10 November 2005

Shugr instead of Sugar

From my main source for random free shit, I received a cannister of 100 packets of Shugr.

Don't you love these intentionally mis-spelled products? We're already off to a great start.

Tried it in my coffee. Needed two packets as I've been brewing a pretty strong batch of beans from Porto Rico Coffee in the East Village.

The taste was sweet, with a bit of a bright bite, but no noticeable aftertaste. I flipped over the container to check out the ingredients: Erythiritol, Maltodextrin, Tagatose, Less than 0.0005g Sucralose.

Ahh, I remember reading about tagatose somewhere. I was particularly fascinated about the structure of tagatose. Its chirality allows our bodies to taste the sugar, but not metabolize it like our common natural table sweeteners. I'll find that article and post excerpts below, leaving out as much science-nerd blather as possible, as I've already reached my quota in the paragraph alone.

Reading down the label, after the company name, Swiss Research, came this surprise: (stock ticker: HESG).

Um, I'm very used to seeing web addresses, consumer information lines, y'know, that kind of crap on labels, but a stock ticker?

Curiousity killed the Pig, so I went to MarketWatch and typed in "HESG". It trades, if a daily volume of around 100K shares can be called "trading", at around 57 cents. On the OTC BB. I clicked on a not-so-recent February 2005 news story on HESG:

Alternative sweetener to hit shelves
Swiss Research says it has competitor to Splenda, Equal

By Rachel Koning, MarketWatch
Last Update: 4:16 PM ET Feb. 12, 2005

CHICAGO (MarketWatch) - Swiss Research said Saturday its Shugr sugar
substitute will be available in about 3,000 heath food and
natural-products stores beginning in March, with hopes for
distribution in large drug and food chains by year's end.

The Los Angeles company unveiled late last year its zero-calorie,
diabetic-safe sweetener, which it says is a more natural competitor to
the established sugar substitutes Splenda and Equal.

Shugr is made from a blend of erythritol, which occurs naturally in
many fruits and vegetables, the company said in a news release. It
also includes tagatose, which includes a pre-biotic fiber believed to
aid digestion.

The company is seeking a patent for its formula. It says the
ingredients carry a GRAS designation -- Generally Recognized as Safe -
from the Food and Drug Administration.

Shares of Swiss Research parent Health Sciences Group Inc. (HESG:

0.57, -0.03, -5.0%) closed at $1.17 on Friday, down 15 cents or 11 percent.

Let's parse this report for the worrisome stuff, like HESG is seeking a patent for its formula. Doesn't have that, yet. So if Shugr's sugar-substitute formula takes off in marketplace, there are currently no IP barriers to entry.

The natural food argument is a weak one. It's weaker still with the modifier "more" before natural. Isn't "natural" like "unique"? It either is "natural" or "unique", or it's not. It cannot be "more".

What about the cost of Shugr, versus Splenda? On Froogle, I found a special on Splenda at Walgreens, two 3.8 oz boxes of Splenda, the equivalent sweetness of 4 lbs of sugar, for $7.00. They regularly sell for $4.29 a box. If you want a box of 100 individual packets, that'll run you about $4.69 at Gristede's Supermarket. I found Shugr at Drugstore.com selling my cannister for $6.99. A 1.3 lbs container runs you $19.99. Shugr is meant to used pound-for-pound with sugar. And therein lies the rub: Shugr is too expensive. Too expensive for diet soda companies to use the product. Too expensive to move beyond niche health food store/diabetic markets. And it uses sucralose in the mix; why not just use the cheaper Splenda that's already dominating the market, if it's sucralose you want?

I found an OTC comment board full of HESG shareholders, discussing their tanking shares, and delusional hopes for a flawed product. It's a fascinating read, in a train-wreck kinda way.

Here are excerpts from the Wired article I mentioned above discussing the missed opportunity of tagatose.

On a sunny morning in his office in Beltsville, Maryland, 79-year-old Gilbert Levin is hunched over a press release from the Danish dairy company Arla Foods. The firm, which holds an exclusive license to food uses of tagatose, has begun production at its first commercial facility, with a second plant on the drawing board. Levin's company, Spherix, will earn a 25 percent royalty on Arla net sales. And in Levin's mind, Slurpees are only the beginning. He wants tagatosein chocolate, cookies, and cakes - and in sugar bowls.
In 1981, Levin patented 10 left-handed sugars for use in foods and began looking for ways to make them. "We found several that were quite good," he says, "but we could never manufacture them cheaply enough."
Most crucially, the Spherix team devised an inexpensive way to make tagatose. Tiny quantities occur naturally in dairy products, and the process to derive it starts with whey, a byproduct of cheese-making. Lactose is extracted by removing proteins and then dissolved to form glucose and galactose. The glucose is sold off, and an enzyme is added to the galactose to form tagatose in bulk, either as syrup or crystals. Spherix patented the process in the late '80s. Finding a way out of the lab and into the high-volume, low-margin food business proved daunting. Levin hustled for the money to build his own full-scale plant or find a partner, but talks with companies like Procter & Gamble fell through. Levin remembers the frustration. "They all told me, 'Once you've got the product developed and for sale, come back to us. We're not going to help you develop it,'" he says.
He hands me a baggie of pure tagatose. I hold it up to the light, dab a little on my finger, and try it. A dead ringer for table sugar.

In a crowded sweetener market, it has to be. In addition to standbys like saccharin and aspartame, there are a handful of entrenched substitutes on store shelves - acesulfame potassium, stevia, and sugar alcohols like mannitol and sorbitol - used in myriad combinations to feed our ever growing appetite for diet food. The most troublesome competitor for tagatose is sucralose, sold as Splenda by McNeil Nutritionals, a subsidiary of Johnson & Johnson.

Sucralose is derived from sucrose through a process that replaces three hydroxyl atoms with chlorine, creating a crystal 600 times sweeter than sugar. Unlike saccharin and aspartame (but like tagatose), sucralose is heat-resistant, so you can bake with it. But it behaves differently than sugar. Foods sweetened with sucralose won't brown as well and they cook more quickly, so recipes may need to be adjusted. Splenda hit the market in 1998 and has since made its way into hundreds of big-name products (see chart, opposite page).

For Levin, the success of sucralose is a frustrating case of what might have been. He licensed tagatose to Arla in 1996, but it took five years for the Danes to obtain the FDA's "generally recognized as safe" status in the US - and then only as a food additive. It's taken another two years for Arla to build the first plant. (Arla obtained approval for tagatose in Australia, New Zealand, and South Korea this summer and expects Japan and Europe to follow.) And while Arla was seeking regulatory approval, sucralose came to market.
Spherix and Arla are tied up in arbitration over the tagatose license contract. The patent on tagatose as an additive expires in 2006, the two patents on production methods a few years later. Levin hopes to see his sugar substitute flood the market before then.

This article ran two years ago. Since then, Splenda has bloomed into the dominant player in the artificial sweetener market.

Tagatose, a.k.a. Naturlose, seems to be relegated to flavoring toothpaste. Perhaps another superior product, a la Betamax, losing out in the marketplace for reasons of cost, marketing, and timing.

Shugr is in the ghetto of health food stores and the OTC BB.

Before I leave these alternative sweeteners behind, let's look at a quick comparison of the three relevant stocks over the past two years, since the Wired article ran:

JNJ, owner of McNeil Laboratories, the US distributor of Splenda.
Approximate stock price in November 2003: $51.00
Current stock price: $61.44
% difference: up about 20%

SPEX, Spherix, owner of tagatose and Naturlose.
Approximate stock price in November 2003: $7.00
Current stock price: $1.40
% difference: down about 80%

HESG, Health Sciences Group, owner of Shugr.
Approximate stock price in November 2003: $1.10-1.20
Current stock price: $.58
% difference: down about 50%

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