A friend flicked this to me - Spec BUY with 31 cts target price....

A friend flicked this to me - Spec BUY with 31 cts target price. Finally some research.

Investment Recommendation - Biome Australia (BIO-ASX) develops and commercialises clinically backed innovative complementary medicines including live biotherapeutics (probiotics) and nutraceuticals. BIO markets 23 products across three brands, and the probiotics portfolio, 'Activated Probiotics' represented c.86% of FY21 sales.

Australia represents c.90% of the business with the UK/NZ the balance. The Australian business is distributed across the pharmacy and independent health practitioner networks, which represent over 2,300 touch points. The Pharmacy sector represented c.70% of sales and the practitioner market c.16% in FY21.

BIO differentiates itself through evidenced based products, via a number of randomised, double-blinded placebo-controlled trials that provide the solid evidence platform to penetrate into targeted distribution networks. The probiotic product is also blister packed to protect individual capsules from open air and humidity, which appear to impact viability and shelf life when packed in a jar/bottle.

The microencapsulation technology, which is unique to BIO in Australia, ensures a 5x lower usage of viable probiotic cells compared with peers, and increases the survivability of probiotic cells as they pass through the stomach. BIO is in its early commercialisation phase, but its product differentiation seizes upon a gap in the market, and with ongoing distribution partner support, we believe it should grow into a material business over the next five years.

We initiate coverage with a SPECULATIVE BUY rating and a price target of $0.31 based on a DCF approach.

Attractive market - According to the Complementary Medicines Australia Audit, seven in 10 Australians regularly use complementary medicines (CMs), with c.33% using them to manage symptoms of chronic disease with probiotics and plant-based products. Probiotics sit in the wider Vitamins and Dietary Supplement (VDS) category which is forecast to grow by c.22% CAGR over the remainder of the decade. The overall CM market is valued at c.$5.7bn and has doubled over the past decade, with BIO’s TAM at c.$4.6bn.

The Australian probiotics market is valued by researchandmarkets.com at c.$445m and the International Probiotics Association estimates the global industry at c.US$6.6bn. Product differentiation provides an opportunity to take market share and become a leading supplier into the Australian market. The adjunct market, where pharmacists can recommend an evidence-based probiotic alongside filling a prescription for an antibiotic, is an attractive opportunity for BIO, in our view.

We believe it can move to areas beyond gut health, which appears to place it in a unique position due to the range of clinically backed products. The key products within this adjunct market fall within a number of different PBS medication categories which encompass c.80m prescriptions.Extensive distributionBIO’s distribution network involves >1,300 pharmacies selling products, which represents a c.65% of the total potential footprint. Most of the remaining c.600 pharmacies will likely be selling product within the next 12 months.

These pharmacies span 15 banner groups and include leading networks such as API, Symbion and Terry White Chemmart (TWCM). Symbion and TWCM have both noted that BIO is the number one growth brand in the professional vitamin category. There is a further c.1,000 touch points through the independent health practitioner market (naturopaths and nutritionists). BIO’s focus in servicing these networks involves extensive education and servicing to engender trust and build enduring relationships. We would expect to see more pharmacy networks adopt the probiotic portfolio over the next 12 months.

Growth has several avenues - Over the next 12 months, BIO aims to improve its penetration within its existing customer base, support the recent launch of two products and launch three more, grow the practitioner market across Australia, the UK and NZ, and increase distribution to additional pharmacy networks/banner groups. Europe, North America and APAC represent longer-term opportunities, in our view.

Forecasts - Having more than doubled sales to c.$2.3m in FY21, sales through to November CY21 suggest that BIO may grow sales c.60% to at least c.$3.7m, which is where we have set our estimates. We expect a further c.70% growth in FY23E to c.$6.3m. We estimate continued strong growth through to FY26E, in which sales could reach c.$23.5m. Gross margins are currently c.57% and with positive supplier relationships, scale and better logistics, we believe margins could rise toward 60% over the medium term.

Valuation - Our $0.31/share valuation is DCF based, but we note that as BIO has a quasi-biotech flavour, it should trade at a premium to the peer group, and we think c.5x medium-term sales is reasonable, particularly given the superior growth rate relative to its product/channel peers. As BIO reports results over several quarters, and demonstrates ongoing strong growth, we believe BIO may increase the current premium to its peers.