Submitted by Sarah Harris as part of our contributors program.
Most investors do not understand ChromaDex (CDXC) and are severely misinterpreting its progression as a company. Looking at the last decade of the ChromaDex’s existence as a laboratory services provider, investors hastily glance at its income statement and assume that its slow revenue growth rate is representative of the company’s growth rate and therefore indicative of the company’s future potential. What investors fail to understand is that ChromaDex is essentially Martek in its early years (before its $1.1 billion acquisition), and past revenue has very little to do with ChromaDex’s true value.
In this essay, I will explain why ChromaDex will likely replicate the success of Martek that most notably produced omega-3 and omega-6 additives to infant formula and was acquired for $1.1 billion in December 2010 by Royal DSM NV, the world’s largest vitamins maker. This article is intended to neither encourage nor discourage investment, but solely to compare the business models, products, and prospects of ChromaDex and Martek. I believe most investors will be shocked at the similarities, which will have implications for the way they evaluate ChromaDex going forward.
The Only Reason You Know “Omega-3 Fatty Acids” Is Because of Martek
Do you recognize the term “omega-3 fatty acids”? It may surprise you to learn that the only reason you recognize this term is because Martek marketed the term to you.
Martek spent millions of dollars aggressively advertising omega fatty acids so that these terms would have top-of-mind name recognition. Martek succeeded in convincing people that although the human body needs billions of chemical compounds (which everyone needs yet no one recognizes by name), “omega fatty acids” should be one of the few compounds they do recognize by name. Most importantly, it should be a compound they demand by name.
After two decades of work, Martek succeeded. Today, despite the billions of chemical compounds in nature that are good for our bodies, we specifically ask for “omega fatty acids” by name. Unsurprisingly, Martek has benefited over a billion dollars from this orchestrated (albeit healthy) trend.
Why ChromaDex Will Become the Next Martek
Like Martek, ChromaDex understands that there are billion-dollar opportunities in the market for natural compounds. Similar to Martek, ChromaDex sells nature-identical compounds with irrefutable, self-evident health benfits. Essentially, both ChromaDex and Martek sell what already exists in nature: natural ingredients.
Money-making opportunities exists for companies like Martek and ChromaDex because large vitamin, food and beverage, pharmaceutical, and cosmetic companies do not dedicate many resources to research and development, preferring simply to focus on increasing sales of existing products. Consequently, most companies in these industries have a small pipeline of upcoming products. Like Royal DSM, large companies are happy to pay a premimum for other companies that have done identified new products that will actually sell in the marketplace.
Prior to its acquisition, Martek grew as a business by developing, marketing and selling nature-identical ingredients. Martek gained (and paid for) recognition of its omega-3 and omega-6 products in numerous scientific studies and even gained the recommendation of the World Health Organization. As more people became aware of omega fatty acids, sales grew.
ChromaDex is already replicating Martek’s early success by obtaining scientific recognition for its products to promote greater market acceptance. Similar to Martek’s omega fatty acids, ChromaDex’s nature-identical pterostilbene (pTeroPure) is simply a natural antioxidant found in blueberries. pTeroPure is self-evidently good for the human body across a range of health areas, including blood pressure. Like omega-3 and omega-6 fatty acids in their early years, pTeroPure is beginning to receive broadening acclaim, increasing demand, and heightening scientific interest.
* The USDA verifies several health claims for pTeroPure, including benefits for the human heart and nervous system
* The American Heart Association hosted clinical results for pTeroPure
* Cornell University and other Ivy League colleges are pTeroPure research partners
* Frost & Sullivan named pTeroPure the 2010 North American Most Promising Ingredient of the Year
* The University of Mississippi sponsored a phase 2/3 trial demonstrating that pTeroPure significantly reduces blood pressure in adults
ChromaDex’s Differences With Martek Are Strengths
Martek and ChromaDex do have some dissimilarities, but most of them simply reflect the older age of Martek. First, the companies are far different in size: Martek has over 500 employees and annual revenues over $450 million, while ChromaDex has under 60 employees and annual revenues over $10 million. Second, Martek’s omega-3 and omega-6 product lines are mature, while many of ChromaDex’s products are still under development. Third, ChromaDex’s lean advertising budget pales in comparison to the hundreds of millions of dollars that Martek dedicated to advertising. Fourth, Martek was able to position its omega-3 and 6 products as critical supplements to infant formula, whereas ChromaDex has USDA health claims and scientific evidence but no “celebrity” endorsements so far. Finally, pTeroPure has broad health benefits for all adults, whereas Martek advertised the health benefits of its infant formula for only a niche age population.
Many of these differences, however, are strengths. ChromaDex has multiple products in its pipeline, most of which are well beyond the “proof of concept” stage and generating revenue. pTeroPure, for example, generated over $4 million in sales this year. Additionally, ChromaDex also has a legacy business of laboratory services that allows ChromaDex to gain foreknowledge of new trends in the natural products space. Because of its order flow from nearly all research laboratories, ChromaDex knows future demand and has proven this forecasting ability with its pTeroPure and ProC3G product lines, both of which were acquired for nominal amounts of money and generate millions in combined revenue.
ChromaDex is also similar to Martek in that ChromaDex recognizes its need to be more than a one trick pony. Martek rode the success of its omega-3 and omega-6 supplements to branch out into additional lines of nutritional supplements by acquiring Amerifit Brands and its line of for consumer health and wellness products. Likewise, ChromaDex is developing additional products in addition to PteroPure, including nicotinamide riboside, a B-vitamin for energy and weight loss that is more effective than another B-vitamin called niacin, as well as anthocynin products with antioxidant and anticarcinogenic health benefits.
At its core, ChromaDex’s business model is identical to Martek’s business model.
* Both companies offer healthy, nature-identical, no-side-effect alternatives to common drugs.
* Both companies license intellectual property and manufacturing rights for natural ingredients and then advertise them to the vitamin, food and beverage, pharmaceutical, and cosmetic industries.
* Both companies accurately predicted future demand of natural ingredients (pterostilbene/pTeroPure by ChromaDex and omega-3/-6 acids by Martek) and now generate substantial revenue from the demand.
* Both companies completed additional human clinical studies to validate health benefits of their respective ingredients.
* Both companies require years of lead time to advertise their ingredients to the world. (Top-of-mind name recognition does not happen overnight.)
Although Martek (founded 1985) is an older company and therefore has achieved more milestones and revenue than ChromaDex (founded 1999), ChromaDex is nearly identical in its progression toward Martek’s billion-dollar status. Moreover, by having multiple products in its pipeline and constantly sensing industry order flow through its laboratory, ChromaDex compares favorably with Martek. With millions of dollars in pTeroPure sales over just two years, ChromaDex appears to have massive potential over the next two decades that correspondingly empowered Martek’s billion-dollar acquisition.