@mikebrisy @Arizona do you have any insight into the $bio supply chain? I understand they don't currently own or develop their own cultures, but source them from one or 2 suppliers, which poses a few risks to the business model.

are you aware of any plans to insource the culture strains, or diversify the supplier base?

@Aaronfzr This has been highlighted by Blair Norfolk as an issue.

He has intimated that there are plans afoot to spread the risk/sort this out/

To my knowledge that is as far as it has gotten, at least publicly.

Its an important point.

Just an FYI but East Coast Research is a paid service with the research commissioned by BIO (same model as Research as a Service). I don't necessarily view that as a negative the way some others do, but worth noting. I do agree you are unlikely to be overly critical of a paying customer, but I've generally found RaaS work to be good (sometimes better than actual sell-side brokers) and this ECR initiation looks good too.

@Aaronfzr and @Arizona that is correct.

What I write below is summarised from the late 2021 Prospectus, but I am not aware of material changes since then.

The active propbiotic ingredients are sourced from two businesses: Probiotical S.p.A. (Italy) and Probi AB (Sweden).

For most of the activated strains and formulations, $BIO does NOT own the intellectual property or in some cases it owns the intellectual property in conjunction with Probiotical S.p.A and/or Probi AB (presumably this is where $BIO have sponsored the clinical trials, but I'm not sure.)

Probiotical S.p.A. is a B2B manufacturer and supplier to the probiotics industry and does not own any brands.

Probi AB does own consumer brands.

For several products, $BIO has a 5 year exclusive deal, most ending in 2026 although some are ongoing contracts requiring 12 months notice. More recent products presumably have later dates for renegotiation.

Encapsulation and packaging is by the Italian firm SIIT R.r.l which is a significant contract manufacturer.

The real risk lies around the renegotiation of the deals with the suppliers. The dates I have given above are from the prospectus, and so I am not aware what updates have been given. I guess there is also the risk that Probi AB offers a "me to" in $BIO's markets, if the supply deal becomes non-exclusive. The risk of this increase as $BIO enters more of the markets in which Probi AB has a significant presence.

The recent German deal is significant as $BIO clearly aim to try and build their own intellectual property by owning the IP around the strain and the formulation.

Of course, the value lies in the brand and the practitioner education, so I think the key risk is what value the suppliers try to extract from $BIO when the deals are up for renewal. Clearly, they will want to maximise their own returns, but would not seek to do this at the cost of $BIO no longer having a viable business.

So, the key to watch will be whether $BIO can maintain their current %GM of 60%. An earlyr "Red Flag" would be the removal of any $BIO product around the time of the deal renewal.

Key Takeaways:

From what I can gather, 2026 is a key year, and so it will be worth engaging BVN on the strategy around these agreements and their renewal. (Possibly something to probe him on at a future investor call or the next time we get him to Strawman.)

BVN has spoken about possibly taking formulation manufacturing in house. But I don't think that's a good idea. Pharmaceutical contracted manufacturing is a commoditised industry, and a better approach might be to diversify the concentration risk across multiple manufactuers in multiple locations. Taking manufacturing in-house for such a small business would bring with it a whole new bunch of risks that $BIO are currently not capable of managing. (I speak as a former manager of world scale pharma manufacturing facilities in the UK.)

Equally, I don't think $BIO can get into the active ingredient manufacturing game. The biofermenter facilities are relatively capital intensive, $BIO's volumes are tiny, and again, they don't have the capabilities.

Ultimately, I think $BIO is a brand company, and they are best placed to manage their supply chain risk in three ways:

1) Maintain excellent relationships with key suppliers, and maintain a portfolio of win-win contracts

2) Take every opportunity to add molecules to the portfolio where they own more of the intellectual property (such as the German deal).

3) Diversify the supply base so that they are not exposed to excessive concentration risk.

I do consider that $BIO's destiny is in the hands of others, and that the current concentration risk is high. That is why I have limited my position sizing to 3.5% (RL).

Disc: Held in RL and SM

@Wini I hadn't yet looked for the disclosure, but it was in my mind.

Thanks for clarifying. I think that might go some way to explaining the narrow range on the valuation scenarios!

A really excellent discussion of the topic, thank you all.

I do see a risk in suppliers renegotiating the GM away, but @mikebrisy makes a good point- they are unlikely to squeeze a distribution channel to death unless/until the suppliers seek to direct-distribute themselves.

I also hadn't considered the value-add in the form of the brand and education.

I have stayed away because I am skeptical as to whether probiotics actually do anything clinically for most people. But that's almost entirely irrelevant... certainly hasn't stopped blackmores making a ton of money

@Aaronfzr indeed. Across probiotics generally the clinical evidence is of low to moderate quality and significance. (Cochrane reviews) Having spent a little effort researching the sector generally and the clinical studies supporting $BIO’s products specifically, I’d assess the quality of $BIO’s placebo controlled, randomised, double blind trials as being typical for the sector and mostly published in lower impact journals.

However, my opinion is less important than the hundreds of pharmacists and other practitioners who are convinced by the education and recommend the products X. (I’ve spoken with a couple of them!)

As you say, Blackmores made a significant business of this. I’m interested to see what progress $BIO makes.

A most excellent point @Wini

To be taken with a grain of salt

@Aaronfzr Agreed, its good to be able to kick this around with you all.