FluCamp does not sound like much fun for volunteers, but for leading CRO (contract research organisation) HVIVO (HVO:AIM) it represents a flagship service which is attracting growing interest from big pharma and biotechnology companies.
The company is at the forefront of HCTs (human challenge trials), a fast-growing niche within the large CRO industry which experts predict will grow from its current size of between $100 million and $150 million to between $700 million and $1 billion.
Having reached breakeven, hVIVO has ambitious plans to grow revenue to £100 million by 2028 from £62 million expected in 2024.
Increasing efficiencies and greater utilisation of new facilities is expected to lead to profitable growth. In the first half of 2024 generated £37.1 million of cash, up from £31.3 million in 2023, and the business is debt free.
The shares trade on a 2026 EV (enterprise value) to EBITDA (earnings before interest, tax, depreciation and amortisation) of eight times according to Panmure Liberum’s estimates, an unjustified discount to CRO peers and not reflecting growth prospects and high barriers to entry.
WHAT IS A HUMAN CHALLENGE TRIAL?
HVIVO specialises in conducting HCTs and has deep experience in testing infectious and respiratory disease with a heritage dating to the 1940s Common Cold Unit.
HCTs differ from traditional clinical trials in that they involve infecting a healthy group of carefully selected volunteers with a specific virus in a controlled environment rather than testing safety and efficacy on participants who are sick.
HCTs have been around a long time, but it was only after the company led the first successful Covid HCT, funded by the UK government, that interest from regulators and drug manufacturers began to stir.
There are several factors driving demand. The US FDA (Food and Drug Administration) recently increased the rate at which it grants Breakthrough and Fast Track designations, to drugs supported by HCTs.
This has resulted in more drug developers adopting HCTs to speed up routes to regulatory approval, creating a surge in demand. Demonstrating the traction being achieved, hVIVO has expanded its order book six-fold over the last three years.
HVIVO is the world’s only specialised HCT CRO and is uniquely positioned to capitalise on the expected growth. The company has conducted around 70 trials and performed more than 4,000 volunteer inoculations, and claims to have more than 90% market share in the commercial HCT market.
Effectively HCTs derisk the route to market for new drugs and help refine optimal dosing levels.
Management has stated that HCTs can cost around 20% of conventional phase two trials. They require fewer volunteers (10s) compared with the thousands enrolled in conventional trials and can be completed in a shorter timeframe.
This is crucial because drug development costs tend to escalate, with phase two trials accounting for between a third to a half of total trial costs.
In drug discovery, identifying failure early can sometimes be as important as drug discovery itself.
WHAT IS THE GROWTH STRATEGY?
Yamin Mo Khan became chief executive in February 2022 and is the architect of the company’s growth strategy. Mo has 25 years’ industry experience, during which he transformed Pharm-Olam from a specialist clinical monitoring firm to a global full-service CRO.
His priority is to expand the order book, increase revenue visibility and promote cross-selling into broader capabilities while increasing utilisation of resources.
A high proportion (around 70%) of fixed costs in the business means increasing scale can drive profitable growth and margin expansion.
Signs are already visible with the first-half EBITDA margin expanding to 24.5% from 19.1% in 2023.
The company opened the world’s largest purpose-built challenge trial facility this year in Canary Wharf with 90% of the build costs funded by its clients to accelerate their studies.
The high-level three biosafety containment facility will unlock new revenue streams and increase the breadth of challenger models, increasing potential revenue by 50% to £90 million.
The flexible space will allow transmission studies designed to test whether a vaccine or drug can prevent transmission to a recipient volunteer.
The company is increasingly looking to leverage its world-class database of 300,000 volunteers, which can screen an additional 1,000 per week.
In summary, HVIVO is well-positioned to capitalise on the growth stemming from higher demand for HCTs and use its unique assets to broaden its revenue stream and diversify risk.
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