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SNES: A 21st century approach to curb rat infestation!

10/03/2019

NASDAQ:SNES

Background

SenesTech Inc., head-quartered in Flagstaff, AZ was founded in 2004. The firm has developed a solution for managing pests through fertility control. Their current marketed product, ContraPest®, a liquid bait, limits fertility in male and female rats. ContraPest is the first and only non-lethal, fertility control product approved by the Environmental Protection Agency (EPA) for the management of rodent populations. The company is also developing a pipeline of fertility control and animal health products, including feral animal fertility control, non-surgical spay and neutering, boar taint, and animal cancer treatment.

Rats!

Rats live in rural areas (agricultural land) and cities (buildings). They tend to be active at night and have multiple nest sites in humid areas close to food and water. The life expectancy for a rat is roughly two to three years. Rats sexually mature at three months of age. Female rats have approximately five litters per year and each litter has six to ten babies. Norway and roof rats are the most common types found in the U.S.

Rapid breeding seems to be the root cause of rodent infestations. Rat population is increasing at an alarming rate and if left unattended, will cause significant damage to property and equipment. Rats gnaw at walls, doors and wires which could result in fires. Additionally, rats are a public health concern, especially in the hospital and food industry, as they are linked to over 100 transmittable diseases communicated through bites, contamination of food or fleas carried by rats.

Traditional approaches for eradication and their drawbacks

(Source: https://senestech.com/contrapest/)

Usually snap traps, glue traps, rodenticides, ultrasonic repellers, humane and electronic traps are used to deter rat population. Employing lethal means to kill rats addresses the issue temporarily as rats are smart and demonstrate “bait shyness”. Rats may also develop a resistance to certain lethal rodenticides. Consequently, rat population rebounds and the sightings and damages are on the upswing. Poisoning a rat results in secondary poisoning of other predators that consume the rat. Sometimes the poison may be nonspecific, thereby killing other animals besides rodents.

SenesTech’s solution: ContraPest

(Source: https://senestech.com/contrapest/)

ContraPest is a liquid bait with high fat content and sweet taste. It contains the active ingredients 4-vinylcyclohexene diepoxide (VCD – chemical-based) and triptolide (plant-based). The chemical VCD has shown to cause destruction of ovarian follicles in rats. Triptolide, a major bioactive component in the traditional Chinese medicinal herb, Tripterygium wilfordii, causes infertility in male rats. Rats have sweet receptors and they require 10% of their body weight in water per day. Therefore, they are repeatedly attracted towards ContraPest. When consumed, ContraPest targets reproduction, inducing egg loss in female rats and impairing sperm development in males, beginning with the first breeding cycle following consumption.

ContraPest is designed using SenesTech’s proprietary gravity feeding system that optimizes consumption and provides a targeted delivery. ContraPest is currently dispensed from a tank and tray, housed inside a tamper resistant bait station. It can be used as an anchor for an integrated pest management program, or as a stand-alone solution. It is designed, formulated and dispensed to be low hazard for handlers and non-targeted species such as wildlife, livestock and pets. Since ContraPest does not kill the rat there is no accumulation of carcassas. In studies, ContraPest was preferentially chosen by rats even in the presence of abundant water sources and plentiful food options. Consumption of ContraPest does not cause illness in rats. Consequently, it does not change behavior or result in bait shyness.

Bait stations containing SenesTech control bait are distributed on the site to determine or confirm foraging locations and to achieve rat acceptance of the bait station. Once rat pathways are located, the control bait is replaced with ContraPest, which the rats eat, and reproduction ceases. As the rat population is reduced fewer bait boxes are needed thereby reducing the cost of continuing treatment.

Target markets for ContraPest include specific customers such as zoos, animal sanctuaries and island ecologies as well as stand-alone option, to PMPs to bring and keep rat populations down. ContraPest is currently being used in the following markets

‣ Animal markets

◦ Zoos and Conservancies

◦ Animal Sanctuaries & Rescues

◦ Animal Research

‣ Food markets

◦ Food processing

◦ Food storage

◦ Agriculture

‣ Commercial markets

◦ National retail

◦ Municipalities

◦ Hospitality/Theme parks

◦ Hospitals/universities

Efficacy Studies

ContraPest’s efficacy has been demonstrated in numerous internal and third-party studies1. The field and laboratory studies indicated that the high fat content and sweet taste leads to repeat consumption even among sought after food sources including animal feed, trash, and other options.

ContraPest deployment

ContraPest has been tested in New York City (80% reduction in rat population), San Francisco, including Recology's Recycle Central at Pier 96, Hawaii, a number of animal shelters in Los Angeles (6 shelters and 65 ContraPest stations) as well as additional deployment in densely populated downtown LA locations. The zoos and sanctuaries, although a relatively small market, offers the best chance at near‐term revenue.

Washington D.C.

Washington D.C. requested for up to four-year supply of ContraPest for all eight wards of the city with at least 469 bait stations for initial deployment in four wards. In May 2019, Washington D.C. spent about $300,000 for ContraPest to eradicate rat population in the city.

California

SenesTech has a number of initiatives in California. The California Certified Organic Farmers has approved the use of ContraPest in an organic farm. California provides about 90% of the organic produce grown in the U.S. Lundberg Farms is one of the largest growers of organic rice and quinoa in the country and is the process of harvesting 100 million pounds of rice and 50 million pounds of quinoa. Rats love cereal (rice) and pseudo cereal (quinoa) grains. Lundberg Farms will use ContraPest for rodent control. This is one of the most important examples for SenesTech since it has a real, and measurable, impact on profits.

Rice is the second largest crop in the world with over 750 million metric tons of production. Both the EPA and the California Dept. of Pesticide Regulation have approved the experimental use of ContraPest in a poultry farm (location not specified). SenesTech will use standard bait boxes and will test other deployment methods. If prior tests are duplicated the rat population could be reduced by over 40%. Results should be known the end of the 1Q20.

The Pestec Pet Solutions company has added ContraPest to its Integrated Pest Management (IPM) program for use in all locations serviced in San Francisco. It will be used at Pier 96 and other areas around San Francisco Bay.

Cats USA Pest Control, a leading Southern California pest control company will implement ContraPest into its current IPM programs at various locations. Cats USA covers 5 S. California counties. Los Angeles will deploy ContraPest in 6 animal shelters and is collaborating with Cats USA to use ContraPest in downtown areas where rat control is a priority.

On Sep. 26, 2019 SenesTech announced that Captain Vineyards, Moraga, CA, 94556 will add ContraPest to its IPM plan. The winery was the first winery in Contra Costa County to be green and to be owl friendly. It is important that the winery use pest controls that are non-toxic to owls and fits that requirement. ContraPest is also accepted for use on green/organic facilities.

Other potential applications

The company has conducted proof of concept studies with feral dogs on the Navajo Reservation in New Mexico with a grant from the USDA, and collected rabies and geographic data on stray dogs in the Tibetan refugee camps of Mainpat, India. They also completed a collaboration with Texas A&M University in June 2016 to test the potential of ContraPest product candidates to manage feral pigs. Studies have also been conducted for proof of concept in Australia with wallaby, rat, and mouse populations and in New Zealand with rats and brushtail possums. SenesTech has also conducted early trials with cats in collaboration with the University of Florida.

Legislation - Rodenticide Ban

California Assembly member Richard Bloom (D-Santa Monica), the Animal Legal Defense Fund, the Center for Biological Diversity, and Raptors Are the Solution (RATS) are sponsoring AB1788, the California Ecosystems Protection Act, which would ban the use of second-generation anticoagulant rodenticides (SGARs) throughout the state, except for agricultural use or by special permit. SGARs result in killing non-target wildlife including raptors, bobcats, foxes, and cougars that consume the poisoned rats. AB1788 also seeks to ban the use of first-generation anticoagulant rodenticides (FGARs). While AB1788 failed in becoming a law in 2019, it could still become one in 2020 as California has a two-year legislative session.

Market

The worldwide market for rodenticides was valued at $725 million in 2016 as per Grand View Research growing at a CAGR of about 3.5 %. The largest company in the industry is UPL Limited, Mumbai, India, a multinational agrochemical company with an estimated market share of less than 10%. Rodenticide sales in the U.S. have a 25% share of the global market, making it one of the largest. Anticoagulants occupy a significant share of more than 75% in the market.

ContraPest has been approved for use on Norway and roof rats in indoor, non-food areas, and outdoors within one foot of a man-made structure. ContraPest requires regulatory approval from each state as law and regulation requirements differ by state. SenesTech has received registration for ContraPest in all 50 states and the District of Columbia, 23 of which have approved the removal of the Restricted Use designation.

The target market segments for ContraPest include structural accounts (multi-family housing); national retailers; zoos and animal sanctuaries; food production and agriculture (e.g., meat packing facilities, dairy production plants, vegetable and fruit preparation facilities farms, storage facilities and protein production facilities (including cattle, sheep, pig and poultry facilities)); hospitality and theme parks (e.g., major restaurant chains and hotels) and municipalities (e.g., subways, transit systems and public housing agencies).

ContraPest is sold to pest management companies via Pest Management Professionals (PMPs), indirectly through distributor sales and a direct sales force to targeted customer segments. ContraPest is priced between $40 and $47 per 550 ml container. Smaller containers (400 ml) are also available.

Potential tailwinds…

‣ The potential passing of the Bill, AB1788, represents a potential accelerant for the company.

‣ SenesTech hopes to expand its platform technology to other mammals, including gophers, prairie dogs, wild pigs, feral cats and dogs, and wild horses that could pave way for partnerships.

‣ The company is also working towards enhancing their product to include an expanded set of bait station options, non-liquid formulations for special circumstances, and the addition of mice as a target species to the label.

Valuation

Based on our discounted cash flow valuation model, which goes out to year 2024, SenesTech is valued at approximately $1.35/share. We assume that major revenue gains will occur in 2021. Based on a near-term price-to-sales metric on comparable growth companies, we value SNES at 2x P/S. A favorable decision on the AB1788 Bill would represent a significant upside to our current valuation.

Risks

‣ Based on our current financial model, we do not believe SNES will generate positive net income in 2020 and expect that the company will need to raise additional operating capital.

‣ The company needs to gain traction in the market place against much bigger and better financed competitors.

‣ Developing relationships with government agencies take much longer to establish than those with commercial partners, but the market segment is so large that SenesTech cannot ignore it.

‣ The industry relies on licensed professionals that buy approved products through distributors. The company does not have control of its sales channels.

‣ All pesticides, including rodenticides, require state registration as well as EPA approval. Loss ofsuch approval would have a significant negative impact on SenesTech.

‣ The major supply of Triptolide from Thunder God Vine is in China and Taiwan. Loss of China as a source would cause a temporary dislocation of operations.

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1. J Zoo Wildl Med. 2017 Mar;48(1):80-90.

 
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