Manufacturing the AstraZeneca vaccine was always going to be a lucrative business proposition for Oxford Biomedica (LSE: OXB). It’s not just the additional revenue, which contributed the majority of the £75.6m of sales reported by the group’s bioprocessing division in the first half of the 2021 financial year, and will have generated £100m in cumulative revenue by the end of the year. Oxford Biomedica’s high-profile contract has captured the interest of investors – the share price has risen 90% in the last year to give the company a market capitalisation of £1.3bn. That’s more than 10 times the forecast annual revenue for 2021.
It is not that hard to argue that Oxford Biomedica’s share price surge is justified. Group revenues rose 139% to £81.3m in the six months to June, helping the company report its first interim operating profit (£19.7m) since 2018. Cash generated from operations was £22.2m and, after £3.5m of capital expenditure, net cash inflows were £18.7m, compared to a £3.7m outflow in the comparable period of the prior year.
Perhaps more important is the fact that the Astra contract has given the company the platform to broadcast the efficiencies of its LentiVector technology on a global scale. The LentiVector uses virus particles to deliver advanced genetic therapies directly into human cells, which is hugely advantageous in complex medicines. Partners such as Swiss group Novartis and US giant Bristol Myers Squibb have used the platform as a tool to help develop novel gene and cell therapies. Others, like AstraZeneca, use it for the ongoing manufacture of medicines. The company has three manufacturing sites in Oxford, including the brand-new 84,000 square foot centre Oxbox, which is still under development.
But therein lies the first problem with Oxford Biomedica’s Astra deal. The vaccine is taking up a huge proportion of the company’s current manufacturing capacity, meaning there is little room to pursue other deals. Indeed, while the exact contribution of the Astra vaccine deal was not reported in first-half numbers, it is fair to assume that revenues from the deal contributed significantly to the £81.3m of group sales, which were up from £34m in the first half of 2020.
Bioprocessing sales (which includes the Astra contract) rose by more than 200%, but revenues from the drug development side of the business fell by 47% to £5.7m as none of the projects currently being undertaken alongside partners generated any significant development milestones or royalty revenue. The company’s LentiVector platform does have a strong pipeline of projects but only two of these are anywhere near commercial approval. Until a medicine gains the green light from the regulators, there is no certainty of long-term revenue generation.
Set aside the Astra deal and the company’s bioprocessing divisions isn’t exactly thriving either. In the first half of the year the group’s bioprocessing programmes with Orchard Therapeutics came to an end, while French partner Sanofi abandoned its haemophilia project and backed out of its contract with Oxford Biomedica. No new bioprocessing deals were signed in the period.
And while none of this would be a problem if the Astra deal was going to keep delivering, the contract is only expected to last three years, at which point Astra will vacate the three suites it is currently using. If Oxford Biomedica hasn’t found new contracts to fill the gap by then, its revenue generation will be very disappointing.
The deal has also been expensive to fulfil, deferring expenditure away from the company’s already uninspiring level of investment in research and development. In the last five years R&D expenditure has risen by just £5m to £29.4m in 2020. That reflects the lack of progress in the development of the group’s own medicines, all of which remain in the pre-clinical stage of testing and are therefore a long way from commercial success.
This isn’t the first time Oxford Biomedica has been tempted by large, short-term financial reward at a cost to long-term development. In 2015 management took out an expensive loan to develop a manufacturing site capable of coping with Novartis’ genetic cancer drug Kymriah. Although Oxford Biomedica remains the sole manufacturer of Kymriah and its owner Novartis has generated peak annual revenues of $474m (in 2020), the drug has never contributed particularly strong sales for Oxford Biomedica. Over five years the company is entitled to a minimum of $75m. For five years between 2015 and 2020, the interest paid on the loan taken to extend the manufacturing facilities cost the company £27.2m.
Oxford Biomedica’s balance sheet is now clean thanks to a £53m equity raise from Novo Holdings in 2019. As of June 2021, the company was sitting on £61m of cash, compared to £46.7m at the end of 2020. The company has also raised a further £50m from new investor Serum Life Sciences, which will own 3.9% of the enlarged company once the fundraising is completed.
It’s a strong endorsement and the money will help Oxford Biomedica complete the development of its Oxbox site, hopefully allowing it to avoid taking out another painful loan. But what will fill the site if the company hasn’t invested enough in new deals? And will any of the partnerships currently in the works be capable of replicating the revenue generated from an internationally distributed vaccine? I’m not confident.
It is also hard to shake the feeling that the Oxbox site was primarily chosen by AstraZeneca and its partners at Oxford University for its location. That’s not enough to justify Oxford Biomedica’s share price surge of the last year, and so the shares are not currently on my watchlist.