Open Orphan: Booming orders show market leadership

Open Orphan: Booming orders show market leadership

Open Orphan (which will be rebranded hVIVO starting 26 October) 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). It has reported in the H1FY22 results revenues of £18.9mln in the first six months of the year at an EBITDA margin of 12.1%. EBITDA was £2.3mln for the period.

The company 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.

High demand for hVIVO's challenge studies in respiratory infections and infectious diseases and a record order book of contracts has lead management to reaffirm their 2022 revenue target of £50mln, and £9mln in post-period revenue has already been added in July and August.

As of September, the contract order book stands at over £80mln — almost three times the value of the order book during the same period FY2021. This highlights the rapid growth in sales fostered by a strong position in infectious and respiratory disease testing using human challenge models. The company has developed challenge protocols for over 10 different infections/conditions with new models being developed and added all the time, including their asthma and malaria models which were launched this year.

H1FY22 results showed a 27% half-on-half increase in sales to £18.9mln. This growth continues to be primarily driven by hVIVO's business line with supplementary but smaller sales from Venn. However, management continues to exploit cross-selling opportunities with Venn supporting hVIVO more and more. Services continue to be added to its offering.

The 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 September 2022, which will result in revenues in 2022-2024, was around £80mln — and not all deals are disclosed. We expect annual 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) multiple 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

The company'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. The customer base includes 4 of the top 10 pharma companies, biotech companies, and government/public health organisations — notably, including Pfizer, Janssen, and GSK. These big pharma clients account for around 40% of the order book.

H1FY2022 results

Exhibit 1 - Sales/EBITDA growth

Source: Open Orphan report/Proactive estimates

hVIVO has announced multiple contract wins in the first half of 2022, with post-period contracts giving a cumulative disclosed value of £80mln as of September. This rapid growth in orders is a strong indication of the level of business that the company can expect going forward. These sources of revenue will be recognised over 2022-24. Studies can run over more than one reporting time period.

Capacity continues to expand and added extra quarantine beds were added in H1FY22; this is not capital intensive. This expansion campaign has included the opening of a new recruitment facility in Whitechapel, an increase in bed capacity of 44% to a total of 62 quarantine and screening beds, and a doubling of screening capacity to 1,000 per week.

Exhibit 2 - Orderbook value to date

Source: Open Orphan H1 2022 Financial Results Presentation

Contract wins

In H1FY22, management announced several contract wins with a total disclosed value of £34.2mln:

• a £5mln RSV contract with a large European biotech company to conduct a human challenge study testing an intravenous antiviral drug candidate.
• a virus manufacturing contract for an undisclosed amount with an existing top 5 global pharma clients. The company will conduct GMP-compliant virus manufacturing due to be completed in Q3 2022.
• a contract with an existing big pharma client to host a phase 2 study of an RSV vaccine candidate.
• a £7.3mln contract to conduct an influenza human challenge study for a leading biotech company.
• a £14.7mln influenza characterisation study contract with a top-five global pharmaceutical company, with a planned follow-on human challenge study.
• a £7.2mln contract with an existing top 5 global pharmaceutical client to host a phase 2a double-blinded placebo-controlled human challenge study testing an antiviral against RSV.

There have also been multiple post-period contract wins:

• a £6.2mln contract with a US biotechnology company to use hVIVO's Influenza A human challenge model to test an antiviral drug candidate, expected to begin H2FY22.
• a £10.4mln contract with an existing top 5 global pharma client to manufacture the H1N1 influenza challenge virus, and then conduct a challenge study to test the client's trial antiviral.

hVIVO

The hVIVO business conducts human challenge studies. This means that the business uses validated clinical protocols. hVIVO has nine human challenge models 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 the company'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. The company uses these facilities as screening centres for potential trial volunteers, and the cumulative weekly screening capacity through the FluCamp platform is 1000+. A core skill of hVIVO is the recruitment of volunteers and careful medical screening to ensure volunteers safety in trials.

Management notes 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, the 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, it is expanding into new services and adding new revenue streams.

Exhibit 3 - Clinic and Screening Centre

Source: Open Orphan H1FY22 results 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 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, in 2020/21 the number of operational sites was trimmed to improve margins.

Venn generates about £6-7mln 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 synergistic with hVIVO, helping to run studies to add value for clients. For example, the biostatics unit in Paris is increasingly analysing data from hVIVO run studies. Preclinical work often leads to follow-on clinical programmes providing an end-to-end early clinical development service. This was illustrated by the £5m RSV human challenge study contract signed in March 2022 with a European biotech, resulting from pre-clinical work completed by the Venn Breda team.

Exhibit 4 - Venn Life Sciences selling opportunities

Source: Open Orphan H1FY22 results presentation

Omicron challenge model

In June, it was announced that hVIVO would be developing the world's first COVID-19 omicron variant human challenge model. The agreement, signed with Vaxart Inc (NASDAQ:VXRT) (Vaxart Inc (NASDAQ:VXRT)), is to manufacture GMP-compliant SARS-CoV-2 virus based on the omicron variant which will eventually be used in a human challenge study from testing an oral vaccine, but the challenge model can be used for other trials. This is yet another example of how the company's position as an industry leader is driving sales and important research in global health.

Profit and Loss

The revenue line is hVIVO work on challenge studies as completed plus Venn services. The company posted £18.9mln revenue in H1FY22 compared to £23.2mln in H1FY21.

It posted a H1FY22 EBITDA profit of £2.3mln, a growth of around 10% compared to the same period last year. Management continue to target EBITDA margin growth going forward, and have already made gains through training programmes, new CRM systems for more efficient recruitment screening, and increased productivity through clinical staff rotas. This has helped the company achieve a significantly greater EBITDA margin of 12.1%.

Cash flow

The cash level at H1FY22 end was £15.9mln, but we understand that post-period end cash as of September 2022 stands at around £20mln. The company's business model means that it can maintain healthy working capital at any one time. When contracts are signed, around 15%-20% of the contract value is paid up front, giving management significant flexibility.

Balance sheet

The balance sheet shows a healthy growing business with a good H1 end cash position of £15.9mln, rising to £20mln as of September. Accounts receivable were £13.3mln up from £8.9mln at end of FY2021. Accounts payable (including prepayments on contracts) were £23.7mln; 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 means that the company has a positive working capital cash flow as it grows. However, the large backlog of orders (order book as of September stands at £80mln) also gives a stable business base, with revenues realised over 2-3 years. The significant proportion of repeat clients — 100% for the top global pharma clients — also puts the company in a strong position in relation to accounts receivable in the short-mid term.