A £13mn deal adds to hVIVO's record order book

hVIVO (HVO:16p), a rapidly growing specialist contract research organisation (CRO), has been awarded a £13.1mn contract with an existing top five global pharmaceutical client to develop a bespoke Influenza B human challenge model.

The manufacture of an influenza B challenge virus agent is now in its final stages, and the characterisation study is likely to start in the fourth quarter of 2023. hVIVO will also earn a supplementary fee to ensure sufficient capacity is available to complete the characterisation trial in an expedited manner.

The aim is to identify a dose of influenza B that elicits a safe and reproducible infection in healthy volunteers recruited through the group’s FluCamp platform. Subject to the successful completion of the characterisation study and the receipt of relevant regulatory approvals, hVIVO expects to conduct an influenza B human challenge trial in the first half of 2024. Revenue from this human challenge model development contract will be recognised throughout 2023 and 2024.

Influenza B is highly contagious and can cause life-threatening complications in severe cases. Unlike influenza A viruses, which have pandemic potential, influenza B viruses typically only infect humans. It causes seasonal epidemics and gradually evolves to evade the immune system, so the seasonal vaccine component against the influenza B virus needs to be updated frequently to maximise protective efficacy. Analyst Mark Brewer at joint house broker FinnCap points out that the creation of a Flu B challenge model will potentially allow the client’s vaccine candidate to gain quick efficacy data against a type of influenza which is near impossible to achieve via traditional field trials.

Contract momentum and order book de-risk earnings

The contract is the fifth sizeable bespoke human challenge model contract the group has signed in the past 14 months, adding another model to hVIVO’s growing portfolio and highlighting the group’s market leading position in this niche market. It also adds to a record £78mn record order book that has risen sixfold since 2019 and offers further support to FinnCap’s expectations of 11 per cent growth in current year revenue to £54mn.

True, both full-year cash profit and operating profit are likely to be flat at £9mn and £6mn, respectively, but that’s only because the 2022 results benefited from net foreign exchange gains of £0.6mn on sales due to last year’s sterling weakness. Underlying growth is still being delivered, a factor that is not reflected in modest current year cash profit and operating multiples of 8.5 and 12.8 times, respectively, to hVIVO’s enterprise valuation of £77mn.

Moreover, the group is expected to deliver free cash flow (FCF) of £5mn (0.7p) this year which more than covers the cost of last month’s one-off special dividend of £3mn (0.45p per share), so net cash of £31.4mn (4.6p) could still increase by the year-end. FinnCap also predicts FCF of £7mn (1p) in 2024, implying an attractive forward FCF yield of 6.5 per cent.

Relative strength against the market

The holding has produced a 73 per cent total return since I initiated coverage at 9.35p (Alpha Research: ‘Ride the boom in vaccine research’, 17 November 2022), albeit the share price has traded sideways since my last update (‘Profit from this forecast-smashing update’, 25 April 2023). However, it is showing relative strength against the market as the FTSE Aim All-Share index has declined 7.5 per cent in the same three-month holding period.

More importantly, buoyed by a record and growing order book, prospects of the group delivering 15 per cent growth in operating profit on nine per cent higher revenue in 2024 are simply not being priced into the current valuation. Offering 38 per cent upside to my upgrade my fair valuation target price of 22p (from 19p), the shares rate a buy.

This article was first published on Tuesday, 25 July 2023 and updated on Wednesday, 26 July 2023 following hVIVO's strong pre-close trading update.