Alliance Pharma (LON:APH) has expanded its product portfolio with the acquisition of two skin care brands.

This morning it revealed the deal to acquire the Quinoderm and Ceanel brands from Ferndale Pharmaceuticals Ltd for £1.5m in cash. Quinoderm is a treatment for acne and Ceanel is a shampoo treatment for scalp psoriasis. 

The two brands contributed sales of £600,000 in the twelve months to September 30 2011.

"We are delighted to announce this acquisition, which extends our Dermatology portfolio.  Quinoderm complements our existing product Rizuderm (isotretinoin), a treatment for severe acne acquired in September this year,” said chief executive John Dawson.

"Today's acquisition, which represents our third transaction this year, is expected to be earnings enhancing in 2012. We continue to evaluate further opportunities to broaden our product portfolio."

The deal is being funded via a £20 million revolving credit facility which was set up last November. 

The facility was established to support the group’s acquisition strategy. Today it said that £6.5 million of the facility has now been used.

Numis Securities today upgraded its forecast for Alliance Pharma (LON:APH) after yesterday’s interim results from the speciality pharmaceuticals firm showed it increased its first half sales to £24.4 million from £23.4 million in H1 2010.

Numis upgraded the figures slightly, with its revenue estimate for 2011 increased by seven per cent to £43.3 million but leaving pre-tax profit unchanged at £10.7 million. Its new earnings per share estimates for 2011 and 2012 have been increased to 3.3 pence for both years, while its dividend estimate for 2011 has been upped to 0.75 pence per share (from 0.64 pence).

Yesterday, Alliance reported that its operating profit for the first six months to June 30 was £7.8 million, compared with £9 million in H1 2010, while pre-tax profit was greater at £7 million (H1 2010: £6 million). Earnings per share came in at 2.21 pence (H1 2010: 1.79 pence) while the firm also declared a 47 per cent increase in its interim dividend to 0.25 pence per share.

The firm said that results for H1 2011 had inevitably been affected by the slowdown in sales of its Deltacortril enteric-coated gastro-resistant tablet that is used for a wide range of disorders; Deltacortril is facing increased competition after Teva launched a rival product product last autumn. But Alliance pointed out that the results show how profits it has enjoyed from Deltacortril during the past two years have been put to good use, with the firm investing in expanding its brand portfolio while also reducing debt.

Dermatology and oncology portfolios are both growing well, Alliance added, which is reflected by underlying sales growth of 29 per cent. 

The firm said that despite market changes affecting Deltacortril 2011 is “still expected to be the second-best year in Alliance’s history” since the underlying business continues to grow well.

“We are pleased to have delivered growth in sales and pre-tax profits in the first half of the year despite the additional Deltacortril competition,” said Alliance’s chairman, Michael Gatenby. “The 47 per cent increase in dividend demonstrates our continued confidence in the long-term cash-generating ability of our business.”

Alliance also announced another acquisition yesterday, to add to its acquisitions of Anbesol and Ashton & Parsons in April. It has bought the UK marketing rights to six products from Beacon Pharmaceuticals for £2.4 million.

Today, Numis commented: “Deltacortril’s woes have continued, with increased competition, price erosion and a market slowdown in coated prednisolone. However, the company's H1 presentation was highly transparent about this issue, which should engender confidence in the management team.”

Numis has retained its ‘buy’ rating and its 37 pence price target for the shares.

Interim results from Alliance Pharma (LON:APH) showed that the speciality pharmaceuticals firm improved first half sales to £24.4 million from £23.4 million in H1 2010.

Operating profit for the first six months to June 30 was £7.8 million, compared with £9 million in H1 2010, while pre-tax profit was greater at £7 million (H1 2010: £6 million).

The firm said that results for H1 2011 had inevitably been affected by the slowdown in sales of its Deltacortril enteric-coated gastro-resistant tablet that is used for a wide range of disorders; Deltacortril is facing increased competition after Teva launched a rival product product last autumn. But Alliance pointed out that the results show how profits it has enjoyed from Deltacortril during the past two years have been put to good use, with the firm investing in expanding its brand portfolio while also reducing debt.

Dermatology and oncology portfolios are both growing well, Alliance added, which is reflected by underlying sales growth of 29 per cent. 

The firm said that despite market changes affecting Deltacortril 2011 is “still expected to be the second-best year in Alliance’s history” since the underlying business continues to grow well.

Meanwhile, Alliance also announced another acquisition today. It has acquired the UK marketing rights to six products from Beacon Pharmaceuticals for £2.4 million.

Alliance is funding the acquisition by drawing a loan from a £20 million revolving credit facility that it arranged in November 2010, bringing the current utilisation of the facility to £5 million.

According to Alliance, for the 12 months to 30 April the six Beacon products it has bought had combined sales of approximately £2 million and a gross profit of £0.9 million, with the bulk of these sales and profit relating to Rizuderm (a treatment for severe acne).

John Dawson, Alliance’s chief executive officer, said that the acquisition would be immediately earnings enhancing, while the firm continues to evaluate further acquisition opportunities that will complement Alliance’s organic growth.

Speciality pharmaceuticals firm Alliance Pharma (LON: APH) said that recent trading has been in line with management expectations ahead of its first half results, which are due in September.

Sales for the six months to 30 June were approximately £24.4 million, which is £1 million ahead of the first half of 2010.

As the firm has previously reported, sales of Deltacortril – Alliance’s gastro-resistant tablets that are used for a wide range of disorders (such as allergies, rheumatic disorders and autoimmune disorders) – have been affected by greater competition. But Alliance said that its promoted portfolios of dermatology and oncology products continue to grow well, particularly Hydromol (its skin care treatment), which grew 26 percent during the first half when compared with H1 2010.

Following Alliance’s April acquisition of the brands Anbesol and Ashton & Parsons from Reckitt Benckiser, the firm said it was pleased with the demand shown for these products during its first two months of ownership.

Anbesol is used to treat mouth ulcers, teething pains and denture irritation, while Ashton & Parsons is used in infants for the symptomatic relief of pain and stomach upset caused by teething. Alliance paid £2.6 million cash to acquire the two brands.

Last year Alliance increase its revenue by 60 percent to £49.9 million during the 12 months to 31 December, while its pre-tax profit more than doubled to £12.9 million (2009: £5.7 million).  

The company’s interim results are due on 7 September.

Alliance Pharma (LON:APH) has renewed its agreement with Sanofi’s vaccines division sanofi pasteur for up to seven years for the distribution of bladder cancer treatment  ImmuCyst in the UK and Ireland.

Sales of ImmuCyst, a treatment for non-muscle-invasive bladder cancer, reached £3.7 million in the 12 months to 30 April 2011. The product has been distributed by Alliance's Cambridge Laboratories business unit since the acquisition of trade and certain assets of Cambridge Laboratories in February 2010.

The renewal triggers the payment of £2.1 million for Cambridge Laboratories.

City broker finnCap has recently revised its forecasts for the company on the back of its strong 2010 report. The results also triggered a target price increase by another broker Numis, which reiterated its “buy” recommendation for the stock and upped its target from 45 pence and 48 pence, representing a substantial premium to the current price of 34.25 pence.

FinnCap was a little more conservative, retaining its price target of 41 pence, however the broker upped its 2011 forecasts in response to the full year report.

The broker now expects to see revenues of £44.9 million, up from its previous projection of £43 million, while the 2011 operating profit and pre-tax profit forecasts have been raised from £12 million to £12.8 million and from £10 million to £10.8 million.

FinnCap commented on today’s news, saying that the extension to the distribution agreement ahead of its scheduled expiry at the end of this year removed any element of uncertainty. Analyst Keith Redpath noted that the deterred payment of £2.1 million had already been included in its forecasts.

Both the “buy” recommendation for the stock and the 41 pence price target were retained.

Dr Keith Redpath, pharmaceutical and biotechnology analyst at finnCap, believes the stock represents good value - today it is trading at 30.25 pence per share - and he rates it as a ‘buy’ with a 41 pence target.

“Alliance Pharma’s business is a deceptively simple one,” Redpath said in a note to clients.

“It acquires or licenses rights to established pharmaceutical products that have been on the market for a number of years. It then manages the outsourced manufacturing, distribution and sales of these. 

“Generally the brands have been off-patent for many years and if a generic was to have entered the market, it would have done so by now.”

He adds: “The business is a readily scalable business, as serial acquisitions have shown, and profitable.”

Alliance has a portfolio of 57 drugs across a broad range of therapeutic areas - including ‘Anti Infective’, Cardiovascular, Obstetrics & Gynaecology, Toxicology, Oncology, Rheumatology and many others.

Redpath notes that the Alliance product portfolio provides gross margins in excess of 55 percent and it has operating margins of about 30 percent, thanks to its low cost business model. Furthermore he reckons that it is very operationally geared and the company could add additional products with little increase in operating cost.

Brokers have been keeping a close eye on the stock during 2010. In December, finnCap stated that Alliance Pharma was trading at a discount to its peers and an increase of nearly 30% would bring it in line, initiating coverage with a 'buy' recommendation and a price target of 41 pence.

Among the bullish points noted in the report were that Alliance is sufficiently cash generative to cover its debt and the low economic risk, as the key products in Alliance’s portfolio of 57 are often the only drugs available for the indication with no generic alternative.

FinnCap accurately predicted Alliance Pharma to make £50.3 million in sales revenues in 2010.

Alliance Pharma could soon be looking to expand after raising its banking facilities to £44 million in November.
The company buys low risk, cash generating drugs that are off patent and require no marketing and promotion spend to support sales.

The average age of the company’s top ten products is around 37 years. Their maturity means the effects of any previous sales and marketing efforts have washed through the system.

They are prescription pad staples the market for which is too small to interest the generic drug producers and of marginal value to big pharma.

Alliance Pharma’s full year results will be released on 23 March 2011.

The broker today initiated coverage of the company, giving it a 'buy' recommendation with a price target of 41pence compared to the current 32 pence.

The broker ran a comparison to other UK-listed speciality pharmaceutical companies on profitable ratios in working out the valuation.

Among the bullish points noted in the report were that Alliance is sufficiently cash generative to cover its debt and the low economic risk, as the key products in Alliance’s portfolio of 57 are often the only drugs available for the indication with no generic alternative.

“Consequently we believe the risk of downward price pressure from the Health Service is low,” said finnCap.
The company currently has a debt of £30.6 million and a market cap of £75.4 million.

It was noted that the portfolio of products provides gross margins of over 55% and the low operating cost business model results in operating margins of about 30%.

FinnCap said that company is very operationally geared and additional products and revenue can be added to the business with little increase in operating cost.

Furthermore, there are no projects in the portfolio that require expensive clinical trials and consequently there is no risk of a product failing in development.

Alliance Pharma paid maiden dividends in the last financial year, which finnCap saw as a “demonstration of management’s confidence in the future of the company, and we forecast a progressive growth in the dividend”.

FinnCap is forecasting Alliance Pharma to make £50.3 million in sales revenues in 2010 and £43 million in 2011 compared to £31.2 million.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) are projected to rise from £11.4 million in 2009 to £16.2 million in 2010 and then decline to £12.9 million in 2011.

Late last month, Alliance Pharma increased its banking facilities to £44 million for possible acquisitions.

It has negotiated an effective interest rate of 4 per cent with Lloyds TSB Corporate Markets. 

The speciality pharmaceuticals group is taking on an £18 million loan repayable over four years, while it has also agreed a £20 million revolving credit facility (RCF) and a £6 million working capital fund. 

It is drawing around £2 million down from the RCF, leaving an £18 million war-chest for deals.

The cost of terminating interest rate swaps and writing off loan cost will lead to a £1.8 million exceptional charge.

New interest rate swaps have been put in place to hedge around 75 per cent of net bank debt at current market rates.

Finance director Richard Wright said: "We are delighted to put in place these new facilities.  

“They deliver a significant reduction in cost, an extended maturity profile and leave Alliance well placed to fund acquisition opportunities as they arise."

Separately, Alliance confirmed that a second generic competitor to steroid pill Deltacortrill was launched this week. 

It also revealed that pre-tax profits before exceptional items are expected to be in line with market forecasts. 

The Alliance Pharma business model is very simple. Founder John Dawson and his team buy low risk, cash generating drugs that are off patent and require no marketing and promotion spend to support sales.

The average age of the company’s top ten products is around 37 years. Their maturity means the effects of any previous sales and marketing efforts have washed through the system. 

They are prescription pad staples that are too small to interest the generic drug producers and of marginal value to big pharma.

Britain’s changing demographics (the baby boomers are now growing older) mean that rather than flat line, sales of these “non-promoted products” grow at an average annual rate of 3 per cent.

"The business model is buying low risk cash generating assets that are prescription medicines," chief executive Dawson told Proactive Investors recently.

"We covet them as much for their financial performance as their medical performance."

With such a pedestrian rate of organic growth, acquisitions are important - the company has made 18 in the last 12 years.

Cambridge Labs, the last of these buys, was its biggest at around £15 million.  The deal brought in Immucyst, a therapy for bladder cancer. Its sales were £3.5 million last year and are growing 20 per cent a year – so it doesn’t seem to fit the Alliance mould. 

And it is one of two major products Alliance actively promotes. The other is Hydromol, used to treat eczema.

This is a deliberate policy, Dawson says. 

"If you have a business model that is dependent on acquisitions and you don’t make an acquisition, where’s the growth coming from? You need some internal growth somewhere," the Alliance chief executive explains.

"In both these instances if we find new acquisitions or in-licence opportunities that fit within those therapy areas, we can put them through the marketing machine.

"We are a speciality pharma company. But we are different from most in that we have this bedrock of mature products that don’t need promotion.

"Most speciality pharma companies rely on growth and therefore have much higher marketing spends relative to their sales."