Anglo-Irish pharma firm Open Orphan (LSE:ORPH) is my choice for the next big thing in UK biopharma, and its Covid-19 test is just one string to its bow.
The AIM-listed company has seen a dramatic rise. Since January the share price has grown from 5.5p to 14p. In that time, its market cap has surged from £30m to £78m. Most of that is down to froth, rumour and hype from its potential Covid-19 antibody test.
Open Orphan has just announced a deal with NASDAQ-listed Swiss firm Quotient to produce Covid-19 antibody tests at a rate of 3,000 per day. Home testing kits can sell from anywhere between £70 to £150.
With the UK government’s commitment to ramp up testing to help reopen the shuttered economy, this could be a major revenue generator for such a small company.
I do own shares in Open Orphan, which puts me at risk of endowment bias. This is where investors are more positive about the future prospects of stocks they own, than those they do not. So of course, like all biopharma stocks, it could fall flat. Drug trials could fail or not be commercially viable. And there is certainly much greater risk on AIM than in the FTSE 100 or FTSE 250.
But I think the share price can still double because the market is only just starting to wake up to Open Orphan. And secondly, it has strong revenues in the pipeline that have nothing to do with Covid-19.
Tiny pharmaceutical companies have become the new gold rush for UK investors. Most are unprofitable. Release some news related to Covid-19 tests or treatments? Your share price soars.
Most of these are trading on ridiculous multiples and crazy valuations, driven by investor Fear Of Missing Out. When short-term momentum fades, their share prices will too, I feel. But I don’t think that’s the case with Open Orphan.
I set a lot of store by companies with strong economic moats, or competitive advantages. This is Warren Buffett’s favourite metric for good reason. After all, if just anyone can swoop in and manufacture or sell your product at a lower cost or higher margin, you may not have a long-term business that will last.
I believe no company of its type can match Open Orphan’s portfolio of viral challenge study models. They cover flu — including a candidate for a universal flu vaccine — asthma and COPD. It has announced £10m in revenue this year alone from human challenge studies unrelated to Covid-19. That includes two contracts, worth £3.2m and £3.5m each for human challenge studies that for treatments for Respiratory Syncytial Virus (RSV), an extremely common virus that causes lung infections in young babies.
It has one other unimpeachable advantage its competitors do not: its studies run at its own quarantine unit in Queen Mary’s Hospital, London. This 24-bed clinic is Europe’s only commercial venue with a quarantine unit and virology laboratory on-site. This makes its drugs testing process ultra-efficient.
So when the hype around Covid-19 stocks begins to subside, when tens of millions of tests have been distributed and taken, I believe Open Orphan will continue to thrive.
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Tom Rodgers owns shares in Open Orphan. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.