International brands driving performance

Alliance Pharma (APH) is a profitable, cash-generative, specialty pharma business. The proportion of sales generated from higher margin international star brands is rising rapidly, and will be boosted by the recent acquisition of Nizoral in APAC, and UK approval and launch of Xonvea for nausea and vomiting in pregnancy, where conservative management has failed. Investment behind these brands together with compliance with new regulatory directives will limit short term growth but positions the company well for the medium term. APH is cash-generative allowing it to pay down debt at a fast rate. Meanwhile, it offers a dividend yield of 2.0%.

• Strategy: Since inauguration, APH has adopted a buy-and-build model, with 35 deals over 20 years assembling a portfolio of more than 90 products and establishing a strong track record. It is accelerating growth through investing in multi-market brands, with infrastructure supported by its ‘local’ brands.
• Interims: Underlying sales, excluding acquisitions, grew 4% to £54.5m (£49.4m), driven by international brands: Kelo-cote (+84%) and MacuShield (+23%). Operating costs reflected continued investment in growth brands, leaving underlying EBITDA and EBIT in line with 1H’17. Net debt at 30 June was £86.3m.
• Growth brands: APH continues to evolve and will now report on ‘international star’ brands and ‘local’ brands (formerly bedrock and local heroes). In 1H’18, international stars represented 32% of sales, and will be boosted from 2H’18 by the inclusion of Nizoral and, to a lesser extent, Xonvea.
• Risks: APH is working to ensure that all products are compliant with new regulations being introduced over the next two years. This, combined with Brexit-related costs, is expected to increase costs annually by £0.7m, with one-off costs of ca.£0.8m in 2019.
• Investment summary: Recent acquisitions look set to boost APH’s underlying CAGR to 16% in sales and 10% in EPS over the next three years. On the back of this strong performance, the company is expected to continue with its progressive dividend policy. The shares are trading on a 2018E P/E of 15.4x, falling to 14.1x in 2019E, and carry a prospective dividend yield of 2.0%.