The "Apple Product" Investors Forgot (Hint: It's Not a TV)

Investors had to wade through years of rumors and unofficial discussions, but Apple finally announced that the Apple Watch was indeed coming to stores this June. While the world's most valuable company grabbed headlines and piqued investor interest, a smartwatch is not the only technologically advanced "apple product" that has made headlines in 2015. There were, you know, actual apples.

Apples that turn brown when sliced are so 2014. Image source: Reshma Shetty/Twitter.

Arctic Apples won't help you avoid rush hour traffic or upload your latest running performance to the cloud, but the non-browning fruit does possess impressive growth potential in both obvious and non-obvious applications. And now that Okanagan Specialty Fruits, the privately held company that developed Arctic Apples, has been acquired by next-generation biotech Intrexon (PGEN 0.76%), the growth potential is within the reach of everyday investors.

"I'm not investing in fruit!"
You would be forgiven for looking past apples as a high-growth investment. But Arctic Apples are special because they provide a simple solution to a long-standing problem facing apple consumption. (As we'll see below, that problem extends well beyond consumers.)

We've all been there. You cut an apple into more manageable slices only to have it turn brown before you can eat the whole thing. That may not be a big deal to most of us, but if you've ever tried to get a child to eat healthy foods then you may appreciate the potential for culinary disaster. After all, it can be difficult to overcome the "yuck factor" of browning fruit.

What makes apples turn brown in the first place? It's a simple chemical reaction that occurs between the enzyme polyphenol oxidase and a group of compounds called phenolics, all of which are naturally produced by apples. Problem is, phenolics are part of what makes apples healthy in the first place, but are partially used up in this reaction.

Enter Arctic Apples, which have had the genes responsible for polyphenol oxidase production silenced. Put another way, the enzyme is present in too small amounts for browning to occur. Additionally, the only genes that have been added are from other apple varieties. That really gives a new meaning to apples-to-apples genetic engineering!

This is great and all, but it still doesn't answer the question: Why would Intrexon, which makes headlines for next-generation cancer drugs and generates most of its revenue from selling cow embryos, acquire Okanagan Specialty Fruits? What's the real opportunity here?

Value-add: Obvious and non-obvious
As outlined above, the obvious value-add for Arctic Apples is in fresh consumption applications, which account for two-thirds of the annual $2.7 billion American apple crop. Studies have shown that school cafeterias that slice apples see apple consumption increase by 71%, but making fruit easier to eat has historically come with the drawback of browning.

Of course, you may question the value of abolishing the "yuck factor." Who really cares, anyway? It may be a small change, but creating new consumer habits can go a long way. For example, the introduction of baby carrots 15 years ago led to an explosion in carrot consumption. Today baby carrots account for two-thirds of total carrot sales in the United States. Should Arctic Apples achieve the same level of success Intrexon would be responsible for over $1.5 billion in annual apple sales.

However, non-browning apples can provide value throughout the supply chain, not just to the consumer at the very end. For instance, producers and packers will benefit from handling fewer apples with bruises, which increases the value of their sales to the next link in the supply chain. That's especially important since Intrexon will be selling trees to producers, meaning it won't have a direct connection with consumers. Consider the following non-obvious ways Arctic Apples create value:

Source: Okanagan Specialty Fruits.

In addition to Arctic Apples, Okanagan Specialty Fruits has a robust pipeline of fruit products under development. For instance, the company is developing a process to create apples with similar or identical characteristics to Arctic Apples through breeding methods, as well as apples that resist common diseases encountered by growers each harvest and new Arctic Apple varieties (Fuji and Gala). There are also non-browning pears and cherries, a peach resistant to pox virus, and novel methods for creating new peach and cherry varieties with new taste or nutrition profiles.

Perhaps most staggering is the acquisition price Intrexon paid for the potential-oozing platform: just $41 million total.

What does it mean for investors?
It's clear that Arctic Apples have the potential to provide value throughout the supply and value chains -- now Intrexon only needs to cultivate the most valuable early stage opportunities to gain a foothold. That will require some patience on the part of investors. Although small quantities of Arctic Apples will hit the market in late 2016, it will take several years for trees to be planted and grown to fruit-bearing (literally) maturity. But now that the U.S. Environmental Protection Agency and parallel regulator in Canada have approved the Arctic Golden (third most popular apple variety) and Arctic Granny (fifth most popular apple variety), investor-worthy updates on commercial progress are right around the corner.