| Ceapro Inc (TSX.V: CZO) Research Report |
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TSX.V: CZO | OTC: CRPOF
Price at Initiation: $0.58 52 Week Hi/Low: $0.70 / $0.40 |
| | Average Daily Volume (3month): 41,517
Issued and Outstanding: 77,686,843
Options: 3,289,333
Fully Diluted: 80,976,176
Market Capitalization: $45 million CAD
Insider Ownership: 8%
TTM Revenues: $18.7 million CAD
TTM Net Profit: $4.3 million CAD TTM Adj. EBITDA: $6.57 million CAD
P/S: 2.4x
P/E: 10.4x EV/EBITDA: 5.5x
Debt: $0
Cash: $8.8 million CAD
Highlights - Ceapro’s acquired business has been able to generate cash flow and help fund its biotechnology efforts with little to no value assigned to the upside optionality
- Solid and growing core business with strong upside optionality from its drug and nutraceutical pipeline
- Low valuation in comparison to other life science companies
- Share price has been resilient even as the larger biotech structure has suffered a long drawdown
The Company
Ceapro Inc. was incorporated in 1997 in Edmonton and maintains a 30,000 square foot GMP processing facility there. The company specializes in developing and commercializing active ingredients from oats and other natural ingredients, the first company to be able to make that claim. Ceapro has worked on developing these active ingredients for the healthcare and cosmetic industries. As part of these efforts, the company has developed several technologies associated with processing these ingredients with a focus on the healthcare and cosmetic industries. The traditional processing involves conventional drying and purification. Ceapro has developed a Pressurized Gas eXpanded (PGX) technology that allows Ceapro to generate new high-value biopolymers and bio composite structures at a micro- or nano-level that these traditional methods do not allow. Ceapro also utilized an Ethanol Fractionation Process and Chromatography Purification to assist in the identification of the potential candidates. In May 2022, the company released the results of the efficacy of its PGX modelling, which show it to have substantially better efficacy at finding candidates. Ceapro’s biotech operations have focused on developing nutraceutical and functional food candidates. Oat beta glucan (OBG) and avenanthramides have a couple of applications being developed, one as a nutraceutical functional drink, with another as a treatment for inflammation. OBG helps to stimulate collagen and skin moisturization, while avenanthramides are a natural antioxidant, anti-irritant and anti-inflammatory, either topically or orally. The company’s acquisition of JuventeDC in 2017 allowed the company to insource its cosmeceutical versions of both OBG and avenanthramides which have become good and profitable revenue drivers. The company has partnered with a number of companies around the globe to give it global reach for its products. In March 2022 Ceapro re-signed a 3-year distribution agreement with Symrise AG, a multi-national flavour and fragrance manufacturer and distributor. With over 11,000 employees and US$3 billion in sales Symrise has a worldwide reach and counts some of the largest companies in the world as clients, companies such as Johnson and Johnson, Procter and Gamble, Unilever, Sanofi and more. While the Symrise distribution agreement currently covers only 12 of Symrise’s clients, Ceapro is building out a sales program to reach other customers and markets not addressed by Symrise. The company is also actively looking to both out and in-license products, while considering contract manufacturing of products as well.
Industry/Market Overview
The total addressable market for the company’s products is extremely large. The company sees a lot of potential opportunities in a number of markets in the below slide included in its investor presentation:
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| | Source: Company Presentation, September 2021
With Ceapro’s efforts to develop solutions with a nutrition focus, it essentially brings in a lot of potential competitors including multinationals such as Pepsi and Nestle. This is a rapidly growing yet very fragmented marketplace as nutrition has become a very large macro trend. However, there are fewer companies actually developing technology to help isolate candidates like Ceapro’s PGX technology does, which could be an as-yet untapped market. Ceapro is also ahead of the game in that it already has established relationships with distributors since getting products listed by distributors can be very difficult and time consuming.
Competition
Ceapro is the only company supplying Avenanthremides and Oat Beta Glucan, the active ingredients in brands such as Johnson and Johnson’s Aveeno and Neutrogena skin care products. The company also supplies these active ingredients to Jergens, Lubriderm, 3MNexcare, KY, Coppertone, Dove, Burt’s Bees, The Body Shop, Philosophy and ROC. It’s likely you have one or more of these products in your home.
While there is no current direct competition for their current line of active ingredients the competition for active agents in skincare is significant. The company faces competition for its extraction technologies.
Codexis (CDXS) is a good example of the type of company Ceapro will be competing with. Codexis has a platform CodeEvolver which it has both licensed out to others to create product candidates as well as to use it to develop its own drug candidates. This is very similar to Ceapro’s current business model as well
Management / Board
Ceapro has put together a very competent management team and Board of Directors with experience at major pharma companies throughout both teams. CEO Gilles Gagnon was former CEO of Aeterna Zentaris and held positions at Novartis and Sandoz Pharmaceuticals prior to that while serving on many industry strategy boards as well. Several members of the leadership group in operations and development team have been with the company over 10 years, bringing good continuity to the company’s work.
Chairman of the Board Ronnie Miller served as head of Roche Canada for several decades so well connected. The remainder of the Board is filled out with several medical professionals and competent businesspeople able to steer and provide connections. The company recently added a Chief Revenue Officer Sigrun Watson which is a sign that the company is getting serious to better develop its current revenue opportunities as well as focus its pipeline towards better growth opportunities with customers they currently don’t serve.
Next Steps
With a relatively large pipeline, Ceapro has a lot of internally developed candidates that are at various stages of development:
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| | Source: Company Website
On a more detailed level, the company broke out candidates under development in September 2021: |
| | The cholesterol reducing candidate clinical trial did not successfully meet the desired results. “The effect of oat beta glucan on the study primary endpoint of change in low-density lipoprotein cholesterol (LDL-C) was not statistically significant compared to placebo”.
The company continues to advance a number of these products by using existing cash flow from operations and government funding. Should some of their drug candidates receive good clinical data the company will look to license these drugs to larger entities who would take them thru to commercialization.
There could also be strong potential to serve as a licenser or contract developer for other biotechs with its PGX Processing technology as it is showing a lot of efficacies over other options as the May 2022 released results compared it to standard drying. It was found that the PGX Technology could effectively dry, purify and increase the surface area of sodium alginate while producing a unique fibrous morphology that cannot be obtained by any other conventional drying method. Ceapro’s PGX process showed much better efficacy with increased surface area, making it a better delivery mechanism for many potential candidates.
The company’s PGX Technology has the potential to deliver many unique bioactive ingredients that cannot be delivered by other existing technologies.
Valuation
Ceapro’s cosmeceuticals business is revenue generating and its technology is used in many well-known products including Aveeno, Lubriderm, Jergen’s, and Neutrogena among others, which separates it from many biotechs. Ceapro also has its own product lines under JuventeDC and is also looking to monetize its bioactive delivery system business.
Codexis is a great comparison to use for valuing Ceapro. It uses proteins, which is different, but it both out licenses its CodeEvolver technology and develops its own projects, very similar to Ceapro’s potential. Codexis is bigger than Ceapro, but it has not been able to achieve this profitably which is a big differentiator.
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| | | We can see that Ceapro compares favorably to Codexis and has been able to achieve profitability at a much lower level.
Ceapro posted terrific Q1 2022 results which featured better margins than prior quarters and some lower costs. While they are being impacted like all companies by inflation, Ceapro had benefits from prior period purchasing as well as seeing the impacts of productivity improvements the company had implemented early in 2021. The company’s R&D spend was also lower as the cholesterol study was completed.
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| | | Catalysts
A ramp up of the company’s sales from its existing portfolio or one of its next level candidates would help to convince the market that its process and science is capable to bring other products to revenue. The company continues to grow its legacy business but this would be a validation of the company’s business model.
The company is also very under-covered by analysts. A link to its website shows no current analyst coverage and its most recent corporate presentation on its website is from September 2021. A lot of this lack of interest is likely due to its self-funding model which does not generate a lot of fees for investment banks so it will likely require a push from another shareholder base.
Risks
One of the bigger risks is that its current business model of developing products does not come to fruition. In November 2021, the company announced that a study it had run on Beta Glucan as a cholesterol reducing agent with Montreal Heart Institute had results that were not statistically significant to the placebo. This is common with biotechs, and Ceapro has several other candidates, but it is a key to its value proposition in the long run.
Biotechs can take a long time to get results; Ceapro is definitely in this case as many of its candidates are very early in their life cycle. The growth of the core business and its consistent profitability greatly mitigates this risk.
There is some customer concentration risk with 94% of trade receivables are with one distributor, Symrise AG. However, this distributor sells into many different end customers so the risk may be somewhat overblown unless they lose this distributor.
Why We Really Like It
In simple terms we like this company because it has consistently grown its revenues and profits over the past 3 years. It has generated 5 consecutive profitable quarters and 9 out of the last 10 quarters were profitable. We are impressed with Q1 revenue growth of 31% and earnings growth of 286% over Q1 2021. Trailing 12-month earnings of $4.32 million was higher by 247% over the year ago period. These are outstanding growth metrics for a company trading at a Price to Earnings ratio of 10.4 and an Enterprise to Ebitda ratio of 5.5 times. You rarely find these types of metrics in a any company let alone a life science company with the potential catalysts that Ceapro possesses.
Summary
We are bullish on the life sciences sector and believe that Ceapro meets many of our criteria for a long-term holding. The Company has a satisfactory history of creating a profitable business while protecting against dilution.
With several capital expenditures and growing pains in the past, Ceapro is well positioned for continued growth with several products in the preclinical stage creating additional optionality for current shareholders.
We are buyers below $0.65 and will continue to update on business progress, or any events that change our thesis.
Disclosure:
Paul and Trevor own shares in Ceapro Inc (TSX.V: CZO)
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