After happily eating cheese and ice-cream for most of my life, I’ve recently developed a dairy intolerance. According to the NHS, I am in good company – one in three Britons suffers some form of food allergy, while another 15 million suffer from hay fever. That creates a great opportunity for innovative vaccine developers, such as Allergy Therapeutics.
Its flagship drug, Pollinex Quattro (PQ), is approved in Europe on a ‘named patient’ basis and has already been used to treat more than 105,000 hay fever suffers. That makes it one of the most widely tested products of any biotech firm. Despite not yet being granted full marketing rights (expected in 2011), it has snapped up 6% of the region’s €650m allergy vaccine sector, which is growing by around 8% every year.
PQ’s main advantage over pills, antihistamines, nasal sprays and eye drops is that its benefits can last for up to 12 months and it only needs to be injected four times a month. What’s more, the patented technology not only dampens a patient’s response to pollen, but it also helps them build up a stronger defence mechanism.
Allergy Therapeutics (Aim: AGY), tipped asa BUY by Nomura
However, the news isn’t all good. By its very nature, drug discovery is risky. During 2007 Phase III trials, for example, the US regulator ordered Allergy to stop testing PQ in America after one person suffered numbness. While this was a major blow, it seems this negative outcome may have been caused by an unrelated matter. Alternatively, a doctor may have administered the wrong dosage.
Whatever the truth, there have been positive results in Europe for this and other drugs (such as GlaxoSmithKline’s Cervarix) that incorporate the same ingredient. These have subsequently been authorised for general release. And my confidence is shared by other investors. In July, the company got a big vote of confidence when it successfully raised £22.4m (before costs) at 12p per share and another £2m in February at 12.5p per share. That helped reduce net debt to £7.1m by December.
Brokers at Nomura are forecasting 2010 sales and underlying earnings before interest, tax, depreciation and amortisation (Ebitda) of £42.2m and £0.2m respectively, rising to £72m and £11.2m by 2013. They have set a 36p price target for the shares. I would value Allergy Therapeutics on a ten-times Ebitda multiple, which, after adjusting for debt and discounting back at 12%, generates an intrinsic worth of around 19.5p per share.
So what are the downsides? Allergy is a small-cap firm operating in the high-risk area of drug discovery. So it would be hit hard by further pipeline setbacks and may require fresh capital if more clinical trials are demanded by regulators. And 70% of its revenues are derived from Germany, so there are the usual foreign-exchange considerations. There is also a remote chance that the firm may be delisted from Aim, given 45% of the stock is owned by the Weinstein family.
Recommendation: SPECULATIVE BUY at 13.5p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments