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A good Straw offers a clear and concise perspective on the company and its prospects.
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I know I haven't posted on $BIO for a few days. Partly because my investing effort is geting absorbed by results season, and partly because I have started some work getting stuck into reviewing the clinical research behind their products.
For anyone who is interested, they list relevant research papers in the "Science" tab for each product on the Activated Probiotics website. So, you can get a flavour of what has been done quite readily.
However, in one of the early products I investigated, at first I couldn't find evidence of a placebo-controlled, randomised, double-blind clinical trial (PCRDB) in the reseach papers cited by $BIO. Initially, I was concerned. But on doing a deeper search, eventually I DID find a relevant clinical study to this standard by one of their research partners, which was more recent that the study on the product website. (Why is it not the one quoted on the website?)
Long story short, the task of investigating the clinical work for 16 products (well, actually fewer, because there are some overlaps) is going to be a bigger undertaking than I initially thought. I am progressing it, and will report my finding here. But it might take a while.
So far, there are no major flags giving me concern that BVN's characterisation of their work is anything but accurate.
What I am finding is that there is a huge amount of clinical research on health benefits of probiotics - after all, there are many bacteria and almost countless strains, many competitors and a huge range of products out there.
On the "Science" element of the Deep Dive, I am forming some loosely supported hypotheses, bsaed on my work to date:
Anyway, this is turning out to be a big piece of work that is causing some indigestion and heart burn ... pass the probiotics!
The good news - I can see why BVN says $BIO is a first mover and differentiated. There does appear to be good empirical science behind their claims, even if the mechanisms of action are less clear and - in some case - appear contestable. As far as I can see, much of the science of how the microbiome achieves outcomes is not fully understood. In many cases I've read there are plausible theories for the mechanisms, but that is not the same as proof. Again, the same is true in pharmaceuticals to some degree. But I am getting to the limit of my scientific competence here.
The less good news - if they develop a valuable business, I think any moat is less secure than one might think for a competitor prepared to go after it. But I have to get more input on this. Of course, this is where being an early-mover with a strong brand will help. And it is clear that they are making good progress in building a brand known to practitioners in Australia.
Lots of questions, but so far no red flags.
Held: RL (0.65%) and SM
As I speculated yesterday, Bell Potter have updated their valuation slightly off the back of yesterday's 4C. I haven't seen the updated report yet, but picked the following FN Arena summary off the news-wires. Likely explains this morning's SP response, recoverings yesterday's "profit-taking".
TP change appears related only due to tweaking the discount rate - which I don't understand. But in any event, they are still probably below where I sit on valuation, particularly after yesterday's SM meeting.
From FN Arena
Displaying the fastest sales growth of the past five quarters, notes Bell Potter, Biome Australia's June quarter increased by 88% on the previous corresponding period.
Also, operating cash flow (OCF) nearly doubled the March quarter, and was the third successive positive quarter, highlights the broker.
Bell Potter attributes sales growth to the release of new products over FY24 and a 25% increase in distribution footprint across pharmacy and health practitioners. Pharmacy sales account for around 66% of total sales, note the analysts.
The target rises to 80c from 73c as the broker lowers the assumed discount rate to 11.8% from 12.5%.
Sector: Household & Personal Products.
Target price is $0.80.Current Price is $0.73. Difference: $0.08 - (brackets indicate current price is over target). If BIO meets the Bell Potter target it will return approximately 9% (excluding dividends, fees and charges - negative figures indicate an expected loss).
Disc: Held in RL and SM
What an interview - well done @Strawman. Your discussion approach was able to get a lot more insights out of Blair than other interviews out there, and I've gained a step-change in my own understanding. (I think this gives StrawPeople an edge over the market!)
Rather than summarise my key takeaways, because it will rehash much of what I've already written, I want to focus on Blair. But I recommend anyone who's interest has been piqued to watch the FULL interview.
Rarely (if ever in the microcap space) have I come across a CEO with such clarity and range, and internal cohesion in their strategic thinking. I truely rate Blair very highly, and as an example, draw attention to his ability to talk with clarity about 2024, 2025, next five years and next ten years. That's one sign of a great strategic leader. He also now has a cashflow positive business, so its not just a "story". He is the captain of his ship.
I upped my stake this morning in RL to 0.75% (as the market superficially appears to have taken some trading profits on a lower q-on-q receipts). I plan to go higher, but will wait now until I see the FY results and, more importantly, the three-year strategy which he will announce (and which I expect will role out some conservative 3-year targets)
I will place some trades to align Strawman (so please don't all just out and pop the SP before the close!! ;-) )
Very, very impressed.
Disc: Held in RL (0.75%) and SM
Very helpfully, $BIO have issued their 4C ahead of today's Strawman meeting, and reporting pretty early in the 4C cycle.
Their Highlight
My Takeaways
Pretty decent results. I was half expecting to see slightly higher payments - based on last two years. But, no, the expense control continues to be excellent.
I have updated my standard CF trend analysis below. The above comment means the trend is ticking up nicely.
Good that %GM maintained at 60%.
For such a small cap, $BIO has quite a stable CF performance.
SP has got a bit spicey lately, and today's result looks like it will do nothing to take the heat out of it.
I'd like to increase my teany, tiny position, but I'm going to be careful not to do anything to add to the heat on this one. We've seem 2 weeks of fairly decent volumes, driving the SP up, with average daily volumes around a million shares or so. So, it looks like there is a bit of accummulation going on, probably on the back of the BP Buy recommendation. BP's sales forecast probably needs upping, so I expect to see them increase their price target at the next revision (will they do of the 4C or wait for the FY Result?).
My $1.10 "scenario" is looking less aggressive by the day.
Research Update
I've done a bunch of further research on the Probiotic Sector which I've not yet published. I think $BIO are building a good brand, but both in Australia and internationally, there are a LOT of brands in the market. There are also a lot of smaller players who, like $BIO, are getting science behind their products, as well as working on targeting the healtcare professional communities as well as building presence in B2C Channels. There are also an increasing number of products that have sustained released encapsulation technologies to get the active agent to the right part of the gut. (As I said in my first post, these technologies are decades old, but of course there is continuous innovation here.)
\While there is no doubt they are doing a great job in Australia, I need to see evidence of what the international business looks like before building too significant a position.
Disc: Held in RL(0.25%) and SM
I conclude my week of immersion in probiotics (not literally) with a summary profile and some commentary on BioGaia - a $1.8bn market cap Swedish company and pioneer in probiotics development for some 30 years.
I chose this company because in many ways, it looks like $BIO might be if it is super-successful over the next 10 years. Understanding it also helps inform what $BIO is up against.
Metrics
I pulled out the following, making the rough conversion that BiaGaia reports in SEK, with 7 SEK about equal to 1 AUD. (Reference points are to the FY24 consensus.)
Revenues are globally diversified: Americas (39%), EMEA (38%) APAC (23%)
Interestingly, it has also recently entered Canada. While there are some overlaps between BioGaia and $BIO products, there are also areas where they won't compete.
Thinking about the UK, while their products appear to be available and well-establised in several online channels, only one baby product is available via the Boots Chain. This indicates to me that they might also be following a similar discerning GTM strategy to $BIO.
Their product range is also widely available in Australia. So that's good news. $BIO has been able to achieve its success to date in Australia even with the strong presence of its more established European competitor. (I think this is rather important)
There are some big differences in strategy between the companies. For example, BioGaia does a lot of inhouse R&D, and it manufacturers (at least many) of its active agents with state of the art biofermentation facilities.
Also, the CVs of the Board and Management Team strike me as being a significant step up in strength and depth. (Sorry to bang on about it)
At about this stage, I have run out of steam for the week. So, I collared my BA Perplexity.AI and set them one final task for the week, providing them with the 2023 Annual Report to summarise along three key headings.
Here is the link to the report.
Here is my BA's summary (unedited) - but from a glance appears reasonable.
Here is a summary of BioGaia, focusing on their financial performance, product portfolio, and strategy/competitive advantages:
Financial Performance (2021-2023)
BioGaia has demonstrated strong financial performance over the past three years:
2023:
2022:
2021:
The company has shown consistent growth in net sales, with a significant jump in 2022 and continued strong performance in 2023. Operating margins have remained stable in the 34-36% range, indicating efficient operations and cost management.
Product Portfolio
BioGaia develops, manufactures, and markets probiotic products for gut, oral, and immune health. Their product portfolio includes:
Pediatrics (78% of sales in 2023):
Adult Health (21% of sales in 2023):
Aldermis: Cosmetic probiotic skin ointment for infants and children
Key features of BioGaia's product portfolio:
Strategy and Competitive Advantages
BioGaia's strategy and competitive advantages can be summarized in the following key areas:
1. Research and Innovation:
2. Brand Strategy:
3. Omnichannel Distribution:
Two main distribution channels:
a) Distribution partners (nutrition and pharmaceutical companies)
b) Direct distribution through subsidiaries
Expanding e-commerce presence, particularly on platforms like Amazon
Six direct markets: USA, UK, Japan, Canada, Finland, and Sweden
4. Product Development:
5. Global Expansion:
6. Financial Strength:
7. Sustainability Focus:
8. Expertise and Leadership:
9. Production Capabilities:
10. Market Position:
BioGaia's strategy focuses on leveraging its scientific expertise, strong brand, and global distribution network to maintain its position as a leader in the probiotics market. The company's commitment to research, product innovation, and sustainability, combined with its financial strength and flexible business model, positions it well for continued growth in the evolving health and wellness sector.
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Happy weekend!
In my ongoing research, this morning I came across a Bell Potter note - well the front page at least! (Updated June-24, TP=0.73)
Just to compare, their FY25 and FY26 NPAT is $0.3m and $3.2m, respectively. My "scenario" that I showed in yesterday's straw (which I argued supports a TP of $1.10), has values of $1.9m and $7.4m.
So my "scenario" is quite a bit more bullish than BP, but in the grand scheme of things, it is in the ballpark.
If I am critical of this note, it appears that they talk about a "gap in the market". This may be true about the Australian market (which is also supported by @Rick's anecdote, yesterday). However, I am less clear the extent to which the same can be said in other markets.
Without making a negative remark about Bell Potter, I do make the general comment that some analysts tend just to repackage what management has told them, without doing independent, fact-based research. So, in sharing this research, I am not endorsing the statements, but just sharing the views of others.
I remain in an information gathering and analysis mode, and I am not yet taking a view on the stock (for avoidance of doubt). But it is interesting.
Disc: Held in RL (0.25%) and SM
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:
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:
Product Range and Unique Selling Proposition
Biome Australia launched its Activated Probiotics brand in November 2019 with nine products. Key aspects include:
Product highlights:
The company's point of difference in the market includes:
Growth and Distribution
Biome Australia has experienced rapid growth since its launch:
Current distribution:
Future growth strategy:
Financial Performance and Outlook
Key financial highlights:
Future financial outlook:
Clinical Research Pipeline
Biome Australia differentiates itself through clinical trials on finished products:
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:
Product Efficacy and Impact
Biome Australia focuses on demonstrating product efficacy through:
The company emphasizes its social and ethical impact:
International Expansion
Biome Australia has a conservative but strategic approach to international expansion:
Leadership and Vision
Blair Vega Norfolk's background and vision:
Investment Potential
Key points for potential investors:
Closing Remarks
Post a valuation or endorse another member's valuation.