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OPTIBIOTIX (OPTI-GB): Microbiome-targeting, evidence-based food ingredients
10 September 2019
Target Price 97.00p
Current Price (previous CoB) 43.00p
We initiate coverage on life sciences company OptiBiotix Health plc (“OPTI”) with an OUTPERFORM recommendation and a target price ("TP") of GBp97 per share. OPTI discovers and develops targeted microbiome-modulating probiotics, prebiotics and other functional food ingredients backed by scientific and clinical evidence. Since its founding in 2014, the company has developed four products for cardiovascular lifestyle diseases and entered >45 commercial deals with corporate partners through which it generates revenues throughout the value chain. The first two ingredients, LPLDL for cholesterol reduction and SlimBiome for weight loss were launched in May 2017 and are already generating revenues. We expect total revenues including those of late-stage assets SweetBiotix (calorie-free sweet fibres for sugar replacement) and LPGOS (prebiotic that enhances the effect of LPLDL) to exceed £50m by 2025E.
Two marketed products with broad applications have started to generate revenues
LPLDL is a probiotic bacterial strain which offers a natural solution for the treatment of elevated cholesterol and in the future high blood pressure. OPTI has already signed 27 deals for LPLDL with partners mainly in the food industry who market the ingredient under both OPTI's own and white label brands. We expect revenues from these and additional deals to grow from c.£400k in 2018A to >£10m in 2024E. The second marketed product is SlimBiome, a patented formulation which reduces hunger and cravings for sweet and savoury foods. It is available as a food ingredient and CE marked medical device that targets the $200bn weight management market. We expect 16 existing commercial deals and many new ones over the coming years to drive strong revenue generation, which in our models exceeds £15m in 2025E.
Early commercial traction lays groundwork for sustained revenue generation
Commercial deals fall into three major categories: manufacturing, formulation and distribution - all of which generate revenues for OPTI. As these agreements can run over many years, OPTI is laying the foundations for sustained, long-term revenue generation. Based on the company’s strong track record, we model nearly 320 cumulative deals for LPLDL, SlimBiome, SweetBiotix and LPGOS during the period 2017A – 2030E. We assume that revenues begin 1 - 2 years after signing and take 5 - 6 years to peak in a range of £100k and £1m per year, depending on partner size and annual sales. Manufacturing deals are the smallest but most profitable category, while the lower-margin distribution deals are the most frequent, accounting for c.70% of all deals in our forecasts.
Targeting the trillion dollar microbiome market with evidence-based food ingredients
Microbiome-modulating approaches have focused on probiotics in foods and supplements to support gut health and general wellbeing. Major technological advances in gene sequencing over the past 20 years have led to the understanding that the microbiome plays a central role in human health overall. Since imbalances of the microbiome cause diseases in many organ systems, its modulation is thought to hold transformational potential in healthcare. This has attracted many players to a market expected to be worth $1tn by 2025E, driven largely by pharma products with specific health claims. Developing these is complex and costly, due to the need for rigorous clinical trials. OPTI decided to focus on functional food ingredients that are supported by scientific evidence including human studies. This provides differentiation in markets where most products have unsubstantiated health claims.
SoTP-derived TP of GBp97 per share suggests significant upside potential
Our TP is based on a sum-of-the-parts ("SoTP") valuation that includes risk-adjusted net present values ("rNPVs") for LPLDL (food and pharma applications), SlimBiome, SweetBiotix, LPGOS, OPTI's 37.6% share in SkinBiotherapeutics (SBTX) and net cash at YE2019E. In our view, recent share price weakness provides an attractive entry point to take advantage of OPTI's long-term growth potential.
OptiBiotix Health secures significant exclusive licence agreement for OptiBiome
Stephen O'Hara | 01 Apr 2020