has a very particular melting curve, between 85 and 95 degrees Fahrenheit, and what gives chocolate that melting property and mouth feel is how many carbons are in each fatty acid and where they sit. So the ability to optimize this means that, for instance, you can make oils that have a very specific melting curve, so they’ll behave in certain ways in a food or in a lipstick.
I like to think about transformer fluids. If you live on a street with electric poles, there are big green humming cylinders on the poles, and for many years those transformers were filled with PCBs that allowed them to stay cool and were non-conductive. We found out that PCBs are incredibly harmful to people so we replaced them with mineral-based or petroleum-based oils. Unfortunately, unlike PCBs, mineral oils have a low flash point, so you get transformer fires like the one that put half of Boston in the dark last year. One of the benefits of petroleum-based transformer fluids is that they are stable for 20 years or more, but they are not stable and liquid at the same time. We developed a profile that allows the triglycerides to be liquid, highly stable, and to have a flash point that is twice as high as the incumbent petroleum-based fluid. So you get something that not only has a lower fire risk, but is biodegradable.
There are many other examples. Think about frying oils. If you are frying food in oil you want to get performance for a long time, so restaurants and food manufacturers were using partially hydrogenated oils like soy oil that stay liquid and stable. But then you end up with trans fats, which are really bad for your cardiovascular system. We have been able to demonstrate that we can make incredibly healthy unsaturated oils that perform the same as partially hydrogenated oils. Some of these oils can be used for much longer, so they’re worth more.
I can tell you that there have been a multitude of errors and misjudgments along the way, but the end result has been two steps forward and hopefully not more than half a step back. It’s been 10 years, but we are finally at a point where we have two products in the market, in nutritional supplements and cosmetics. We have very large plants coming online in Brazil, France, and Iowa, and we are also running a demo and commercial facility in Peoria, Illinois, where we do production for a lot of the cosmetic ingredients.
X: It’s often hard to get customers to switch to a new product like a longer-lasting frying oil unless it’s also cheaper. Can your oils compete on cost?
JW: It depends on the product line. One study determined that our oil had a little over three times the oxidative stability of a premium, high-oleic frying oil that is commonly used today. At the end of a 10-day fry study, it had more days of fry life left than the premium canola oil had at the beginning.
Let’s say your canola costs $1 per bottle. If our oil lasts three times as long, it should theoretically be worth at least $3. Now, the reality is you wouldn’t move into a market by charging that. You would charge something less than the multiple. So the oil may still be more expensive, but the cost to the user is substantially less.
I’m not saying how we would price the oil, but either we have to provide something at a better cost, or we have to be able to provide a better product. In the case of the frying oil, the cost of use is less and you get tangible consumer benefits, because it’s heart-healthy.
X: Are you hoping that you’ll be able you apply this tailoring ability to fuels in the future?
JW: Yes, it works even in fuels. In a barrel of crude oil, you can assume that some of that barrel is worth a low price, some of it is worth a medium price and some is worth a high price when you send it to the refinery. If want our plants to have the highest margins then we are going to focus on the most valuable cut of the barrel of oil and producing a blend stock. Maybe take a heavy sour crude from Venezuela and uplift it so that you can run it in a refinery that hasn’t been refitted. Or take a light sweet oil and blend it with bunker fuel so that you can uplift it to a low-sulfur diesel.
I’m not telling you that down the road we won’t be producing a one-to-one replacement for petroleum. But right now I’m telling you we don’t need to do it. It doesn’t make sense, from a company-building perspective, to focus on making the whole barrel—it makes sense to focus on a component of the barrel.
X: What about the cost of your feedstocks? You have to get the carbon from somewhere. Finding cheap, non-food-crop sources of biomass that has been a major pitfall for biofuels producers.
JW: Yes, absolutely. You should think of this as a platform that converts biomass into oil, and the conversion cost is driven largely by the cost of the input biomass. One thing we’ve demonstrated is that we can use lots of different kinds of sugars, including cellulosic sugars like prairie grasses and grass clippings from golf courses. We are not building our first plants based on those sources of biomass—you want your first plants to run well so you are not going to take one of the harder sources of biomass to start. The cost of using Brazilian sugarcane is higher than the cost of collecting forest residue or paper mill waste. But I believe our technology will ultimately be commercialized on many different feedstocks.
We’ve already demonstrated at least a dozen that work. That doesn’t mean the logistics to collect all those feedstocks are in place. But I believe strongly that our technology will ultimately be running on many different feedstock sources and will be extremely competitive on price.
X: Let’s suppose that your cosmetics and nutritional supplements businesses become very lucrative. Would it still be worth the investment to go into the fuel business? Would you be unhappy if that never happened?
JW: The markets that we can go into are very large and profitable without getting into fuel. But we started the company because we wanted to use biotechnology in a way that would positively influence the planet. There are some very good solutions like electric cars, but I think liquid fuels are going to be around for a very long time, especially in certain applications like aviation and heavy marine. It’s going to be very important to have renewable, sustainable alternatives for liquid fuel.
So, my answer is, we could build a very big company without being in fuel, but we have no intention of doing that. Fuel is very important to us; it was the reason we started the company, and it will be a critical focus for us, because it provides an amazing market opportunity.
X: Given that this is still your ambition, do you feel what you’re learning now about making cosmetics and nutritional supplements will really help when it comes time to start making fuel?
JW: Absolutely, yes. It has allowed us to come down the cost curve and commercialize at the same time. It has also instilled commercial discipline into a company that started out as an R&D organization. It’s really hard to turn an R&D organization into a commercial enterprise—we needed to build out quality assurance and quality control and customer relationships and the discipline of selling products at a positive margin. Those were all things that didn’t exist inside the company and are very synergistic in allowing us to get to fuel. Going one step further, the ability to transform the oils—to get to a better frying oil, for instance—helps us to focus on the better part of the oil barrel.
X: What are the main indicators you look at to figure out whether this is all working?
JW: Our most important KPI [key performance indicator] is product sales. We have had a very substantial upward tick in product revenue over the past couple of years, a lot of it owing to our cosmetics brand launch. Production capacity coming online is another indicator. Peoria is running, a Phase 1 facility is running in northern France, and a Phase 2 is going to begin commissioning this month. Then you have the facility in Clinton, Iowa, that should be running in early 2014, and in Brazil in late 2013. Over 125,00 metric tons of production capacity should be coming online between now and early 2014, and that is a very big deal.
The ability to put together financing and partnership to get all that capital to build capacity was one of the things that people thought we were going to have a very hard time doing. I’m not going to say it’s been easy, but I’m satisfied with where we are.