Open Orphan delivering on growth expectations

Proactive Published 21/06/2022

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Open Orphan is a growing specialist contract research organisation (CRO) with 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 and infectious diseases, helped the group move into profit in 2021, recording an EBITDA (underlying earnings) of £2.9mln (versus a loss of £6.1mln in 2020). An indication of the growth and the leading position in the field is that new contracts totalling £34.2mln have already been announced in the first half of fiscal 2022 (H1FY22); other contracts have been announced without value disclosure.

Open Orphan is a leader in human respiratory disease and infectious disease challenge clinical studies. These recruit carefully screened, healthy volunteers and deliberately infect them with a pathogen under controlled conditions to test pharmaceuticals and vaccines. Such studies offer a rapid initial assessment of the efficacy of a candidate therapy. They are followed by larger field studies. Challenge studies are now becoming more commonly used to fast track drug development. Open Orphan has developed challenge protocols for nine different infections/conditions. A new malarial challenge study protocol is being clinically validated and will be commercially available later in 2022.

A leader in human respiratory and infectious challenge studies

Open Orphan's 2021 results showed a 76% rise in sales from £23mln in FY20 to £39mln in FY21, exceeding our estimates by £2mln. This is due to hVIVO's growth complemented by steadier revenues from Venn. Our FY22 forecast suggests Open Orphan could generate £50mln or more of revenues with an EBITDA of around £7mln.

Open Orphan rapid growth is being driven by the pharmaceutical industry's increased investment in infectious and respiratory diseases, presumably a knock-on effect of the pandemic. The value of signed contracts as of 1 June 2022, which will result in revenues in 2022-2024, was £64.2mln — and not all deals are disclosed. We expect revenues to grow to at least £70mln by 2026 as new disease models are added. The move into profitability was reflected in a turnaround in earnings per share (EPS), which moved from -1.80p FY20 to -0.01p FY21.

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 an indicative value of £228mln or 34p/share, more than twice the current share price.

Conclusion

Year end Dec 31 · 2019 · 2020 · 2021

Revenue £M · 3.5 · 22.2 · 39.0

EBITDA (£M) · (3.8) · (6.1) · 2.9

Open Orphan's revenues (Exhibit 1) are primarily generated by its human challenge subsidiary, hVIVO, but also 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. Open Orphan has a customer base that in 2021 included 4 of the top 10 pharma companies, biotech companies, and government/public health organisations.

Revenue growth came from hVIVO in FY21, with the division effectively doubling its revenue and accounting for 82% of revenues. Venn saw a minor contraction in revenue of £800k, but revenues overall for the division remain stable, buttressed by the synergies between hVIVO and Venn services. EBITDA growth was also strong to £2.9mln.

FY21 results and outlook for 2022

Exhibit 1 - Open Orphan sales/EBITDA growth

Source: Open Orphan report/ ProActive estimates

hVIVO has announced multiple contract wins in the first half of 2022 (Exhibit 2), with a cumulative disclosed value of £34.2mln year to date. This adds to the current order book giving a record total of £64.2mln so far. This adds to contract wins in December 2021 of a large influenza challenge study for US$13.4mln (about £10mln) and another for £5mln, both to be run over 2022. This is a strong vindication of the level of business that Open Orphan can expect going forward. These sources of revenue will be recognised over 2022-24. The accounts payable line on the Balance sheet (Table 3) stood at £18.4mln on 31 Dec which includes deposits on contracts. Studies can run over more than one reporting time period.

Open Orphan continues to expand capacity and added extra quarantine beds in H1FY22; this is not capital intensive.

Exhibit 2 - H1FY22 contract wins

Source: Open Orphan press releases

Contract wins

In H1FY22, Open Orphan announced several contract wins with a total disclosed value of £34.2mln (Exbibit 2):

In March, it announced a £5mln RSV contract with a large European biotech company. Under the contract, hVIVO will conduct a human challenge study testing the efficacy of an intravenous antiviral drug candidate, hosting healthy volunteers at their newly expanded 62-bed quarantine facilities in London. Open Orphan will also provide crucial infectivity and serology data to the study through hLAB, Open Orphan's specialised virology laboratories. Revenues from this contract will be realised in 2022 and 2023. Importantly, this contract was a cross sell from the Venn division following their earlier clinical work. This reinforces the clear synergies between hVIVO and Venn in securing contracts (Exhibit 3).
In May, Open Orphan announced a virus manufacturing contract for an undisclosed amount with on of its existing top 5 global pharma clients. Open Orphan will conduct GMP-compliant virus manufacturing due to be completed in Q3 2022.
In May, hVIVO gained a contract with an existing big pharma client to host a phase 2 study of an RSV vaccine candidate. hVIVO will recruit volunteers and the Plumber's Row clinic will act as a vaccination site.
In May, a £7.3mln contract to conduct an influenza human challenge study testing the efficacy of an antiviral product for a leading biotech company was unveiled. The study will be conducted using healthy adult volunteers recruited through Open Orphan's FluCamp patient recruitment platform. hLAB will also provide virology services to the study, with revenues being realised over 2023 and 2024.
In June, it was awarded a £14.7mln influenza characterisation study contract with a top-five global pharmaceutical company, with a planned follow-on human challenge study. After the characterisation study in which hVIVO and hLAB will develop and validate challenge agent-specific assays for a new flu challenge agent, hVIVO will then conduct a human challenge study to determine the efficacy of multiple vaccine candidates. This follow-on study has a target start date of the first quarter of 2023. Revenues will be realised over 2022 and 2023. This contract follows the announcement in May of a virus manufacturing contract with the same client.
In June, Open Orphan gained a contract with an existing top 5 global pharmaceutical client worth £7.2mln. Open Orphan's Whitechapel specialist quarantine facilities will host a phase 2a double-blinded placebo-controlled human challenge study testing the safety and efficacy of an antiviral against RSV.

Exhibit 3 - hVIVO & Venn - working together

Source: Open Orphan investor presentation

hVIVO

The hVIVO business conducts human challenge studies. 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.

Its studies are conducted at Open Orphan's specialist facilities in London which has a total of 62 beds following recent expansion. The Company has Category 2 quarantine facilities at both its QMB facility and its Whitechapel Clinic, a former boutique hotel which the company converted to a quarantine facility in a capital light manner in 2021. The limiting factor long-term might be the 62-bed utilisation rate, but beds can be added within a 4-6 month period.

The Company recently opened two new FluCamp volunteer recruitment screening centres, the first in Manchester and the second in London (Plumbers Row) which has 12 beds and on-site lab facilities. These are suitable for diseases such as flu, respiratory syncytial virus (RSV) and Human Rhino Virus (HRV) The Company uses these facilities as screening centres for potential trial volunteers, and Open Orphan’s cumulative weekly screening capacity through their FluCamp platform is 1000+. A core skill of hVIVO is the recruitment of volunteers and careful medical screening to ensure volunteers safety in trials.

Open Orphan management note that:

The infectious disease market is expected to grow to in excess of US$250bln by 2025 due to the global focus on the infectious disease market post-pandemic.
The infectious disease clinical trials market alone is expected to grow to around US$5.5bln globally by 2027.
Due to historic underinvestment in antiviral and vaccine therapies (because they offer low returns on research & development investment) the industry has a poorly developed infrastructure for running such studies.

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, volunteer recruitment capacity, and deep know-how are strong barriers against potential competitors. The company's history dates back to the Common Cold Unit which ran the UK's first challenge trials from 1947. Additionally, Open Orphan is expanding intto new services and adding new revenue streams (Exhibit 4)

Exhibit 4 - New services and revenue streams

Source: Open Orphan investor presentation

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 provides biostatistical and data management services for clinical trials. As part of a restructuring of the Venn operations, Open Orphan in 2020/21 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.

STRiVE

hVIVO has an ongoing project, STRiVE (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), HRV, parainfluenza virus (PIV), influenza, and RSV.

Profit and loss

The revenue line is hVIVO work on challenge studies as completed plus Venn services. Open Orphan attained a 76% year-on-year growth in revenue to £39mln. As previously mentioned, most of this growth came from the hVIVO division.

Open Orphan have for the first time moved into EBITDA profit for the year at £2.9mln. Management continue to target EBITDA margin growth going forward, and hope to use their new profit position as a strong base to grow out the position of the business. Other income includes research & development (R&D) tax credits that are not necessarily received in the period; in 2021, these were £2.1mln. It is also notable that there is a material but non-cash level of depreciation of right to use and other assets.

Table 1 - Profit and Loss

Source: Open Orphan reports, ProActive estimates

Cash flow

The cash flows are shown (Table 2) after the deduction of the depreciation charges. The cash level at year-end 2021 was £15.7mln, about 700k higher than our previous estimates. This shows a net cash outflow of £3.5mln. In FY21 there was a small £780k investment outflow, primarily in improving volunteer screening and quarantine facilities' capacity. There was also a financing outflow of £1.2mln in most part due to the spin out of Poolbeg and capital reduction. We expect FY22 cash of about £16.8mln.

Table 2 - Cash Flow

Source: Open Orphan reports, ProActive estimates

Balance sheet

The balance sheet (Table 3) shows a healthy growing business with a good FY21 year-end cash position of £15.7mln.

Accounts receivable stood slightly below FY20 at £8.9mln. Accounts payable (including prepayments on contracts) were £18.4mln; these figures are not externally predictable and can be volatile during periods of higher growth to reflect the cash cycle of its client base. The strong prepayment model (reflected in the high Accounts payable figure) means that Open Orphan has a positive working capital cashflow as it grows.

However, the large backlog of orders (order book as of June stands at £64.2mln) also gives a stable business base, with revenues realised over 2-3 years. The significant proportion of repeat clients — roughly 80% of FY21 revenues — also puts Open Orphan in a strong position in relation to accounts receivable in the short-mid term.

Table 3 - Balance Sheet

Source: Open Orphan reports, ProActive estimates