1. Horizon Discovery Group PLC (LON: HZD) is a Pharmaceuticals & Biotechnology company, which is engaged in the activities related to gene modulation and gene editing to support scientists from research to therapy.

2. The Company offers a catalogue of products and services such as Gene editing, Gene modulation, Screening services, Cell models, CHO cells, Molecular Diagnostics, Custom synthesis to build an understanding of genes function across species and genetic drivers of disease to develop gene therapies.

3. The Group has a broad range of tools and applications to support research related to the Coronavirus, which can prove to be a gamechanger to scale up business operations and increase the market value.

4. Collaboration with Mammoth Biosciences will bolster their position as a provider of CHO cell lines to produce next-generation biologics.

5. Access to a variety of cell engineering technologies allows them to take a technology-agnostic approach and makes them a leader in gene modulation and gene editing market.

6. HZD recently (in April) raised £6.9 million in equity placing and it will provide them with the additional financial flexibility to grow the business further.

7. It is serving 19 out of 20 largest biopharmaceutical companies, which reflects its strong market position and significant market penetration.

8. Fundamental drivers of the biopharmaceutical market are strong enough to generate opportunities for the business in the long run.

9. HZD has a strong geographic reach and works closely in sync with distributors to make its products and services available to customers in every corner of the world.

10. The Company is actively seeking acquisitions and strategic partnerships globally to increase its product portfolio and bring new synergies to increase its market share.

11. HZD is confident towards its business model and management team to tackle the uncertain times as prevailing currently due to the Covid-19 mayhem.

12. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this growth stock.

Horizon Discovery Group PLC (LON: HZD): COVID-19 Outbreak Bringing a Mix of Opportunities and Challenges for the Company

Horizon Discovery Group PLC is a cell engineering Company, which is focussed on biopharmaceutical drug development and commercialising the application of gene modulation and gene editing. It serves through three key areas- basic research, therapeutic applications and drug discovery & development. The Company is primarily involved in altering the expression of genes across human cell types and mammalian to conduct cell engineering. The Company is headquartered in the United Kingdom with offices in Japan and in the United States. It serves more than 2,000 customers (including 19 of the largest 20 biopharmaceutical Companies) in over 60 countries with around 416 employees. It is listed on FTSE AIM 100 index and was admitted to the London Stock Exchange on 27^th March 2014.

The Group will hold its annual general meeting on 18^th June 2020.

(Source: Presentation, Company Website)

Key Fundamental Statistics


Segments at a Glance

The business is divided into the following business units – Research agents, Screening, Bioproduction, Diagnostics and Base editing. Further, the revenue is differentiated in terms of timing as the Group split its GBP 58.2 million revenue (FY2019) into GBP 43.6 million from ‘at a point in time’ revenue and GBP 14.6 million in to ‘Over time’ revenue.

Geographically, most of its revenue is generated from the United States, while other geographic segments are United Kingdom, Europe, Middle East and Africa, Asia Pacific, and Other Americas.

How They Are Mitigating the Impact of COVID-19?
 

1. Using the gross proceeds of equity placing to bolster the liquidity position to continue investing in strategic priorities.

2. Adopted cash preservatives including reduction in capex, remuneration and operating expenses.

3. Supporting clients in the potential drug development by keeping the US and UK sites open.

Significant Developments of 2020 – Reflecting Contracts and Collaborations

- 19^th May 2020: The Group signed a licensing agreement with Rentschler Biopharma for cell line development in difficult-to-express proteins.

- 22^nd April 2020: The Group announced the potential of its platform CHOSOURCE™, which could be further use in the development of immunotherapy for treating autoimmune diseases.

- 17^th April 2020: The Company raised £6.9 million in gross proceeds by placing 6,764,365 shares.

- 13^th January 2020: The Company collaborated with Mammoth Biosciences to facilitate the development of CHO cell lines to produce therapeutic antibodies.

Top Shareholders Statistics

 
(Source: Refinitiv, Thomson Reuters)

Financial Highlights – Strong Revenue Generation in FY2019 (31^st December 2019)

(Source: Annual Report, Company Website)

1. For the financial year ending 31^st December 2019, driven by an increase in revenue from research reagents and screening business, the group’s revenue from continuing operations increased by 7.8 per cent to GBP 58.3 million from GBP 54.1 million in the financial year 2018.

2. The gross profit from continuing operations stood at GBP 40,755 thousand in FY2019 with a gross margin of 70 per cent for the period.

3. The adjusted EBITDA from continuing operations stood at GBP 3.9 million in the financial year 2019 versus GBP 2.1 million in FY2018.

4. The reported LBT (loss before tax) from continuing operations stood at GBP 11.5 million in FY2019 versus an LBT (loss before tax) of GBP 6.6 million in FY2018.

5. The LAT (loss after tax) from continuing and discontinued operations stood at GBP 4,605 thousand in FY2019 versus a LAT (loss after tax) of GBP 35,139 thousand in FY2018.

6. The basic and diluted loss per share from continued and discontinued operations stood at 3.10 pence in FY2019 versus a basic and diluted loss per share of23.5 pence in FY2018.
 

Performance of Business Units

(Source: Annual Report, Company Website)
 
In the financial year 2019, the revenue from Research Reagents business increased by 8.4 per cent to GBP 33.5 million, while the revenue from Screening business surged by 28.1 per cent to GBP 11.4 million. The revenue from BioProduction and Diagnostics businesses declined by 1.1 per cent and 14.3 per cent to GBP 8.6 million and GBP 4.8 million, respectively, for the period FY2019.

Business Strategy

(Source: Annual Report, Company Website)
 
Horizon Discovery has a strong business model which supports its strategic objectives. The Group is focused on expanding its services offered through acquisitions and strategic partnerships. It will bring new synergies and help in automating and scaling of business operations to increase the production capabilities. The Company will be able to generate strong revenue from new and existing customers and will continue to innovate its business operation.   

Business Collaborations

In December 2019, HZD and Mammoth Biosciences signed a strategic collaboration agreement to develop technologically disruptive suite and next-generation CHO cell lines to solve challenges related to biologic drug development.
In October 2019, HZD entered into a partnership agreement with Celyad. As per the agreement, the group will give a license for the use of its shRNA technology SMARTvector™ in CYAD-02. CYAD-02 is a CAR-T cell therapy based on novel autologous NKG2D.

Planning for US Public Offering

On 4^th February 2020, HZD announced the submission of a draft registration statement with the SEC (Securities and Exchange Commission) for proposed initial public offering. The listing process is delayed due to volatility and market conditions, and the Company will pursue this when conditions get favourable.

Financial Ratios: Strong Liquidity Position versus Industry Median
 

The reported Gross Margin and EBITDA Margin stood at 70.00 per cent and 7.9 per cent for the financial year 2019 and was higher than the last year data.On the liquidity front, Horizon Discovery Group Plc’scurrent ratio was higher than the industry median of 1.80x, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the Assets-equity ratio of the Horizon Discovery Group Plc’swas 1.22x, which was significantly lower as compared to the industry median of 1.65x.

Share Price Performance Analysis

Daily Chart as on 28^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 28, 2020, at the time of writing (before the market close, at 8:33 AM GMT), Horizon Discovery Group Plcshares were trading at GBX 101.00, up by 1.20 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 186.80/GBX 96.00.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 10-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Method 1: Enterprise Value to Sales Approach (NTM)


To compare Horizon Discovery Group Plcwith its peers, EV/Sales multiple has been used. The peers are Clinigen Group Plc(NTM EV/Sales was 2.59), ConvaTec Group Plc(NTM EV/Sales was 3.23), Ergomed Plc(NTM EV/Sales was 1.95), Fusion Antibodies Plc(NTM EV/Sales was 4.98) and Allergy Therapeutics Plc(NTM EV/Sales was 0.50). The Average of EV/Sales (NTM) of the company’s peers was 2.65x (approx.).

Method 2: Price to Cash Flow Approach (NTM)

To compare Horizon Discovery Group Plcwith its peers, Price/Cash Flow multiple has been used. The peers are Abcam Plc (NTM Price/Cash Flow was 48.50), Medica Group Plc (NTM Price/Cash Flow was 14.12), ConvaTec Group Plc(NTM Price/Cash Flow was 18.32), Clinigen Group Plc(NTM Price/Cash Flow was 21.61) and Gerresheimer AG(NTM Price/Cash Flow was 9.50). The Average of Price/Cash Flow (NTM) of the company’s peers was 22.41x (approx.).

Growth Prospects and Risk Assessment

The Company provides cell engineering solutions in several lucrative markets. The key demand drivers are -  increasing dependence on genetic expressions for diseases study, rising demand for complex cell models, increasing demand for tools and services to reduce the cost and time of drug development and adoption of novel therapeutic approaches for genetic diseases. The market opportunity by segment can be seen in the picture below:


(Source: Presentation, Company Website)

The Group has been continuously developing and commercializing tools across business units to cater to the high-growth end market. Its bioproduction capability is supported by the largest biopharmaceutical companies in the world. The Company has significant market penetration as it serves 19 of the largest 20 biopharmaceutical Companies. It has enhanced e-commerce platforms to drive the unit sales of Research Reagents business. Further, the Group has 85 PhD level scientists to support its operations in 12 countries. The Company keeps on launching new platforms and upgrade the old products and services related to gene modulation and gene editing to become one of the market leaders in the healthcare market. The Group has a strong network of distributors and partners, which is selling its products in multiple regions and is well-positioned to be an expert in the cell technologies with high value and unique portfolio. The Company, through its wide-ranging scope, had accelerated growth organically and through acquisitions and strategic partnerships.

Regarding the risk, the Group is exposed to cybersecurity risks due to the increased profile of business through eCommerce and growing footprints geographically. Further, the legacy systems, retaining and recruiting the right talent put risk to the proper functioning of the business. HZD is exposed to the effects of political and economic risks. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets.
 
Business Outlook Scenario

In the financial year 2019, the Group witnessed an increase in the financial performance. Both the top-line and the bottom-line performance have improved for the period, while profitability remained in the negative zone. The Company formulated a new strategy in FY2019, which focus on high-growth opportunities. HZD divests its Vivo business to focus on its core business; enhanced its investments in the IT infrastructure and automation for a stronger platform to achieve sustainable revenue growth.

The Company’s increased base editing investment and Mammoth Biosciences collaboration will provide strength in cell-line engineering core competence. Horizon Discovery Group entered the financial year 2020 with more simplified approach and strategic plans to be executed. HZD has a strong balance sheet and action plans taken to combat covid-19 chaos. The order book of the Group is increasing, which support strong results for H1 FY2020, but it is not able to quantify the impact of uncertainty and will not be able to predict the full-year performance. In precision medicine domain, the product and services provided by HZD are critical elements for therapeutic value chain and drug development. In the long-term period, the group expects pharma-biotech fundamental drivers to be strong to support growth.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 24.07 million in FY16 to GBP 58.25 million in FY19. Compounded annual growth rate (CAGR) stood at 34.26 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 99.40 (as on 28^th May 2020, before the market close at 8:00 AM GMT+1), with lower-double digit upside potential based on 2.65x EV/Sales (approx.) on FY20E sales (approx.) and 22.41x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken fromRefinitiv, Thomson Reuters.

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