ChromaDex: The Bear Case
I belong to a small tribe of ChromaDex retail shareholders who are properly characterized as True Believers. We don't know how many of us there are -- probably a dozen or so, but maybe much more -- the online no-fee stock broker Robinhood reports over 400+ ChromaDex investors:
These True Believers I am talking about are mostly not professional investors, but biochemists, biohackers, or just health supplement enthusiasts. They heard about Nicotinamide Riboside (NR), a peculiar new version of Vitamin B3, tried it on themselves, and suspected that they had discovered something special.
Then they did enough research to learn that for reasons not yet well-understood most organisms, as they age, run low on a molecule called NAD. Mitochondria may power the organism's cells, but NAD molecules power the mitochondria, so running low on NAD could cause cells to lose energy and malfunction. And humans are among the organisms that run low on NAD.
It is a plausible theory that many of the effects we associate with aging -- from gray hair to varicose veins to Alzheimers -- might be at least partially caused by this inevitable decline in NAD.
And now there might be a way to slow or even reverse that decline.
Although human research was in short supply, lab mice seemed to be aging backwards, and every day scientists working on cell cultures or animals seemed to be discovering new clues as to how replenishing NAD with NR might one day be shown to improve health.
The existence of Nicotinamide Riboside has been known for a long time, but NR's peculiar ability to replenish depleted cellular NAD, and thus rescue cells running out of energy, was only discovered in 2004 by Dr. Charles Brenner, a professor of biochemistry at Dartmouth.
Dr. Brenner and Dartmouth were awarded patents for using NR in a health supplement or pharmaceutical formulated to increase NAD, and those patents were licensed to ChromaDex, an obscure supplier of health supplement ingredients.
And ChromaDex is publicly traded -- almost a penny stock -- so you could buy a share from any online broker, and we did.
From the standpoint of the True Believer, research and personal experience, as well as shared anecdotes, convincingly show that oral NR is efficacious, and the only question is just how many conditions might be improved.
But even ameliorating a single symptom of aging might be extremely valuable. So we think that ChromaDex is smart to put all its eggs in the NR basket, and even if NR only achieves a fraction of its potential, it will still be worth a lot. And even if alternate NAD replenishing molecules emerge, NR will still have a valuable head start. We think ChromaDex is well-positioned to succeed, and has a professional management team with the right incentives. We think Elysium's claims mostly lack merit, and are just a manifestation of sour grapes, which, although heartfelt, is not legally cognizable.
But the rest of the world disagrees with our tiny tribe. I mean, SERIOUSLY disagrees.
That's pretty clear because ChromaDex's stock price is very, very low -- recently at a 52-week low, lower than when ChromaDex was first listed on the NASDAQ, and also lower than it was 5 years ago:
And nobody's doing very well. As bad as the S&P 500 has been over the past twelve months, ChromaDex has been worse:
This is not the financial profile of a company that's about to be worth a billion dollars (5x the current share price), and certainly not the share price you'd expect for a company that has a patent on the fountain of youth.
So the rest of the world thinks we're wrong about ChromaDex, if not NR. And if you believe in the wisdom of crowds, then the rest of the world is probably right.
So let's take a look at the bear case for ChromaDex and try to understand what the rest of the world is seeing outside the self-reinforcing bubble conversations of the True Believer Tribe.
This is not an empirical research piece, so I am not going to try to find short sellers and ask them what inspires their skepticism, or even ask institutional buyers with a small stake why they don't have a larger stake. Instead, I will simply try to construct the best, strongest arguments possible as to why it's not going to happen for ChromaDex.
I see basically five components to the Bear Case:
1. NR may prove ineffective
2. NR may have negative side effects
3. A superior substitute for NR may emerge
4. ChromaDex's intellectual property may fail
5. ChromaDex may fail to execute on the opportunity
Every one of these scenarios is possible, and not just remotely possible -- entirely plausible. I won't hazard a guess as to the likelihood of each one, but if each one were a 50-50 shot, then the odds of ChromaDex being able to successfully navigate all five conditions would be 1-in-32, or about 3%.
That by itself would be enough to scare away all but the most daring investors.
Of course we True Believers have constructed in our minds explanations why all of these challenges will likely be surmounted, but let's still look at this from the standpoint of everyone else.
1. NR May Prove Ineffective
The evidence against NR is non-trivial.
As every researcher knows, there are all kinds of things that work on rodents that don't work on humans. And the biochemistry of NAD replenishment is sufficiently subtle and complicated that there can be no automatic assumption that human studies on actual conditions will show efficacy, even if mice end up living forever.
And so far we haven't seen much success with the human studies. At least three human studies have shown that NR is safe and effectively increases blood NAD levels. But that's exactly one step short of showing that the increased blood NAD levels actually do anything beneficial for humans.
And against this we have an isotope study that suggests the opposite, that oral NR is almost entirely turned into Nicotinamide before it enters the cells, and so NR brings nothing special to the table.
I have suggested that there are real problems with this isotope study, but I am a true believer and a lawyer, so rational people won't take my word over the group of biochemists from places like Harvard, Princeton, and Rutgers who signed their name below the following statements:
"Nearly complete first-pass metabolism of oral NR and NMN [likely results] in these compounds having systemic effects similar to or indistinguishable from oral NAM,"
"Intravenous, but not oral, NR is delivered intact to tissues."
That's kind of game-over right there, right? It says that NR is just an expensive form of NAM, and NAM is cheap and available for everyone.
Moreover, the human studies that have been done haven't generated stellar results. For example, although the biggest/best study to date showed that NR safely raises NAD and may help with blood pressure and arterial stiffness, look at all the factors they looked at in the study that were NOT affected by NR:
Total energy intake and expenditure, oxidative fuel source (carbohydrate vs. fat), and physical activity patterns were not affected by NR (Supplementary Table 7). Likewise, we observed no difference in body mass, body mass index (BMI) or percent body fat compared with the placebo arm (Supplementary Table 7) and no differences were observed in measures of glucose or insulin regulation (Supplementary Table 7). Finally, there was no effect of the intervention on overall motor function (Supplementary Figure 2), maximal exercise capacity, as assessed by VO2 max and treadmill time to exhaustion (Supplementary Figure 1A, B), or on markers of submaximal exercise performance
Oh, I can explain that away, too -- there weren't enough subjects, the subjects weren't obese, they didn't measure long enough, etc -- but the end result is that even the most positive human study on NR generates bushels of grist for the doubters' mills.
In sum, the human studies haven't shown that NR is a fountain-of-youth pill, and if anything they have suggested that it might not be. The best we could say objectively is that it's too early to know, and a lot more studies will be required.
Sure, there are all kinds of anecdotal reports of amazing effects, and one guy on his blog won't shut up about Restless Legs Syndrome, but the Placebo Effect is absolutely powerful enough to account for all of those stories, not even counting Confirmation Bias. And by the way, if it's so great for RLS, why haven't we heard a bunch more anecdotal reports from the other FIVE MILLION Americans who suffer from RLS? Don't they read blogs? Anecdotes prove nothing.
2. NR May Have Negative Side Effects
If we don't have enough research to conclude whether orally administered NR generates good positive effects in humans, we REALLY don't have enough research to know whether it has negative side effects.
For example, maybe your body develops a resistance to NR over time, and NR becomes less effective. Or maybe it stops working entirely. Or maybe it works great for three years but in Year Four you contract a metabolic syndrome, or a degenerative disease, or a cancer, or your skin turns green. No one knows, and no one's going to know for sure, for a long time.
The best we can say is that other forms of Vitamin B3, like Niacin, have been taken for years without negative side effects, and so far people have been taking NR without much in the way of anecdotal severe side effects. But that's not entirely satisfying, because the whole point of NR is that it's different from Niacin, and so if it has different effects, maybe it also has different side effects.
Of course we true believers think it will probably come out okay, but we have precious little data upon which to hang our hats. And for a counter-example, the rug got pulled out from under pterostilbene quite suddenly due to side effects. And who has the patents on pterostilbene? ChromaDex.
3. A Superior Substitute for NR May Emerge
This bad contingency seems almost a certainty. EVENTUALLY something more efficacious will likely show up, even if it is just a different formulation of NR -- something that makes it longer lasting, more bioavailable, more quickly absorbed, more slowly absorbed, less likely to be degraded, and/or less expensive to manufacture.
The only question is whether that happens sooner or later, and whether the new substance is ALSO controlled by ChromaDex, or becomes a superior competitor in the marketplace potentially obsoleting ChromaDex's primary product.
We True Believers are constantly scanning the horizon for this one, and we suspect that ChromaDex's Chairman and ChromaDex's Scientific Advisory Board are, too. But it remains a dark part of the map.
The obvious contender is Nicotinamide Mononucleotide (NMN), which is chemically so similar to NR that if you strip off the phosphate it's the same. And our bodies have no trouble stripping off that phosphate, and no qualms about doing it. So in a very real sense, taking NMN is just like taking NR, and might have very similar or even superior effects [although there is also some evidence that NMN might be worse].
Moreover, celebrity biochemist David Sinclair, who must have walked away from Sirtris a multi-millionaire, is quite aggressively committed to developing NMN as a drug, and hints that he has a small army of researchers working out the details (I think he mentioned it near the end of this video). So if Sinclair's research goes well and he is able to bring enough capital to bear, and production cost drops, the world could suddenly be awash in an alternative NAD precursor that claims to be better.
But there are other candidates besides NMN. Perhaps NA or NAM will prove more efficacious than we thought, especially in combination with some unknown chemical that might defeat current shortcomings with those precursors. Or maybe a new NAD precursor will be developed.
Or, less plausibly, perhaps for every condition that NR might treat, some alternate treatment might be better for that specific condition. So, for example, maybe NR will have some potential to prevent Alzheimers, but it won't matter because amyloid-clearing technologies will prove better, and although NR has some potential to prevent aging, telomerase technologies will prove better, etc.
NR's primary advantage is that right NOW, TODAY, it appears to be the most available, most effective, best researched NAD precursor. But that could change any day, so to the extent that ChromaDex isn't a billion-dollar company right NOW, the odds would seem to only get worse over time, not better.
4. ChromaDex's Intellectual Property May Fail
ChromaDex claims to have a robust patent portfolio, but a patent portfolio is only as robust as the PTO and federal courts say it is, if some competitor is determined to disregard the patents. And ChromaDex is obviously facing such a determined competitor in Elysium Health, which has proposed to a federal judge in Delaware every kind of reason why Elysium should be allowed to manufacture and sell NR in a health supplement in disregard for ChromaDex's patent claims, including that the patents are invalid and/or unenforceable.
Well no one knows whether a patent is valid -- the biggest companies in the world fight their patent battles across jurisdictional lines, with one court reversing another. The PTO was granting too many patents previously, which spawned patent trolls, which in turn caused the development of the PTAB's Inter Partes Review process, which purported to be a streamlined way for the PTO to correct its errors, but in reality ended up as a graveyard for patents. On the other hand, the Federal Circuit only affirms the PTAB about 75% of the time, which adds substantial uncertainty to any PTAB decision. And elsewhere in patent law, whole categories of patents get thrown into doubt, as the Supreme Court's Alice decision did to software patents. Patent Law is one of the fastest evolving practice areas.
Patent Law exists at the intersection of Science, Law, and Incomprehensibility, so there is a great deal of ignorance as to how it works. Even the simplest issue, like how long a patent lasts, or when it starts, or who is entitled to assert it, can generate chapters of discussion. Rather than recount here every issue with ChromaDex's patents, it will be enough to say that nobody knows how it will come out, EVEN IF ChromaDex has well-crafted patents that are entirely plausible.
And of course, if the litigation goes on forever, the direct and indirect costs could substantially interfere with ChromaDex's efforts to commercialize Niagen, EVEN IF ChromaDex eventually prevails.
5. ChromaDex May Fail To Execute on the Opportunity
Even if you had the Fountain of Youth, bringing it to market in the US would be a quite difficult task. First, because of stringent regulations governing health supplements, you aren't allowed to say it's the Fountain of Youth. In fact, you aren't really allowed to say that it does anything at all tangible, like treat any disease or condition, without going through years of tests and trials.
Second, consumers disappointed by a long legacy of quackery that co-exists with legitimate medicines are suspicious. The market place is filled with healing crystals and other dubious treatments. You can buy Resveratrol at Costco, and Dr. Sinclair will tell you that he takes it, but other reputable biochemists will tell you that resveratrol has poor bioavailability and is ineffective.
So perhaps consumers can be forgiven for doubting claims about Niagen, even when based on strong research -- and even when that strong research is built on strong theory.
And perhaps we should forgive some of the same consumers for nonetheless making Horny Goat Weed a top-selling supplement on amazon.
But most of all let's forgive ChromaDex's woebegone marketers for whatever troubles they have trying to figure out how to talk effectively to this group of healing-crystal-using horny-goatweed-buying Niagen doubters, while gagged by the FDA.
Or let's be rational investors and not forgive them anything, and simply predict a reasonable possibility of their failure.
True Believers like me think that ChromaDex has a pretty impressive management team, filled with senior leaders with experience in managing multi-billion dollar businesses -- sometimes in difficult and contentious circumstances similar to those ChromaDex faces.
But everyone else in the world can at least see a business completely disrupted, with major changes to ownership, management, and business model. And by definition, nobody has experience taking a Fountain-of-Youth Pill from concept to global supplement hegemony in just a few years.
True Believers may think that ChromaDex's early global expansion opportunistically achieves maximum market penetration and competitive advantage, whereas a hard-headed MBA might think that a full-court-press in the US market ought to come first.
True Believers think that the Nestle deal is brilliant, but a more skeptical mind could wonder whether it will lead to low-margin sales and distract from or even compete with the core business.
Should ChromaDex go on television? Or try infomercials? If so will they be too early, or too late? Is the health market more promising than the geriatric market? Nobody knows for sure, and there is every chance to mis-execute.
And then what about the Honig thing? Some accused pump-and-dump fraudsters got called out by the SEC for misbehavior, and some of those alleged fraudsters had significant involvement with ChromaDex some years back. Frost has reached a settlement with no admission of guilt, but things might not go as easily for Honig. Does their prior involvement with ChromaDex suggest some potential for ongoing or future liability? If so, for what?
True Believers think that ChromaDex may have been the victim of securities fraud, but don't see any evidence that ChromaDex might have liability as a perpetrator. But who has any way of knowing for sure, without being privy to the facts of what might have happened?
Building a big business on a single supplement is not a simple or easy thing, even if it works and you have the IP.
So it's not very surprising that ChromaDex's share price remains low year after year. From the standpoint of a rational investor, there's every reason to think that the magic might never happen for ChromaDex.
Now, as a True Believer, unlike a rational investor,
(1) It seems obvious to me that Niagen is efficacious, we just don't know how good it might be;
(2) It seems highly doubtful that a water-soluble vitamin will have any worse adverse side effects than any other water-soluble vitamin;
(3) Any better alternative to NR will take years to prove itself -- as many years as NR has taken;
(4) Elysium's legal arguments appear to be mostly specious, and that includes their arguments with respect to intellectual property, and
(5) ChromaDex's new and improved management team has more than enough skill, experience, and capital to do what needs to be done.
But a more skeptical observer could harbor reasonable doubts about all these points.
In fact, let's assume, for the sake of argument, that ChromaDex is destined to have a billion-dollar valuation, which means a share price of about $18. You could wait until the share price goes to $6.00 and still triple your money.
And assume, for the sake of argument, that ChromaDex is destined to have a billion dollars in revenue, and a valuation of ten times that, so a share price of $180. You could wait until the share price went to $18 and still get a ten-bagger.
So what rational sense is there in buying CDXC now? Wouldn't it make more sense for a prudent investor to wait until (1) the science casts a little more light on efficacy and potential side effects, (2) any promising alternatives falter, (3) the legal risk is reduced by favorable rulings, and/or (4) the management team shows that it is able to make some headway on marketing and sales?
If those things happen the share might start to rise, but the risk will drop, too, leaving plenty of upside with less downside. And isn't there time to wait and see? This train, wherever it may be going, has definitely not yet left the station.
If that analysis makes sense, then we would expect savvy and large investors to be placing only very small bets on ChromaDex right now -- just enough to keep a hand in while watching closely, and then pull the trigger when two or three specific contingencies occur that transform the risk/reward ratio to something more appetizing.
And isn't that exactly what we are seeing? Lots of institutional investors have made small bets, and the only larger bets are by entities for whom a few million dollars IS a small bet.
So the Bear Case is real, and probably sufficient to explain the low share price. Will any of the major risks materialize, or will little ChromaDex somehow pilot its way into the Fortune 1000?
Only time will tell.