Vectura is a breath of fresh air

Shareholders in Vectura* (VEC), of which I am one, should breathe easy following this morning’s results from the inhaled medicines specialist. Vectura has reported a maiden profit after tax of £3.7 million on the back of revenues up by 59% to £58 million. However, this is just the beginning, as Vectura is now a company that truly is coming into its own.

Vectura is a UK-based speciality pharmaceuticals company focused on the development of inhaled drugs mainly for respiratory diseases – a market which is estimated to be worth $32.4 billion in 2013 and is expected to grow to $43.9 billion in 2018, with a compound annual growth rate (CAGR) of 6.2% (source: BCC Research). The group currently has eight products marketed by its partners including GSK, Novartis and Baxter International and a portfolio of drugs in clinical and pre-clinical development, some of which have been licensed to major pharmaceutical companies.

The headline figures from today’s results include a 55% increase in royalty revenues to £25.2 million as new products come on-stream. For example, sales of Seebri and Ultibro (both used to treat COPD), from which Vectura receives mid single digit royalties from Novartis, grew rapidly and amounted to $309 million in FY15. There is scope for further growth during the current year, as Ultibro has been launched in 21 countries (including Germany, Japan and Canada) but has been approved for use in over 60 countries including countries within the EU, Japan, Latin America, Canada, Switzerland and Australia. Meanwhile, Vectura expects FDA action on both QVA149 (Ultibro) and NVA237 (Seebri) by Q4 2015, and the launch of these products in the US is anticipated to generate significant additional milestone and royalty income for Vectura. Of course, there are risks with bringing these products to market, but given that they are already approved in many other jurisdictions around the globe it appears unlikely that the FDA will take a different view.

Vectura has also been busy gaining the necessary European marketing authorisations for AirFluSal Forspiro (formerly known as VR315). AirFlueSal has been launched in 12 European countries, and also in South Korea and Mexico. It has been approved in approximately 30 countries. VR315 is a generic copy of GlaxoSmithKline’s $8 billion-a-year inhaled lung drug Advair, a real blockbuster. Analysts at Berenberg had been assuming 2017 sales of around $250 million, or roughly 10% of Advair’s current European sales. This could prove conservative. Vectura is also partnered with “a US division of a leading international pharmaceutical company” for bringing VR315 to market in the States, which could be a source of further upside over the medium term.

In any case, Vectura has now made the transition from loss-making R&D outfit to profitable pharmaceuticals business. There is also cash of £90 million on the balance sheet, and the company has no debt. With this in mind, we could be nearing an inflexion point, both in terms of the firm’s financial performance and its share price. The imminent ramp-up of royalties from various avenues means that a multiples-based valuation for Vectura will be possible from now on, which makes the stock much easier to value. For example, broker Stifel notes that Vectura trades on an estimated FY16 P/E of 27.4x, but a FY17 estimated P/E of just 10x. It notes that this looks “unwarranted” given the strong growth.

Elsewhere, last year’s acquisition of German pharmaceuticals company Activaero packs out the company’s development pipeline into the foreseeable future and represents a focus for the reinvestment of the royalty income from the aforementioned products. With the caveat that Vectura carries risks traditionally associated with the pharmaceutical sector (e.g. product development failure, regulatory risk etc), it appears to be building what could ultimately become a valuable franchise, and I believe the shares are worth a look for the more adventurous investor. What’s more, Novartis has been very open about its ambitions in the inhaled medicines arena, and has not ruled out the prospect of acquisitions. Vectura would be an obvious target given its existing working relationship with Novartis.

* James owns shares in Vectura.