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  • Can Lucas Bols Compete With Diageo?

    Last Wednesday, February 4, the Amsterdam Stock Exchange IPOd Lucas Bols at €15.75 ($18) per share. Lucas Bols is a Dutch company selling a range of spirits brands with a heritage dating back to 1575.

    Lucas Bols is one of the oldest Dutch companies still active and Bols is the oldest distilled spirits brand in the world. It has a portfolio of more than 20 brands across a range of spirits products, including liqueurs, genever, gin and vodka.

    The company's products are distributed to and sold globally in more than 110 countries, divided in four geographic markets: Western Europe; Asia-Pacific; North America; and Emerging Markets.

    (click to enlarge)

    The Group's global premium and superpremium spirits brands, which represented 69.2% of the Group's revenue in FY 2013/14, include Bols Liqueurs, Bols Genever, Damrak Gin, Bols Vodka, Galliano and Vaccari.

    Lucas Bols has leading market positions in the Liqueur Ranges category with a number one position in the world outside the US and a number three position in the US, which represents the world's largest liqueurs market. Many of the company's other products have market or category-leading positions in the Group's geographic markets.

    The Bols brands also include the House of Bols Cocktail & Genever Experience, and Europe's largest bartending school, the Bols Bartending Academy. The House of Bols Cocktail & Genever Experience offers visitors an experience into the world of cocktails and bartending, as well as a discovery of the traditional Dutch genever.

    History

    The following table summarises key dates and events in the Group's history.

    1575

    The Bols family arrived in Amsterdam to open 'het Lootsje' where they would distil liqueurs. The starting point of what would become the world's oldest distilled spirits brand. The Bols distillery grew quickly and the original 'Lootsje', a wooden shed, was replaced by stone buildings. The name 'Lootsje' remained.

    1652

    In 1652, Lucas Bols was born. He was an influential business man, living in the Golden Age, when Amsterdam was the world's major trading city. Lucas Bols managed to turn Bols into an international brand and greatly expanded the range of liqueurs. The herbs and spices of the Dutch East India Company (NYSE:VOC), which was the first company with publicly traded shares, played an important role in this development and Lucas Bols had, as a major shareholder in the VOC, first choice of the 'new' herbs and spices that seafaring merchants brought into Amsterdam from the West Indies. With his knowledge of distilling, he created 300 different liqueurs, by distilling, macerating and percolating those natural ingredients.

    1664

    The company started producing the first genever, at that time a very common drink.

    1816

    After years of prosperity the last male member of the Bols family died in 1816. The company was sold under the proviso that the name Lucas Bols should always be retained. The new owner received approximately 300 original, handwritten Bols recipes as part of the legacy.

    1868

    The company was sold to the Moltzer family who put a lot of effort into large scale export of Bols products.

    1954

    The last member of the Moltzer family left the board of directors and Bols Distilleries became a listed company in Amsterdam.

    1956

    Lucas Bols started its cooperation with Brown-Forman Corporation (BF.A, BF.B) in the United States, currently one of the leading global spirits companies.

    1969

    Lucas Bols moved to Nieuw Vennep, because further expansion in Amsterdam was impossible.

    1997

    The merger with Koninklijke Wessanen, which was effected in 1993, was dissolved, whereafter Lucas Bols moved to Zoetermeer. The product range meanwhile 97 included many well-known brands, such as Bols, Bokma, Hartevelt, Coebergh, Pisang Ambon, Gold Strike, Hoppe and Henkes.

    2000

    Lucas Bols was taken over by Rémy Cointreau (OTCPK:REMYF) and the Avandis production joint venture (the Netherlands) was formed.

    2006

    Lucas Bols became independent by means of a buy-out by its management and AAC in 2006 and moved its organisation back to Amsterdam.

    2007

    The company opened the House of Bols Cocktail & Genever Experience, winner of the Dutch Design Award in 2007 and created the Bols Bartending Academy.

    2008

    The company re-launched Bols Genever from 1820 and was awarded Best Cocktail Initiative 2008 by Drinks International Magazine and Best New Spirit at Tales of the Cocktail 2009 (New Orleans). In addition, the company established the production joint venture Bols Kyndal (India).

    2009

    The Group renegotiated a major part of its distribution agreements following the dissolution of the distribution network Maxxium World Wide and acquired 50% in the distribution joint venture Maxxium (the Netherlands).

    2010

    In 2010, the company set up a fully owned subsidiary in the US as distributor for Bols Genever, Damrak Gin and Galliano.

    2013

    The Group acquired Wynand Fockink, a distillery and its nearby tasting room 'Proeflokaal Wynand Fockink'. Wynand Fockink is an artisanal Amsterdam liqueur and genever brand that dates back to 1679 with a wide range of products. All these products are available in the 'Proeflokaal Wynand Fockink'. The Group also took the distribution of the Bols Liqueurs in the US in its own hands.

    2014

    The distillery acquired in 2013 was opened in 2014 and all distillery activities have moved to the renewed Lucas Bols Distillery located in the centre of Amsterdam, next to the Dam square and close to the Rozengracht where the Bols-family started its activities in 1575.

    Why US investors have to know about this small cap from The Netherlands?

    The last weeks institutional investors in Frankfurt, Paris, London, New York and Boston embraced this Dutch company, because of diversification and valuation purposes. There are just not that many international spirit companies.

    Strengths

    One of the strengths of Lucas Bols is their flexible and asset-light business model allowing management to focus on core activities. A large portion of the production process (blending and bottling) is outsourced to strategic partners. The production joint venture Avandis, in which the company has a 33% participation, undertakes the blending and bottling process for the majority of the countries where the Lucas Bols sells its products.

    The Bols Liqueurs for the US market are blended and bottled locally by Brown-Forman Corporation, with whom the company has had a longstanding relationship since 1956, see history.

    Lucas Bols relies on its strong and long-standing relationships with its distribution partners in order to ensure the route-tomarket of its products. It operates via a cost efficient and flexible organisational structure. It has no ageing stock on its balance sheet and a history of very limited uncollectable trade receivables.

    The Offering

    The proceed of the offering will be used to repay debt and will not be used to grow the company's business.

    The post IPO free float is 64.9%, assuming no exercise of the over-allotment option. The total number of issued and outstanding ordinary shares of Lucas Bols is 12,480,3291.

    One of the big competitors of the company is Diageo (NYSE:DEO).

    Diageo

    Diageo is the product of a merger between Grand Metropolitan and Guinness in 1997. The company is the world's leading producer of branded premium spirits. It also produces and markets beer and wine. Brands include Johnnie Walker blended scotch, Smirnoff vodka, Crown Royal Canadian whiskey, Captain Morgan rum, Baileys Irish Cream, and Guinness stout. Diageo also owns 34% of premium champagne and cognac maker Moet Hennessy, a subsidiary of French luxury goods maker LVMH Moet Hennessy-Louis Vuitton (OTCPK:LVMHF), and a 55% stake in India's United Spirits.

    Diageo's incentives to continue consolidation is to broaden its product portfolio. Volume in the spirits industry is fairly stable, but trends are transient. For example, the current shift away from white spirits (mainly vodka) to brown spirits is a reversal of the trend in the 1990s. The breadth of Diageo's portfolio across categories with both global strategic and local niche brands mitigates some of the risk to volume from such shifting consumer tastes and preferences. Nevertheless, bourbon and Irish whiskey are examples of gaps in Diageo's category footprint.

    Premiumization will be a significant long-term tailwind for global distillers. Today in mature markets, spirits are taking share from beer and wine as consumers trade up. In both the U.S. and the U.K., for example, the distilled spirits category has added an average of around 20 basis points of share of throat from other categories every year for the past decade, and a continuation of that trend could support Diageo's volume in developed markets.

    Comparison

    (click to enlarge) 

    Lucas Bols could be an interesting takeover target in some years, especially if they can grow their business in emerging markets.

    Final Note

    Lucas Bols works in close collaboration with professional bartenders from all over the world to develop new products, create new flavours and adapt old recipes. The ability to innovate and to build and maintain long-standing relationships with professional bartenders in the geographic markets where the company is active are key factors which could contribute to the success of Lucas Bols.

    This approach is totally different than that of major players such as Diageo , Remy Cointreau and Pernod Ricard (OTCPK:PDRDF). These powerhouses are looking more to the acquisition side to achieve growth.

    Risks

    Spirits companies are subject to heavy regulation and taxation. Governments may enact policies that place restrictions on Lucas Bols or Diageo's business activities or increase liquor taxes, resulting in a demand headwind. Recently, the Chinese government's crackdown on gifts to government officials has led to drastic drops in demand and price in scotch and the ultrapremium baijiu segment.

    Distilled spirits is more cyclical than some other consumer staples industries, including brewing, and more closely tied to economic growth.

    Diageo's acquisition strategy is inherently risky--the firm could destroy shareholder value if it overpays for acquisitions. Also, most of Diageo's maturing inventory is stored in Scotland. If this maturing inventory suffers a catastrophic loss due to contamination, fire, or other natural disaster, Diageo may not be able to satisfy consumer demand, and insurance may not fully cover the replacement value of the lost inventory.

    Sources

    - IPO Prospectus

    - Morningstar

    - Reuters Eikon

    Feb 09 9:54 AM | Link | Comment!
  • Arch Therapeutics, Where To Go From Here?

    On December 12, 2013 I recommended a speculative position in Arch Therapeutics (OTCQB:ARTH). Back then the stock price was $0.21. On January 3, we saw a high of $0.42 and now the stock is traded around $0.40.

    As said in my prior article, a talented management team is an important asset for a company to execute its business plan. Seasoned professionals who have started or managed successful companies before is one of the most important criteria. The pre-existence of an experienced management team in a startup life science company increases credibility and improves the chances of getting funding.

    But without a unique product or therapy, a life science company cannot succeed. Investors feel more confident if a proof of concept has been demonstrated, at least in preliminary experiments. In the case of Arch Therapeutics (OTCQB:ARTH) the proof of concept has been demonstrated through experiments performed on animals, resulting in data that can reasonably be extrapolated to realistic predictions of significance and human trial results.

    The company's lead product candidate-- one that stops bleeding-- is called AC5™. This hemostasis product keeps the blood within the body wound and seals it.

    For investors not familiar with hemostasis I will explain it briefly. Hemostasis is the act of restricting or stopping blood flow from a damaged vessel or organ. Effective management of bleeding is critical for promoting positive outcomes in the surgical patient. Throughout a surgical procedure, bleeding must be controlled, not only to provide the best view of the operation site, but also to prevent the adverse physiological effects associated with blood loss. When the natural process of blood clotting does not occur or is adversely affected by surgery, other methods of achieving and maintaining surgical hemostasis are often indicated.

    The methods currently available to effectively manage surgical hemostasis have many common drawbacks (see picture below.

    (click to enlarge)

    As shown in the sheet above, many available hemostatic and sealant agents possess a combination of limitations, including slow onset of action, general unreliability, user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection, and other safety concerns.

    The leading product of Arch Therapeutics doesn't have these common drawbacks; that's why we think the company's AC5 product could capture a large chunk of the wound closure and management market, when available.

    The Market Size

    According to a 2012 report produced by MedMarket Diligence, LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery in the U.S. Arch Therapeutics estimates that 20%-25% of those surgeries are performed using minimally invasive procedures. Basically more than 25 million wounds could benefit from sealants and hemostatic agents, such as AC5. Additional trends that support a demand for hemostatic and sealant products include the following:

    • Overall procedure volume growth;
    • Ambulatory same day surgery volume growth;
    • Laparoscopic procedure volume growth;
    • and Efforts to reduce operating room time.

    According to the same report of MedMarket Diligence, the market for these products achieved approximately $3.4 billion in 2010 worldwide sales and will surpass the $6.5 billion mark in 2017. Over two-thirds of those sales are for hemostats. Further, the projected growth rate for sealants may be even higher than that for hemostats due to a general lack of available products and potentially larger unmet need.

    (click to enlarge)

    From inception Arch didn't have any revenues and the company had incurred a net loss of $4,631,871. Of course the company needs to raise additional funds to continue the business. This is nothing strange and is normal for biotechs in the development stage. We think Arch Therapeutics could be open to in-licensing activities and collaborations. It makes sense for the company to seek deals with pharmaceuticals that are sitting on huge piles of cash.

    Lead Product AC5™

    Investors that didn't read my first article about Arch Therapeutics are, of course, not familiar with the product. That's why I will describe it here again.

    AC5 is designed to accomplish hemostasis in minimally invasive and open surgical procedures. The product is a biocompatible synthetic peptide containing naturally occurring amino acids. When applied to the wound, AC5 intercalates into the interstices of the connective tissue where it self-amasses into a physical, mechanical nanoscale structure that provides a fence to leaking substances, such as blood.

    The results of early data from preclinical animal tests have shown that AC5 achieves hemostasis quickly and effectively. Hemostasis occurred over 30 times faster than control use of saline and 10 times faster than the use of cauterization. AC5 can be applied right away as a liquid or a spray, making it user-friendly and able to conform to irregular wound geometry. Because it is not sticky or glue-like, AC5 is perfect for use in the setting of minimally invasive laparoscopic surgeries. Further, AC5 is transparent, which should make it easier for a surgeon to maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts. This procedure is called Crystal Clear Surgery™.

    Current Achievements

    From The Biotech Showcase™ 2014 presentation I copied this good overview of the company's achievements so far. The Biotech Showcase™ is an investor and partnering conference devoted to providing private and public biotechnology and life sciences companies an opportunity to present to and meet with investors and pharmaceutical executives during the course of one of the industry's largest annual healthcare investor conferences.

    (click to enlarge)

    Final Note

    The success of any surgical procedure depends on a surgeon's ability to effectively and efficiently manage hemostasis to provide an optimal view of the surgical field and to prevent the adverse physiological effects associated with blood loss.

    That said, the benefits of the AC5 Surgical Hemostatic Device™, aimed at controlling bleeding and fluid loss in order to provide faster and safer surgical and interventional care, it far outshines any current available options.

    Over the coming weeks, the company will further discuss the upcoming milestones for 2014.

    Arch Therapeutics is currently one of the most promising small cap ideas in the life science field. Investors can still anticipate and invest before any milestone is presented. One thing seems for sure: the stock price will appreciate going forward.

    Sources: Company's presentation Biotech Showcase, 10-K filing, MedMarket Diligence

    Disclosure: I am long ARTH, .

    Jan 20 4:35 AM | Link | 2 Comments
  • Arch Therapeutics, A Promising New Life Science Company

    A versatile and talented management team is a very important factor for building a great company, especially in the life science sector. I think Arch Therapeutics, Inc. (OTCQB:ARTH) provides a compelling opportunity for high-risk investors to profit from an emerging life science company that has the ability to execute.

    A stock price of $0.21 doesn't tell you the whole story. The average volume for the last 3 months is relatively low at 197,784. But I think investors that are looking for a rather new company with an experienced management team, a great advisory board, and a promising lead product candidate may be interested in having a look at Arch Therapeutics.

    The company transferred itself to a life science company from selling automobile spare parts online. On June 26, 2013, the current company saw the light and changed its operations to develop polymers containing synthetic peptides designed to form gel-like barriers over wounds to stop or control bleeding and seal wounds. This process is called hemostasis.

    Description of Hemostasis

    According to Wikipedia, hemostasis or haemostasis (from the Ancient Greek: αἱμόστασις haimóstasis "styptic (drug)") is a process that causes bleeding to stop, meaning to keep blood within a damaged blood vessel (the opposite of hemostasis is hemorrhage). It is the first stage of wound healing. Most of the time this includes blood changing from a liquid to a solid state. All situations that may lead to hemostasis are portrayed by the Virchow's triad. Intact blood vessels are central to moderating blood's tendency to clot. The endothelial cells of intact vessels prevent blood clotting with a heparin-like molecule and thrombomodulin and prevent platelet aggregation with nitric oxide and prostacyclin. When endothelial injury occurs, the endothelial cells stop secretion of coagulation and aggregation inhibitors and instead secrete von Willebrand factor, which initiate the maintenance of hemostasis after injury. Hemostasis has three major steps: 1) vasoconstriction, 2) temporary blockage of a break by a platelet plug, and 3) blood coagulation, or formation of a clot that seals the hole until tissues are repaired.

    The evolved ability of the human body to stop bleeding has limits when the size and/or nature of the wound overwhelms the clotting process. Additionally, patients with compromised abilities in their clotting process can be at extreme risk from relatively minor wounds. As a result, hemostasis products have seen and will continue to see strong growth in the overall wound closure and management market.

    Given the opportunity and the relatively low barrier to market entry, Arch Therapeutics could become an important player in the hemostasis market.

    (click to enlarge)

    Source: MedMarket Diligence, LLC; "Worldwide Surgical Sealants, Glues, Wound Closure and Anti-Adhesion Markets, 2010-2017." Report #S190.

    Growth in the global hemostasis market is near 10% with some of the highest growth seen in the U.S. and Asia/Pacific markets, although driven by different dynamics.

    Lead product AC5™

    As mentioned before, Arch Therapeutics is a life science medical device company that aims to develop products that make surgery and interventional care faster and safer by utilizing a novel approach that stops bleeding ("hemostasis"), controls leaking, and provides other advantages during surgery and trauma care. The leading product candidate, AC5™, is designed to accomplish hemostasis in minimally invasive and open surgical procedures.

    AC5™ is a biocompatible synthetic peptide containing naturally occurring amino acids. When applied to the wound, AC5™ intercalates into the interstices of the connective tissue where it self-amasses into a physical, mechanical nanoscale structure that provides a fence to leaking substances, such as blood.

    The results of early data from preclinical animal tests have shown that AC5™ achieves hemostasis quickly and effectively. Hemostasis occurred over 30 times faster than control use of saline and 10 times faster than the use of cauterization. AC5™ can be applied right away as a liquid or a spray, making it user-friendly and able to conform to irregular wound geometry. Because it is not sticky or glue-like, AC5™ is perfect for use in the setting of minimally invasive laparoscopic surgeries. Further, AC5™ is transparent, which should make it easier for a surgeon to maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts. This procedure is called Crystal Clear Surgery™.

    Business Plan and Catalysts

    (click to enlarge)

    Source: Company's website

    In the company's 10-Q filing, we can distillate the long-term business plan. The plan includes the following goals:

    • Expanding intellectual property portfolio
    • Conducting successful clinical trials on AC5™
    • Obtaining regulatory approval or certification of AC5™ in the European Union, the U.S., and other jurisdictions
    • Developing appropriate third party relationships to manufacture, distribute, market and otherwise commercialize AC5™
    • Develop additional product candidates in the hemostatic and sealant field.

    It's good that the company described their long time business plan, but many investors are looking for short-term catalysts. The following catalysts for the remainder of 2013 and 2014 can be found below.

    • Further developing and securing intellectual property rights
    • Engaging a large scale manufacturing partner to produce cGMP product for clinical trials
    • Participating in EU and, subsequently, U.S. regulatory meetings
    • Preparing for initial clinical trials, including developing clinical trial protocols
    • Conducting formal biocompatibility studies
    • Commencing human clinical trials.

    A Great Management Team

    Making judgments about management is important before you invest in a company, especially when it is a start-up. A company is nothing without a CEO. The CEO of Arch is Terrence W. Norchi, MD. He co-founded the company in 2006. Dr. Norchi has a medical analytical investment background as a portfolio manager, but also as a pharmaceutical analyst at Putnam Investments, Citigroup Asset Management, and Sanford C. Bernstein. He earned an M.B.A. from the MIT Sloan School of Management in 1996 and completed internal medicine residency in 1994 at Baystate Medical Center, Tufts University School of Medicine, where he was selected to serve as Chief Medical Resident. He earned an M.D. degree in 1990 from Northeast Ohio Medical University.

    The Head of Operations and Manufacturing is Mr. William M. Cotter. He has been advising Arch Therapeutics since 2011 and is an industry veteran who brings expertise in operations and product development. Mr. Cotter has over 30 years of operational experience in Medical Devices, Diagnostics, Biologics and Life Science companies, ranging from early stage startups to large multinationals. Mr. Cotter has served in senior operations and development roles for companies including Cohera Medical, Helicos Biosciences, Closure Medical Corporation (Johnson & Johnson), Sanofi Diagnostics Pasteur (Beckman Coulter), Genetic Systems Corporation (Bio-Rad) and Advanced Technology Laboratories (Phillips HealthCare).

    For more on the management team, look here.

    Final Note

    Great emerging ideas are the lifeblood of investing. I think Arch Therapeutics offers a compelling opportunity to those who are patient and are familiar with the life science space.

    The company is currently devoting most all of its efforts toward product research and development. In light of that, the company will require new financing for its research, development, and commercialization of its potential products. I think the current stock price doesn't reflect the future value of the company.

    Arch Therapeutics lead product, AC5™, will capture the hemostasis market. With a great management team in place, we will hear more of this company going forward.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQB:ARTH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Dec 16 7:28 AM | Link | Comment!
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