(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long BU.TO and POE.V)
The Destination Nears on Burcon's Long Road to Revenue, but ADM is Driving the Bus
While the commodity rout continues, I thought I'd write a quick note on Burcon Nutrascience Corporation (BU on the TSX or BUR in the U.S.) given the potential for a significant re-rate in the next 3-9 months. It also helps that Burcon has nothing to do with the resource sector, which is a welcome distraction on days like today when I see names like Pan Orient (POE on the TSX Venture) trading at a 20% discount to its cash value, but I digress…
For those who have never heard of Burcon, it is a "nutrascience" company that has devoted its R&D efforts towards the extraction of functional plant proteins for use in food products. In simpler terms, Burcon is focused on enabling the trend towards increased protein content in the foods we eat. The science is not simple and the road to commercialization is long. Isolated plant proteins must have taste, texture, and pH compatibility characteristics that allow them to be added to foods without negatively impacting the overall look/taste/texture experience... and once products are developed, they must be rigorously evaluated by customers and integrated into supply chains. Burcon investors got a little ahead of themselves about 4-5 years ago when the stock traded as high as the C$11 range… then reality set in… it would be years before Burcon would see revenues from its flagship CLARISOY™ protein. Even though global food ingredient giant ADM (ADM on the NYSE) had signed a 20-year worldwide license and distribution agreement for Burcon's CLARISOY technology in March 2011 (see the press release here), investors slowly lost interest in Burcon over the following years, which brings us to today...
CLARISOY is a clear, soluble, neutral-taste soy protein that comes in a variety of formulations which make it ideal for protein fortification in a number of product categories (link to ADM's webpage on it here). Imagine a clear sports drink that not only replenishes electrolytes, but also gives the consumer a boost of protein; or a meal-replacement beverage with twice the protein and none of the "chalky" feel; or protein-fortified fruit juice -- it's not hard to imagine the myriad possibilities, and that's what loyal Burcon shareholders believe ADM has been thinking as well. To that end, after building a CLARISOY pilot plant in 2012, ADM announced in March 2014 that it would be proceeding with full-scale commercial production (see the press release here; and the chart above).
One of the odd things about the Burcon story is that the company is pretty much in the dark with respect to ADM's CLARISOY operations, sales channels, and throughput plans… and so are Burcon's shareholders when it comes to trying to establish the potential value and timing of the associated royalty stream. It's not surprising that investor fatigue has set in, but that's just the nature of dealing with a monster company like ADM. All that is known is that ADM appears to have started building a CLARISOY plant in Brazil in Q2 2014 and that Burcon management thought that it might take 18-24 months from that event before ADM would start to record sales from that plant (and thus begin paying royalties to Burcon). So what is that royalty stream worth on the first commercial-scale plant and what could the global potential be? Those are the million dollar questions. I'm not going to try to make a guesstimate here, but I have seen back-of-the-envelope estimates from others suggesting that Burcon could be looking at something in the neighbourhood of US$0.50 of after-tax EPS based on just the Brazil plant operating at full capacity, with the potential for 2-3x that over a longer time period. If that's the case, then it's easy to see why institutions like the Lynch Foundation (directed by Peter Lynch… yes, that Peter Lynch) are involved in such an obscure company (link to the BCSC filing relating to the Lynch Foundation's January 2015 share subscription at C$3.09, here).
Burcon is also in the advanced stages of developing a pea-based protein, dubbed "Peazazz", but that product isn't as advanced as CLARISOY in terms of its path to market, so I'll leave that for a future discussion. Having said that, the Peazazz product development appears to be going quite well with talk of potential partner discussions in Burcon's latest quarterly discussion (link to it here).
I know I'm waving my arms a lot when it comes to just what CLARISOY might be worth to Burcon, but what I do know is that the market was once quite excited by the possibilities and that the story has only become more tangible since that time. I have to admit that I've never tried the product, but the feedback I've heard with respect to its reception at trade shows tells me that this product and its market potential are for real. In any case, I think it's worth keeping an eye on this obscure little company, because if and when CLARISOY royalties start hitting the balance sheet things could move quickly... and if the suggested timelines are accurate, that day might not be that far off.
(p.s. Thanks to a good [and patient] friend out West who has really carried the torch on Burcon over the years… here's hoping that patience pays!)