In my first post on ChromaDex (NASDAQ:CDXC), I laid out the enormous opportunity and potential challenges the company faces. Today, I want to take but a moment to delve a bit more into the story. I promise, this won't be too long a read, but it will be worth your while if the stock's performance since my last post, +20%, in a week, is any indication. To be perfectly honest - as a cynic - even I'm surprised at the speed and magnitude of the run-up, but I think there's still plenty of more room to run.
Now, introduction aside, I think there are a few areas investors and potential investors need to focus on, the beauty of which is that one reinforces the other and vice-versa, the so-called (by me, at least) 360 business model:
Through its legacy businesses (testing, supplying samples of chemicals (botanicals and nutraceuticals) to food/beverage, university, and other researchers/product development teams), CDXC knows before everyone but the buyers of these products/services what future demand will look like.
ChromaDex is then able to license rights to these chemicals (if they don't already have them) and get started on animal and, later, human safety and efficacy trials for a variety of uses. For example, they've licensed and applied for patents with pTeroPure for a number of conditions:
Now, while the BluScience line using pTeroPure has already demonstrated success - approximately $1mm in development costs (ex mostly one-time marketing/promotional expenses) with ~$4mm in revenues since launch - ChromaDex does not plan on becoming a supplier/retailer themselves. As I mentioned in my first post, BluScience is really a proof of concept, demonstrating the commercial success of products containing ChromaDex's chemicals. The real plan is - based upon the aforementioned information and temporal advantage - to sell the rights to their licensed chemicals to large, established players while collecting royalty streams for years and years.
What does this mean, numbers-wise? After speaking with management and doing some other research, it looks like CDXC could reasonably earn single-digit millions of dollars up-front from such deals, plus royalty payments anywhere in the 5-25% range, depending on several factors. Remember, CDXC did about $8mm in revs in 2011, so even a single such deal - of which there could realistically be many - would be a huge boost to the firm's currently less-than-stellar income and cash flow statements.
Let us presume - I think fairly - for a moment the efficacy studies for pTeroPure that are being presented next Thursday the 20th are positive (the safety results already are), especially for lowering/moderating blood pressure and cholesterol. I think one would be hard pressed to make a case that Big Pharma wouldn't be champing at the bit to acquire a compound license from ChromaDex that combats two or more of the most widespread (and profitable) health issues in this country, for a tiny fraction of the cost of developing their own drugs and enduring the FDA's drawn-out approval process.
It can take billions of dollars and a decade for a big pharma company to develop a drug to treat the ailments that ChromaDex's compounds appear to do, compounds that are developed for 1/1,000th the cost and (for now) bypass the FDA pharmaceutical approval process. The value proposition to big pharma is obvious: Same/similar effectiveness/revenue, far lower costs, and a quicker time to market. These same benefits apply to the supplement, food and beverage, and other industries as well. It's a rare win-win for ChromaDex and their customers.
This is only one way in which CDXC investors can benefit. Other firms with similar natural alternatives to pharmaceuticals have been acquired for enormous sums of money. Martek, a company that made an omega-3 acid for baby formulas, was acquired in 2010 for $1.1 billion (with a B); Abbott Labs acquired Kos Pharmaceuticals in 2006 for $3.7 billion (again, with a B), essentially getting an extended release version of niacin, a B vitamin, for which ChromaDex has acquired the exclusive patent licenses for a newer - and likely better performing product - Nicotinamide Riboside (NR) just this year.
ChromaDex also has a license for a new anthocyanin, which has just as much, if not more, promise than pTeroPure.
Each of these compounds offers promising - if not already proven - benefits for all-too-common ailments such as weight loss, cholesterol, blood pressure, energy, and cognitive function. If even just a few of the things ChromaDex has underway or in the pipeline come to fruition, I find it hard to believe this stock doesn't achieve superior returns (and/or get bought out at an attractive premium).
There are, of course, risk factors (please, if you find an undervalued stock which has none, get in touch ASAP!):
- While it seems, given the above several hundred words, the company has rather astounding business and financial prospects, we still have to consider: Execution, liquidity, scientific, and - although unlikely given recent capital raises - solvency risks. These are rather hard to quantify, especially since the company is in a transition phase, so investors should use their own judgment on each, although I don't think at this point liquidity and solvency risks pose much if any concern through the intermediate term at least.
- Besides the BluScience line, the other new products are in the development stage and have not necessarily been put through the proper diligence via safety and efficacy studies, despite showing promising early results. Until these are completed and show positive results, we're looking at outcomes that are inherently difficult to predict with much certainty.
- For now, we're still playing in penny stock land, and while insiders own a large percentage of the stock, while it's trading at such a low price, it will still remain vulnerable to manipulation by opportunistic shady folks who may have the resources and inclination to "pump & dump" or "short & distort" the stock for their own benefit and the detriment of longer-term shareholders.
Whether you're a technical/momentum trader or a longer-term investor, I think ChromaDex offers plenty of upside opportunity. However, while the stock could increase 2, 3, 5, 10x+, there's never any guarantee in the markets, so it would probably be just a bit imprudent to bet your life's savings on one company. Fortunately, though, there is still a fairly significant margin of safety with both the legacy business and the fact that with good marketing, even minimally/ineffective supplements can be sold for a fortune (i.e. Omega-3, see the conclusions at the bottom of the study abstract).
As always, do your own diligence, and caveat emptor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Stone Street Advisors’ company policy is to keep the bespoke, paid research and analysis we do for clients confidential. However, in certain circumstances – and only with a client’s explicit permission – we may share some or all of that research publicly. The above (the analysis/article) contains some of the research we performed for/with a client, however the opinions presented herein are those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in ChromaDex, nor do we have any plans to initiate one in the immediate future. The information and opinions presented in this article are presented as-is, and do not constitute any offer, solicitation or investment recommendation. Stone Street Advisors LLC makes no representation as to the accuracy or completeness of the information contained herein and has no duty to update the information and opinion in the article. The content presented is not investment advice, nor is Stone Street Advisors LLC a Registered Investment Advisor.