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A new trend is developing in the pharmaceutical industry: Leading companies are beginning to focus on safer plant-based and nutraceutical products that provide the efficacy without the side effects. Industry leaders are realizing that they are missing out on tremendous revenue opportunities, as consumers will not buy many products because of the side effects.

Flying under the radar is an innovative natural products chemical company called ChromaDex (OTCQX:CDXC). ChromaDex has been developing its plant-based nutraceutical line for the past 13 years and, from my perspective, is at the forefront of this new trend in medicine.

On Sept. 20, the company will announce the results of a clinical trial for its lead product, pTeroPure. This will take place at the prestigious American Heart Association's High Blood Pressure Research Conference. pTeroPure is addressing three huge pharmaceutical markets: blood pressure, obesity, and cholesterol. If the trial results are positive for any of these indications, shares of ChromaDex should soar.

ChromaDex Addressing $76 Billion Pharmaceutical Market

The total addressable market for cholesterol, obesity, and blood pressure drugs is about $76 billion.

First, let's take a look at the cholesterol market. All told, the cholesterol market generates about $20 billion a year. Lipitor, which lowers blood cholesterol, is the biggest selling drug in pharmaceutical history. In 2011, Lipitor generated $7.4 billion for Pfizer (NYSE:PFE). But here's the catch: It has side effects, including headaches, muscle and joint pain, lack of appetite, back pain, and constipation. Crestor, the second most popular cholesterol drug, is bringing in $4.2 billion a year for AstraZeneca (NYSE:AZN). But Crestor's side effects are even worse. They include headaches, nausea, vomiting, diarrhea, muscle pain, liver failure, muscle breakdown, and kidney failure.

Second, let's look at the obesity market. It is difficult to calculate because there have been no effective drugs in the market for quite some time. With 300 million obese people worldwide and a drug cost of $100 per month, we can project a potential market of $360 billion. Let's say that 10% of this population decides to use weight-control drugs -- that gives us a total addressable market of $36 billion. As a point of reference, Orexigen (NASDAQ:OREX) estimates the total addressable market to be above $100 billion. No wonder so many pharmaceutical companies are scrambling to come up with an effective and safe obesity drug.

Two pharmaceutical companies, Vivus (NASDAQ:VVUS), and Arena (NASDAQ:ARNA), have recently made progress on the obesity drug front. Each company will soon be launching its respective new drugs, although the safety and efficacy of these drugs is questionable. Vivus's drug Qsymia only helps users lose 10% of their weight and lists side effects including increased heart rate, birth defects, and a condition called metabolic acidosis, which can lead to hyperventilation, fatigue, and anorexia. In clinical trials, Arena’s obesity drug Belviq was associated with average weight loss of 3% to 3.7%. Belviq's most common side effects are headache, nausea and dizziness, and patients taking Belviq were twice as likely to have neuropsychiatric and cognitive side effects.

Third, let's look at the $20 billion market for high blood pressure drugs. Lisinopril (brand names include Prinivil and Zestril) was the third-largest selling drug in the world in 2010 with 87.4 million prescriptions written. The side effects include cough, headaches, dizziness, sexual dysfunction, diarrhea, and tiredness.

So you get the picture: huge potential markets, but with products that may create nearly as many problems as they solve. It's easy to understand why Big Pharma is now focusing on nutraceutical and plant-based pharmaceuticals that provide efficacy without side effects. If ChromaDex is able to report positive efficacy data on Sept. 20, the company will no longer be an obscure micro-cap. With a $76 billion total addressable market, this company will be on everyone's radar.

Big Pharma's Healthy Approach

Let's take a look at some of the prescription nutraceutical products Big Pharma has developed that provide efficacy without the side effects.

GlaxoSmithKline (NYSE:GSK) has a product called Lovaza. This is an omega-3 fatty acid derived from esterified fish oils that it markets for cholesterol control. GlaxoSmithKline sells it as a prescription, and it is a more than $2 billion a year drug for the company. The main reason this drug is so popular is because it lowers cholesterol without producing side effects.

Abbott Laboratories (NYSE:ABT) launched a successful product called Niaspan, which is nothing more than time-release niacin, a common B vitamin. Niaspan is generating about $1 billion a year for Abbott.

Prescription-based nutraceuticals have become popular with physicians. If a physician has the option to write a prescription for a product from a major pharmaceutical company, he or she will do so rather than have the patient gamble with off-the-shelf products that can vary in quality. Patients prefer this system because their insurance company or Medicare will usually reimburse them, whereas they won't be reimbursed for a product bought off the shelf from Walgreens.

These prescription nutraceuticals are working into the existing medical system very well; Big Pharma salespeople call on the doctors, the doctors write the prescriptions, the patients get the prescriptions filled, and Big Pharma ultimately gets paid. It's a time-tested loop that is transferring well into the prescription nutraceutical market.

ChromaDex is focusing on discovering and developing these new prescription nutraceuticals, and then partnering each product with major pharmaceutical companies.

ChromaDex's Business Model

ChromaDex has a unique and cost-effective business model that allows the company to discover, develop, and get products to market. Here is a breakdown of the ChromaDex business model:

  • Phase 1: Determine which new phytochemical compound is creating a buzz in the research community.
  • Phase 2: Determine whether or not this compound addresses a large enough market to be profitable.
  • Phase 3: Run preliminary tests for efficacy and safety.
  • Phase 4: Determine if compound can be manufactured.
  • Phase 5: Buy the license.
  • Phase 6: Manufacture and begin selling the compound.
  • Phase 7: Initiate proof of concept trial.
  • Phase 8: Begin discussions with big Pharma regarding partnership.
  • Phase 9: if trial results are positive, finalize partnership.

ChromaDex's Secret Weapon

The key to ChromaDex's success is its natural products chemistry laboratory in Boulder, Colo. This laboratory, which generated about $6 million in 2011, develops phytochemical compounds that it sells to prestigious universities and research organizations. The lab gives ChromaDex the opportunity to gather intelligence from these research organizations with the goal of discovering the next big product.

By observing the ongoing research, ChromaDex essentially has inside information, which allows the company to identify valuable compounds before anyone else even has a clue. Big Pharma can't get in at this stage because it just doesn't have access to the data that ChromaDex has.

Business Model Details

When ChromaDex sees that a particular phytochemical compound is creating a buzz in the research community, it tags the compound and begins internal research in ChromaDex's lab. The goal at this point is to determine whether or not this compound provides compelling safety and efficacy data and can be manufactured cost-effectively.

If so, ChromaDex then goes to the university or research organization and buys the license. This is where it gets interesting. A typical licensing deal would include a $15,000-$50,000 upfront payment and royalty payments in the low single digits. However, because ChromaDex is getting in so early, the licensing can be purchased for practically nothing. There is no competition because nobody else knows these licenses have value.

Next, ChromaDex begins selling the compound to food, beverage, and dietary supplement companies. This is actually easier than one would think because ChromaDex has such a strong reputation among the big players. Most of its customers are practically begging to get early access to any new ChromaDex product. ChromaDex incurs very little sales and marketing costs at this point because of its strong customer relationships.

If the customers really like the product, ChromaDex moves on to the next stage, which is to begin a proof of concept study. This study is typically 100% funded from product sales, so there is very little risk for ChromaDex.

Once this proof of concept trial begins, Big Pharma often approaches ChromaDex with the intention of a potential licensing deal. This is a desirable situation because ChromaDex doesn't have to go out and knock on Big Pharma's door. In fact, some Big Pharma companies are actually approaching ChromaDex at the licensing stage. Big Pharma is very focused on building its prescription nutraceutical product lines, and ChromaDex appears to be one of the best sources for these new products.

Once the proof of concept trial data is released, if positive, negotiation talks should accelerate and the upfront and milestone payments rise accordingly. This is why the Sept. 20 trial results announcement is so important.

The ChromaDex Pipeline

ChromaDex currently has three products in development, all at various stages.

Product No. 1: pTeroPure

ChromaDex 's lead product, pTeroPure, was awarded Frost & Sullivan's 2010 Most Promising Ingredient of the Year as "an ingredient with proven efficacy and safety that addresses the needs of multi-populations." pTeroPure is used in the treatment of obesity, high blood pressure, and high cholesterol. pTeroPure ingredient sales from inception should exceed $6 million by the end of 2012. (ChromaDex has only invested $1 million in TeroPure's development.)

There are two primary markets for pTeroPure. First, pTeroPure is sold as an ingredient to dietary supplement companies. There are about 30 dietary supplement products that now use pTeroPure. Second, TeroPure is the primary ingredient in ChromaDex's BluScience retail line. You can buy BluScience products at Walgreens, GNC, and thousands of other pharmacies throughout the United States. Thus far, BluScience sales have exceeded everyone's expectations. The product is now available in 20,000 stores, and I expect sales to increase significantly over the next 12 months. I think ChromaDex will actually sell the BluScience division within the next year, which could provide another positive catalyst for shareholders.

After the clinical results are announced, the company intends to showcase pTeroPure on the "Dr. Oz Show," "60 Minutes," "20/20," "The Today Show," and "Good Morning America." As ChromaDex brings more attention to pTeroPure, partnerships or a buyout of the BluScience retail line become more likely.

Product No. 2: ProC3G

ProC3G, an anthocyanin, is a product that ChromaDex is already selling to dietary supplement companies. The next step will be the proof of concept human clinical study. ChromaDex has the only high-purity anthocyanin in the market today. Its goal is to convert ProC3G into a major drug candidate and partner with Big Pharma.

ProC3G's primary indications are weight loss, blood sugar control, heart health, and anti-aging. Given the large market for these indications, this product should generate significant interest from pharmaceutical companies as well as the nutraceutical industry.

Product No. 3: Nicotinamide Riboside

Nicotinamide Riboside ((NYSE:NR)) is at the proof of manufacturing stage, and ChromaDex expects to begin selling this product by Q1 2013. NR is an extremely advanced version of niacin without the side effects (flush). This compound could easily replace the multibillion-dollar niacin market. Niacin is included in foods, beverages, dietary supplements, pharmaceutical products, animal products, and cosmetics. ChromaDex is the only company that owns the patents for NR, and has the ability to manufacture it in commercial quantities.

This is an effective compound, with health benefits that exceed niacin's, including weight loss, energy boost, and cholesterol control. Due to the interest that has already been generated by this product, I would anticipate that Big Pharma will be negotiating with ChromaDex way before the proof of concept study even begins. From my perspective, this could be one of ChromaDex's most successful products.

Potential Big Pharma Partners

I believe ChromaDex is already in negotiations with some Big Pharma companies, which could include Novartis (NYSE:NVS), GlaxoSmithKline, Pfizer, and Johnson & Johnson (NYSE:JNJ). Also, considering that Dr. Phillip Frost, chairman of the board of Teva Pharmaceutical (NYSE:TEVA), is a major ChromaDex shareholder, there's a good chance that Teva could become a partner with ChromaDex.

Food and Dietary Supplement Businesses

So far I've just been talking about the revenue potential for Big Pharma products. But there is a whole other side to the business where ChromaDex is already generating sales in the food, beverage, dietary supplement and sports nutrition markets. Some of ChromaDex 's customers include Kraft (KFT), Pepsi (NYSE:PEP), and Cargill.

Many of these large companies have shifted their focus, and now want all of their products to provide health benefits. This opens the door for ChromaDex because ChromaDex owns the patents to some of the most desirable compounds. I expect ChromaDex sales into these markets to increase significantly over the next couple of years.

One thing I like about the food supplement market is that ChromaDex can begin selling products much earlier in the process since the clinical trials are shorter than those required by Big Pharma. ChromaDex should be able to generate revenue streams in the tens of millions fairly quickly in the food supplement business.

Insider Buying

During the past year, there have been over 30 insider purchases and only one sell. In late June, Pharma guru Dr. Phillip Frost bought 600,000 shares at $0.65. He now owns over 15 million shares, or 16.5% of the company. Co-Chairman and Director Barry Honig has been adding shares recently, and now owns 7.7 million shares, or 8.35%, of ChromaDex. I have been following Frost's and Honig's investment activities and am impressed by their track records.

Risks for Investors

There are some risks that could have a negative impact on share price. There is always the possibility that the Sept. 20 pTeroPure clinical data announcement is negative. Also, ChromaDex can be a thinly traded stock, so buying and selling large blocks can be difficult. Finally, ChromaDex may need to do a financing some time this year. The company has $2 million in cash, and unless it wants to cut back on expenses -- which it could do -- a financing may be necessary.

As an investor, I am willing to accept these risks because of possible positive outcomes. I think that Sept. 20 clinical data will be good, partly because the American Heart Association would not have invited ChromaDex unless some compelling data was going to be presented.

If the clinical data is good, a partnership including upfront and milestone payments is possible. That would negate the need to raise capital, assuming it happened in a timely manner.

Three Reasons to Own ChromaDex

I became a shareholder because I believe ChromaDex stock will appreciate after Sept. 20. Here are three reasons why:

  1. The Sept. 20 announcement should provide positive clinical data for weight loss, cholesterol, or high blood pressure. Success with any of these indications will provide ChromaDex with access to multibillion dollar markets, as well as give investors immediate share price appreciation.
  2. ChromaDex 's access to the research done by universities and research organizations gives the company a huge competitive edge in spotting the next wave of new products. This provides an almost unlimited supply of new products and access to licenses at low prices.
  3. The company has a valuable patent portfolio, and this portfolio should grow as new products are licensed. These patents cover leading edge products that have high probabilities of strong future demand. ChromaDex has proven to investors that it can predict future market demand by its success with pTeroPure.

Conclusion

ChromaDex provides investors with two short-term catalysts. First, if the clinical data is positive, ChromaDex's price should surge and partnership negotiations will be accelerated. Second, if a partnership is announced, or ChromaDex sells the BluScience division, the shares will go even higher. ChromaDex is a well-managed company with a strong competitive advantage, and I believe the short-term and long-term prospects for investors are excellent.

Disclosure: I am long OTCQX:CDXC. 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. For complete disclosure and disclaimer information, please click here.

Source: Near-Term Catalyst Could Drive ChromaDex Shares Higher