After revenue jumps 60%, is Oxford Biodynamics plc a buy?
There are many early-stage biotech companies trading on AIM today that don't deserve a second glance. Most of these highly speculative companies will never reach the production stage and will certainly never reach profitability.
Oxford Biodynamics(LSE: OBD) does not fall into this category. Shares in Oxford first started trading on AIM at the beginning of December last year, after the company was spun-out of the University of Oxford. The company is focused on epigenetics and its technology analyses biomarkers in the blood to help pharma companies work out which patients are likely to benefit most from a particular drug.
Oxford raised £20m through the public offering, of which £7.1m found its way to the company's coffers, giving it working capital for the next two to three years. The cash will help the group expand its offering and break into the US market.
Unlike other early stage biotechs, Oxford is already revenue-generating, getting its income through contracts with pharmaceutical groups. And today's results from the group show that revenue jumped nearly 60% last year from £0.7m to £1.1m.
Unfortunately, the group is still loss making and reported an operating loss of £2.3m for the year. After adjusting for one-off IPO costs the operating losses amounted to £1.9m, up from a loss of £1.6m the year before.
Exciting year ahead
After a transformational 2016, 2017 is expected to be a year of growth for Oxford. As the company looks to expand its offering, pre-tax losses are expected to rise to £4.1m for the next fiscal year,but this should lead to growth. Analysts have pencilled in revenue of £3.1m for the fiscal year ending 30 September 2018 and a pre-tax loss of £1.7m, around 60% better than the year before.
As with all early stage biotechs, Oxford is a high-risk/high-reward investment. The company may see sales and profits explode over the next few years but it may also struggle to build the customer base required to achieve escape velocity.
Nonetheless, it seems there is demand for the company's offering. The group recently signed a pilot development agreement with Singapore-based EpiFit, to analyse the effect of EpiFit's fitness regimes. If successful the agreement could translate into a multi-year contract but as of yet nothing is certain.
Still, Oxford has several years of working capital in the bank after its recent IPO, giving the group plenty of headroom to get the business up and running.
A safer buy?
As a small-cap company Oxford is a speculative investment -- but so, to some extent, is the company's much larger sector peer AstraZeneca(LSE: AZN).
2017 promises to be a make or break year for Astra as the company awaits the results of major clinical trials this year. The biggest one, called 'Mystic', involves two ground-breaking lung cancer drugs. If these tests prove that the treatments are effective, they could produce more than $6bn per annum for Astra when they enter production.
Astra is expected to report a 6% slump in revenue and a 7% fall in profits for 2016, so the group needs some positive test results to reassure investors about its outlook.
The bottom line
After reporting a 60% increase in revenue Oxford Biodynamics may be a 'buy', but the company is a highly speculative bet. For the risk adverse investor, Astra might be a more sensible purchase.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.