By Craig Keolanui
The worldwide addiction to sugary sweet carbonated beverages has taken its toll on an adoring public, and health experts are starting to raise red flags. Obesity and type-II diabetes have become worldwide epidemics leading to the loss of life and devastating ailments while also costing the insurance and healthcare industries billions of dollars annually. Giant beverage companies like The Coca-Cola Company (NYSE:KO) and PepsiCo Inc. (NYSE:PEP) are starting to feel the effects of a health conscious movement that is starting to place much of the blame on their sugary, high-carbohydrate products.
Public outcry has now created a demand for carbonated beverages with low-carbohydrate or, specifically, low-sugar content, as well as sugar substitutes that can replace cane sugars and high fructose corn sweeteners. Despite having sucralose (Splenda), aspartame (Equal, NutraSweet), and saccharin (Sweet‘N low, SugarTwin) at their disposal, soft drink beverage giants Coca-Cola and Pepsi have focused more of their attention on the all-natural zero-calorie sugar substitute derived from the stevia plant.
Many of these artificial sugar substitutes have long been considered to taste processed and “fake” while also having to battle the unproven perception of causing cancer. Stevia sugar substitutes have the advantage of being all-natural, derived from the leaves of a small green tropical plant. Although the taste of the plant’s steviol glycoside extracts has been found to be up to 300 times sweeter than natural sugar, there are concerns that the primarily-sought ingredient of stevia plant extracts, rebaudioside A, is difficult to produce and has sweetness accompanied by a metallic, bitter, or licorice aftertaste.
Despite concerns about the aftertaste, the rush to use all-natural sugar substitutes, like the extracts found in stevia leaves, has picked up steam as both Coca-Cola and PepsiCo have seen soda consumption go down about 17% since its peak in 1998. Now, faced with health concerns and competition from flavored waters, sports drinks, and energy drinks, there is plenty of concern that soda formulations need to have less sugar in order to regain some of this lost market share.
Late last year, PepsiCo took a risk by introducing a reduced-calorie Pepsi soda in Australia that uses a combination of high fructose corn syrup and stevia sugar substitute, and has about 30% fewer calories than regular Pepsi. PepsiCo has even entered the stevia sugar substitute marketplace by partnering with Chicago-based Merisant’s subsidiary, The Whole Earth Sweetener Company, to develop PuraVia. This move and past moves, like acquiring Quaker Oats and Sabra, only prove PepsiCo’s intentions to go after more of the health conscious public that the company feels have been steering away from many of its high-carbohydrate beverages and snack foods.
There are several companies looking to capitalize on the current demand for stevia products. Cargill (private), a major international food products producer, has already brought a stevia sugar substitute to market through a partnership with Coca- Cola. The company’s product, Truvia, is derived from stevia plants cultivated in foreign soils and is currently used as a sugar substitute in many different products including some beverages produced by Coca-Cola. Truvia’s challenges include a high production cost due to the foreign crop cultivation, steviol glycoside extraction techniques, and concentration and purification of the extracted “sugars”. In order to lower the costs of extracting rebaudioside A from the stevia leaves, Cargill has invested over $5.3 million in the development of a microbial fermentation process for extracting rebaudioside A from stevia plant matter.
Cargill has partnered with Swiss company, Evolva Holding (FRA:ADF), to further the development of this fermentation process. Evolva Holdings is also busy at work producing other flavors, like saffron and vanilla, with its microbial fermentation-based platform. Evolva Holdings, with a market cap of about $185 million stands to receive over $7.5 million in milestone payments and even has the right to 45% participation in the final business. Perfecting this process can certainly boost Evolva’s “holdings”.
A small company based out of Central California, Stevia First Corporation (OTCMKTS:STVF) is also developing a microbial fermentation process for extracting steviol glycosides with a license from Vineland Research and Innovation Centre of Ontario, Canada. Stevia First might be small (market cap about $20 million), but has the advantage of working to develop a vertically integrated platform for stevia sugar substitute production. This platform starts with stevia plant cultivation by utilizing the agriculture experts from the universities and farming community of the Central California region in order to grow stevia plants locally. Stevia First has also developed direct seeding of the stevia plant with Seed Dynamics of California that cuts down on the high cost of greenhouse seed development followed by transplantation to the field. Controlling crop production close to home ensures a domestic supply of stevia plants while allowing for studies to improve the potency and concentration of the steviol glycosides present in the plant leaves.
Stevia First is hoping to use the microbial fermentation process to further the understanding of the biochemical pathways used to produce the glycoside extracts. This will eliminate the need for stevia leaf production, which contributes up to 70% of the overall cost of stevia sugar substitute production. This process will also allow Stevia First (STVF) to characterize many of the other (30 identified) steviol glycosides, besides rebaudioside A, present in the leaves to evaluate their properties and develop methods of producing the most desirable of these glycosides. Any savings in production costs might be overshadowed by the capability of producing additional sugar substitutes that might eliminate the aftertaste or produce different flavor characteristics.
Another company looking to capitalize on the stevia sugar substitute phenomenon is Senomyx Inc. (NASDAQ:SNMX). Senomyx is a company that develops flavor enhancers and taste modifiers to increase the sensitivity of the consumer’s taste to lower levels of existing sweeteners like sucrose and sucralose (S52617 and S2383). Two other flavor modifiers (S6821 and S7958) are being hailed as “bitter blockers”, which can take the bitter aftertaste away from aspartame and stevia sugar substitutes, acting to improve their flavors. The battle to get stevia sugar substitutes into any one of the many popular sodas might come down to Senomyx and the ability of S7958 to block out the undesired aftertaste. If any of these taste modifiers find their way into a can of Pepsi or Coca-Cola, Senomyx will be a company worth substantially more than the current market cap of $85.7 million.
Stevia First has made plenty of headlines for a company with shares currently valued at only $0.36 a share (May 20th). The road might be longer and include some twists and turns, but the value of this nano-cap stock is easy to see. If Cargill is willing to pay more for a stake in the fermentation process than what Stevia First’s stock is currently worth, it makes Stevia First an attractive candidate for investors or even a takeover. Senomyx, currently valued at $2.11 a share (May 20th) has plenty of upside for its products that can open up the doors for stevia sugar substitute acceptance. Coca-Cola has been battling issues with declining revenue while its stock remains stable, currently at $42.38 a share (dividend yield 2.60%). PepsiCo, at $82.59 a share, has experienced more growth and has a slightly better dividend yield of 2.70%, but it is the steps PepsiCo has taken in the emerging markets of India and Brazil that might make its stock a better investment.
The global sweetener market is estimated to be worth over $58 billion (2011) and the stevia sugar substitute market is estimated to now be only about $800 million to $2 billion of this amount. Any company that perfects the microbial fermentation process will be in the best position to capture more of the stevia sugar substitute market share. Considering Stevia First’s modest market cap around $20 million and a marketplace that could easily exceed $5 billion in very little time, it is easy to see value in this low cost stock investment.