hVIVO shares: the investment case for 2024

hVIVO is going from strength to strength, as demonstrated by today’s trading update. Here’s the investment case for 2024.

In the hit 2015 film ‘the Martian,’ astronaut Mark Watney (Matt Damon) is SPOILER accidentally left stranded on the surface of MARS where he must survive until his crewmates, alongside scientists on Earth, engineer an escape plan.

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Similarly, there’s probably at least one hVIVO investor who bought at the top of the market (38.5p) during the pandemic madness of mid-April 2021, having been encouraged by the rocket from 5p during a time of ultraloose monetary policy and meme hysteria.

This investor — who saw the share price fall from this giddy high to less than 10p by late 2022 — has now watched the stock return to 28.5p today. They may feel a little like Watney waiting for the rescue mission; dozens of small cap companies saw record highs during the pandemic era, and only a handful have managed to recapture those highs. Indeed, the AIM market has almost halved in value since August 2021.

But will hVIVO charge to new all-time highs in 2024?

Let’s dive in.

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hVIVO explained

Where other small cap biotechs are concerned with highly risky clinical trials of a single flagship treatment — where success makes millionaires and failure means corporate bankruptcy — hVIVO is better thought of a growth stock within the pharmaceutical company.

The business is now an industry leader in full-service viral challenge studies — or in technical terms, it’s a growth-stage specialist contract research organisation (CRO) which acts as a world leader in testing infectious and respiratory disease vaccines and therapeutics using human challenge clinical trials.

No, I wouldn’t want to have to repeat that when handing over my business card either.

The company’s client base includes several of the largest biopharma companies in the world, with the services business including a portfolio of >10 human challenge models to help test an expansive range of clinical trial products.

It also offers agent manufacturing, drug development, and clinical consultancy services through its Venn Life Sciences brand. Then there’s the lab offering via its hLAB brand, which includes immunology biomarker, virology, and molecular testing.

The key business offering is the human challenge studies — where volunteers are intentionally exposed to disease for research. Subjects are recruited through the Flu Camp advertising campaign, with tests run from labs in London.

There is an ethical investing decision to be made here. While human challenge subjects are well paid (up to £4,400 for two weeks), there is always the outside risk of serious, lasting side effects — and a detractor could argue that many volunteers feel financially pressured to participate. However, human challenge studies are essential to medical advances, and almost every company has ethical trade-offs.

From a pure investing standpoint, hVIVO can be best thought of as the ‘picks and shovels’ stock for the biotech age. Companies arriving at the middling stage of clinical trials will need somewhere to run challenge studies, and investors can benefit from exposure to this demand rather than taking the high risk of directly investing in the trial results themselves.

Clearly this approach is resonating with the market — despite the volatility, HVO shares are up by 371% over the past five years.

H1 2023 progress

Results to 30 June 2023 evidenced strong progress. H1 revenue rose by 52% year-over-year to £27.3 million, while EBITDA more than doubled to £5.2 million. Meanwhile, EBITDA margin increased sharply to a healthy 19.1%.

The company ended the period with £31.3 million in net cash — a rare and happy place to be as a small cap — with a weighted contracted orderbook of £78 million.

In terms of operations, the development of a Human Metapneumovirus (hMPV) challenge model was already underway, supported by an end-to-end human challenge service contract with a North American biopharmaceutical company. Then there was the completion of the manufacturing process for Influenza H1N1 and Omicron human challenge viruses to consider.

The Asia-Pacific (APAC) region has been identified as a key long-term growth area — with HVO signing the first challenge trial contract with an APAC client in over a decade. Additionally Venn Life Sciences secured a substantial €3.2 million contract with a major pharmaceutical client.

The value proposition for hVIVO’s human challenge trials was further strengthened by positive outcomes for clients — notable successes included Pfizer’s ABRYSV obtaining FDA approval for RSV vaccines, Cidara’s influenza antiviral candidate receiving FDA Fast Track designation, and SAB Biotherapeutics securing FDA Breakthrough and Fast Track designations for its influenza antiviral candidate in 2023.

And post-period end, the company announced that clients were funding a new ‘state-of-the-art facility,’ mostly funded by hVIVO clients and due to open in this half. Further, its Flu B challenge model was under development, funded by a £13.1 million bespoke manufacturing and characterisation contract with existing top five global pharmaceutical client.

A savvy investor might wonder why clients would fork out to build the facility when HVO has significant cash on hand — however the 2022 Annual Report shows that the company also has circa £31 million of liabilities (matching its cash position at 30 June 2023). However, the very fact that its clients were prepared to help out with the expense suggests a high level of confidence in the company and business model.

Recent updates

On 5 October 2023, hVIVO reported that client Pneumagen reported successful clinical proof of concept for its broad-spectrum antiviral candidate Neumifil, demonstrated from a Phase 2a influenza human challenge study conducted by hVIVO.

The trial was comprised of 104 adult volunteers recruited through Flu Camp, and the client now plans further clinical studies — undoubtedly with HVO as its partner. CSO Andrew Catchnpole noted that ‘this is another example of the value of human challenge trials in delivering clinical efficacy data and de-risking later clinical development.’

On 13 December 2023, the company reported that it had signed a £16.8 million full service contract with an existing ‘top five global pharmaceutical client’ to test its RSV antiviral drug candidate using the hVIVO RSV Human Challenge Study Model. Most of the revenue will be recognised in 2024, with the Phase 2A trial to start in H2 2024. The study is planned to take place at the new state-of-the-art facility in Canary Wharf, which remains on track to be operational shortly.

Additionally (and perhaps not surprising given this news), the business announced that trading remained strong, with revenue ‘slightly ahead of previous market expectations.’ In addition, EBITDA margins were expected to exceed 20% for FY23.

CEO Yamin Khan enthused that ‘this contract is another example of the end-to-end full service offering that hVIVO has already successfully provided to several clients. We are also delighted with the Company’s strong operational performance in 2023.’

Then on 2 January, the business signed a £6.3 million contract with a biotech client to test its antiviral candidate using the hVIVO Human Rhinovirus Human Challenge Study Model. The study is also expected to commence in H2 2024, with the revenue recognised in 2024 and 2025. Catchpole noted that ‘with our new state-of-the-art facility, we are able to conduct significantly more multi-cohort challenge trials concurrently, providing quick efficacy data to accelerate drug development.’

Today’s trading update

All this good news was compounded by this morning’s trading update for FY23: revenue increased by 15.5% year-over-year to a record £56 million — driven by the continued strong delivery of human challenge trials and consulting services.

HVIVO’s growing operational team also delivered its highest number of inoculations to date, driving further revenues and improved margins. In addition, the company also brought in R&D tax credits of £2.6 million.

Even more encouragingly, EBITDA margins came in ahead of expectations at 22% and the cash position increased to £37 million.

Where next for hVIVO shares?

It’s worth noting that hVIVO is the only UK provider of full-service human challenge services across the entire value chain. It now boasts a weighted contracted order book of some £80 million.

The company gave revenue guidance of £62 million for 2024 — and an annual dividend expected to start being paid out this year. For context, it paid a one-off special dividend of £3 million in 2023.

The company is entering its ‘its strongest ever position with 90% of 2024 revenue guidance already contracted, and record revenue visibility into 2025. The Board is confident that the Group’s consistent year-on-year growth of revenue, orderbook, sales pipeline, and contract values are a strong indicator of the long-term health and growth potential of the human challenge trial market.’

Medium-term, HVO plans to grow group revenue to £100m by 2028, with the majority of this to be achieved through sustained organic growth complemented by small, strategic bolt on acquisitions. And as it has no debt, the company is strategically well placed to pursue both organic and inorganic growth.

Khan enthuses that ‘in 2023, hVIVO demonstrated strong financial and operational performance, delivering record-breaking results across all key parameters…the infectious disease market has witnessed increased interest from both commercial and non-profit entities, as well as a notable uptick in M&A activity. A significant highlight of the year was the market authorisation of the first-ever vaccine incorporating human challenge trial data as part of its submission package.’

Is Khan signalling a buyout offer in the near future? This would not be surprising. It’s growing fast, has a massive economic moat, and has proven its value to some of the largest pharmaceutical titans in the world.

An investor presentation will be made at 6pm today, and hVIVO will also be presenting at UK Investor Magazine’s conference on 13 March.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

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