Valneva – Microcap vaccine producer

Valneva

+ Two strong cash generating assets, with the prime asset being Ixiaro, the only FDA approved vaccine for Japenese encephalitis

+ The only company attempting a Lyme disease vaccine, with a potential huge untapped market.

+ Strong family owner, which is the largest shareholder with 15%.

+ Interest from US investors who have taken a stake in the company above current market price.

– Not the best track record of successfully launching vaccines, several failures lately.

– In the hands of the big players to partner in development of vaccines, it is too costly to do by themselves.

– Small development pipeline means a lot hangs in the balance on very few trials and there is some doubts around the Lyme vaccine.

 

I already briefly introduced the company in a previous post, if you have not read that post, I urge you to start with the shorter pitch written there: See Valneva headline in this post

Below follows a bit deeper dive into the company (press Read More):

Company Overview

In May 2013 Intercell AG (listed in Austria) and Vivalis SA (listed in France) merged into a the new entity Valneva. Although it was a merger Vivalis was the controlling part which offered a premium to Intercell shareholders to accept the merger. Intercell was formed as a spin-off from Research Institute of Molecular Pathology (IMP) in Vienna. Intercell was the company which developed the vaccine for Japanese encephalitis, which now has grown into Valneva’s cash cow. Vivalis had at the time developed a cell line they call EB66, which can effectively scale different type of vaccines in duck eggs. In Jan 2015 the new entity Valneva acquired Crucell Sweden AB which owned the license to Dukoral, a vaccine against cholera and traveler’s diarrhea caused by ETEC, as well as a Nordics vaccine distribution business. Valneva paid 45m EUR for this acquisition. Dukoral is today Valneva’s second income generating asset, so none of Valneva’s significantly income generating assets comes from the Vivalis group. Even so the company is controlled by Vavalis largest shareholder, the Grimaud family, which today holds some 15% of the outstanding shares of Valneva. Which leads us over to management

Management

President & CEO Thomas Lingelbach – CEO of Intercell since 2011, before that MD for Novartis Vaccine & Diagnostics Germany. Holds some 130 000 shares outright and also options.

President & Chief Business Officer Franck Grimaud – Found of Vivalis and also involved in the family business Groupe Grimaud, which is the largest Valneva shareholder of 15% of shares outstanding. In general I see it as a big positive to have a strong family owner. In this case the large owner also has some financial muscle since Valneva is only a smaller part of Groupe Grimaud, which is large animal breeding group and specializing in genetic selection.

Chief Medical Officer Wolfang Bender – Senior international positions at various large life science companies including Novartis, Takeda, Pfizer and Hoechst, experiences in scientific-medical affairs, drug development and general management of vaccines and pharmaceuticals, more than 30 years of experience in life sciences.

The company also has a strong group of board members, with long careers with Pharma companies. The board is led by Frederic Grimaud who represents the family group.

Ownership Structure

There are also a some 17m preference shares trading, which are a heritage from the company merger. This shares would under certain conditions be converted to ordinary shares. From what I have found those conditions have not been met and hence the preference shares should not be accounted into the diluted shares. Also from what I have been able to find out this preference shares will at the latest be converted in June 2020, so after this the company would be in a better position if it wants to pay an dividend (although unlikely).

Compensation

Given that this is a very small company with historically has been burning cash, I think its extra important to look at compensation. Here I feel the company is paying out fairly high amounts, given that this a French company. In USA this would have been very normal, but Europeans are usually a bit more moderate in paying top euros. Let’s look at the bonuses paid in 2018 and 2017, this is after two years where the stock price more or less ended flat for the period

Total Compensation (including long term shares/options)	2018	2017
Thomas Lingelbach	€644,400.34	€1,208,098.02
Franck Grimaud	€408,759.85	€879,805.50
Wolfgang Bender	€470,923.43	€934,274.21

About half of the 2018 amounts are fixed salary, but bonus seems to be given out on fairly easy grounds. The high 2017 amounts is due to a long term shares incentive program. Personally I think share/option incentives programs are the best way to align shareholders and management so I’m all for that. But it hurts a little bit to see staff picking up so significant salaries, for such a small cap company.

Business History

Looking a bit deeper at Valneva’s history in terms of vaccine development, it has actually been a number of disappointments along the road. The company had two main vaccine candidates in the pipeline some 5 years ago:

1. Pseudomonas aeruginosa (VLA 43) – This was really the big one, where a big enrollment of 800 patients was done (co-finance by GSK). It ended really poorly with the following result: Valneva´s Pseudomonas Aeruginosa Candidate (VLA43) Did Not Confirm Positive Vaccine Effect in Phase II/III trial. This was obviously a big set-back for the company, it’s like with all medicine development, just because Phase II looks good does not mean that one will pass Phase III. Although the rates passing through Phase III is higher than for conventional medicine (this is one of few benefits with vaccine development compared to other medicine). This failure also created a write-down of assets.
2. Clostridium difficile (C. diff) (VLA84) – Here we find another set of issues for a small player like Valneva, they have a positive Phase II result, but they need a partner to go ahead with the large scale Phase III. Since Pfizer has already launched a 16 000 patient Phase III trial, which should be finalized by this year, Valneva struggled to find anyone that wanted to pick the fight with Pfizer. So the candidate has been put on hold, by my guess until the results of the Pfizer study is out. If that study fails, maybe they can then find a partner, being the only other option still in the game. But this highlights a major risk for Valneva, they can have a fantastic product, but if they can’t find a partner, they will not be able to launch a new vaccine to the market anyway. Article on the competition for C.diff: Pfizer, Valneva stand to gain from Sanofi’s C. diff vaccine flop.
3. There was also a short lived project to produce a Zika vaccine, which has been shut down for now.

Another type of service which Valneva has tried to scale is what they call their EB66 platform. This is Valneva’s platform for large scale vaccine production through embryonic stem cell (duck eggs). Valneva claims efficient low cost production through their platform. A number of agreements has been signed with various Pharmaceutical companies. For example GSK supposedly would produce their pandemic and seasonal flu vaccines on this platform (I have not been able to verify the current status of this). Here is the link to the announcement from 2016: GSK EB66. As you understand this platform becomes highly interesting given the Corona virus which is currently spreading over the world. But after 2017, when they signed an agrement with Bavarian Nordic, it has been very silent both in terms of announcement and from Valneva itself about the EB66 cell line. As we also can see from the below revenue split, very minor revenue comes from this cell line. Valneva has previously claimed potential milestones of up to 80m EUR from the platform, but very little of that has materialized.

So far the history looks fairly negative, with multiple failures. What has been more positive is the way Valneva managed to scale its existing approved products, Ixiaro and Dukoral.

Current Business outlook

The largest driver for Ixiaro has been the US military, which alone stands for some 50% of Ixiaro sales worldwide. Economies of scale is very much part of driving the cash flow generation here. All US Military and their families going to the Asian region receives the vaccine. So partly I guess this sales will be driven by how active the US military is in the region. I think we have seen a boost in sales due to Trump allocating more money to the military overall. Valneva guides for continued growth of the vaccine. Here the strength is really in that Ixiaro is the only FDA approved vaccine, which gives a long runway for continued growth just from the general population.

Dukoral is an interesting case as well. It has a somewhat lopsided sales geographically, with 59% of sales from Canada. We will go a bit deeper into this in the competition section, but its all down the availability and what the doctors in those countries recommend. Dukoral is available over the counter in Canada, without prescription. In most other markets there are either competitors selling Cholera vaccine, and/or it is a prescription medicine. Dukoral mainly is a vaccine against Cholera, but it is some markets it is recommended as a general precaution for “tourist stomach”. Since it’s freely available OTC, it has become common for Canadians that travel to for example Asia to take this vaccine as a precaution: Traveller’s Diarrhea Vaccination (Dukoral Vaccination).  Another aspect of Dukoral that I came across which I never seen mentioned by the company is this study, linking prostate cancer death reduction rates by use of Dukoral: Association between post-diagnostic use of cholera vaccine and risk of death in prostate cancer patients. In my view this could be a huge growth driver for Dukoral, given the number of prostate cancer cases in the world.

Some speculation from my side would be that the EB66 cell line might be used more in the future by Nordic Bavarian. They have recently bought two vaccine assets from GSK and has an agreement with Valneva on the cell line.

New Vaccine development

Looking ahead the company has now two vaccine candidates, one which has been in Valneva’s road map for a long time, against Lyme disease and the other one thanks to CEPI awards which wants to fast-track the development of Chikungunya vaccine. Let’s talk about Lyme first

Lyme disease

For the once that doesn’t know what this tick looks like, they are tiny creatures, which will jump onto you and start to suck your blood. As they do that, they will spread the Lyme disease (also called Borrelia) to you. The case for a vaccine for this disease is very strong and climate change seems to make the tick borne disease more and more prevalent.

This is Valneva’s timeline so far for development of the vaccine.

So things look good, there are no competitors developing vaccines against Lyme, Phase I has shown that the vaccine is safe. If this vaccine comes to market there is multi-bagger potential for the stock, since it could add revenue potentially larger than current Ixiaro sales. After this summer when the Phase 2 interim data is expected, the company again comes to this crucial phase of needing to find a partner to move on to a large scale Phase III study. Failure to quickly find a partner would at least delay the launch of a vaccine, given that testing of the vaccine can only be done during “tick season” once per year. However, It is not a given that such a partner could be found. And the reason for that is due to that this particular disease has an especially thorny history with a previously launched vaccine against Lyme. Instead of summarizing everything here, because it is a lengthy story, I instead found an excellent article written on the subject: Can a new Lyme disease vaccine overcome a history of distrust and failure?

As you can see from the article, that getting a vaccine approved does not only have upside, but potential downside, from lawsuits. Vaccines will always be a controversial product, since you give it to healthy people. Just my personal view is that vaccines in general is also a fantastic product, which for very little money removes some serious tail risks from your life.

Estimates given by the company for Phase III development of Lyme vaccine is about $360 million, which includes clinical, nonclinical and so on. So basically, if you take the 50% of that, you deduct a bit that Valneva can generate through own cash generation. They will need to raise some  EUR 100 million, there has been indication by the company that such a raise would happen through a new listing of the company in the USA. In general the US market has much more experience with funding this type of companies in clinical trials and probably Valneva will be able to more easily raise this there. A first step which made this even more probable was the US investor base that was taken in during the previous Capital Raise in 2018.

Chikungunya

This project is more driven (and funded) by CEPI (Coalition for Epidemic Preparedness Innovations). It is the same CEPI that in the last few days given large contributions for the development of a treatment/vaccine against the Corona virus (2019-nCov), not to Valneva though, but some of it’s competitors in the vaccine space. Naturally CEPI don’t want to put all their bets on one horse in this kind of case, so there will always be competition for the production of these vaccines. I don’t think Valneva has any edge here against the competition, perhaps rather the opposite, given how much smaller Valneva is than its competitors. Valneva claims to have the only solution that potentially would be a single shot dosage, whereas competitors is a 2 shot solution (2nd shot a month after the first). But from what I can find from the competitor Emergent Biosolutions they say the following:

Seroconversion occurred in 74% to 98% of subjects within seven days after one dose, and in all subjects by 28 days after the last dose. Looking specifically at the single-dose regimen, 96% of the single dose volunteers had detectable antibodies within seven days of the vaccination. At the one-year visit, 98% of subjects receiving the single-dose regimen remained sero-positive.

Quite frankly I think the potential upside here is limited, one would almost need to see that the competitors vaccines fail, for this to be a proper success for Valneva. The likelihood that both competitors fail and Valneva succeeds, seems low. This topic kind of already lead is into the general competitive landscape.

Competition

For the Dukoral and Ixiaro it comes down to which markets the vaccines are approved in. The big issue for Dukoral is that the company never went through the process of getting FDA approval and now a competitor launched a similar product which got FDA approval. Dukoral is strong in some markets and has the benefit of being a well recognized name. Some people might have taken it many times over the years, when they travel to places like Africa, India, etc. Ixiaro has a much stronger position, since it is the only FDA approved JE vaccine. In other markets there are competitors to Ixiaro, but I think a big growth driver here is sales to the US public. The problem is that Americans travel so little to the regions where JE is most prevalent. Still I think there is potential to grow this product a lot and being the recommended product by the US FDA pulls a lot of weight in many other markets as well (which is equally much the issue for Dukoral).

In general the competition is three fold in terms of companies, the major Pharmaceuticals which have their own lines of vaccine production and sales. But these companies are also partners to Valneva and needed to share the risk/cost and potential income of developing a new vaccine. Then there are local players in emerging markets, here unfortunately it seems patents for the vaccines do not hold up. Perhaps it because it is in the developing countries interest to have cheap vaccines produced. So very little sales seems to come from this region since vaccines mainly seem to be copied at a fraction of the cost. This is an important point and unfortunately this takes away a lot of the strong growth that could be seen by sales in emerging markets. A lot of the most dangerous diseases exist closer to the equator, like Japanese encephalitis which is mostly prevalent in Asia’s jungles. The vaccine market for Valneva, is very much a developed market business. Thirdly there are the more pure play vaccine companies. I will focus on the two pureplays which also have a Chikungunya candidate in the pipeline:

Emergent Biosolutions

This is the company that is most similar to Valneva, listed in USA with a market cap around 9x as large as Valneva and also current revenue of about 9x Valneva’s. The main difference is then of course of the launched pipeline of drugs/vaccines, where Emergent has a big lead. Even so the pipeline of upcoming products is very similar to Valneva’s. Both have been working on the Chikungunya as mentioned above. Both have also worked on a Zika vaccine. The Vaxchora is now launched in USA, which is a direct competitor to Dukoral (which is not licensed in USA) in some markets. The Vaxchora launch is in particular worrisome, since this might threaten further growth of Dukoral, or even detract future sales.

Moderna

This is an even larger company with a Market Cap of 7.4bn USD, with a large development pipeline. In the pipeline is both Zika and Chikungunya.

It is interesting (and worrying) that none of these two companies sees potential to go after a vaccine for the Lyme disease. One has to again question the likelihood that Valneva will find a partner for it.

Capital Allocation

There is not that much to say about capital allocation. The company is now cash flow positive on it’s two products, and Valneva plows down some 30 million EUR of that cash into R&D and development of their current pipeline. If the company can further grow it sales, it will most likely increase that R&D spend further, to some 35-40m EUR annually. Basically it comes down to if one values that 30-40 million spent on R&D as long term adding value to the company, or if it’s just burning the cash and never manage to get a successful product launch to the market. This bring is to the valuation.

Valuation

There are many ways to look at the valuation of a Pharma company with cash generating assets + a pipeline of vaccine candidates. One can play around with the probability rates for success of the vaccines. It is equally unclear how large sales would become once the vaccine is launched. Although unlikely, but some countries might recommend all citizens to take the vaccine, like the Lyme disease vaccine, that would mean huge sales. Or there could be backlash from anti-vaccine groups, scaring people from taking the vaccine (rightfully or not). It’s almost impossible to put a narrow range of the value of a small vaccine pipeline like Valneva’s. If you have a diversified pipeline like Moderna, you can use averages which will make more sense.

Let’s start with the easier part, what is Ixiaro, Dukoral and the EB66 platform worth?

Assumptions:

I assume these assets will generate some 35 million EUR of free cash flow

Growth: 5% per year (which is conservative, given Valneva’s own guidance)

Discount rate: 10%

Adding Net debt of: 16m EUR

This gives me a value of 5.15 EUR per share for this cash flow. 

Another way to prove that these assets are worth quite a lot is to look at recent M&A. Nordic Bavarian recently bought two similar assets like Valneva’s. One is for TBE (Tick Borne Encephalitis), which highly relates to the Lyme disease (since this the other disease this tick spreads). It also relates to Ixiaro, since the symptoms of the disease is very similar like the Japanese Encephalitis which Ixiaro protects from. The other is a Rabies vaccine. The combines sales of these two assets is 175m EUR (compared to Valneva’s 125m). For these two assets Nordic Bavarian paid 301m EUR upfront and a up to 495m EUR more in further milestone payments (some parts of this milestone was to pay for inventory). Just the upfront payment is more than Valneva’s current MCAP.

So what the market is telling us now is that since this cash is used for R&D, the pipeline Valneva currently has, has a negative effect on that cash flow. The market would increase the valuation of Valneva if it ceased its R&D efforts and just milked the cash out of the assets it already has. Is this a reasonable assumption then? Well yes perhaps, given what I have stated above, the Chikungunya does not look very promising. Although Valneva has received cash to produce this vaccine, it probably still takes away effort from other products that could have been developed. The Lyme diseases then, which is the big one has a very troubled history. There must be good reasons why the other companies are staying away from this vaccine.

So this puts one as an investor in a bit of hair scratching moment, the companies assets are worth quite a lot, but the company is burning the cash on not so promising products. If the market is wrong on this and either Chikungunya or Lyme becomes a cash generating product, we have quite a lot of upside from here. Taking a position in Valneva basically comes down to a few key questions:

1. Will Ixiaro continue its nice sales growth for the long term?
2. Will Dukoral at least hold up its current sales level, or perhaps the indication that it reduced prostate cancer deadliness can ramp up sales?
3. If the Lyme disease candidate can find a partner for it’s Phase 3, even if this means some share dilution, the upside is many times more than the share dilution of some 30-35%.
4. Can the EB66 platform create a new revenue leg, for example we have the Corona virus now, the platform should be able to produce a vaccine here. The previous co-operation with Nordic Bavarian also sounds promising, given that they bought the GSK assets.

I have to say I’m a bit split myself here, I bought into the company around 2.5 EUR per share, but at the time of writing, the stock is already at 3.18 EUR per share, still far away from some “fair value” of about 5 EUR per share. But I’m not all convinced of the pipeline and the previous execution of the other vaccine candidates does leave some extra worry in how it will develop.

Usually it really helps to do a proper write-up, the case becomes more clear, you get more conviction. I have done a tone of reading this time, honestly I barely summarized a third of what I read in this post (I thought it got long enough anyway). I have to say in this case I got more confused if I should own Valneva or not. Any input from you readers would be most welcome!