Throw all of your revenue projections out the window for now. Renewable oils manufacturer Solazyme Inc (NASDAQ:SZYM) started out the week with some bad news. The company announced that it was dissolving its joint venture with Roquette Freres — a mutual agreement — after the two had “divergent views on an acceptable commercial strategy, timelines for manufacturing, and the marketing of joint venture products”. Apparently, Roquette — along with the rest of Europe — is not too thrilled about using genetically modified organisms in its food.
It marks the first time that the company has had a major setback and serves as a reminder to stay on your toes when investing in the turbulent industrial biotech industry. While it certainly isn’t good news in the short or long terms, it isn’t all bad news, either. I know that sounds hard to believe given the dismal view investors got of the inner workings of the joint venture Monday morning. However, there are several things investors and potential investors need to know after the change in circumstances.
The bad news
Well, Solazyme Roquette Nutritionals (SRN) is no more. What does that mean? The commercial facility being developed in Europe — which was owned 100% by Roquette, anyway — is no longer going to contribute oils for the company’s top and bottom lines. A phase-two expansion of the facility to 5,000 metric tons (MT) of annual capacity was under way and expected to be ready for ramp-up this month. A phase-three expansion could have boosted total annual nutritional oils capacity to 50,000 MT in later years.
That missing production is a slight blow in the short term. SRN was only going to contribute 2,500 MT of oils by the end of 2014 and, if expanded further, only 25,000 MT. By contrast, Solazyme Inc (NASDAQ:SZYM) will capture much larger production volumes with its partner Archer Daniels Midland Company (NYSE:ADM) and in its joint venture with Bunge Ltd (NYSE:BG)
| Biorefinery | Nameplate Capacity | Nameplate Operations By | Solazyme Capacity |
|---|---|---|---|
| Clinton, Iowa | 20,000 MT | Mid-2015 | 20,000 MT |
| Moema, Brazil | 100,000 MT | Early to mid-2015 | 50,000 MT |
Source: SEC filings
The Clinton facility will eventually be expanded to 40,000 MT and 100,000 MT — all of which will be owned by Solazyme Inc (NASDAQ:SZYM). The Moema facility, being jointly developed with Bunge Ltd (NYSE:BG), will not be expanded under current agreements. However, the two are expected to add an additional 200,000 MT of capacity at other locations (half-owned by Solazyme Inc (NASDAQ:SZYM)) to their venture by 2016, meaning that it would be operating at full nameplate capacity by mid-2017 at the latest.
Total annual nameplate production without SRN will only drop from 72,500 MT to 70,000 MT by the time the middle of 2015 rolls around. Longer-term production, including planned but uncommitted capacity with Bunge Ltd (NYSE:BG), will be axed from 275,000 MT to 250,000 MT. That represents about $75 million-$125 million in annual revenue in the long term (2013 revenue will not be affected).
The good news
There is some good news to go around. The decision to dissolve the joint venture is not related to technological setbacks, but rather timelines that could be made to satisfy both companies. Additionally, Solazyme Inc (NASDAQ:SZYM) still retains the nutritional oil profiles it has developed. Depending on regulatory hurdles in South America and the United States (the FDA recently granted regulatory approval for another nutritional product), the company can manufacture nutritional oils at Clinton and Moema with upgrades to downstream processing equipment. It would require Bunge’s approval in Brazil, but the firm has expressed interest in food oils in the past.
What I find interesting is that the company may actually find it easier to fulfill initial volumes at its larger facilities. Whether or not management has major off-take agreements for specialty chemicals ready to go remains to be seen, but adding nutritional oils to the mix could alleviate some of that pressure by expanding the potential customer base. It also isn’t out of the question that another food partner would be brought in to build a new facility for nutritional oils.
Foolish bottom line
This was surprising news for investors, but it isn’t necessarily all bad news. Solazyme Inc (NASDAQ:SZYM) will now miss out on $75 million-$125 million in future revenue per year from the facility. However, this will allow it to perhaps expedite commercialization of nutritional oils and focus on manufacturing operations in Brazil and the United States. If you can see the company’s amazing long-term potential, then perhaps you will see this as a buying opportunity. I still have concerns about analysts’ projections for the company’s revenue that need to be settled, although I will certainly look to buy shares if shares slip much further.
The article Commercial Life Catches up With Solazyme originally appeared on Fool.com and is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and biotechnology.The Motley Fool owns shares of Solazyme.
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