PURE Bioscience Reports Continued Progress And Leadership Role In 'Preventive' Food Safety

| About: PURE Bioscience (PURE)


PURE's operational restructuring completed; strategic transition to food industry focus well underway.

Test results with trial partners indicate superior efficacy and compelling economics versus incumbent cleaning and disinfectant solutions.

New "preventive" solutions in development and to be submitted for FDA and USDA approval this spring.

Future fiscal quarters should reflect progress in commercializing PURE’s SDC-based technology as a leading food safety solution.

In mid-2013, PURE Bioscience, Inc. (NASDAQ:PURE), initiated a change in strategic direction and corporate transformation to commercialize its proprietary silver dihydrogen citrate (SDC) anti-microbial technology platform as an anti-bacterial solution for food contamination and disease issues across the food industry. Seven months into this process, in PURE's quarterly conference call on March 13th, Hank Lambert, CEO, and Peter C. Wulff, CFO/COO, reported continued, on-going progress in executing this strategy and discussed exciting progress in developing new "preventive" applications for SDC to help block pathogens from entering the food supply chain.

On the sales and business development front, Mr. Lambert announced:

•PURE has been successful in converting its test trials with three national food processors into commercial business. A fourth multi-national food processor also has placed an initial order.

•Test results from trials documented up to a 96% improvement in "killing" efficiency for SDC versus incumbent ammonia and chlorine-based cleaning and disinfectant solutions.

Feedback from trial partners indicates that the non-toxic characteristics of SDC eliminate the need to break down, rinse, and dry production equipment during cleaning cycles - thereby reducing process downtime, improving process utilization rates, and yielding compelling cost savings versus incumbent cleaning and disinfectant solutions.

•A national QSR (quick service restaurant) completed testing that reaffirmed prior test results indicating that SDC-based products provide superior efficacy versus incumbent disinfectant products.

•PURE reported this national QSR is conducting a commercial supply chain test trial in April at 700 QSR locations within several US regions. Contingent upon completion of this larger commercial trial, a plan for a phased, system-wide U.S. national rollout is under review and development.

•A second national QSR chain has approached PURE about test trials.

PURE estimates that the total addressable U.S. market for sanitizers, disinfectants, and cleaners in the food industry represents $1.5 - $2.0 B/year opportunity; the company believes that through direct sales to a targeted pipeline of 25 potential customers it can achieve $20 - $30 M penetration of these markets with existing products and regulatory approvals. In the short term, the company anticipates reaching a $750 K/quarter revenue run rate by July, 2014, increasing to a $3 M/quarter revenue run rate by July, 2015. At this revenue level, the company expects to achieve pre-tax profitability. PURE has accumulated net-operating losses exceeding $70 million to offset future pre-tax profits.

On the operational front, Mr. Wulff also highlighted:

•Successful execution of a distribution agreement with Brenntag Specialties, Inc., to distribute SDC as an active ingredient or preservative for use in personal care products.

•A strategic collaboration agreement also has been signed with Intercon Chemical Company (Pending:ICC) to take over PURE's legacy distribution channels and other non-food distribution opportunities.

•Completion of restructuring its operations by outsourcing manufacturing operations to ICC to reduce operating expenses and avoid future capital expense for building and maintaining manufacturing capabilities. This manufacturing transfer will result in a 50% reduction in facilities costs and improve manufacturing and supply chain agility.

•The company has raised an additional $1.3 M since January, for a total of $6 M raised since last August. This has enabled PURE to strengthen its balance sheet through the retirement of all long-term debt and through a significant reduction of accrued liabilities from fiscal year-end 2013.

On the financial front, PURE reported revenues of $156 K for the six-month period ending January 2014, versus revenues of $373 K for the six months ending January 2013. Net losses for the same six-month period were $6.3 M in fiscal 2014 versus a net loss of $4.0 M in fiscal 2013. Both revenues and net loss reported in 2014 were indicative of PURE's strategic restructuring process and transition period as PURE moves away from its legacy business model to its new food industry-specific focus. On a pro forma basis, excluding restructuring and stock-based compensation expenses, the adjusted net loss for the year-to-date six months 2014 was $2.6 M, a reduction of 28% compared with prior year-to-date net loss in 2013.

With the operational restructuring completed and transition to a new focused business model well underway, future fiscal quarters should reflect progress in commercializing PURE's SDC-based technology as a leading food safety solution.

Compelling New Product Applications Aligned with FDA "Preventive" Direction

Of equal significance, PURE management discussed its progress in developing a new series of preventive SDC "spray/wash" applications as processing aids and interventions for produce, poultry, and meat processing and to enhance shelf life of fresh and packaged foods.

For the Food and Drug Administration, prevention now is at the heart of food safety. According to FDA Commissioner Margaret A. Hamburg, M.D., "Preventing problems before they cause harm is not only common sense, it is the key to food safety in the 21st century. We cannot afford to wait until people become ill to realize there is a problem." Prevention, in fact, is a core principle of the FDA Food Safety Modernization Act (FSMA) that President Obama signed into law in 2011. This Act created a blueprint for the most sweeping changes to the nation's food protection system since the early 1900s. FSMA not only empowered the FDA to implement a revamped, science-based system to address food safety hazards but also shifted the focus of regulators from merely responding to contamination to preventing unsafe foods from entering the food chain in the first place. The fundamental tenet of this "preventive" approach is to eliminate hazards at early stages of the food supply chain rather than trying to contain or control them once the problem has occurred. Put simply, not allowing contaminated foods into the system is preferable to trying to deal with contamination once it's out in markets and restaurants.

In fact, a continuing issue for the food industry is the number of product recalls and food-borne illness outbreaks due to the presence of food contaminants and pathogens. Since my first article on food safety in late January, there have been over 20 additional food recalls for salmonella, listeria, and e. coli risks alone. This includes four in the past week, most notably a COSTCO (NASDAQ:COST) recall of its Kirkland Signature Real Sliced Fruit product for potential salmonella contamination. For restaurant chains such as Darden (NYSE:DRI) and QSRs such as McDonalds (NYSE:MCD), Yum Brands (NYSE:YUM), and Jack In the Box (NASDAQ:JACK), viral outbreaks can be a PR nightmare with serious impacts on brand equity, a costly impact to the bottom line, and legal liabilities. Food processors such as Conagra (NYSE:CGA) and Tyson Foods (NYSE:TSN), which recently recalled chicken product due to possible salmonella contamination, face the same risks.

Transition to a simple, preventive approach to food safety would go a long way toward ending the recurring cycle of food contamination by eliminating or reducing pathogens early in the food production chain. However, the tools for preventive food safety are currently sparse. In this context, PURE's new initiative for preventive upstream food safety application related to the processing and packaging of produce, poultry, and meats is timely and significant. In Q4, 2013, PURE began this work though partnership with Dr. James Marsden, a noted food safety scientist and expert at Kansas State University. Specifically, PURE is pursuing immediate development of "spray/wash" applications of its non-toxic, SDC technology as a broad-spectrum, antimicrobial for "direct contact" wash/spray for produce, meat, and poultry processing as a preventive measure to kill various food-borne pathogens. A long-term development opportunity also exists to seek approval as a non-toxic preservative to reduce spoilage and extend shelf life for fresh produce, fruits, and pre-packaged food products.

According to Hank Lambert, CEO of PURE Bioscience, "Having an SDC-based direct food application that is more effective in the killing of pathogens that persist through the processing of produce, poultry, and meats will greatly increase the value of the food safety solution that PURE is able to offer the food industry. We are excited that preliminary test results are encouraging in this regard."

In short, companies can use SDC to stay ahead of the regulatory curve, as the most cost- effective way of keeping pathogens out of their supply chains and as a very savvy insurance program to protect brand equity. PURE estimates the potential addressable U.S. market opportunity for these new "preventive" applications to be in excess of a $1 B per year.

Mr. Lambert indicated in the conference call Q&A that he expects to file submissions for these applications of SDC with the FDA and USDA this spring. He estimates that the authorization process would take between six and nine months, with the goal of initiating commercial use by the end of the calendar year 2014.


When asked in the Q&A session, "What are your biggest concerns ahead?" Mr. Lambert responded that they are two-fold. First, under the direct sales model, actual sales cycles can be elongated due to in-depth testing, piloting, and roll-out processes. As a result, a return to revenue growth could take longer than expected. Cash is a second concern. The new PURE is burning cash at a rate of approximately $1.0 M to $1.2 M/Qtr; cash on hand will only last through the third quarter of fiscal 2014, and the Company expects to tap the capital markets again. Equity financing will dilute the existing shareholder base. The longer the sales cycle and time to revenue, the more cash will be required.


In terms of valuation, PURE currently trades in a range around $1.30 per share with a market cap of $35 M. Zack's Small Cap Research issued a report on PURE with a revised 12-month price target of $3.00 per share and $81 M market cap. Zack's believes this is conservative.

The stock has traded in three ascending bases since reorganizing last summer and has formed a handle in the present $1.30-$1.35 range. Risk tolerant investors should continue to build positions or begin accumulating PURE now. The company is poised to break higher on any one of several catalysts that could occur over the next twelve months including: 1) the announcement of definitive agreements with major food processors and/or restaurant chains within the next 60-90 days; 2) approval from FDA and USDA for new preventive direct-contact/spray applications; 3) indications of sales traction and revenue growth after the company completes its business transformation away from legacy operations by July, 2014; and 4) potential re-listing on one of the national exchanges in 2015.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.