This is just a small piece of the puzzle on the way to a disruptive future that doesn’t account for selling prices, off-take agreements, production costs, and market adoption — all things that will be crucial for a successful investment that I will delve into in future articles. Nevertheless, let’s look into the story and discuss what 500,000 L means for the company and investors. But first, let’s take a quick detour to discuss the dangers of only looking at the reward side of an investment.
You can’t afford to speculate
The public darling of the industrial biotechnology industry has inspired plenty of speculation, especially from those who don’t fully understand the industry. If 2012 taught us anything, I hope it was that speculation can be very dangerous in this industry. Consider how the following companies fared on their 400th day on the market compared with their overhyped IPO closing prices:
| Company | IPO Closing Price | 400th Trading Day Closing Price, % Difference |
|---|---|---|
| Codexis, Inc. (NASDAQ:CDXS) | $13.26 | $4.98, (62.4%) |
| Amyris Inc (NASDAQ:AMRS) | $17.23 | $2.83, (83.6%) |
| Gevo, Inc. (NASDAQ:GEVO) | $17.10 | $3.27, (80.9%) |
| Solazyme | $20.71 | $7.75, (62.6%) |
Source: Historical data provided by Google Finance.
Dozens of red flags were visible when each company went public and remained in place last year, but horrendous projections from wishful bloggers, writers, and analysts (with skin in the game) got in the way.
De-risking or premature jubilation?
As a bioprocess engineer, I find it disappointing to see a lack of discussion about the risks involved. Don’t get me wrong — steady progress is being made, and Solazyme’s announcement in December only enhanced the industry’s commercial prospects. Let’s just not forget that there were only two partial runs to brag about — a questionably small amount of data points to throw around words like “de-risking.” Celebrating too early has doomed other companies in the recent past.
Last July, Gevo CEO Dr. Patrick Gruber announced the company had shown it could “successfully ferment isobutanol in large (about 950,000 L) commercial fermenters, isolate the product, and get it into tanks and railcars.” Just four months later, the company admitted that production at its Luverne, Minn., facility would switch to ethanol production as engineers worked on increasing yields of isobutanol. Spin or not, the market didn’t like it.
In 2011, slow-motion train wreck Amyris hit snags at 200,000 L fermenters, which eventually knocked the company’s timeline back considerably. The company is now focusing solely on its Paraiso biorefinery and should announce important updates when it reports earnings Feb. 19. With corrections to initial expectations, management team turmoil, and ballooning costs behind it, Amyris will attempt to gain traction in 2013.
Troubles at Codexis and LS9 have little to do with scale (so far), as the companies have demonstrated the ability to operate at 150,000 L and 135,000 L, respectively. Codexis suffered a massive blow when Royal Dutch Shell plc (ADR) (NYSE:RDS.A) decided to leave for more immediate returns on the thermocatalytic platform of Virent. Now on its own with a new management team in place, the company faces a make-or-break year in 2013 as it desperately seeks partners for its cellulase enzymes. Meanwhile, LS9 has completed multiple runs producing fatty alcohols in its recently opened demonstration-scale facility in Florida. The company, in need of cash, may be thinking twice about its original plans to forgo an IPO.
What’s in a number?
Now, what does 500,000 L really mean? I’ve read some pretty spectacular calculations since the announcement was made from people trying to determine how much oil the company could produce per run. Unfortunately, the numbers are pretty useless. Why? Investors won’t know the process metrics (things like yield, efficiency, on-stream factors, and so on) for Solazyme’s heterotrophic algae platform anytime soon, if ever.
The following simplified engineering principles should help investors realize just how little is actually known.
Bioreactors operate at working volume, which is usually 80% of tank volume. That’s because the tank needs empty space for fermentation broth (an annoying byproduct), air, and a safeguard against interns who add too much of anything. That immediately sets the maximum production level of a 500,000 L tank to 400,000 L of product — and we haven’t even begun fermentation. Next, knowing that the company’s algae contains 80% oil further lowers the bar to just 320,000 L of maximum product per run.
The 320,000 L figure will be reduced further by fermentation yield (the tank contains more than just crowded algae cells), instrument displacement (agitator blades, temperature probes, and internal piping take up room, too!), success factor (inevitably, some runs do not meet the standard and must be thrown out), and downstream efficiency (separation loss, refining loss, and the like). Nonetheless, we can deduce that less than 64% of total tank volume will actually go to product for the company.
That may sound depressing at first, but all sustainable chemical companies will face similar constraints. In fact, biopharmaceutical manufacturing platforms can often have total product yields well below 50% because of strict purity guidelines. I just want to help investors understand the ins and outs, no matter how big or small, of the companies they own.
The fact remains that Solazyme is in rarefied air at 500,000 L.
Foolish bottom line
I admit that I don’t have all of the answers, but I do want to help the world invest better. I hope what I’ve shown you illustrates why it’s dangerous to read too much into speculations and gives a brief inside glimpse into the engineering aspects facing the industry. The “coolness” of a technology means little in terms of financial opportunity: I still want investors to acknowledge the risks that lie ahead.
Nevertheless, I remain cautiously optimistic that Solazyme will successfully reach the 750,000 L fermenters needed to meet economic production of its renewable oils. The potential markets are huge, and the message it would send to the world would be profound. Solazyme’s great relationship with its partners and track record for hitting milestones on time should comfort investors as well. Do you think Solazyme can grow into the disruptive game-changer it has set out to be? Let me know in the comments section below.
The article What Does Solazyme’s 500,000-Liter Fermenter Really Mean? originally appeared on Fool.com and is written by Maxx Chatsko.
Fool contributor Maxx Chatsko owns shares of Codexis. Check out his personal portfolio or follow him on Twitter, @BlacknGoldFool, to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool owns shares of Solazyme.
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