International brands driving growth

Alliance Pharma’s buy-and-build strategy to evolve into a profitable, cash generative, specialty pharma business is clearly bearing fruit. Acquisition of the dermatology and woundcare products from Sinclair Pharma was transformational, doubling the size of the company and providing a more internationally-oriented business. The enlarged group is also a more attractive and credible partner for in– licensing and M&A opportunities. 2017 is building on the foundations laid in 2016 with international growth brands driving performance, which will be boosted by the upcoming regulatory approval of Diclectin.

• Strategy: Since inauguration, APH has adopted a buy-and-build model, with 33 deals over 19 years assembling a portfolio of >90 products and establishing a strong track record. It is accelerating growth through investing in three multimarket brands, with infrastructure supported by its passive products.
• 1H’17 sales: In a trading update to the market, APH stated that underlying first half sales grew +2.6%, boosted at the reported level by currency (+£2.6m), to £50.3m (£46.4m). Key growth drivers, Kelo-Cote (+33% CER) and MacuShield (+65% CER), both exceeded expectations
• Cashflow: The strong cash generation from operations seen in 2H’16 has continued through 1H’17 (+£11.1m), which was boosted further by the £4m warranty receipt from Sinclair Pharma. Net debt at the end of the period, at -£63.4m, was about £1.2m better than forecast.
• Risks: APH has a diversified strategy that includes International Star brand growth potential supported by Bedrock products. However, established sales patterns are not guaranteed and can be prone to unusual distributor buying patterns. Timing of approval of Diclectin is entirely in the regulators hands.
• Investment summary: Although APH is forecast to have +8% CAGR in sales over the next three years, medium-term EPS growth will be held back by the investment in marketing. The progressive dividend policy is expected to remain. Shares are trading on a 2017 P/E of 12.6x and carry a dividend yield of 2.5%, covered 3.2x. Launch of Diclectin has the potential to transform medium- to long-term growth prospects (only UK launch costs included in current forecasts).