The company is one of just a few firms globally providing a key material for mRNA treatments like vaccines, which could provide big returns
Thursday 01 Apr 2021 Author: Yoosof Farah

Investors should buy chemicals firm Croda - a highly exciting stock which should provide substantial multi-year returns for investors.

What’s firing our excitement is the new-found expertise in its healthcare division in so-called lipid nanoparticles or LNPs, which are fatty molecules used in drugs and vaccines to encase and protect the stuff in the drugs and vaccines that help people. Substances like these are sometimes known as excipients.

What does Croda do?

The company manufactures a range of chemicals which are key to many products in a wide range of sectors including medicines, personal care, electronics and devices, building and construction, renewable energy, etc. These products in such diverse sectors provide stability to
its revenue and earnings
in a downturn.

There are few companies in the world that can make LNPs, and Croda is one of them after it bought Avanti Polar Lipids in July 2020. Avanti is one of the world leaders in LNP technology, but it didn’t have the expertise to find a way to be able to manufacture them in a commercially viable way and at scale. Croda has
that expertise.

A CRITICAL ROLE IN MRNA TREATMENTS

Here’s the exciting part. LNPs are crucial for mRNA treatments – like mRNA Covid-19 vaccines including the ones developed by Pfizer and Moderna.

These don’t work without LNPs, because the messenger RNA delivered to the body via a vaccine for example needs protection from the body’s T cells (provided by being encased in a fatty molecule) in order to deliver the message to the body’s immune system to fight diseases like Covid and not get degraded and wiped out before it has the chance to trigger an immune response.

The growth potential here means investors should not get hung up on an apparently expensive valuation, with the shares trading on a 12-month forward price-to-earnings ratio of 31 times, and a price-to-book ratio of 5.6 times.

In November Croda signed a deal with Pfizer to provide LNPs for its mRNA vaccines, and for 2021 Croda said it expects to generate a minimum $125 million (£90 million) in sales from the contract with Pfizer alone.

Croda’s sales were £1.4 billion in 2020. A more typical customer contract size for Croda is somewhere between £1-£3 million according to analysts, who suggest the Pfizer deal could deliver EBIT (earnings before interest and tax) of around £23 million for Croda going by the EBIT margin of 30% in its life sciences division.

One risk to highlight with the stock at the moment is political risk, with reports suggesting exports of its LNPs to Pfizer’s EU factories could be blocked amid a row over vaccines between the UK and EU. However, while there is potential for this to have a short-term impact on sentiment, this is unlikely to have any impact on the huge medium and long-term opportunity for the company.

APPLICATIONS BEYOND COVID VACCINES

The Pfizer contract is an entirely new revenue stream for Croda, and that’s just from one vaccine. There’s a lot more mRNA vaccines in development, as well as several mRNA treatments for other diseases.

Pfizer and Moderna’s vaccines getting regulatory approval has given confirmation for mRNA technology and look like they could well open the floodgates for several more mRNA treatments to be successfully developed.

Messenger RNA technology is seen as a game-changer in the healthcare industry because it means treatments can be created a lot quicker, it has the potential to be used for many diseases, and it means mRNA vaccines can be given to people with compromised immune systems, unlike traditional vaccines. They can also be adapted quicker when mutations to a virus occur.

Croda definitely sees scope to benefit from mRNA outside of the immediate boost from Covid vaccines: ‘While this was a proud moment for all at Croda, the vaccine marks an early use of innovative mRNA technology which is expected to drive future excipient growth well beyond Covid-19 in the prevention of other infectious diseases and treatments, including cancer.’

A ‘MULTI-YEAR BLOCKBUSTER’

Liberum analyst Adam Collins thinks the ‘mRNA platform could be a multi-year blockbuster for Croda’.

He adds: ‘Some in Croda have compared the [Avanti] deal to the acquisition of Sederma in 1996 which has been the fastest-growing and most profitable part of its Personal Care division.’

Collins says it’s quite likely 2021 will be the peak year for the Pfizer vaccine contract as vaccine rollouts across the world hopefully result in herd immunity in many countries later in the year. But he adds there will likely be the need for repeated programmes and potential for mRNA medicine to become bigger in many areas.

Berenberg analyst Sebastian Bray says Croda is working on ‘many pre-clinical and clinical solutions in RNA applications including oncology’, and that the firm also thinks its LNP technology could also play a role in gene therapy (inserting new genes into cells).

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