2017: strong operational cashflow

Alliance Pharma is continuing with its buy-and-build strategy having evolved through 35 acquisitions over a period of 20 years into a profitable, cash-generative, specialty pharma business. The company has a mix of international growth brands – notably Kelo-Cote and MacuShield – and a bedrock of solid local low-growth brands. In a trading statement for 2017, strong sales of its international growth brands have underpinned group sales growth and helped generate strong underlying operational cashflow. The recent acquisitions of Vamousse (third international growth brand) and Ametop (bedrock brand) look set to further enhance future performance.

• Trading update: APH has continued its year-on-year growth trend with 2017 group sales of £103.3m (£97.5m), +6% and in line with our forecasts. At constant currency, sales grew 3%, benefiting from exceptional sales of its two international growth brands Kelo-Cote and MacuShield.
• International brands: The international growth brands were true to their name in 2017 with sales coming in above expectations. Kelo-Cote sales increased 33% to £13.3m (£10.1m), £0.6m better than forecast. MacuShield brought in £7.3m (£5.3m), representing 37% growth and beating expectations by £0.3m.
• Acquisitions: Towards the end of the trading period, APH completed two product acquisitions: Vamousse (head lice) from TyraTech and Ametop (local anaesthetic gel) from Smith & Nephew. Initial considerations of £9.7m and £5.6m, respectively, and inventories of £0.7m, were paid from cash resources.
• Net debt: Strong operational cashflow reduced underlying group debt ahead of expectations. However, end-of-period acquisitions were financed in cash, giving net debt of -£72.3m at 31st December 2017, vs. -£73.9m forecast. Net debt/EBITDA was 2.5x, comfortably within APH’s 3.0x covenant limit.
• Investment summary: Recent acquisitions are forecast to boost APH to generate 8% CAGR in both sales and EPS over the next three years. On the back of this solid performance, the company is expected to continue with its progressive dividend policy. The shares are trading on a 2018E P/E of 14.5x and carry a prospective dividend yield of 2.1%, covered 3.3x.