Submitted by Christopher French as part of our contributors program.
Transparency/Disclaimer: I was compensated modestly by ChromaDex Corporation to write this article. While I have vetted each company, researched it thoroughly and I’ve done my own due diligence, my due diligence is not a substitute for your own.
Natural supplement maker ChromaDex Corporation (CDXC) could see a boost in share values that is similar to the one that Arena Pharmaceuticals (ARNA) is now enjoying. Option trading for Arena increased by 35% when the news hit the wires that the Food and Drug Administration (FDA) had given the company permission to market a new prescription diet pill called lorcaserin.
The Wall Street Journal noted that the level of option trading for Arena exceeded that for Apple (AAPL). The buzz around lorcaserin caused Arena’s shares to rise by 29% in price to $11.42 on June 27. It is easy to see why investors are so excited about Arena. Lorcaserin is the first new weight-loss drug approved in the United States since 1999.
The potential market for lorcaserin is huge and growing fast. Around 78 million American adults are now obese, and there are another 500 million obese people around the world. There is also little competition for the drug because of the safety concerns facing other weight loss drugs. The FDA yanked another popular diet pill, Meridia from Abbott Laboratories (ABT), from stores in 2010 because of fears it could cause heart attacks and strokes.
ChromaDex Supplement Could be Bigger Than Arena Pill
Even though lorcaserin is attracting all the attention, ChromaDex could be the real winner in the weight loss market. The company recently purchased a license to manufacture a supplement called nicotinmideriboside (NR). Laboratory experiments indicate that NR can encourage weight loss by speeding up the metabolism.
Nicotinmideriboside could be far more profitable than lorcaserin because it is a supplement. Since it is a supplement, NR would be available without a prescription. It would also probably be far cheaper than lorcaserin. Consumers would have an easier time buying and taking advantage of NR products. That means ChromaDex could actually have a much higher sales volume than Arena. One way it could get a higher sales volume would be to place its supplements in discount stores such as Walmart and Family Dollar.
ChromaDex would be able to bring NR to market quickly and get it in the stores and for sale online in just a few months. It could also take advantage of powerful marketing mediums for natural supplements such as Dr. Oz’s popular syndicated TV show and online venues for supplement information. That could spread the word about NR quickly and drive sales.
Many Consumers Would Not be Able to Afford Arena Drug
Sales for new weight drugs such as locarserin and Qnexa from Vivius (VVUS) will be slowed by a number of factors that would not affect NR. Business Week speculated that insurers probably will not pay for the drug until Arena can demonstrate it can result in serious weight loss. Studies so far have shown its use only leads to slight amounts of weight loss.
That means most consumers would not be able to afford locarserin, even if it is on the market. The pills will cost around $2 each and have to be taken twice a day. Without insurance coverage, most consumers couldn’t afford them. The same people would be able to afford a supplement like NR. That could quickly translate into millions, or even tens of millions of dollars, worth of sales for ChromaDex.
Even if health insurance companies eventually start paying for lorcaserin, there are still around 30 million Americans without health insurance. Many of those uninsured Americans would presumably want to lose weight, but couldn’t afford the prescription pills. Those people would be able to afford a supplement such as NR. Some observers have speculated that part of the reason why supplement sales are going up is the number of uninsured people looking for a substitute for prescription drugs they can no longer afford.
So ChromaDex’s market is potentially far larger than Arena’s. It will be able to market and sell its supplements to large numbers of people Arena can’t reach. Even if Obamacare eventually extends health insurance to the uninsured, the policies still might not cover weight loss pills. ChromaDex has a weight loss pill that anybody who has cash or a credit card can purchase.
Serious Safety Concerns with Arena Drug
Even though it has received the FDA seal of approval, there are still some serious safety concerns with locarserin. The drug works in much the same as fen-phen, a diet drug that was pulled from the market in the 1990s because it caused heart problems. Some media outlets have reported that Arena is conducting further tests to see if locarserin can create the same kind of problems as fen-phen.
That means that many people would be afraid to take Arena’s new pill in the first place. There are no concerns about heart problems with NR; it is actually a kind of Vitamin B made from milk products.
ChromaDex may have a safer and cheaper product than Arena does. That means its stock value could be poised for the same kind of growth that Arena has seen. It is targeting the exact same market with what could be a superior product that sells at a lower price.
Unlike Arena, ChromaDex can sell its supplements directly to consumers via retailers. That means it doesn’t have the added cost and hassle of marketing through doctor’s offices and medical facilities.
Supplement Industry is Growing Fast
ChromaDex is bringing out NR at a time when the natural food and supplement industry is growing. The demand for natural foods and supplements in the United States is now so high that Natural Grocers by Vitamin Cottage, a Colorado-based retailer, has filed a $110 million IPO. In its IPO, the company included a report from a consultant called the Buxton Company that stated the U.S. could support an additional 1,100 Natural Grocers stores. Around 30% of Natural Grocers revenues come from supplement sales.
Obviously, a large percentage of the supplements sold at Natural Grocers and its competitors, such as Whole Foods Market (WFM), are weight loss products. ChromaDex is introducing what could be the best-selling product in a fast-growing market.
NR would fit right into this fast-growing market because it is a form of niacin, or Vitamin B. Supplement users are already very familiar with niacin and its benefits. Many of them are increasingly looking for supplements based on sound science rather than hype. ChromaDex has a new vitamin product based on legitimate science that it can sell to a wide variety of customers.
ChromaDex already has experience providing products to the dietary supplement, food and beverage, and pharmaceutical industries. Companies in all of these fields might be interested in purchasing NR and using it is an ingredient in their products. Products that could conceivably contain nicotinmideriboside include beverages and pills.
Sports nutrition drinks, which are now sold in 80,000 retailers and vending machines in the United Kingdom alone, would be just one of the many products that NR could be added. The large profits from sports nutrition drinks prompted GlaxoSmithKline (GSK) to buy Maxinutrition, the manufacturer of one of the most popular sports nutrition drinks, Maximuscle. NR could be easily added to sports nutrition drinks because it is made from milk. The people who consume such beverages would be interested in NR because of its metabolism-boosting capabilities.
If ChromaDex can rapidly develop a range of NR products, it should be able to generate large amounts of cashflows that will translate into increased profits and share value.
If ChromaDex can succeed in bringing out a complete line of products with NR as the active ingredient, its stock value could grow faster than Arena’s. That success could transform ChromaDex from a penny stock into an industry leader. It would also make it into one of the best value stocks around because ChromaDex has the exclusive rights to manufacture and sell NR.