Vectura Share Discussion Threads

[polaris] 24/10/2019 14:56

Hi frazboy, (after a few minor edits on exact figures from litigation)

Good questions - For a full response i recommend that you send the email directly to IR at VEC. they have all the necessary information.

My interpretations are as follows:

Q1. We need to separate the VEC and SKP legacy IP here. The £9M capped royalty is from legacy SKP IP and the first major patent family will expire in November 2019. As the £9M royalty cap was hit in H1 2019 then VEC will not receive any further royalties from this going forward. The VEC IP is still under litigation and the expiry of the 991 patent is in June 2021. The EU has struck down these patent families and so there will be no revenues due to VEC from non-US territories, unless an appeal is successful on the arrow judgement from last year (nothing on that front for a while). In the US, the patent infringement was upheld and the $89.7M award was for royalties due from Mid 2016-end 2018. A further submission from VEC for damages up to mid-May 2019 was entered along with supplemental damages and the award of costs. An extra $10.5M was awarded but the costs and supplemental damages were not awarded (see ). Interest was also awarded ($6.7M) on the backdated damages and the total sum was around $107M at judgement date, with an appeal likely to be lodged by GSK. The patent holds in the US until expiry in June 2021 and the 3% royalty rate will be fixed until then on all sales of relevant products unless the appeal judgement changes that. Further, interest will be added to the $107M until payment at a rate set out in the above web-link, stated as treasury T-bill rate compounded annually.

Q2 is related to Q1. The $107M is basically the damages and royalties owed to VEC from original agreement expiry in 2016. The award covers the period up to mid-May 2019. The judgement states that future royalties until the 991 patent expiry will be at 3% of net US sales of relevant products.

The tax position for VEC will be dependent on the outcome of the appeal and how they then account for the payments. They could restate all FY figures from 2016 to account for the contributions in the relevant FYs (unlikely) or the just take it as a one-time gain in whichever FY it is eventually paid in and pay whatever corporation tax on the profits, or offset them with accrued losses.

Q3 None of the award is on future sales. The awards to date only cover period up to mid-May 2019. Everything from that point is fixed as 3% of reported sales of relevant products in the US territories in the final judgement, with no upper limit/cap. On current sales forecasts, that will be of the order of $30M p.a. until expiry in June 2021. That should just be recognised as normal royalty revenue in the figures, again depending on the outcome of the appeal from GSK. It may be 2019 or it may be 2020...

Q4 Don't quote me on it but i think that the royalty rate is 3% on net sales of VR632. The exact rate will depend on which technology is incorporated. I think it is formulation work and so it should be low single digit. If it is device then it might be anything up to high single digit. The current value of the EU Symbicort and generics markets is between $750M-1Bn. It remains to be seen how this product will impact both market value and what its market share will grow to be. That will require a couple of reporting periods to evaluate but the aim would be for something around $250M IMO, so eventually $7.5M p.a. to VEC at 3%.

On the observations:
I think H2 2019 will be slightly weaker in revenues than H1 for similar reasons - the £9M for Ellipta was all in H1. However, the tracking for Flutiform sales states they are to management expectations and there will be further recognition of revenues from the Hikma agreement on Ellipta from the up-front fee (another £3.2M to be recognised over next 1.5 years). I'd expect FY revenues to be in the £165-170M region. The cash pile will also grow more in H2 as various payments are recognised in H1 but not received until H2 (Q3).

2020 and beyond - yes but not for long, as the royalties from Ellipta will expire in mid 2021. There will be growth from Airbufo Forspiro (VR632) and most likely QVM149 by that time to offset falls. I don't know what happens to the Rayos/Lodotra agreement post 2022. Any Flutiform growth in Japan/China will also see royalties as that agreement is not capped in the same way as the Mundipharma agreement for EU/MENA.

One-offs in that time should include the $32M from Pacira for $500M annual sales of Exparel and the $5M approval milestone for QVM149. I'm not sure what other sales based milestones there are out there on the younger products. There may well be others.

By late 2021 i'd expect news on generic Ellipta and generic Symbicort in the US (VR2081) plus significant work on the nebulised therapies.

regards,

Paul

[frazboy] 23/10/2019 22:29

Paul et Al,

A few Questions and some general observations.

Q1: Note this excerpt from the Half Year report:

"This is partially offset by accelerated amortisation of the GSK Ellipta® intangible in 2019 following the £9.0m annual royalty cap being reached ahead of the earliest expiry date for one of the granted patent families in major markets of November 2019."

Now, we already know that we've reached the cap for 2019, that's not the point of pasting the excerpt. The query I have is, what are the dates when the rest of the granted patent family come off patent? 2020? And how many of the series are involved. I think, in a previous post, Paul implied that we should expect no further revenues from this family of patents? That was my understanding.

Q2: What's the tax situation on these awards (once/if recognised) from the Delaware IP infringement case? Are we due tax, and if so, are they to be offset by losses? As they are considered ‘damages’; I assume no tax is due.

Q3: Related to Q2 - if there is no appeal, some of the award is made on future sales of the Ellipta Brio range, will these be due tax? I don't see why not... I presume the revenue will be recognised as received - the judge cannot forecast sales!

Q4: Does anyone know what the royalty is from VR632 (launched in July)? I'm assuming low single digit, the problem with this assumption is, I don't have a clue what the sales forecasts are!

Some other general observations:

I'm not expecting H2 to be as strong as H1 due to the previously noted loss of Exparel, and the cap on Ellipta having already been realised, but also due to the fact that I think, having cross checked the Flutiform sales numbers (in market) with the Flutiform product supply revenues that there was stock building ahead of the expected Brexit date... I think one of the RNS's earlier this year hinted at at this too, but I could be wrong about this.

2020 and beyond...Due to the fact that we will hopefully, have, the 3% of the GSK revenues awarded by the judge to come through in 2020, and the downside cap on Rayos (from the H1 2019 Report "the Licence Agreement for RAYOS®/LODOTRA® was amended with effect from 1 January 2019 and Vectura is now eligible for a minimum $8.0m annual royalty for RAYOS® for the calendar years 2019 to 2022."), and only very modest decline in Ultibro/Seebri, our royalty revenues should increase in 2020 (after perhaps only £20m in H2 2019 Edit: not including revenues awarded if the judgement is not appealed and is recognised). Some of this strength should be retained in 2021 until patents do, validly, expire. On the plus side Flutiform should still creep up in Japan and Row (perhaps decline in Europe), and, we should also see QVM149 revenues and launch bonus (if that's what you call it).

I'm still surprised at the sell off on Monday and weakness thereafter. I don't understand why the seller wouldn't wait until the buybacks kick in. Unless they're a big seller, and they know they're going to struggle to offload the stock anyway?

Some positive news flow on the CEO (the CFO really does not inspire confidence in the 2019 H1 conference call), and, positive news on VR354 (Generic Ellipta) would be very warmly received.

[davr0s] 23/10/2019 18:30

I've made a lot on VEC in the past but trend trade so sold several years ago and bought back in earlier this year and currently +ve on the latest trade. This still seems to be basing/consolidating so still seems ok but agree tough if you rode it all the way back up and down or even worse bought it high. But atm it still seems fine

[best1467] 23/10/2019 17:59

Would have to agree Paul’s analysis is Superb and very in depth,but we can’t get away from the performance since SKP tie up as been a disaster and I find it hard to be as positive about everything apart from Fluitiform which without SKP we wouldn’t have.
Let’s hope some of the mentioned revenue streams coming on line actually produce worthwhile revenue because we need some good news.

[pooroldboy55] 23/10/2019 15:41

Paul
As i said before i agree with most of what you say,like many i'm here from SKP being honest vec is a sort of hobby for me .Don't need the money so will hang on in but have said before timespan mine not VECs. Paul I do really appreciate your analysis .
A

[pooroldboy55] 23/10/2019 15:31

It's not that there are no new products but its all forward and how many years has this been going on as i say above if this is such a good investment why are HBM getting out .Yes some will say it does not meet their criteria but surely they are out to make money it's not a hobby .

Cheers All (Remember tomorrow never comes ,on that cheerful note must have a G&T )

[polaris] 23/10/2019 15:23

Andrew - i write it off as i do not control the HBM portfolio. No-one here knows the reasons for HBM selling and so it is pure speculation. If i had an inside line on a 'sure-fire' 100% ROI over the next 12 months then i'd be selling VEC too. If you are a private equity group then you have the possibility to invest in companies that might turn you 1000% or more. You draw the money to invest in those from more mature companies that cannot show the same return on capital/investment. It doesn't mean they are bad investments.

[polaris] 23/10/2019 15:20

But we are not without flutiform and so the hypothesis is flawed. In fact, the flutiform part of the business is growing nicely and so provides the basis for all other developments with limited risk.

The $110M and counting from GSK will also be a nice addition once they realise the US court case is fruitless to pursue.

I see VR632 was finally launched in Europe as well - as Airbufo Forspiro. It'll be interesting to see how royalties progress there over next 12-18 months with QVM149 hopefully to come in mid to late 2020 on approval in EU (plus the $5m approval milestone). Who says there are no new products? ;-)

[pooroldboy55] 23/10/2019 15:19

Paul ,I can't see how you seem to right off HBM selling so lightly if they see better investments elsewhere what does that tell us. Also how long does it really, take to get a new CEO.? Headless chickens does seem to sum up BOD.

Cheers A

[best1467] 23/10/2019 15:13

Well let’s hope if that’s the case they don’t Rob Peter to pay peter again looks like we are heading back to The seventies yet again.
Without flutiform we we would be in serious trouble the rest of the business as achieved next to nothing since the merger.

[a1ord53] 23/10/2019 15:12

polaris, agree with you.
... and short sellers with HBM brining share price down....
Why they dont wait for buy back ?

[polaris] 23/10/2019 13:39

I've also finally read the notes to H1 results in detail and see how they got around the retained losses issue to propose the special dividend from cash held. See note 15 to the results. You just have to love accountancy...;-)

It also means that post dividend that the retained earnings are still positive with a likely further increase in the future. That means we can expect further cash returns and probable dividends.

[cap160] 23/10/2019 11:43

Me too. Bought B and E when they were about 3p if I remember correctly

[polaris] 23/10/2019 11:30

@diesel - indeed there are negatives.

I think the last 12-18 months have seen most of the old guard move on. If a half decent CEO is appointed then sentiment will turn on the proverbial sixpence.

HBM have a business plan and will buy and sell accordingly. Doesn't mean they are right. I do get the feeling that a certain fund manager held a reasonable number of VEC shares and they have also been arriving on the market in a disorderly manner! ;-)

The problem with a CDMO type organisation is what to buy? You need to look at IP bolt-ons and i don't see much out there that matches well. Maybe that will also be resolved by new blood at the top.

Unimaginative use of cash is better than spraying it in all directions on flights of fancy. ;-) I'll take a slow buyback of shares with spare cash above a certain level, as it increases effective EPS. If something comes along on the acquisition front then the company have the mandate to issue up to 10% of new share capital and can always call a EGM if they need more than that. There are many small pharmas out there that are just cash eating machines with little prospect of ever getting anywhere. VEC can, and should, be selective in how to proceed.

It's a shame that SKP didn't succeed with Flutiform on the timescale planned (it would have been huge as first to market in the US) and that had the knock-on effect of requiring the sale of the Depodur assets, which is now Pacira. The 'funny' thing is that PCRX are valued significantly higher than VEC, despite never turning a decent profit...blue sky pie vs stodgy pudding solidity? ;-)

[popper joe] 23/10/2019 11:19

Yes, thanks for that Paul, and just to trump Colsmith :-), I've been in since the company was making tents! Anyone else remember Black and Edgington?

[diesel] 23/10/2019 11:13

Paul, agree with most of your summary, but the negative sentiment is also not helped by ..
Lack of CEO
Sell off by HBM
Little in the way of new collaborations.
Unimaginative use of cash, no growth or acquisition plans....
We need fresh blood at the top to revitalise the image, as you say the business is sound but the negatives of the past and present weigh heavily.

[pooroldboy55] 23/10/2019 11:11

Hi PAUL
Agree with all of that, have also looked at all the future prospects but as you say its all jam tomorrow will the market catch on ? lets hope so but doesn't look like that at the moment who knows 1/2/3 years ?
Anyhow all the best (from one who is normally wrong )
Andrew

[colsmith] 23/10/2019 10:57

Thanks Paul, well articulated and practical review. I've been in since SKP days and always thought the combination would be good - maybe its a question that the companies time has come in that sense.

[polaris] 23/10/2019 10:51

There is a negative sentiment surrounding VEC and, added to that, most people do not understand the business model. While i do not disagree with the statement that the merger of SKP and VEC was an unmitigated disaster in terms of shareholder value for people who have held 5+ years, that is in the past and is something we cannot change.

Unfortunately for VEC as an ongoing business, the legacy of the shareholder destruction is still in play, in the form of the balance sheet write-offs. These distort the financial reporting and lead to the headline numbers that appear to show that VEC is a loss-making company and has been for a number of years.

Once you get beyond the headline numbers then it is clear that VEC are actually profitable from the on going business. This can easily be established by looking at the growth of the cash pile over the last several years. If a company isn't profitable then the cash pile doesn't grow! Then you have the financial websites, this one included, that have outdated information. ADVFN still show that VEC have a large debt position. For the life of me, i cannot see that in the financial reports. VEC is debt free and has a large, growing cash pile. Most of the metrics that a financial website uses will mark VEC as a risky play and certainly not a growth stock. The issue is that the distortions are all accountancy gimmicks.

At an operational level VEC are a solid company with significant prospects going forward. They are self-sustaining from existing portfolio of younger products on market and are evolving from a blue sky smaller pharma into a CDMO (contract development and manufacturing organisation). That means that R&D spend will fall and developments will be targeted towards partnered work. That is significantly lower risk, but lower overall potential reward; think Flutiform and Depodur developments years ago from the original SKP for examples of the blue sky approach.

IP rights and development of IP are the staple for a company like VEC. Defending that IP is crucial and so the on going battle with GSK is very important. The development of new IP is also crucial going forward. Here, i'm thinking the nebulised therapies and the generics (Ellipta, Symbicort, others to a lesser extent). Formulation IP remains important (see QVM149, Ellipta, generic Advair, Sandoz Symbicort in EU as examples).

The US litigation result against GSK shows that IP defence in action. Once fully resolved, it is likely that VEC will be $110M better off, along with ongoing revenues from US sales of the relevant Ellipta series until end 2021. That is not to be underestimated...yet it is almost entirely discounted IMO.

The Flutiform manufacturing and supply chain is the engine room of the company, allowing the other developments to take place. This product alone will be worth £100M+ in revenues to VEC in 2019, contributing £35M+ in profit from manufacturing margin (worldwide) and royalties (from Kyorin). Yet there are still posters who think that this revenue stream is in doubt or should be discounted in some way. Why? well surely a generic will appear and so the revenues will fall. Here's an example of that false assumption, Ventolin has been on the market for more than 20 years and still reaps over £500M in annual sales. Why would a relatively niche product in the market be a target for generics? These revenues will not go away and Kyorin has big plans for Flutiform in Japan and, potentially, China. In fact, I can only see revenues growing there. In the EU market, the market penetration is stable, despite assertions otherwise based on single markets. What market value for the manufacturing and supply chain for Flutiform alone?

Generic Advair remains a red herring to my mind. That boat sailed long ago. People should be looking towards QVM149, the generic Symbicort in the EU (Sandoz) and the generics developments in the US (Symbicort and Ellipta). Add to that the potential for the nebulised therapies in multiple areas. I expect news on that front in the coming months and some of the products to be fast tracked via orphan drug status.

The secondary revenue stream from Ultibro/Utibron/Seebri is not to be sniffed at. That is all pure royalty revenue and is worth over £15M p.a. There are smaller contributions from AirFlusal, Breelib and Gyrohaler. There are older products that have life left in them - the final Exparel milestone ($32M) and Rayos/Lodotra royalties (min $8M p.a. to 2022) are two good examples.

VEC seems to be worth significantly less than the sum of its individual parts, for what seem to be legacy reasons. The past is done, finished, irrelevant. I look to the now and the future prospects and am positioned accordingly. The only real question for me is when the market will finally cotton on to what has been staring it in the face for some time now.

regards,

Paul

[gbcol] 23/10/2019 10:30

SP seems a bit all over the place at the moment. Indicative is showing as 81.6p however when I just tried a dummy sell I got quoted 82.2p and for a dummy buy it was 83.65p. Not sure what to read into that. Any views?

[jimboyce] 23/10/2019 09:56

Once all the legal actions have been settled, I would be surprised if there isn't a move made on VEC at around £2 per share, making a value of £1.2billion. Not unrealistic in a time when generic medicine businesses are very attractive bolt ons.

[cockneytrader] 22/10/2019 18:02

Special Dividend

The proposed Special Dividend will involve the Company returning 6 pence per existing ordinary share in the capital of the Company to shareholders on the register of members of the Company as at 6.00 p.m. on 11 October 2019.

It is expected that the Special Dividend will become payable to shareholders on 25 October 2019.

[cottonpickers] 22/10/2019 17:58

I think it's ex div already

[a1ord53] 22/10/2019 17:47

Anybody could explain if it will be ex divi day on 25 th of October ?
Or there is no cut off for special divis ?
Please, kindly explain who knows.
Thanks a lot.
Record day was on 11 october and now its different quantities of new consolidated shares on 14 october.
So there is no way for cut off imo.

[insideryou] 21/10/2019 21:54

The guy who called the 90plus price would soon see 80p again didn't have to wait long. Printing money these guys are by controlling the price action.