Untapped potential in Vectura’s pipeline

Recent half-year numbers suggest Vectura is already in recovery mode. Lower amortisation and integration costs, combined with better sales and product supply margins cut operating losses by over a quarter to £30.2m. Most notably, R&D costs fell 19 per cent to £25.3m as management prioritised its later-stage pipeline drugs and partnered higher-risk medicines. Continued cost management encouraged broker Numis to upgrade its guidance for the year to December 2018 – adjusted cash profits (Ebitda) are now forecast to grow at a compound annual rate of 35 per cent over the next three years.

Revenue growth has recently been hampered by a decline in non-inhaled products, but that doesn’t matter much in the long term. Respiratory, which accounts for four-fifths of sales, is where Vectura’s true expertise lies and here revenues rose 7 per cent in the first half. Flutiform – which is the largest contributor – reported an 8 per cent increase in ‘in-market’ sales in the first half, which should translate to higher royalties for Vectura in the second. Ultibro (partnered with Novartis) and AirFlu (Sandoz) are also expected to report higher revenues in 2018, while Ellipta (GSK) continues to consistently hit its £9m royalty cap.

Broker Numis estimates the value of these established drugs at 101p a share based on their growth trajectory. Added to the £84m of net cash (or 12.6p a share) and the net present value of Vectura’s existing portfolio is 113.6p – 40 per cent above the current share price. 

And more potential value lies in Vectura’s pipeline of new respiratory products. The group currently has two novel medicines, three generics and two devices in the late stages of development and is expected to report five major clinical updates in the next 12 months, which could catalyse a share price recovery. In November 2017, Numis gave a risk-adjusted net present value of 49p to these late-stage products. On top of that, the group has a pipeline of new therapies which are targeting rare disease sectors with “individual peak year sales potential of over $250m”.

The group is keeping its R&D costs in check by seeking partnership for all its products – a strategy which has worked very well for peers such as Hutchison China Meditech (HCM). The two novel devices and one of the generics are already partnered with large global peers, which has lowered the risk of the development process – for example, when Hikma (HIK) was forced to re-test its generic version of GSK’s asthma drug earlier this year, Vectura (its partner in the project) didn’t have to take on any of the extra development costs.