2 Easy Ways Solazyme Can Unlock Value for Its Most Profitable Brand

By Markets Fool.com

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Whenever I'm (dragged) in a Sephora store (against my will) I try to make the best use of my time. It's interesting to study the marketing of biology-derived cosmetics; the colors used in the packaging, the trendy words used in the messaging, and the setup of the product display for each brand. Apparently, ingredients sourced from plants and algae are becoming increasingly popular and more prominent in product positioning.

That's good news for the Algenist skin and personal care portfolio ofSolazyme , which ended 2014 with 34 individual products selling in 21 countries. It's available in over 2,500 retail stores owned by Sephora, Ulta Salon , select Nordstrom stores, and SpaceNK Limited, among others, which have no doubt aided its impressive growth in recent years and should continue to catalyze expanding sales in coming years.

More importantly for investors, Algenist is by far the company's most popular brand, accounting for $24.4 million in revenue at a 68% gross margin in 2014. That's fantastic, but what if Solazyme could catalyze the growth of Algenist and more fully monetize the development of its unique cosmetic ingredients? It is possible -- and it may be easier than most investors think.

Algenist by the numbers
Investors are patiently awaiting the arrival of full-scale operations at Solazyme's two commercial manufacturing facilities in Clinton, Iowa, (annual capacity of 20,000 metric tons when fully utilized) and Moema, Brazil (annual capacity of 100,000 metric tons when fully utilized). Unfortunately, market conditions and production delays have lowered near-term expectations considerably. While the frustrations are understandable, investors may not be fully appreciating the importance of Algenist, especially for its role in keeping product revenue afloat while the company transitions to its new commercialization strategy.

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Consider the brand's growth and individual importance since it was commercialized in 2011.

2014

2013

2012

2011

Revenue

$24.4 million

$19.8 million

$16.5 million

$7.2 million

Gross Margin

68.3%

68.1%

67.7%

66.3%

% of Total Product Revenue

65.4%

99.5%

100%

100%

Source: SEC filings

The consistent performance and growth of Algenist, year after year, is simply stunning. But what allows the brand to be highly profitable, even as the company struggles to achieve positive margins elsewhere?

Well, it's quite simple. Algenist products are sold directly to consumers . While Solazyme manufactures at least two of the key cultured ingredients included in the products from its microalgae platform (alguronic acid and microalgae oil), Algenist products are formulated products. That allows the company to capture more value from the production of its main ingredients than it would if they were supplied as a raw ingredient or as part of a market-ready formulation to other personal care brands.

Or consider this example. Let's say I own a business that manufactures high-end medical bandages from eucalyptus pulp, which come from a100 acre plot of land my business owns. I also own an adjacent 500 acre plot of land, but my business doesn't yet need more raw ingredients, so I don't plant trees there. Now, I'll make a lot more money from selling finished medical products to consumers than I would from selling eucalyptus pulp to other businesses. But if the opportunity arose I could expand production of eucalyptus pulp pretty easily, still supply my own business and its growth, and capture even more revenue than I did before.

Here, Solazyme owns both the eucalyptus trees (alguronic acid manufacturing capacity) and the medical bandage company (formulated Algenist products), but it could easily supply pulp to other businesses.

Unlocking additional value in skin and personal care
Solazyme and other industrial biotech companies will be pursuing opportunities for their cultured ingredients production by optimizing the value of various strategies that launch an ingredient into a market. The value available to capture from a value chain depends on the market in question, the product development cycle for the products involved, the out-of-pocket expenses the company is willing to incur, and other important factors. Generally speaking, the market launch strategies are as follows:

Market Launch Strategy

Reasons to Pursue

Value Capture

Supply raw ingredient to other businesses

Too expensive to develop in-house brands, no opportunity exists outside of supply, not the most valuable cultured ingredient for a company to develop brands for

Suppliers capture the lowest amount of value from the value chain.

Develop and market product formulations to other businesses

Company wants to increase demand for a cultured ingredient, to accelerate an industry's adoption of cultured ingredient, to nudge other businesses to include cultured ingredient in next product development cycle

Formulators are further downstream in value chain than suppliers and therefore capture more value.

Develop and market formulated products directly to consumers (through retailer)

Company sees valuable opportunity to monetize production of a cultured ingredient in direct consumer applications, but wants to leverage footprint of existing retailers

Selling through retailers may allow a company to capture 25% to 30% of a final sale.

Develop and market formulated products directly to consumers (through in-house efforts)

Company sees valuable opportunity to monetize production of a cultured ingredient in direct consumer applications and is willing to invest in in-house portals (i.e. website), company doesn't want to split revenue with retailer(s)

Selling through an in-house website allows a company to capture up to 100% of a final sale.

Source: author discussions with industry executives and marketers

It's not uncommon for companies to pursue combinations or all of the market launch strategies above. As you can see, Solazyme currently utilizes the final two by selling through retailers such as Sephora, Ulta Salon, and Nordstrom and through its own website. But there's an opportunity to supply alguronic acid and microalgae oil ingredients and formulations to other personal care businesses and grow sales and profits even further.

Yes, it would capture less value from the overall supply than the strategies being pursued at the moment, but keep in mind that Solazyme is the only company capable of manufacturing alguronic acid, which it patented . Considering that the niche ingredient sells for somewhere between $20,000 per MT and $4 million per MT, based upon earlier admissions by the company, that could be an opportunity worth pursuing.

Should Solazyme ever encounter stagnate growth from its Algenist brand (which shouldn't occur for a very long time) or wish to more fully monetize production, then investors should know that it has multiple opportunities to do so.

The article 2 Easy Ways Solazyme Can Unlock Value for Its Most Profitable Brand originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool recommends Nordstrom, Solazyme, and Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.