Hvivo has strong upside potential – even using conservative targets

Aim-traded hVIVO (HVO:28.5p), a fast-growing contract research organisation (CRO), reported results slightly ahead of the upgraded guidance at the time of the pre-close trading update (‘Business is booming at Hvivo’, 12 February 2024).

The company provides early clinical development services for a broad client base of biopharma companies. It is the only CRO focused on human challenge studies, providing expertise and capabilities in challenge agent manufacturing, and has a portfolio of human challenge models to test a range of infectious and respiratory disease products.

Organic growth is being driven by the steady expansion of the human challenge trials (HCT) market, and more specifically by the company’s influenza and respiratory syncytial virus (RSV) challenge models being key drivers. That’s because there has been renewed interest in RSV vaccine and drug development from the global biopharma industry following the approval of the world's first RSV vaccines last year. hVIVO conducted the successful Phase 2 challenge trial for Pfizer's ABRYSVO™ vaccine, the data from which supported the FDA Breakthrough Designation and an accelerated approval.

The directors also highlight the increasing number of drug developers that have incorporated HCTs into their clinical development plans, which has led to an increase in both repeat and new business from a growing roster of biopharma clients. Notably, four of the top 10 global biopharma firms are clients and contracts are increasing in both size and scope.

The fact that the majority of hVIVO’s new challenge models are funded by its clients, which have also largely financed hVIVO’s new state-of-the-art quarantine facility in Canary Wharf, is indicative of the strong growth prospects of the HCT market and recognition of the value that hVIVO’s HCTs provides. It’s well worth noting that the new facility will house a much larger laboratory with the capability to conduct HCTs in CL-3 pathogens such as Covid-19.

Earnings estimates de-risked

Importantly, with the £80mn orderbook diversified across work on seven challenge agents and 11 HCT clients, the spread of contracts mitigates the risk of postponements or cancellations to improve the quality of both revenue and income. Around 90 per cent of current year revenue guidance of £62mn is covered by  the order book with revenue weighted to the first half of 2024 to further reduce earnings risk.

On this basis, brokerage Cavendish expects annual cash profit (post share-based payments) to rise from £13mn to £13.8mn, implying that the £194mn market capitalisation company is rated on a multiple of 11 times cash profit estimates to enterprise valuation of £157mn. In addition, analysts at both Investec and Cavendish expect hVIVO’s free cash flow to boost net cash (pre-IFRS 16 lease liabilities) by £9-10mn this year. The burgeoning cash position gives management firepower to make small bolt-on acquisitions in existing areas of expertise including complementary drug development consulting businesses and patient recruitment companies.

Admittedly, hVIVO’s progress has not gone unnoticed with the share price trebling in value since I first advised buying (Alpha Research: ‘Ride the boom in vaccine research’, 17 November 2022). However, the rating is modest for a company that is aiming to become a £100mn revenue business by 2028, buoyed by organic growth of 8-10 per cent per year and the contribution from synergistic bolt-on acquisitions.

Offering decent upside to Cavendish’s and Investec’s upgraded target prices of 40p and 41p (from 38p), and the more conservative valuations of Liberum (34.5p) and Stifel (35p), hVIVO’s shares continue to rate a buy.