Freeze drying technology has been the industry standard in both the food and pharmaceutical industry for decades. It has increased the shelf life of numerous products and allowed many that previously required refrigeration to be stored at room temperature. However, the process has many drawbacks, including high costs and slow processing.
Interest has grown in developing improved dehydrating processes. EnWave has done this by bringing to market its Radiant Energy Vacuum (REV) technology.
EnWave licensed the original REV technology from the University of British Columbia (UBC) in 1996, developing it to commercial scale in 2008. The idea behind REV is pairing of microwave energy under a vacuum to quickly dehydrate materials. Many researchers have attempted to develop such a machine, but so far, EnWave appears to have the lead. It recently consolidated its lead with the acquisition of intellectual property in the microwave assisted dehydration field from iNAP GmbH.
REV technology allows faster dehydration using less energy with a smaller machine- the company claims up to 80% reduction in processing costs. Food has been shown to retain better color, texture, and taste, while live materials and nutrients maintained similar post-dehydration recovery compared to freeze drying. The company’s goal is to replace freeze-drying with REV as the industry standard- quite ambitious.
A well-defined development plan has been put in place for the REV technology. Each market segment is targeted with an individually tailored design. There is nutraREV for drying foods, powderREV for dehydrating enzymes and probiotics, and bioREV/freezeREV for delicate pharmaceutical products. EnWave seeks to position its technology as a major player in the food and pharmaceutical dehydration industry by putting its machines in the hands of influential early-adopters.
In a two-tiered approach, it is cultivating large “Tier 1” multinational companies to co-develop novel applications for REV which will be exclusively licensed to the customer. These top companies give EnWave both credibility and assistance in gaining traction on the world market. Tier 2 customers are comprised of smaller, regional players who are in the market to improve their offerings or lower their costs. These may be comprised of some of the more entrepreneurial companies designing new product concepts.
NutraREV is the company’s most advanced product. After the first commercial machine was built in 2008, CAL-SAN Enterprises, a major blueberry producer, licensed the first machine in 2009, proving the viability of REV technology. Additional research agreements have been signed with an arm of Nestle SA and Grupo Bimbo this year around the NutraREV technology. Both are confidential, with terms undisclosed.
EnWave began a collaboration with Danisco in 2008 with a research agreement focused around the powderREV platform. By 2010, the company had successfully delivered kilogram batches of dried probiotics (beneficial bacteria) with powderREV. A pilot machine will be tested in 2011 and a final product is expected to be delivered in 2012.
Recently, EnWave entered an agreement to begin testing their REV technology with Grimmway farms, the worlds largest supplier of Organic carrots and vegetables and a major player in the grocery, soup and beverage industries.
BioREV and freezeREV are designed for drying live or active pharmaceutical ingredients, bioREV for items that cannot be frozen and freezeREV for quick freeze and dehydration. Both technologies are still in pilot testing and years from commercialization. A biological materials manufacturer is testing some single vial versions while new multi-vial prototypes are in production. FDA approval will also be required for use in therapeutic applications such as vaccines and antibody drugs.
While the company estimates sales of freeze-drying equipment to be in the range of $2 billion, it does not intend to sell its machines outright; instead, they will be offered through licensing agreements. Each license will restrict the device to a specific function, with royalty rates in the range of 2-10% of net revenues generated by each machine.
Based on revenues, the new addressable market for EnWave is worth some $133 billion dollars. Of this, $25 billion goes to foods, $22 billion for drinks, and $10 billion for probiotics. In addition, $31 billion are for vaccines and antibodies, and $36 billion are for antibiotics and other pharmaceuticals. A hypothetical revenue model of 5% penetration and 5% royalty rate on sales excluding the pharmaceutical market would generate $175 million in sales.
This is a savvy business model. A 5% penetration and 5% royalty rate applied to the entire $133 billion market would yield sales of over $300 million. The company would need to achieve over 15% penetration in the $2 billion freeze-drying equipment market with a typical sales model to achieve similar numbers. And not only are the sales higher, they are recurring; each additional license adds to the growing royalty stream.
Their royalty model provides for a high earnings margin compared to the typical equipment sales and manufacturing model. For example, such a business with $175 million in revenue would generate less than $20 million in pretax profits. EnWave has the potential to make $120 million in profit on the same amount of sales even while paying 20% royalties to UBC, their licensor; the typical manufacturer would need sales of close to $1 billion to generate the same level of profits. Also, as noted earlier, the $175 million sales number excludes the pharmaceutical market.
Everything included, assuming $300 million in revenue, pretax profit would exceed $200 million.
A royalty based model mirrors the technology industry’s trend toward subscriptions. In both cases, the buyer benefits by having lower upfront costs, and pay only for the amount of resources needed.
EnWave is now working with some 30 companies to develop applications for its REV technology and expects to sign more. These are only in the early stages and are not an accurate gauge of future sales but indicates significant interest.
The company has now validated interest through initial testing and trials from four major multinationals evaluating the REV technology for different applications. They have four different channels to build on. These channels are expected to grow as the number of Tier one collaborations increase and transition from testing programs into agreements. The key risk moving forward is demonstrating the reliability of the technology at scalable levels required by our partners with the cost and/or product benefits justifying a royalty mode.
The company is fundamentally sound; it has $5.1 million of cash with no debt, along with an another $1.8 million in warrants expected to convert in January- plenty of money at its current burn rate of $190,000/month. Its current market cap of CDN$105 million does not seem outrageous for a company with such considerable potential. The only problem is substantial sales will not be forthcoming as it will take some time to become the new industry standard.