Microbiome Specialist Entering Commercial Phase
KEY INVESTOR MESSAGES
- Leading science in microbiome, one of the hottest areas of healthcare innovation
- Rapidly transitioning from product development to the commercial stage with award-winning products and several deals finalized in past six months
- Addressing the management of significant, chronic health problems such as obesity, high cholesterol and hypertension
- Rich deal pipeline to translate in material revenue growth in the upcoming months, against a lean cost base
- Our SOTP valuation points to significant stock price upside over the next 12-18 months
- Already struck deals with major corporate partners such as Tata (x2) and DSM (the worlds largest ingredient supplier)
MICROBIOME OVERVIEW
OptiBiotix Health Plc (LON:OPTI) focuses on managing and treating widespread, chronic medical conditions, such as obesity and high cholesterol, through the modulation of the human microbiome.
This has the potential to be a substantial opportunity in an emerging market fashioned by new research into the human microbiome, which has created a unique window of opportunity for compounds that can modify the human microbiome and bring specific health benefits. US researchers and clinicians presenting at the 2016 Medical Innovation Summit identified the microbiome as the world’s top innovation, describing it as healthcare’s ‘most promising and lucrative frontier’.
To exploit the diversity of opportunities, OptiBiotix’s (LON:OPTI) has developed a number of technology platforms using different approaches to modulate the microbiome. These technology platforms have moved through the development process of laboratory studies, independent human studies with world-renowned key opinion leaders, and manufacturing scale up. This has substantially reduced technical and clinical risk.
The Microbiome refers to the trillions of bacteria colonizing our skin and gut; in normal "physiological" conditions our body has 10x more bacterial cells than own cells.
A rapidly growing body of scientific literature shows that specific health benefits can be achieved by actively intervening on the composition and activity of our microbiome. As an example, by intervening on the bacteria populating our gut, we can influence how foods are digested, absorbed or directly excreted, thereby controlling the quality and the size of our calorific intake.
To that end, OptiBiotix has developed several products across four technology platforms, addressing large medical problems such as weight loss, high cholesterol and high blood pressure.
One platform, SkinBiotix, was successfully spun-out in April 2017 and listed on the London stock exchange as SkinBiotherapeutics. It has now a market capitalization of about £11.5mln; OptiBiotix still owns approximately 42% of its capital.
The main features of OptiBiotix key products are summarized in Table 1.
Just recently OptiBiotix was awarded important prizes at ProBiota and Food Matters, two key industry events, showing the strong scientific and consumer rational behind their key products in the probiotics and weight management areas.
OptiBiotix is pursuing a commercial strategy based on deal opportunities across multiple levels of the value chain, starting from manufacturing agreements such as the profit sharing agreement signed in May 2017 with Sacco Srl for the production of LPLDL and Knighton Foods (November 2017), which is a 100% owned subsidiary of Premiere Foods, for the production of SlimBiome.
The Company is also seeking deals for the supply of white label and branded products to food producers and consumer health companies, up to distribution agreements directly with retailers.
This multi-channel strategy will enable OptiBiotix to maximize the income potential of every product, whilst limiting the risk related to any individual deal.
As shown above, OptiBiotix is pursuing a commercial strategy articulated around several revenue streams.
As an example LP-LDL platform generates sales via B2B, bulk product and retail sales.
SlimBiome income derives from profit-sharing agreements with several partners as Knighton, Cereal Ingredients and from own label retail sales.
OptiBiotix has products on markets for cholesterol so we see a low regulatory and development risk and a low manufacturing cost as the strain is a very fast grower.
As brand awareness and products' recognition build up on the back of the first few deals recently announced, we expect OptiBiotix to be able to attract the interest of larger partners such as multinational companies with a turnover in excess of $100mn. This is expected in turn to lead to larger corporate and retail deals.
ADDRESSABLE MARKET
It is hard to precisely estimate the size of the market addressable by OptiBiotix products, as the science behind the therapeutic benefits deriving from the modulation of the human microbiome is still young and new potential applications are continuously discovered. According to Research and Markets, a research firm, the microbiome market is rapidly growing at an annual rate around 23%.
Furthermore, OptiBiotix products, such as LPLDL, can be combined in a number of formulations to deliver enhanced health benefits. Euromonitor, a business intelligence firm, expects the global dietary supplements market to growth from c. $50bn in 2016 to over $60bn in 2021. Within that, the supplement segment alone is expected to grow in the US from $2bn to about $3.3bn by 2021.
Although the modulation of the microbiome is attracting the interest of many companies and investors, OptiBiotix appears to be quite unique in its focus on solving specific health problems, rather than general wellbeing, whilst targeting the consumer health segment, at least in these early days of its commercial expansion.
DEAL FLOW
OptiBiotix is rapidly transitioning from being focused on product development to the market launch of their products. OptiBiotix launched SlimBiome and LP-LDL in May 2017 at Vitafoods, a European exhibition, and Supply Side West in Las Vegas at the end of September 2017. This lead to eight deals in the last 6 months of 2017.
We understand that the Company is actively pursuing a wide range of commercial deals, including licensing, profit sharing and distribution agreements, across multiple geographies. In the last couple of years, OptiBiotix has already entered into development and commercial deals with several international companies, including KSF (Slimfast), Tata (x2), DSM (the worlds largest ingredient company) and Sacco (one of the worlds largest probiotic manufacturers).
We are confident that the current rich deal pipeline will trigger a significant revenue uptake in the coming quarters. Based on our understanding, a typical commercial deal could 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; we also note that larger deals in the multi-million range are within the Company's current reach.
We expect the income generated by the ongoing commercial expansion to provide the resources needed to accelerate OptiBiotix commercial push, including the potential acquisition on new IP and products.
At the recent General Meeting of January 25th, it was approved a reorganization of capital that will essentially convert the Share Premium in Distributable Reserves, thus allowing for potential dividend payments (cash or in lieu via SkinBiotherapeutics' shares).
VALUATION
The valuation of a food ingredient company that is rapidly shifting from product development to the commercial phase isn't straightforward.
As background considerations, we would however note that:
- OptiBiotix products address markets that are both very large and rapidly growing, pushed by consumers' attention to wellbeing and healthier foods’
- Their multiple-technology platform allows the company to extract value via several different sales channels: the same ingredient could be follow a B2B path, as bulk or white label, or enter the retail channel directly; often a combination of both
- Recent history showed product traction and management ability to finalize deals in rapid sequence
- Our model conservatively include sales forecast from deals already closed, but not from new deals, that we would still expect to come through in the coming quarters
- In September 2016 CHR Hansen, a global leader in food ingredients, acquired from Valio Lactobacillus rhamnosus GG (LGG®), a probiotic strain for EUR 73 mln against LGG® sales of approx. EUR 9 mln
- There is significant M&A activity in this area; niche but rapidly growing products tend to fetch prices equivalent to 7.5-15 x sales
We value OptiBiotix using a SOTP methodology, by which we look separately at the value their platform in the three key addressable markets of probiotic supplements, dietary cholesterol and functional sugars.
In essence, our SOTP valuation shows how even small market shares in these rapidly growing areas, could translate in substantial valuation upside from the current level of market capitalization.
As shown in the table above, our SOTP valuation yields a per share valuation that is over 2x current market price.
Risk-adjustments reflect our view of both the time-value of future sales, and the intrinsic risk of the three platforms.
As OptiBiotix business model will be proven successful with revenues start flowing through and more deals announced, we see the stock's valuation inching towards the £100 mln mark, over the next 12 to 18 months.
Finally, it is worth highlighting the significant operating leverage of the business, as OptiBiotix is run on a very asset-light infrastructure. Products manufacturing is outsourced, and low fixed admin and selling expenses ensure a significant margin expansion, as revenue will keep growing over the next few years.