The Open Orphan (LSE:ORPH) share price has had a rough couple of months. Despite reaching a new all-time high in April this year, the stock has since fallen by over 50%. Its 12-month performance is still an impressive 75% return. But the question remains – what caused the Open Orphan share price to lose more than half its value? And is this an opportunity to add some shares to my portfolio at a discount?
The collapsing Open Orphan share price
I’ve covered Open Orphan’s business model before. But as a quick reminder, it’s a clinical research organisation (CRO) that assists large pharmaceutical companies in developing new drugs. The firm is also a specialist in vaccine and anti-viral human challenge trials. And is currently using its knowledge to combat Covid-19 under a £46m contract with the UK government.
So what’s going on with its share price? Open Orphan spinning off its drug development division into its own entity — Poolbeg Pharma. The goal is to become a more focused CRO business while simultaneously lowering the risk profile. Once the split is complete, existing shareholders will receive shares in this new business.
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With that in mind, seeing the Open Orphan share price fall makes perfect sense to me. After all, the earnings potential of its flagship influenza drug just shifted to another business. As a result, the market has adjusted the firm’s valuation. But now that this drug is part of Poolbeg Pharma, can the Open Orphan share price continue to grow over the long term?
Moving forward
Looking past the falling share price, Open Orphan appears to be making good progress. Its Covid-19 contract has been expanded, boosting revenue estimates. Meanwhile, it started a new project to run human challenge trials for AIM ImmunoTech’s Rhinovirus HRV anti-viral candidate. Beyond this, its Netherlands office has secured yet another contract worth €0.9m for its clinical trial management services.
Needless to say, this continued expansion of ongoing projects is an encouraging sign. At least, I think so. And it seems the management team agrees since two directors, including CEO Cathal Friel, just bought around 8.2% of the shares outstanding.
According to the business, “the infectious disease market is rapidly expanding and expected to grow to in excess of $250bn per annum by 2025”. If this forecast is accurate, that gives Open Orphan and its share price some enormous room for growth over the next four years.
However, it’s important to remember that the business is not the only CRO around. In the UK alone, approximately 1,395 labs are offering similar services. And these services are highly regulated. Suppose the business were to inadvertently breach these regulations? In that case, I think it’s likely that its existing list of customers could quickly switch to a competitor.
The bottom line
The recent decline in the Open Orphan share price has brought the valuation down to a more reasonable level, in my opinion. And over the long term, if it can continue securing new contracts, I do believe the stock can rise substantially. However, the management team has announced further plans to spin off other assets that will likely once again send the share price down in the future. For now, I’m keeping this business on my watchlist until a clearer picture begins to form.
