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LEXX: An Investment That’s Easy to Swallow

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By John Vandermosten, CFA

NASDAQ:LEXX

READ THE FULL LEXX RESEARCH REPORT

We are initiating coverage of Lexaria Bioscience Corp. (NASDAQ:LEXX) with a valuation of $15.00 per share. This present value is based on cash flows related to probability adjusted estimates related to the completion of the hypertension, nicotine and antiviral programs, partnership with consumer, medical and pharmaceutical companies, approval by regulatory authorities and commercialization of approved products. Lexaria is advancing a number of programs using its proprietary DehydraTECH (DHT) drug delivery technology, primarily in cannabidiol (CBD) for hypertension (HTN), nicotine for oral pouches and nicotine replacement therapy (NRT), antivirals and related compounds for COVID and other viral diseases. The company also has relationships with several consumer products companies which provide growing revenues to the company in the CBD and nutraceuticals spaces.

Lexaria’s DHT takes advantage of the digestive and circulatory system’s fast track pathway for long chain fatty acids (LCFAs) to deliver a variety of drug compounds to the blood plasma. LCFAs are able to bypass absorption into the blood via the capillary system and instead form into triglycerides which are transported into lymph vessels as chylomicrons via the lymphatic lacteals. This route allows for more rapid delivery to the circulatory system and bypasses the liver, improving bioavailability.

DHT employs a relatively simple structure that combines an API with an LCFA. LCFAs can be any number of edible oils that are mixed with the API then combined together with a carrier compound by way of a dehydration synthesis reaction in commercial dryers. Lexaria has almost exclusively used high oleic acid sunflower oil as the LCFA source for its formulations, although its patents cover many other fatty acid source compounds. Carrier compound excipients are added which may improve passage through the digestive system and allow the mixed product to be rendered as a powder for later use in a capsule or emulsification.

DHT is amenable to lipophilic APIs and has been investigated in a number of compounds including cannabinoids, nicotine, antivirals, PED5 inhibitors, human hormones, non-steroidal anti-inflammatory drugs (NSAIDs) and vitamins among others. Many of these drugs have low bioavailability or take a long time to enter the bloodstream. In addition to rapidly and efficiently shuttling desired compounds into the bloodstream, DHT also provides other benefits including taste masking, improved delivery across the blood brain barrier (BBB), reduced levels of drug required for efficacy and reduced risk of side effects.

Lexaria is conducting several preclinical and clinical studies to advance DHT with CBD for hypertension. Two animal studies have generated successful results and three human studies have been completed or substantially completed and have provided evidence of safety and efficacy. Two other human studies are being prepared to begin this autumn which are expected to produce data over the next year. Four preclinical studies have been successfully completed in the antiviral program which have examined compounds such as remdesivir and colchicine in cell-based and animal studies. The company’s longest standing relationship is in the nicotine space. In recent years, with increasing restrictions on smoking, nicotine delivery in oral pouch (snus) avoids risks of lung cancer and provides an alternative when smoking is not allowed. New alternatives for NRT are in demand as existing offerings suffer from slow onset and low bioavailability.

Lexaria offers a portfolio of indications that take advantage of DHT’s simple but elegant approach to drug delivery. DHT substantially improves the rapidity and quantity of API transport to the blood plasma and brain using the body’s natural process for distributing fatty acids via the oral route. Products from Cannadips, Impact Naturals and Amari Botanicals among other consumer goods companies that use Lexaria’s technology are being sold online and at retailers including Albertson’s, Safeway and Hudson News stores. Interest in using DHT extends across many categories beyond the primary pharmaceutical focus of the company from foods to beauty products and nutraceuticals, and across a range of formats from oral ingestible to oral buccal/sublingual to topical products.

Target markets for APIs that can benefit from DHT are immense. Hypertension affects about 150 million persons in North America and over a billion around the globe. Many of these individuals are untreated or do not benefit from existing medications. DHT with CBD offers a natural alternative to hypertension control for many who are unresponsive to existing medicines or could benefit from the product in combination with currently prescribed therapies. Viruses are omnipresent in our daily lives and their impact extends beyond the over 200 million cases and 4.3 million deaths from COVID around the globe. Every year from 10 to 50 million Americans catch the flu and around 1 billion global cases occur with hospitalization rates of 1 – 2%.1 There are also many other viruses that cause severe symptoms, hospitalization and death. The need for orally administered anti-viral medications is critical to keeping hospital beds open and treating those in areas with less developed health care infrastructure. There are approximately one billion smokers around the world and around 40 million in the United States. There is significant demand for nicotine replacement products, substitutes for nicotine when smoking is prohibited and less risky alternatives to smoking. This need opens the door for DHT technology which can address many of the shortcomings related to nicotine addiction including rapid binding to receptors in the brain and inconspicuous consumption.

On May 31, 2021, Lexaria held $8.5 million in cash on its balance sheet after raising gross proceeds of $11 million in January 2021. The funds have enabled Lexaria to continue multiple preclinical and clinical studies clearing a path for partnership and further development. The company holds no debt and has a market capitalization of just over $35 million. We expect the company to consume from $3.5 to $4 million in cash annually, providing a multi-year runway with existing cash reserves. The company also disclosed that it had received an additional ~$4 million in funds from warrant exercises during the fourth quarter.

We anticipate that partnerships and pivotal data will emerge over the next several years with registrational submissions by 2023 and commercialization in 2024 for DHT CBD in hypertension potentially using the 505(b)(2) pathway. Other development products in nicotine and antivirals are expected to come to market in subsequent years. Existing revenues from partners in the consumer goods space provide current revenues and are forecast to grow at a modest rate offsetting cash burn and providing support for the technology.

Key reasons to own Lexaria shares:

➢ Patent portfolio supporting DehydraTECH in multiple compositions

➢ DehydraTECH provides marked improvements over other methods of API delivery

◦ Improved bioavailability

▪ Fewer side effects

▪ Lower drug cost

◦ More rapid delivery to blood plasma

◦ Able to cross the blood brain barrier

◦ Flavor masking allows for use of fewer excipients

◦ Allows select infused or injected drugs to be administered orally

◦ Approaching infusion levels of drug bioavailability

▪ Can generate substantial savings converting infused medicines to oral

➢ DehydraTECH can augment performance of numerous APIs

◦ Cannabidiol (CBD)

◦ Nicotine

◦ Anti-virals

◦ PDE5 inhibitors

◦ NSAIDS

◦ Hormones

◦ Vitamin D3

➢ Existing license and product revenues provide supportive cash flow

◦ Relationships with several consumer packaged goods (CPG) manufacturers

◦ Double digit revenue growth

➢ Low cost technology that can produce up to 400,000 CPG units per day at existing facility

➢ Collaborations with Fortune 100 companies Altria and British American Tobacco

In our initiation report we review the various APIs being pursued by Lexaria and the studies conducted on its behalf. A review of the lead indication in hypertension is presented along with discussion of the disease’s prevalence, treatment and risk factors. We report on relevant preclinical and clinical data, trial design and development history for DehydraTECH in hypertension and provide a summary of other potential combinations with the technology. Following an in-depth discussion of our model assumptions, we provide an appraisal of Lexaria’s valuation generating a target price of $15.00.

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1. Based on CDC Figures