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RKDA: Initiating Coverage of RKDA: Leveraging Gene-Editing Expertise to Target High Growth Markets

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By Brian Marckx, CFA



SNAPSHOT: Anticipating Three Key Launches, Steepening Growth Curve
Arcadia Biosciences, Inc (NASDAQ:RKDA) is an innovative agricultural company with a broad and growing product portfolio focused largely on improving the nutritional and other valued-added qualities of crops and consumer food products. The company owns or exclusively licenses 216 patents worldwide across 30 patent families. Through leveraging of their TILLING (Targeting Induced Local Lesions in Genomes) and in-licensed CRISPR Cas-9 platforms, RKDA has created a niche position as a developer of high value non-genetically modified (non-GM) traits, the market for which is experiencing significant and broad-based growth as consumer demand continues to shift more towards natural food options. Arcadia’s large patent estate provides them with the ability to gain full control over crop genome advancements, thereby affording the relatively unique advantage of obtaining patents on non-GM traits.

These technologies also allow for relatively rapid development and commercialization of novel traits, which in some instances can be accomplished in approximately one-half of the time as more traditional techniques. These advanced gene-editing and breeding capabilities provide Arcadia with significant advantages in our opinion, as the ever-increasing competitive landscape among consumer food and health companies has placed greater importance on time-to-market and the ability to successfully and reliably develop healthy food options and value-added product differentiation.

Arcadia’s technological innovation brought SONOVA GLA safflower to market. SONOVA GLA, developed under a licensing agreement with Abbott Laboratories (ABT), contains the highest concentration of gamma linolenic acid (GLA) of any other currently available plant oil. GLA has important health and anti-aging benefit and is used in a variety of products including dietary and nutritional supplements, medical foods and, more recently, dog and cat foods. While SONOVA GLA is Arcadia’s sole commercial product, other, higher-potential programs (i.e. non-GM wheat, hemp/CBD and drought-tolerant soybeans) are where most of the company’s growth opportunity lies. These also represent the bulk of the equity investment value of RKDA, in our opinion.

Arcadia has rapidly built a foundation for growth by scoring key product regulatory approvals and securing talent, resources and expertise through the recent consummation of collaborations and partnerships with industry-leading organizations. This includes a joint-venture and collaboration related to their hemp/CBD and non-GM wheat programs, respectively, both of which were announced in August. Revenue from both programs is expected to begin later this year and quickly steepen going into 2020. Meanwhile, proprietary drought tolerant soybeans, which represents a third catalyst, is expected to make its commercial introduction next year in Argentina.

Having laid the groundwork for growth and on the cusp of three key product launches, in late-August the company issued initial financial guidance. This includes expectations of generating revenue in excess of $10M and $30M in 2020 and 2021, respectively, and reaching a point of positive cash flow from operations by mid-to-late 2021.

One of the company’s flagship pipeline programs is their GoodWheat brand, representing proprietary non-GM varieties of wheat with improved nutritional value, including one wheat that contains very high levels of amylose. This is a significant value-added trait as it conveys high dietary fiber content, a characteristic that has become increasingly important among both consumers and food companies. Arcadia’s GoodWheat product line currently consists of High Fiber Resistant Starch, Extended Shelf Life and Reduced Gluten wheat varieties.

In March 2018 the company announced that, through their advanced development technologies, they were able to achieve up to 94% amylose (corresponding to high levels of resistant starch) in their Resistant Starch wheat program, which is the highest levels available. Concurrently, Arcadia reported that their GoodWheat varieties deliver levels of dietary fiber that meet the U.S. Food and Drug Administration (FDA) threshold for claiming a “Good Source” of fiber or “High in Fiber” on consumer packaging. GoodWheat’s addressable U.S. market is estimated to be as much as $9.7B.

A collaboration between Arcadia, Arista Cereal Technologies and Bay State Milling, signed in late-August, is a key milestone towards commercializing their high fiber resistant starch wheat in North America, Europe and portions of Asia (the agreement also eliminates what had been an ongoing patent dispute between Arcadia and Arista). Meanwhile, a collaboration with Ardent Mills, a leading North American flour-milling and ingredient company, is focused on furthering development of their Extended Shelf Life program. The company also has other wheat-related projects ongoing, including a strategic collaboration (entered in August 2017) with Corteva Agriscience (CTVA), the recently spun-off agricultural unit of DowDuPont (DWDP), which is leveraging each companies’ technologies for the development and commercialization of “a breakthrough improved wheat quality trait” in North America.

Meanwhile, Verdecca LLC, a joint-venture between Arcadia and Bioceres, a major Argentinian crop and seed trait agri-bio company, is focused on the development of (GM) drought tolerant soybeans, the annual commercial market for which is estimated to be worth ~$25B. Brazilian and USDA regulatory approval of their HB4 drought tolerant soybeans, critical commercialization-related gating factors, were achieved in May and August 2019 (which follows FDA approval, received in August 2017), respectively. The HB4 trait now has regulatory approvals covering more than 80% of the global soybean market. Assuming successfully gaining import approval from China (by far the largest importer of soybeans), Arcadia anticipates the initial launch of their HB4 soybeans (grown in Argentina) happening in early 2020.

Arcadia Specialty Genomics (ASG) is one of the company’s most recent ventures. Formed in February 2019 and seeking to leverage the burgeoning U.S. interest in hemp-based products, ASG is a new business unit focused on the development and commercialization of genetic improvements related to the plants content, quality, climate resiliency and yield. ASG’s development strategy, which heeds U.S. state and federal laws and regulations, will initially focus on hemp (i.e. a non-psychoactive strain of the cannabis plant) and hemp-derived products. Arcadia commenced its initial hemp-related research program earlier this year through an Industrial Hemp Pilot Program in Hawaii and in August announced the formation of Archipelago Ventures, a joint-venture with Legacy Ventures Hawaii, to grow, extract and sell superior sun-grown hemp.

Leveraging ASG’s genetic expertise and licensed Hawaiian cultivation facility and Legacy’s proven extraction and sales capabilities, Archipelago Ventures represents a complete seed-to-sale supply chain for hemp-derived cannabidiol (CBD) products. In addition, Archipelago will have access to Legacy’s equity partner, Vapen CBD, a division of publicly traded Vapen MJ Ventures (OTC: VAPNF), which will build and operate Archipelago’s Hawaiian hemp extraction facilities. With their first hemp harvest completed and expectations that Archipelago’s extraction facilities are operational in the coming months, Arcadia anticipates that CBD oil sales could commence by current year-end (contingent on regulatory authorization) and ramp quickly thereafter.

Arcadia looks to exploit accelerating demand in rapidly growing markets…
The markets for Arcadia’s products are expanding as the company looks to leverage the growing demand for healthier, non-GM foods and the rapidly burgeoning interest in CBD which has been spurred, in part, by recent passage of the U.S. ‘Farm Bill’ As the average American’s daily diet currently includes approximately 500 calories worth of wheat products (equal to ~25% of the FDA’s total recommended caloric intake) and consumers are placing evermore importance on ‘gluten-free’ and fiber-rich foods, the market for GoodWheat is large and rapidly expanding. And in addition to consumer preferences, non-GM foods have other inherent advantages over their genetically modified counterparts, including less costly and time-consuming regulatory oversight in the U.S. and access to markets where GMO foods have been banned, such as Europe and Asia.

Interest in and demand for CBD has exploded since passage of the U.S. Agriculture Improvement Act of 2018 (i.e. the ‘Farm Bill’), which went into effect on January 1, 2019 and completely removed hemp from regulation under the Controlled Substance Act. Research on and use of CBD for a variety of health-related applications has blossomed and facilitated demand that industry-watchers estimate will generate revenue of up to $22B annually by the year 2022. Consumer spending on CBD products, including edibles and vapes products, and increasing use of it in medical applications are expected to be the main drivers of global demand, approximately 50% of which is from the U.S.

Arcadia’s yield and stress-related pipeline (most notably their HB4 drought tolerant soybeans) also target rapidly emerging markets. While crop trait development has historically focused on herbicidal and insecticidal traits, abiotic factors, such as drought and soil salinity, have proven to be much more problematic to crops. The relative dearth of competing drought tolerant soybean traits means this is a market for the taking.

We have initiated coverage of RKDA with a $12/share price target.

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