At the time of writing, the Oxford Biomedica (LSE: OXB) share price has stormed ahead 82% over the past 12 months, and 170% over two years. And over the past five years, we’ve seen a massive 630% gain.
The latest bullish sentiment appears to stem from record first-half results released in September, which showed a surge in earnings. A 139% rise in revenue, to £81.3m, led to an operating profit of £19.7m, from £5.8m a year previously.
On an EBITDA basis, it’s even more impressive. The half brought in a figure of £27.1m, from an EBITDA loss of £0.4m in H1 2020. My Motley Fool colleague Zaven Boyrazian has dug more deeply into the results, so I won’t repeat them here. I just want to look at the bigger investment picture.
Oxford Biomedica specialises in gene-based biotechnology. And its key technological development is its LentiVector drug development platform. That’s used by pharmaceuticals companies for R&D, including big names like Novartis and AstraZeneca.
Oxford Biomedica strikes me as something of a picks and shovels investment. You know, when there’s a gold rush, those selling the digging tools make their money whoever finds the shiny stuff. It’s perhaps not quite like that here, but I do see something similar.
The LentiVector financial model renders things a little differently from straight picks and shovels sales. Customers pay an initial licence fee. And then further cash comes from royalties should the drugs being developed turn into commercial successes. That makes for a nice potential long-term income stream. But much of it will come from the successful users of the technology.
So where are the current big profits coming from? Oxford Biomedica has also been doing some manufacturing, of AstraZenenca’s Covid-19 vaccine, and that contributed strongly to those first-half profits.
It does create some concern for me over the Oxford Biomedica share price strength. Those H1 results show revenue from licences, milestones and royalties of just £5.7m, down from £10.6m. That’s only a small fraction of total revenue. The Covid vaccine deal will probably keep the cash coming for some time yet. But it’s going to wind down eventually, surely.
Oxford Biomedica share price valuation
If the current valuation is driven by those vaccine profits, I can see a risk of price falls when that happens. So what does the valuation look like? Well, simply doubling up first-half EPS, and going on the current Oxford Biomedica share price, I get a forward P/E of around 35.
The company says it expects EBITDA in the second half to be below the H1 figure, due to “an increase in research and development, administrative and bioprocessing costs“. So the real forward P/E should be higher than my guess. I even see some forecasts suggesting around twice that valuation, with a P/E of close to 70.
A company in transition
Right now, Oxford Biomedica is in something of a transitional phase. It currently has its manufacturing capacity to bring in the shorter-term cash. And I can see further opportunities there. But long term, it’s surely all about the LentiVector technology and its licensing progress and royalty income.
On balance, I see attractive potential here, but with a fair helping of risk. I’ll keep watching, in the hope of better buying opportunities in the future.