By Leopold Epstein
Thousands of miles from their native homeland in South and Central America, lush perennial plants grow in Yuba City, California. Although far from their homeland, growing conditions are optimal for the plants, which are 2 to 3 foot tall bushy specimens and heavily laden with glossy, dark green leaves. Valued not for their appearance or even fruit, the plants represent the beginning of the newest and fastest-growing member of the natural and zero-calorie sweetener products, stevia. Although the Guarani Indians of Paraguay had used the leaves and their extracts for medicinal purposes and as a sweetener for ages, it was not marketed commercially until 1970 when it was first sold in Japan. By 1988, the stevia plant extracts comprised roughly 41% of the overall market share of sweeteners in Japan. The mega-potential $8 billion sweetener market of the United States would have to wait until a December 17, 2008 GRAS (generally recognized as safe) designation in which the FDA noted, “The subject of the notice is rebaudioside A purified from Stevia rebaudiana (Bertoni) Bertoni. The notice informs FDA of the view of Cargill, Incorporated (Cargill) that rebaudioside A is GRAS, through scientific procedures, for use as a general-purpose sweetener in foods, excluding meat and poultry products, provided that food standards of identity do not preclude such use, at levels determined by current good manufacturing practices (cGMP).” Rebaudioside A is the sweetest of the stevio glycosides (about 300 times sweeter than sugar) and is generally the desired portion manufacturers extract and further purify.
On November 11, 2011 the European Union approved the use of steviol glycosides (the total of the sweet extracts from the stevia plant leaves), a move that would expose the still-fledgling manufacturers of the product to the $500 million European sweetener market. Although just a few short years from its U.S. debut, the sweetener has overtaken aspartame as the number two sales leader in the zero-calorie sweetener market and is now second only to Tate & Lyle’s (TATYY.PK) Splenda® in the U.S. With a zero glycemic index, zero calories, and an all-natural product, stevia’s growth potential is largely unrealized. With the U.S. as the obvious biggest target market, very little stevia is grown in the country with most imported from growers in Southeast Asia.
Stevia First Corporation’s (PINK:STVF) acreage in Yuba City, California marks the beginning of what could be a revolutionary player in the industry. Using local agricultural and bioagricultural expertise, Stevia First planted its first pilot crops in 2012 with the intent of using the results from the many growing conditions and cultivars (stevia plant types) to pair optimal growing conditions with the desired plant type to grow the highest-yielding plants with the most favorable taste profiles it can develop. Although the company is just emerging as a potential stevia supplier, Stevia First has already jumped ahead of its competition in some regards due to a late 2012 acquisition that could mark the beginning of a new era of stevia manufacturing, consistent quality, and ample supply. On August 29th, 2012 Stevia First Corporation announced the acquisition of a fermentation-based stevia production license from Vineland Research and Innovation Centre. Using the same biochemical pathways that stevia plants utilize to produce the steviol glycosides, scientists developed a fermentation process that mimics the pathway to produce the sweet glycoside with much more efficiency that the traditional agricultural model does. With some 70% of the traditional steviol glycoside production attributed to the actual growing of the leaves, costs and time savings could be potentially phenomenal if the process is implemented properly. On January 22nd, the company updated shareholders on its development progress and gave goals for the company for this year. These goals should be construed as catalysts for investors and could provide for healthy share price action over the next few days, weeks, and months. If successful in either its bioagricultural or fermentation endeavors; the upside in share price for investors could be substantial for the budding $32 million company. Following are listed goals that I believe could significantly affect share price for 2013:
“Demonstrate the directed production of steviol or steviol glycosides through microbial fermentation.” This is likely a pilot plant operation of the process on a smaller scale in order to maximize the product’s efficiency of quality versus quantity of the desired steviol glycosides end product. These smaller scale runs will most likely be used to determine the “recipe” that would then be upscaled to a larger production version. Updates on successful batches of the product produced here legitimize the technology and will give an indication of price and volume of steviol glycosides expected going forward.
“Complete engineering work on fermentation systems, or key fermentation components, which clearly show a near-term commercial product opportunity resulting from deployment of this technology.” Upscaling is not as simple as it may seem. To simply upscale by an order of magnitude of ten, one can’t simply just make all the production systems ten times larger than the pilot plant scale equipment. Larger fermentors are less efficient at dissipating heat, require more complicated aeration systems (if an aerobic digestor), require more sophisticated raw material and finished product handling equipment, larger-scale raw material purchases, and require a larger volume of waste material to be discarded/recycled (dead culture cells, salts, mildly weak acid/base material, etc) and other logistical concerns such as quality control, following FDA guidelines for food additives, and proper accreditation for overseas and domestic sales (IE: ISO-22000, HAACP and others). The initiation of these processes will give an indication that the company is serious with its endeavors, and a successful first production batch will help validate the facilities. Once the process is actually producing product for consumers, the production portion of the business model should be considered as validated and the company should be construed as a viable competitor and possible acquisition target.
“Advance R&D related to discovery and production of next-generation stevia sweeteners, and communicate the importance of this work to validate leadership within our industry” and “Demonstrate how our Stevia First natural tabletop sweetener is distinguished from major competitors”, and “introduce a formal launch of this high quality consumer product.” When depending on agricultural products, differing soil types, climates and environments can make it difficult to produce consistent products with the same taste profiles. Not only could a fermentation process give Stevia First personnel a tighter control of the fermentation product’s flavor profile, but it could probably be tweaked to produce a certain flavor profile for one customer type (table top sweetener, for example) or another (soft drink company). The end product would likely have a flavor unique to the industry and could have the desired flavor profile for huge potential customers. If highly successful and desirable, lab tests could be utilized to provide evidence for copyright purposes and for patent applications, protecting the product from competitors trying to replicate the valuable flavor profile.
“Demonstrate utilization of modernized stevia leaf extraction methods in the United States, and establish how this compares favorably to traditional leaf extraction methods used by current overseas suppliers” and “Complete and announce results from our California stevia field trials.” Although several countries have been growing stevia for much longer than the United States, the efficient agricultural practices in the U.S. will likely prove to be a formidable foe for other countries who are now importing the product into the U.S. Despite our population and voracious appetites, the U.S. exports 23 percent of our raw farm products, produced by farm and ranch families, which comprise just 2 percent of the U.S. population. Once these efficient growing practices get fully implemented on Stevia First’s farm(s), the amount likely produced at a much cheaper cost than the import versions could prove to be more than U.S. food manufacturers can ignore. Once yield numbers become available from the company’s crops, comparisons can be made between its yields versus competitors, which will either validate the crop as either comparable or superior relative to those competitors. Any announced leaf harvest or customer contracts should be considered as validation of the company’s agricultural venture and serve as a share price driver.
With multiple catalysts possible in 2013 for the small capitalization company, Stevia First common shares should attract many investor dollars over the next few months. With a business model creating a desired end product via two differing methods, the company appears to protect itself from failure with two solid alternatives. If successful with either endeavor, shareholders will likely benefit. If successful with both endeavors, the company must decide how to move forward, and shareholders would benefit even more. If both the agricultural and fermentation processes advance as anticipated, substantial upside could be likely via potential earnings or via possible company acquisition. Stevia appears to be a trend, and not a fad. Stevia First may be the best investment to experience the growth of the product from the early stages on through marketing/buyout. For more information on the company’s prospects, please see the January 22nd corporate update as a solid next step in your due diligence. With little downside likely due to two differing chances at success, this may be one of the safest development- phase companies available for investors with much upside possible for the $32 million market capitalization company in a multi-billion dollar industry.
Disclosure: Long STVF