Renovo

Restructured biotech Renovo says it will have plenty of cash left in 2011 when it produces crucial Phase III data for its highly anticipated anti-scarring treatment, Juvista.

The Phase II results, published recently, were very well received in the City and by the medical community, with rare ‘congratulations’ ringing in from the normally acerbic Lancet magazine. Juvista has been signed up to an $825m (£505m) deal with Shire, of which $125m has been paid, with a further $25m still to come on filing with the FDA, $150m on approval and $525m of sales milestones plus royalties in the teens to follow.

With £65m in the bank in September and economic conditions not the most friendly, chief executive Mark Fergusson decided to slash costs, reducing total staff numbers from 180 to 108 to put the discovery business ‘on pause’. He and his board colleagues board have shown their confidence in the business by deferring bonuses and linked their incentives to those crucial Phase III results, firmly aligning their interests with those of shareholders.

The cash burn has been cut so that by the first half of 2011, having completed and reported the results of the Juvista trials and progressed advanced clinical tests for three other treatments, Renovo should still have £25m in the bank. If Juvista were to fail or be delayed, there would still be some healthy financial headroom for manoeuvre.

Recent results for the year to September revealed losses widening from £16.7m to £20.2m, though the City expects this to be limited to below £16m for the next two years. Over the next 18 months, KBC Peel Hunt analyst Paul Cuddon sees ‘downside limited to 35%, and upside being several multiples of the current price’ and has doubled his target price to 80p.

For investors willing to bear some risk, there is significant potential in the shares. Buy.