Health Enhancement Products, Inc.'s President's Annual Report to
Shareholders
KEEGO HARBOR, MI--(Marketwired - Mar 31, 2014) - Today, March
31, 2014, the Company filed its 10-K Annual Report with the SEC.
The filing can be found at:
http://www.sec.gov/cgi-bin/browse-edgar?CIK=0001101026&action=getcompany
This report is prepared by management and distributed to
shareholders for the period covering the calendar year 2013.
As discussed at the August, 2013 shareholders' meeting, the
Company's business model has evolved into that of a biotechnology
development firm. In so doing, the research and product development
has taken on a distinctly different nature -- using biotech
research to build the value of the Company's intellectual property
so it can then be licensed to larger, better-financed brand names.
This new model provides the Company with a wider range of
opportunities and the potential for significant earnings.
The Value of Research
In the biotech business model, R&D is the key value driver.
The studies are proof points that our products are safe and
effective, and that the processes to produce them are safe and
consistent. Studies are conducted for each individual application.
For example, regulations require that a dietary supplement for
canine joint health is tested for safety and efficacy for canine
joint health specifically, and in the form it will be marketed.
Let's assume a dog treat. That application may require several
different studies. We then develop a manufacturing process that
doesn't reduce effectiveness or introduce unsafe substances, even
if it's just an ingredient in someone's finished product.
Once all the studies are successfully completed, we will be in a
position to offer a license for a canine dog health treat. Every
animal, every claim (joint health, healthy liver, muscle recovery,
etc.) and every finished product requires its own set of
time-consuming and complex studies. We are therefore compelled to
choose our targets carefully.
The point is simply this -- the Company will continue to test
and conduct studies. It's how the Company builds shareholder value.
Every test is an asset, a block in a foundation of intellectual
property that supports our market claims and our scientific claims,
boosting the value of our licenses. Well-executed R&D provides
the Company leverage in negotiating the price of a license or
option.
Bovine Mastitis Prospects
As disclosed in a Form 8-K filed December 20, 2013, the Company
entered into a confidential and exclusive Collaboration/Option
Agreement with a global animal health company. To reach this
important milestone, the Company conducted nearly 40 separate
experiments and tests to build a dataset that was acceptable to
this group of experienced, sophisticated animal health scientists
that already leads the world in animal health products. The scope
of this new study is large, complex and costly. We have been
working with our partner and contracted researchers to develop and
review all the details and protocols before our product is actually
tested. The prospects are exciting.
To further clarify previously released information, the two
90-day periods that accommodate evaluation and negotiation,
respectively, begin after the close of the bovine in
vivo study, which is still in process. The timeframe of the
study is dependent on partner approvals, capital funding and
logistical realities. However, project leaders anticipate at this
time that preliminary results for select test groups will be
available in two months' time.
The value of an effective bovine mastitis treatment should be
considerable. The loss of milk production in the US alone due to
bovine mastitis is nearly $3 billion annually. At any one time, up
to 10% of US dairy cows are suffering with mastitis, according to
the National Mastitis Council. Further, the 9 million head in the
US dairy herd represents only 3% of the world's estimated 244
million dairy cows. The global demand for a successful product
could be significant.
Canine Joint Health
Beginning last year, the Company commenced its canine joint
health efforts in earnest, with in vitro studies using cell
cultures and blood. From there, the research effort has expanded to
the use of tissues grown in culture that can mimic portions of an
unhealthy joint. Preliminary results showed great promise, and the
joint tissue study is being repeated and expanded, per the request
of a potential partner.
Just a few days ago, we contracted with one of the world's
largest contract research organizations to test our compounds in
biological models that mimic canine osteoarthritis. The design of
the study alone took nearly two months, working closely with
scientists at the research organization to develop the kind of
detail and dataset features that we believe will be useful to our
target customers -- animal health companies. In this case, we're
testing a canine joint health dietary supplement application, but
we're also looking at what other health benefits we may find during
the course of this study.
A successful product concept could quickly grab significant
market share in the $300+ million canine joint health supplement
segment. And, with the prospect of a shorter regulatory path to
market, monetization may occur within a shorter timeframe than
other animal applications.
Algal Products
Reproducing naturally-occurring molecules on a
commercially-viable basis can be a challenge. When new management
took over in early 2012, the output of active ingredients was
miniscule, inconsistent and commercially impractical. Working with
Dr. Barry Rosen, management explored a variety of production
approaches that would safeguard the primary cultures. In April of
2013, after careful evaluation of Dr. Rosen's results, the
Scottsdale facility was shut down and the cultures moved to the
Arizona Center for Algae Technology and Innovation (AzCATI) based
at the East Mesa campus of Arizona State University.
After 10 months of intensive testing, various scaling
experiments, genetic mapping and extensive analyses, researchers at
AzCATI are now capable of producing hundreds, if not thousands, of
MED's (Minimum Effective Doses) for anticipated applications every
two weeks. Testing and validation follows. We have now arrived at
the position whereby we can consider commencing our own production
or looking for a contract grower.
The culturing process developed by AzCATI is proprietary, but it
consists of combinations of known and previously published
techniques. Patenting the process would merely inform others. The
Company has instead opted to keep the methods developed
confidential.
Other forms of the natural compounds are also being isolated,
refined and continuously tested. Chemically extracting the natural
compounds from algal biomass or from the surrounding water is a
technical and commercial challenge. Once we can do so consistently,
the next step is to develop a large-scale commercial process to
deliver a train-car load of product to our potential customers,
fully compliant with federal and state regulations and profitable,
to boot.
Active Ingredients and Class of Compound
At the August, 2013 shareholders' meeting, we advised those
present that the active class of compound appeared to consist of a
complex of similar fatty acids and we have been conducting
validation experiments since that time. As we proceed, it appears
that this class of compound, the esters or residual products
thereof, may also be arranged or structured to function as
signaling molecules, and thus further characterized as bioactive
small molecular entities (SME's). Upon initial review, this is
consistent with the mechanism of action previously described by
cholesterol researchers.
A common strategy to develop manufacturing processes for small
molecular entities or to validate their 3D structure is to create a
synthetic version of those molecules. This is not a straight-line
process because the work is conducted at the molecular level using
chemical reactions. Extensive testing and validation with
biological or chemical assays follow. We have stopped and started
the synthetic program several times to adjust for test results and
will continue to do so.
The synthetic strategy can create its own delays, but there's a
potential bonus: If successful, we will have added a considerable
amount of value to the natural product license, because the
synthetic may serve as the template for a potential therapeutic
lead compound.
Research and Funding
Life science R&D is not a straight-line proposition.
Scientists are dealing with biological systems, which can be
unpredictable. Some experiments must be repeated several times
before we can establish a useful trend or significant results to
guide us further. In some instances, our team must conduct several
experiments just to confirm that the test we're using is the best
tool to measure what we set out to measure in the first place.
Adding to the challenge, we are working at the molecular level.
But, progress has been steady.
When Health Enhancement Products transformed itself into a
biotech research firm in early 2012, the Company was effectively in
the starting blocks. Two years and dozens of experiments later, the
Company has executed a collaboration/option agreement with a global
animal health company for its premier intellectual asset. In the
biotech world, some may consider this remarkable progress.
Which brings us to another key point: R&D moves forward at
the pace of funding. Health Enhancement Products is still
pre-revenue -- not unusual for a two year-old biotech firm. Raising
funds in an economic recession is difficult for any startup, made
more difficult by our history prior to 2012.
Given some of the calls and emails received recently, it appears
that some investors may be unaware that purchasing HEPI shares on
the open market provides no capital directly to the Company. Shares
purchased online or through a broker are actually acquired from
another shareholder or an OTC market-maker. To pay for research and
overhead over the past two years, the Company has been funded by
private lenders and individual HEPI shareholders.
It's only with new private capital in hand that the Company can
continue its aggressive drive to monetize its intellectual
property. Gaps or delays in capital funding create a corresponding
gap or delay in research and product development, while overhead
costs continue to accrue. To the extent possible, management has
endeavored to minimize the impact of such gaps and has focused its
efforts on the nearest-term monetizing opportunities with the
lowest capital requirements.
Addressing Risk
Financial realities led the Company to focus on animal health
products and an early monetizing stratagem. To use a baseball
analogy, management will accept a solid "single" over a more risky
"triple". Further, with a portfolio of potential products, several
such "singles" may surpass a 'triple' while minimizing execution
risk.
A good many biotech companies work with one small group of
bioactive compounds focused on one application. A failure in a
single study or clinical trial can be cause for real concern and in
some cases, extinction. Our website contains a graphic on the
Products page featuring a platform approach to our Algal Products
group -- what investors have come to know as the core algae-derived
products offered by HEPI.
This platform approach is a risk-management strategy. It
provides management with backups should studies prove inconclusive,
markets fail to materialize as expected or licenses are somehow
delayed. It describes multiple pathways for monetization.
It's also the game-plan for our core strategy: Investigate a
particular technology, validate it quickly and cost-effectively,
and license or sell at the earliest opportunity.
To that end, Health Enhancement Products has developed a
particular capability over the past two years. The addition of a
dedicated R&D director, a product development director, a
skilled administrator and individual scientists in the last 10
months has positioned the Company to manage and direct R&D as
it relates to algal products, and to examine derivative products
and closely aligned technologies for adjacent opportunities.
WellMetris - Wellness Testing One of these 'adjacent
opportunities' was acted upon in August of 2013. The Company
acquired the foreclosed assets of Wellness Indicators, Inc., in a
stock and cash transaction with the lender, Essex Angel Capital.
The Company immediately set about moving forward with the final
phase of commercialization, pending available funding.
However, in the fall of 2013, the Company's resources were
directed at a possible collaborative agreement with a potential
animal health partner and fundraising activities were primarily
engaged in supporting the Algal Products group.
This situation didn't deter the project's product development
manager, who was able to achieve remarkable progress with a limited
budget and minimal resources. In the six (6) months since the
acquisition of Wellness Indicators, Inc., assets in late August of
2013, the WellMetris pre-launch effort has yielded the following,
some of which is described on the WellMetris website:
- A complete engineering review and reappraisal of the analyzer
device, reporting software and dry chemistry, including development
of an FDA-compliant product design history
- Development of new dry chemistry for three (3) key biomarkers
and validation of the other six (6) key biomarkers
- Re-design of the test cartridge to minimize the 'ick' factor
associated with self-administered urine tests and their safe
disposal by the user or test administrator
- Dramatic decrease in manufacturing costs for the analyzer
device, from roughly $1,500 to less than $400, while still
utilizing a potential US-based, FDA-licensed manufacturing
site
- Dramatic decrease in manufacturing costs for the test
cartridge, not to be disclosed for competitive reasons
- Design of a completely virtualized enterprise, developed in
partnership with SalesForce.com and Amazon.com, that integrates
salespersons, customers, ordering, billing, fulfillment, returns,
HIPAA-compliant records management, data analysis and related
services in a highly-scalable platform available to health
insurers, employers, governments and accountable care
organizations
- Due to significant price cuts in manufacturing costs, a revised
econometric model presents a compelling ROI for early pre-clinical
screening of asymptomatic populations by wellness consultants,
accountable care organizations or government agencies administering
public programs such as Medicaid
The market potential for the WellMetris Profile wellness
assessment is considerable, given the pressures on employers,
insurers and providers to slow the increase in healthcare premiums,
claims and costs. The pre-launch punch-list is relatively short.
The following activities are on hold, pending capital funding:
- A norming study to establish ranges for the three (3) newly
developed dry chemistry tests
- Finalize customer support, sales support and tech support
functions
- FDA-compliant QA and QC protocols for manufacturing of test
cartridges
- Product and sales training for prospective sales
representatives
- First large orders of analyzers, test cartridges, dry
chemistry
- Staffing the launch team
- Official marketing launch, PR blitz
The Affordable Care Act (ACA) and the expansion of Medicaid
represent potentially huge opportunities for WellMetris. Language
in the ACA calls for establishing a 'baseline' of wellness for
managed populations and routine screening after pre-clinical
intervention, such as weight loss programs, smoking cessation, drug
rehab, etc., but without specifically testing for abused
substances. The WellMetris Profile test doesn't look for the
presence of drugs, alcohol or tobacco. Rather, it looks for the
downstream consequences in the overall health of an individual. The
test provides an objective and accurate assessment of the impact of
unhealthy lifestyle choices, which can also include obesity, lack
of exercise or sleep, and similar behaviors. This also applies to
Medicaid recipients and establishes a protocol for intervention
which could place the WellMetris test at the forefront of a
pre-clinical screening program for millions of Americans.
Future WellMetris Products
Another compelling aspect of the WellMetris testing technology
is its potential follow-on applications and future products. The
Company has filed provisional patent applications for bovine and
companion animal health assessment. Further, once revenues are
realized, the Company will fund additional studies to substantiate
claims that the WellMetris Profile test can predict Metabolic
Syndrome, a pre-diabetic condition that may be present in over 65
million Americans, and millions more in Europe and the Mideast.
Finally, the WellMetris product development manager is actively
engaged in a next-generation testing platform that uses a
disposable testing cartridge which plugs directly into a smartphone
and, using a downloaded app, monitors the positive or negative
effects of an individual's personal dietary supplementation over
time. In this way, health-conscious individuals can track the
benefits of expensive (and sometimes ineffective) dietary
supplements, as well as the metabolic effects of an exercise
program, changes in diet or sleeping habits, etc.
R&D Center Update
We had previously advised shareholders of our interest and
intent to create an R&D center to support our algal products
licensees and potential pharma licensees. To that end, management
has been pursuing a combination of public and private grants, loans
and loan guarantees for the past year. In short, the process is
still underway and the prospect of such funding is still
viable.
Summary
Other challenges surely await us. Communicating the complexities
of the experiments and what they mean is equally difficult without
revealing confidential information or placing potential patent
claims in jeopardy. Over the last two years, Health Enhancement
Products has firmly repositioned itself as a credible biotech
R&D entity. The scale and complexity of the science demands a
careful, measured approach, significant funding, and involves
well-known researchers at the top of their game and in high demand.
Schedules tend to stretch out as we accommodate the time demands of
academic researchers and the availability of contract research
organizations to handle our research requests.
Our target customers and potential partners are sophisticated,
well-regarded scientists from global pharmaceutical companies and
food ingredient manufacturers. They demand a level of documentation
and validation consistent with the work product of other leading
biotech companies -- a standard that HEPI strives to match in every
test and experiment it undertakes, in every report or presentation
it creates.
The team has worked diligently over the past year to transform
perception of the Company from that of an interesting backwater
stock play into a biotech contender with exciting prospects in the
near term. Wherever the research may lead, and whatever prospects
face the Company, opportunity favors the well-prepared.
About Health Enhancement Products, Inc.
Health Enhancement Products, Inc. (OTCQB: HEPI) is a
Michigan-based biotech company engaged in the investigation of the
health benefits of bioactive compounds derived from its proprietary
algal cultures, and the development of natural bioactive compounds
for use as dietary supplements and food ingredients, as well as
biologics and synthetic candidates for medicinal and pharmaceutical
applications in humans and animals, specifically focused on
autoimmune modulation.
Forward Looking Statements
This report contains forward-looking statements that involve
risks and uncertainties. These statements reflect the Company's
future plans, objectives, expectations and intentions, and the
assumptions underlying or relating to any of these statements.
These statements may be identified by the use of the words
"anticipate," "expect," "estimate," "intend," "believe," and
similar expressions. The Company's actual results could differ
materially from those discussed in these statements. Factors that
could contribute to these differences include, but are not limited
to, those discussed below and elsewhere in this document. This is
not a solicitation for investment and is presented for information
purposes only.
Safe Harbor Statement
Except for any historical information, the matters discussed in
this press release contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties. A number of factors
could cause actual results to differ from those indicated in the
forward-looking statements, including the timing of completion of a
trial, actual future clinical trial results being different than
the results the company has obtained to date, and the company's
ability to secure funding. Such statements are subject to a number
of assumptions, risks and uncertainties. Readers are cautioned that
such statements are not guarantees of future performance and those
actual results or developments may differ materially from those set
forth in the forward-looking statements. The company undertakes no
obligation to publicly update or revise forward-looking statements,
whether as a result of new information or otherwise.
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