Catalysts and competition for Lexaria Bioscience (CSE: LXX)

QUESTION: “I have a modest portfolio that includes the companies you’ve recommended. My question is about Lexaria (CSE: LXX) (OTCQX: LXRP). I read your interview with CEO Chris Bunka in your newsletter recently and it got me thinking. Some of the companies you’ve favored have some reasonably clear tailwinds. Sunniva, for example, has a state of the art facility being built.

LXRP has the agreement with Altria (NYSE: MO) but what other catalysts do you see in the months or years ahead? I don’t follow the bioscience space that much but LXRP is very much in the space where approval, adoption, and use of patented products rules the day. I also read the 10Q’s which discuss competition. What is your general evaluation for competition in the rapid absorption space? It seems like this will be a highly competitive concept that would see pressure from many angles.

Will you talk about your view on upcoming catalysts and competition for LXRP?”

A.G. from Chicago, IL

ANSWER: Here is my take from what Chris Bunka had to say. A few days after the interview, I attended the LXRP Annual Meeting, met a number of their employees and had a tour of the new lab they have built in Kelowna. So perhaps I have a few more nuances I can share.

The Altria agreement gives them exclusive use of LXRP’s DehydraTECH™ in the United States for oral delivery of nicotine. That is a fairly narrow definition. So I think another major development could be in nicotine delivery outside of the United States.[1] Putting on my analyst’s hat, LXRP was talking to other major tobacco companies before the Altria deal so it seems logical to think those contacts and their interest is still out there. In addition, the Altria Project will produce significant amounts of information that LXRP can add to its knowledge base.

It also leaves open the application of LXRP’s technology for many other uses including:

• cannabis that was my original interest;

• hemp that LXRP has been working with for several years that has really come to the forefront since the passing of the Farm Bill in the U.S. late last year;

• non-steroidal anti-inflammatory drugs (NSAIDS) such as aspirin and ibuprofen that is used in Advil and Motrin;

• vitamins;

• estrogen and testosterone hormone treatments;

• PDE5 inhibitors best known by commercial names such as Viagra or Cialis;

• Any other applications that may be identified.

Of these groups, several of the possibilities have greater revenue potential than cannabis applications. In other words, there is a long list of potential catalysts or drivers for Lexaria going down the road that include cannabis applications and are potentially larger in terms of future revenue generation.

I would like to mention one new product LXRP has recently introduced that I think has exciting potential. The product is ChrgD+ that is a water-soluble, hemp supplement powder. The size of a fast food restaurant sugar packet, ChrgD+ delivers hemp oil into any beverage hot or cold. In effect, whether you prefer Coke over Pepsi or a Corona over a Bud, ChargD+ will deliver hemp oil from the beverage of your choice using LXRP’s DehydraTECH™ technology. It is virtually odorless and tasteless and has no oily residue. ChrgD+ has only been available in stores for a few weeks but I think the potential for the product is significant enough to qualify it as a possible catalyst.

In terms of competition, I would like to make two points:

1. When you’re talking about companies of the size of Altria (Philip Morris cigarettes in the U.S.), Pfizer (Advil) or Eli Lilly (Cialis), it’s all about science. Companies of this size don’t make decisions on hopes and promises. They require scientific proof. LXRP has made significant additions to its base of scientific knowledge over the years and its DehydraTECH™ technology has received ten patents in the U.S. and Australia and has patents pending in over 40 countries around the world. Also, there has been a lot of discussion about nanotechnology lately. This is an old technology and the original patents have started to run out. You can buy a nanotechnology machine from Amazon for as little as around five thousand dollars. I doubt nanotechnology applications add much value to major companies like these. This has a significant bearing in reducing the perception of the competition that LXRP faces in marketing its technology. DehydraTECH™ may not satisfy every application but for those it does, I think it will evolve as the way to go.

2. LXRP is a technology company. It is a Business to Business operator. Let me give you a hypothetical. Assume DehydraTECH™ speeds up the absorption of PDE5 inhibitors and both Pfizer and Eli Lilly adopt it. At this point, LXRP simply authorizes Pfizer and Lilly to use the DehydraTECH™ technology in return for a royalty payment and has no active role in marketing the end products, namely, Viagra and Cialis. Similarly, with Altria. If MO adopts an application of DehydraTECH™, it will probably be implemented in a line of consumer products that already represents an established sales base larger than the sales of the largest cannabis company at this time. Those consumer sales are Altria’s strength. In that sense, DehydraTECH™ is potentially similar to “Intel Inside” in this hypothetical and Lexaria is akin to Intel (NASDAQ: INTC) or “Dolby noise reduction” and Dolby Labs (NYSE: DBY). Intel and Dolby don’t care who is selling the most computers or sound systems because almost all of them use their respective technologies.

Conclusion: I am not trying to convince you that Lexaria is the next Intel or Dolby. What I am saying is if you turn your imagination loose, it’s possible. Let’s look at the “Altria Project” because the investor response has been so underwhelming. This is a three part project and we might learn the outcome of Phase One in the next six months. As far as I am concerned, the market is giving almost no credit to the potential of this project. If it is announced that Phase One has been completed and they are proceeding to Phase Two, don’t you think the market should give Lexaria some significant amount of credit in the form of a higher stock price? Consider the list of potential drivers I have listed with several potentially as large as the Altria Project. Maybe I need to refocus my attention. Thinking of Lexaria as a cannabis play is emphasizing the market opportunity with the least potential. Very substantial in the cannabis world but comparatively small otherwise.

Here is a chart I have referenced many times over the years to make this point. It shows the tobacco industry is almost one hundred times larger than the cannabis industry. You might think that DehydraTECH™ only applies to a small fraction of the tobacco industry but the world is changing. Go to the website of Philip Morris International (PMI) (here) often cited as the largest tobacco company in the world and what is the first thing you will see on the landing page?

Designing a Smoke-Free Future

How long will PMI be in the cigarette business?

Follow the link and this is the message you will find that couldn’t be clearer:

“We’ve built the world’s most successful cigarette company, with the world’s most popular and iconic brands. Now we’ve made a dramatic decision....We’re building PMI’s future on smoke-free products that are a much better choice than cigarette smoking. Indeed, our vision – for all of us at PMI – is that these products will one day replace cigarettes.”

Let’s think about Altria that once owned Philip Morris International before spinning them off. In December 2018, Altria purchased 35% of e-cigarette maker Juul for $12.8 billion. But what followed? The American Heart Association sarcastically called the transaction “…a match made in tobacco heaven.” Eleven Democratic senators wrote a letter to Juul Labs that said, in part, “The corporate marriage between two companies[2] that have been the most prolific at marketing highly addictive nicotine products to children is alarming from a public health standpoint and demonstrates, yet again, that Juul is more interested in padding its profit margins than protecting our nation’s children.” San Francisco, where Juul is headquartered, recently passed a law that will ban the sale of all e-cigarette and vaping products next year.

I would venture to say Altria probably feels a heightened sense of urgency with respect to the project with Lexaria.

It is for all of these reasons that I have begun recently to talk about buying shares of Lexaria for your children and grandchildren. This will help you avoid the mistake of selling the shares when they are down and out as is the case with Lexaria at present. It will help you ignore the ups and downs in the market. This is the time to buy cannabis stocks and if one of your choices is Lexaria, I think your children and grandchildren will thank you.

[1] The “big five” global tobacco companies are Philip Morris International (PMI), British American Tobacco, Imperial Brands, Japan Tobacco and China Tobacco. PMI was an operating company of Altria (MO). In March 2008, Altria spun off PMI effectively separating the U.S. tobacco business that stayed in MO and the rest of the tobacco business that stayed in PMI.

[2] Altria and Juul