• Ted Ohashi

Interview with Lexaria Bioscience (CSE: LXX) CEO Chris Bunka

This week I interview Chris Bunka, Chairman of the Board and Chief Executive Officer of Lexaria Bioscience (CSE: LXX) (OTCQX: LXRP) since 2006 who was primarily responsible for the corporate pivot from older business activities to bioscience. Chris is a serial entrepreneur and has been involved in several private and public companies since the late 1980’s. He has extensive experience in the capital markets, corporate governance, project acquisition and corporate finance. He is a named inventor on some of Lexaria’s pending patents.

Chris is one of my first and most valued contacts in the cannabis industry. We have been talking Lexaria and cannabis for almost four years. My recommendation of LXX did exceptionally well going from around $.30 per share to over $3.00 per share before slumping back to around a $1.00 per share over the past year. As the interview reveals, it is ironic that while the stock price has fallen, business activities have never been more promising for Lexaria. In this interview, Chris talks about:

  • The interaction of human digestion and the effect on ingesting drugs such as THC, CBD and nicotine

  • Why LXX’s DehydraTECH™ technology is superior but can work with nanotechnology

  • How DehydraTECH™ works and what it can do

  • Why LXX was targeted by ‘big tobacco’ and the proof of concept project with Altria (NYSE: MO)

  • Expected flow of news from the Altria project in 2019.

  • The rest of LXX’s business and the explosion in their hemp operations

Conclusion: I continue to like LXX for the portfolio of long term growth investors. But here’s another idea. I think it is an ideal stock to buy for your children’s and grandchildren’s portfolios. I’m sure they will thank you.

The Interview:

Ohashi: Hi Chris. How are things?

Bunka: Things have never been as advanced as they are now but the market is giving us the cold shoulder so it’s frustrating. But the markets are what they are….. I’m very satisfied with what we’ve accomplished to date and we’ll just keep going and hope the markets will catch up.

Ohashi: Many people have just learned of Lexaria and your technology. Let’s provide some background to give a better understanding of the big picture. What happens when a drug like CBD is ingested?

Bunka: Sure. But let me start by disclosing I am not a doctor and I am not dispensing medical advice in any way. What I will try to do is explain in lay terms what I have learned about our technology - DehydraTECH™.

We are water-based creatures and almost everything we eat is converted into water soluble forms for release into the bloodstream. Vitamins will help clarify: Vitamin C is water soluble and Vitamin E is fat soluble. So if you take a multi-vitamin with both C and E in it, 60% to 90% of the Vitamin C will probably end up in your bloodstream. But chances are also very good that only 5% of the Vitamin E in the tablet will end up in your bloodstream. So the body has challenges absorbing fat soluble vitamins.

Compare alcohol and cannabis. Alcohol is water soluble and is easily absorbed into the bloodstream and if you take a breathalyzer test 24 – 36 hours later, it will be all gone. Cannabis is fat soluble. If you use cannabis and take a test, it can show up in your system 3 – 4 weeks later because there can be residual amounts of cannabis in your liver for a long, long time.

Lexaria’s technology focusses on those difficult to deliver fat soluble molecules and we significantly enhance the quantity that actually gets into your blood. We also radically reduce the amount of time required to get the molecules into your system. We have lots of scientific evidence to support these statements.

Ohashi: cannabis and tobacco are frequently smoked.

Bunka: yes, smoking is completely different and gets us into different ways of administering a drug. If you use a hypodermic and inject it into your bloodstream, that’s called perfect bioavailability, that is. 100% of the drug in the syringe enters your bloodstream. Anal suppositories are the next most efficient but obviously less popular. They typically deliver 60% to 70% of the drug. Pulmonary inhalation (smoking and vaping) delivers 30% to 40% and is next best. The two main drawbacks to smoking are it bothers people who are around you and especially with combustion, in time, it will likely kill you. Vaping is most certainly much less harmful than smoking but it is not without harm. The simple reason is human lungs evolved to exchange only oxygen and carbon dioxide while the stomach and intestine evolved to absorb everything else. Also with eating most things go into the liver to get metabolized so the body can use the materials and then it moves to the bloodstream. With smoking you have a first bypass of the liver and the drug has a chance to circulate and bind with human receptor cells. So this first bypass is a characteristic that is much sought after because the drug can get into the bloodstream without being altered or delayed by going through the liver.

Ohashi: how does nanotechnology fit in the scheme of things?

Bunka: nanotechnology is a large area of discussion right now and it has mostly positive outcomes but there are negative ones as well. Nanotechnology is over twenty years old and research peaked around 12 to 15 years ago. The original idea was to make molecules small enough to get across the intestinal barrier or intestinal wall and another reason that it is still being pursued is to penetrate the blood/brain barrier. But the downside is that because nanotechnology doesn’t exist in nature, the human body has not evolved to deal with nanotech. This means nanotech might be able to get molecules past these natural filtration systems but they might not be able to get out. So there is a lot of concern about using nanotech with inorganic materials. For example, silver is being used to treat certain conditions but the downside is an inorganic material like silver can also accumulate in the body and result in medical situations the body did not anticipate. For example, what if you end up with large amounts of silver in your heart tissue? So for organic molecules, nanotech is probably fine but one should be cautious when used with inorganic materials.

Finally, big pharma is pursuing extremely complex applications of nanotech. Anyone can go to Amazon and buy a simple $5,000 nanotech machine that will work in your kitchen. But that’s not so useful to the pharmaceutical industry anymore. In pharma, recent applications involve nanoparticles coated with different layers of materials with each one designed to do a different thing. You are not going to see these processes used in consumer products because it could cost between $10 to as much as $200 per dose. So if you encounter nanotech in a consumer product it probably isn’t one of the high end, sophisticated pharmaceutical forms.

Ohashi: is there a difference in the way the body treats a sold as opposed to a beverage?

Bunka: the body recognizes things based on molecular characteristics more than whether it’s solid or liquid. Probably over 95% of what you eat passes through the stomach and is absorbed in the intestine. Athletes have packets of simple sugars you can put in your mouth and is absorbed sublingually, that is, under the tongue or directly through the stomach but these are exceptions. Liquids might possibly be absorbed more readily because it is already broken down whereas solids are not but it probably isn’t going to be a big thing.

Ohashi: so the bottom line is you’re trying to get more the material into your system, faster.

Bunka: you can imagine almost every person in North America has some kind of over-the-counter medication in the cabinet to relieve pain. When you are in pain, you want it to go away quickly so speed of delivery is important. Or consider our experience with soft recreational drugs like caffeine, nicotine or alcohol. Many people get up in the morning and one of the first things they do is smoke a cigarette or have a cup of coffee. They don’t want to wait. The same thing is probably true with a glass of wine or beer. So in the simplest sense, yes, speed matters to everyone but maybe for different reasons.

Ohashi: so where does Lexaria’s technology fit in?

Bunka: DehydraTECH™ is a technology we own that has nearly a dozen patents issued and 60 patents pending. It processes fat soluble molecules in a new and unique way that alters the way the body perceives them. In many ways we are the antithesis of nanotech because we purposely make the molecules “bigger.” We have found a way to take a drug like CBD or THC and attach it to a long chain fatty acid such as olive oil or walnut oil. Our user effectively receives the advantage of both these molecules. The long chain fatty acid has an important action as they tend to lock the bitter taste receptors on the human tongue and in the mouth so the bitter taste of the drug is not detected.

Then at the intestinal wall a communication process goes on to identify what you have just eaten resulting in a somewhat unique formulation of bile being produced and released to assist in digestion. The body has a preferential pathway for long chain fatty acids. In fact these are so useful to the body that we manufacture androgynous long chain fatty acids to aid in our own digestion. So DehydraTECH™ kind of highjacks a natural bodily process doctors have known about for years and the long chain fatty acid with the drug in tow tends to be shunted away from the liver directly into the lymphatic system. With Lexaria’s technology we bypass first-pass liver metabolism with an edible. This means DehydraTECH™ produces a drug delivery result similar to smoking because smoking also avoids first pass liver metabolism and we save the 30 to 90 minutes processing time required by the liver. That is the main reason traditional cannabis edibles are so slow. They have to get through the liver.

This leads to another important and more recent discovery - the role of fatty acids and interaction with the blood/brain barrier. The blood vessels that feed and take away from the brain get exceptionally small and make it difficult for viruses and bacteria to make that journey. That’s the point of the barrier. But evolution is ingenious. It has evolved a protein based long chain fatty acid transport mechanism. Once again, our technology has highjacked a mechanism to enable much larger molecules to pass into the brain. We only discovered this recently through testing we conducted. If you have medical professionals as readers, I hope they will excuse me for reducing what is a very complex process into something I hope lay people can understand.

Ohashi: that’s an excellent lead into nicotine and the Altria (NYSE: MO) agreement. Is this what Altria saw that got them interested in DehydraTECH™?

Bunka: I recognize in the public company world, there is a lot of information and disinformation. Lexaria only talks about scientific ideas and concepts when we have trials or studies to back it up. So with respect to Altria, we have known internally for almost three years that our technology works in a similar fashion on fat soluble drugs provided those drugs have certain other molecular characteristics we have identified. We know nicotine and cannabinoids share those characteristics.

In the early spring of 2018, we conducted a test on nicotine with 12 animals and we found the delivery into the bloodstream increased by several hundreds of percent and by over 500% into brain tissue. At the time, we were in discussion with one of the other international tobacco majors, not Altria, and they were greatly impressed with the results. They asked us if we would be willing to reproduce the study with a larger animal population and we agreed. In August 2018 we published the results of a study with 40 animals that showed about a doubling of delivery of nicotine into the blood and over a 300% increase to the brain. When you smoke a cigarette, nicotine enters your bloodstream starting in 10 to 15 seconds which is very fast but the maximum blood level concentration of nicotine from that first puff takes 4 to 7 minutes depending on things like your age, gender and body weight. With our technology we were delivering nicotine into animal blood within 2 minutes. And in ten to twelve minutes were delivering more nicotine to the blood than the generic formulation did in one to four hours. This was a real breakthrough in both the amount of nicotine and the speed at which it was delivered.

By August we were in discussion with three major tobacco companies and we were hearing comments along the lines that “ this company we have never seen oral nicotine delivery results this fast.” At that point we knew we were onto something. Just for the record, I would like to say Lexaria is not advocating people who do not use nicotine should start. We are addressing the reality that there are 1.1 billion people who smoke cigarettes every day. If those people can find a safer way to satisfy their need for nicotine, Lexaria will have made the world a better place.

Ohashi: we know also the combustion of tobacco is what creates the health issues. It is not the nicotine.

Bunka: nicotine is one of the most addictive substances known. But in small quantities, nicotine is relatively harmless in and of itself. So you’re right; it is the combustion that completely transforms what happens to the human body. So if it is tightly controlled in an oral form, it is harmless. In fact, nicotine in an oral form is being used as a partial treatment for Alzheimer’s disease. So it may even do some good. Nicotine is known to have some cognitive enhancement effects. What we know is if you are using nicotine, smoking is the most harmful method of delivery. Vaping is almost certainly safer. Oral delivery is safer still and that is where Lexaria’s technology comes in.

Ohashi: and that is Altria’s sole interest – delivery of nicotine in oral form.

Bunka: yes, Altria is a consumer products company. Our agreement gives them exclusive rights in the United States and non-exclusive rights in the rest of the world for nicotine delivery in oral form.

Ohashi: in the old Vancouver Stock Exchange “Wild West” days, we would see junior resource exploration companies with an exceptionally interesting property doing a deal with a major mining company and the flow of news would suddenly stop. Is that what we’re seeing with Lexaria and Altria?

Bunka: Altria’s a big company. They’ve been exceptionally respectful and collaborative with us. But I think last year they had around U.S. $27 billion in revenue. So out of necessity, anything they do means they have a lot to lose. The corporate and scientific due diligence they did was extremely extensive. So yes, as a result of all of that we are constrained in what we can say and do. Having said that, I couldn’t more pleased with our progress under the agreement to date. From where I sit, everything is two thumbs up.

Ohashi: if we go back to the resource example, there was always a recognition on the part of the large company that the small company needs a flow of information. Is there something in your agreement with Altria that recognizes your need for information?

Bunka: yes. Under defined circumstances there is allowance for news to be issued after it is jointly reviewed and approved by both companies. There is another aspect that is likely of great interest and that is Altria has non-exclusive rights to use the technology outside of the United States so Lexaria is free to pursue additional nicotine or tobacco type relationships. Altria is the largest tobacco company in the U.S. with something like an astonishing 51% market share but they have very little operations outside of the U.S. So we are and will continue to pursue nicotine deals with tobacco companies outside of the U.S.

Ohashi: have you gotten to the position with Altria where you might do a general update or are you not far enough advanced?

Bunka: I think it’s the latter with one possible exception on a piece of work Lexaria had commissioned prior to our agreement with Altria. It was a bit serendipitous that this fits really well into the work with Altria and that work is well advanced and nearing completion. It could be argued that we could release that information independently but I don’t think that would be in the spirit of our relationship. However I can see some advancements toward the end of the summer and if that is the case I will advocate for the release of an update.

Ohashi: originally, I understood there are three phases in the work plan with Altria. So would you say you are well advanced in phase one?

Bunka: as I said, perhaps in that one area but not otherwise. It’s taken a while to get going but I would add I don’t think we’re ahead of or behind schedule.

Ohashi: keeping in mind everything we’ve said about the constraints, is there anything else you can say?

Bunka: the entire program has been designed for oral forms of nicotine delivery and Altria already has a business line that is active in that sector. I don’t have the numbers as we talk but I think Altria reported around U.S. $27 billion in revenue and something like 10% to 15% of that is in non-combusted forms of delivery. Some portion of that would potentially use Lexaria’s technology. The point is we are talking about an existing business line that is very large. Using this back of the napkin arithmetic, likely over $1 billion in existing revenue. With our agreement, subject to the proof of concept work we are doing being positive, there is a royalty agreement in place. If we are able to help Altria improve their product lines whether it is in the amount of nicotine absorbed or the rapidity of absorption or improvement in flavour or the lack of irritation caused by delivery, we will start to earn a revenue stream from a really accomplished consumer products company that even in these sub-categories of their business, there are revenue streams larger by far than from the largest cannabis company in the world today. So we have an amazing potential partner we’re just thrilled to have.

Ohashi: so your relationship is all positive?

Bunka: we were very, very nervous going into this relationship. We’ve been in meetings where there are 20 of them and three of us. But here’s the best answer I can give. It appears to me if we identify a scientific or engineering problem, they want to identify them in order to solve them. They recognize it’s in everyone’s best interest to make this work. I really believe they are in this looking for solutions so they can be in business for another 100 years.

Ohashi: originally, we were looking at a timeline of two years for the Altria project. So have we made a dint in that? Where do we stand now?

Bunka: we don’t know how long this will take. I know we are already thinking that instead of everything running in linear fashion, we can have some things running in parallel. So I don’t know if it will take 18 months or 36 months but it will be in that range. We’ll know a lot more when Phase One is completed and I do think that will be in 2019. When we get into Phase Two, we’ll really be able to roll up our sleeves and conduct a lot more work but I think for now, I believe it will fall into that timeline.

Ohashi: the other thing that is emerging here is the outcome doesn’t have to be all or nothing.

Bunka: absolutely. There are so many possible outcomes to the program. I think my earlier comment that everyone is looking for a way to market applies here. If we get to market it’s a benefit for Lexaria and Altria.

Ohashi: sorry but Altria took up most of the interview and that was my intention. Any quick comments on the rest of your business?

Bunka: the big event at the end of last year was the passing of the Farm Bill that basically made cannabidiol (CBD) from hemp legal in the U.S. As a result, our hemp division has never been so busy. We are having discussions with both American and International companies ranging from very small to incredibly large that are interest in the CBD space. The fact that we have almost five years of experience in hemp oil formulations has really proven to be a bonus for us. We have announced a couple of small new customer agreements and we have more Letters of Intent out right now and in some cases with larger potential dollar values than at any time in our history. Also with each month that goes by we get closer to the date that cannabis edibles become legal in Canada. I know this has been a frustration but as it stands any cannabis and hemp edibles sold in Canada are illegal and we can’t go there. But when it is legal, Lexaria can begin generating revenue from its Canadian based agreements with edibles companies. Finally, Illinois recently became the 13th U.S. state to legalize in addition to the over 30 that are medical cannabis legal. So things are accelerating in our favour. I can say 2019 is the busiest year we have ever experienced and I anticipate 2020 will be busier than this year.

Ohashi: can you elaborate on your hemp based activities?

Bunka: in the U.S. our technology is long since patented. In the U.S. we have formulated a CBD from hemp capsule (pill) and we have a formulated a powder called “ChrgD+” that is packaged like a restaurant sugar pack that weighs only two grams and can be carried in your purse or pocket. It is designed to be dispensed into any beverage ranging from water to cola to a glass of wine, a cocktail or beer. It has no aroma and only a miniscule impact on flavour. “ChrgD+” lets you convert any drink of your choice to a CBD based beverage. That product has just gone on sale a week ago and we are starting to receive some small stocking orders. And we recently announced a new customer in the CBD from hemp beverage category.

We are talking to well-known consumer products companies that are exploring adding CBD from hemp into a variety of products including mints, chocolates, protein bars, beverages and even personal care products. So our hemp business has really exploded for sure.

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