What to Watch at Solazyme Inc (SZYM)

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Solazyme Inc (NASDAQ:SZYM)Solazyme Inc (NASDAQ:SZYM) continues to trek ahead toward its ambitious goals of scaling one of the world’s first industrial biotechnology platforms. The developmental stage company will bring 125,000 metric tons of annual nameplate renewable oil capacity online by mid-2014, which has many investors sizing up revenue growth models and profitability projections. The growth will be undeniable, but there are obstacles ahead as well. Here are three things investors need to watch at the often misunderstood company.

1. Capacity additions
The disruptive company finished 2012 on a high note with several upstream commercial partnerships. Solazyme Inc (NASDAQ:SZYM) accelerated its partnership for domestic renewable oils production with Archer Daniels Midland Company (NYSE:ADM). The two will eventually produce an annual capacity of 100,000 metric tons — all belonging to Solazyme — at the Clinton, Iowa, biorefinery, which will have an initial nameplate capacity of 20,000 metric tons. The joint venture with Bunge Ltd (NYSE:BG) was also expanded from an initial agreement of 100,000-300,000 metric tons of annual nameplate production by 2016 — half of which belongs to Solazyme Inc (NASDAQ:SZYM).

There are differences between the two. Whereas the Archer Daniels Midland Company (NYSE:ADM) expansion will occur at Clinton, the Bunge expansion would require additional greenfield construction at locations other than the joint venture’s current Moema, Brazil, facility. That entails additional permits for construction and operation, construction costs, off-take agreements for 200,000 metric tons of new products, and other big capital commitments. Luckily, those costs will be split between Solazyme Inc (NASDAQ:SZYM) and Bunge Ltd (NYSE:BG).

Adding all planned capacity to that currently under construction amounts to 450,000 metric tons. That’s a big, big deal, but still 100,000 metric tons shy of the company’s internal goals. There are currently no announced plans on where the extra 100,000 metric tons will come from. Investors will want to remain on their toes when it comes to costly additions with Bunge Ltd (NYSE:BG) and any announcements regarding the unfilled capacity. The company’s cash hoard will disappear pretty quickly, so bringing revenue-generating capacity on line as quickly as possible is crucial.

2. Licensing for novel food oils
Solazyme Roquette Nutritionals, or SRN, has generated market interest from various food processing companies looking for nutritional supplements. The company’s Almagine HL (flour) and Almagine HP (protein) have performed well in testing against industry standard applications from other plant-based sources. However, neither product is a novel tailored oil.

Qualifying as non-novel allows each of the two nutritional supplements to be sold to customers without special regulatory filings. That may not fly with several products under development today, but the degree of novelty remains to be determined by American and European regulatory agencies. Why does it matter?

The SRN facility in Europe is currently undergoing a phase-two expansion to an annual capacity of 5,000 metric tons; up from the current 300 metric tons. Depending on market adoption, which seems to be sky-high for protein supplements, SRN can decide to expand the facility to an annual capacity of 50,000 metric tons under a phase-three agreement. Should the two products under development be labeled as novel Solazyme Inc (NASDAQ:SZYM) will have to go through the proper regulatory channels to gain approval for commercial sales in Europe and possibly the United States. CEO Jonathan Wolfson recently noted that could take “a couple years”, which could delay the need for phase-three expansion.

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