Potential of Diclectin

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 attracting in–licensing and M&A opportunities. 2017 looks set to be an exciting year for the group. Not only is there solid growth potential in the re-focused group, but approval of Diclectin in the UK also offers significant growth potential.

• Strategy: Since inauguration, APH has adopted a buy-and-build model thereby establishing a strong track record of 32 deals over 18 years to assemble a portfolio of >90 products. It is investing to accelerate growth through three multi-market brands, with infrastructure supported by its passive products.
• Diclectin: The ‘unknown entity’ for the future is the potential of Diclectin, which has been in-licensed for the UK and nine European countries, to achieve its commercial opportunity in morning sickness. For APH territories, this represents an estimated £40m market penetration, equivalent to 40% current group sales.
• Forecasts: Early evidence of success for the multi-market growth brand strategy was evident in the 2016 sales: Kelo-cote (+18%) is APH’s first £10m sales product and MacuShield is up +40%. Sales forecasts have increased, but near-term investment in marketing/infrastructure will temper the profit growth rate.
• Forex: Translation of overseas sales benefited reported numbers by +£4.2m in 2016. This has a knock-on effect in future years which are forecast on a CER basis to provide a true picture of underlying growth. The benefit is not so great at the profit level given the natural hedge with overseas COGS and marketing costs.
• Investment summary: APH is forecast to have a CAGR in EPS of 9% and DPS of 10% over the next three years. The shares are trading on a 2017 P/E of 11.3x and carry a dividend yield of 2.7%, covered 3.2x. Internationalisation of the business coupled with the accelerated growth strategy augurs well and underpins forecasts. Management intends to invest in Diclectin, initially in the UK in 2017 and 2018, given its potential to transform medium-term prospects.