The allure of identifying the right penny stock remains strong, despite the high risks involved. The low starting point for these tiny enterprises makes finding just one winner a very lucrative prospect.
I’ve had my magnifying glass out recently, scouring the penny stock landscape to try and unearth potential hidden gems. Here’s one I’ve found that I’d seriously consider buying.
Business momentum
Formerly known as Open Orphan, hVIVO (LSE: HVO) tests infectious and respiratory disease vaccines in human challenge trials at its specialist London facility. Its clients are drug developers, including four of the top 10 global biopharmaceutical companies.
The purpose of a challenge trial is to check whether a vaccine candidate protects people when they’re deliberately infected with the virus. Having staged more than 60 such trials, with over 3,000 volunteers inoculated, hVIVO is a global leader in this niche market.
The firm’s sales this year are expected to be just under £50m, including £7m in underlying profit. That is substantially higher than the £12.2m revenue posted five years ago. In 2023, the top line is expected to grow to £54.7m, with almost £10m in underlying earnings. These are the first green shoots of profitability in the firm’s history.
Record contracts
Last month, hVIVO signed a deal worth £13.6m to stage a phase II RSV (respiratory syncytial virus) challenge trial. This follows a £14.7m influenza antiviral contract signed in June with an unnamed global biopharma client.
These are hVIVO’s largest deals to date, and they’re also end-to-end contracts. That means the firm will recruit volunteers itself, manufacture the virus, carry out the characterisation study, then test the vaccine.
This full-service capability increases its attractiveness to potential clients, as well as increasing the value of the contracts. The company had an £80m contracted order book, as well as £20m in cash as of September. Unlike many small firms, it seems in rather good financial health.
Share price action
The share price has responded to this business momentum, rising 27% over the last month. Zooming out a bit longer though, the shares are actually down 50% so far this year. I think this could offer a potential investor like me an attractive entry point.
The market cap currently stands at £80m, which gives it a forward price-to-sales (P/S) ratio of 1.6. I don’t think that’s particularly eye-watering.
Further considerations
hVIVO has been enjoying tailwinds from the pandemic and the extra R&D spending directed towards respiratory infections. In fact, from 2019 to 2021, there’s been an 86% increase in active vaccine, anti-viral and respiratory compounds going through development.
But therein lies the risk, because this supportive environment could soon soften as the pandemic shifts to an endemic phase. The red-hot sales growth seen over the last couple of years could cool, sending the share price down.
Plus, as these human challenge trials intentionally expose viruses to human volunteers, it may be seen as ethically controversial to some. However, these studies have improved massively over recent decades to satisfy various safety and regulatory requirements.
All in all, this penny stock looks very attractive to me. I’m going to start a position once I have more capital to invest.
