James Faulkner on Vectura: Worth a look for the more adventurous investor

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Shares in inhaled drugs specialist Vectura* (VEC) spiked last week on the back of news that New Drug Applications (NDAs) for its Ultibro and Seebri treatments for COPD were submitted to the FDA by partner Novartis in the fourth quarter of 2014. Vectura is eligible to receive milestone payments upon acceptance of applications by the FDA, along with mid-single digit royalties on sales thereafter. This news goes further towards de-risking the investment case for Vectura, shares in which could be approaching an inflection point, in our view.

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 main driver for Vectura’s business is its relatively diverse R&D pipeline, centred on inhaled drug therapeutics.

In terms of revenue generating potential, the main focus for investors are four compounds: NVA237, QVA149, VR315 and VR632. The first two are licensed to Novartis and in development for chronic obstructive pulmonary disease (COPD), while the latter two (excluding the US rights to VR315, which have been acquired by another “leading international pharmaceuticals company”) are both licensed with Novartis’ generics division, Sandoz, and in development for both COPD and asthma. In addition to these drugs, Vectura possesses a host of other compounds – for the treatment of Parkinson’s disease, cystic fibrosis and erectile dysfunction to name but a few – that have yet to find licensing partners.

Last week’s news relates to NVA237 (Seebri) and QVA149 (Ultibro) follows positive top line results from the pivotal Phase III trials for Ultibro and Seebri which supported the application. Results from the EXPEDITION (FLIGHT 1, 2 and 3 studies) and GEM (including GEM 1, 2 and 3 studies) clinical trial programmes met their primary and secondary endpoints, with Ultibro demonstrating statistically significant and clinically meaningful improvements in lung function (FEV1 AUC0-12) at Week 12 versus comparator in the FLIGHT 1 and 2 studies in moderate-to-severe COPD patients, as well as meeting the secondary endpoint of improving overall health status. Seebri also demonstrated significant and clinically meaningful improvements in lung function (FEV1 AUC0-12) at week 12 versus placebo in moderate-to-severe COPD patients. Broker Investec is forecasting peak sales of c.£400 million and £100 million respectively for QVA and NVA, which suggests peak royalties of c.£25 million to Vectura.

Vectura has also been busy gaining the necessary European marketing authorisations for AirFluSal Forspiro (formerly known as VR315).

VR315 is a generic copy of GlaxoSmithKline’s $8 billion-a-year inhaled lung drug Advair, a real blockbuster. With other European approvals likely to follow suit, the shares could really take off from here. For example, analysts at Berenberg had been assuming a 40% chance of approval in Europe and 2017 sales of around $250 million, or roughly 10% of Advair’s current European sales. This could prove conservative. 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 the obvious target.

In any case, Vectura is poised to make the transition from loss-making R&D outfit to profitable pharmaceuticals business.

There is also cash of £84.6 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 just a few years out, which would make the stock much easier to value. We believe the quality of the pipeline is such that the shares are worthy of attention before this becomes a reality.

Elsewhere, the recent acquisition of German pharmaceutical 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 we believe the shares are worth a look for the more adventurous investor.

* Disclosure: James Faulkner, a contributing writer at SpreadBet Magazine, owns shares in Vectura.

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