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MYOS: Initiation Report

04/03/2018
By Anita Dushyanth

NASDAQ:MYOS

Headquartered in Cedar Knolls, NJ, MYOS RENS Technology Inc. (NASDAQ:MYOS) is an emerging advanced nutrition and biotherapeutics company. Their business is focused on developing and commercializing nutritional supplements, functional foods and therapeutic products aimed at improving muscle health and function. Their flagship product, Fortetropin®, is a bioactive proteo-lipid complex that is developed from fertilized egg yolk using a proprietary process. MYOS received patent (U.S. Patent No. 8,815,320 B2) entitled “Process for Producing a Composition Containing Active Follistatin” to cover the proprietary manufacturing of Fortetropin in August 2014 from the USPTO. The patent is valid through early 2033.

The science behind Fortetropin...
Fortetropin is a bioactive proteo-lipid complex. It is isolated from fertilized egg yolk using a patented process that preserves the various proteins and other bioactive molecules and their bioactivity. A preclinical study of Fortetropin's mechanism of action demonstrated regulatory effects on three important molecular signaling pathways (Myostatin pathway, mTOR pathway and Ubiquitin pathway) that are responsible for healthy muscle growth.

MYOS’ product Fortetropin: In March 2017, the firm commenced sales of Fortetropin®-based products under the brand name Qurr (pronounced, “kyoor”) through their online website (www.qurr.com). Qurr products are available in two flavors (chocolate raspberry and vanilla coconut) and in the form of powders, puddings and shakes. Qurr products are positioned for three distinct consumer group demographics in an effort to capture a broader audience:
• “Qurr Well” supports healthy aging by increasing lean muscle
• “Qurr Toned” for promoting healthy muscle which can lead to a lean and toned body
• “Qurr Strong” for athletes hoping to reach their most ambitious training goals

Qurr products are sold directly to consumers from this site as well as via Amazon. Qurr products are advertised as low calorie, naturally soy-free and non-GMO, with a recommended daily dose of 6.6g of Fortetropin. Pricing starts at $130 per package (four weeks supply containing 28 individual packets) with additional savings for monthly subscriptions or larger quantities. Each packet has 10.4g of supplement powder that contains about 50 total calories and less than 4g of carbohydrates.

Management provided us with samples of the supplement powder. As a part of our research process, we analyzed a few physical characteristics. The texture of the powder is similar to that of breadcrumbs. Because it has a coarsely ground texture, it offers a nice crunchy taste when put directly in the mouth. There is no artificial color added. The sample powder definitely has the aroma of the flavor indicated on the label (vanilla coconut). The powder offers a convenient alternative of eating as is or blending with foods. The powder blends well with water, yoghurt as well as milk. The stevia and monk fruit extract give it a subtle sweet taste. The coconut milk adds a smooth flavor and the taste is not overpowering. Despite being a sweetening agent, the monk fruit sweetener contributes zero calories. There was no gastrointestinal side effect such as stomach discomfort after consumption.

Clinical Study: A study was conducted in 2014 to investigate the effects of Fortetropin on skeletal muscle growth and strength in resistance-trained individuals. The study also aimed to investigate the anabolic and catabolic signaling effects of Fortetropin. 37 resistance-trained male subjects of similar age and physique/musculature (i.e. lean muscle mass, body mass, fat mass, muscle thickness) were randomly assigned to receive one of two Fortetropin doses, 6.6g or 19.8g (given as MYO-X), or placebo. All the men followed the same training schedule for 12 weeks. Participants completed a training protocol for muscle hypertrophy on one day and strength-training exercises on another day for two days of each week. Each group performed the same exercises. All subjects were instructed not to consume eggs for the duration of the study. Participants’ strength was assessed using one repetition maximum (1RM) lift in leg and bench press exercises. Subjects completed two sets of warmup activities. Following warmup, subjects were instructed to attempt to repeat their 1RM load and allowed five attempts to do so. Anaerobic power was measured with the Monark Wingate cycle test.

Results: The participants who received Fortetropin® had more lean body mass, lost more fat tissue and gained more muscle mass than those that received placebo. In addition, concentration of myostatin decreased in the blood of the participants who had used Fortetropin®. There were no significant differences observed in results of the 6.6g (1 scoop/day) group versus the 19.8g (3 scoops/day) group. Bench press, leg press and Wingate power were used to measure strength and power. The results were significantly increased from baseline in all study groups. No study related adverse events were reported. The study also evaluated certain biomarkers including IFN-γ inflammatory cytokine, a pro-inflammatory protein that plays a critical role in inflammation and autoimmune diseases. Excess levels of inflammatory cytokines are associated with muscle-wasting diseases such as sarcopenia and cachexia. For subjects in the placebo group, no statistically significant changes in serum levels of IFN-γ were noted. However, subjects in both arms dosed with Fortetropin experienced statistically significant decreases (p < 0.05) in serum levels of the IFN-γ inflammatory cytokine. This study demonstrated that Fortetropin has a positive role in training-induced skeletal muscle adaptation.


To-date, the firm has not filed a Medwatch Form 3500A (reporting all serious adverse events) with the FDA. Fortetropin has been awarded BSCG Drug Free® certificate and granted regulatory approval by Health Canada in 2015 (NPN: 80061148).

Market Opportunity: In the last decade, sales of vitamins and nutritional supplements have surged. While there are a plethora of products promising muscle building, weight-loss and improved overall health, most supplements lack scientific evidence backing many of these claims. Discerning consumers seek scientific evidence that supports the statements made by the manufacturer when purchasing supplements . MYOS’ product proposes to fill this gap. Also, in many disease conditions, which leave the patient temporarily non-ambulatory, muscle-building supplements can play an important role in recovery. Nutritional supplements are gaining traction in the pet nutrition sector as well. It is in these spaces that MYOS intends to gain market share. MYOS’ current market focus is in the sports and nutrition sector.

Marketing Strategy: Fortetropin is manufactured by a single third-party manufacturer who is in full compliance with cGMP standards set by the FDA. Fortetropin is available as an over-the-counter (OTC) product. Fortetropin is a functional food sold through Qurr and Amazon sites.

In February 2014, the company signed an exclusive distribution agreement with Cenegenics for the sale of a proprietary formulation of Fortetropin to their network of age-management centers in the U.S. Cenegenics also promoted Fortetropin through their community of physicians which focused on treating a growing population of geriatric patients. The distribution agreement with Cenegenics expired in December 2016. However, in May 2017, the company received a purchase order from Cenegenics to deliver more products to them.

In addition to MYOS’ branded products, the company also plans to sell their proprietary compound as an ingredient in other branded supplements. Since MYOS is attempting to increase its offerings, we believe that the sale of Fortetropin as an ingredient in other products is a great strategy to maximize their reach with little incremental sales and marketing spend.

Continuing their brand-awareness strategy, the firm was a sponsor at the IDEA World Convention in Las Vegas in July 2017. Soon after, they announced a partnership with NFL Alumni under its commercial marketing arm, Pro Football Legends, in support of the NFL Alumni NY/NJ Chapter's Optimal Bowl and Wellness Challenge. MYOS, which provided the participants (former NFL players and military veterans) with Qurr products during their workouts, noted that they gained valuable product exposure and alliances for future business opportunities.

Additionally, the company showcased Fortetropin and the Qurr Line of Muscle Health Products at the 2018 Arnold Sports Festival in March. The "Arnold", which is billed as the world's largest multi-sport fitness gathering, is co-promoted by legendary bodybuilder and film star Arnold Schwarzenegger. There were more than 200,000 attendees at this year’s event, which featured 20,000 athletes from 80 nations and over 1,000 booths of fitness equipment, apparel and nutrition. MYOS had a strong presence there, offering samples and special EXPO discounted prices for Qurr products.

In continuing their efforts towards building brand awareness through brand partnerships, MYOS inked a sponsorship deal with IMG College, a division of IMG, in November of last year (2017). IMG College represents more than 200 colleges across multimedia rights, licensing and sponsorships. IMG is a global company with deep roots in professional sports. It also owns the Ultimate Fighting Championship (UFC). MYOS commenced marketing its products to collegiate athletic programs. IMG serves as a distribution channel for MYOS’ products while helping build brand visibility. We believe the potential to leverage IMG’s wide network is substantial.

Valuation
Differentiated product: While some sports and nutrition supplements have a strong scientific basis, many do not. Clinical studies have shown that Fortetropin increases lean muscle mass, improves age-related muscle-mass reduction, triglycerides and fat mass. While the studies reported improved performance in rats, which was insightful, the research conducted on athletes is much more compelling. Further, Fortetropin has been certified by BSCG, a gold standard in dietary supplement and ingredient certification. The current long-term patent for Fortetropin is set to expire beginning 2033.

The company expects to utilize trade shows and social media in the U.S. to promote Fortetropin and maximize the market opportunity for their product. MYOS is anticipating Cenegenics’ network of clinicians as well as their brand ambassadors who are athletic trainers to integrate Fortetropin into their treatment/promotion, which can help augment sales. Eventually we think Fortetropin could find its way into in specialty retailers including GNC and Vitamin Shoppe. In order to drive initial uptake, MYOS plans to collaborate with IMG College, a third party sales representative for the college sports, to introduce Fortetropin to certain Division I schools, professional sports teams, cross-fit and other endurance-format athletes. The demographic of college sports fan base is diverse, young (18-24 years of age) and affluent. This niche market provides a key consumer audience for MYOS.

DCF MODEL: We have built a financial model using a discounted cash flow (DCF) analysis to derive a fair value for MYOS RENS. The firm’s primary revenue stream comes from selling products containing Fortetropin from their recently launched Qurr site. Sales of MYO-X in
2013 was more than $3 million. It was sold through specialty retail stores such as Vitamin Shoppe and GNC. We believe, getting the product on the retail shelves could boost revenue for MYOS as it had in the past. Revenue generated from expansion into the age-management market was significantly higher in 2014 as compared to 2013 as a result of MYOS’ distribution agreement with Cenegenics. Sales to Cenegenics accounted for ~60% of revenues in 2014. We think this pattern could repeat itself as MYOS received a purchase order from Cenegenics to deliver more products to them in 2017-2018. We think this also bodes well for MYOS’ growth prospects beyond 2018 and currently model 2019 revenue of approximately $3 million.

Gross margin for Q4 2017 came in close to 60%. Widening of gross margin to 70% or more could happen by 2020 as bulk and volume purchases increase. If MYOS commences selling Fortetropin as an ingredient, that could provide incremental economies of scale and further benefit gross margins.

Since the disease-specific applications are yet to be investigated, we do not include them in our valuation. At this time, we have also excluded the potential revenue from the pet nutrition segment as the product is still under development. Depending on progress, this could result in upside to our current forecasts.

We anticipate an aggressive sales strategy focused on building initial awareness, educating target audiences on the clinically-differentiated benefits of Fortetropin, eliciting initial purchase and driving post-adoption repeat sales. Correspondingly, we expect expenses associated with the anticipated expansion of MYOS’ sales team and marketing strategyto increase incrementally. We are guiding Op-Ex to have an average run rate of about $3 million over the next couple of years. We think that the firm could achieve positive net income as soon as 2023. The prime take-away from conversations with Mr. Mannello (CEO) was his plan to grow the business in two years’ time to create meaningful shareholder value.

We incorporate a discount rate of 15% and 2% terminal growth rate. We value MYOS at approximately $3.50/share. This valuation provides more than 150% upside to the current trading price of $1.25/share.

Risks: MYOS’ business model focuses on marketing their proprietary product Fortetropin. As this is a new and unproven entrant into the market, there is risk that adoption could be slower than anticipated. As the protein supplement market is highly fragmented with multiple players, market entry is easy, however creating product differentiation and brand awareness can be challenging and expensive, which could lead to higher than expected marketing expenses.

READ THE FULL RESEARCH REPORT HERE.

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