Top Value Creation Play In Biocare

Hofseth BioCare: Top Value Creation Play In Biocare by Jan Martínek of CEC Partners

  • Most interesting Value Creation Biocare plays in Scandinavia.
  • The transformation from animal feed to human medicine.
  • Product margins should increase ten times over 3 to 5 years.
  • Sales are due to double each year due to the higher value-added product and access to prominent global retail chains.
  • Trading in Oslo, NASDAQ listing planned for mid-2021.

Hofseth BioCare (HBC) is a Norway based Company engaged in processing marine raw materials into products to enhance global health. The Company has USD260 million market capitalization, no debt and USD20 million in cash. Hofseth BioCare’s headquarters are in Ålesund, Norway with branches in Oslo, London, Zürich, Chicago, Mumbai, Palo Alto and Tokyo. HBC is listed on Oslo Stock Exchange.

HBC has produced a series of useful videos and interactive animations that introduces the Company and its business. At least these two should be watched:

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  1. Introduction video to Hofseth Biocare
  2. Hofseth Biocare production process summary and patented technology

History

Hofseth Biocare was established in 2000. In 2009 the Company was acquired by the Hofseth Group, the largest Salmon exporter to the United States. Significant capital was invested into the technology. The management estimates that the replacement value of the plant is over EURO 150 million and this does not include the value of all the IP they have over the process and health benefits.

Hofseth BioCare

Production process

The production process and the modern equipment is well shown in the 3 minute video linked above. Production utilizes proprietary enzymatic hydrolysis process protected by patents and trade secrets now covering the processing of all marine sources of off-cuts and allowing for significant leverage to growth.

Hofseth BioCare

Production capacity increases

The Company has increased its footprint at its Midsund plant by over 200% allowing for an new spray-dryer to be built on site thereby improving the efficiency of the plant by increasing its yield and reducing its costs. As a result the Company was not producing for several weeks in Q3.

The Company has one additional plant in Berkak. If necessary, the Berkak production facility capacity could double output of the Company at a cost of just USD10 million. Other species can be processes here too so there is no issue with supply of raw material.

Current products

The lowest margin product is output for marine feed, that is supplied to other fish farmers. It also supplies salmon oil and salmon protein in bulk to animal/pet feed producers.

The Company has started its transformation to higher margin products. The strategy has two legs: sell existing products directly to customers at higher margins and step up in the value chain to higher value products. 100% of its output is for human consumption now and this differentiates itself from any other Company of its kind.

3 Pillars of value creation

Until this year Hofseth Biocare was producing mainly for animal feed ingredients. The Company was selling the Salmon oil and Salmon protein to pet feed producers. This is now changing. The Company is completely repositioning its sales. It is changing its products and changing distributions channel. Both should create multiple times margin increases.

Hofseth BioCare

Source: Hofseth Biocare

Value creation by upgrading the product portfolio

The roadmap to value creation is simple:

  1. In the first stage move from low margin animal feed towards high margin finished products for pet and human-grade Nutraceutiacal products available in retailers and pharmacies globally. This is happening now.
  2. In the second stage, reposition to Pharmaceutical products with documented health benefits. This is starting to happen.

Both stages are in the process now. Diversified R&D pipeline focused on the treatment of anemia, inflammatory bowel disease, BMI reduction, asthma & COVID-19, bone & joint health.

Ingredients are further developed through thorough lab work and then and preclinical and clinical studies in leading medical university labs globally.

The Company is already moving into clinical work for Gastro-Intestinal (GI) health & Protective Medical Food, Medical Food to help treat age-related Sarcopenia, as well as likely phase 2 studies for eosinophilic asthma Asthma and iron deficiency Anemia as soon as 2021 using its proprietary Salmon Protein Hydrolysate bioactive fractions.

Current human nutrition product portfolio

OMEGO® FRESH SALMON OIL

OmeGo® is one of the freshest fish oil available on the market today. The oil is liberated from salmon off-cuts, free of contaminants and with practically no taste and odor. The oil includes only natural antioxidants and all the omegas unlike any other commercial oil available.

OmeGo® contains no Vitamin E. Although Vitamin E addition is marketed as a positive in other oils, this is actually used as a anti-oxidant in the manufacturing process and is evidence that normal 18/12 fish oil oxidizes fast and becomes pro-inflammatory – the opposite effect of what the consumer is looking for. The Company claims that its OmeGo® has a shelf life of 4 years without any assistance from Vitamin E. This is probably the best way to verify just how different their product is.

Hofseth BioCare

Source: Hofseth Biocare Store

OmeGo® is neither boiled nor pressed in the patented extraction process, which enables the Company to maintain all the natural lipids and molecular structure of Norwegian salmon. The Company has developed a proprietary enzymatic extraction technology that solubilizes the flesh and allows full separation of the oil at very low temperatures, thus avoiding oxidation and maintaining the broad health benefits of fish oil as per eating fresh fish.

A study shows that Hofseth BioCare’s fresh salmon oil will help improve your cardiovascular health. The study also shows that as little as 80 mg of EPA/DHA will produce a good enough health effect as regards reducing the risk of heart disease and improving cardiovascular wellbeing.

A study shows that by maintaining the natural composition of the salmon oil Hofseth BioCare’s OmeGo provides greater antioxidant and anti-inflammatory effects, important elements to reduce the risk of heart disease and improve cardiovascular wellbeing. Sen and Framroze paper from Nutrition and Food Sciences 2013  shows OmeGo as the only one to significantly reduce oxLDL compared to other oils (algae, processed fish oil and sunflower oil) hence demonstrating the greater antioxidant effects of the whole salmon oil.

The below slide shows comparison with other similar products

Hofseth BioCare

Source: Hofseth Biocare

PROGO® – HYDROLYZED SALMON PROTEIN

ProGo® is a soluble protein powder produced from salmon. It has fast uptake of protein nitrogen into the body. That is important, especially when you have just exercised and your muscles have broken down protein.

HBC

Source: Hofseth Biocare Store

Due to its rapid uptake and more than 98 % digestibility, ProGo® can be the nutrition source of choice for medical food applications for infants, post-surgery and geriatric adults. In clinical studies, ProGo® has also proved its ability to help increase red blood cells (hemoglobin) in anemic individuals, and also to help reduce BMI. It also provides anti-inflammatory effects.

CALGO® – MARINE CALCIUM

Marine calcium shows a better effect than normal calcium sources in terms of bone growth and density. Without any side-effects, you can enjoy quality of life and mobility as you age.

HBC

Source: Hofseth Biocare Store

Hofseth BioCare’s marine calcium is produced from salmon bones without any additives, only ingredients from natural sources. It is a natural bone powder that has been shown to increase bone density, as well as new bone deposition in older individuals.

The most important health benefit when using CalGo® is quality of life. Taking tablets of CalGo® would benefit those whose skeletal bone mass is shrinking and becoming more fragile. Any one taking regular calcium supplement would do well to replace them with this natural products as it already contains all the elements of bone to help foster bone growth and bone strength.

HBC

Source: Hofseth Biocare

Human medicine products

Iron Deficiency Anemia – In October, 2020 the Company got consent from FDA and Health Canada (Canadian regulator) to use its Bioactive Peptides™ to become the first and only non-iron containing product in the US market to maintain healthy levels of ferritin and hemoglobin. Based on this Hofseth can use of the below claims on the US label are:

  • supports healthy ferritin and hemoglobin levels
  • helps maintain iron-rich blood
  • promotes energy utilization
  • supports red blood cell production
  • supports gastrointestinal and immune system health
  • assists in iron absorption from your daily diet

The Qualified Health Claims attained from Health Canada are an even stronger accolade as apart from the clear IP protection it now has for the Bioactive Peptides, the Company can now continue its process to attain drug claims and hopefully get “New Chemical Entity” status in 2021 for both the peptides present in the protein to treat Anemia AND the bioactive fraction in the Salmon oil to treat steroid-resistant asthma.

The U.S. structure function claims are based on two studies of ProGo® in adults (18 years and older). Both trials used whey protein isolate (WPI) as the comparator/placebo. Unlike ProGo®, WPI did not have any significant impact on ferritin or hemoglobin in either study whatsoever.

It is anticipated that HBC will now look to collaborate with global formulators and contract manufacturers to establish a major presence in the nutraceutical market with a portfolio of offerings with the aforementioned claims.

HBC

Source: Hofseth Biocare

Treatment of inflammation of digestive tract – HBC signed a second research agreement with Stanford University 6 May 2020. The agreement is a continuation of an established research collaboration that has shown promising results.

Treatment of Covid19 – The treatment will focus on former smokers and steroid-resistant asthma patients (“Patients”), who exhibit early non-acute lung injury caused by the SARS-CoV-2 virus. Based on initial feedback from regulatory authorities and medical researchers with expertise on eosinophils, it seems very likely that the protocols will be approved in all relevant countries.

Treatment of asthma – Approximately 5 per cent of asthma patients suffer from eosinophilic malfunction. We will continue to develop a product for treating steroid-resistant asthma in parallel with its COVID-19 clinical trials progressing towards preclinical animal trials in Q3 2020 and based on a positive outcome, progressing to Phase 1 clinical trials in 2021.

Value Creation Strategy

Salmon oil value creation strategy – Until this year, the majority of sales were to animal feed producers. Last year it changed the Brilliant Salmon Oil, and its launch is going extremely well. The Company now sells through over 1000 stores in the US in the past 5 months and into some of the major retailers in the UK and across Europe. During November the Company should start selling the product on Amazon and Alibaba affiliate. The Company opened its retail websites in it major markets.

During first half of 2021 it should start selling the Brilliant Salmon Oil product through 1000 stores of Cosco US, where the Company is nearly 20 times larger than in the UK. By selling the oil under its own brand, the Company is tripling revenues per unit of volume. At the same time HBC is starting to sell its oil product under private labels that sell through different sales channels to avoid cannibalizing its own brand.

At the same time the Company is launching Cardio Salmon Oil pills for human consumption. This product has ten times higher price then the original animal feed. By this transformation the Company hopes to double its revenues for years to come.

It’s worth mentioning that no value in the share price is assumed for the phase 2/3 Covid-19 trial using the cardio oil. The lab work already points to very successful studies showing that a component present in their oil acts as a very strong anti-inflammatory to eosinophils present in the lungs along with the other elements that have broad anti-inflammatory effects. Combined these could help to limit the progression of the infection. Any success here would be a bonus but the important point is that the evidence supports the Company’s belief that they do have a treatment for asthma in their oil.

With the production increase in its Mitsund plant and opportunity to double its production in its Tronheim plant, the opportunity to increase sales by 10 times from current level over the next 3 to 5 years is quite realistic.

Once the Company enters into the medicine field with Bioactive peptides (see above) the sales prices would magnify further further and likely attract Biotech investors that are currently not present on the shareholder register despite all the phase 2 trial work the Company is pursuing. The history of this Company being part of the salmon farming industry has resulted in it being off the radar of growth investors – something that is likely to change.

Protein value creation strategy – Similar value creation strategy can be shown on its second best selling product – Protein.

Until last year the Company was selling all its protein to animal feed producers. This year the Company started transformation to sell its protein to human protein product producers. The product is now sold by many companies such as Amata-Power or Nutrabolics’s Pesca.

The Company already announced, that it signed a letter of intent to deliver its protein to Nestle owned chain Garden of Life. The deliveries should start very soon to prepare for a full global launch next summer.

The sales price for human protein products are at least three times higher than for animal products. Just Garden of Life relationship could double the protein sales in the first year of signing. All the advertising and marketing will be undertaken by them. With the US and Health Canada claims achieved last month and launch appears certain according to the VP of GOL as reported in the Q3 report from HBC.

It is again not unrealistic, that protein sales should increase 10 times over the next 3-5 years.

HBC

Source: Hofseth Biocare Store

Catalysts

There are multiple forthcoming catalysts in the pipeline:

  • Commencement of sales on Amazon Europe (November 2020), Amazon US Dec/Jan 2021
  • Commencement of sales on Alibaba affiliate (November 2020)
  • Commencement of sales in Costco US and/or other global retailer 2021
  • Commencement of sales to Garden of Life – very soon
  • Main Oslo exchange listing Dec 2020
  • NASDAQ listing (2021)
  • Commencement of sales Bioactive Peptides in the US and possibly Asia(2021)

The above is just a fraction of the news pipeline. I understand that multiple other trading relationships are being established now. The Company will be making announcements on those.

Conclusion

Hofseth Biocare is undergoing material restructuring. Under our estimates, the sales should easily increase ten times over the next 3-5 years. As the input costs of the raw material are very low and predictable, and the output is human nutrition, the margins should increase significantly as well. If the restructuring is successful, investors should multiply their capital several times. It goes without saying you are unlikely to find and more ESG / Sustainable business model (turning industry waste into human-grade medicine and potential drugs) anywhere in Europe that yet remains almost entirely undiscovered with no broker coverage as of yet.