We are initiating Redpoint Bio (RPBC) with an Outperform rating and $0.50 price target. Despite the low stock price, we believe that Redpoint is poised for a major breakout based on several key drivers in 2010. From our point of view, there are three near-term shots on goal, one of which could result in sizable upfront payments to Redpoint.

An All-Natural Sweetener

The first is the licensing of RP44, which Redpoint has disclosed in January 2010 to be rebaudioside C (Reb-C), a component of the Stevia plant. Redpoint has spent the last eight months securing the intellectual property around RP44, an all-natural sweetness enhancer that has the potential to be a game-changer for sweetening carbonated or non-carbonated beverages.

Until recently, Reb-C has been essentially ignored by the end-user consumer product companies such as Coca-Cola (KO) and PepsiCo (PEP). All the focus has been on use of another component of the Stevia leaf, rebaudioside A (Reb-A), as a zero-calorie sweetener replacement for sugar or high fructose corn syrup.

Stevia (Reb-A), a product that has been used around the world for centuries, received U.S. “generally accepted as safe” (GRAS) clearance in December 2006, and is now one of the fastest growing alternative sweetener products in the market, thanks to its all-natural profile. This has allowed consumer product companies like Coca-Cola and PepsiCo to market products such as Truvia and PureVia with a significant advantage over artificial sweeteners such as aspartame, saccharin or sucralose.

Red-A is an estimated 300-400x sweeter than table sugar (sucrose) and has quickly been finding its way into carbonated beverages and sports drinks over the past few years. However, we believe Redpoint is about to change the perception on how to sweeten these products with the introduction of RP44 as a sweetness enhancer.

Studies have shown that the addition of small levels of RP44 (Reb-C) amplify the existing sweet taste of caloric sweeteners such as sugar or high fructose corn syrup, enabling beverage manufacturers to reduced amounts of caloric sweeteners by between 25% to 50%, while still retaining the “clean sweet taste” associated with a fully sugared product. The resulting product can then be marketed as all natural, with the same great taste, but up to 50% less calories. It is a significant opportunity for flavor enhancement and consumer product companies that currently spend in excess of $50 billion on sugar and high fructose corn syrup each year.

…Three Shots On Goal…

Redpoint Bio has essentially two avenues for pursuing a licensing deal with RP44. The first is with end-user consumer product companies, for example such as Coca-Cola or PepsiCo, and the second is with flavor and ingredients companies, for example such as Givaudan, IFF or Firmenich. There are obviously dozens of additional potential licensees, but either way management chooses to proceed, the value proposition for Reb-C is extremely attractive down the entire product chain.

1. Stevia manufacturers are interested in Reb-C because it allows them to produce a second product from the Stevia leaf besides Reb-A

2. Flavor and ingredient companies are interested in offering the consumer product companies an all-natural solution for reducing sugar costs and expanding their product lines

3. Consumer product companies are interested in lower costs, potentially avoiding government imposed sugar taxes on their core products, and expanding their product lines without alienating customers

4. Consumers are interested in lowering their sugar intake through an all-natural — not artificial — solution without sacrificing safety or taste

We estimate GRAS approvability of RP44 could come late 2011 or early 2012. Given the sizable market opportunity and the ability for management to strike several meaningful deals over the next several quarters, we think RP44 has the potential to create significant value for shareholders in the near future.

The second potential opportunity for Redpoint Bio is to leverage its Microtiter Operant Gustometer (MOG) novel and proprietary technology platform used to discover RP44. The technology implies sourcing natural compounds and then screening these compounds using in-house proprietary, computer controlled operant animal model system.

The Stevia leaf has been used as an all-natural sweetener around the world for hundreds of years. Reb-C was dismissed by consumer product companies as a relatively useless compound within the leaf until Redpoint’s discovery of its sweetness enhancing effects. Redpoint potentially has discovered a blockbuster product in RP44 right in the midst of the Stevia revolution using its MOG technology. Management has the potential to leverage its discovery of RP44 into signing new discovery collaborations in 2010 or 2011 for the discovery of additional all natural sweeteners or sweetness enhancers.

The third opportunity for Redpoint Bio stems from the company’s work in TRPm5 modulators and the discovery of incretin and glucose-dependent secretogogues. TRPm5 is an ion channel that is involved in amplification of the G protein-coupled receptor (GPCR)-linked taste signals. The signaling cascade downstream of GPCR activation provides several targets for discovery of modulators of the sweet, savory and bitter taste sensations.

This work could potentially offer a new exciting therapeutic option for the treatment of type 2 diabetes and obesity. Given the obvious validation of this pathway by blockbuster drugs such as Byetta and Januvia, Redpoint has received significant interest from pharmaceutical partners looking to collaborate through an early-stage discovery program on TRPm5. Redpoint is currently in discussions with these potential collaborators for its incretin secretogogue program, and we are anticipating a deal in 2010 or 2011.

…A Deal Must Get Done…

We estimate Redpoint should have exited 2009 with roughly $5.5 million in cash on hand. This is enough to fund operations into the second half of 2010. Therefore, a deal must get done on one of the three above potential opportunities in the second quarter 2010.

The opportunity with RP44 represents biggest potential upside to shareholders at this point, and given the recent filing to protect the intellectual property and the proximity to the Stevia World Americas conference — an event we attended on February 25, 2010, in Atlanta, GA — we believe now is the optimal time to strike while the iron is hot around Reb-C. However, a partnership on either the MOG technology platform or Redpoint’s work on the TRPm5 pathway could also come into play at any time. 

At the current price of $0.11 per share, Redpoint stands with a market capitalization of only $9 million. We believe this is significantly undervalued. Perhaps investors are spooked by past failures, or the low cash position. However, we think there is meaningful opportunity for upside in 2010.

Redpoint is trading like a call option with three potential ways to make money. RP44 has the potential to be a very significant product for someone in the not-too-distant future. We expect Redpoint to secure a licensing partner shortly for RP44, as well as explore opportunities with MOG and TRPm5.

At today’s price, the market is pricing-in no potential for any of these programs. We think this is overly pessimistic.
 
For additional information, download our full 18-page research report on Redpoint on Zacks.com, or contact your Zacks institutional sales representative for a copy of the report.

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