Probiotec (PBP) - not really a biotech

"Probiotech is a brand owner, manufacturer, marketer and distributor of a range of over the counter (OTC) pharmaceuticals, complimentary medicines and specialty ingredients." (PBP propectus p.9) Not to be confused with what are considered your usual biotech companies - companies that research and develop drugs for prescription medicines, vaccines and high strength pain killers that undertake years of clinical trials often having to continually raise capital to stay afloat until they are fortunate enough to strike a licensing or commercialization deal - which more often than not they don't. I remember reading somewhere on Marketwatch.com that about 1 in 10 biotechs actually 'make it'. I don't know how accurate those numbers are but even if they are exaggerated they're not encouraging.

Probiotech on the other hand has a portfolio conisisting of 122 TGA approved products consisting mainly of OTC pharmaceuticals and complementary medicines with a limited range of prescription pharmaceuticals. Thus they have established brands already in the marketplace such as Milton, Biosource, David Craig and Arthro-flex to name a few. PBP believe the pharmaceutical manufacturing business will become dominated by fewer players offering more products to an increasingly health aware,ageing population. The increased awareness and willingness to use supplements to enhance the lifestyle of Australia's ageing population is seen as the main drivers of industry growth. The company considers the capital intensive nature of the pharmaceutical manufacturing business presents high barriers to entry into the industry and therefore they are well positioned to take advantage of future industry growth and consolidation.

Turning to the numbers, the prospectus forecasts a doubling of profit from NPAT of $2.1m in FY06 to $4.3m in FY07 on the back of a 29.6% increase in sales. Thus the company is anticipating increased profit margins refecting a change in the product mix of sales and price increases. Looking at the historical half year information annualising the 6 months results to June 2006 gives Sales of $45m and EBITDA of $7m implying increases in Sales and EBITDA in of 19.5% and 35.7% respectively to achieve the company's prospectus forecast. The company expects the growth to be achieved through a combination of organic sales growth from the Milton product range, price and margin increases in the company's nutritional product range and a more than 10% increase in pharmaceutical contract revenue. PBP aim to release a new product every month in fiscal 2007.

A point of concern is the company's current ratio post listing of 0.93x (numbers in the above table are pre-listing) a current ratio of at least 2x is considered solid. Also the relatively high debt to equity ratio of 69% whilst not critical would not want to creep any higher than current levels. I will be watching these two ratios closely to see improvements in working capital and cashflow. For these reasons I would expect any acquisitions in the near term to be done via equity rather than debt. I would be more comfortable with no acquisitions until the balance sheet looks more solid and there is evidence of strong cashflow generating ability coming through.

The stock listed at a 16% premium to the offer price of $1.00 and is currently trading at $1.12 which is 12.1x FY07 earnings. In the two months since listing the stock has drifted to $1.12 on low volumes. Whilst with listed companies it is often the penchant of management to talk up their share prices PBP have been silent in the past two months with no announcements of significance by the company which I am comfortable with as I would much rather see management getting on with the more important function of running the business than talking up the price of their stock.