Allergy Therapeutics: Third Consecutive Year Of Operating Profits

Allergy Therapeutics (AGY.L) intends to become a top-three player in the global AIT (allergy immunotherapy) market; recent and upcoming regulatory catalysts should support this, driving future revenue growth. The FDA clinical hold lift on Pollinex Quattro (PQ) Grass permits Allergy to go ahead with US plans to secure a partner within the next 12 months. PEI feedback (and potential approval) of the German PQ Grass MAA is expected in Q412, which will allow commercial marketing in Germany and the initiation of filings across Europe under the Mutual Recognition Procedure (MRP).

US: Aiming to close PQ partnership in 8-12 months
The formal process will start imminently with non-confidential PQ data being sent to a shortlist of 25 potential licensing partners. A smaller group, identified in 10-12 weeks, will undertake more extensive due diligence under CDA with the aim of closing a deal within 8-12 months. The partner is expected to fund pivotal trials and to provide sales infrastructure. Best case, PQ Grass could be on the market in three years.

Europe: PEI feedback to expand PQ EU penetration
Germany is the largest AIT market globally; PEI approval of PQ Grass would allow increased promotion but with an immaterial price increase. More importantly, following approval, PQ Grass registrations will be sought under the MRP in new markets where it is not available (eg Scandinavia, Central Europe). The MRP process could take a year, thus PQ could become more widely available by early-2014. Initial feedback on the 10 MAAs filed in 2011 should also start to come through from end-2012 onwards.

Financials: A third consecutive year of operating profit
Gross revenue grew 2%, but net revenue was affected by German market dynamics; ex-German growth was 9% (constant currency). Named patient PQ sales grew 2.8% to £21.4m. Lower overheads supported a third year of operating profit. Net debt of £620k reflected the April balance sheet restructuring. Guidance remains double-digit revenue growth in the next five years and pre-R&D EBITDA c 20% of sales. We forecast lower net revenue growth in FY13/FY14, but continued operating profitability.

Valuation: £55-70m ex-US DCF vs £48m EV
The US is a significant additional opportunity, which is not yet factored into the Edison revenue model. We intend to include this when a US partner is secured and there is visibility on both development timelines and deal economics. Allergy’s EV of c £48m (market cap of £48.8m minus net debt of £0.6m at end-June 2012) compares with an implied £55-70m DCF-based valuation range (12.5% discount rate; 2.5-5.0% TGR).

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