Alliance Pharma Plc (LON:APH) 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 looks set to be an exciting year for the group: not only is there solid underlying growth potential in the re-focused group, but also regulatory approval of Diclectin offers further significant growth potential.
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 multi-market brands, with infrastructure supported by its passive products.
2016 results: Reported sales of £97.5m were boosted by acquired products and forex, with underlying growth of +7.4%. Gross margins were lower largely due to the acquired portfolio. Weak sterling negatively impacted net debt to -£76.1m; loan reduction in 2017 will benefit from cash from the Sinclair warranty.
Growth brands: About half of marketing spend is focused on key international growth brands: Kelo-Cote became APH’s first product to pass the £10m sales mark; strong growth also seen with MacuShield; and once approved in UK and EU, Diclectin is also expected to become an ‘International Star’ brand.
Risks: Alliance Pharma has a diversified strategy that includes International Star brand growth potential supported by Bedrock products. However, as demonstrated with Kelo-stretch, established sales patterns are not guaranteed, and the newly in-licensed Diclectin is an unknown entity.
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 11.6x and carry a dividend yield of 2.7%, 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).
