The OBJect of my desire?

OBJ Limited (ASX: OBJ) has potential.

Of course, relative to any sensible financial metrics it is still an overpriced equity, despite some recent downward correction in the trading price. It has also had a fairly decent news stream that has made the punters scratch their head as to why the company’s stock isn’t rocketing along. In my opinion, this is a good sign because it means that the near-term potential of the company is correctly baked into the share price and it’s not quite one of those frothy, crap retail-driven stocks that moves just because the CEO farted. It’s possibly the sort of equity you can reasonably “safely” (I use that word with extreme reluctance) hold in a portfolio without worrying that it is going to get too unruly in either direction. I personally wouldn’t want to see much movement in this equity until a real progress milestone has been reached, like $5m in annual sales/royalties from a lead product.

I also don’t care much for the basic science in terms of using magnetic fields to induce novel microfluidic behavior. It’s not quasi-science, but it’s hard to know how much fundamental intellectual property protection you can really build around this technology. Design IP capture, maybe. Doing an initial IP scout based on what is in the public domain didn’t really yield much that excited me but I think in a situation like this we have sort of have to rely on the deeper confidential diligence that OBJ’s business partners are able to conduct as evidence that there might be “something there” that is robustly defensible.

Whether you like the science or not, the business concept makes a whole lot of sense for basically two reasons. Firstly, anything you can do to improve delivery of a consumer health product without re-formulating it, is highly desirable. Formulation takes a lot of time, can be very challenging, has regulatory implications in certain instances and product enhancement in the cosmetics/derma industry is a key part of managing the product life cycle to maintain market share and competitiveness. OBJ has quite possibly built some traction there, though putting on a skeptical hat, it’s also hard to really argue that $1m of revenue is an indicator that this technology has really hit prime-time.

Still… it’s a start.

The second reason I like the concept is because consumer health companies love “razors and razor blade” models. Nothing like selling a consumable for a “device” to increase the stickiness of your product and increase the barrier to entry for competition. OBJ’s “wands” are not only pretty slick from a marketing vantage but it’s easy to demonstrate to the average person why the idea might be differentiated. Probably the only thing I liked about their website was the demonstration videos that are visually very compelling. It’s probably backed up by enough science that consumers may very well accept they are not just investing in cosmetics (for example) but also a technology. That’s important, because they are distinct purchase decisions.

As a slightly irrelevant side comment, the “digital wands” sort of take me back to Total Recall’s “digital nail painting.” Awesome. Korean and Japanese girls will love it. Especially if they can find a way to pair it with their smart phone, a la eSkin. Great vision! I think that’s what I like about this company, it has some originality. The Bodyguard platform is little less interesting in my view and will be yet another product in a very congested consumer space.Digital Nails

The only thing that I wish OBJ would do, is improve it’s marketing, branding and public persona. It’s clunky. The website is cluttered and awful and the critically important fact that the company has “products” is drowned in the noise. OBJ is also kind of a weird name for a cutting-edge cosmetech / dermal / drug delivery (or whatever) company. Once again, I think we are seeing a case of scientists trying to do marketing and while I recognise that their financial resources are limited, they can do much better. Also moving the laboratory and services component of their business into a separate subsidiary / organisation (with separate branding, web presence, etc.) would be a smart idea. All the service stuff “clutters” the neat product-oriented stuff they are doing. Service and bespoke development companies also don’t command the same type of valuations as a product company and OBJ will see a lot more momentum around partnership announcements if the two are made more distinct.

But in doing so, they also need to be careful about organisational capability claims. A company that has a “state-of-the-art” lab or product development capability doesn’t have an asset register, payroll or consumables profile anything like what OBJ has reported in their financial statements. This is the problem with a small-cap public company, it’s all out there in the open. If this really is a differentiated and core capability of OBJ’s, investors needs to be mindful about what it really delivers to the market cap of the business and what it’s true scale is. That’s why focusing on talking about products rather than services also makes the best sense.

 

Awesome Photo Credit: Ryan McGuire. http://www.gratisography.com/

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