Cathal Friel on Open Orphan’s exciting plans in the rare and orphan drug space
Following re-admission to AIM last month, Open Orphan has got straight to work on realising its plan to become a full-service consultancy for orphan and other speciality healthcare products in Europe. Here, CEO Cathal Friel explains why he feels the high margins and opportunities for consolidation associated with Open Orphan’s sector could make it well worth buy into the firm at its current £18.7m market cap.
Progress period
The steps leading to Open Orphan’s current position as an AIM-listed player began last December when it announced a strategic collaboration with London-listed business Venn Life Sciences. Venn offers drug development expertise and clinical trial design and management to pharmaceutical, biotechnology and medical device firms across Europe with partners extending into the US. The outfit wished to accelerate its orphan drugs (drugs that remain undeveloped) and rare diseases operations by using Open Orphan’s clinical research and regulatory consulting expertise in both sectors.
Supported by a £1m loan note with a 10pc coupon, the partners committed to resource sharing and joint marketing as a way to achieve a stronger commercial position in their target markets. Following this, in May, Venn conditionally agreed to acquire Open Orphan for £5.6m using a reverse takeover, prompting the suspension of its shares. Venn’s shareholders approved the deal, and the company returned to the market last month, having changed its name to Open Orphan.
The new Open Orphan group is focused on building a leading, full-service consultancy platform for orphan and other speciality healthcare products. The company has chosen this market because incentives across the US and Europe has led to a boom in the development of orphan drugs. Indeed, 58pc of all new drugs gaining FDA approval in 2018 and coming to market are orphan drugs. Likewise, the sector is expected to grow 2X faster than the non-orphan prescription drug sector, with an 8.8pc CAGR forecast by 2020 (figures from Open Orphan presentation).
Specifically, Open Orphan will target the European market, where it will offer what it calls a ‘one-stop-shop’ solution for drug developers. The company will assist the development of rare and orphan drug products from pre-clinical development, into the clinic, and through clinical development.
The business has planned several key growth initiatives supported by its recent £4.5m placing at 5.6p a share to build on its existing position. Firstly, it intends to develop its patient health data platform in partnership with many patient advocacy groups. It will also build a Virtual Rep and Data Access Platform, consisting of physicians and key opinion leaders.
Acquisition strategy
Critically, Open Orphan has also identified an extensive pipeline of target acquisitions primarily in the regulatory approval, reimbursement and product launch areas. Friel tells us that due to Europe’s complex regulatory system, drug developers have to be reimbursed on a country-by-country basis. This has resulted in a highly-fragmented orphan drug pharmaceutical services market populated by a large number of smaller-scale consultancies. He says that Open Orphan hopes to make use of its already-advanced position to consolidate the market through acquisitions and make the EU-wide reimbursement process easier for drug developers:
‘We want to use acquisitions to build up a European footprint. Orphan drugs are more expensive, and their developers need to get reimbursed properly. In North America, they are reimbursed centrally, but in Europe, they are reimbursed on a country-by-country basis. So, it is important to have that whole of Europe presence. We have several bolt-on acquisitions ready to go. The approach is not too dissimilar to what other consultancies like Clinigen have done – they have gone from a £50m market cap to about £1.5bn in six years.’
However, Friel says that one critical difference between Clinigen and Open Orphan is that Open Orphan does not plan to get exposure to the development, testing, and handling of drugs. He says that limiting operations to consulting is key to providing pharmaceutical exposure without the ‘all-or-nothing’ risk associated with trying to advance drugs through numerous, difficult testing phases. One only has to look at the UK market to see the realities of this risk – firms like Immupharma and Motif Bio have seen vast amounts of value wiped away as a result of difficult newsflow in recent years.
‘We are purely in the services space; we are not developing and testing drugs. The pharmaceutical services sector offers very high margins, so it is a profitable area to be in. We provide a way of getting exposure to the profitable pharmaceutical industry without the inevitable surprises of trials. We get paid in full for our services, so the idea is to limit our downside risk exposure considerably. Handling products adds risks – if it works, the share price goes through the roof, but if it fails, it slips. The unfortunate reality is that quite a large number of drugs fail.’
Moving on up
Finally, with Open Orphan’s market cap currently sitting at £18.7m, Friel believes that now represents an excellent opportunity for investors to get exposure, given his ambitious plans for the future:
‘Between £4-5m of that market cap is cash, so it really is not a large amount compared to the £14m of revenues achieved by Venn last year. What’s more, we are guiding the market that we are going to have a good shot at £20m of revenues by Christmas. Everyone else in our space trades at 2.5X to 3X revenue on a modest valuation. I think we can get our market cap much higher as we roll out our story. For someone coming in at the moment, our target is to get it to £50m by Christmas. At this point, you are really in a position where you can continue to create value by pushing on and adding those acquisitions. Then you are on a clear runway to building a serious business.’
Open Orphan PLC – integration on track one week on from IPO
