Chippenham-based Alliance Pharma (APH:AIM) is ideal for investors who want exposure to the pharmaceutical industry without the risks of developing new drugs.

The company acquires and licenses pharmaceutical and healthcare products and delivers these to patients.

The shares look cheap against its forecast growth. Based on consensus forecasts the company trades on a price-to-earnings to growth ratio for 2018 of just 0.58 times. Anything below 1.0 can imply good value on this metric.

Alliance Pharma sells its products to over 100 countries through direct channels, joint ventures and a large distribution network. Half of its sales are generated in the UK, with a quarter in Europe and the remaining 25% generated elsewhere in the world.

It drives growth through targeted marketing for what it describes as its ‘bedrock’ products. These typically require modest promotion to maintain meaningful sales due to limited competition.

Examples include Haemopressin to treat extremely dilated sub-mucosal veins and Flamma, a product that soothes skin after sunburn.

‘Bedrock’ products comprise half of overall sales and provide a reliable source of cash flow to invest in acquisitions or marketing. Additional growth comes from bolt-on acquisitions where it can take drugs being produced by smaller firms and channel them through the company’s wider distribution footprint.

The company recently acquired rights to topical anaesthetic gel Ametop from Smith & Nephew (SN.) for $7.5m and worldwide rights for TyraTech’s (TYR:AIM) head lice treatment Vamousse for $13m.

The deals are expected to boost earnings immediately, with Numis analyst Sally Taylor having nudged anticipated earnings per share for the year to 31 December 2018 up 3% and by another 4% for the following year.

There is the odd fly in the ointment. Nausea treatment Diclectin failed to get marketing approval from the UK’s regulator, the Medicine and Healthcare Products Regulatory Agency (MHRA) in August. This is unlikely to have any impact on financial forecasts in the near term.

Discussions between the drug’s licensor Duchesnay and the MHRA are expected to continue into 2018.

We are reassured by the group’s strong cash flow generation, which is forecast to increase by more than 10% in 2018 to £23.7m based on FinnCap’s forecasts. (LMJ)

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