The Open Orphan share price has halved in 5 months. Time to buy?

The Open Orphan share price has plummeted in recent months. Zaven Boyrazian explains why, and whether the fall is a buying opportunity.

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It’s been a rough couple of months for the Open Orphan (LSE:ORPH) share price. Despite achieving explosive performance throughout last year, the stock has been on a downward trajectory since April. While its 12-month performance still stands at an impressive 41% return, the Open Orphan share price is down nearly 45% over the last five months. And last week, it continued to decline as investors were unimpressed with its interim results. But has this created a buying opportunity for me? Let’s take a closer look.

A promising update

I’ve explored this business before. But as a quick reminder, Open Orphan is a specialist contract research organisation (CRO). It assists larger pharmaceutical companies to run clinical trials and continues to play a pivotal role in antiviral testing for Covid-19 vaccines.

Despite the lacklustre reaction of the Open Orphan share price, the latest earnings report did show some impressive signs of growth. Revenue for the first six months of 2021 came in 242% higher than a year ago, reaching £21.9m. Meanwhile, thanks to improved margins, this rise in sales enabled the company to become operationally profitable. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the period arrived at £2.1m versus a loss of £4.1m last year.

This growth appears to primarily stem from the six ongoing challenge trials tackling influenza and other respiratory diseases beyond Covid-19. Overall, 75% of revenue originated from non-Covid-related operations, which has significantly reduced the firm’s single-product risk.

Needless to say, these are some encouraging results, to my mind. So why did the Open Orphan share price fall?

The Open Orphan share price has its risks

The falling Open Orphan share price

There are undoubtedly many factors at play causing the stock to suffer. However, a few leading reasons include the firm’s recent spin-off and plain old valuation. Earlier this year, management announced that it was separating its drug development division into a brand new company called Poolbeg Pharma.

This decision ultimately offloaded a significant portion of risk as the drug development process is quite arduous and exceptionally expensive. But it also means that any future growth investors were expecting from drugs in the pipeline just disappeared. So, I’m not surprised to see the Open Orphan share price fall as a result.

It’s also worth noting that even today, after a big fall in its market capitalisation, the firm still has quite a lofty valuation. Based on these latest figures and its current share price, Open Orphan is trading at a price-to-earnings ratio of around 120! When stocks trade at such high multiples, seeing large price drops in short spaces of time is quite common.

The bottom line

All things considered, my opinion on Open Orphan as a business has improved since the last time I looked at it. The reduced reliance on Covid-19-related studies is especially encouraging. Having said that, I’m still not tempted to add this stock to my portfolio. Management still has plans to spin out other parts of its business. And currently, the level of impact on the future growth of such actions remains unclear. Therefore it’s staying on my watchlist for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. 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.

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