STRONG COMMERCIAL MOMENTUM BUILDING
Elric Lloyd-Langton April 7th 2018
Sometimes it's very difficult to keep up with events at OptiBiotix. Before we do, a factoid for you. NHS spend on treating obesity and diabetes is greater than the police, fire service and the judicial system combined!
If you were to look to the share price graph, it would suggest there is a funding issue, or there has been no progress by the BOD – In fact, you'd be forgiven for assuming the BOD have failed miserably over a two year period; they haven't and there is no funding issue. In truth, I think it is fair to say, with the benefit of hindsight, OptiBiotix perhaps got away from itself by December 2015 when the share price touched on the heady high of 103p. The fact is, OptiBiotix were back then, very much building an impressive IP bank, building the business from the foundation up to where it is now, the first floor of commercial progress. This metamorphosis from an R&D to a commercial entity only started eleven months ago at Vitafoods in Switzerland, where the company will again launch new products with one of it's largest partners, SACCO. There is anticipation a range of new LP-LDL® & SlimBiome® products will be launched soon, in-fact, the new corporate website has taken a metamorphosis of its own in preparation which will act as a central point for all stakeholders across the commercial, scientific and investment sectors wanting to find out more about the company’s developments and expertise. It's main focus will be B2B with B2c facilitating a retail arm for OptiBiotix's products and that of their partners.
OptiBiotix is now entering a key phase, it will be a year since it's first products were launched, by HLH BioPharma – the first of what group CEO, Stephen O'Hara calls small national type deals. Since then, in what must seem an eternity to long term investors, OptiBiotix has gone from strength to strength by signing increasingly larger commercial deals, ranging from raw ingredient manufacturers, formulators to distributors and sales.
Where are we now? Since May 2017, OptiBiotix have signed an average of one commercial deal per month. Most recent of these were with Trigen for OptiBiotix's own-label CholBiome™ products in South Asian markets and Cambridge Commonalities for SlimBiome® weight management technology, on a non-exclusive basis for the UK, or at least that is what many investors thought, so I asked SOH if he would clarify; “We build into any agreement the opportunity for any distributor to extend into new territories on a named customer basis. So if they came to us with a major retailer we would look to agree term on a named customer basis for that territory. This gives us maximum commercial scope without limiting further agreements in other territories.” Essentially, this means partners have the option to distribute throughout their commercial footprint on a named customer basis.
In a recent interview with Proactive Investors, SOH highlighted the point there is increasing interest from large pharmaceutical companies, and suggested it was a matter of time before OptiBiotix's IP was utilised in a pharmaceutical production, after all, all the IP is pharmaceutical based. But, there are two issues investors are struggling to understand, which has resulted in a two year negative trend in spite of real commercial progress with tight controls on the cash. 1: revenue visibility (more on that later). 2: The length of time a partnership result in tangible products. Currently (as far as we know) only HLH and 72% owned THWLC (GoFigure brand) have products on the shelves, so. I think it's fair to say many investors expected partner products to be available much quicker. The reality being, the partners have all grown in size, so has commercial footprint of these partners, so the logistics of other partners, like SACCO, Nutrilinea (earlier raw ingredient suppliers) need to manufacture the ingredients, then the process of market research and taste tests before production, all this can take 9-12 months for the larger partners like, Gallenicum, for example. Their commercial footprint for their “Stop & Go” probiotics spreads from Japan, Middle East, EU and Americas.
The revenue projections has been a real battleground on the forums, not helped with broker FinnCaps constant “corporate rating” non event....just say nothing guys. To be fair, they are waiting for guidance from SOH. Rightly or wrongly, SOH is being ultra-cautious, when the AIM market is rife with ramping statements from unscrupulous BOD's (usually ahead of a placing) some OptiBiotix PI's would perhaps like SOH to forget all that at and big the company up a little. In my opinion, SOH is being astute. The moment you start offering financial projections you are at the mercy of the partners and if those projections slip by 20% then a profit warning would need to be issued. That said, SOH has given us firm indications, approximate figures based on what the company has build thus far. Just because they have not appeared in an RNS, it doesn't make them less credible when the info is out there.
Revenues Back-end of last summer, SOH offered up the following in a conversation; “Our strategy is to build multiple partnerships and the £3-6m based on approx 10 national partnerships per application areas each delivering £300-£500K per year of existing products which comes from our discussions at Vitafoods, It does not include retail partnerships which in themselves can be worth £5-6m pa, or other application areas such as dairy, snack bars etc or partnerships with global corporates as these are more difficult to forecast both in terms of deal structure and timescale.”
It should be noted OptiBiotix have moved on since this comment, in that the national type deals appear to be taken over by the much larger deals, though I suspect we will get the c10 national type deals spread across all platforms. It is also worth noting the specific ref to “retail partnerships which in themselves can be worth £5-6m pa” given SOH's indication OptiBiotix have 3 lined up. Also another example, SOH indicated larger deals; TATA, Gallenicum, CII, and now I presume, FineFoods and Tigren could be worth c£1.5m +pa. “Both the OptiBiome® and OptiScreen® divisions have been set the target of breakeven this year and should have revenues of around £5m in a few years giving us a conservative valuation for each platform at £50m on a 10X multiple.” Continuing; “SBTX – of which we own 41.9% and the SweetBiotix® and microbiome modulation division will be valued higher. Investors may also have picked up that LP-LDL® is increasingly attracting interest from large pharma. The product has been develop using a pharma platform, has clinical studies equivalent to phase 1 and 2 and is increasingly be seen by partners as a biotherapeutic. This will greatly enhance the value of this asset. “
Let's think about this for a moment. OptiBiotix platforms are already equivalent to phase 1 and 2. Just the basic research time-frame can be anything from 3-6 years; that is a lot of time and funding saved right there, making OptiBiotix LP-LDL® very attractive, more so given the high profile pharmaceutical companies that have dropped their cholesterol hope, like Pfizer and more recently, Merck, citing its clinical trials were not good enough.
OptiBiome®: A high throughput technology platform that screens identifies and/or develops microbiome modulators, which can be used in proprietary formulations to prevent, manage, and a wide range of chronic lifestyle diseases. SlimBiome®, the first product commercialised, is used to manage weight to help ensure an individual’s health and wellbeing. Other products under development that help to improve human health through the science of the microbiome include:- I. CardioBiome® shown to reduce total cholesterol by 25% in gut models II. ImmunoBiome® is under development. Designed to improve immune health and reduce allergy symptoms III. PsychoBiome is under development. Designed to improve cognitive health and reduce anxiety and stress related conditions.
OptiScreen®: Targeted Probiotics A high throughput pharmaceutical screening platform to identify microbial metabolic pathways that interact with human pathways to improve health. OptiBiotix Health has developed a proprietary high throughput screening and optimisation technology platform designed to identify microbes with metabolic pathways that can interact with human physiological processes and derive health benefits.
The ProBiotic platform, could prove a much easier to predict revenues, because this tech is most likely going to be used to enhance existing probiotics, as demonstrated with Chr Hansen's LGG in collaboration with DSM. By using this to enhance existing probiotic products, it would by default have more predictable revenue recognition, because the sale data is historical and the royalties would be also. I think most of us forget about this platform and the size of it's existing market, which is growing rapidly. And given the recent headline about sugar content in some dairy products, this platform has the potential to be huge, and thus spun-out along with SweetBiotix. The scope here is huge, but it takes time.
Valuation benchmark We first need to understand the low cost business model. If this works well the company should be able to build up revenues in the £20-30m region in the future giving a valuation for OptiScreen division alone under current industry examples in the region of £200-300m. Perhaps this seems wishful. However, ProBi’s valuation of £500m (2016) value on £25m sales in 2015 accounts, or 20x revenues = industry valuations.” This is the model valuation I am using – right or wrong, so find your own benchmark that makes you comfortable.
I have commented on the Probi business model OptiBiotix is employing before in some detail, which can be seen here. It seems to me only seasoned long term investors understand the workings of what I believe is a brilliant strategy the wider market has not yet realised what is before them even as it unfolds. As well as the Probi business strategy, there is the company structure to consider.
Current commercial progress Broken down in to partnership value to OPTI. These are approximate figure based on the lower* end of anticipated progress. Built in are performance related targets designed to protect OPTI. I put the following to him this week, to which he answered, “looks right to me.” Brief and to the point.
Small – £300k + pa THWLC (GoFigure) HLH BioPharma PharmaBiota
Medium – £500k to £1m pa Nutrilinea Knightons Cambridge Commodities
Large £1.5m + pa CII 2XTATA Tigren pharmaceuticals FineFoods & Pharmaceuticals Plus as yet two unknown **US partners; One took shipment of one ton of SlimBiome® for trial purposes and the other SACCO brought to the table for LP-LDL® which I think is for dairy products.
SOH has also spoken of three large UK Retails, these could yield **£5m – £6m pa, but at reduced margins. In addition, it is hoped the new e-commerce site will in time represent 10-12% of group revenues and become a business in it's own right.
If we concentrate on the lower estimates* we have for confirmed partners, we arrive at a figure of c£11.9m revenues. This is forward looking with 12 months of revenues from all existing partnerships, by FY 2019, being the most realistic time-frame. Using the 20 x revenue multiple, I arrive at a market cap of c£236m, ex £2m PLC costs attributed additional to the new **e-commerce site **Not included in estimated revenues.
The other noteworthy, is operating margins. Prob's are not so great compared to OPTI. According to stockcube comparison tool, 2017 GROSS MARGINS were under 50%. See http://tinyurl.com/y7pulkl7 I have no idea how accurate this tool is and I haven't done the maths myself either, but we do know OptiBiotix's GROSS MARGINS are considerably greater than Probi's – so, in time I wouldn't be surprised if OptiBiotix's earning multiple was double or even more than Probi's. Just not yet though! The reason for the huge difference between OptiBiotix v Probi's margins is down to one difference in the business model; OptiBiotix is essentially a virtual company, Probi is not because it has a manufacture facility. Dependent on quantities of whatever it needs to manufacture, it does so in-house – OptiBiotix is out-of-house via CII, SACCO, Knightons & DSM, ALL 50/50 profit share on supply of ingredients. Furthermore, partners like SACCO undertake further scientific studies to prove up the science even further at no additional cost to OptiBiotix.
Near term revenues will come from SACCO, CII, Nutrilinea, Knighton and DSM, because these companies will provide the raw ingredients for products, which will be invoiced and paid for on delivery. Royalties and profit share later.
IMHO, SOH will have an indication of product sales based on ingredients weight supplied, and in most cases, he should have a good indication by interims 2018 and perhaps he may feel confident in offering guidance at the FY report in April/May 2019. That said, it is likely SOH would be tempted to keep a lid on expectations until most contracts have had 12 months under their belt. I see nothing wrong with this tactic, though understand investors want as much detail as possible. However, this needs to be balanced within the terms of NDA's – respect, trust builds confidence and a strong business relationship.
Commercial retail hoops I'm like so many investors here, I just don't fully understand the mechanic of what management do behind the scenes. Yes I imagine time consuming negotiations, legal documents, etc. OptiBiotix are in a very good position as first movers in key healthcare area's within the humanbiome and their technology is highly sort after. This causes it's own problems, in that you may have multiple companies wanting exclusivity over in terms of territory, or product(s), this is a nice problem to have, but it slows the whole process down as OptiBiotix BOD try to strike the right long term deal. The consequence of this, OptiBiotix get the deal that is right for them without compromising on strategy and costs.
Christina gave a very useful insight to the work she had to do and the payback, which I imagine many of us will not have been aware of, unless they had a background in retail purchasing, etc. On the SlimBiome® front, I have been very active putting the right foundations in place ready for a big commercial push in 2018, including working on applications, product development and process improvement with the right partners. As I am from a food manufacturing background, I know what is needed by retailers so had to put some ‘rigour’ into our process by introducing the necessary governance, traceability, trials and gate approval systems for best products/ingredients/manufacturers ready for listings. Our new improved SlimBiome® is now ready and has opened up a lot of new opportunities and possibilities as we can include it in much wider range of products without affecting its functionality. All that takes time but it was well worth investing in it to get it right ready for commercialisation. We ran some trials which were very successful and gave a much better end product than using the original SlimBiome® as well as improving the mouthfeel and texture. There’s also a lot on GoFigure but I cannot go into detail until our next RNS. To get listed in any major retail outlet, there are only 2 range reviews per year and a product approval system to go through prior to getting products on the shelves. This can take many months as they want to check products, regulatory, store trials before finally giving the ‘green light’. There is also a lot of testing from our side to see how the products respond to different temperatures and humidities , (in the case of exporting) shelf life trials (how does the product degrade over time), micro’s testing (is there any danger of microbial growth over time) – all of which takes time and investment.
Summary observations The current share price fluctuations are part of a trend we have seen a few times over the last 12 months where market makers and some traders selectively pick out a couple of areas to panic/concern investors to put download pressure on the price. History tells us that the price typically bounces back as the fundamentals on which the business has been built have not changes. These are:- 1. OptiBiotix are leading the field in the microbiome space, a market growing at 22.3% per year, and described by health experts as ‘healthcare’s most promising and lucrative frontier’. Recent corporate visits to the US and across Europe added further reassurance to BOD's belief that they have world leading technology which is exciting the interest of major corporates. 2. The company has been built on four platforms: SkinBiotherapeutics (of which OPTI owns 42%), OptiBiome (of which SlimBiome® is one product), Optiscreen® (where they have launched LP-LDL®) and OptiBiotics® (which includes microbiome modulators). These diversify investor risk and create multiple opportunities across major markets. We believe we are unique in capturing such a wide breadth of opportunities in the microbiome space. 3. In the last 3 years the company has created new science, tested it in the laboratory, and then performed clinical studies, so we can be assured we have safe and effective products. Products have won international awards and we have won awards for best science at major scientific events in both 2017 and 2018. This demonstrates the leading nature of both the science and products. OptiBiotix now have world leading key opinion leaders presenting its science for them which creates corporate interest. This is all part of building a strong and valuable business. 4. The strategy has been clearly defined from the beginning: develop the science, strike joint development deals with global partners, prove the science in humans studies, and then strike deals with manufacturers, formulators, and distributors to commercialise the products. This is a track I have gone down many times and builds true value. 5. OptiBiotix have struck deals with major corporate partners such as Tata (x2) and DSM (the worlds largest ingredient supplier) to either manufacture product on a global scale or develop applications for themselves consistent with a JV and JDA strategy. NDA's means confidentiality not to disclose the launch plans of these companies as because of the “intel inside” and not the product owner. 6. Rapidly transitioning from a product development company to the commercial stage of the companies development. This started in Europe in May 2017 and USA in late September. Since then been a rich deal pipeline has been developing which will build into significant revenues over time. The plan is for each divisions building revenues of between £5-£10m in the forthcoming years giving valuations for each division of £50 to £100m. Most investors will have seen from the recent RNS’s the gradual evolution from small privately owned pharma companies to larger £100m + revenue companies like Cereal Ingredients and Gallenicum. OPTI will continue on this path as it reduces the dependency on one or two big deals but has to be negotiated carefully so as not to exclude the global opportunity. 7. OptiBiotix are in a new space with new partners I believe providing revenue forecasts is high risk until the completed commercial transition. However, SOH has often provided guidance on likely deal contributions...see above. 8. Typical commercial deals should generate annual revenue in the £250,000 – £500,000 range for smaller privately owned companies with deals with companies with £100m + revenues typically worth £750k-£1.25m pa, as well as anticipation of larger deals in the multi-million range with global corporates and large retailers. 9. On AIM there is often a disconnect between the scale of opportunity and the share price which can often be artificially manipulated (higher or lower) with a number of trades. However, as outlined in the most recent proactive interview investors should be able to see they are building commercial momentum across all our platforms, starting with the smaller deals with pharma groups which are quicker to execute and building into larger deals with the likes of Cereal Ingredients, Gallenicum, and FineFoods. This trend looks as though it will continue interspersed with a number of corporate and retail deals in the pipeline. 10. I feel we are close to the wider market realising both LP-LDL® and SlimBiome® have already built up multiple revenue streams, possibly greater than we initially envisaged. Once this becomes fact, then each new partnership announced will have a material effect on the share price. 11. Opportunities to close out 3 major retailers, six major corporates, including 2 global corporates for SweetBiotix® 12. Online site at the end of April selling a wide range of products being developed by our partners.
The signs are there, you just need to look What followed was one of the biggest confirmation signposts yet OptiBiotix are gaining significant commercial traction in the US and Europe, with the building of new pharma ready production capacity (FineFoods (12000 sqm), CSL & SACCO combined 3700 sqm) in US and Europe and confirmation from our CEO, OptiBiotix is key to this development. Of course, there is the usual caveats here; OptiBiotix are not CSL & SACCO's only client and I'm sure any new corporate would want assurances any business they give them, they have the capacity to supply them. Either way you look at this development, it is great news, but how far out there beyond existing investors has it got?
What we need is an RNS stating; due to commercial demand for a number of OPTI wellbeing products, two of the global leaders in the manufacturing capabilities have invested in the expansion of pharma ready and FDA approved production capacity in the US and Europe to ensure they can assure their clients they can meet increasing demands for the products containing OptiBiotix, LP-LDL®, the “intel inside” their dairy and other food products. And of course, commercial contracts that eat up this capacity.
SOH's thoughts after SACCO tweet and comment from me. He offered the following, which confirms my thoughts, hopes, I guess would be more accurate.
SACCO are an excellent partner who have invested heavily (£1m) in supporting LP-LDL given us booth time at major exhibitions and employing new staff to take the product across Europe, and the USA, and take the dairy product to Asia. THE INCREASED CAPACITY IS A REFLECTION OF THE INTEREST IN LP-LDL and OTHER OPPORTUNITIES BEING DEVELOPED BY OPTIBIOTIX, and Sacco reputation and expertise. We had numerous opportunities to work with global manufacturers but chose SACCO/CSL for their industry reputation, extensive network and track record in building sales. We believe we have made the right choice.
We are seeing a similar commitment from Cereal Ingredients which we believe will pay major dividends in the US market.
I hope this type of news helps build the picture for investors of our commercial strategy whereby we strike partner agreements with manufacturers, formulators, and distributors taking a percentage of each part of the value chain to give us multiple revenue streams form multiple partners across multiple territories. This is unlike any other company who tend to focus on a single technology, single product platform, but is designed to mitigate risk and build a £200m+ business.
We started on the commercialisation path in May (Europe) last year for SlimBiome® and LP-LDL® but investors should not forget that whilst lst SlimBiome® and LP-LDL® are starting to build sales their are large opportunities with microbiome modulators, OptiBiotics®, SweetBiotix®, and of course SBTX. I believe any one of these has the potential to be a £60m business in its own right. As you have identified anyone reading the SBTX report should be able to see the potential opportunity for SBTX and recent rises in the share price would seem to support this. Manufacturing scale up, the data on Staph aureus, are significant milestones which with a an upcoming clinical study should lead to a significant value enhancement.
The author of this report has a financial interest in Optibiotix Health PLC and SkinBioTherapeutics PLC as a shareholder.
The contents of this reports is for educational and information purposes only. No advice is intended.