Open Orphan: profitable outlook for 2022
In just over two years Open Orphan (Open), a rapidly growing specialist contract research organisation (CRO), has built a high-growth London-based clinical trial business (hVIVO) supported by a European clinical services subsidiary (Venn). High demand for hVIVO's challenge studies in respiratory infections, caused by pharmaceutical investment in new projects, moved the group into profit in the second quarter of 2021 (Q2FY21) and we expect increased margins in 2022. As an indication of this growth and leading position, two new contracts, one for about £10mln and one for £5mln, were announced in December 2021 after £21mln of new business already signed in H221.
Open Orphan is now a leader in human respiratory disease challenge clinical studies. Challenge studies use carefully-screened, disease-free volunteers and deliberately infect them with a pathogen under tightly controlled conditions to test new pharmaceuticals and vaccines. Such studies offer a rapid initial assessment of the efficacy of a candidate therapy and quickly provide a wealth of scientific data. They are followed by larger studies. Challenge studies are now becoming an accepted fast track in drug development. Open can run nine different challenge protocols. A new malarial challenge study protocol is being clinically validated and will be commercially available later in 2022.
Open has 43 Category 2 quarantine beds in East London, 19 of which are in a leased Whitechapel former hotel facility and 24 on the QMB east London site. These are suitable for diseases such as flu. For the 2021 COVID-19 challenge study, which needed a higher level of bio-security, 19 higher specification Category 3 beds were used at the Royal Free Hospital.
We anticipate a rapid rise in sales from £23mln in FY20 to our FY21 estimate of £37mln. This is due to hVIVO growth underpinned by steadier revenues from Venn. In our FY22 forecast, guided by management, Open could generate £50mln or more of revenues with underlying earnings (EBITDA) of around £7.5mln.
Importantly, 75% of the reported H1FY21 revenue was not SARS-Cov-2 related; we expect this to increase into 2022. More typical projects are like the contract with Pneumagen to test respiratory pathogens like Respiratory Syncytial Virus (RSV). Most clients are not disclosed but include Pfizer.
A leading company in human respiratory challenge studies
Open's rapid growth in 2020 and H121 was driven by the pharmaceutical industry's increased investment in respiratory diseases. The value of announced deals in H221, which will result in 2022 revenues, was £36.3mln -- and not all deals are disclosed. We expect revenues to grow steadily to at least £70mln by 2026 as new disease models, like malaria, are added. Open may expand capacity by adding extra quarantine beds; this is not capital intensive. Competition comes from established CROs with residential capacity and from small hospital research units; however, Open Orphan's expanding range of challenge models, ability to scale-up trials and deep know-how are strong barriers against potential competitors.
Applying a notional price/earnings (PE) ratio of 15 to a possible 2026 revenue target of £70mln with a 22% prospective EBITDA margin to £15.4mln and applying a 13% discount rate gives a current indicative value of £228mln or 34p/share. Three unvalued assets may deliver future additional returns; the Poolbeg distribution in mid-2021 was worth about 4p per share.
Conclusion: Indicative value of about 34p/share
Open Orphan provided formal financial guidance, summarised below:
- Revenues (including other income) of about £40mln in 2021. Non-COVID-19 work was about 75% of H121 revenues.
- Profitable at EBITDA level for full-year 2021; H121 had an EBITDA of £2.1mln.
- Year-end cash balance in line with that of H1 (30 June 2021 £14.9mln).
- Revenues of £50mln are targeted for 2022 from non-COVID work.
- We expect COVID-19 work to add at least £5mln.
Revenues are from the human challenge subsidiary, hVIVO and from Venn: a subsidiary offering biometry (biological data analytics) from its Paris office plus Chemistry and Manufacturing Controls (CMC) and Pharmacokinetic services from a site in Breda, Holland (Exhibit 1). Overall, Open Orphan has a customer base of top companies (Exhibit 2). Our FY21 and FY22 forecasts are in Table 1.
Outlook for 2022 and FY21 estimates
Exhibit 1 - Open Orphan at a Glance
Source: Open Orphan
Exhibit 2 - Open Orphan growth and strong customer base
Source: Open Orphan
Table 1 - Summary Financials
Source: Open Orphan Reports, ProActive estimates
Corporate history
The current Open Orphan business was assembled firstly through the reverse merger of Open Orphan DAC and Venn Life Sciences Holdings PLC in June 2019 and secondly through the merger of Open Orphan PLC (AIM:ORPH, OTC:OPORF) and hVIVO PLC in January 2020. A further acquisition was announced on 14 July 2021 of CHIMagents Limited. CHIMagents designs, manufactures and tests agents for use in challenge studies.
The listed company was renamed Open Orphan PLC (AIM:ORPH, OTC:OPORF). In 2019, the focus was on acquiring orphan drugs with development data, so lower risk, and realising value in those assets. This rapidly shifted after the hVIVO acquisition in 2020 as the COVID-19 pandemic struck and the pharmaceutical industry needed a fast route to test therapies for respiratory infections, which is an hVIVO speciality.
The financial history because of these mergers is somewhat complex but for comparison purposes, Table 2, extracted from the 2020 Annual Report, shows proforma figures. The reported Open Orphan PLC results are slightly different because of timing and consolidation accounting. The effect was to give a dramatic turnaround in the H1FY21 figures with an H121 EBITDA of £2mln. We have used EBITDA to get comparability across different accounts. NB Open Orphan itself was a consolidation vehicle.
Table 2 - Historic and proforma financial statements
Source: Open Oprhan 2020 Annual report
Sources of growth
Open saw rapid H1FY21 growth (Exhibit 3).
Open has two divisions but segment information was not given in H121:
- hVIVO (the human challenge study business) acquired on 17 January 2020 for £13mln; and
- Venn Life Sciences (which provides PK, CMC, biometry, patient trials randomisation and data management services).
Our estimates compared to historic figures are shown in Chart 1
Exhibit 3 - Open Orphan rapid H1FY21 growth
Source: Open Orphan
Chart 1 - Sales and EBITDA
Period 2020-2022e
Source: Open Orphan reports, ProActive Estimates
Most of the revenue growth comes from hVIVO. In H1FY21, Open had six active challenge studies, up from two in H120. We discuss below Accounts Payable which we assume includes significant prepayments for contracted studies.
There may be a further £5mln of revenue in 2022, as guided, from a UK government COVID-19 challenge study. Data from a H1CY2021 study is discussed below.
The changing pattern of variants, the high level of vaccination of the UK and the changing governmental response makes this area difficult to forecast.
hVIVO
The hVIVO business conducts human challenge studies (Exhibit 4). This means that the business uses validated clinical protocols. hVIVO has nine currently with a malaria challenge protocol in clinical validation. Challenge studies need a defined and validated clinical protocol, are often run in residential facilities and need close medical supervision.
Exhibit 4 - Operational H1 FY21 highlghts
Source: Open Orphan
hVIVO was originally a 1989 spin-out from London University (Queen Mary) and pioneered viral challenge human disease models to establish early proof-of-concept. By 2019, it had developed specialist challenge models in influenza (flu), respiratory syncytial virus (RSV) and human rhinovirus (HRV) and also covered other respiratory indications like asthma, chronic obstructive pulmonary disease (COPD), and cough.
Studies are conducted in quarantine facilities. The limiting factor long-term might be the 43-bed utilisation rate. One of the facilities is a leased, converted Whitechapel hotel with 19 beds. The other is the original hVIVO facility at the Queen Mary [College] Bioenterprises Innovation Centre (QMB) facility of 24 beds: so 43 in total.
There are two other facilities: a location in Manchester and a street-level, former retail unit in east London. These act as recruitment and screening centres for potential trial volunteers, up to 520 a week. A core skill of hVIVO is the recruitment of volunteers (often now through social media) and careful medical screening to ensure volunteer safety in trials.
Normal respiratory trials, for flu or RSV, are being run in Category 2 facilities as at Open's Whitechapel and QMB facilities. A Category 3, 19-bed facility at the Royal Free Hospital was used to run the very successful 2021 COVID-19 challenge study; Open does not own or control this facility. Category 3 beds are in rooms with negative air pressure to prevent dangerous pathogens from escaping.
hVIVO business
Open management notes that:
- The infectious disease market is expected to grow to in excess of US$250bln by 2025 due to new vaccines and especially COVID-19 vaccines.
- Every major pharmaceutical company has started to look at the opportunity and many new non-COVID vaccine programmes have been started in the last 12 months
- Due to historic underinvestment antiviral and vaccine therapies (due to historically low returns on infectious disease R&D investment) the industry has a poorly developed infrastructure for running such studies.
On 10 December 2021, Open announced a large influenza challenge study contract for US$13.4mln (about £10mln) to be run over 2022. This is a strong vindication of the level of business that Open can expect going forward. On 21 December, a further £5mln contract was announced. We estimate that about eight or nine studies were run in 2021 and expect 12 or more in 2022. Studies can run over more than one reporting time period.
Table 3 shows contract wins from July 2021 onwards. Many of these are scheduled to run over 2022 and the later contracts run in H222. The values reported are £33.9mln for hVIVO and £2.4mln for Venn: £36.3mln; however, not all amounts and not all contracts are disclosed, so the actual value will be higher.
Table 3 - Contract wins H2 2021
Source: Open Orphan announcements
One can illustrate the growth in pre-booked business by looking at Accounts Payable, Chart 2. These will include VAT owed and payments to suppliers, but the line item also contains pre-payments. Clients pay a 20%, non-refundable deposit when booking a trial so every £10mln of prepayments equals £50mln of contract value; however, Open did not disclose the breakdown of this figure in the H121 accounts. On 31 December 2020, the value had ballooned from £3.9 million in June 2020 to £21.4mln. It fell back to £16.9mln on 30 June 2021 as studies were completed. We estimate that the value may have been between £15mln and £16mln on 31 December 2021.
Chart 2 - Accounts payable, cash and sales
Source: Open Orphan reports, ProActive estimates
This gives a year-end cash level similar to 30 June 2021 of about £15mln, as guided by management.
Pneumagen case study
We cite this project as a publicly disclosed partner to show hVIVO's role. Pneumagen is a promising Scottish biotech company, founded in 2016 using innovative science from St Andrew's University. Its lead product is Neumifil: a glycan targeted intranasal therapy for the pan-viral treatment of infectious diseases of the respiratory tract. Priority targets for Neumifil are patients at high risk from viral respiratory tract infections including front-line health professionals and the elderly, (especially those in care homes) and those who are obese, diabetic or at risk of seasonal flu, such as people with chronic obstructive pulmonary disease and asthma. Neumifil is in a 60-patient initial clinical study (NCT05093530), at Hammersmith Medicines Research to show safety. This will then move in H2 2022 to hVIVO for a Phase 2 challenge study; the protocol is not yet available, but one hopes to see efficacy in a Phase 2. Following this, we'd expect a large Phase 2 controlled study. This shows nicely how hVIVO's specialist capabilities can accelerate a clinical programme. Pneumagen has raised £3.8mln to conduct the study and manufacture product.
STRiVE - keeping track of respiratory virsues
hVIVO has an ongoing project, STRiVE project (Seasonal Transmissible Respiratory Virus SurvEy), that collects respiratory viral strains suitable for challenge agents from consenting hVIVO employees. The collection of new respiratory viral strains allows hVIVO to update and broaden its portfolio of human challenge study models as viruses mutate over time.
Since starting STRiVE, hVIVO has identified more than 180 promising virus candidates and 12 different strains. Viruses isolated include several strains of coronavirus, adenovirus, human metapneumovirus (HMPV), human rhinovirus (HRV), parainfluenza virus (PIV), influenza, and respiratory syncytial virus (RSV).
Malerial challenge model commercial from H2 2002
In 2021, Open revealed its malarial challenge model and on 20 January 2022, it announced the first cohort of volunteers had been inoculated with a GMP-manufactured malaria challenge agent as part of its first controlled human malaria infection (CHMI) challenge study.
Exhibit 5 - Malerial Sprorozoites
Source: NIAID, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons
The study assesses CHMI using the existing standard of care antimalarial drugs against Plasmodium malaria. This is a validation study. The validation data should be available in Q222. Following this initial trial, hVIVO will be able to enter commercial contracts. hVIVO expects contracts to assess the efficacy of novel antimalarial drugs and vaccines as well as correlates of immunity using a Plasmodium challenge agent.
Malarial parasites, sporozoites (Exhibit 5) once in the blood travel to the liver. There, they replicate asexually within liver cells for about seven days. The liver cells then disintegrate releasing the next life cycle stage, called merozoites. These infect red blood cells where they further replicate, destroying red blood cells, infecting more red blood cells and causing anaemia and fever. Malarial infection can be detected usually by day 10. See www.malariavaccine.org for more gruesome details. Over 200mln people suffer from malaria and there is interest, commercial but also philanthropic, in new treatments and vaccines. Vaccines are complicated and weakly effective because of the parasite's complex life cycle.
The hVIVO malaria challenge model consists of Direct Venous Inoculation (DVI) of volunteers with purified, infectious P. falciparum sporozoites, harvested from the salivary glands of Anopheles stephensi mosquitoes. This type of malaria challenge model has been safely used in multiple clinical trials in the United States, Europe and Africa. Using DVI rather than traditional methods with infected P. falciparum mosquitos (five mosquitos needed) gives superior predictability, a cleaner safety profile and improved control over levels of infection.
This type of model was pioneered in the US from 1971 onwards. A challenge model now exists that replicates mosquito-delivered infection with a similar incubation period (10 days or so). For hVIVO, the use of DVI means that expensive mosquito-handling facilities are not required on site. After infection and treatment with the new agent or vaccine being trialled, volunteers are treated with antimalarial drugs such as chloroquine to prevent long-term infection. A 2019 paper from the Center for Vaccine Development and Global Health (The Controlled Human Malaria Infection Experience at the University of Maryland, Friedman-Klabanoff et al (2019)) gives more details on such studies.
COVID-19 validation challenge study data
A pre-print (not yet peer-reviewed) paper published on 1 February 2022 by Killingley et al (2022) shows the expertise of hVIVO in the difficult area of running COVID-19 challenge studies. The trial was a dose-finding validation study to determine the acceptable dose of SARS-CoV-2 virus that could be safely given to uninfected and unvaccinated young (age 18-29) volunteers. It was run between March and July 2021.
The findings were that a much lower dose of the virus than previously given would induce a detectable infection in just over half the volunteers. This is a useful threshold with which to run future challenge studies of potential ant-viral drugs and candidate vaccines. It shows how such studies can be run and their safety. Technically, it shows the strengths of the hVIVO team that ran the clinical protocol; however, the SARS-CoV-2 virus moves faster than the paperwork of clinical studies. The virus type used was the common pre-alpha strain with the D614G mutation in the spike protein. This has been succeeded by alpha, delta and now the second major omicron variant. As omicron is more infectious but less virulent than the original SARS-CoV-2 wild type virus, the trial protocol may need recalibration. The use of younger volunteers was for safety reasons but this is not regarded as an at-risk group and any company testing a therapy will be more concerned about its efficacy in people with co-morbidities aged over 55.
The other commercial factor is the future need for further challenge studies in a highly-vaccinated population with a less virulent strain dominant. Hence, we expect COVID-19 work to be a minor revenue stream in the future. Of course, a highly infectious and virulent evasive new mutant may arise, so it is essential to have this validation study to draw on
Venn Life Sciences
Venn was, and is, a Contract Research Organisation providing a suite of consulting and clinical trial services. Venn conducts most of its business in Euros and now operates from two offices in Breda (Holland) and Paris (France). The Breda site runs CMC and pharmacokinetic analytical services. The Paris office analyses biomarker data from clinical trials. Open trimmed the number of operational sites to improve margins.
Venn generates about £7-8mln a year of revenues and contributes positively to group results. Venn's results are linked to the Euro-£ exchange rate. Venn's capabilities are increasingly used to support hVIVO run studies to add value for clients. For example, the biostatics unit in Paris is increasingly analysing data from hVIVO run studies.
Other value sources: one realised, three in progress
Open has in interesting portfolio of value-enhancing assets (Exhibit 6). Of these, Poolbeg has been crystallised and its shares distributed and three others are in progress. As we are unclear on future values, we have not attempted to value these.
Exhibit 6 - Other value sources
Source: Open Orphan
The Poolbeg spin-out was completed in summer 2021 with the value realised (£26.2mln) being distributed to shareholders using a tax-efficient distribution in specie. The prospectus is dated 19 July 2021. Poolbeg was de-merged from Open and then listed issuing 50% more shares, 250mln, to make 500mln in issue. The 50% owned by Poolbeg was then distributed. This was equal to about 4p/share at the time.
hVIVO entered the Imutex joint venture (JV) in 2016. This is with PepTcell Ltd, a small private UK company trading as SEEK. The JV aims to develop two novel candidates, FLU-v (a “universal” flu vaccine Phase 3 ready) and AGS-v (a malaria vaccine. hVIVO owns 49%). There is no recent data on these candidates. In November, data from the first Phase I clinical study of the new AGS-v PLUS mosquito vaccine candidate was released showing favourable safety, tolerability, and immunogenicity results. The data will be published in a peer-reviewed journal.
Disease in motion uses data from the trial analysis work done by Venn Life Science. PrEPBiopharm is another joint venture this time with a 62.6% current stake.
Profit and loss
The revenue line (Table 4) is sales — that is hVIVO work on challenge studies as completed plus Venn services. Other income includes research & development (R&D) tax credits which are not necessarily received in the period; in H121, these were £1.5mln. It is also notable that there is a material but non-cash level of depreciation of right to use and other assets. In FY20, these totalled £2.1mln, mostly on the right of use and the H1FY21 charge was £1.4mln. We assume the majority of these are on the leased Whitechapel facility. As of 31 December 2020, these Right of Use assets were valued at £4.2mln.
Also in 2020, there was a £2mln exceptional item
Table 4 - Profit and Loss
Source: Ope Orpahn resport, ProActive Estimates
Cash flow
The cash flows are shown (Table 5) after the deduction of the depreciation charges. We have assumed that the cash level in December 2021 was similar to that on 30 June 2021, as guided. This implies a net cash outflow of about £4.4mln making our year-end estimated cash balance at about £15mln.
Table 5 - Open Orphan Cash Flow
Source: Open Orphan Reports, ProActive Estimates
Balance sheet
The balance sheet (Table 6) shows a healthy growing business with a good FY21 year-end cash position, estimated by us at about £15mln. We assume that accounts receivable are in line with H1FY21 at about £11mln and that accounts payable (including prepayments on contracts) are about £16mln; however, we note that these figures are not externally predictable and could be volatile during periods of higher growth; for example, the 10 and 21 December 2021 contract wins of about £10mln and £5mln respectively could have prepayments of £3mln. This is a useful source of working capital. A large backlog of orders also gives a stable business base.
Balance sheet restructuring
On 19 May 2021, Open gained court approval to reduce its capital. Consequently, the deferred share capital balance of £62.8mln was bought back by the company and the balance in the Share Premium account of £44.5mln was transferred to retained earnings.
On 18 June, Open made a distribution of Poolbeg Pharma Ltd shares of £1.5mln to all shareholders as of 17 June 2021. These shares are held in trust by Croft Nominees for 9 months following Poolbeg’s admission to AIM on 14 July (so until April 2022).
Table 6 - Open Orphan Balance Sheet
Source: Open Orphan Reports, ProActive Estimates
Valuation
Valuing Open Orphan is complex as it is a growth company in a suddenly reinvigorated market as its pharmaceutical clients recognise the value of using challenge studies to speed up earlier-stage clinical development. COVID-19 showed, as an ironic side effect, the value of vaccines and therapies against multiple respiratory diseases, so the industry also started investing into previously unfashionable respiratory therapies.
Open is constantly developing new challenge models and although this takes time (safety being paramount), these models with the skills and expertise to run them are formidable barriers to entry. The number of beds is a possible growth bottleneck but Open can add bed capacity for relatively small capital investment into its east London sites so this is not seen as an issue for some years; however, contracts are mostly confidential and are also large and lumpy so hard to estimate. The backorder pipeline smooths out reported revenues.
We have accordingly taken a view to 2026 that sales might grow incrementally to at least £70mln. With significant deprecation charges, EBITDA is used as a proxy to reflect the cash generative potential of the business. Assuming a steadily improving EBITDA from an estimated 15% in 2022 to a postulated 22% in 2025, we project a possible 2026 EBITDA of £15.4mln.
We then apply a multiple to EBITDA of 15x to give £231mln as a possible 2026 stock market value for Open. A 15-fold multiple takes account of the estimated EBITDA growth rate. As a benchmark, another UK CRO, Ergomed, announced on 9 February that it was acquiring a clinical services business, ADAMAS, with a 22% EBITDA margin of £1.8mln for £25.6mln, a 14.2-fold multiple (ex-cash).
Assuming a cost of capital of 8% plus inflation of 5% on average, the appropriate discount rate could be 13%. In that event, Open would have a current prospective value of £228mln equating, with 671mln shares in issue, to about 34p/share (Table 7). If further revenue growth looks feasible with stronger margins, the value could be much higher. As a profitable company, Open will pay appropriate taxes in future periods once historic tax losses are used.
There are three other, unvalued, assets that may also deliver significant future additional returns. For example, the Poolbeg distribution in mid-2021 was worth about 4p per share.
Table 7 - Value Estimate
Source: ProActive estimates