By Sven Olson
There is a growing body of evidence on the negative health effects that high-fructose corn syrup (HFCS) has on the body. Included now are researchers from both the University of Oxford and the University of Southern California (USC) who found specifically that Type 2 diabetes prevalence was higher by 20% in countries that consume HFCS in its products. Michael I. Goran, professor of preventive medicine at USC and the director of the Childhood Obesity Research Center and co-director of the Diabetes and Obesity Research Institute also at USC, commented about the research, “The study adds to a growing body of scientific literature that indicates HFCS consumption may result in negative health consequences distinct from and more deleterious than natural sugar.”
Researchers examined the amount of HFCS consumed in 42 different countries and discovered the association between HFCS and diabetes. The top five consumers of HFCS were the U.S. with the average person consuming 55 pounds per year, followed by Hungary with 46 pounds per year, then Slovakia, Canada, and Bulgaria. It turns out that most populations have quite an appetite for sweets, and according to study researcher Stanley Ulijaszek, director of the Institute of Social and Cultural Anthropology at the University of Oxford, “…our metabolism has not evolved sufficiently to be able to process the fructose from high-fructose corn syrup in the quantities that some people are consuming it.” HFCS can be found in foods one would not expect, such as yogurts and breads, including Pepperidge Farm 100% Whole Wheat Cinnamon Raisin Swirl, cereals such as Fiber One, Planters honey roasted peanuts, Seagram’s tonic water, and many more.
Professor Marion Nestle at New York University, an expert in food policy, pointed out that the study doesn’t show that diabetes is caused by HFCS, and she also noted that there is a legal battle between the HFCS and sugar producers over how HFCS is marketed. In her comment to the New York Times she said, “I think it’s a stretch to say the study shows high-fructose corn syrup has anything special to do with diabetes… diabetes is a function of development. The more cars, more TVs, more cellphones, more sugar, more meat, more fat, more calories, more obesity, the more diabetes you have.”
Whether Ms. Nestle is correct or not, she has brought up the main point of the problem: It doesn’t matter if it’s sugar or HFCS, people are clearly consuming far too much of a product which studies show lead to lower levels of high-density lipoprotein cholesterol and higher levels of triglycerides, increasing the risk for heart disease, obesity, diabetes, and other illnesses. There are products on the market that consumers and manufacturers can use as substitutes for sugar and HFCS, and more people are looking at these natural, low, or zero calorie substitutes. Stevia and monk fruit are natural substitutes that are making headlines these days with both consumer and manufacturers.
McNeil Nutritionals, a subsidiary of Johnson & Johnson (NYSE:JNJ), makes the popular sugar substitute Splenda and has developed a natural based sweetener derived from the extract from the monk fruit, also known as Luo Han Guo. Monk fruit is a small green melon that grows in the mountains of central Asia and can be 150-300 times sweeter than sugar with zero calories. It contains sweet mogrosides, antioxidants that are unique to the plant. In developing a “natural” zero-calorie sweetener, McNeil may have been looking for a product to go up against stevia, the natural zero-calorie product that is rapidly growing in popularity as the natural sugar substitute of choice, and has taken a bite out of Splenda’s market. Nectresse is a blend containing monk fruit extract, and is being marketed as a natural, zero-calorie sugar substitute. However, monk fruit is not the main ingredient. Erythritol, a sugar alcohol commonly derived from corn, is the main ingredient, followed by sugar, then monk fruit extract.
Amax NutraSource Inc. recently launched its own monk fruit and sugar alcohol blend called Perfecta. Amax is one of two companies supplying monk fruit to the U.S. market, the other being the giant international holding company Tate & Lyle PLC (TATE:LON) through the New Zealand company BioVittoria. Amax last year signed a supply agreement with The Imperial Sugar Company to add monk fruit to its NatureWise sweeteners line, and more recently it signed an agreement as the exclusive North American distributor of monk fruit to The Procter & Gamble Company (NYSE:PG). Though monk fruit may have a future as one of the natural alternatives to sugar, today its product line is limited. There are few companies substituting monk fruit for sugar in its products, and the monk fruit that is available is a blend, which brings into question just how natural the product really is.
As an investor, there are not many choices in investing in the future of companies growing or distributing monk fruit. Amax NutraSource, Imperial Sugar, and BioVittoria are privately held companies. Tate & Lyle, Procter & Gamble, or Johnson & Johnson are by no means growth stocks, and buying any of them for a monk fruit play makes little sense. J&J is $190 billion market cap diversified pharmaceutical company. It has a good dividend yield of 3.44 and a P/E of 13.9 slightly below the industry average. Stifel Nicolaus recently initiated coverage with a hold rating, though they added “We see JNJ as a core health care holding and total return vehicle in any environment for investors looking for safety and stability, particularly in these uncertain times.” Zacks maintained a neutral rating on J&J based on its third-quarter results. P&G, a $180 billion dollar consumer package goods company is a safe haven in a turbulent market. Closing at $68.99 it is kissing its 52-week high. Zacks maintained its buy rating, and analysts’ consensus price target is at $74.00.
Monk fruit at this time does not have the name recognition, the product line, or the development of stevia, a rapidly-growing natural and zero calorie sweetener. However, the one area where monk fruit producers have found to attack stevia is its lingering and sometimes licorice-like aftertaste. Nonetheless, that may soon be a non-issue as more stevia companies continue to develop new strains and major manufacturers, like Archer Daniels Midland Company (NYSE:ADM), The Coca-Cola Company (NYSE:KO), or PepsiCo, Inc. (NYSE:PEP), are working with stevia farmers and manufacturers, like S&W Seed Company (NASDAQ:SANW) and PureCircle Limited (LON:PURE), to grow strains of stevia plants that are high in rebaudioside A (Reb A)—the sweetest of the all natural steviol glycosides—to breed out the lingering sweet aftertaste. Two small companies, however, are taking a completely different approach to developing the sweet steviol glycosides, utilizing separate fermentation processes in order to produce a sweeter tasting product with little or no lingering aftertaste.
Stevia First Corporation (OTC:STVF), a small company in Yuba City, California, is hoping to make big strides in its development of sweeter and less costly varieties of stevia. Earlier this year, the company entered into a worldwide licensing agreement for the intellectual property to a fermentation process from Vineland Research and Innovation Centre of Ontario, Canada. The licensing included compositions and methods of producing steviol and steviol glycosides through a yeast fermentation-based process developed by scientists at Agriculture and Agri-Food Canada (AAFC). The stevia leaf contains only a small quantity of the sweet components and the normal extraction and purification process amounts to70% of the cost of producing the sweet extract. What the scientists at AAFC were able to do was find the characteristics of the natural biochemical pathways involved in the production of the sweet components of the stevia leaf. Armed with that knowledge, they were able through the fermentation based technology to produce the stevia extract, bypassing or significantly lowering the need for leaf production. More importantly, since the fermentation process makes it possible to separate and produce the individual components, Stevia First Corp. (STVF) will be able to concentrate on developing new strains of the Reb A that would be sweeter and should be able to remove the negative characteristics of the steviol glycosides including the lingering aftertaste. Also, once fully operational this fermentation process should be able to produce a supply chain to meet the multinational companies who require a consistent supply of Reb A — one that does not vary from batch to batch or from grower to grower. Due to the lower costs associated with the fermentation process they should be able to produce the product at a far less cost than the other stevia growers around the world.
Stevia First also is developing an organic stevia product on its acreage in California. What I like about this company is that it is not rushing its development or its stevia product to market. In an interview, CEO Robert Brooke commented on the timetable of its stevia production, “… the focus of Stevia First is to build the industry in California and North America in a sustainable way. We’re working to do this through aggressive R&D efforts that seek to improve upon and leapfrog older industry technologies… So rather than focusing on small-scale commercial stevia leaf production to make a few bucks in the short-term, our efforts are directed towards building sustainable competitive advantages that will enable us to compete favorably in the long-term with overseas stevia growers and producers.” Stevia First has a market cap of $22.61 million, and trades in the $0.40 range. However, like many development-stage companies, it can move greatly on news, positive or negative. With that in mind, I see this company as having great potential and may be a sleeper stock.
Evolva Holding SA (SIX:EVE SWISS EX) is a biosynthetic pharmaceutical company based in Reinach, Switzerland developing pharmaceuticals such as the EV-077 for the treatment of complications of diabetes by reducing vascular inflammation by inhibiting the activity of prostanoids and isoprostanes, and EV-035, a novel bacterial type II topoisomerase inhibitor. The company also develops key components in food ingredients such as saffron, vanilla, and stevia through a fermentation-based platform producing a lower cost yet flavorful product for the marketplace. In 2009, Evolva entered an agreement with San Francisco-based Abunda Nutrition regarding the discovery and development of food ingredients, including producing the key constituents of stevia. In 2011 Evolva purchased Abunda to gain full ownership of the firm’s stevia and other nutritional ingredient programs. Evolva will continue its research at its Copenhagen site, with development activities in the U.S. Though there has been little news over the past year, Evolva does plan on moving forward with its stevia production on a pilot-scale with expectations of its production by 2015. I like this company and its business model. However, as an investor I do not see as much upside potential in its stevia production as some of the other companies that primarily concentrate on developing and marketing stevia.
The research of the health risks of consuming HFCS and sugar are compelling. It is clear that a natural, zero, or low-calorie sugar or HFCS substitute in needed. The question is, as an investor, which product will capture the market, and which company will give the best bang for the buck? While monk fruit appears promising, few companies that have invested the time or money to further advance the product beyond the market shelves. Stevia, on the other hand, has in a short time been added to products that are consumed on a daily basis, and the list keeps growing. Stevia also keeps evolving as companies like Stevia First, Evolva, and PureCircle work to develop a tastier product. I see stevia having the staying power to be the natural, zero-calorie sugar substitute of choice, and will continue to grow in popularity. I also see Stevia First Corp. as the best bang for the buck, as it is a pure stevia play with the most potential for growth. However, in investing, especially in any small development company, caution is advised, and due diligence is highly recommended.
Disclosure: Long KO, STVF