In our technology driven world Balchem Corporation (NYSE: BCPC) is responsible for making our foods last longer and be more nutritious. As one of the main innovators behind the technique of microencapsulation, which involves the wrapping of a nutrient or chemical in unique layers of fats or lipids that break down inside livestock to enable delivery, Balchem is responsible for creating food for livestock and consumers that can be chemically modified to maximize the delivery of specific nutrients. Additionally, Balchem is a supplier of raw chemicals to hospitals and other biotechnology firms who use them, among other things, to sterilize hospital equipment, respectively.
Since 2007, Balchem, along with other firms in the food industry have had to confront an increasing shift amongst consumers towards organic foods which do not have the additives that BCPC manufactures. One of the contributing factors driving this change are the increasing number of warnings issued by the FDA. So far in 2008, more than 200 separate warnings and recalls of food products have been issued and consumers are choosing to utilize local farmers rather than the large food manufacturers that make up a large proportion of Balchem's sales. While organic food is more expensive than what is readily available on the store shelves, demand has remained steady even as the US economy has declined.
Balchem is divided into three main divisions with one focused on the production and transport of chemicals and two divisions that specialize in the development of products that incorporate the microencapsulation technology. All three divisions have seen positive growth both in organic revenue and net income between 2005 and 2008. 
The Specialty products division is responsible for the manufacturing and global distribution of ethylene oxide, propylene oxide, and methyl chloride. Ethylene oxide is sold primarily to health care providers as a sterilant and fumigant while propylene oxide and methyl chloride are usually shipped to other manufacturers who use these chemicals as intermediate additives or solvents in order to create everything from foam to fertilizer. Due to the relatively low level of research and development expenses present in this sector, it is one of Balchem's most profitable divisions bringing in more than 2.5 million dollars in net profits during the first quarter of 2008.
The Food, Pharma, and Nutrition division is home to Balchem's consumer oriented microencapsulation products. As of 2008Q1, BCPC offers the following products: Bakeshure, Meatshure, Confecshure, Vitashure, Flavorshure, Chline, Betaine, and Pharmashure. Each product line is geared towards maximizing the delivery of a nutrient, preserving the shelf life of an ingredient, and/or increasing production efficiency. For example, BCPC's Confecshure line of products include delayed release carbon dioxide capsules that can be flavored and are eventually used to make the popular Pop Rocks candy. Additionally, the Meatshure line has microencapsulates that have increased the efficiency of sausage manufacturing by 40%. In the first quarter of 2008, this division brought in more than 40 million dollars in sales accounting for more than two-thirds of BCPC's total organic revenue.
As the world's largest supplier of FDA approved choline, a vitamin B derived nutrient that is essential in the diet of livestock, BCPC's Animal Nutrition and Health division helps to deliver millions of pounds of microencapsulated dietary products to farmers in the meat industry each year. None of Balchem's products can wholly substitute for grain but are all supplemental to the natural grain diet usually given to livestock. The four product lines in this division are: Reashure, Niashure, Nitroshure, and Chelated Minerals all of which are developed and manufactured by BCPC. Each product line is tailored towards the preservation of a specific nutrient until it reaches a specific stage in the digestive tract of a cow in order to maximize absorption. In 2007, BCPC also acquired two companies, both in the choline chloride industry, that have helped to expand its production capacity and distribution network: Akzo Nobel Chemicals and Chinook Global Limited. 
|Nutrient '||Delivery Process|
|Reashure||Choline||Microencapsulates choline to prevent pre-mature digestion in the rumen (the first of the cow's stomachs)|
|Niashure||Niacin||Microencapsulates niacin for the same purpose as choline|
|Nitroshure||Urea||Allows for a gradual breakdown of urea into nitrogen that is kept in proportion with other nutrients digested by the cow.|
|Chelated Minerals||Wide Range including Zinc, Copper, and Calcium||Direct introduction of a discrete chemical compound that is comprised of a soluble salt with an amino acid that is meant to improve nutrion|
Balchem collaborates directly with global feed manufacturers and not necessarily cattle or dairy farms. With the world population currently at 6.5 billion, demand for feed is at an all-time high, and government regulations regarding the safety and quality of food has gotten much more stringent in Europe and other developing countries. With all of that combined, the demand for Balchem's microencapsulates, which are geared towards promoting healthy animals, hasbeen fairly robust. Farmer's can't just feed their dairy cows no nutritional supplements or else the milk that the cows make will not meet government standards.
BCPC has seen its net earnings triple between 2003 and 2007 going from 5.6 million to 16.1 million. These earnings, all else being equal, will only continue to rise over the next 20 years as the global demand for the food products that are treated with Balchem microencapsulates, such as meat and dairy, are expected to more than double by 2030.  Balchem, during the 2007 fiscal year, also began three research and development projects that are intended to expand the uses of choline to vitamins and probiotics; however the results of these projects will not be seen at least until 2010. 
The USDA deems all foods that are free from foreign additives such as fertilizer and, in this case, microencapsulates as organic. In 2007, sales of organic foods reached nearly 20 billion dollars which represented a 25% growth from 2006. With the revelation during the first half of 2008, that some of the food the United States received from our largest importer, China, was contaminated, consumers have begun not only to flock towards organic foods but to foods that are locally grown and distributed directly by local producers who usually can not afford the additives sold by Balchem. This demand has persevered even as the US Economy has seen an economic slow down with demand increasing more than 7.7% between June 2007 to May 2008. In 1990, Balchem benefited from the enactment of a nutrition labeling law in the US that forced food manufacturers to look toward nutrition additives as a way to enhance the nutritional value of their products without sacrificing shelf life. In other words, food manufacturers wanted to maximize the amount of nutrition they could place on the labels by maximizing the nutrients in their foods in a cheap and cost effective way. Therefore, a move by consumers towards additive free foods, will only hurt BCPC's bottom line.
All of the techniques and processes used by Balchem to manufacture its microencapuslated products are protected by 17 patents that, as of 2008Q1, are valued at close to $2 million or more than 12% of their total net earnings during fiscal 2007. However, with more than 107 active patents in the US that have been issued regarding this process, Balchem is under constant pressure to ensure that their competitive advantage is not eroded by the technical achievements of their competitors. This is especially true as Balchem seeks to use their patents to create pharmaceutical products, while patent expiry can cause sales to drop by more than 80%. This severe reduction in sales is caused by the flood of generic drugs onto the market, which are usually priced at a much lower level but have the same chemical ingredients as the original.
All three of the substances sold under the Specialty Products division are shipped in double walled, recyclable stainless steel drums. Steel prices have increased almost 50% since the beginning of 2008. With nearly all of the major steel suppliers predicting higher prices for the second half of 2008, Balchem, like other companies dependent on steel (automotive, construction), will be forced to either pass on higher prices to consumers or reduce production. These rising expenses have already started to take a toll on the profitability of the Specialty Products division which saw a 10% drop in year to year earnings during the 2008Q1 that was coupled with a 5% increase in sales during the same period.
The consumer goods sector contains more than 1000 publicly traded companies but BCPC's main competitors, like itself, are firms that have a consumer oriented approach to biotechnology and who offer scientifically advanced products that have an everyday applicability.
|2007 Gross Revenue||2007 Net Profit||Number of US Patents||Market Cap|
|BioDelivery Sciences International (BDSI)||1.778M ||(2.826M) ||2 ||45.91M|
|Praxair (PX)||9.89B ||1.22B||942||28.56B|
|Monsanto Company (MON)||11.04B||1.91B||4213||61.51B|