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Buy Vernalis ahead of sales surge

We see recent weakness in the Vernalis (VER) share price as a short-term opportunity
December 10, 2015

Drug development group Vernalis (VER) is readying itself for a major sales push of recently approved cough and cold medicine Tuzistra, which management thinks could generate peak revenues in excess of $400m (£267m). Despite the huge opportunity, the share price has recently weakened in line with the general waning of investor sentiment towards the biotech sector and in anticipation of a short-term rise in losses at the company as it invests in commercialising Tuzistra. We think this represents a buying opportunity. Management is building a global drug discovery company, while simultaneously proving its worth as a commercial enterprise.

IC TIP: Buy at 71p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • US rollout of Tuzistra
  • Growing revenues
  • Takeover potential
  • Net cash position
Bear points
  • Generic challenge to Frovatriptan
  • Escalating investment in US business

Vernalis's losses are going to escalate in 2016 as the group spends heavily on supporting the commercial launch of its new cough and cold medication in the US - the largest flu market in the world. But by 2018, broker N+1 Singer forecasts that the ramp-up of revenues from Tuzistra will have caused sales to surge to £77m, producing £8.5m adjusted pre-tax profit and EPS of 2.2p.

 

 

We think the group's pipeline of future products also holds promise. The company anticipates New Drug Application (NDA) filings for its new drug candidates - known only as CCP-07 and CCP-08 for now - during the 2016 calendar year, and proof of concept (POC) data for two others - CCP-05 and CCP-06 - possibly in 2016 too. Clinical timetables are always subject to delay or hiccups, but Vernalis has an encouraging track record - it only took around 15 months to take Tuzistra from POC to approval at the end of April and then official launch.

The group has said it isn't planning to make further investments in its "new chemical entities" portfolio, and has made the products available for partnering instead. This signals the group's move away from seriously early-stage assets, which are more prone to fail, and sharpens its focus on late-stage drugs and products already in the market.

There's also scope for Vernalis to become a takeover target. The cough and cold market is a mature one, but Vernalis has proved it can convince regulators and compete with far larger companies across some of the largest flu markets in the world. This might persuade some large pharma groups that have significant respiratory portfolios to consider taking out a competitor with valuable technology.

VERNALIS (VER)
ORD PRICE:71pMARKET VALUE:£316m
TOUCH:71-72p12-MONTH HIGH:87pLOW: 45p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:17pNET CASH:£61m

Year to 30 JuneTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201314.3-7.9-1.3nil
201412.3-7.1-1.1nil
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2015*20.5-9.5-1.5nil
2016**16.4-28.1-6.1nil
2017**33.8-16.5-3.5nil
% change+106-41-43-

Normal market size:10,000

Matched bargain trading

Beta: 0.19

*18-month period following change of year-end

**N+1 Singer forecasts