Open Orphan (LSE:ORPH) has provided more details on its proposed £5 million placing following the completion of its merger with peer hVIVO earlier this month.
In a 23 January 2020 RNS, the specialist pharma services firm said it currently undertaking meetings with investors in connection with the placing. The company added that it hopes to raise at around the implied offer price of 6.3 pence per share – a considerable premium to the issue price of its last placing – although this is yet to be confirmed.
Open Orphan’s merger with hVIVO – an industry-leading services provider in viral challenge studies and laboratory services – passed formally on Monday. The two groups merged by way of a reverse takeover following a bid by Open Orphan – which only listed on AIM in June last year following the reverse takeover of Venn Life Science – that valued hVIVO at £13 million.
Open Orphan provides rare disease-focused pharma customers with a range of services including initial pre-clinical consultancy services through to running pre-clinical trials, Phase I, and Phase II clinical trials. Also, Open Orphan has developed its own in-house data-driven digital platforms and is building one of Europe’s largest, low-cost, genomic records databases, making use of artificial intelligence tools.
The company believes that the European pharma services market is fragmented between numerous small consultancies, presenting an excellent opportunity for consolidation. Open Orphan chose to pursue hVIVO because it believes that the firm shared this vision.
Specifically, Open Orphan believes that combining the two entities will not only cut corporate overheads but enable the pursuit of much larger services contracts. This is because hVIVO has previously been unable to provide anything beyond so-called “challenge studies” (early-stage tests of initial product efficacy) in spite of high demand from clients. Open Orphan can provide these services – which includes things like Phase I and Phase II clinical trial – meaning that together the firms can charge clients much more for far a more comprehensive service.
Open Orphan’s executive chairman Cathal Friel is so confident in his enlarged group’s potential that he has injected more than £2 million of his own wealth into its equity. This figure, which is subject to a three-year post IPO lock-up, helped to establish Open Orphan and support its IPO in June 2019. He has also underwritten up to £2.5 million of the upcoming placing free of charge – helping the deal to go through unconditionally, thus preventing it from slipping through Open Orphan’s fingers to a counter bidder. Finally, Friel also plans to invest a further £300,000-£500,000 as part of this latest placing.
As Friel put it in a recent video interview with ShareTalk, the reason for this support is that he sees the merger as a once-in-a-lifetime opportunity. Describing hVIVO as a “sleeping giant” that “lost its way”, the director said Open Orphan acquired the firm for around one-tenth of its invested capital, picking up £50-60 million of assets and a £100 million pipeline for just £13 million.
“hVIVO is the world leader in this small niche of challenge studies. We paid marginally less than one times revenue, which is a fantastic deal. We are capitalised today in an enlarged company. We did about 30 million revenues last year and we are trading at about one times revenue. Our peer group, everybody else providing these profitable services, trade at two to three times revenue. We think we are pretty heavily undervalued as we speak.”
Elsewhere in his interview with ShareTalk, Friel dispelled the myth that investing in a pharmaceutical services company is akin to investing in an organisation that makes drug for trial. Over the years, this latter type of operation has grown a reputation for being something of a “coin-toss” investment. This is because the prospects of such companies are binary – they come down entirely to whether or not they can get their proposed drug through regulators and into the market.
However, as Friel explains, this is not the case for Open Orphan as it gets paid by clients regardless of trial success or failure.
“This is a purely profitable pharmaceutical services company providing services cost plus. We are not providing legal services; we are not an accounting service. The service we are offering is helping pharmaceutical companies get their drugs approved, run the trials and do preclinical, that is telling them how the drugs work.
“We get paid 100% regardless of trial success or failure. That is why the big CROs trade at three to four times revenue, they basically cannot lose. You get a pharma customer involved; they keep paying regardless of whether the trial is a success or failure. There are not a lot of small services company on AIM doing this. Your traditional AIM investor looks at pharma as being these high risk, high reward because they are doing discovery. We are not developing drugs; we are selling profitable services.”
