WFL (ASX) SK 2 Info

Originally posted by abdm ↑

Hi hopeful,

Keep in mind that formulating and optimizing formulations (such as those found in eye creams) for maximum bio-effect requires experience across a wide range of disciplines, ALL of which form the core competencies of OBJ.

However, assuming that your view was correct for the moment, what value would you then allocate to the wand if it can only be purchased with the cream in a Magnetic Eye Care Kit for $165? If P&G also plan to continue offering the SK-II Stempower Eye Cream which it launched in August as a separate unit for $145 (with far less efficacy) are you suggesting that OBJ would only attract a 1% to 5% royalty rate on the wholesale value of that $20 margin - For arguments sake let's say that was 3% of $15 = 45c per unit?

And, if that was correct and your interpretation of the announcement only applies value to OBJ for each separate wand sold by P&G how would we then calculate the royalties when the integrated solutions begin to start looking like this...?

and this...?

I've been invested in Apple longer than I have OBJ, and I can promise you that the components for the display screens alone cost Apple more than $35 - It actually involves quite an extraordinarily complex process to make those things. 'EPV' is a technique used for valuing stocks... 'Earnings power value' - I think OBJ's reference to royalties on 'end product value' relates to the value chain, so they were most likely talking about 'wholesale value'.

To be honest I've never discussed this topic with management so I'm not exactly sure what their position is, however there are certainly constraints on what they can and can't say, so I don't anticipate we'll here much in this regards over the next 12 months. There is a possibility that some guidance may be offered to s/holders at the company's next AGM in November, however there is little chance that we'd be provided any specific details relating to the terms of agreement, such as the royalty schedule.

Obviously revenue will be reported, and in addition to royalty fees, minimum funding (including development and R&D expenditure) is also required to maintain the commercial exclusivity granted to P&G under the PDA, and associated work plans also provide for the payment of Licensing fees.

In regards to never finding out how 'lucrative' this deal is, I think over time the statutory reporting will provide some clarity, but more importantly, given the information we already have access to such as P&G's Connect + Develop business model, and the success of P&G's external C+D partnerships, it would almost be impossible for anyone to argue that this deal won't be 'lucrative'. As you stated, we just don't know how lucrative.

As one good example that you may find helpful, Corium International is also one of P&G's external Connect + Develop partners which have executed one Licensing agreement leading to the release of one commercial product. Importantly, like OBJ Limited, Corium also develops transdermal delivery systems and related technologies, and derives most of its current revenue through three commercialized products, namely;

Clonidine TDS (marketed by Teva Pharmaceuticals)
Fentanyl TDS (marketed by Par Pharmaceutical)
Crest Whitestrips (marketed by P&G)

Clonidine is indicated in the treatment of hypertension and Fentanyl is a very powerful synthetic opiate analgesic about 100 times more potent than morphine. It is used to treat patients with severe pain.

The details below disclose the most recent financial results reported by Corium for the 3 months ending 30/06/2014. While the sales revenue for both the Transdermal Clonidine Patch and Transdermal Fentanyl Patch have been declining rapidly, this has been partially offset by the increase in sales of P&G's Crest Whitestrips. This is important to note as most investors still assume pharmaceutical products return the highest revenues, and this has been quite true of the past, but we are currently witnessing a paradigm shift within the pharmaceutical industry which began a few years ago moving from sickness to wellness and medicines with high toxicity to more natural solutions. Acceptably, P&G is also not your average performing consumer goods company.

Corium International

Go on hopeful, give it a go - and minus all the other partner developments and internal product initiatives just to keep things conservative

Corium: 1 product = $12m pa
OBJ: +8 products = ?

Actually, let's tone it down a lot more - 3y fwd projection rounded off at a total of only 8 products @ only $3m pa for each product (Qtr the revenue earned by P&G's other drug delivery technology partner)

Corium: 1 product = $12m pa
OBJ: 8 products = $24m pa

P/E ratio of 30 = MktCap $720m or $0.45c (fully diluted)

That's almost down-ramping, and it still looks ok.

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Hi ABDM

Thank you for your in-depth response to my questions. As usual your research has unearthed interesting comparisons for shareholders/potential holders to digest. I agree that the Corium deals with P&G provide rare insights to the potential revenues available through deals with P&G. However, I am not sure that they relate to potential income for OBJ in the oversimplified way that you suggest. As you are aware, all partnership deals made with P&G are different, in both their revenue structures and their contributory commitments from both parties. Whilst Corium can boast spectacular revenues from their dealings with P&G, it is less clear how much that revenue costs Corium and what percentage of that revenue is due to Corium's financial input. If you read the following section it appears that Corium actually SELL their tech in product form as well as receive royalties:

" Product revenues consist of product sales, royalties and profit sharing from products that have been commercialized and are sold by our partners. Clonidine TDS, Fentanyl TDS and Crest Whitestrips make up the significant majority of our product revenues."

and then....

"Cost of Product Revenues

The primary components of our cost of product revenues are materials, personnel costs, depreciation, facilities costs, other overhead costs and expenses associated with the manufacturing of our products. Our manufacturing overhead costs are significant, and are currently allocated among our products at rates consistent with current unit production volumes. As the number of units we manufacture rises, we expect that our overhead costs would rise less rapidly due to efficiencies of scale, resulting in less costs of producing these higher product volumes. Conversely, if total unit volumes fall, as we expect to be the case in fiscal 2014, the costs of product revenues, measured as a percentage of product revenues, will rise as we lose economies of scale."

This item, "cost of product revenues" suggests that Corium is operating under a very different business model to that agreed by P&G and OBJ, wouldn't you agree. Indeed, Corium's Total revenue amounts to $10.7M and their total costs are $11.5M ($5M of which are from the aforementioned "cost of production revenues"). So, I think extrapolating Corium's P&G revenue to use as a guide for OBJ's royalties for the wand has little relevance. If OBJ had produced the wand themselves and then sold it to P&G then I'm sure OBJ's revenues would be much, much higher - but then so would the costs!

As for comparing Corium's ONE product to OBJ's 8, I think you'll find that your balance needs to be recalibrated somewhat. In the Corium report it states " These marketed products are Clonidine Transdermal Delivery System, or TDS, Fentanyl TDS and four Crest Advanced Seal Whitestrips products." So, let me repeat, "four Crest Advanced Seal Whitestrips products. OBJ has ONE product in the SK-II stable that is just an add-on to the existing cream. Not a fair comparison I'd say. I know that you are talking about a three year projection but as far as I am aware there is only ONE signed licensing agreement so far. I believe that OBJ WILL have many more in the future but the time scale is clearly open to interpretation. After all, Corium started dealing with P&G in 1999 and, despite expectations of further use of the tech, it is still only in Crest Advanced Seal Whitestrips. Unfortunately, OBJ has zero control over the pace at which P&G further introduces collaborative products, or if they go any further. There are no guarantees in this game.

Given the above, I do not see much point in me providing an estimation of how much revenue will be received from P&G for the wand technology - I'd be guessing. However, until we get more information about the business model, percentage of product deemed to be OBJ tech and projected earnings then I would say that OBJ will be happy to get $1 Million pa from this deal. Just my opinion.

Anyway, it seems that we read the same documents in different ways which is always a good thing in trying to critically evaluate the rhetoric that Joe Public is fed in official announcements. I look forward to further interpretations from you and from a few other more analytical posters. Cheers.