Else Nutrition: What’s the investment case?

Consumer

Else Nutrition: What’s the investment case?

Else Nutrition has developed and patented the world’s first, whole plant infant formula free of dairy and soy. The company currently offers a clean-label alternative for toddlers over the age of 12 months whose families are either flexitarian, looking for a plant-based alternative, want a more sustainable option or are intolerant to traditional formulas.

The company says it is ‘advancing towards’ meeting the FDA’s Generally Recognized As Safe (GRAS) requirements for its infant formula ingredients and the New Infant Formula Notification, as well as EU requirements for its plant-based formula for babies from birth to one year of age. Management expects a decision on whether it meets the requirements by 2025. The same studies for the FDA and GRAS will be used as the basis of submissions in Europe and beyond.

Other product lines are already available for sale on Amazon, in supermarkets, large grocery and drugstore chains, and include ‘clean label-certified’ baby cereals for babies of six months and over, and plant protein nutritional shakes for children aged three years and over. Else is listed in Canada on the TSX and headquartered in Israel, with subsidiaries in the United States, Canada and Australia. Further details are available in the company’s latest investor deck.

The business recently announced that listings in North America have grown to more than 11,000 retail stores and that it expects all of these outlets will be selling by Q223. Else began 2022 with roughly 1,200 retail locations.

While still in its loss-making ramp-up phase, Else declared US$11m in cash at the end of January 2023, having boosted its position with a funding round of C$7.3m at the end of June 2022, revenues of C$6.1m from the first three quarters of that year and a further C$4.25m raise in December 2022.

Below are eight facts about Else Nutrition that investors need to know:

1. What differentiates its baby formula?

Traditional formulas are based on dairy or soy proteins which are strong allergens and made of nutrients that are isolated or fractionated from whole food ingredients.

In contrast, Else says its all-plant formula is based on ‘minimally processed’ ingredients, which keeps the nutritional characteristics very close to those of the original whole foods. Its ingredients of almond butter, buckwheat flour and tapioca maltodextrin are also unrelated to the traditional bases of animal-based dairy and plant-based soy.

2. What is Else’s opportunity?

In 2020, according to US market data from Euromonitor, 40% of infant milk formula sold in the US was specialty cow’s milk formula, catering to allergic and intolerant babies. Also, according to Dairy Foods Magazine, more than 47% of Americans define themselves as flexitarian.

Else’s own survey of more than 600 consumers shows that the majority of children aged one and over presenting with gastrointestinal or dermatologic symptoms before using its alternative formula reported improvements or full recovery following its use. These benefits included weight gain, better stool consistency and/or a reduction in skin rashes . The results were reported in Abstract N-P-078 at the 54th annual meeting of the European Society for Pediatric Gastroenterology, Hepatology and Nutrition (ESPGHAN) 2022.

The company also claims that using its ingredients can deliver a carbon footprint reduction of around 65% versus that of the core ingredients of dairy formulas.

While management has built an infant formula brand synonymous with these benefits, it also plans to continue leveraging brand preferences into other product lines.

As Edison analyst Sara Welford wrote in her initiation note in June 2022:

Plant-based diets are no longer restricted to vegans and are being adopted as part of a flexitarian lifestyle as consumers look for healthier, more sustainable options. Non-dairy milks have become ubiquitous in many markets during the last five years. Else’s products offer a solution for children with allergies and intolerances but could be adopted more widely given their clean label and minimal processing.

3. What does Else’s near-term expansion look like?

Having secured listings of its early life nutrition product lines in more than 11, 000 stores in North America, Else’s strategy calls for listings in 20,000 stores in the United States alone by the end of 2023.

It is also continuing its push into China to generate ‘significant revenues’. Meanwhile, it is planning to open up the Australian market in Q323, as well as the European. The start of the European launch programme is set to be focused on the six largest markets – Germany, France, Italy, Spain, the Netherlands and Sweden – as well as the UK. The UK will be the first market, planned to be launched later in 2023 . Else plans to continue these launches during 2024.

4. Is the intellectual property protected?

Else has secured two families of patents. The main patent family covers composition of non-dairy, almond-based formulas for infant and toddler formula functional foods, and nutritional supplementations to be consumed by all ages. It includes 34 granted patents in 20 countries, including the United States, Australia, Canada and Japan and additional applications still under examination.

The second patent family is directed at reducing the trace elements found in plant-based food products and nutritional compositions, allowing their use in strictly regulated infant formulas. This patent family has entered a national phase in Europe, the United States, Australia and Canada as well as many others.

Else is also in the process of filing additional patent applications covering other aspects that have not yet been made public.

5. Is there a new product development pipeline?

While exact details have yet to be released, Else has revealed it is working on a child and adult ‘ready to drink’ line, which will first target the North American market.

It also has adult and paediatric medical nutrition in its crosshairs , as well as foods for those with special dietary needs. It has plans to launch products which can promote better health in the general population.

In terms of marketing its brand and lines, Else says it plans to target healthcare professionals and key opinion leaders as well as consumers.

6. Does Else’s management have relevant experience?

The three co-founders occupy the CEO, COO and CTO board positions. All of them have significant experience in infant nutrition. Else’s scientific advisory board consists of world-leading key opinion leaders with diverse expertise in fields such as paediatric nutrition, paediatric gastroenterology, allergies, proteins as well as considerable experience in research, and sitting on scientific bodies and industry boards. Else’s North American scientific advisory board has five members, including a consultant to the World Health Organization. Their five counterparts on Else’s European scientific advisory board include a past presiden t of ESPGHAN.

7. What about the financials and valuation?

Edison Group last published a report on the company in September 2022. This is what analyst Sara Welford concluded:

Else Nutrition’s Q222 results demonstrate the growth momentum in the business, with management delivering on its stated goal to reach a C$1m quarterly revenue run rate on Amazon.com by the end of Q2, and on track to reach listings in 4,000 retail stores by the end of FY22, with listings currently in over 3,500 stores. Else added nearly 2,000 stores during Q2 and boosted its cash position with a funding round of approximately C$7.35m at the end of June
We value Else primarily on a DCF basis and flex for different scenarios. Our base case assumes a sales CAGR of 47% in years four to 10, followed by 15% in years 11–15 and 10% in years 16–20. We assume 2.0% terminal growth and a 15% terminal EBIT margin, resulting in a mid-case 12-month value of C$4.0 (from C$5.80/share). In a more bullish scenario, assuming a faster roll-out and uptake of product, our fair value is C$7.0, and on more pessimistic assumptions our fair value is C$2.7, which still represents significant upside to current levels.

Since this report, Else reported another funding round of C$4.25m in December 2022 .

8. What are the downside risks of the business?

Almost all companies at Else’s stage of development face inherently greater risks and uncertainties, relative to more established companies.

Else says that, as of the end of December 2022, it had a cash runway of 12–14 months. Markets, meanwhile, are currently somewhat resistant to capital raising, particularly from smaller, less well-established businesses. While some may expect market conditions to brighten considerably in due course, there are no guarantees around Else’s ability to raise more cash, and/or how much new stock might need to be issued.

Furthermore, it should be noted that Else is competing in a market where incumbents include large multinationals such as Nestlé and Danone, and that baby nutrition is a highly emotive category – product recalls or safety issues can cause damage to a brand.

However, it is clear why Else Nutrition is targeting a slice of the market. Infant nutrition was valued at US$79.4bn in 2020 by Mordor Intelligence.

Thank you for reading this article. For more information on Else Nutrition, visit the company’s page on the Edison Group website, or the business’s own investor relations pages.

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