The Open Orphan (LSE:ORPH) share price has been on fire over the last 12 months. Since April 2020, the clinical research organisation (CRO) has seen its stock price jump by more than 600%. But what’s causing this growth? Can it continue rising? And should I be adding the company to my portfolio?
The rising share price
To be clear Open Orphan is not a drug developer. It actually, provides services to large pharmaceutical companies like Pfizer and Johnson & Johnson to assist in the execution of clinical trials.
The firm specialises in vaccine and anti-viral testing. This has been in rather high demand recently due to the pandemic. So it’s not surprising that Open Orphan was the first to run Covid-19 human challenge trials under a £46m contract with the UK Government last October.
What’s more, the management team believes that governments and pharmaceutical companies are now investing considerably more capital into vaccine development programmes in order to be better prepared when the next global pandemic hits in the future.
Consequently, the vaccine development market is expanding considerably. And needless to say, this provides many more opportunities for the business and the ORPH share price to grow. Even more so now that it has launched its Disease In Motion platform. This new project allows its clients to access a vast database of clinical, immunological, virological, and digital biomarkers that can significantly accelerate various steps in the drug development process.
Some risks to consider
I’ve previously discussed the highly regulated nature of the pharmaceuticals industry. And while Open Orphan is not directly developing any drugs of its own, it is still subject to the same regulations surrounding clinical testing. These rules create complexities and high expenses. But they also protect patients’ health and safety.
While I believe it’s unlikely, if the firm fails to meet the regulatory standards, there would be severe legal consequences as well as reputational damage. So much so that I doubt its clients would continue using its services, especially when there are a vast number of alternative CROs.
The company performed admirably in 2020 and even reached profitability in the last quarter. But based on the current revenue forecasts of £29m for the year, the ORPH share price looks a bit expensive to me. By comparison, the firm’s current market capitalisation sits at around £290m. Thus placing its price-to-sales ratio at a relatively high value of 10.
The bottom line
The sudden surge in the ORPH share price appears to be strongly linked to shareholder expectations rather than fundamentals. Experience has taught me that this often leads to short-term volatility and a higher level of risk.
However, over the long term, Open Orphan looks to me like a business whose services should never fall out of fashion. Also, I believe its Disease In Motion platform grants it some significant competitive advantages versus other CROs. Therefore, while risky, this is a growth stock I would consider adding to my portfolio.