How ChromaDex Doubled Its Revenues

Submitted by Mike Anthony as part of our contributors program.

ChromaDex operates in the rapidly-growing nutraceutical industry. The company has two primary business divisions: 1) selling dietary supplements and 2) providing laboratory services for the food and beverage, cosmetic, pharmaceutical, skin care, and dietary supplement industries. The former division (sales) is where ChromaDex has experienced rapid growth and doubled its quarterly revenues. This article will analyze ChromaDex’s recent performance and what investors should expect from the company in upcoming quarters.

ChromaDex Doubles Revenues and Increases Margins

On November 8, 2012, Chromadex reported $3.6 million in third quarter revenues, an increase of 99% from the third quarter of 2011. Gross margins also improved from 25% to 34%. ChromaDex has been able to increase sales while managing its cost of goods. The positive third quarter is not just a fluke; year-to-date revenues rose to $8.1 million or 28% compared to the same period in 2011.

ChromaDex’s legacy business division of laboratory services generated $6 million year-to-date, a slight decline of 5% compared to the same period in 2011 but steadily rising from comparable 2008 revenues of $4.5 million. Although a more mature business division, ChromaDex’ laboratory provides healthy cash flow and maintains invaluable customer relationships with Kraft Foods Group (KRFT), Nestle (NSRGY.pk), Pfizer (PFE), Cargill, and nationwide laboratories that use its manual of 3,000 phytochemical and 470 botanical reference standards.

What is the driver behind ChromaDex’s growth? Its BluScience® product line generated $2.1 million of revenues in the first nine months of 2012 from virtually $0 in 2011. The vitamin line has five SKUs at Walgreens (WAG), GNC (GNC) and Drugstore.com:

– Anti-aging – EternalBlu®
– Heart health – HeartBlu®
– Weight management – TrimBlu®
– Focus and energy enhancement – Blu2Go®
– Cognitive function enhancement – MemoryBlu®

BluScience’s products are based on a compound found naturally in blueberries: pterostilbene. Manufactured under the trade name pTeroPure®, interest in ChromaDex’s nature-identical pterostilbene has grown due to the compound’s benefits for high blood pressure, its selection as Frost & Sullivan’s “Most Promising Ingredient of the Year,” product marketing in Latin America by OPKO Health, and an exclusive signing with food and beverage giant Glanbia Nutritionals in North America.

The Future of ChromaDex

Ultimately, ChromaDex may continue to enjoy the double-digit sales growth of pTeroPure® until the tens or hundreds of millions, or it might eventually decide to sell the product line to a larger company with more resources to fully develop the product line. ChromaDex owns substantially all intellectual property and manufacturing rights for pterostilbene and will enjoy a licensing fee or upfront payment in exchange for its rights.

It is worth mentioning that German pharmaceutical conglomerate Bayer (BAYZF.pk) recently agreed to acquire Schiff Nutrition International (SHF), a major nutritional supplements company, for $1.2 billion. Following Bayer’s bid, another global company, Reckitt Benckiser Group (RB: LN), increased the bid offer to $42 per share or $1.5 billion and is likely to win Schiff. In previous years, Royal DSM acquired nutritional supplement Martek for $1.5 billion.

A billion-dollar price tag for ChromaDex is unlikely at this stage However, it is clear that the ChromeDex is operating in an industry that is receiving increased attention from large pharmaceutical and consumer product companies with plenty of cash. In addition, many pharmaceutical companies are eagerly looking for sources of growth as major pharmaceutical patents will expire in the near future. A compound like pTeroPure® with no side effects whatsoever is an attractive acquisition option for big pharma companies seeking to the raw, natural benefits.

ChromaDex’s Two New Products for Future Growth

ChromaDex has proven that it can grow revenues of existing products by millions of dollars, but it is also developing new products through partnerships with university laboratories. ChromaDex’s close relationships with research institutions affords it the unique opportunity to gain free, early-stage knowledge of developments in the nutritional supplement space.

In particular, ChromaDex is currently developing two additional intellectual property portfolios because of the early knowledge it gained from academic institutions: ProC3G and Vitamin NR. If successful, these two products will further benefit ChromaDex and its shareholders to pTeroPure’s tune of millions of dollars.

The first product, ProC3G (Cyanidine-3-Glucoside), is in the anthocyanin natural chemical family and could be helpful in reversing aging, diabetes, and obesity. ChromaDex commercialized AnthoPure and its retail brand, ProC3G, after licensing the patents from SUNY Buffalo. The company has already sold a small amount of the compound and is now working to further commercialize this product as a dietary supplement.

The second product is Vitamin NR (Nicotinamide Riboside). ChromaDex acquired the commercial patents related to this natural compound from Cornell and Dartmouth. Vitamin NR is a nutrient found in milk in the vitamin B3 family which helps the body maintain healthy chemical levels. Nicotinamide is improves the body’s metabolism processes and is helpful in countering obesity. In a recent column, Mark Bittman of The New York Times wrote about the health risks of consuming milk beyond infancy, generating significant attention. The reason that individuals consume so much milk is for particular nutrients like protein or Vitamin NR. ChromaDex will be able to isolate this valuable nutrient and sell it as a dietary supplement.

Conclusion

Many people understand the value of natural supplements in their daily diets (think Vitamin C, omega-3 fatty acids, or protein powder), not to mention the pharmaceutical and clinical uses of natural compounds in high potency (think penicilin or Niaspan). Natural products are relatively inexpensive and seldom have side effects. They are thus preferred to synthetic drugs whenever possible.

ChromaDex is a company that is exploring this market in an efficient and innovative way. Sales of the company’s BluScience® product line are growing at an exponential rate, and the company is pursuing two other products that it believes will share similar success. By focusing its marketing on a few promising products while maintaining its cash-generating laboratory services division, ChromaDex has a scalable business model. As BluScience® revenues continue to grow alongside the launch of ProC3G and Vitamin NR, a long-term view will likely be more beneficial for consumers as well as shareholders in this growth-stage company.