IFF Makes Sweet Redpoint Deal - Analyst Blog

Redpoint Licenses Sweetness Enhancer RP44 to IFF

On June 30, 2010, Redpoint Bio (RPBC.OB) announced that it has entered into a license and commercialization agreement with International Flavors & Fragrances Inc. (IFF), covering the commercialization of RP44, Redpoint’s all-natural sweetness enhancer. Under terms of the agreement, IFF will have exclusive rights for five years to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. 

In return, Redpoint will receive an upfront payment of $0.5 million and will be eligible to receive up two separate $0.5 million in milestone payments based on supply and regulatory approval. In addition, Redpoint will receive royalties based on the amount of RP44 purchased by IFF for use in products. We believe this royalty rate equates to about a mid-single digit royalty on RP44 commercial sales.

Some key points to the deal:

• IFF will assume responsibility for the regulatory process and for costs associated with prosecuting and maintaining Redpoint’s intellectual property (IP) covering the sweetness enhancer.
• After the 5-year exclusivity period, all rights return to Redpoint Bio, potentially allowing for a more lucrative -- exclusive or non-exclusive -- deal to be signed in 2015 should RP44 be a success.

We believe that IFF is an ideal partner for Redpoint Bio with RP44. IFF is a global leader in the food and beverage industry with deep sector knowledge and a global customer base. IFF will provide outstanding regulatory and product development capabilities.

Supply Remains Key Question

For the past year, management at Redpoint has been providing small levels of purified RP44 to major ingredient suppliers and food and beverage companies so these organizations can evaluate RP44 in their own taste models. Now that a deal has been signed with IFF, a long-term commercial supply agreement must be put into place for the product to be viable in foods and beverages.

As a reminder, the company announced it had discovered RP44, an all-natural sweetness enhancer, in June 2009. RP44 is rebaudioside C (Reb C), a component of the Stevia plant and side-stream byproduct of the rebaudioside A (Reb-A) production process. Redpoint is in discussions with suppliers of Reb-A to determine the economics and manufacturing process necessary to extract and produce Reb-C on a scale large enough to allow for commercialization.

Based on our analysis, if Reb-A manufacturers, such as PureCircle and Cargill / GLG LifeTech, can manufacture Reb-C on a level of around 1 pound of purified Reb-C from 160 pounds of raw Stevia leaf, the economics are favorable compared to Reb-A and sugar. Currently, manufacturers are producing about 1 pound of Reb-A from around 40 pounds of raw Stevia leaf. We expect yield on Reb-A production to improve dramatically over the next few years thanks to improved material sourcing and genetically-modified crops.

Reb-A currently sells for roughly $215,000 per ton. Data from PureCircle and GLG LifeTech shows the gross margin for Reb-A product is around 35%. Therefore, manufacturing costs of 1 ton of Reb-A is around $140,000, about 70% of which ($95,000) is the raw leaf sourcing. We estimate that Reb-C can be purified from the Reb-A post-extract product for an additional $45,000 per ton, with a yield at around 25% of the pre-Reb-A figures.

Having a second product from the raw Stevia leaf is a highly desirable venture for PureCircle and Cargill / GLG LifeTech, and we believe that now that IFF is involved, a product supply plan will be outlined over the next several months. At this point, how PureCircle and Cargill would go about allocating the manufacturing and raw leaf sourcing accounting costs remains to be seen, but it is clear that this would help drive down costs of both Reb-A and Reb-C over time. Our base-case assumption is that the selling price of Reb-C will be around $90,000, yielding a 50% gross margin to the manufacturer.

The next step for IFF is to conduct safety studies to support regulatory filings in the U.S. and around the world on RP44 through the GRAS (Generally Recognized as Safe) determination / notification process. From what we have seen in the past, these extensive testing activities typically require 12-18 months to complete.
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