Small Company Champion & Lemming Investors Research and Newsletter Updates

Thursday, 26 November 2020

OptiBiotix Health - Cost of Sales & Profit Margin's

 





A discussion centred around the cost of sales (COS) and profit margin on an ADVFN Guild forum was an interesting one, if not confusing for some readers. Given the variables and grey areas and the knowledge, some companies understate their COS to boost the company's margins; thus profitability, I thought it would be a worthwhile topic to feature.

OptiBiotix has a rather complex nature to it thrown in; this being it is both a business to business (B2B and business to consumer (B2c), the former the much larger part of the company and its core strategy. 

It’s safe to say that a good profit margin for any company depends on several factors, including but not exhaustive; location, industry, and product(s). 

Brick-and-mortar retailers usually have a low-profit margin; 0.5 and 4.5%. Compared to online retailers have higher profit margins of c6.5% for the obvious reason, a bricks-and-mortar retailer typically has higher overheads, like rental, and staffing levels.

OptiBiotix and industry context.

 

Gross Margin:  This is the sales price minus the cost of producing, warehousing, and distributing the goods.  The higher the gross margin, the more money we make on the sale of our products. Royalties and profit share have a 100% margin. 

 

The gross margin reported in the annual and interims accounts is a composite of sales and royalties across the whole company and is affected by:-

 

  1. The sales channel:  Direct to consumer sales via the online store typically have a higher gross margin than selling via an intermediary (although marketing costs will be higher and effect the new margin)
  2. What is sold (ingredient or final product): Product sales (e,g CholBiome X3, GoFigure)  typically have a higher margin than ingredient sales.  Selling final product provides a double margin - on the ingredient sale to the manufacturer and the sale of the final product.  
  3. The end customer: Sales to Pharmacies, GPs, hospitals will have a higher gross margin than retailers, but volumes will be lower.  The aim is to have a mix of high volume retail sales and higher margin sales to pharmacies etc.
  4. Cost of goods:  The cost of goods is influenced by how much a company orders from a supplier and the commitment to a minimum order quantity (i.e. how much you commit to annually).  As volumes, scale companies have a stronger purchasing power to renegotiate the cost of goods.  (Note my comment in the interims 2020 (issued 24th September 2020): Achieving and then growing profitability in each division by scaling sales, leveraging our purchasing power as volumes increase to reduce the costs of goods, and focusing on higher-margin products and my comment in the Results 2019 (issued May 2020): This is not just about continuing to grow sales, but also about managing costs, renegotiating contracts as volumes increase, reducing the cost of goods to OptiBiotix, and focusing on higher-margin products.

Average industry gross margins for comparison are Retailers 25%, Food: 25%, Apple products 38%, Airlines 5%. OptiBiotix gross margin is between 55% & 60%. This will fluctuate because there is an initial trade-off as the company builds the retailer partnerships we are now seeing with Holland & Barratt and Optipharm. However, if successful strong revenues build at the royalty stream which is 100% margin. So as each retail partner buys more product it creates the volume, this, in turn, allows for further opportunities to renegotiation term's; thus increases the group margins and strong cash flow. 


Net Margin: This is the margin after all the operating expenses (salaries, marketing, R&D etc.) have been deducted from the companies revenue and give you the profit.

  1. This will be affected by the admin costs and the one-off exceptional costs you mention. (ex Board changes = severance packages) Our marketing cost is low, and the challenge is how we increase marketing spend and get a return.
  2. OptiBiotix, three major costs are salaries, R&D, and IP.  The latter two should decrease whilst salaries will increase as we add to the team as we grow the business. Salaries are a difficult challenge as we look to control costs but try to compete in an exciting space like the microbiome where talent is in short supply and established companies can offer 2X or 3X salary.

The most important aspect to remember when considering the B2B strategy OptioBiotix is using is the marketing of goods is typically at the cost of the partner, not OptiBiotix. The beauty of this strategy is the company's ''intel inside'' gain market attractions, and brand building is done on OptiBioti's behalf. While this may seem slow because of the nature of incorporating new science into new products, this becomes something of a trade-off because thinking of this logically, a small company still in its infancy concerning its intended partners, many of which have a long and successful history, OptiBiotix does not; thus the need to establish its first-generation products with small partners first. This allowed the company to gain market awareness while building the IP, and often forgotten increasingly valuable assets. During the next transition as an R&D company to a commercial entity, the company's products were winning multiple awards, and the science was being peer-reviewed by key opinion leaders in the industry, further validating the TM/Branding and IP. 

As previously mentioned, think of the electric vehicle industry. Few counties are well equipped with sufficient charging infrastructure. Tesla was aware of this; thus set about putting in place charging amenities in strategic locations at their cost, this, of course, adds to the company COS and eats into their margins.

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