Top Value Creation Play In Biocare (OTCMKTS:HOFBF)

Hofseth BioCare (HOFBF, Oslo: HBC) (“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 the Oslo Stock Exchange.

HBC has produced a series of good videos and interactive animations that introduce the company and its business. At least these two should be watched:

  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 in technology. Company 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 the company has over the process and health benefits.

(Source: Hofseth BioCare)

Production process

The production process and the modern equipment is shown in the 3-minute video linked above. The production utilizes a 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.

(Source: Hofseth BioCare)

Production capacity increases

Hofseth BioCare has increased its footprint at its Midsund plant by over 200%, allowing for a 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.

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

Current products

The lowest-margin product is output for marine feed, which 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 Hofseth BioCare from any other company of its kind.

Three 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, and the company is completely repositioning its sales. It is changing its products and changing distribution channels. Both should create multiple times margin increases.

(Source: Hofseth BioCare)

Value creation by upgrading the product portfolio

The road map 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 nutraceutical products available at 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. The company has a diversified R&D pipeline focused on the treatment of anemia, inflammatory bowel disease, BMI reduction, asthma and COVID-19, and bone and joint health.

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

Hofseth BioCare 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 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 an 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 its product is.

(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. Hofseth BioCare 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 well-being.

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 well-being. Sen and Framroze’s 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 a comparison with other similar products

(Source: Hofseth BioCare Store)

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.

(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 for 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 the quality of life and mobility as you age.

(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. Anyone taking regular calcium supplement would do well to replace them with these natural products, as it already contains all the elements to help foster bone growth and bone strength.

(Source: Hofseth BioCare Store)

Human medicine products

Iron Deficiency Anemia – In October 2020, Hofseth BioCare got consent from FDA and Health Canada (the 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, the 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 Hofseth BioCare 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.

(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 COVID-19 – 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 an expertise on eosinophils, it seems very likely that the protocols will be approved in all relevant countries.

Treatment of asthma – Approximately 5 percent 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. Hofseth BioCare 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. In November, it should start selling the product on Amazon and Alibaba affiliate. The company opened its retail websites in its major markets.

During the 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, Hofseth BioCare 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 a ten times higher price than the original animal feed. By this transformation, Hofseth BioCare 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 Hofseth BioCare’s 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 it does have a treatment for asthma in its oil.

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

Once Hofseth BioCare enters into the medical field with Bioactive Peptides (see above), the sales prices would magnify further and likely attract biotech investors who 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, Hofseth BioCare was selling all its protein to animal feed producers. This year, the company started the 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 has already announced that it has signed a letter of intent to deliver its protein to Nestle (NSRGY)-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 is at least three times higher than for animal products. Just the 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, 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.

(Source: Hofseth BioCare Store)

Risks

The major risk is a delay in the transformation of the business. The risk of the delay in the first stage – the move from low-margin animal feed towards high-margin finished products for pet and human-grade nutraceutical products – seems lower. Hofseth BioCare has already developed a new product portfolio and seems to be quick in opening new distribution channels. The value added by the change in product portfolio is so material that even slower sales penetration would still result in material revenue and profitability growth. The second-stage transformation to pharmaceutical products with documented health benefits is starting to happen as well. The company is already involved in multiple studies so that the risk of delay on one product development is diversified away.

Catalysts

There are multiple forthcoming catalysts in the pipeline:

  • Commencement of sales on Amazon Europe (November 2020), Amazon US December/January 2021
  • Commencement of sales on Alibaba affiliate (November 2020)
  • Commencement of sales in Costco US and/or another global retailer 2021
  • Commencement of sales to Garden of Life – very soon
  • Main Oslo exchange listing December 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 that you are unlikely to find a 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.

Disclosure: I am/we are long HBC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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