Vectura Group PLC (LON: VEC) – Special dividend of approximately £115 million to be paid during 2021.

Vectura Group PLC is focused on the research, development and commercialization of drug delivery system and therapeutic system. Moreover, the Company is an industry-leading specialist inhalation CDMO. VEC has around 11 key inhaled and 11 non-inhaled products, which are marketed by key partners with royalty streams. The key partners include Hikma, Sandoz, Novartis, Kyorin, Bayer, etc. VEC is a constituent of the FTSE 250 index.

  (Source: Company presentation) 

Growth Prospects and Risk Assessment

The Company had made significant operational developments during FY20 to become an industry-leading inhalation CDMO. Moreover, VEC had signed 18 new CDMO contracts, which contributed around £3.0 million of revenues during H2 FY20. Moreover, VEC had accelerated the progress of the co-development pipeline as it had received the approval of VR315 (US), generic Advair® programme in collaboration with Hikma during December 2020, which had triggered a milestone of approximately USD 11 million. Moreover, the approval of Enerzair® Breezhaler® was also received in Japan and Europe, triggering the milestone of USD 6.25 million.

(Source: Company presentation)

Vectura Group had received a positive outcome in the patent litigation against GSK. The Company had received £127.6 million to date with further royalties pending during the first and second quarter of 2021.

However, the performance can be significantly impacted by several risk factors. The Company is exposed to the risk of damage to flutiform® performance or long-term value due to actions. Moreover, VEC may get failed in offering robust, differentiated technologies, which meet present and future customer needs. The failure of co-development partners to deliver on the targets may impact the revenue of the Company.

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Vectura Group PLC.

Financial and Operational Highlights for the twelve months ended 31 December 2020 (as of 18 March 2021)

(Source: Company result)

• VEC had reported a jump of around 6.9% in revenue to £190.6 million during FY20, driven by robust growth in Royalty and other marketed revenues as it had shown a growth of 32.6% during the period.
• On the profitability front, the adjusted EBITDA surged by 41.7% to £61.5 million during FY20, illustrating a reduction in R&D investment.
• Moreover, the Company had maintained strong liquidity reflected by closing cash and cash equivalent of £78.6 million as of 31 December 2020, reflecting robust free cash flow generation and share buyback of approximately £16.4 million during FY20.
• The Company had shown around 92.8% increase in free cash flow to £24.1 million during FY20.
• Meanwhile, the Company had approved a special dividend of approximately £115 million to be paid during 2021. 

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 15 April 2021, at 08:44 AM GMT, VEC shares were trading at GBX 112.90, up by 0.44% against the previous day closing price. Stock 52-week High and Low were GBX 131.60 and GBX 82.38, respectively.

From a technical standpoint, 200-day SMA (GBX 111.10) supports the upside potential. VEC's prices are trading in a rising channel formation for more than a year and forming a series of higher highs and higher lows. Currently, the prices are trading around the lower band of the pattern that is acting as an important support zone and indicating the possibility for an upside reversal. The momentum indicator RSI (14-period) is trading at ~46 levels and showing a neutral to a positive trend for the stock.

In the last two years, VEC’s stock price has delivered a positive return of ~64.25%; and it has outperformed the FTSE All-Share Pharmaceuticals & Biotechnology index with a return of around 5.52% and the FTSE 250 index with a return of about 13.23%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Vectura Group had shown resilient financial performance during 2020. Moreover, VEC would focus on the execution of a services-based strategy during 2021. The Company had anticipated revenue contribution from CDMO service-based agreements to reach more than triple from the levels achieved during FY20. However, the revenues from co-development contracts during FY21 were expected to remain on similar lines as that of FY20. The partner demand forecast had indicated Vectura product supply revenue to be ranging from £75 million to £80 million during FY21 as stock builds would not recur during FY21. Furthermore, the royalties and other marketed revenues would be expected to remain the same during FY21 as that of FY20 since the revenues benefitted from USD 17.3 million approval milestones in 2020 after the approval of generic Advair® and Enerzair® Breezhaler®. The R&D revenue had anticipated to be ranging from £22 million to £25 million during FY21 consisting of accelerated investment in the generic Ellipta® programme with Hikma.

VEC had also expected to incur exceptional cash cost of low-single-digit million pounds during FY21 due to the undergoing transition towards a development services model and operational restructuring of the Group. Overall, the Company would accelerate its growth trajectory over the long term by focusing on investment in technology and capability.

(Source: Company presentation)

Considering the strength of the business model, broadest offering of inhalation capabilities, decent cash generation, robust financial performance, strong underlying CDMO market growth, special dividend payment in 2021, strong financial guidance for flutiform® revenues, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Vectura Group at the current price of GBX 112.90 (as on 15 April 2021 at 08:44 AM GMT), with lower-double digit upside potential based on 25.95x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

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