Interactive Investor

Allergy Therapeutics tipped to bounce back

26th September 2016 14:01

Harriet Mann from interactive investor

Successful investors find undervalued companies that have either been overlooked by the market or have fallen out of favour. It's a risky business, but two City brokers reckon they have found such a gem in Allergy Therapeutics. However, a surge in research and development (R&D) costs plunged the allergy treatment developer into the red, and may have delayed a return to cash profits by a year.

Raising £11 million net of costs in a 41 million share placing during the year, Allergy is certainly prioritising R&D - over £16 million was invested in product development during the year, a significant ramp-up from 2015's £3.1 million budget. Much of that went on the US grass and European PQBirch dose studies.

This increased investment is a boost to Allergy's product pipeline, helping launch dust mite treatment Acarovac Quattro and food allergy care Polyvac Peanut. Ending the period with £20.2 million cash, management has funds to help grow market share to a level where it can one day invest and improve margins at the same time.

Revenue rose 12% to £48.5 million, or up 19% at constant currency. While all its main European markets exhibited double-digit sales growth at constant currency, the contribution from Germany jumped 13% to £30.7 million. The majority of revenue comes from its flagship product Pollinex Quattro, which accounts for 45% of total sales.

This strong European performance briefly distracts attention away from the development setback of its Phase II Pollinex Quattro Grass. Without conclusive evidence of an optimal dose regime, the entry into the US market has been delayed, although management reckon there is still a chance it could be the first drug of its kind authorised for marketing in America.

Acquired in June 2015, the new Alerpharma group also contributed £1.7 million to sales, although restructuring charges pulled the division into a £0.6 million loss after tax.

Before R&D expenditure, operating profit rose 13% to £4.3 million"We continue to see a strong outlook for the business in Europe and following the disappointing commercial performance of daily tablets in the US, ultimately see it as the best-placed company to crack the larger US market, with a treatment format that suits the US allergists' preference for injections."

Before R&D expenditure, operating profit rose 13% to £4.3 million, although this crashed to a £12.1 million loss when including R&D compared to a £0.7 million loss last year. The net loss grew from £0.1 million last year to £13.1 million.

Allergy shares are 'very cheap'

With Allergy's enterprise value (EV) just 1.6 times 2016 forecast sales, broker Numis Securities thinks the shares look "very cheap", with peers trading on three times EV/sales. That's why analyst Paul Cuddon thinks the shares are worth 37p, implying 113% upside.

The market has other ideas: Monday's further 3% slide to 17.4p means the share price has halved since last October, slipping below the 18p level where Allergy has previously found support since the EU referendum.

Numis only initiated coverage of the company last week and has already downgraded forecasts. "We now expect AGY to put greater investment in sales and distribution than we had previously forecast, and so we now expect a nominal earnings before interest, tax, depreciation and amortisation loss in FY 2017," said Cuddon.

He'd previously pencilled in nominal cash profitability in 2017/2018 before US trials restarted, but the focus on ramping up R&D has reversed this forecast to a £1.3 million loss instead, which should shrink to a £0.6 million loss in 2018.

Still, Cuddon still likes "significant additional upside from the pipeline, which now includes a promising peanut vaccine".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.