Alliance Pharma Plc (LON:APH) has adopted a buy-and-build strategy to evolve through a series of 28 acquisitions into a profitable, cash generative, specialty pharma business. The acquisition of part of the dermatology and wound-care products from Sinclair IS Pharma was transformational, broadly doubling the size of the company at a stroke, providing a more internationally-oriented business with the potential to exploit growth opportunities of its existing products. Moreover, it has made the enlarged group a more attractive and credible partner for in–licensing and M&A opportunities.
► FY 2015 results: Underlying sales growth was +5.0%, boosted to +11% reported by acquisitions. Net debt was slightly better than forecast at -£71.5m. However, 2015 numbers were not particularly important; the announcement provided management with the opportunity to update the market on integration.
► Re-focused group: APH now has a more balanced portfolio of actively managed growth products (52%) and a bedrock of established, low growth, cash generative niche medicines (48%), on a pro-forma basis. Growth opportunities are in Dermatology (32%), Mother & Child (16%) and Ophthalmology (4%).
► Internationalisation: Acquisitions in 2015 have also altered the sales mix. On a pro-forma basis. 50% of sales are derived from the UK, 25% of sales from Western Europe and the balance of sales in SE Asia, Eastern Europe and Latam. In addition, the group has more infrastructure in Europe and Asia.
► Risks: Doubling the size of the business creates potential integration risk. However, extensive planning, human resource reallocation and the provision of transitional services with the vendor should help to mitigate this. Individual product risks (eg Nu-Seals) now have much less impact.
► Investment summary: Alliance Pharma Plc shares are trading on a 2016 PE of 11.1x with a CAGR growth rate of ca.9%. The progressive dividend policy offers a yield of 2.6% (2016E), covered 3.5x. After a period of no/low EPS growth the outlook is more favorable following the acquisition of the Sinclair products and with the addition of Diclectin into 2017 when timing of launch becomes clearer.
