Business Overview
Vectura Group Plc (LON: VEC) is a research and development company related to the inhaled formulation, development capabilities and devices. The company is a leading inhaled disease-focused company with an employee base of 450 people and 9 million patients utilising the company’s products. The company reported to have over 200 experienced scientists to lead clinical, formulation, device and regulatory teams. The company has over 20 years of history in inhaled product development and has launched 11 on-market inhaled medicines with the help of licensees and partners. The company’s services include Formulation and Development, Pharmaceutical Analysis, Device Development and Manufacturing and Technical Transfer to its partners and clients. The group partners portfolio includes GSK, Bayer, Hikma, King York, Kyorin, Mundipharma, Novartis and Sandoz. The product offerings include dry powder inhalers, pressurised metered-dose inhalers, jet nebuliser and vibrating mesh nebuliser. The company also owns Skyepharma, the market leader in oral technology deliveries and drug development. Skyepharma is serving many large biotech, consumer health and pharmaceutical industries globally.

The current Independent Non-Executive Chairman is Bruno Angelici and was selected in February 2014. Will Downie holds the responsibilities of the Chief Executive Officer. He was selected as CEO of the group in November 2019. Paul Fry is the current Chief Financial Officer (CFO).

Key Statistics



Top Shareholders

 

Research and Development Funding


(Source: Company’s Website)
 
In the first half of the financial year 2019, the company managed to reduce its R&D expenses by 10 per cent to GBP 24.5 million from GBP 27.2 million in H1 FY2018. In H1 FY2018, the company was more focused on pre-partnered funding, while in the H1 FY2019, the company has moved into the balanced approach and opted for Partnered and Pre-partnered funding, which has resulted in lower costs related to research and development and also improved the profitability of the company for the period.

Pre Close Trading Update – FY 2019

On 13^th January 2020,Vectura Group Plc announced a pre-close trading update for the financial year 2019. The company expects its revenue and underlying EBITDA to be in line with the set guidance and cash balances are expected to be around GBP 74 million for the period. The company shifted to a service based low-risk model, driven by a strong cash position. The company also announced plans to return its shareholders of GBP 60 million in cash. The company paid a special dividend in October 2019 of around GBP 40 million. The company announced a share buyback programme of GBP 20 million and completed around GBP 3.5 million in FY2019 and remaining will be completed in FY2020. After the US Jury verdict against GSK related to patent litigation in the US, the company awarded with on-going royalties and damages amounting to USD 200 million (approximately).
In the Financial year 2020, the company expects to get approval for QVM149 and VR315 (US) from its partners in the second half. The company, after the approval of VR315 (US), would earn USD 11 million and royalty on product sales. After the approval of QVM149 in the European market, the company would earn USD 5 million and royalty on product sales. The company expects growth to continue from flutiform® partner in-market sales in FY2020 and revenues from Vectura product supply is expected to remain similar to 2019 level. As the company moves towards a development services model, the revenues from development services expected to rise, while the overall R&D is expected to decline due to capacity release from proprietary pipeline. The company’s expected R&D investment is to be in-between GBP 40 million to GBP 45 million in FY2020. The company will announce its preliminary results for 2019 on 17^th March 2020, Tuesday.

Recent News

On 27^th November 2019, Vectura Group’s partner Hikma Pharmaceuticals Plc announced the submission of responses to the FDA (US Food and Drug Administration) for generic Advair® (VR315US). The submission is for the review of data as requested by the FDA which includes further Clinical Endpoint study in the CRL (Complete Response Letter). Vectura Group and the Hikma have partnered in the development of US generic version of Advair Diskus® (VR315US), an AB-rated substitutable.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, £, million)

In the first half of the financial year 2019, driven by an increase in the revenue from product supply by 42.9 per cent for the period, the company’s revenue surged by 14.8 per cent to GBP 91.7 million as against GBP 79.9 million in H1 FY2018. Due to the higher cost of sales for the period, the gross profit declined by 1.3 per cent from GBP 52.6 million in H1 FY2018 to GBP 51.9 million in H1 FY2019. In the first half of the financial year 2019, the adjusted EBITDA increased by 10.6 per cent to GBP 25.1 million from an adjusted EBITDA of GBP 22.7 million in H1 FY2018. The adjusted EBITDA margin declined by 1 ppts to 27.4 per in H1 FY2019 from 28.4 per cent in H1 FY2018. The company reported an operating profit (before amortisation and exceptional items) of GBP 19 million in H1 FY2019 versus an operating profit (before amortisation and exceptional items) ofGBP 18.8 million in H1 FY2018.

Key Performance Indicators


Revenue Growth

Revenue is the income generated by the company from its normal day to day operations. The revenue growth drives cash generation as well as the profit growth of the company. The company’s total revenue increased by 8.4 per cent from GBP 148 million in the financial year 2017 to GBP 160.5 million in the financial year 2018. The growth in the revenue was driven by a decent supply of flutiform® and a new deal with Hikma.


Adjusted EBITDA

Adjusted EBITDA is used by the managers and the Executive Leadership Team to identify the performance of the company and useful information related to the profitability of the company. Due to higher revenue growth and decline in the research and development expenses for the period, the adjusted EBITDA increased by 51.2 per cent to GBP 39 million in FY2018 from GBP 25.8 million in FY2017.


Net Cash

Net Cash shows the liquidity position of the company. Liquidity is important for Vectura to fund its R&D investment and strategy. In the financial year 2018, despite the company utilised its cash for share buyback programme, the net cash was at GBP 104.2million in FY2018 versus GBP 99.6 million in FY2017.


Clinical Studies Completed

Vectura in the financial year 2018 successfully completed 3 Clinical Studies as compared to 1 Clinical Study completed in the financial year 2017.

Financial Ratios 
 
 

The profitability margins in H1 FY2019 period were lower when compared with the industry median. On the liquidity front, Vectura GroupPlc’scurrent ratio was higher than the industry median of 2.08, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Vectura Group Plc’s was 0.02x, which was lower as compared to the industry median of 0.19x, reflecting that the company is less leveraged as compared to its peers.
 
Share Price Performance
 

Daily Chart as of  January 23^rd, 2020, before the market close (Source: Thomson Reuters)

Vectura Group Plcshares were trading at GBX 92.00 at the time of writing before the market close (at 11:38 AM GMT) on 23^rd January 2020 and were up by 0.28% versus the previous day closing price. Stock's 52 weeks High and Low are GBX 102.24/GBX 68.70. Stock’s average traded volume for 5 days was 1,323,266.40; 30 days – 1,028,614.20 and 90 days – 783,590.48. The traded (average) volume for five days was up by 28.65 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.78. The outstanding market capitalisation was around £559.71 million.The shares of the company have delivered a positive return of 24.09 per cent in the last nine months. The shares of the company have delivered a positive return of 9.65 per cent in the last three months.

Valuation Methodology
 
Method 1: Price to Earnings Approach (NTM)
 
 

To compare Vectura GroupPlc withits peers, Price/Earnings multiple has been used. The peers are Dechra Pharmaceuticals Plc(NTM Price/Earnings was 28.52), ECO Animal Health Group Plc(NTM Price/Earnings was 21.97), ConvaTec Group Plc(NTM Price/Earnings was 21.67), UDG Healthcare Plc(NTM Price/Earnings was 20.20) and GlaxoSmithKline Plc(NTM Price/Earnings was 14.95). The average of Price/Earnings (NTM) of the company’s peers was 21.46x (approx.)

Method 2: Enterprise Value to Sales (NTM)



To compare Vectura GroupPlc withits peers, EV/Sales multiple has been used. The peers are GlaxoSmithKline Plc(NTM EV/Sales was 3.56), ConvaTec Group Plc(NTM EV/Sales was 3.53), Hikma Pharmaceuticals Plc(NTM EV/Sales was 2.87), Clinigen Group Plc(NTM EV/Sales was 2.81) and ECO Animal Health Group Plc(NTM EV/Sales was 2.48). The average of EV/Sales (NTM) multiple of the company’s peers was 3.05x (approx.)

Growth and Risk Assessments

The company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the healthcare market. The company partners with market leaders of the Healthcare sectors, which will help them to operate more effectively and will also help them to fund its future operations. The group is exposed to the effects of political and economic risks, including the impact of Brexit, as the market expects macro-economic uncertainty or downturn in the UK economy as a result of Brexit. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets.

Conclusion

The company had shown good top-line performance in the first half of the financial year 2019. The company expects growth to continue from flutiform® partner in-market sales in the financial year 2020. As the company moves towards a development services model, the revenues from development services expected to rise. Due to high barriers in entry and exit, the company faces less competition and is able to capture large market portion. The company remained a cash generative in the current financial period due to focused investment prioritisation, and tight financial management approach opted by the company. In FY2018, the company’s adjusted EBITDA improved by over 50 per cent, mainly driven by increased revenue, high supply margin and low expenditure on R&D.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from GBP 36.5 million in FY14 to GBP 160.5 million in FY18. Compounded annual growth rate (CAGR) stood at 44.81 per cent.

Based on decent 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 91.43 (as on 23^rd January 2020, before the market close at 8:40 AM GMT) with single-digit upside potential based on 21.46x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 3.05x NTM EV/Sales (approx.) on FY19E sales (approx.). 
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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