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What Does Solazyme Inc (SZYM)’s 500,000-Liter Fermenter Really Mean?

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At the end of 2012, renewable-oils manufacturer Solazyme Inc (NASDAQ:SZYM) announced that it had performed two upstream process runs in 500,000-liter fermenters. If the reports of linear scale-up are true, then Solazyme will go down in history as the first next-generation platform to reach such a volume. And while two half-runs are hardly enough to reach the company’s ultimate goals, the news could lead to much bigger and better things.

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.

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