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RESEARCH NOTE | JUPW: An Exciting Investment Opportunity Emerges

08/30/2022

By Brad Sorensen, CFA

NASDAQ:JUPW

Jupiter Wellness (NASDAQ:JUPW) is very likely the strangest company that I have researched, but also presents a potential opportunity to get in the stock of a company that’s on the verge of exploding. Jupiter Wellness translates innovative health science, using extensive research, into potentially revolutionary products aimed at skin, hair, sexual wellness, and general health. The development pipeline includes products to address psoriasis, eczema, burns, herpes, cold sores, and skin cancer. Jupiter Wellness generates revenue from a growing line of over-the-counter skin care products, wellness brands sold through retail channels, and the licensing of intellectual property and proprietary formulations and that revenue stream appears to us to be on the verge of a swift acceleration.

The History

To understand why JUPW is trading at such a low price, and why we believe the market is missing the story, we have to go back in history. Investors appear to be, justifiably, reluctant to invest in a company that has had a somewhat confusing and scattered past. The company began operations with a goal of finding ways to use CBD (cannabidiol) in health solutions for a variety of conditions but soon realized that the CBD market was getting saturated, and they would have to expand beyond that somewhat narrow arena. So, as you’ll see, although the company is no longer a “CBD company” it can use the knowledge gained from the study of CBD to augment or improve certain products.

For example, the endocannabinoid system, which is a body system affected by CBD, plays a pivotal role in maintaining healthy skin through modulating pain sensation, cell proliferation and inflammation. According to company management, the company’s strategy for the treatment of skin indications is to focus on the use of CBD-containing topical formulations and to explore potential combinations of CBD and other agents that may augment and act in concert with CBD. The company is using this strategy by conducting controlled clinical trials to ultimately gain FDA approval for specific indications as discussed below.

But getting back to the history, here’s where it gets a bit strange, the company purchased SRM Entertainment in 2020—not exactly in the wheelhouse of health products. SRM Entertainment is a leading design and manufacturing company of toys, plush and gifts. It holds the license to sell to the largest entertainment and theme parks across the world, to produce exclusive high-quality products. However, as we’ll see, even this somewhat off-the-beaten path purchase can fit into the company’s new, focused direction.

The last piece of history to understand, and this is what seems to have propelled management to focus in on the health products, is the purchase of Applied Biology, Inc. a leading biotechnology company specializing in hair and skin science, for $225,000 and up to two million shares of Jupiter Wellness stock deliverable upon completion of certain milestones. Applied Biology is a developer of breakthrough drugs and medical devices for the treatment of skin and hair disorders. According to management, before the acquisition, Jupiter Wellness and Applied Biology had well-established and ongoing collaborations including Jupiter Wellness’s exclusive license for Applied Biology’s Photocil psoriasis treatment in the United States, as well as Applied Biology serving as the clinical research organization for several of Jupiter Wellness’s proprietary cannabidiol dermatological treatment candidates.

The Present

So where has all this historical action left Jupiter Wellness? In pretty good shape in our opinion. After speaking with management, we are convinced that the company has a focus that fits in well with their history and has a great pipeline of products ready to hit the market. But before we get to those, the company already has a product line that impresses us—NoStingz, which is a jellyfish protective sunscreen—and if you’ve ever been stung by a jellyfish, you know how valuable that can be, and the company just announced that it will be showcasing the NoStingz products at the upcoming Surf Expo in Orlando, Florida, which is the largest and longest-running watersports and beach lifestyle trade show in the world. Reef friendly is becoming more important as an increasing number of locations, such as Hawaii, Aruba, Bonaire and Key West have all banned sunscreens containing oxybenzone and octinoxate. And regardless of whether a beach location has banned it, a report from Consumer Reports from August 2022 noted that several studies have shown that two common ultraviolet filters—oxybenzone and octinoxate—may have the most detrimental effects. Specifically, the report cites a 2016 study published in the journal Archives of Environmental Contamination and Toxicology. The study found that baby coral exposed to oxybenzone exhibited signs of distress, including coral bleaching, a condition that leaves coral vulnerable to infection and prevents it from getting the nutrients it needs to survive. Coral also had DNA damage and abnormalities in its growth and skeleton. Having a sunscreen that works, without the potential damage to the environment is a market that appears to us to be expanding. Additionally, along this line, the company has a legacy sunscreen called Canisun. Being a Florida company, and this analyst being a resident of Florida, we are thrilled to see this reef friendly sunscreen that uses hemp, but contains 0% THC, in the market and look forward to the company expanding distribution. Here’s also where the SRM Entertainment purchase can make sense—in the distribution of NoStingz products. SRM has relationships with and supplies the amusement park industry with exclusive products that are often only available to consumers inside the relevant amusement park, entertainment venues and theme hotels in Orlando Florida, Beijing China, Japan and other places throughout the worldwide theme park industry. Company management has noted the potential to put theme-park-friendly labels on the sunscreen, such as with popular characters, for example, the Smurfs (little blue guys), which the company just acquired the rights to use. These products were the main factors in the company’s 2Q 2022 revenue jumping to $3.0 million from $600,000 in the year ago period—a trend that we believe is just beginning.

The Future

This brings us to the future, and we all know that stocks trade on what is anticipated to happen in the future—and that’s where JUPW really starts to excite us. The pipeline of potential products the company has is robust and growing. First, the SRM Entertainment division has the possibility to benefit the company going forward in two ways. Jupiter could keep the division, having cleaned up much of mess that was apparently in SRM before the acquisition, and use it to expand their NoStingz distribution as well as being provided with a steady revenue stream, or they could choose to spin it off as its own entity and use the potential proceeds to further solidify their balance sheet, a process that is already well along the path.

But back to the pipeline. At the heart of the company’s pipeline, and here’s where the history makes sense again, is the realization through multiple studies that addition of cannabidiol to potential treatments can enhance the effectiveness, while minimizing the side effects of those products. For example, in February 2021, the company announced the results of its Cannabidiol-Aspartame combination treatment, known as JW-100, clinical trial which showed it reduces the ISGA (Investigator’s Static Global Assessment) score in Eczema patients. 14 days after application, the average reduction in the ISGA score was calculated for each group. Additionally, the proportion of subjects achieving ISGA score 0 (clear) or 1 (almost clear) with at least 2 grade improvement from baseline was recorded for each arm of the study. 50% of subjects in the JW-100 arm achieved ISGA clear or almost clear (1 or 2) with at least a 2-grade improvement from baseline after treatment versus 20% and 15% in the CANNABIDIOL-only and placebo arms, respectively. The percentage of subjects achieving clear or almost clear with at least a 2-grade improvement from baseline was found to be statistically significant. JW-100, a novel topical formulation containing cannabidiol and aspartame, was shown to significantly reduce ISGA score in atopic dermatitis patients after two weeks of use. The combination of cannabidiol and aspartame was more effective at reducing ISGA scores than cannabidiol alone. A Phase 3 study, a head-to-head comparison with marketed product Eucrisa, is in progress. An OTC system for the treatment of Eczema based on this approach is planned for launch in 2023.

JW-100 is exciting because it has the potential to provide relief to millions, and because the market for such a product has proven to be quite large. As you may have seen on TV, Dupixent from Sanofi Biotechnology is one of the most popular eczema treatments out there, with over $4 billion in sales in 2020 (data from Dupixent). According to data from Dupixent, 36% of adults at 52 weeks of taking the treatment saw clear or almost clear skin--indicating that there is a lot of room for improvement by a competing product such as JW-100. Additionally, another popular product, eucrisa—mentioned above—has only 32% of patients with clear or almost clear skin at 28 days acc Eucrisa, while both potential competitors warn of potential side effects such as: burning, stinging, allergic reactions and trouble breathing—none of which have been present with JW-100.

Another product with intriguing potential is a treatment targeting women’s sexual health. To our knowledge, there are no FDA-approved products presently available addressing women’s sexual satisfaction—but Jupiter’s RJ-101 treatment has shown great potential in addressing that need. Originally developed as a treatment to help increase nipple sensitivity in women who have undergone surgery due to breast cancer, other impacts were discovered along with the increase in sensitivity, including lubrication and increased orgasmic response. Studies are currently being done to quantify these effects, but the company believes that the product will launch as an OTC topical treatment sometime in 2023. Needless to say, we believe that the demand for a product such as this, should the indications be quantified and verified, would be substantial and provide another great market opportunity for Jupiter.

Finally, moving to the other gender largely, although it can potentially benefit both men and women, the company is working on a topical treatment that is designed to improve the efficacy of minoxidil-which is a hair treatment meant to promote hair growth. Company studies have shown that the Jupiter product increases the enzymes needed for minoxidil to work, known as sulfotransferase enzymes, by up to seven times over a two-week period. At this point, company management notes that they are looking for licensing opportunities for the treatment as have already signed one deal with a Japanese company, the largest seller of minoxidil products in Japan, netting Jupiter a $300,000 upfront payment and 3% royalties, as well as an India-based company that came with a $50,000 up front payment and 10% royalty payments. Again, the potential we see for this product appears to be enormous, with the announced deals just the tip of the potential iceberg.

The Investment

We believe the description of the activity undertaken by Jupiter Wellness over the past year indicates that company management is focused on its goal of promoting health and wellness and has an impressive pipeline that is likely to grow over the coming years. As mentioned above, we’ve seen sales reported by the company rise to $3.0 million in 2Q2022, up 500% from the $600,000 in revenue seen in the same period a year ago, indicating the focus of management is paying off—and we believe this is just the beginning of a substantial revenue ramp up. Also giving us confidence is the fact that, as of June 30, 2022, the company had approximately $5 million on the balance sheet—allowing them the liquidity needed to bring the company’s pipeline products to market. And potential shareholders of JUPW should be heartened by the $5 million share buyback program currently being undertaken, further demonstrating the confidence management has in their plan. We also appreciate the diligence Jupiter seems to show toward its product offering, most of which don’t need FDA approval. The company notes that products are tested each time they are manufactured and that DCR Labs, which manufactures Jupiter products, is compliant with the FDA’s Current Good Manufacturing Practice.

Although a somewhat complicated story, we believe it’s clear that the JUPW story is one that is improving and provides an opportunity for investors to get in on an exciting growth company at the very beginning of a ramp up in operations and revenues. With a renewed focus, an existing solid revenue stream through SRM Entertainment and the NoStingz sunscreen line, an exciting pipeline of products meant to address markets with huge potential, and a balance sheet that has been cleaned up and is improving, we believe JUPW is worth a long look by investors who are looking for growth and have a higher risk tolerance.

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