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Why Crestfallen Stevia Could Soon Be Making Headlines Again

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In recent years, many analysts have given much attention to the now world-famous sugar alternative, stevia. Since the FDA gave a no objection approval for “generally regarded as safe” (GRAS) status in 2008, many have predicted that stevia is set to take hold of the sweetener market. As if to consolidate this opinion, a number of leading food and drinks manufacturers have introduced stevia derivatives into their products. When considered objectively however, stevia has not taken hold of the food and drink industry to the scale that analysts expected. However, five years into its US commercial life, this could be about to change.

Why The Slow Uptake?

For those that are unaware of stevia and its potential, there is much content available that describes, in detail, its production, development and market potential. Here is a quick primer. Stevia is a plant that can be grown, harvested, dried and processed into an all-natural non-sugar sweetener. It is currently being grown in South East Asia, South America and the US. In its processed commercial form, stevia offers calorie free sweetness, and in certain cases has been shown to taste three hundred times sweeter than natural sugar. The size of the global sweetener market was estimated to be more than $58M in 2010. In 2011, this rose to just short of $100M. The World Health Organization (WHO) estimates stevia intake could replace 20-30% of all dietary sweeteners. So if it is calorie free, all natural and much sweeter than natural sugar, why such a slow commercial uptake? In short, the taste. Stevia sweetened products have a bitter aftertaste similar to that of tea.

To understand why, a little bit of science.

Stevia in its natural, unprocessed form is not FDA approved. The GRAS status refers to a processed derivative of stevia called rebaudioside A. Rebaudioside A is one of two main glycosides (the second being stevioside) found in stevia plant tissue, and is the compound responsible the plant’s sweetness. A glycoside is a sugar bound to another functional chemical group by a glycosidic bond, so it tastes sweet but is not used as fuel by the body. The reason rebaudioside A is used over stevioside is that it is not quite as bitter, but, despite its intense sweetness, it is still considered too bitter to enjoy by many. As a result, while there are obvious health benefits associated with the compound, its uptake has been stunted.

What Can Be Done?

Stevioside and rebaudioside A are used because they are the most prevalent glycosides found in the stevia plan, in terms of weight faction accounting for between 5–10% and 2–4% respectively. There are however, a whole host of other glycosides found in the plant, but only in minute quantities. Two of these, namely rebaudioside D (reb-D) and rebaudioside X (reb-X) have been found to have almost no bitterness. Using these two compounds instead of (reb-A) could be the driving factor behind stevia’s commercial uptake. The problem is that because they are only available in such minute quantities in the stevia leaf, it is as yet uneconomical to do so.

A leading stevia producer has realized this, and is doing something about it. That company is PureCircle (PCRTF.PK).

PureCircle has spent a number of years selectively breeding stevia to increase the concentration of reb-D and reb-X found in the plant. Increased concentration reduces the cost of production and, in turn, enables the company to economically produce a stevia derivative sweetener that combines all the qualities of reb-A with none of the associated bitterness. This breakthrough could relight consumer interest in stevia, and be the catalyst behind its commercial growth. The FDA gave a no objection approval for GRAS status of reb-D in June this year, and PureCircle expects the same for reb-X as soon as this month.

The Industry Is Taking Notice

Both PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO) are PureCircle clients, and both are investigating the possibility of using the bitter-free glycosides in their drinks.

In a patent application that can be found here, Pepsi outlines the taste profile of its cola product when prepared with reb-D as compared with a number of alternatives. The profile details the vastly improved bitterness and sweetness results compared to reb-A.

Coca-Cola is also actively investigating the use of PureCircle’s enhanced stevia products in its namesake product. In September last year, Coca-Cola announced it had partnered with PureCircle for a “joint investigation and development of a stevia sweetener product as a commercially viable food ingredient.”

While the announcement made no mention of the specific product, a more recent announcement made in May this year stated that PureCircle had “made a GRAS filing with the U.S. Food and Drug Administration for the use of purified steviol glycosides with reb-X as the principal component as an ingredient in food.”

An even more recent announcement, made in July this year stated, “A detailed safety evaluation has now been conducted by an independent Expert Panel on high purity reb-X and has received self-affirmed GRAS status.  PureCircle has now elected to formally submit its GRAS notification to the FDA for the agency's additional safety review.”

A reasonable conclusion to draw is that both of these behemoth drinks manufacturers are seeking a viable alternative to the high fructose corn syrup they currently use in their products, as well as artificial diet sweetener alternatives, and that PureCircle’s reb-D and reb-X are leading the way. If this is the case, PureCircle stands to benefit greatly.

PureCircle is under the jurisdiction of UK regulators and its latest 10-Q is from last December. Nevertheless, earnings show the company is going in the right direction. Sales have nearly doubled from $17.4M in the second half of 2011 to $27.4M in the second half of 2012. Gross profit has tripled and net loss has been cut almost in half to $7M. It has $70M cash on hand which is more than enough to fund it for 10 years at current burn rate, so cash is not currently an issue. It has a debt load of $112.1M (page 10), which at 12% market cap is sustainable.

The most recent development for Purecircle is its expansion into Mexico. On September 25, the company reported the opening of a new facility in Mexico City.

Drinks you may be familiar with that have been reformulated with PureCircle products are Sprite in France, Benelux, and Switzerland; the pineapple flavored Fresca in the US and Mexico; Fanta in Mexico; and Pepsi Next in Australia and France.

An Alternative

Another company that deserves mention in this space and is working on the production of alternative steviol glycosides is Stevia First. (STVF.OB) Stevia First does not have the established presence, infrastructure, big name partners like Coke and Pepsi or the working capital that PureCircle has. This of course makes it a mostly speculative bet. But what it does have is an intriguing patented prototype. Rather than the selective breeding method that PureCircle has used, Stevia First is using a process called microbial fermentation.

In simple terms, Stevia First uses an enzyme found in the stevia plant called steviol synthetase that was discovered in 2007 by Vineland Research and Innovation Centre in Ontario. The process is a complicated one, and best left to the experts to describe in detail, but essentially the enzyme is used in conjunction with a growth medium (yeast, for example) to create steviol. From steviol the company can create any of the steviol glycosides found in the stevia plant, including reb-D and reb-X. The nature of the production process also means that Stevia First could bypass stevia leaf production, which reportedly accounts for more than 70% of the total costs of traditional stevia extract production. The company is still in the development stage of the technology and manufacturing process, but holds worldwide exclusive rights to steviol synthetase meaning if the process proves effective it will be the only company able to develop reb-D and reb-X in this way.

Conclusion

With the dramatic shift in public health consciousness over the past decade, the companies that produce products that include undesirable ingredients are being presented with a choice: adapt or lose market share. Unfortunately for them, adaptation means changing their products, which in many cases also leads to losing market share. Analysts hailed stevia extract as being the answer to these companies’ prayers a few years ago, but the bitter aftertaste of reb-A has proven to be its downfall. Now the race is on to find a viable alternative. Reb-D and reb-X could well succeed where their crestfallen counterpart has failed. As of now PureCircle is the safer bet, with Stevia First being the wild card for high-risk high-return speculative cash. In the end, whoever can produce and market these compounds most efficiently will win.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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