By Henry Kawabe
When one thinks of the sweetener business, sugar and artificial sweeteners, such as aspartame, are immediately focused on. However, there are other aspects to the business. A very important part of the business and one that should not be snubbed, as it is a valuable area of investing, is taste modifiers. This is the concept of increasing one’s taste sensitivity for a specific sweetener in a way that allows use of less of a sweetener and still experience the same amount of taste intensity. In this way, you are ingesting less of the sugar, high fructose corn syrup, or artificial sweetener that is being targeted and used by the taste modifier.
One company that is using this inventive method in the industry is Senomyx Inc. (NASDAQ:SNMX) — a $75 million company that is relatively unknown for many. The company focuses on taste modifiers with its 339 patents and many more pending. Senomyx’s approach is brilliant in that it doesn’t try to compete with or replace traditional sweeteners (sugar, corn syrup, saccharin, etc.). Since the taste modifier approach allows for less of the targeted sweetener, in the case of sugar and high fructose corn syrup, the consumer is ingesting fewer calories as a result. The company has a wide array of modifiers with five of these being applicable to use with sweeteners. The potential for the company’s products is undeniable. Consumers and big brand manufacturers would benefit from the taste modifiers: consumers would be using less caloric sweeteners, contributing to their health, and manufacturers would need less quantities of sugar/sweetener in their manufacturing process, thus saving vast amounts of money.
Two of Senomyx’s products could potentially yield the greatest sales, and those are the company’s sucrose modifiers, S6973 and S9632. These modifiers result in half as much sucrose required in order to experience the same level of sweetness as compared to the non-modified version. The upside is undeniable, especially if giant beverage manufacturers and food producers catch wind of the potential savings and use. Another of the company’s products is S52617 (S-617) which has proven successful in taste tests while reducing high fructose corn syrup and sucrose use. The flavor modifier, S2383, is unique because it increases the potency of sucralose and allows for 75% less of its use, thus saving money for manufacturers. The fifth and sixth flavor modifiers that Senomyx has are bitter blockers, S6821 and S7958. These products would be useful with certain sweeteners that have been noted as having bitter after tastes.
The company has received Generally Recognized as Safe (GRAS) international regulatory approvals for many of its flavor modifiers and looks to be an attractive acquisition target, as it currently has some collaborations going with companies that include PepsiCo, Inc. (NYSE:PEP) and Nestle. If the company’s taste modifiers product line proves itself to a large food or beverage producer, then Senomyx stands to gain much from a partnership or acquisition. With a $75 million market cap, the revenue in 1H 2012 was $15.1 million (and $15.7 in 1H 2011). 1Q 2012 closed with $47.9 million. About 79% of Senomyx’s 1H revenue was from collaborations with PepsiCo and Firmenich. The company is financially responsible and only used $6.2 million as its cash burn in 1H 2012. Though still not a profitable company, the potential success and upside for Senomyx stands evident.
Another very promising company in the sweetener space takes a completely different approach to pleasing the taste buds, capitalizing on the new craze surround the stevia plant. This company is a very promising little upstart located in Yuba City, CA (of California’s Central Valley). And for the investors looking to take advantage of the opportunity of a new player in the game, jumping aboard the booming stevia industry, I recommend taking a look at this small company: Stevia First Corp. (OTC:STVF). More on this company in a bit…
Just in the past few years we have started seeing stevia products on grocery store shelves of various brands. Even though stevia has been utilized for hundreds of years in some countries (originating in South America), the trend is new here in the US. The popularity surrounding stevia grows as safety concerns surround artificial sweeteners increases. For many years, stevia was not permitted in this country due to a variety of reasons, including sugar and artificial sweetener companies lobbying against its use. Stevia was permitted in this country only as late as 2008. The specific stevia plant extract that is permitted for sale is called rebaudioside A (Reb A) — but only as a “food additive” and not as a “sweetener” (oh bureaucracy…). The EU just permitted its sale even more recently, in December 2011. Reb A is one of the four major compounds, called steviol glucosides, found in the stevia plant; these compounds are responsible for the sweet taste. This compound is about 350-450 times sweeter than sugar. What makes Reb A particularly noteworthy is the important fact that it has the least bitter aftertaste. One major stevia brand in the US is Truvia, which is the brain child of Cargill and The Coca-Cola Company (NYSE:KO). Another brand, Purevia, comes from PepsiCo, Inc. (NYSE:PEP) and the Whole Earth Sweetener Company. These brands have started to conquer the artificial sweeteners Splenda (sucralose), Equal (aspartame), and Sweet N’ Low (saccharin). Truvia is second only to Splenda in sales at this point. This bodes very well for Stevia First Corp. (STVF) and other stevia manufacturers in general.
The safety profile of stevia looks very good, with the biggest issue being complaints of bitter or a licorice flavor aftertaste. This is not deterring sales, however, as consumers are enthusiastically turning to natural and safe alternatives for their non-caloric sweetener. Stevia First Corp. is capitalizing on the wide-spread increased acceptance and desire for stevia. The company will be able to target the diabetes and weight-loss market — both which are hugely lucrative. Stevia First is intending to concentrate its man power and expertise on creating a reliable and steady supply of stevia extract, and one that is cost-effective and consistent. These are all important factors that have not been met by certain suppliers in the past. The company will stand out in the industry if it achieves its goals of doing so. In successfully meeting its endpoint, manufacturers on the receiving end will be spared massive costs over the long term, and assurance that their stevia ingredient is perfect and consistent.
Stevia First has the main objective to be a first of its kind vertically integrated stevia producer in North America. The company has taken on a slew of experts on research and agriculture to aid in its goal, and the company will draw on its resources from university partners and US government funding.
In the company’s latest SEC filing, it indicates assets of $1.14 million with $917 of that amount being in cash. Financing and the recent 1000 acre land lease for crops, in addition to office space and R&D space, is contributing to high cash to assets ratio. There is significant upside potential with Stevia First, and any news of successful growing and Reb A extraction could send the stock soaring. The company’s recent news on acquiring a license for the intellectual property for fermentation-based stevia extraction from the Vineland Research and Innovation Centre of Ontario, Canada, is yet another step in the right direction and shows the promise ahead. Though take heed: Any development-phase company has risks and some prudence should be exercised. As I see it, however, the rewards can really outweigh the risks here. Stevia First Corp. might just be the next blockbuster thing…
Saving the biggest sweetie for last, the $9.7 billion Ajinomoto Co., Inc. (PINK:AJINY) is the world’s largest aspartame supplier. Much negative sentiment and press surrounds the very profitable artificial sweetener, which had originally been FDA approved in 1974. In spite of any controversy that exists with aspartame, Ajinomoto’s stock is bullish and increases about 24% per year, which is staggering for a company with its market cap. The product was created (by accident) by G.D. Searle in 1965, and the approval for aspartame was actually rescinded the following year in 1975. Permission was, once again, granted for aspartame use in dry food — then expanded to include utilization in beverages in 1983. All restrictions were lifted for its use in 1999 and can now be used in any food product. Aspartame is approximately 200 times sweeter than sucrose with only 4 calories per gram. Very little of the sweetener is required to have the desired effect. This is why the product has been so wildly successful and attractive to health-conscious consumers — because very few calories are ingested while avoiding sugar-induced side effects, yet still tastes sweet. However, aspartame doesn’t fare well in baking because of the fact that it breaks down in high heat conditions, becoming unpleasant and bitter. It is better suited for confectionary uses, such as icing, puddings, and other goodies, which require little or no heat.
Regardless of any draw backs and despite the substantial anti-aspartame sentiment that exists, the artificial sweetener has solidified its position in the sweetener industry, without a doubt. Its presence in most diet sodas is testament to its success. Diet Coke is the second most sold soft drink in the US (with a whopping 927 million cases sold), only surpassed by regular Coke (with a not-too-shabby 1.6 billion cases sold). Ajinomoto Company is enjoying a lucrative existence in a lucrative business.
However, the company’s dominance is not untested, as saccharin (with the most popular brand being Sweet N’ Low) and sucralose (known mostly by the Splenda brand) are also big players in the field, and have been vying for the top spot. Currently, Splenda, which is manufactured by Johnson & Johnson (NYSE:JNJ), has the number 1 spot in sales in the “low-calorie” sweetener world. Being 600 times sweeter than sugar, twice as sweet as saccharin, and 3 times as sweet as aspartame, the product boasts being a true “no-calorie” sweetener, as the body cannot metabolize it. Sucralose cannot, however, be used as a sugar replacement for baking or certain other applications, as it is too unstable. The number 2 spot in the “low-calorie” sweetener realm is, in fact, stevia.
Despite competition from other hugely successful products, Ajinomoto Company is going strong and is a major player in the industry. According to the company’s 1H 2012 financials, sales of aspartame for the restaurant market remained the same from the previous interim period, but sales for the processing industry declined. This is due to an overall lowered sales volume and unfavorable foreign exchange rates. In any case, Ajinomoto stands as a very low-risk investment despite the decrease in aspartame sales. This aspartame giant pays a dividend to shareholders of about 1.5% annually. If you are looking for a very sweet investment opportunity, I would recommend that you take a look at the already established, tried and true Ajinomoto Company.
Disclosure: Long AJINY, STVF
