If you’ve been to a supermarket, you’ve seen ‘new and improved’ products. They’re touted with bright labelling and bold claims. The consumer goods industry thrives on this sort of innovation.
Often, though, those products are the result of years of study at cutting-edge research universities. And getting those ideas from the lab to the shopping trolley is a fascinating business.
From the lab to the shopping trolley
Revolymer is bringing polymer technology originally developed at Bristol University to the mass market. Rather unusually for a business with this pedigree, its target markets are in the world of fast moving consumer goods (FMCG).
FMCG thrives on innovation. Advertisers all agree that the three most powerful words in FMCG marketing are “new and improved”, and this is exactly what Revolymer seeks to do. It develops patent protected materials that will improve existing products.
Revolymer’s typical customer is a multinational brand in personal REVOcare, household goods or adhesives and coatings. It may have its own research labs and enormous expertise in manufacturing, marketing and distribution. But what Revolymer can provide is that vital ingredient that creates a ‘new and improved’ version of the lipstick, skin cream, detergent or adhesive. This allows the brand owner to improve both sales and margins, creating premium versions of their existing product range.
Revolymer’s technology has two ‘killer apps’. The first is related to ‘moisture management’ – improved moisture management can be useful in the cosmetics industry, for example. Polymers have also been developed that can attract or repel oils or water. These could be used in coatings, adhesives and cleaning products.
The second killer app is encapsulation. These are polymers that can trap an active ingredient and hold it stable in its carrying solution, before releasing it for use. A good example here is the ability to incorporate bleach in liquid laundry detergent. Liquid versions of washing powder are increasingly popular, but bleach can’t be included in the liquid formulation because it is unstable. Revolymer’s technology encapsulates the bleach in the liquid and the responsive polymer coating releases it when detergent is used.
Now, Revolymer does not plan to get involved in manufacturing on a commercial scale. It makes a prototype in-house to demonstrate the product’s qualities to a customer. But has no desire to get into bulk manufacturing. This is an intellectual property business; revenues will come from licence fees and royalties from products infused with their high-tech polymers.
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How Revolymer makes money
To give you a feel for this model, let’s assume an FMCG customer sells $400m worth of detergent. Revolymer’s ingredient creates a new and improved version, which is expected to convert a quarter of the existing sales. Revolymer’s royalty would be between 3-5%, or about $4m.
This might not sound much. But there are no direct costs attached to these sales – it’s all profit. Overheads run at just under £6m, which is mostly R&D – 27 out of the 33 people in the company work in that department.
Revolymer doesn’t need many of these deals in order to create some real value. At the moment the company has four products at an advanced stage with potential customers, all of whom are billion-dollar-plus companies in the consumer goods and personal care sector. Things can move a little slowly when dealing with giant companies. That comes from the need to demonstrate product safety and to prove Revolymer’s claims. Dr Pettman hopes to announce at least one deal in the next year, and it will then take a further 18 months before the licence revenues start to come through.
There are already some sales in the pipeline from the company’s nicotine chewing gum business. The licensing deals in FMCG products are the main focus, but the gum division also has potential to grow. Revolymer originally developed a chewing gum which, thanks to clever polymers, didn’t stick to pavements when discarded. The qualities of this gum in texture, taste and chewing properties also make for a better nicotine gum product. In July they announced a deal in Canada, with sales expected to start this winter. Another relationship has been established in Poland to supply the central European market. And at the moment, Revolymer is preparing a filing to enter the $500m US nicotine gum market.
The shares floated at 100p, and unfortunately haven’t seen that price since. This can easily happen to a company if sales are some way off and news flow isn’t sufficient to sustain interest. Patience might still be required, but with the shares now at 54p they look an interesting proposition. Revolymer is very well funded. It raised £25m in the IPO, and its balance sheet is very strong, with just under £20m in cash out of a current market value of £29m.
The licensing model benefits from having low capital intensity and generally lower risk. The downside is that it limits the amount of the value chain that can be captured, and hence the size of the company. Size isn’t everything, however, because licence and royalty income is very high quality. So keep an eye out for those four consumer sector deals coming through.
• This article is taken from our free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
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