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Full-calorie colas are seeing their market share slip as buyers look elsewhere for health and other reasons. Here is how Pepsi describes the current market conditions:
"Colas have declined as consumers have increasingly sought greater variety in their repertoire of beverages. For this reason, we diversified our portfolio, North America – actually this began in the 1990s, when we embarking in a strategy to be a total beverage company. As a result of multiple steps in this diversification, today we have the leading position in liquid refreshment beverages in measured channels in North America. Almost 40% of our North American beverage volume is non-carbonated and only a fifth of our North American beverage volume is full sugar cola.
So what's our approach on colas; simply put, we like to lead disruptive innovation. The industry has not had truly meaningful innovation colas since the introduction of Diets in 1960s. Our research indicates that consumers still love bubbles, they love the cola taste, but would like to lower their caloric intake without the taste of artificial sweetness."
Pepsi's first attempt along this line was their 60% lower-calorie "PEPSI NEXT" product, which by all accounts does NOT contain any SNMX ingredients, they stated that first-year sales were greater than $100m. Further at the CAGNY industry conference a few days later they actually described it as "nearly $150m in sales" - so this gives you an idea of what sales a new product in the soft drink market can garner. Of course, reformulation of existing flagship brands would mean sales much higher.
Pepsi has been talking about innovation in the sweetener area for several years (was even featured in a CNBC documentary), including the partnership with Senomyx. But they acknowledged directly on their most recent call that new product offerings are closer at hand than ever:
"So, as we shared with you over the year ago, we've been developing new natural sweeteners and flavorings aimed at reducing calories with no compromise on taste. We have some promising projects that are currently going through the FDA review process that once commercialized could potentially alter the trajectory of our cola business in a meaningful way."
"We're just waiting for the FDA approval... and that's not in our hands, it's in the government's hands. Once we get the FDA approval, we'd be launching posthaste."
The question of course is whether any of these projects involve Senomyx ingredients such as S617 which can reduce high-fructose corn syrup (HCFS) by up to 35% in carbonated beverages. SNMX also has a natural high-potency sweetener program which Pepsi is involved in, but it has not generated any product candidates yet unless the company is materially misleading investors as to its status.
The answer is a decided maybe, but not definitely. The hangup for me is that, in contrast to natural/artificial sweeteners like sucralose, etc, food/beverage ingredients such as S617 do not go through the FDA approval process hinted at by Pepsi. Instead, they are most often certified through the "Generally Recognized As Safe" or GRAS process.
SNMX is very secretive about their progress with Pepsi, as required by their giant partner. So we may or may not learn anything of consequence on their upcoming earnings call. Royalties for product sales involving other sweet-enhancing or MSG-reducing ingredients have grown at an anemic pace due to extensive pre-launch vetting by partners and launches that only involve small, geographically narrow brands. However, the hint that commercial sales of a blockbuster Pepsi product containing a Senomyx ingredient are on the near horizon could be a major catalyst for the stock. Stay tuned...