back of the envelope valuation., page-8

Bullish synopsis GSW but I hope that if you are only 10% right, the journey will be a plaesant one! Firstly, playing with finacial models is not a bad thing to do. In the case of HGR, there are a few unknowns. But what we do know is the following:

1. The demand currently exceeds supply. By how much?
2. Currently there are no significant global distibution
contracts formalised (although I have a strong suspicion
that this may be about to change)
3. They do not have FDA approval but have been sited by
the FDA agency to apply for FDA approval with the
objective of setting the Oraline product as a world
benchmark. As a result of this process,the product has
been withdrawn from the US market but once FDA approved,
will have a dramatic impact on global sales since the
majority of HGR clients will be Govt agencies or
affiliated groups. The degree of this impact?
4. The margin on the current Oraline product is closer to $3
but this is a function of wholesale or retail pricing
structures so this could possibly be subject of some
variance on the upside going forward
5. The one off user nature of the product means that once
used,it must be replaced so sales data has the potential
of growing exponentially as sales traction and market
penetration increases as per the gloabl multi channel
distribution strategy about to be deployed by HGR

The annual sales figure provided by GSW was 36m units. I would be inclined over the first two years to apply a standard discount rate of 90% to this figure. This would provide an annual movement of say, 4 m units, excluding the possibility of entry to markets of Oraline hybrids and other inhouse sourced products.

If we assume current product costs run at about 25% of T/O and the product margin is closer to $3, this would mean an EBITDA of around $9m-$10m for the first year, maybe two? The industry PE for biotech issues is about X18 so this would equate to a market capitalisation of about $180m. This base figure under normal circumstances would probably support a SP of about A$0.50 -A$0.65 under such conditions?

The "one of use" of the product for each test event is a key component in growing sales. No doubt about the market, no doubt about the product, the unknown is now clearly focused on the ability to generate sales. Once critically important ditribution agreemnts for different provinces are in place, the sales numbers will undoubtedly follow since the product is excellent and the market need simply huge.

I tend to be conservative in my revenue models but I look where we are right this moment and where it has the potential to go and I am simply left wondering.

ciao