ChromaDex: Analysis of a Small Cap Nutrition Company

ChromaDex: Analysis of a Small Cap Nutrition CompanyCompany Overview

ChromaDex Corp (OTC:CDXC) is a publicly traded company that was established in 1999 and is based in Irvine, California. It provides proprietary, science-based solutions and ingredients to the dietary supplement, food and beverage, cosmetic, and pharmaceutical industries. ChromaDex is a leader in supplying phytochemical standards, reference materials and libraries. The company has a market capitalisation close to $64 million dollars which puts it into the small capitalisation category. This is an important note for investors who seek large liquid stocks as this company is unlikely to provide such benefits. The business is conducted under two subsidiaries ChromaDex, Inc. and Chromadex Analytics, Inc. An intriguing point to note for investors is that 19% of the company is owned by Philip Frost, who is an American billionaire and pharmaceutical entrepreneur. Since, Dr. Frost’s is responsible for the success of Ivax and Key Pharmaceuticals, both multi-million dollar business acquisitions, and many investors see his participation in ChromaDex as a vote of confidence.

Company’s Future

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The company was able to grow revenues by 30.6% from the year 2010 to 2011. The revenue amounts for each year were as follows, 2011 was $ 7,566,370 and 2010 was $5,777,865. If we were looking at the business cycle of ChromaDex we could say that it was currently in its growth period, and that we expect growth in revenues to continue as it did between 2011 and 2012, providing investors a great opportunity to invest.

Research and Development is an important part of a company such as ChromaDex and it is one of the factors that will help the company continue to grow. In 2003, it acquired research and development group of a competing natural product company called Napro Biotherapeutics (now Tapestry Pharmaceuticals). This strategy of expansion through acquisitions is one way of growing the business in the future. It plans to continue buying smaller companies who are having difficulty expanding their revenue base.

The firm reinvests profits back into the company with $2 million being invested in laboratory equipment. By buying smaller competitors and investing heavily back into the firm helps the firm better position itself in the future. However, an even greater point to mention is that ChromaDex has personnel possessing over 150 years of combined pharmaceutical and natural products chemistry experience.

 However, an important factor to consider when investing in such a company is to see how many patents it holds on its intellectual property. If a firm such as ChromaDex wants to commercialise its business it must have patents to protect its intellectual property. Also, it is important to look at when those patents expire as that can be another risk to the firm. ChromaDex has six patents which all have expiration dates beyond 5 years, protecting the firms’ intellectual property in the short-term. An interesting strategy that ChromaDex has put into place is licensing its intellectual property to companies who will commercialise it. The company will therefore gain royalty payments from such arrangements.

ChromaDex is also selling its new health products in many brand name stores. Its Blu-science line can be found at health food stores such as GNC Holdings Inc. (NYSE:GNC), now the product has recently been launched in Walgreen Company (NYSE:WAG) stores. With the scheduled merger of WAG and Rite-aid this could further increase the revenue of the company, as Blu-science hits shelves in Rite-aid.

 Now, looking at the exposure ChromaDex has internationally, we can see that it has exclusive distribution agreements in Europe, South America, Korea and India. This is a great sign to investors as the last three places are considered growth markets where substantial economic growth is likely to be seen in the foreseeable future. These regions and countries will have an increase in demand for products such as the Novel Dietary Supplement and Food ingredients as their economies grow. However, the international market is competitive and ChromaDex faces substantial competition from the international community such as Phytolab in Germany, and Eurofins in France. These competitors offer similar resources and have the scale and resources to compete for larger customer accounts. They also larger in size and have better access to the capital markets. Obviously, this is a threat to ChromaDex, but as long as it remains innovative, takes advantage of its highly experienced staff and continues protecting its intellectual property it can compete with such players in a large scale. It shows to investors that also ChromaDex has a large potential to grow given the size of its competitors who offer similar products proving that there is a large market for such products.

Risks to Company

 Investors should be aware of the risks that face ChromaDex, before deciding to invest in such a company. Firstly, one of the main risks to the company is the further deterioration of the global economy and the financial markets conditions. Such increases in volatile and negative conditions could cause decreased demand for products and services, and there could also be scaling back of research and development. However, this would also affect ChromaDex competitors in the same way. ChromaDex exposure to South America, India and Korea may mean that its sales will not be hit as much since these countries are unlikely to deteriorate as much.

Another risk the company is that all the effort spent in research and development may not materialise for the firm as it may find that it cannot commercialise the products for certain reasons such as one product proving not to be safe and effective in clinical trials. Commercialising products for ChromaDex is clearly a big risk and is one it needs to make work for it to move from laboratory to a successful business. Since ChromaDex has a highly skilled workforce the chances of product failures are likely to be low.

However, this brings us on to our last point that ChromaDex depends on key personnel for the future success of the business. There needs to be clear steps made by the firm to maintain such personnel by offering competitive salaries and benefits. Otherwise, such key personnel will be encouraged to move to competitors.

By way of conclusion, we can see that ChromaDex offers some great opportunities for an Investor as a company in its growth stages. Management hazz clearly turned the laboratory of ideas into a full scale business with lots of potential. There are some risks to the firm that investors should be aware of such as patent expirations etc, but so far management seem to be on top of these issues.