Spending money wisely is a non-negotiable quality that all well-run companies possess. This is especially important for small growth companies where the business model is not yet established, and the funding runway is finite. In such cases, ensuring that each dollar is thoughtfully spent is important so that the company has the best chance of creating evolutionary value between dilutive capital raises.

In many of our past analyses, we often focused on non-cashflow-generating businesses, usually in the mining or biotechnology space. For Immuron, they have an interesting business structure where a revenue-generating business line (Travellan and Protectyn sales) exists alongside an extensive R&D program (four clinical trials).

This not only means they do not release quarterly cash flow reports but also means that their P&L statement items of interest exceed the usual R&D vs. G&A ratio. In this case, we are interested not only in the G&A cost relationship with R&D but also with gross profit. See the figures for the last four years below:

With these time periods in mind, let’s examine the ratios:

The figures here tell two stories. The first looks at gross profit, which shows that it is still far from sustaining G&A, unfortunately. Yet, if we examine the history of the company, COVID drove sales down to near zero and is only just starting to pick back up after licensing and logistics delays. Between FY22 and FY23, the ratio improved by 107%, which shows that gross profit can increase significantly without a meaningful increase in G&A. This means that the company can continue to increase sales to achieve a parity rate with G&A without concern for a linear increase in overhead costs.

The second story looks at R&D, which, similar to the gross profit dynamic, has increased meaningfully without a proportional increase in overhead G&A costs. This means that in recent years, the company has been able to run more growth investment activities (clinical trials in this case) on the same cost base as in previous years when less occurred.

Overall, we can see that Immuron has been able to increase gross profit and R&D, two key metrics (concurrently!), by 150% and 294%, respectively, despite just a 19.7% increase in general and admin costs.

If this continues, the company may rapidly be able to achieve breakeven and use potential profits (on top of already generous government cash grants) to fund blue-sky R&D programs where any success usually leads to a meaningful valuation re-rate for biotech and pharmaceutical companies.

Investing is all about creating upside predictability in the investments we choose. This allows us to understand not only the risks in the investment, but also the likely payoff should management deliver on their roadmap.

Therefore, having management that is willing to commit to goals and follow through with their execution is very important. Yet, this is not to say that goals cannot be changed or replaced, as it's equally prudent to maintain an agile approach to business and ensure that things adapt.

A great way to examine for this “threat” is to review past milestones/goals and compare them to actual delivery. What we want to see is the timely completion of goals, or an acknowledged variable in them. What we do not want to see is goals changed or missed without any explanation.

In Immuron's case, the new managing director Steven Lydeamore has delivered a robust pipeline of goals across the company's four clinical programs. The investor presentation closest to him taking the role outlines this (link).

Let's review how many of these goals were satisfied within the time range given or varied with an updated explanation/guidance.

2H 2022

1H 2023

2H 2023

As we can see, the company has somewhat had success in meeting their timelines originally set out. A lot of this relates to the company's CampETC CHIM trial (targeting ETEC and Campylobacter) that was delayed as a result of an FDA hold, which was later resolved by at the expense of time. This is in addition to the highly unpredictable nature of most biotechnology and pharmaceutical development.

Yet in all cases of delay and variance, a timely update was provided informing shareholders of this change, in addition to an updated timeline. This is a great start as it wasn't simply ignored without commentary. What would be an improvement from here, is an explanation concerning the reason for the delay to provide additional transparency.

Overall, the company appears to have adhered to most of their timelines and we can therefore expect this to continue going forward. Immuron's latest timeline guidance is below.

Investor transparency can take many forms but is important in ensuring that the market receives up-to-date information on all of the company's past and present activities. This goes hand in hand with setting goals.

In the case of high-risk companies, which constitute most of the small-cap section of the market, ensuring that investors understand all the good and bad aspects of the company is important. This commonly comes in the form of regular updates on the company's activities, as well as presentations to external groups.

Immuron has done a great job of maintaining regular communication with the market and ensuring that investors have complete information. Over the last four quarters, not only has the company advanced its underlying business, but it has also increased its release of presentations and provided more progress updates compared to 12 months prior.

This approach to transparency is especially important when the company encounters unexpected developments, such as the FDA hold on the CampETEC trial. These events may alter an investor's understanding of their investment risk profile, so ensuring that each step of the rectification process is communicated clearly is critical. In many cases, it is preferable to invest in companies that are transparent with risks and bad news, as this may show they have less to hide.

Indeed, the company has maintained a good cadence with investors via ASX announcements and has put meaningful effort into promoting to new groups through presentations. Additional opportunities lie in hosting more in-person events to better connect with investors, as well as facilitating more investor questions.

My concluding thoughts

Immuron has had a patchy journey in the last 48 months. From COVID disrupting the sales of its travel medication products to the FDA delaying a clinical trial, the growth curve has not been straightforward. Yet, with the technology proven and products back on shelves, Immuron looks finally set to pick up where COVID left off by leveraging its $17 million cash balance and unique technology to drive high-margin sales. This is in addition to four clinical trials currently live, which provide additional upside on success.

However, there are a few areas of concern despite these positive signs. Firstly, the directors of the company have very little shareholding in the business, which could create misalignment with shareholder interests. Although this usually isn't an issue, it does place additional emphasis on the achievement of goals and remuneration discipline. Secondly, the company could further improve its communication strategy by facilitating more Q&A sessions and shareholder events.

Despite these two areas to note, Immuron has demonstrated a significant opportunity to generate shareholder value, and therefore, we view the company as a rare Triple Threat.