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Lipoxen: Initiate Coverage at 11.25p with a Target Price of 30.7p and Recommendation of Buy

Lipoxen is an AIM listed UK biopharmaceutical company that uses proprietary and comprehensively patent protected technologies to discover new therapeutic candidates as well as to develop or re-profile and reformulate existing drugs in the fields of vaccines and protein drugs.

The company’s core discovery and development technologies are PolyXen® for protein drug delivery and ImuXen® for DNA, protein and polysaccharide vaccines. These technology platforms use naturally occurring compounds within the body to act as each drug candidate’s delivery mechanism, which improves efficacy and targeting while minimising rejection.

Despite its modest size, Lipoxen has worked with some of the leading global biopharma groups on a very wide range of drugs. Lipoxen has drug development collaborations with shareholders, Serum Institute of India Ltd (India’s largest biotech company and one of the world’s largest vaccine companies) and Russian companies, FDS Pharma and Pharmsynthez. The clinical data generated through these collaborations on potential blockbuster candidates have been very encouraging. Also Lipoxen has a US$75 million license agreement with the global pharmaceutical giant, Baxter International (the company’s 3 rd largest shareholder), for making bio-superior blood clotting agents (Factor VIII) and two additional drug candidates.

Moreover, Lipoxen has achieved all this with limited recourse to equity capital markets and we estimate the company held about £1.0 million at the end of the 2010 financial year.

Valuing any biopharma is a highly speculative exercise because they are usually a bet on one or two very early stage drug candidates making it to market or securing a late-stage clinical trial partner before the company runs out of cash. Lipoxen, however, is different because its management team is financially and commercially focused; its technology are generating increasing numbers of candidates in therapeutic areas of high unmet need; and it operates a low risk clinical development strategy.

Nevertheless, we have adopted a cautious approach to prospective revenue generation in our model that extends out to 2021, and after applying very demanding discount rates (WACC of 20% and 40% discount rate to generate the NPV, which is then further discounted by 60% for investment risk) indicates an initial target price of 30.7p per share. Therefore, with the shares trading at 11.25p we initiate coverage with a BUY recommendation.

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