Chromadex Management Makes its Case (CDXC)

At first glance, most investors would likely pass on Chromadex (ticker: CDXC). The stock has been largely flat for years.

But that recently changed. It's up significantly in 2017.

Why?

The company has been implementing major changes.

As a result, top tier investors are piling in.

Hong Kong billionaire Li Ka-shing invested.

And Mark Zuckerberg’s wealth manager Iconiq Capital invested too -- along with other "high profile VCs and international strategic investors" (SEC filing).

What are these billionaires seeing in small-cap CDXC?

Until now, CDXC enjoyed success selling its vitamin supplement “NIAGEN” through resellers.

From CDXC’s Q1 2017 earnings call:

“We think that there's somewhere between maybe $60 million to $80 million of retail sales of NIAGEN that took place in 2016; retail sales. That's not our wholesale. So that's retail sales….and that market went from $0 three years ago to that level in just 3 years.” 

The demand for NIAGEN is very, very strong. There is a lot of repeat ordering of NIAGEN. People who buy it tend to buy it again because if they take it for two months or three months, they start to notice impacts and then they stay with it. 

So consumer demand is strong, but growing dramatically”

An impressive business. From $0 to $60-$80 million of retail sales in 3 years. Not bad.

But why did the stock suddenly shoot up?

In early 2017, CDXC “pivoted”.

Instead of continuing to sell to resellers CDXC launched its own vitamin supplement brand "TRU NIAGEN".

From CDXC’s Q1 2017 earnings call:

“We expect that during this pivot, during this transition in the coming months that a significant portion, if not most of that revenue (the $60m-80m previously generated by resellers), is going to come to us directly. And, of course, the gross margins are better when we sell our own brand.

There's already established demand

...there's already a clear product market product fit

...we just have to change the competitive landscape. 

We think margins will be excellent…”

So, management changed its business model -- transitioning to a direct sales model and launching its own brand TRU NIAGEN.

But the question remains why suddenly substantial interest from top tier investors?

While a nice business, does this sort of model shift warrant interest from investors no doubt looking for substantial returns?

Fast forward to a September 2017 investor presentation where new President Rob Fried said the following:

"It’s not unreasonable to assume we can get 20-30 million people to take this every day. 

If you have 20 million people paying you $40 a month that would be $1 billion a month and margins that are really good.

We're on our way to getting there. 

We have the right partners outside the US, right strategy in the US, right science, right patents, well capitalized and in process of putting A++ team together to help execute.”

We all know the supplement market is substantial.

From CDXC’s Q1 2017 earnings call:

“If we have 170 million people presently buying supplements in America, and who knows the actual number worldwide, there is a percentage of that community that would be interested in a safe compound which is derived from milk; milk, the thing that moms give to their kids, milk; the elixir that exists in high concentration in human breast milk. There is a percentage of the population that would be interested in taking that compound.”

And since the "pivot", CDXC's new brand TRU NIAGEN appears to be gaining traction.

From CDXC’s Q3 2017 earnings call:

“Of course we started with a very low base, but we have consistently grown 30% to 40% per month. So it's starting, it's adding up. 

But you have to remember also that there's still a lot of companies out there that are charging at retail, almost 50% less per bottle than TRU NIAGEN, although those entities are disappearing quickly and they don't have much of an inventory remaining. 

So -- but notwithstanding that, we still are growing fairly dramatically but we expect to really see -- even far more significant growth in the coming months as those inventory levels disappear and that there's a little bit more pricing parity in the marketplace 

…our main focus in 2018 is to grow TRU NIAGEN around the world.”

But there's more...

From CDXC’s Q2 2017 earnings call:

“we believe we have a blockbuster ingredient in the anti-aging market -- BUT we'll be more than just an ingredient supplier.”

So, CDXC will be more than just a vitamin supplement and ingredient supplier.

From CDXC’s Q1 2017 earnings call:

“The NIAGEN game plan will have 3 tiers. 

We have the pharmaceutical opportunities that we're working and developing with nicotinamide riboside (NR), but that's one area that I think could be $1 billion opportunity for us. 

We're working on licensing deals to monetize other areas beyond the supplement space, food, beverage and nutrition, skin care, that's another area that could be a substantial for us in terms of monetizing nicotinamide riboside (NR). 

And we also have the third area which is the – what will be the direct-to-consumer, the dietary supplement business that we're going to be able to go after as well.

So, I think we've got 3 substantial opportunities for monetizing the opportunity that we have.”

So, according to management the company has many ways to win.

And how are they executing?

1. Eliminating resellers (Q3 2017 earnings call):

“we've been reducing the number of NIAGEN brands in the marketplace. 

In March, we had more than 20 resellers of NIAGEN. Today, we have terminated the supply agreements to all, but 7, and expect it to be less than 5 by year's end. 

…we expect a couple of quarters more, of residual inventory for those that we've cut off.”

2. Selling online with own branded supplement TruNiagen (Q2 2017 earnings call):

“The primary distribution channel for TruNiagen in the United States will be online distribution. There will be distribution to some third parties, but it will always be the TruNiagen controlled consumer brand.

3. Selling through retailer Watsons in Asia / Europe (Q3 2017 earnings call):

“we began our international expansion of the TRU NIAGEN brand with the successful launch in Hong Kong and Macau with our partner Watsons (owned by new top tier CDXC investor Li Ka Shing). 

Watsons is the leading health and beauty retailer in Asia and Europe with over 6,000 stores in 11 Asian and European markets. We expect Watsons to expand to new markets in the coming months.”

4. Launching pharmaceuticals (Q3 2017 earnings call):

“Moving to the pharmaceutical side. 

We are still on track to file our IND for Cockayne Syndrome by the end of 2017. 

ChromaDex continues to make significant progress in development of our first pharmaceutical opportunity for NIAGEN.

Q2 2017 earnings call:

"ChromaDex completed our pre-IND meeting with the U.S. FDA back in November 2016 for the development of NIAGEN as a drug in the treatment of Cockayne Syndrome, which is a rare pediatric orphan disease that results in a significantly shortened lifespan for the affected children. 

During that pre-IND meeting, we mapped out a plan with the agency to complete the final IND-enabling work. Subsequently, ChromaDex completed a pilot trial needed to execute the additional safety study required by the FDA. We communicated the findings from that study to the agency as well as our plan to utilize the results in the design of a final IND-enabling preclinical study. We addressed several important points with the FDA relevant to our development plan. And consequently, we've initiated the final study needed to support safety of drug administration and the proposed clinical protocol for Cockayne Syndrome children. 

The draft of the final preclinical study needed for the IND submission is scheduled to be complete in November, and our goal is to submit the IND by the end of the year. We are clearly excited to embark on this next clinical phase of pharmaceutical development path for NIAGEN.”

What's an IND?

"An Investigational New Drug (IND) application is submitted by the company responsible for developing the drug (sponsor) to the FDA. The IND is submitted after the sponsor has determined through animal studies that the proposed drug is reasonably safe for initial use in humans, and that it shows sufficient promise as a treatment to justify commercial development. The FDA reviews the IND application and decides whether it is safe for the company to progress to the next stage, i.e. clinical trials, wherein the drug is tested in humans. The sponsor has to wait for 30 calendar days after submitting the IND before commencing any clinical trials."

CDXC has been methodical about working with the FDA in preparation for launching its first pharmaceutical. Management has also repeatedly communicated that once this first drug is commercialized more will follow.

It’s plausible that once CDXC files its IND with the FDA and the path to pharmaceutical development and commercialization is clear then the equity market will no longer consider CDXC simply an ingredient and vitamin supplement company – but also a pharmaceutical company -- and thus revalue it accordingly.

What about patent protection?

From CDXC’s Q1 2017 earnings call:

“ChromaDex has put a very, very strong patent portfolio together around nicotinamide riboside (NR), and it represents an opportunity that's not big, it's extremely big, because you have a compound here that has an impact in the way we age.”

From CDXC’s Q2 2017 earnings call:

“Today, ChromaDex has a comprehensive global patent portfolio of 16 patents and applications spanning the processing, use and composition of nicotinamide ribosome (NR). We will vigorously defend this estate. Additionally, the FDA status we hold will continue to reinforce and protect our position.”

From CDXC’s Q2 2017 earnings call:

“Li Ka Shing (Hong Kong billionaire and new CDXC investor)….I know that they definitely did diligence on the patents.”

But from management’s perspective the key to the company is the science behind Niagen / TruNiagen / NR:

From Q2 2017 earnings call:

“As you know, we have been very active over the past 3 years working on developing the science and research validating the importance of NIAGEN as an effective NAD precursor. 

We have over 120 collaborative agreements in place for NIAGEN with highly-prestigious universities and research institutes all over the world, and this number continues to grow. 

There are also 14 human clinical trials on NR that are in varying stages that can be found on ClinicalTrials.gov, and we expect additional clinical studies to be added to this list during 2017. 

It is increasingly evident that the number of studies of NIAGEN showing positive effects are approaching an inflection point, where peer review published preclinical and clinical data are likely to result in additional commercial opportunities for NIAGEN.”

From CDXC’s Q3 2017 earnings call

“We have something incredibly special with nicotinamide riboside (NR). 

And the science has gone way beyond what I think we even expected it would be."

What is "NAD" that Niagen /TRU NIAGEN/ NR impacts?

From CDXC’s Q2 2017 earnings call:

“NAD is an energy metabolism compound, cellular energy metabolism compound, that is mission-critical for cellular health. And it happens to be a critical nutrient that is effectively depleted by the aging process itself. Meaning as you age, NAD pool declines. But when the NAD pool declines as you age, it sort of -- that's what is a trigger for a lot of health-related problems associated with aging. The progression of many of these age-related diseases is linked to the decline of the NAD pool, and that's a big deal right now... 

So NAD is really going to be the sort of the critical story moving forward, and that link to the decline of NAD as we age. And the one thing that we have that is very effective in fixing that problem is nicotinamide riboside (NR). Nicotinamide riboside (NR) is the most effective way of repairing that NAD depletion.”

KEY POINT: As you age your NAD declines which leads to health related problems.

SOLUTION: CDXC's vitamin "NR" is the most effective way of repairing NAD depletion.

As for the new top tier investors, here’s what CDXC management has had to say…

From CDXC’s Q1 2017 earnings call:

“Recently, we announced an investment led by Mr. Li Ka-shing (Hong Kong billionaire and Watson's drug store chain owner), and the team at Horizons Ventures. Mr. Li and Horizons Ventures are very accomplished strategic investors that see the category of healthy aging as an emerging high-growth opportunity.”

From CDXC’s Q2 2017 earnings call:

“...the money was great. There's no doubt about that, and we didn't view this investment as just a money investor here or cash investor. They were a good strategic fit for us as an investor because of the resource base that they bring, and you can see evidence of that from other deals that they've done before. 

And I think that they're going to help us by bringing a tremendous amount of value in terms of who they -- what they can bring to the table through their connections, meaning both as Horizons Ventures as well as Chairman Li himself as well. But that was a big part of the reason why we want to do this deal with them.” 

I think the initial stages of that are going to focus on, what I'll call, ChromaDex's distribution strategy for the Asian markets, which right now is wide open for us. We really don't have much in terms of business relationships and revenue that we're currently doing in the Asian markets, and this is going to be a great expansion for us, and it'd be a great help for that in particular.”

Finally, CDXC is bulking up management. The most recent significant hire is the newly departed CFO of Mattel (ticker: MAT).

From CDXC’s Q3 2017 earnings call:

“I'm extremely pleased to join ChromaDex at this pivotal time with a tremendous foundation of science supporting NR and the launch of the TRU NIAGEN platform. I believe that my extensive experience can accelerate the global growth opportunities for TRU NIAGEN as an international consumer brand.” 

…I think it's a great opportunity for us to grow a global brand and create a large company and be very successful.”

Expect more management additions to come.”

Conclusion

In conclusion, some key points:

As you age your NAD declines which leads to health issues.

CDXC's "NR" is the most effective way of repairing NAD depletion.

Recent studies provide growing evidence that CDXC’s NR can also positively impact people suffering from Alzheimer’s, breast cancer and various other diseases (see CDXC’s recent press releases HERE).

Management has a robust online and offline commercialization strategy including pharmaceuticals, supplements, food, beverage, skincare etc.

Top tier investors are piling in.

The balance sheet is solid with recent capital raises totaling ~$50 million.

Near term CATALYSTS include (a) the release of results from a second human trial and (b) management’s filing of an IND leading to the commercial launch of its first pharmaceutical product. Both of these are expected in the near term.

And to sum it up, here again is CDXC President Rob Fried at an investor conference in September discussing ONLY the supplement business (not including the pharma, food, skincare opportunities):

"It’s not unreasonable to assume we can get 20-30 million people to take this every day. 

If you have 20 million people paying you $40 a month that would be $1 billion a month and margins that are really good.

We're on our way to getting there. 

We have the right partners outside the US, right strategy in the US, right science, right patents, well capitalized and in process of putting A++ team together to help execute.”

NOTE: One issue to keep in mind: There’s litigation ongoing. But CDXC management doesn't seem concerned. See the Q&A on CDXC’s Q2 2017 earnings call.

Disclosure: Long CDXC

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