Shore Capital thinks hVIVO PLC (AIM:HVO) shares are worth far more than the market price, despite a bruising year for the stock. The broker has reiterated its Buy rating and set a fair value of 25p a share, more than five times the current price of 4.8p.
The investment case rests on an improving backdrop for biotechnology companies in the US and what that could mean for demand at hVIVO, a specialist contract research organisation.
Funding conditions for biotech have been weak since the pandemic boom faded. That has made companies cautious about starting new clinical trials. For hVIVO, this has shown up in a shrinking order book and contract cancellations over the past 18 months.
Shore Capital points to signs that the cycle may be turning. In one day this week, eight US biotech groups raised about $3.2 billion through follow-on share sales, a recent record.
The main biotech indices are up more than 30% this year, helped by takeover activity and licensing deals. Stronger balance sheets matter for companies like hVIVO because they give clients the confidence to commit to new trials.
The broker says this is already easing some of the pressure that has held back contract research organisations. Political noise around US drug pricing has also cooled, reducing fears of cuts to research spending by large pharmaceutical groups.
For hVIVO, the key issue is timing. Shore Capital says a recovery in its human challenge trial business still needs to be backed up by contract wins before sentiment towards the shares can fully improve.
Management has warned that the pace of recovery is likely to be slow and may not gather momentum until 2026.
Two large opportunities could change that picture. One is a potential record contract with ILiAD for a pivotal trial linked to its BPZE1 vaccine, which is expected to enter phase III studies next year.
The other is a project with a large global pharmaceutical company that already has internal financial approval, with a final decision due next year.
Valuation is where Shore Capital sees the biggest disconnect. With a market value of £33 million and net cash of £23 million at the half year, the enterprise value is about £10 million.
That equates to just 0.6 times last twelve months' EV to EBITDA, or 1.5 times including lease liabilities. The broker argues this understates the long-term value of a profitable and cash-generative business that remains unique in its field.
---This article was first published in mid-December---