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Investors are underpricing Alliance Pharma's growth potential
Pharmaceutical specialist Alliance Pharma (APH:AIM) runs an asset-light business model, making it unique in the sector and very cash generative.
Alliance Pharma owns or licenses over 90 pharmaceutical and healthcare products and sells them in more than 100 countries. Unusually the company outsources all the capital intensive activities such as manufacturing, storage and logistics.
Management focuses on the activities they believe will deliver the greatest value, such as marketing and product sourcing. Expertise in medical regulation matters are kept in-house.
Over the past 20 years the company has grown through selective promotion of what it calls ‘star brands’ as well as making 35 acquisitions.
It has built a balanced portfolio of products with growth potential and stable cash-cow characteristics. Alliance Pharma is not exposed to research and development risk as all of its products are proven and well established.
The company splits its business into international star brands and local brands. The star brands are predominately healthcare products with international reach offering significant growth.
The fastest growing brand is Kelo-Cote which was purchased in 2015 from Sinclair Pharma. This product is a patent-protected silicone gel treatment for keloid and hypertrophic scars, sold in more than 65 countries. The scars treatment market was valued at $4.8bn in 2017 and is expected to grow around 10% per year for the next six years.
Since purchase the company has seen a three-fold increase in revenue, driven by marketing support, the launch of a global website and promoting best practice in scar management.
For the first six months of 2019 Alliance Pharma reported like-for-like revenue growth of 21% for the star brands to £30.9m, representing 44% of total sales. Eye supplement product MacuShield was the standout performer growing revenue by 27% to £4.7m.
The local brands portfolio includes established therapeutic niches with strong heritage, albeit without the potential to be marketed internationally. Collectively they generate significant profit and cash flows because they do not require a lot of promotional spending.
This dynamic undoubtedly contributed to the 40% increase in the firm’s first half free cash flow of £14.5m, which allowed the company to reduce net debt by £11.7m to £74.1m.
The company grew its total revenue by 29% which helped push earnings before interest, tax, depreciation and amortisation (EBITDA) up 34%. Underlying earnings per share grew by 15% and the dividend increased by 10%. Leverage fell to 1.95 times debt-to-EBITDA.
Given the company’s strong track record of revenue and profit growth, which have averaged 21% a year for the last five years, the share rating is too cheap, trading on only 13.4 times next years’ earnings.