Gubra: Share price finally starts to catch up with obesity peers but future potential still not fully discounted.
Gubra’s stock is up almost 25 percent this month with no new announcements from the company. Instead, investors sentiment is most likely positively affected by media speculation that Gubra could potentially be part of the current increased M&A activity within the biotech sector - particularly within obesity - as well as investors looking for opportunities within the huge and high growing obesity space that has not yet been discovered or fully appreciated.
As we have repeatedly communicated, Gubra’s share price development has lagged that of obesity peers Zealand Pharma, Novo Nordisk, and Eli Lilly, which does not seem fully warranted. Of course, we acknowledge there are reasons the development for Gubra can differ from their obesity peers.
- Gubra is not only an obesity company, but a special biotech company that combines a high growing, profitable and cash generating service CRO (Contract Research Organization) business with a traditional biotech development business (D&P). While the latter attracts attention due to its obesity exposure, Gubra’s CRO business is still the bread and butter of the company financially and if valued at premium peer CRO multiples due to the higher growth and margin in the Gubra CRO compared to peer CRO’s, Gubra’s CRO business comprises almost 40 percent of the current market value of Gubra. So, if Gubra were to be acquired for its obesity pipeline, the company would probably need to be split up. Certainly doable, but still an obstacle for a potential buyer - and investors - to consider as the two businesses are partly integrated operationally.
- Within its D&P business, Gubra is still an early-stage company primarily engaged in pre-clinical or discovery phases while peers are much more advanced and established in their development and commercialization.
But even taken the above points into consideration, we think it is still relevant to look at Gubra as a company with a strong and broad-based obesity exposure in the future – and therefore as a long-term investment opportunity for investors who look for obesity exposure.
- Firstly, Gubra is not just claiming obesity expertise, various partnership arrangements and an accompanying combined milestone potential from these partners of obesity projects of DKK 4,5 billion – of which DKK 420 million is expected before 2026 - clearly validates Gubra’s expertice.
- Secondly, Gubra’s obesity product candidate portfolio is well diversified and illustrates a flexible approach from a scientific perspective, ranging from different discovery projects to the more advanced amylin analog based project (GUBamy) developed by Gubra without partners, currently in phase 1.
As far as M&A is concerned, Gubra is not unaccustomed to M&A as the company has been active as an acquirer of a Danish - albeit very small - CRO company. MiniGut, last year. While bolt-on acquisitions will likely create value both financially and scientifically, these types of acquisitions are by nature small in size. From the perspective of the more interesting potential for Gubra to be a takeover target, recent deals suggests that both obesity and CRO projects are in high demand. Big Pharma are currently buying their way into the space as illustrated by Astra Zeneca who made a licensing deal in November 2023 regarding an obesity drug with Chinese based Eccogene worth up to USD 2 billion, and Roche who acquired US-based diabetes and obesity focused Carmot Therapeutics in December 2023 for USD 3, 1 billion. Similarly, within the CRO space Gubra peers Ergomed and Syneos were both acquired in the fall of 2023 with premiums of 20-30 percent.
As the increased interest for obesity focused biotech companies has affected Gubra’s stock price positively, the return on the Gubra share is now close to that of Novo Nordisk for the first time when measured since the listing of Gubra in late March 2023. To get perspectives on what is now discounted by the market after the share has risen, we have revisited our company guided DCF model. Despite the huge catch up to obesity peers, if Gubra’s CRO business is valued by a conservative 20 percent premium of current peer group EV/EBIT multiples of 17,2 times, the market is still only implicitly assessing an absolute level of 24 percent likelihood that Gubra will be successful in getting its obesity drugs approved. Relatively, this PoS (Probability of Success) is more in line with industry experience which suggests a 26 percent likelihood pipeline project within obesity will make it from pre-clinical and phase 1 trials through phase 3. Generally, an absolute low level of PoS for biotech companies can also reflect that the market thinks there is a high risk of upcoming diluting capital raises, but in Gubra’s case we don’t consider this a high risk due to the company’s special business structure with a cash flow generating CRO business unit.
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Disclaimer: HC Andersen Capital receives payment from Gubra for a Digital IR/Corporate Visibility subscription agreement. /Claus Thestrup 8:25 AM 08-02-2024.
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Gubra
Gubra is a pharmaceutical company. The company's operations are focused on the early stages of drug development. They mainly conduct research and development in the field of metabolic and fibrotic diseases. The company's product portfolio includes several brands and pharmaceuticals, and operations are conducted on a global level, with the largest presence in North America and the Nordics. The head office is located in Hørsholm, Denmark.
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