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Which small cap pharma firms make a profit?
Typically people invest in small cap biotechnology and pharmaceutical stocks in the hope they can enjoy returns of many times their initial investment as the share price reacts to the discovery of the next wonder drug.
However, stories like these are actually few and far between and lots of companies in this space instead burn through their cash quickly and end up going bust.
Profitable businesses are a rarity in the small cap pharma space. We calculate only seven out of 60 London-listed pharma firms with a market cap of up to £500m are profitable, amounting to a little over 10% of this investment universe.
The fact they are making money provides some comfort on the sustainability of their business model, but does a lower risk approach mean surrendering the prospect of mega-returns?
We calculate the average total return from investing in five of the seven profitable small cap pharmaceutical companies over the last five years is 222.3%, but this is heavily skewed by the exceptional performance of Bioventix (BVXP:AIM). Excluding Bioventix, the average total return would be 84.6%.
Two currently profitable companies have been excluded as these are forecast to tip into a loss.
Redx Pharma (REDX:AIM) is expected to be loss making over the next few years after delivering a £1.6m pre-tax profit in the year to 30 September 2017.
Last year, trading was suspended at Redx after flirted with financial collapse over an unpaid debt and after temporarily stopping a clinical trial after the first patient suffered ‘significant adverse events’.
Drug discovery company Synairgen (SNG:AIM) is also expected to fall into a loss as pre-tax profit is anticipated to fall from £1.6m to a loss of £5.5m in the year to 31 December 2018.
In October, Synairgen’s partner AstraZeneca (AZN) abandoned a Phase IIa asthma clinical trial.
This leaves five companies that are expected to continue being profitable: Alliance Pharma (APH:AIM), Eco Animal Health (EAH:AIM), Bioventix, Anpario (ANP:AIM) and Animalcare (ANCR:AIM). All of this quintet also pay dividends.
BIOVENTIX’S SHARES HAVE RALLIED
Shares in antibodies developer Bioventix have soared from 595p to £29.25 in only five years.
Bioventix manufactures high affinity sheep monoclonal antibodies for use in blood testing machines in hospitals and laboratories worldwide.
One of its biggest sellers is vitamin D antibody called vitD3 .5H10, which is used for vitamin D deficiency testing.
Over the last few years, Bioventix has enjoyed consistently rising sales and profits.
In the year to 30 June, earnings per share beat expectations thanks to higher sales across the majority of its products, prompting broker FinnCap to upgrade its forecasts.
For 2019, sales are expected to be 11% higher at £9m and adjusted operating profit is anticipated to rise 12% to £7.1m.
OUR TOP PICK
Alliance Pharma offers exposure to the pharma sector without taking on drug development risks.
Alliance Pharma acquires and licenses pharmaceutical and healthcare products and delivers these to patients. Approximately half of all sales are generated in the UK with the remaining sales generated equally from Europe and elsewhere in the world.
Concerns over one-off costs from stricter regulations and Brexit preparations have seen the shares give back the strong advance they enjoyed in the first half of the year.
While Alliance Pharma’s cash flow may be negatively impacted by stockpiling to mitigate Brexit, we consider this a short-term set back and still like the business.
Eco Animal Health develops and markets medicines to control disease in livestock such as chickens and pigs, as well as companion animals.
Its antibiotic Aivlosin treats various gut and respiratory diseases in pigs and poultry. This market is worth $1.5bn according to Eco Animal Health, whose product is already licensed in Europe
Eco Animal Health wants to take advantage of consolidation in the global animal health industry by looking for drugs to acquire that fit into its portfolio and specialised markets.
ANIMALCARE IN THE DOG HOUSE
Rival Animalcare supplies animal health products such as bandages, dressings, treatments and microchipping for various animals, including cats, dogs, horses and cows.
It has been a tough year for the company following a profit warning in April as a changing sales mix and competitive pressures hit earnings.
The company is trying to create a pan-European animal health business through the acquisition of Ecuphar, helping Animalcare expand its direct sales operations to seven countries.
POTENTIAL BREXIT HEADWIND FOR ANPARIO
Anpario produces high performance natural feed additives, which are food supplements for farm animals that cannot get enough nutrients from traditional meals.
In the year to 31 December 2017, sales climbed 20% to £29.2m and profit before income tax jumped 27% to £3.4m thanks to strong trading in South East Asia, China, Middle East and the US.
Looking ahead, Anpario plans to invest in growth and potentially seek earnings enhancing acquisitions.
Peel Hunt’s Charles Hall warns of a potential Brexit-related issue for Anpario as half of its goods are purchased from Europe. (LMJ)