Interview with Lexaria (CSE: LXX) Director Chris Bunka
Last week I had the opportunity to speak with Chris Bunka, CEO and Director of Lexaria Bioscience Corp. (CSE: LXX) (OTCQX: LXRP), a company that has developed and out-licenses its proprietary technology (DehydraTECHTM) for improved taste, rapidity and delivery of bioactive compounds, including cannabinoids. LXRP provides a superior administration method by delivering hemp oil ingredients through a patented process within food products, as well as cannabis oil ingredients through agreements with licensed partners. The technology also has potential applications with vitamins, non-steroidal anti-inflammatory drugs (NSAIDs) and nicotine.
As a B2B enterprise, Lexaria is in licensing discussions or has existing agreements with companies in Canada, the largest-market states in the U.S., and internationally. Lexaria also has an R&D partnership with the Canadian government's National Research Council to characterize molecular bond formation with LXRP’s unique technology.
LXRP has a strong Intellectual Property portfolio. As of 2017, the patent portfolio included 19 patent applications filed and pending in more than 40 countries around the world with more patent awards expected.
Lexaria expects additional new patent awards both in the USA and internationally in 2017 and 2018.
In January 2019, LXRP announced a partnership with Altria (NYSE: MO), the world’s largest tobacco company to fund research and development of DehydraTECHTM for oral nicotine applications. I started the interview here.
Ohashi: can we start with an update on the relationship with Altria?
Bunka: as you might imagine, so far there has been a lot of work relating to project design and study design. We had some serendipity in that some of the work we have been doing with the National Research Council can be used with Altria. We have to make sure the science is acceptable to them but we think it is and if so that will be a plus for us. It really means that by coincidence we were working on the Altria project before we had concluded a deal with them. All this advance work necessary but that is pretty much behind us and we are getting ready for our first big face-to-face meeting of around four of our people with around two dozen of their scientists and project managers. We’re looking at this as our strategic kickoff for the project.
Ohashi: when you say kickoff, are you talking about Stage 1 or the whole project?
Bunka: I suppose it’s Phase 1. But we don’t want to get too far ahead of ourselves. So we would like to complete Phase 1 and do the R&D necessary to justify moving on to Phase 2 and 3 before we jump ahead. So I think we are taking a very organized and professional approach to it.
Ohashi: remind me again of how the money flow works. Is it by each Phase or by specific goals being met?
Bunka: well it’s both but mostly by phase. Each phase has its objectives and questions to be answered. I guess the best way to say it is there is a timeline for each phase but it isn’t a hard and fixed date. So we want to stay close to the timeline but the project is results based so once the data is in, Altria has time to review it and assuming they are satisfied with they see, we move onto the next phase in the same way.
Ohashi: is it your impression so far that Altria is taking your project seriously? Do you get the sense that this is important to them? A priority?
Bunka: I can only give you my perspective on that but I think so. We have been on a lot of calls with them. We have the list of people from their side who will be attending what I refer to as our kickoff meeting. They have two dozen or more people that are involved. It’s not as if they have assigned a couple of people to stand around and watch what’s going on. So from my point of view, I would say they are taking this very seriously. I think it’s important to them.
Ohashi: what’s going on with the rest of your business?
Bunka: we are very busy. We moved into our new facility in Kelowna at end of January 2019. It’s not huge but the 3,000 sq. ft. we have now is three times the office space we had before. The new lab is built and the security protocols are in place but still being outfitted with equipment. I would say we’re about halfway through that process. I mean it’s hard for me to tell how much better this is going to be. As a back of the napkin illustration, if we were doing 20 formulations a year in our facility in Phoenix, we will have the capability to do 100 to 400 here. We are still waiting for the Health Canada license so we can do research and development work with controlled substances such as cannabis but John has other things to work on until that comes through. (John Docherty is the President of LXRP and has primary responsibility for the science and technology while Chris Bunka is the CEO and handles the business matters including investment banking and capital markets relationships. I have watched them working together over the years and it is a relationship that works extremely well.)
Ohashi: so an R&D license will allow you to service your clients or potential clients…
Bunka: that’s right. Our clients often come to us with questions like, “What if we add this flavoring” or “that sweetener.” Right now we have hope that John can get down to Phoenix in the next couple of weeks to get an answer. Now we will be able to do it Kelowna with a lab technician and we could have the answer in a day or two. We will also be doing formulation work for Altria here as well as for clinical studies, university studies and to pursue our own ideas. Incidentally, we just advertised for our first, full-time, in-house lab tech. It speeds everything up.
Ohashi: didn’t you recently announce you were doing some work with nanotechnology?
Bunka: for some time, we have been working with nanotechnology and DehydraTECHTM and we have made huge advances. Over a year ago, when we were doing beverage formulations, required 10 to 20 millilitres of fluid in order to infuse 10 milligrams of THC. Today we can infuse 10 milligrams of THC with less than one millilitre of fluid. So think about a can of Coke which is 300 or 350 millilitres, we need less than one of those millilitres to put our ten milligrams of THC in it. This really demonstrates the advancement of our technology to be used with consumer products having virtually zero impact on taste, clarity, and so on.
Ohashi: does that advancement reflect the work you have been doing with nanotechnology?
Bunka: with beverages it does. With other edibles, we can do it if the customer wants it.
Ohashi: is this something that has been commercialized? I mean are you selling it?
Bunka: I would say within the next 30 to 90 days, the answer to your question will be yes.
Ohashi: is any of the nanotech work you’re doing proprietary? I always thought nanotech is old technology…
Bunka: nanotech is not very well understood. Nanotech is more or less generic. I will send you a link where you can go on Amazon.com and buy nanotech equipment. I have seen sonication used with cannabis. You can go on Amazon.com and buy a sonication machine starting at the $2,000 level and up. So you take a beaker of fluid with, say, a cannabis extract in it and the machine uses sound waves to disturb (break up) the material in the fluid. The problem is there are long tails to the distribution curve which means if you have 100 particles and sonicate them, you might get 65 particles that are the right size. You might have 20 that are too big and 15 that are too small. The workaround is to run it through again and after four or five passes you are at the 90% threshold that you need for a consumer product. But that’s not efficient. DehydraTECHTM will work with sonication but sonication is not efficient. We recommend microfluidization that gives you a distribution curve result of 90% or 95% in one pass. What do you do with the nano-sized particle? Big pharma takes the nano-molecule and encapsulates it with materials to deal with stomach acid, receptors, or whatever they need. But the cannabis industry isn’t doing that. In our case with a drug, let’s say THC, there is a molecular association with the long chain fatty acid and the nano-particle. So combining nanotech with DehydraTECHTM gives you the benefit of both smaller size and our technology. So we think nanotech and DehydraTECHTM gives you a major advantage and as the science advances, this will become better known.
Conclusion: from an investment perspective, Lexaria Bioscience has two parts: the research arrangement with Altria and the rest of the operations. Here is how I see it coming down. In my opinion, the research and development agreement with Altria, the world’s largest tobacco company, is the most important from an upside point of view. Right now, I judge it to be a ‘win/can’t lose’ for LXX. The stock closed last week at $1.69 per share. On January 14, 2019, the day before the Lexaria/Altria agreement was announced just over three months ago, LXX closed at $1.68 per share. In other words, there is almost nothing priced into LXX for a successful outcome to the agreement with Altria. Of course, if the agreement is not concluded and it breaks down somewhere along the way, the stock will drop. But at that point, I wouldn’t be overly worried. I think it will have every reason to recover to around current levels.
But what if it is successful and Altria makes an offer for Lexaria Nicotine LLC? I have no difficulty in imagining an offer in the hundreds of millions of dollars and possibly more. Every $100 million is worth approximately $1.20 per share. In other words, $300 million would be worth over $3.50 per share. That makes LXX a three bagger from here over, say, two to two and one half years.
Also remember the way management has structured their future, Altria is only buying the rights to use DehydraTECHTM for nicotine applications. The rights for vitamins, NSAIDs and cannabis can still be sold. Of these, the cannabis market is by far the smallest.
I have used this chart several times in the past and the numbers could probably be updated although the relationships won’t have changed much. While cannabis is the fastest growing market but also the smallest by a substantial margin. Vitamins are almost 4X as large, NSAIDs are some 7.5X as large and tobacco is nearly 100X as large. So even if Altria buys the nicotine rights to DehydraTECHTM at some point in the future, the rights for these other markets are still extremely valuable. There are also other potentially large markets. For example, Lexaria has applied for a U.S. patent utilizing DehydraTECHTM for the delivery of phosphodiesterase type 5 (PDE5) inhibitors which is probably more easily recognized by the product names ViagraTM (sildenafil) and CialisTM (tadalafil). Imagine the potential for a faster acting ViagraTM or CialisTM.
I believe Lexaria warrants a position in portfolios because any downside is likely to be brief and limited while the upside is potentially enormous. This is the risk/reward ratio that every investor should take advantage of.