Near-term profitability, spin outs, and challenge study contracts put Open Orphan on track for major valuation growth (ORPH)

By Anna Farley


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After years of hard work, pharmaceutical services firm Open Orphan is reporting ongoing profitability.

When a company first starts out, profitability can seem a long way off.

But after years of hard work, pharmaceutical services firm Open Orphan (LON: ORPH) is hitting that benchmark in style.

And not only that, but the firm is rewarding shareholders for their faith in the form of four fascinating spin-offs.

Here, Cathal Friel, the company’s executive chair, set aside some of his time to talk over major new developments with ValueTheMarkets.

Friel, who recently invested more than twice his annual salary in Open Orphan shares, began by highlighting the company’s success so far and the opportunity that lies ahead.

The journey to profit

In an incredibly short space of time, Open Orphan has transformed its hVIVO and Venn Life Sciences acquisitions.

Neither had ever made a profit before, but had combined to form an operationally profitable business by the fourth quarter of 2020 under the Open Orphan umbrella.

As a result, Open Orphan itself was comfortably Ebitda profitable in the first half of this year.

And now, thanks to its hard work, it is on course to report a profitable 2021.

Friel celebrates this achievement. He notes that ongoing profitability will mean the group can fund its own growth plans without depending on investors.

“The main benefit of profitability is we’re a services company, so we don’t burn cash and we are now moving into cash generation. That’s a difference from many other AIM companies that seem to be constantly loss making,” Friel says.

One key step on this journey was removing the majority of the acquired companies’ previous C-suite and management teams. C-suite refers to people like chief executive officers and chief financial officers.

“Long standing and loyal” internal employees replaced the old leadership, Friel explained. This meant there was no need to go out and make new hires.

Open Orphan has also adopted a hybrid work style, with nobody permanently in the office post-pandemic – including Friel himself.

As a result, overheads are down. Whilst these aren’t visible from the recently reported numbers due to increases in staff numbers to facilitate the company’s increased pipeline of challenge studies, this can be seen from the pro forma numbers and will have a bigger impact on 2021 numbers as Open Orphan moves into profitability.

At the same time, revenues and order book are up substantially. The growing demand for challenge studies in the wake of the Covid-19 pandemic is a major factor.

In fact, Open Orphan is working with the government on a very important coronavirus challenge study. And there’s recently been a major development…

Next steps – expanding a unique Covid-19 study

Open Orphan’s hVIVO subsidiary has been working on the world’s first Covid-19 human challenge study. A study that—thanks to early success—is now set to expand.

hVIVO is continuing to work with the UK government to inoculate up to an additional 20 volunteers as part of this Covid-19 characterisation study, the first in the world.

In a challenge study, volunteers agree to purposeful infection with pathogens like Covid-19. This helps scientists gain insight into different diseases and their treatments. This takes place in a safe, controlled, clinical environment and under supervised conditions.

The benefit of these types of trials is that results are much quicker. Traditional trials might involve giving thousands of people a vaccine or a placebo and then following them to find out if they are infected later. This takes a long time. First to inject so many people and then just waiting to see if they get sick.

But in a challenge study, you can take a smaller group and split them into vaccine or placebo. Then, by intentionally infecting them, it takes a much shorter time to find out if the vaccine offers protection.

Part of the UK government’s characterisation study is identifying a Covid-19 dose that causes safe and reliable infection among people who haven’t had the virus or been vaccinated.

And the goal in now expanding the study is to answer more questions that might help fight the virus.

Already, data from the study is offering important insights into the virus behind Covid-19. These can help manage the virus and offer future treatments.

An editorial opinion piece on the challenge programme recently appeared in the prestigious New England Journal of Medicine (“NEJM”). The title of the piece is ‘Establishing the Model during an Evolving Pandemic’.

The piece looks at the extensive preliminary review process commissioned by the UK government and delivered by the Covid-19 human challenge programme coalition. The NEJM piece also explores arguments for including a challenge study programme as part of the Covid-19 pandemic response.

Friel was “delighted to see support for the Covid-19 human challenge programme” in the NEJM. After all, the NEJM has a reputation as the leading medical journal and website worldwide. The programme will be a vital part of the ongoing trials of vaccine and antivirals that make up an “effective pandemic response”.

And speaking of challenge studies, Open Orphan just announced another major one in a different field all together…

Brand new contracts and the next pandemic

One of Open Orphan’s latest exciting contracts is with immuno-pharma company AIM Immunotech, testing antiviral candidate Ampligen.

hVIVO will conduct this phase two trial, which uses both human Rhinovirus HRV (aka the common cold virus) and Influenza (most commonly referred to as flu). The single study will begin in the fourth quarter of 2021.

Excitingly, the company will recognise most of the revenues from the contract in the current financial year.

The AIM Immunotech contract further reinforces Open Orphan’s status as a world leader when it comes to human challenge studies, since it involves testing multiple pathogens at the same time in the company’s state-of-the-art zoned unit.

The firm expects to see more contracts in this area going forward, as all eyes are on the world of respiratory and infectious diseases in the wake of the pandemic.

And Friel says Influenza is the next big ailment on the minds of drug and vaccine makers. According to him, pharmaceutical majors are preparing for “a bigger potential epidemic problem” than coronavirus, “and that epidemic problem is Influenza”.

The chair points out that “previous pandemics were predominantly Influenza based”. He mentions the Spanish flu pandemic of 1918 and the Russian flu pandemic of 1889 to 1891 specifically, both caused by influenza.

The worry, then, is that a future flu pandemic could be “much more troublesome” than the current coronavirus pandemic.

Importantly, the current pandemic has meant more focus than ever before on stopping that from happening.

Friel points out that, pre-Covid, the infectious disease represented “about a $20 billion a year market”. Of that, the large majority – perhaps 70-80% – went purely towards developing that year’s new flu vaccine.

That is all set to change, he says. The market is now set to hit an incredible “$250 billion annually by 2025”, becoming “the single largest pharma market”.

That means even more revenue could well be coming Open Orphan’s way very soon. After all, infectious diseases are its bread and butter.

Friel notes that big-name drug companies like Pfizer(NYSE: PFE), GlaxoSmithKline (LON: GSK | NYSE: GSK), and AstraZeneca(LON: AZN | NASDAQ: AZN | STO: AZN) are all investing heavily in infectious diseases at the moment.

As well as the AIM Immunotech deal, Open Orphan also signed a new approximately €900,000 contract with an existing customer.

The contract is for clinical trial management by the company’s Breda office in the Netherlands, which is “now fully integrated” according to Friel.

A dynamic duo – How profitability and spin-offs work together

Open Orphan’s challenge study business is one of its “cash-generating machines”, as Friel calls them.

The other machine is spin-offs, of which the company will soon have four.

There’s Poolbeg Pharma, for starters, which just completed a successful and oversubscribed £25 million placing. This gave it a £50 million valuation at admission to AIM, where it began trading last week.

Poolbeg is a clinical-stage company with a capital light model focusing on infectious diseases. As mentioned, this is set to be an enormous $250 billion market in just a few short years.

Open Orphan shareholders own the bulk of Poolbeg, Friel says, making the spin-off “a huge payout to them”.

Then there’s the company’s recently created Disease in Motion platform, which it also plans to spin off. This alongside two further entities also set to be monetised.

With both a profitable services company and a “value-generator” in the form of these spin-offs, and shares handed back to the firm’s own shareholders, the Open Orphan investment case looks very strong indeed.

All the right pieces in all the right places

It’s clear that Friel himself has complete faith in Open Orphan. This is clear not just through his hard work so far but also his investment in the company itself.

Most recently, he invested £300,000 – twice his annual salary – in the company and now holds a 7% stake.

He’s happy to invest, he says, in large part because each of Open Orphan’s non-core asset spin-offs bring “another return on that investment”.

Not only did Friel invest, but non-executive director Brendan Buckley invested alongside him, a move the chair commends.

When you add together impressive spin-offs, major contracts, and a clear near-term path to profit…

It’s obvious that Open Orphan is headed toward great things.

The incredible growth of the infectious disease market due to the pandemic means the firm is sitting right at the heart of a major market expansion.

Now is the perfect time to invest in this boom, and Open Orphan has what it takes to make the most of that opportunity.


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Author: Anna Farley

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Anna Farley does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Anna Farley has not been paid to produce this piece by the company or companies mentioned above.

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