The outsourcing expert is fighting fit to grab market share while rivals struggle
Thursday 16 Jul 2020 Author: Martin Gamble

The global healthcare pandemic has increased awareness of diseases and the threat they pose to public health as well as economic activity. This has spurred the pace of drug discovery with an increasing number of new drugs in trials and provides a supportive backdrop for UDG Healthcare (UDG) to capture growth.

UDG provides outsourced services to over 300 healthcare companies and smaller biotech firms. It is active across the whole spectrum of health services such as helping firms bring new products to market and supporting patients to access medications.

It has two divisions: Ashfield provides advisory, communications and commercialisation services and generates just over two thirds of group operating profit, while Sharp is a leader in contract clinical trials, manufacturing and packaging.

Investment bank Berenberg estimates that roughly 20% of the company’s profits are affected by the pandemic, relating to sales reps’ work restrictions and face-to-face meetings. Sales reps have since come off the government support schemes in Belgium while Germany is showing signs of improvement and the same is expected in the UK later in the summer.

The 80% of the business not affected is showing good demand although lower expected levels of activity led the group to withdraw its earnings guidance for the rest of the year.

Low leverage will allow the company to continue deploying $100 million to $200 million on two or three acquisitions a year. Net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) is 0.3-times.

UDG is classified by Berenberg as a ‘best in class’ company. It says such businesses can trade on higher than average valuations, but they can scale and compound high returns over many years, thus deserving a premium rating. UDG trades on 20 times forecasts earnings for 2021.

Operating profit has grown at a compound annual growth rate of 14% over the last five years. Before the pandemic management targeted underlying operating profit growth of between 5% and 10% a year with supplemental acquisitions on top.

The total addressable market across all segments is estimated to be around $30 billion a year and with UDG’s 2019 revenues of $1.3 billion implying a market share under 5%, there is plenty of runway to maintain good growth and deliver shareholder value.

‘Healthcare spending will increase as awareness in defeating diseases and combating health crises rises,’ says Berenberg. ‘Pharmaceutical companies will increasingly rely on outsourcing partners to manage complexities and improve flexibility.

‘UDG’s strong balance sheet will leave management with sufficient power to further consolidate the market. Smaller, more inefficient and more levered competitors will likely struggle over the coming months, providing UDG with opportunities to deploy capital for the right acquisitions.’

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