It showed Alliance to be a lean, cash generating machine.
It also provided proof, if it were needed, that chief executive John Dawson and his team were right in late 2015 to spend almost £128mln on the healthcare assets of Sinclair Pharma.
This was a deal that has helped catapult Alliance’s market capitalisation from circa £90mln to almost a quarter of a billion pounds.
It also provided the business with a European network.
A year-and-half on from the transaction’s completion we are seeing in full Technicolor its impact on both the profit and loss account and the balance sheet.
Sales grew 8% in the six months to June 30 to £50.3mln.
Free cash flow was £11.1mln, or around £22mln on an annualised basis, and net debt had fallen by £12.7mln to £63.4mln.
“It demonstrates that the business model we have here, which is asset light - we outsource the capital intensive things like manufacturing and logistics - does really give a high conversion of operating profit into free cash flow,” CEO Dawson says.
Growth by acquisition
The company has grown via a series of well-judged acquisitions (33 in 19 years, reveals Dawson) and Alliance now owns around 90 pharmaceutical and healthcare products and sells into over 100 countries.
In that portfolio it has what it calls ‘local hero’ lines, which sell well in a particular territory or country. The crown jewels are its ‘global stars’, which are managed and marketed centrally and, as the name suggests, are sold internationally.
They are Kelo-Cote, a scar reduction spray and gel, and MacuShield, for an eye condition called age-related macular degeneration.
The former saw its sales increase 52% in the first half to £6.2mln, while the latter’s advanced 67% to £3.4mln. In other words they showed their ‘star’ quality.
There was supposed to be a third international product, Diclectin, for nausea during pregnancy, but it failed to gain UK regulatory sign-off here in the UK.
While a blow to Alliance’s plans, the short-term financial impact will be negligible, analysts say.
Dawson believes the heavy marketing spend that would have been required to promote the new treatment can be usefully directed elsewhere, although he stresses his team hasn’t decided how the freed-up cash will be invested.
It leaves Alliance looking for a Diclectin replacement, which is likely to come via acquisition or in-licensing rather from within the current portfolio.
With net debt falling towards two-times underlying earnings (EBITDA) by the year-end so the headroom grows for more well-judged purchases.
“Our approach is we will recycle cash generated on bolt-on acquisitions,” says Dawson.
“As well as organic growth we have as another part of the business model growth by bolt-on.”
The shares, which had a little hiccup towards the end of last month when the Diclectin decision was announced, have advanced 15% over the last year. It is also worth pointing out the company pays a tidy dividend that provides a yield of around 2.5%.
However, it is probably fair to say the current market valuation fails to fully capture the full potential of the business.
Peer group analysis suggests Alliance Pharma should be valued on an enterprise multiple (EV to EBITDA) of around 13.5 times. It is currently trading two percentage points below that benchmark.
Dawson skilfully skirts tricky questions on valuation, but makes this observation: “I think the challenge is becoming known and established and recognised for success.
“We believe the market is re-adjusting for the better growth prospects we’ve got.”