Hank Lambert, CEO of PURE Bioscience, Inc. (NASDAQ:PURE), acknowledges that PURE investors have historically needed a lot of patience - but less so since new management stepped in August 2013 to drive a laser-focused commercialization plan for silver dihydrogen citrate (SDC) as a food safety solution to the food industry. The promise and potential of the Company's SDC anti-microbial technology platform had propelled its market cap to over $250 million in early 2008, before collapsing in the financial crisis later that year. The Company has always had great technology, but the previous executive team wasn't successful bringing it to commercialization.
After languishing for several years, in mid-2013, PURE initiated a change in strategic direction, as well as a corporate restructuring and refocus to commercialize SDC as an anti-bacterial solution for the food industry. In its quarterly earnings conference call on March 13, 2014, PURE reported ongoing progress in executing this strategy, and indicated exciting potential in developing new "preventive" applications for SDC to help block pathogens from entering the food supply chain.
In my Seeking Alpha article of March 21, I covered the key aspects of the Company's transformation strategy. In the subsequent two months, the Company has released four significant business updates via a series of press releases:
- On April 9, the Company reiterated stellar results with a leading quick-service restaurant (NYSE:QSR) chain in testing SDC as an anti-microbial, hard-surface disinfectant, which led to expanded use in 650 U.S. locations.
- On April 15, PURE reported that food processing customers are re-ordering and expanding their pilot adoption of the PURE Hard Surface anti-microbial product at various pathogen and hygiene control points in their plants.
- On May 1, PURE announced initial testing success with new "direct food contact" applications to kill Salmonella bacteria at poultry processors, thus opening a potential new food industry opportunity.
- On May 19, the Company announced initiating in-store testing at three additional QSR chains for the PURE Hard Surface anti-microbial product.
To gain further insights, I requested and was granted a phone interview with the two leaders of the Company this week. Participating in the call were Hank Lambert, CEO, and Peter Wulff, CFO/COO. We began with a set of Q&As, summarized below, and continued with a general follow-on discussion.
Q: Are you still on track, and now 30-45 days away from a formal sales win with your lead QSR?
A: Yes, we are now 30-45 days away from the decision for a national, system-wide rollout. Our SDC product is initially being positioned as an extra layer of protection in addition to existing cleaning protocols, resulting in a small insurance premium to minimize QSR food safety risks. Eventually, as our customers gain more confidence, we hope to take a larger role as their antimicrobial disinfectant and cleaning agent of choice, increasing our share of the market.
Q: Are there other QSRs in the testing pipeline?
A: We have one other major and two other medium-sized national QSR chains in various stages of testing. We expect these to complete over the course of the next 60 days. We have "system-wide" revenue expectations for all three this calendar year. In total, we have 6-8 of the top national QSR chains at various levels of engagement.
Q: Can you share when any announcements will occur?
A: No, we cannot give exact dates or name our partners at this time. However, we will file an SEC 8-K and make press announcements when the appropriate time arrives.
Q: Are you still on-track for formal sales agreements with your food processing partners?
A: We currently have five food processor customers in various stages of commercial pilot adoption. We have received and fulfilled re-orders from several of them. They enthusiastically report that our SDC product has demonstrated superior anti-microbial performance versus their incumbent disinfecting and cleaning agents. They intend to expand their commercial pilot adoption for broader use, now that they have completed extensive in-plant testing, which demonstrated the product's effectiveness in other areas, such as walls, floors, conveyor belts, and process equipment.
Q: Can you advise when revenue will ramp appreciably from this activity?
A: We are talking about introducing a disruptive technology into a market with well-established suppliers who are industry-leading companies. So the sales cycle can be long. That said, we expect to show a ramp in food processor sales over the second half of calendar 2014.
Compelling New "Direct Food Contact" Applications
The most intriguing part of our teleconference was when PURE management discussed its recent progress in developing a new series of preventive SDC "direct food contact" application as a processing aid for poultry, produce, and meat producers. In Q4, 2013, as part of its new food industry focus, PURE began an initiative with Dr. James Marsden, a noted food safety scientist at Kansas State University. The work consisted of testing SDC as a broad-spectrum, non-toxic, antimicrobial wash/spray for produce, meat, and poultry processing as a preventive measure to kill various food-borne pathogens. Management laid out a "roadmap" to first develop and test a direct food contact application product for Salmonella in poultry, followed by a version for produce, and finally one for other meats, each optimized for the different processing methodologies.
According to Lambert, test results for SDC as a processing aide for poultry yielded "spectacular results, with no detectable levels of Salmonella bacteria."
The timing couldn't have been better.
In December of 2013, the USDA's Food Safety and Inspection Service (FSIS) released a priority list of actions, which was outlined in a Los Angeles Times article. At the top of the list was a plan to fight Salmonella; the most frequently reported cause of foodborne illnesses, which is responsible for an estimated 1.3 million cases of foodborne illness per year in the United States. FSIS released a Salmonella Action Plan that outlined the steps it will take to address the most pressing problem it faces--Salmonella in meat and poultry products. These included "developing more stringent sampling and testing and creating first-ever national standards for salmonella contamination rates in cut chicken parts." Elisabeth Hagen, USDA under secretary for food safety, said the plan was the most comprehensive effort the agency had taken to reduce Salmonella. "This is the biggest priority we have," Hagen said, "we've got over a million people in the U.S. getting sick... Anything we can do to bring those numbers down is critical to protecting public health."
According to the LA Times, the plan included "developing more stringent sampling and testing procedures and creating first-ever national standards for Salmonella contamination rates in cut chicken parts." The push by the USDA to limit Salmonella came after a Salmonella outbreak tied to Foster Farms poultry plants in California sickened hundreds nationwide in October, 2013. The outbreak exhibited an especially virulent strain of Salmonella that showed signs of resistance to antibiotics. But more significantly, the incident demonstrated how the entire food chain: from producers, to processors, to retailers, to restaurants, were exposed to Salmonella contamination. For example, Kroger (NYSE:KR) and Costco (NASDAQ:COST) were both impacted by the Foster Farm incident. In recent years, producers and processors such as Tyson Foods (NYSE:TSN) have been linked to Salmonella contaminated poultry and other foods. Restaurant chains such as Yum Brands (NYSE:YUM) and McDonalds (NYSE:MCD) are constantly at vigil and subject to great scrutiny as they further process and deliver foods to the consumer. All these companies have significant brand equity exposed to food contamination, and are incented to take measures to ensure a Salmonella-free food supply.
According to the Washington Post report, in 1998, the USDA had instructed processors that "no more than 23 percent of whole chickens in any plant could test positive for Salmonella. In 2011, the agency lowered that limit to 7.5 percent and began posting test results online." "The result is the contamination rate of the carcasses has dropped," stated Robert Tauxe, CDC deputy director. "But here's the puzzle," he said. "The frequency of human illness didn't change. Just about everybody buys chicken parts, but there's no government standard for Salmonella levels in chicken breasts, thighs and legs. If you look at how much Salmonella is on the parts, there's a lot more than is on the whole carcass." Also from the Washington Post:
The USDA itself suspected this, and found that 24 percent of parts were contaminated with Salmonella; nearly four times the amount as on chicken carcasses. That same percentage held true at the Foster Farms plants tested during the recent outbreak, USDA officials said. The USDA has said it plans to institute new standards regulating chicken parts as soon as this year.
It seems PURE's initiative undertaking direct food contact application testing for poultry was spot-on. When furthering its regulatory review for approval by the FDA and the USDA, PURE will partner with several producers to test Salmonella levels before and after chicken carcasses are cut into pieces and processed.
Confident in these initial testing results, PURE invited the USDA and the FDA to review the poultry test data in a meeting during the first week of May. According to Lambert, these officials found the results "compelling in the reduction of Salmonella," and encouraged PURE to "apply for regulatory approval to commercialize" by submitting a Food Contact Notification, or FCN, to kick off the review process by the FDA and the USDA.
Last week, the timing again looked brilliant. Lambert, when discussing PURE's direct food contact application "roadmap," indicated that PURE had also already initiated testing a direct application for produce, and will follow on with testing on beef and other meats. Three days later, on May 16th, Brian Ronholm, FSIS acting under secretary for food safety, announced on the USDA Blog that FSIS would this summer begin a new testing of ground beef to improve safeguards against Salmonella. He wrote: "While FSIS has a range of safeguards to reduce E. coli in ground beef, this summer we will begin new testing to improve the safeguards against Salmonella as well." He went on to comment: "Salmonella is the most urgent issue facing FSIS when it comes to protecting consumers, and it is why we developed our Salmonella Action Plan."
Lambert indicated that the FDA submission for the direct food contact application of SDC on poultry as a processing aid would be submitted by the end of May. The regulators have a 120-day study and response period. Once FDA grants the FCN, the USDA thereafter requires a program of three trials at poultry producers, followed by three weeks of USDA analysis before a formal decision is rendered. Under this timetable, management hopes to begin commercial shipments potentially as early as December 2014. Testing for direct food contact for beef and produce applications, and subsequent submission for regulatory approvals should follow 30-90 days later.
PURE estimates that the total addressable U.S. market for sanitizers, disinfectants, and cleaners in the U.S. food industry represents $1.5B-$2.0B/year opportunity; the Company believes that through direct sales to a targeted pipeline of 25 potential customers, it can achieve $20M-$30M penetration of these markets with existing products and regulatory approvals. According to Lambert, once approved, the new SDC-based direct food contact applications will enable PURE to pursue an incremental $1B per year addressable U.S. market opportunity.
When asked if the Company had sufficient cash available for the remaining part of the year, Peter Wulff responded that PURE's recent restructuring had resulted in a "significant reduction in working capital to fund inventory and manufacturing operations." Furthermore, Wulff stated that the Company is regularly raising additional capital from existing investors, and that PURE's financing needs also will be driven by the growth in market development costs and accounts receivable. Lambert also cautioned that PURE competes against established companies such as Ecolab (NYSE:ECL) and privately-held Diversey and Birko. Although confident that SDC's superior performance will enable PURE to establish a market presence, the competitive environment may result in longer-than-anticipated sales cycles that stretch the time to material revenue. That said, the Company expects to attain EBITDA breakeven by the second calendar quarter 2015.
Historically, SDC was such a promising story that PURE shares sold at much higher prices in 2007 through 2010; but the former management couldn't deliver sales results, and market cap plummeted from nearly $250 million. Today, the "new PURE," with a very focused market execution plan on food safety, is finally on the verge of delivering results, but shares are close to all-time lows; PURE currently trades in a range of $1.10 to $1.50 per share with a market cap of $30M.
Recent press releases and my interview with PURE management support the conclusion that PURE's long-awaited breakout is finally in sight. Lambert, when asked why an investor should buy PURE today, responded:
"We are not well known, but have a solid management team with excellent ties to the food industry, and are a leader in two growth markets with substantive opportunities that are the focus of government public health initiatives."
Risk-tolerant investors should continue to build positions or begin accumulating PURE now. The Company is poised to break higher upon the announcement of definitive agreements with major food processors and/or restaurant chains, or regulatory approval for new direct contact applications for poultry, beef, and produce. A meaningful uptick in revenue in the next one or two quarters will also prompt an increase in share price. My takeaway is that PURE's risk-to-reward ratio is shifting; it may be more favorable to buy shares today at prices under $1.50, as opposed to waiting for downstream announcements and paying prices as high as $3 or $4.
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.
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