In this straw I set out an interesting journey I have been on this week, following an exchange with @Tezzdog  last weekend, that put $BIO on my radar screen. I posted an initial - and somewhat bearish - response to @Tezzdog's question.

@Strawman promptly came to the party and, by midday Monday, had lined up a SM Meeting with MD and Founder Blair Vega Norfolk (BVN) for Monday coming. (Well done, sir! Where else can you get that kind of access to a CEO – I ask you.)

For those who are interested, this straw contains some further resources that can help prepare for Monday. (If you are anything like me, I like to go into Strawman meetings with a lot of research under my belt, as I find I "hear" so much more. I agree with @Wini from the recent SM Meeting that its important to have an informed point of view, before you listen to management.)

Alternatively, you can skip all this and I’ll see you on Monday, leaving you with the thought that, yesterday, I picked up a tiny starter stake in $BIO - even though there's every chance I have royally overpaid. However, if it meets my expectations, I have a lot in the tank I'd be prepared to allocate over the next year or two. So, I'm not too fussed.

Summarising my Bearish Views

My governing thoughts (based on an hour's research on Sunday) was that I considered 1) the global competitive landscape and 2) the strength of board and management as significant barriers to achieving the global success to which $BIO aspires. I also highlighted why, at 11x revenue - whatever the outlook - it ain't cheap. That was then.

Meetings with BVN which Helped Me Form a More Bullish View

The following two videos are worth viewing:

1. 4D Half Yearly Results Video - February
2. Interview from Shares In Value with BVN

There's quite a bit of overlap between the two videos, with more insights in the second. So, I got my assistant Claude.AI to summarise the transcripts under key headings. I've reviewed it, it seems pretty accurate, and I’ve dumped it at the end of this Straw for those who are interested, but haven't got 30 minutes to watch the video. (Scroll down to the dotted line, if you want to skip straight to that bit.)

My Take-Aways - what I've learned over the last 5 days

I structured my takeaways from this material and other research under some key headings, including what I learned in doing the next level of research, and how it challenged some of my initial bearish views. I was not starting from scratch, as I did some work on the probiotics market several years ago when I was looking at Blackmores, but never progressed further. It is a market that has long been of interest to me, partly because it combines healthcare and retail – two areas in which I am very happy investing and have enjoyed some success over the years.

1. Research-supported Condition-specific Activated Probiotics

In my bearish response at the weekend, I focused on just how large and well-established the global probiotics market is, and how established the international competition $BIO will faceas it ventures beyond Australia.

BVN made a remark in both videos (which no doubt we'll hear on Monday) that $BIO are first movers in "clinically supported, condition-specific, probiotics". Having cursorily examined some of the global competitors, I am not sure I agree with this statement, and I believe I can show that it is incorrect. However, it is true that the vast majority of the current global probiotics market has quite general label claims (e.g., “promoting gut health”), without specific clinical trials support or defined, specific indications.

Another advantage is that the formulation/encapsulation technology $BIO uses allows more of the live probiotics to survive passing through the stomach to reach the gut (small and large intestines). Again, while I am sure this isn't unique, it is a differentiator from the vast majority of probiotic pills, powders, yoghurts, and drinks out there, which churn around in the stomach acid for 30 minutes or so. (I happen to have 5 years’ experience working in pharmaceutical formulation technology and manufacturing, so am not an entirely novice in this area. In fact, part of my post-doctoral research involved a collaboration looking at sustained-release formulations, albeit I was not a principal investigator for this work!)

The standard behind $BIOs claims is that each formulation is supported by double-blind, randomised, controlled, clinical trials measured against specific end points. Again, I want to emphasise that I don't believe they are unique in this respect. However, it does differentiate them from most of the current market. Learning this, made me sit up and take more notice.

2. A Differentiated Go To Market (GTM) Approach

This is where BVN's marketing background shines through - and I think it really does differentiate them. Listening to him speak convinces me that this guy really does have deep marketing expertise.

Most probiotics are essentially a fast-moving consumer good (FMCG). Develop the brand, do the distribution deals, and get as much shelf acreage for each SKU. Support sales through brand-building, advertising and marketing spend. This is what Blackmores does with Bioceuticals. If necessary, discount the hell out of it to land the mega distribution deals, e.g., Chemist Warehouse.

$BIO is different. They sell "behind the counter". They aim to provide products to the community pharmacist, the nutritionist, the dentist, etc. where they can add value to their customers. They are giving these customers something you can't get at the "pile 'em high and sell 'em cheap" outlets.

This means the professional is incentivised to recommend $BIO's product. Because they generate more margin per sq metre of shop space than the competing mass market offerings, where margins are thin. While $BIO does distribution deals, they won't compromise on price. BVN quantifies these metrics in the videos, and I’m sure we’ll hear more about that next week.

To test this, I've done some online trawling, and indeed, each product appears to have a consistent price floor. Maintaining pricing discipline appears to be a core value – it maintains margins and supports the delivery of value to the healthcare-professional-retailers.

3. A Global Rollout that Follows the Australian GTM Approach

$BIO are not in a hurry in their global rollout. While they have plans for UK, EU, Canada and soon we'll hear about the USA, they are following a strategically slow approach.

The UK and Ireland is an example. They've been working there already with key professionals and opinion leaders to market test the product fit and build the support of the healthcare professional community.

This approach is consistent with what they've delivered in Australia since 2018. It not a boots-on-the-ground and roll it out classic FMCG sales and marketing strategy. They want to work with the targeted healthcare professionals to build product support and market fit.

(I think BVN started out in luxury goods marketing, so he understands brand value and pricing!)

This is very important to me, because it means that with the next 1-2 years of getting going in the UK, we'll have an opportunity to see to what extent they can scale in another market. And from UKI, then the EU is next.

4. Capital Raise - What Capital Raise?

In my bearish response over the weekend to @Tezzdog, I "confidently" predicted that with the recent, massive uptick in SP, and the impending global rollout, that $BIO will be raising capital, and soon.

But will they? Watch the video and see what you think. BVN clearly takes some pride in that they haven’t done a major raising since IPO and that they are now cashflow positive. Their GTM approach is entirely consistent with boot-strapped growth (think $PME).

Furthermore, with 60% gross margins (which I think must include elements of embedded "R&D" and "manufacuting capex" in the cost of goods given their business model), excellent expense control, and a capital-light model, maybe they can do it.

That said, the SP has gone crazy over the last year, so perhaps there is something to be said for building a strong balance sheet. Defintitely one for @Strawman to question on Monday.

5. Market Position

This is really all about Australia. $BIO has established 5,000 “distribution points” across Australia, roughly split 50:50 between community pharmacies and practitioners. They have deals with Terry White Chemmart (600 pharmacies) and Priceline, and supply 1500+ independent pharmacies, giving them a product line that the big discounters can’t access -well they can if they are prepared to pay the full price.

So, what does $13m of sales look like in an Australian market context?

Well, according to Research and Market (2023), the overall market size is around $350m. But of course much that includes the animal segment and probiotic foods. Based on an older source (2016), only about 8-10% of the headline market relates to “Dietary Supplements”. If that’s true, then $BIO have achieved a significant Australian market share in 5-6 years. (I need to do more work on this.)

BVN believes the runway ahead in Australia is 8x current sales, driven by doubling the number of outlets and then growing the sales per outlet. I’m less sure about this, and hopefully we can discuss further on Monday. (To what extent does the “creaming curve” and “diminishing return” come in to play?)

In any event, it looks like there is a good runway ahead in Australia, where they appear to have established a financially sustainable model at $13m revenue, growing at c. 70-80% p.a..

6. Economics and Scaling - Looks Good So Far

6.1 Quarterly Cash Flow Trends

(edited straw now includes legend in graph below)

The chart above shows my usual trend analysis from the 4C Cashflow statements. While there is some seasonality through the year (which BVN comments on), the trend is clear.

This business appears to have clearly headed to the inflection point, while yet to achieve $15m in annual revenue. This has been possible because of disciplined expense control and the capital light model (R&D partnerships, and outsourced manufacturing – active agents and formulation.)

6.2 Balance Sheet

With only $2m in cash at the last 4C, $BIO is running close to having to raise capital.

However, rather than do this (beyond exercise of options), BVN has been drawing down some debt. At the last 4C they had drawn $1m of a $1.2m facility.

Although $BIO now appears to be cashflow positive, a question for the SM meeting is whether it would be prudent to leverage the current high SP and raise some capital to buttress the balance sheet for the next phase of growth. (To my mind, $20 million wouldn't be too dilutive, and would give some head room on staffing, and licencing in new molecules.)

6.3 Financials and a What-If Scenario

I’ve done a little “spreadsheet jockeying” this week (of course, as I’ve had two weeks of cold turkey!), and from the 2021-2024F actuals, and a modelled scenario for FY25 and FY26 I have developed the picture below.

The above picture is a scenario – its not a forecast!

What it shows is the impact of strong revenue growth, 78%, 76% and 80% (FC) for the last 3 years, including the current.

Expense control has been exemplary, with +3.4% (FY22) and +6.7% (FY23), and I’ve thrown in a +20% assumption for each of FY24, FY25 and FY26.

With minimal D&A (capital light), if revenue growth in FY25 and FY26 are 75% and 70%, this baby is soon generating a meaningful NPAT!

Why did I choose these revenue growth numbers for this scenario – see my comments in 5. Market Position, above. And BVN says in the video that current rates of growth can be sustained in the short to medium term.

7. Ownership

According to Simply Wall Street, individual insiders own 34.5% of $BIO, with BVN’s shareholding at 8.5%, and BVN’s long-term partner in science Dr JB (who I referred to last weekend as the part-time chief scientific officer) has 1.72%,

So, there is reasonable alignment and, in one year, BVN has become a wealthy man!

8. Valuation

In my experience, it is notoriously difficult to value a company that’s coming up to the inflection point.

In terms of valuation multiples, you might take one look at 11x Revenue and move on.

But if $BIO can deliver the financial performance in the scenario I’ve shown above, then at a SP of $0.63, its P/E in 2026 falls to 19.

If its P/E in 2026 is 40 (which would be very modest given my forecast revenue and earning growth), then the valuation discounted back to today would be $1.10.

So that’s not a valuation, but as a result I felt quite comfortable taking a RL position of 0.25% because I want to follow this business very carefully as I do further research.

4Q is typically a high payments period, so if there is a bit of a "SP panic" at the next 4C, I’ll up my position. Whatever happens, our shared experiences here in microcap land is that you can take your time building a position. FOMO is for Dumbos!

9. BVN – A Founder with a Vision

BVN tells his personal story in the longer video – and it is quite interesting. I’m quite impressed by him. We’ll all get a chance to form our own views next week, so I’ll keep this brief.

One point from his CV is that he is a Non-Exec Board Member of the International Probiotics Association. I think this is interesting because it means he is linked into the global industry players, and this role will help him incubate the partnerships that are key to $BIO’s business model. And it also gives him an international industry perspective, which is so important to $BIO’s long-term success. (You can see some of his posts showing his attendance at industry events on LinkedIn.)

CONCLUSIONS

I find $BIO and BVN interesting. It was easy to be dismissive with 1 hour’s research on Sunday. But with now 30 hours of more in-depth work under my belt, including updating my view on the sector globally, I find $BIO to be very interesting and am really looking forward to next week’s meeting.

I still have concerns about the Board and Management bench strength, given the company’s ambition. But I find BVN to be impressive. He is the founder and has a vision for this firm. He appears to be strongly values-driven, and clearly articulates his strategic thinking. (And remember, Sam Huppert and Richard White grew with their businesses over the years!)

While I don’t completely buy everything he has said (when viewed from the perspective of some of the larger probiotic-specialist competitors overseas), $BIO is definitely a unique play in this part of the world. The big question is – how do they scale and compete internationally? UKI will give us the first insights, and we will see this over the next 1-2 years. Yay!

My final word – thank you @Tezzdog for asking the question! If nothing else, you have helped me have a very interesting first week back from holiday.

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Claude.AIs Summary of the "Shares In Value" Interview with BVN (5th July 2024)

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Company Background and History

Biome Australia (ASX: BIO) is a company focused on developing and commercializing live biotherapeutics and complementary medicines. Founded by Blair Vega Norfolk in 2018, the company's journey began much earlier:

• In 2012, Norfolk completed his MBA and was working in California advising nutraceutical companies on customer understanding.
•  After developing his second autoimmune disease, Norfolk partnered with Dr. JB, an Australian PhD in medicine with 20-30 years in drug research, to formulate nutraceutical products in 2013.
• They initially planned to test market in Australia before launching in North America, but realized Australia was a significant market for complementary medicines and probiotics.
• From 2013-2018, they used their initial company as a vehicle for R&D, market understanding, and building relationships with distributors, pharmacy groups, and suppliers.
• In 2016, they moved into R&D and research in the microbiome space.
• Biome Australia was founded in 2018 to focus on condition-specific probiotic products.

Product Range and Unique Selling Proposition

Biome Australia launched its Activated Probiotics brand in November 2019 with nine products. Key aspects include:

• First-mover in condition-specific probiotic products globally
• Unique IP and products put through randomized, placebo-controlled, double-blind clinical trials

Product highlights:

• Biome Lift: Clinically validated probiotic for mental health
• Biome Fem: Probiotic for female vaginal health conditions

The company's point of difference in the market includes:

• First-mover advantage in condition-specific probiotics
• World-first clinical trials
• No direct competition on their products
• Premium, affordable pricing strategy without discounts
• Strong margin (60%+) compared to industry standards

Growth and Distribution

Biome Australia has experienced rapid growth since its launch:

• FY20: 100 stores, $800,000 revenue
• FY21: 1000+ stores, $2.1 million revenue
• FY22: $4.1 million revenue
• FY23: $7.2 million revenue
• FY24: $13 million revenue (beating upgraded forecast of $12.5 million)

Current distribution:

• Approximately 5,000 distribution points in Australia
• Roughly 50/50 split between community pharmacies and practitioner market
• Major customers include Terry White Chemmart (600 pharmacies) and Priceline Pharmacy
• 1500+ independent pharmacies

Future growth strategy:

• Currently at 40% of addressable market in terms of distribution points
• Only 25% developed within existing distribution footprint
• Potential to quadruple current revenue with existing distribution
• Opportunity to double distribution
• Conservative approach to expansion, focusing on optimizing existing accounts before adding new ones

Financial Performance and Outlook

Key financial highlights:

• Achieved first quarter of positive cash flow in December quarter (FY24 Q2)
• Positive cash flow in March and June quarters (FY24 Q3 and Q4)
• Positive EBITDA for the first two quarters in a row
• Cash flow positive and expected to remain so
• No capital raising since IPO ($8 million raised)
• Grew from $2 million to $13 million in sales and became profitable with initial capital

Future financial outlook:

• Continuing to reinvest for growth
• Aiming to become a significant dividend-paying business in the long term
•  Planning to release "Vision 27" - a three-year strategic plan
• Likely to provide revenue forecasts for upcoming quarters and financial years

Clinical Research Pipeline

Biome Australia differentiates itself through clinical trials on finished products:

• Leveraged 30 years of partner IP and research to develop their product range
• Own 40-50% of their product formulations and research
• For licensed products, conduct clinical trials to own hybrid IP

Current clinical trials:

1.    Biome Lift (mental health probiotic):

o  Study with La Trobe University on sub-threshold depression

o  Product on long-term exclusive license, but clinical trial gives Biome IP ownership

2.    Biome Daily Kids:

o  Study at Federation University on children in daycare settings

o  Focus on upper respiratory tract infections, colds, flu, and stomach bugs

o  Biome owns the IP, formulation, and concept

3.    Additional studies in late-stage development (yet to be announced)

Research strategy:

• Lean R&D budget
• Develop relationships with universities and IP companies
• Negotiate partnerships where Biome provides advice and product, while partners fund the studies

Product Efficacy and Impact

Biome Australia focuses on demonstrating product efficacy through:

• Clinical trials
• Real patient feedback and testimonials
• Visual evidence for dermatological products (e.g., eczema and acne treatments)

The company emphasizes its social and ethical impact:

• Registered as a B Corp company
• Reports on social, environmental, and sustainability standards
• Focuses on patient impact and improving quality of life

International Expansion

Biome Australia has a conservative but strategic approach to international expansion:

• Entered UK and Irish markets 2.5 years ago
• Initial soft launch focused on educating health professionals
• Launched into health retail in UK and Ireland in January 2024
• Recently received Health Canada approvals
• Considering North American market entry via Canada in the near future

Leadership and Vision

Blair Vega Norfolk's background and vision:

• Over 13 years of experience in the global nutraceutical and probiotic industry
• Passionate health advocate
• Speaks to medical professionals about probiotics
• Board member of the International Probiotic Association
• Goal to solve health problems not addressed by current medical interventions
• Aims to position Activated Probiotics products alongside pharmaceutical drugs
• Long-term vision to grow Biome Australia to rival major players like Blackmores

Investment Potential

Key points for potential investors:

• Microbiome space is leading drug discovery and development in the pharmaceutical industry
• Probiotic businesses globally are performing well due to product efficacy
• Biome Australia has potential to capture significant market share
• Company has internal expertise to potentially develop probiotic drugs in the future
• Considering pursuing TGA or FDA-approved probiotic drugs to gain trust from health professionals

Closing Remarks

• Investors can find more information on the Biome Australia website's Investor Hub
• The company is open to answering further queries from potential investors
• Biome Australia represents an opportunity in the growing microbiome and probiotic market, with a focus on clinically-proven, condition-specific products and a strong growth trajectory.