1 Thing Investors Overlooked in Solazyme's Breakthrough

Last week, synthetic biology and industrial biotechnology company Solazyme announced first-quarter earnings. The developmental-stage company didn't have much to report in terms of revenue as it builds out the initial wave of commercial capacity, but it did update investors on a new ability to tailor its portfolio of renewable oils. Since the company missed on revenues and beat on EPS, investors have to figure that some of the pop in share price in the days following the announcement is directly attributable to the latest tailoring capability.

However, investors may be getting a little carried away with the news. One thing the market seems to have overlooked about the latest scientific breakthrough is that it will have the biggest impact initially on nutritional oils. Unfortunately, the regulatory atmosphere surrounding novel nutritional oils is still up in the air on multiple continents.

Does tailored equal novel?
Solazyme Roquette Nutritionals, or SRN, currently sells two products: Almagine HL Whole Algalin Flour and Almagine HP Whole Algalin Protein. European regulatory agencies consider neither product novel, and it's allowed to be sold right now. In the United States, Solazyme classified each item as Generally Recognized As Safe, or GRAS, through a self-affirmation process, and the Food and Drug Administration issued its own GRAS, no questions asked, about 12 months later.

The company is going through a similar process for newly developed oils in the United States and hopes to attain an FDA GRAS, no questions asked, for each product. Currently, companies aren't allowed to sell commercial quantities of products based solely on a GRAS self-affirmation, although millions of tons of oils are sold as such each year. The problem arises with the FDA's answer to the question, What is novel?

Should the FDA consider any of Solazyme's nutritional oils as novel oils, the company may expect some questions to be stapled to the back of each issued GRAS. That could lengthen the costs and timeline associated with regulatory approvals and delay the launch and sale of products from commercial facilities. Solazyme is looking to nutritional oils to fill an important part of initial capacity next year, so any delays could set back revenue expectations.

The question of novelty is even more uncertain in Europe. CEO Jonathan Wolfson has already stated that should a nutritional oil be classified as novel on the continent, regulatory approval could take years. Why is that a big deal? The SRN facility in Europe is currently undergoing a phase 2 upgrade to 5,000 metric tons of annual capacity. The company could probably easily fill that capacity without the products currently in development, but a future phase 3 upgrade to true commercial scale -- 50,000 metric tons of annual capacity -- is certainly caught in the crosshairs.

Foolish bottom line
Whether investors are just excited about a smaller loss than expected is unknown. But if the market is pricing in the latest tailoring capability, I think it's doing so prematurely. Nutrition segment margins are expected to be north of 40% once the biomanufacturing process is optimized -- and that could take more than the 12 to 18 months needed to reach nameplate capacity after each biorefinery opens. Just remember to keep a watchful eye on updates from Solazyme management about the regulatory uncertainty facing these products. It's one of the biggest immediate risks facing the developmental-stage company.

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The article 1 Thing Investors Overlooked in Solazyme's Breakthrough originally appeared on Fool.com.

Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio or his CAPS page, 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. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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