Gubra: A hidden gem in the obesity space?

Gubra: A hidden gem in the obesity space?

Gubra released a strong 3rd Quarter report last week following the recent upgraded guidance of growth and profitability. Gubra’s unique business model combining a high growing and very profitable CRO-service business with a product discovery business that has a broad and interesting pipeline of obesity product candidates is showing impressive progress in all areas. Following the release last week, CEO Henrik Blou and CFO Kristian Borbos participated in an event hosted by HCA to present and discuss the report and as always, they were very confident and optimistic about Gubra’s prospects. Key takeaways were:

Firstly, Gubra reported 28% organic revenue growth in its CRO-service business for the first three quarters of 2023 as the business area continues to gain traction and broaden the numbers of disease areas. In terms of disease area, among others, the increased interest of obesity in the pharmaceutical industry affected growth positively. Profitability was equally strong, as EBIT grew 25% to DKK 34.5 million, and the EBIT margin was 28%. The financial key figures in Gubra are higher than the CRO industry in general, and as CEO Henrik Blou explained at the event this is due to a more specialized and selective approach, which raises the expertise and likelihood of faster and more accurate study-designs that can be priced higher. The raised guidance for the full year could be interpreted as conservative when the current strong run rate in the third quarter is considered, but CFO Kristian Borbos explained that it is not deliberate. Instead, Gubra has been surprised by very high growth in US and that the return from the corona lock down has been very accommodative in creating customer leads from higher meeting activity and busy conference schedules. Also, the difficult European funding market for Gubra’s clients has not yet reached their US clients so a cautious – rather than a deliberately conservative - approach is warranted.

Secondly, the obesity focused pipeline, led by its Amylin project, which is about to move into phase 1 in UK, after showing impressive pre-clinical results as a combination treatment with semaglutide from Novo Nordisk, also continues to evolve. Together with its partnership with Boehringer Engelheim within obesity this exemplifies that Gubra not only has a premium quality CRO business, but also a premium quality D&P business, particularly within obesity. According to CEO Henrik Blou this is due to Gubra’s highly effective peptide discovery and development technology platform, streaMLine. On the prospect of the obesity market and its potential CEO Henrik Blou didn’t want to speculate on specific markets sizes but expected that the market would continue to grow through the development of many new products for many years to come thereby creating huge commercial opportunities for many players, including Gubra.

Thirdly, on the terminated Bayer partnership, Henrik Blou commented that it had to do with different strategic priorities from Bayer, but according to CEO Henrik Blou the data obtained so far can be used to develop so called healthy weight-loss products instead. This suggests that the termination interestingly opens for making at least as valuable new partnership deals in the future. Generally, Gubra will only take one or two candidates to clinical phases and typically seek a partner for the most promising candidates after no later than phase 1b or 2a.

To summarize, the 3rd Quarter report and the management comments at the event clearly demonstrates a strong business development and high confidence in Gubra’s future. Investors are starting to subscribe to this as the Gubra stock has outperformed the stock market in general but particularly relative to its obesity peers in the latest month, following the company’s raised guidance on 26^th October. 

From a valuation modelling perspective this has some interesting perspectives. If Gubra’s CRO service business is valued according to average CRO peer group multiples (see exhibit 1 below), the implicit value of the obesity focused pipeline in its D&P business has risen by approximately 30% in the latest month. While the obesity space certainly deserves to attract increased interest, in theory the fundamental value of a given pipeline should only move up gradually with the discount rate if there is no new news of development of the individual product candidates in the pipeline. If instead the value of the Gubra D&P business is held constant, the value of Gubra’s CRO service business has implicitly increased by approximately 40% the latest month. As there is no doubt Gubra’s management sometimes feels the CRO business is a bit underappreciated, such higher value of the CRO business probably better reflect the higher growth and profitability levels than peers as this warrants a premium instead of an on-par valuation. For more on valuation perspectives, please see the attached One-Pager: Gubra (one-pager)

Peer-Group valuation:

Disclaimer: HC Andersen Capital receives payment from Gubra for a Digital IR/Corporate Visibility subscription agreement. /Claus Thestrup 1:25 PM 17-11-2023.