Initiating Coverage of Oxis International
We are initiating coverage of Oxis International (OXIS) with a Neutral rating. We are intrigued by the potential sales opportunity ERGO represents. Our research has shown that, in the past, first-mover or sole-source advantage in a new consumer health product has the potential to be very profitable. Products like Ester-C and Emergen-C, which offer fewer antioxidants and health benefits than ErgoFlex, both generate sales over $ 100 million. And products such as JuicePlus+ and MonaVie clearly demonstrate the power of direct marketing and an enormous desire by U.S. consumers to seek-out health supplements and antioxidant products. JuicePlus+ and MovaVie combined generate annual revenues over $ 1 billion. If ErgoFlex can capture just 5% of this market, it would generate sales over $ 50 million. Oxis International s current market capitalization is just $ 14 million.
Building The Business
• Intellectual Property: Oxis holds 12 U.S. patents with 7 additional patents pending on L-ergothioneine. These address the protective effect of ergothioneine on mitochondria, ERGO manufacturing processes, and neuroprotectant methods and composition of ERGO. In September 2010, Oxis resolved a patent dispute with the Estée Lauder that provided Oxis with full title to two patents (USPTO No. 6,103,746 & 6,479,533). Oxis also recently acquired rights to a patent relating to use of ERGO as a primary preservative for cell and tissue cultures.
• Generating Data: Oxis is currently conducting its own safety and efficacy studies on ERGO, and is also preparing a self-affirmation petition to obtain the FDA s designation of ERGO as Generally Recognized as Safe (GRAS). We expect this filing to take place in the second quarter 2011. In August 2010, the company announced that an Oxis sponsored 12-patient safety study of ergothioneine was published online by the prestigious peer reviewed journal, Toxicology. We expect the FDA to respond with a no objection letter to the GRAS approval later this summer. Oxis plans to conduct larger, randomized, double-blind, safety and efficacy studies in human subjects later this year.
• Financing: In November 2010, Oxis International secured an equity investment of $ 250,000 from Gemini Pharmaceuticals. Under terms of the agreement, Gemini purchased 1.67 million convertible preferred shares at $ 0.15 per share. Gemini also provided a $ 750,000 line of credit at a rate of prime plus 2% per year. Gemini is Oxis primary product development and manufacturing partner, and the potential $ 1 million in funds provides some validation to model. The deal with Gemini provides cGMP manufacturing and logistic support, as well as expertise in marketing and promoting both over-the-counter (OTC) drugs and vitamin / nutritional supplements. Gemini has been active in the private label manufacturing of OTC dietary supplements, herbs and nutritional products for almost 30 years.
• Marketing: In March 2011, Oxis announced it has formed a joint venture (JV) with leading online marketer engage:BDR to promote, market and sell a number of Oxis planned health and nutrition products, with an initial focus on ErgoFlex. We expect that engage:BDR will provide a full range of turnkey online marketing services to the joint venture, including developing brand strategy, the design of all digital media and interfaces, online media planning and buying, leveraging and integrating social media, and customer analysis. Engage:BDR offers both premium (placement-specific) marketing solutions and the ability to distribute campaigns through its own display platforms and channels. This should help drive uptake for ErgoFlex in the coming months.
An Enormous Market
Dietary supplements are a multi-billion dollar industry. According to the Nutrition Business Journal, sales of dietary supplements totaled $ 27 billion in the U.S. in 2010. It is a rapidly growing market driven by an aging U.S. population, growing acceptance of alternative medicines and nutraceutical products, and clinical studies documenting the positive benefits of certain supplements. These sales include vitamins, minerals, herbs/botanicals, fibers, fatty-acids, and meal and sports-related nutrition products. Pure antioxidant supplements are an estimated $ 2 billion market in the U.S. Globally this is a $ 5+ billion market. Consumers seek-out antioxidant claims in vitamins, minerals, enzymes, and herbs, and products such as grape seed, pine bark, ginkgo biloba, selenium, zinc, copper, and many others. These products are generally recognized as safe (GRAS). ERGO, one of the world s most powerful antioxidants, has the potential to be a new major player in this $ 2 billion U.S. market.
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