Alliance Pharma

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From Shares Magazine

Chippenham-based Alliance Pharma (APH:AIM) is arguably a lower risk play in the pharmaceutical sector with a buy and build strategy that continues to deliver strong growth.

It may interest anyone who wants exposure to the industry but doesn’t want to invest in a company at the mercy of drug trials. Alliance does not undertake any drug development. Instead, it buys specialty drug products and sells them in more than 100 countries via direct channels, joint ventures and a network of distributors.

Sales, pre-tax profit and the dividend are all growing. However, this is not a risk-free investment. For example, the £250m pharma business suffered a setback in July when its nausea treatment Diclectin failed to receive marketing approval from the UK’s regulator, Medicine and Healthcare Products Regulatory Agency (MHRA).

Discussions between the drug’s licensor Duchesnay and MHRA are expected to continue into the next year. ‘Diclectin is a much-needed product as there is no licensed medicine for treating nausea and vomiting of pregnancy in the UK,’ says Alliance.

Cash generative and profitable

In the first half of 2017, Alliance generated £11.1m in free cash flow and hiked the dividend by 10% to 0.44p.

Over the same period, underlying pre-tax profit rose to £11.9m from £11.7m, a slightly restrained performance as currency movements affected the cost of goods and operating costs.

The company made £22.2m pre-tax profit in 2016. Investec estimates that figure will rise to £23.7m in 2017, £26.4m in 2018 and £29.1m in 2019.

Sales in the first half of 2017 from scar gel Kelo-cote and food supplement MacuShield have surged 52% to £6.2m and 67% to £3.4m respectively thanks to growth in new territories and existing outlets.

Half of Alliance’s sales are made in the UK, with 25% in Europe and the remaining 25% of revenues generated globally.

Buy and grow strategy

Investec analyst Andrew Whitney believes Alliance is currently in delivery mode and is de-leveraging ahead of the next phase of its ‘buy and grow’ strategy, which could drive outperformance.

He flags the acquisition of Sinclair’s healthcare products business in 2015 as important as it ‘materially increased the breadth of its portfolio’.

Alongside organic growth, Alliance focuses on bolt-on acquisitions by buying products that have a good history of stable sales.

It also targets growing products from smaller entrepreneurial companies that need a larger business with a wider distribution footprint for further growth.

Alliance Pharma currently trades on 12.4 times forecast earnings per share for the year to 31 December 2018.