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One company we have been watching is Lexaria Bioscience (LXRP) which is levered to the North American cannabis industry. Over the last few months, Lexaria has announced several developments that have the company well positioned for growth throughout 2017.
During the last few months, Lexaria has improved its fundamental story through the following developments:
1) The company was issued several patents around its IP
2) Lexaria has entered several agreements and letters of intent
3) During the last quarter, the company entered into its first private label agreement
4) The company’s cash position has improved significantly and after raising over $1 million in the last quarter it will be able to execute on its operating plan
Recently, we had the opportunity to sit down with Chris Bunka, CEO Lexaria.
Last week, you announced a notice of allowance from the U.S. for a new patent. Can you explain how this differs from the patent issued last year?
The new patent allowance is the single most significant event in our Company’s history. Last year we received the granted patent for the delivery of non-psychoactive cannabinoids, but had four molecule classes in total, under application. We were approaching each class on a one-by-one basis.
My expectation was that we would progress to the psychoactive cannabinoids at about this time, and that the vitamins would follow in 2018, and with a bit of luck, the NSAIDs and nicotine molecule classes would follow in 2019. Instead, the USPTO issued our notice of patent allowance for ALL our requested molecule groups right now.
It obviously affords us immediate intellectual property protection utilizing our delivery methodology for all four of our product molecule groups. The new patent allowance is much, much more broad that the patent granted in 2016.
We noticed that nicotine was on the list of verticals that are covered under your newly awarded patents. How large is that addressable market and do you see that vertical as a major growth driver for Lexaria moving forward?
There is virtually no way to compare the different sizes of the cannabis market to the tobacco or nicotine market. The global nicotine market was US$770 billion last year and that does not include health care related to nicotine use which is estimated at well over $200 billion per year just in the US. It’s about one-hundred times larger than the current legal cannabis industry.
So contrast that with a legal cannabis market today estimated at about $8 billion. Even with the undeniable growth in the cannabis sector which is expected to become a $25 billion or $30 billion market, globally, by 2020, there is just no way to compare the size of these two industries.
How will this patent make Lexaria a more attractive potential partner for research firms?
Phillip Morris International and British American Tobacco are the two largest tobacco companies in the western world. EACH of them is on record with multi-billion R&D programs to find non-combustible ways of delivering nicotine. Tobacco companies are spending probably 100x or 1,000x more on R&D than all the cannabis companies in the world combined.
Go to www.pmi.com and just look at their landing page. It’s a shocker! If our patent allowed technology allows tobacco companies to deliver their active ingredients in edible formats, Lexaria could positively influence an industry with truly global reach.
And that ignores the billions that is spent every year on R&D in the pharma sector. We will be testing our DehyraTECHTM delivery platform for the improved delivery of substances like ibuprofen – just imagine, if successful, the ability to consume 1/5th your normal dosage of pain reliever for the same pain-cutting effectiveness, AND having it start to act in 15 minutes instead of waiting a half hour or longer. This shows just one more area in which our new intellectual property (IP) recognition could result in important new research.
Lexaria has significantly strengthened its balance sheet over the last year. How to plan to utilize this capital for growth initiatives going forward?
We made a promise to our shareholders last year that we would repair our balance sheet, and we did so primarily by raising CDN$5 million in equity last winter and early Spring. We have no debt and we still have a healthy cash balance of nearly CDN$3 million in the bank. This is sufficient for all our plans – including R&D spending on nicotine, cannabis, and NSAIDs – and overhead through until the end of 2018. Long before then we hope to start realizing more significant cash flows from licensing of our tech to other business partners.
Where do you see Lexaria being able to generate the most value for shareholders via its patent portfolio?
The main thrust of our business is out-licensing our technology to other leading businesses. We are focused first and primarily on cannabis companies that need our tech to make their edibles products faster acting, better tasting and more highly absorbable. We hope and expect these out-licenses in the cannabis sector to pick up steam rapidly in 2018 as jurisdictions like California and possibly Canada put into effect new rules about cannabis edibles.
But even as 2018 evolves and our R&D in the other sectors starts to produce results, we expect to begin our corporate outreach to companies in the tobacco, pharma and pain relief sectors. The potential licensing revenue in these sectors is far higher than it is from the cannabis sector, but we will be utilizing cannabis sector revenues to help us build the company and pay for expenses.
Ultimately, it will be pharma and tobacco industry R&D success that leads to the biggest possible revenue streams and value generation for our shareholders. The combined market sizes of ALL our patent allowed molecules is over $1 trillion per year, globally. Technology licensing streams in markets of this size have the potential to transform our company.
How will Lexaria be able to utilize its technology across several continents?
It will be a challenge to manage our growth, no question about it. By now people should recognize that Lexaria takes a methodical approach to its strategies. Job #1 is to obtain IP patent protection in each market where we want to be active. Obviously a big part of that was just achieved in the USA. But we have patent applications pending right now in 44 countries around the world! This includes the majority of the European countries, India, China, Japan, Australia, Canada, and more.
We have started and will actually accelerate our patent pursuits in these countries. Shareholders can expect news at any time from any of these jurisdictions about progress in these patent applications. It would be unrealistic to think we will be successful in every application we file around the world, but I think it would also be unrealistic to think we would be unsuccessful in all of our applications.
As our international patent portfolio grows, and as our R&D results successfully support, our ability to conduct international business will be surprisingly easy since we will not ourselves be launching new consumer products or drugs in those countries; our prospective new business partners already active in those countries will.
What are the costs associated with entering new markets? Do research partners cover some of the expense you incur with these projects?
We’ve tried to be really, really respectful with our shareholder’s money. That’s why you haven’t seen us raise an enormous sum the way some companies in the cannabis sector have been doing, even though we are approached nearly every day from firms wanting to raise money for us. We prefer to offer the highest valuation we possibly can per share of our outstanding capital.
Currently, every new letter of intent we sign with a prospective new business partner itemizes who is responsible for costs. In almost all cases, our potential new business partner has to absorb the costs of new product development, recipe formulations, specific testing and so on. In fact many of Lexaria’s hard costs are also covered by the business partner.
There are of course certain costs that we have to absorb ourselves, but we feel confident in our existing capital for all of 2018.
Can you tell us about Lexaria’s current partners and the projects they are focused on?
I’m only permitted to say so in fairly generic terms due to securities laws and confidentiality clauses. We have one existing cannabis chocolate company in Colorado paying revenues to us today. We are in formal discussions with quite a few cannabis companies in California and Nevada. Some of these are market leaders while others are startups. We’ve also had or are having business discussions with companies in the cannabis or hemp sectors in Canada and Mexico. We’ve also announced relationships with public companies that have expressed interest in producing products for the Korean and Japanese markets.
Many of these are hemp based and as such are focused on cannabinoids that have no psychoactive properties. The nutritional qualities of hemp based foods and extracts are highly sought-after by consumers in many areas of the world. Obviously, one of the deliverables we have to evidence is our ability to evolve these exploratory relationships into income-generating sales. We expect to begin doing that despite the many obstacles faced by all companies operating anywhere within the cannabinoid universe.
Going forward, we expect to add companies from the other, non-cannabis sectors identified earlier, to our list of business prospects. That should begin to add explosive growth potential to our sales pipeline in 2018. But before then and indeed as soon as possible, we are working to convert several of our current sales prospects into long term, revenue-generating business partners.