Open Orphan Plc

Share Buyback or not?

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By Elric Langton | 25th January 2022

My in-box is never short of a PM or two from members; I welcome them. Monday was manic for a number of reasons; Ukraine/Russia, inflation fears, China concerns, all pointing to investors having their wealth transferred to savvier operators. I have seen this game played many times. I have learned not to overreact, in fact, I tend not to watch the bloodbath, I find a dark cupboard and suck my thumb! Seriously, I have learned not to focus on short term market movements, no matter how violent they are, they rarely last and attempts to second guess can leave one looking foolish, if not regretful of one’s actions. Catch your mind back to March 2019! Did you regret kneejerk selling? Well, run companies recover.

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Most of the emails were from Open Orphan Plc (ORPH) investors, for the most part, from relatively new investors that have not experienced market turmoil before. Leaving the market aside, the overriding topic from the more experienced investors was an invitation to badger CEO Cathal Friel into using the growing excess cash to buy back Open Orphan shares or at least take the pesky seller out. The assumption is there is a prominent seller. My view is there are far more retail investors with deeper pockets than some of us may appreciate, and perhaps some are trading the range, which is easy to predict.

So, what about a share buyback? On the face of it, it appears a great idea. Why?

• It would indicate the company has no funding issues

• It would be a shot in the arm for investor confidence

• I would suggest the company is supremely confident for 2022, and why would it not be with 95% of the 2022 forecast booked!

Very few companies are in Open Orphan’s position. It has a growing cash balance, no funding issues, with an ever-increasing infectious disease market.

However, some investors incorrectly view Open Orphan as a COVID-19 stock when it is evident, or should be, the company is anything but. So, perhaps a share buyback would have a limited impact. I would also point to Spectre Systems (SPSY). The share buyback did not help the company one iota. On the contrary, it hindered the company for the very reasons I suggested it would. I.e., Spectra shares were already very illiquid; buying back more stock made them even more illiquid. Many investors complain about traders and their short term view, but this view ignores the benefits traders bring to the market. We should embrace the fact traders help to make a liquid market. There is no trading of Spectra because the illiquid nature results in a wider spread, which kills the need for the shares.

Kite Flying

I believe the best course of action would be to continue to build the cash position rather than squander it on short term traders because ultimately, it would be the traders that see most of any positive benefits from a share buyback. Moreover, the odds of a cash dividend increase is a better way to reward long term investors. Yes, traders would also benefit if they timed their trades, but for the most part, investors benefit more.

Improved margins, cash generative profitable company with no debt in a climate of infectious disease market which is expected to be worth $250 billion by 2025 could prove very enticing to big pharma. In my opinion, this is the end game for Open Orphan, hence the spinouts. The idea appears to be a lean, clean CRO company with no baggage.

We have received the following feedback from Cathal on a share buyback:

We are in a very lucky position to have a good cash balance in both Open Orphan and Poolbeg Pharma. I feel that doing a share buyback now in Open Orphan would be a lazy option would indicate to the investors that we have run out of ideas. If everyone bears with us for a month or two, I am absolutely convinced that both Open Orphan and Poolbeg Pharma will be very different positions, and the share prices will be much improved from upon its current position. 

You may recall in 2015 when I was looking to transition Fastnet Oil & Gas into Amryt Pharma with a c. €15m cash balance, and we had some shareholders telling us to do a share buyback. However, I said in my view a share buyback is when the management team have run out of ideas and by holding onto the cash in Fastnet Oil & Gas, we converted to Amryt Pharma, and I am pretty certain we have given shareholders a vastly better return than just handing some of the cashback to them.

In July last year, we handed £25m of free dividend in specie shares in Poolbeg Pharma to our Open Orphan shareholders. We have guided the market that there are other non-core assets in Open Orphan, and we will spin these off in the months ahead of us. Thus, in summary, I think if our shareholders bear with us, I think they will end in a very good place of the months ahead.

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