Alliance Pharma: Acquisition strategy continues to pay off

Shares in speciality pharmaceuticals company Alliance Pharma (LON:APH) have done very well since late 2008, when the banking crisis not only led to the demise of Lehman Brothers but also severely knocked the confidence of stockmarket investors worldwide.

Many shares, particularly on London’s Alternative Investment Market, plunged to rock bottom back then and Alliance Pharma was no exception – having fallen to 2.75 pence by Christmas of that year (an all-time low).

Canny investors who bought into the shares at that time would have enjoyed gains of more than 1,280 percent had they held on for 23 months and sold on 9 November 2010. But even now the shares – currently trading at 26.5 pence each – are significantly ahead of their nadir in December 2008.

Alliance’s shares have done well since the height of the banking crisis not only because of greater confidence in stockmarkets than was the case two-and-half-years ago but also because of the firm’s exceptional performance in terms of revenue and profit growth during that time.

While revenue for the firm’s 2008 financial year came in 20 percent ahead of that for 2007 at £21.8 million, the firm saw even greater improvements in 2009 (£31.2 million) and last year (£49.9 million). Pre-tax profit more than doubled in 2009 and did so again in 2010.

A key driver of this growth has been some pretty smart acquisitions made by Alliance’s management team. For example, the firm’s February 2010 acquisition of Cambridge Laboratories – including its portfolio of 18 prescription products that target a variety of therapeutic areas – accounted for £11.7 million of its £18.6 million increase in sales last year, yet the cost of acquiring the business was around £16 million.

Included within this acquisition was ImmuCyst – an immunotherapy for bladder cancer that is “doing well and getting good clinical results”, according to Alliance’s chief executive John Dawson.

Oncology products acquired through the acquisition, including ImmuCyst, represented around 40 percent of Cambridge Laboratories’ portfolio in terms of revenue and, combined, have seen double-digit growth in sales during the past few years.

Another key product in driving sales, since it was acquired from Pfizer in July 2006, is Deltacortril. This is Alliance’s enteric-coated gastro-resistant tablet that is used for a wide range of disorders (such as allergies, rheumatic disorders and autoimmune disorders).

Sales of Deltacortril quadrupled in 2009 to £8.5 million and they increased a further 59 percent last year to £13.5 million.

Deltacortril is a bit of a cuckoo in the nest as far as Alliance’s management team is concerned, since the firm’s strategy is focused on running a portfolio of highly-specialised medicines and treatments rather than generic products. “We’re not typically a generics company but we had this opportunity in the generics market, so we took it,” explains Dawson.

Unfortunately, Alliance is unlikely to see similar growth in sales of the product on account of increasing competition in Deltacortril’s marketplace.

“Since March 2009 we have been warning that a number three player would emerge and that did in fact happen last November,” says Dawson, referring to Teva’s launch of its own prednisoline enteric-coated tablets in the autumn of 2010. 

However, although Alliance’s rate of revenue growth is likely to be affected by this new entrant to Deltacortril’s market the rest of the firm’s portfolio has also shown very strong overall growth. “Our five-year growth rate has been around 28 percent, and around 21 percent excluding Deltacortril,” Dawson points out.

Earlier this month, Alliance reported that sales of its dermatology and oncology products continue to grow well. “In dermatology, we have got some good products that have a lot of appeal for users and carers alike,” says Dawson.

In particular, the firm’s Hydromol skin care treatment grew 26 percent during the first half when compared with H1 2010. Hydromol is a range of products that are aimed at dealing with such problems as dry skin and eczema. “Skin sensitivity seems to be on the increase,” says Dawson and various surveys, concerning eczema in particular, back up this view.

For example, a survey of data from GP surgeries conducted in 2009 by researchers from the universities of Edinburgh, Manchester and Nottingham found a 42 percent increase in incidents of eczema over a five-year period.

Meanwhile, following April’s acquisition of the brands Anbesol and Ashton & Parsons from Reckitt Benckiser, Alliance is 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.

According to Dawson, the last sales figures for these products were £1.3 million per annum for Anbesol and £0.8 million per annum Ashton & Parsons.

In fact, demand for the Ashton & Parsons products is a lot greater than £0.8 million per year. “Sales of Ashton & Parsons have been curtailed by production issues,” explains Dawson. “But we are addressing that and we took it into account when acquiring the product.”

Once the company deals with these production problems, sales of Ashton & Parsons should improve significantly. “People are rationing the use of it with their babies because of the production issues that have been going on for more than a year now,” Dawson points out.

Investors in Alliance should look out for news of further acquisitions. “We’ve done 19 acquisitions in 13 years and we’re working very intensively on other deals at the moment,” says Dawson. “It certainly remains part of our strategy.”

Last year, Alliance made a pre-tax profit, after exception items, of £12.9 million (2009: £5.8 million) on turnover of almost £50 million.

Both Alliance’s house broker Numis and independent broker FinnCap expect revenue and profit to come in lower this year, although the profit is still expected to be very healthy and Dawson says that the firm is maintaining its progressive dividend policy (last year it increased its full-year dividend by 90 percent to 0.57 pence per share).

Numis estimates that sales for this year will be £42.2 million, with pre-tax profit coming in at £10.6 million. For next year, it expects a slight increase in revenue to £42.9 million with pre-tax profit of £11.1 million. Earnings per share for 2011 and 2012 are expected to be three pence and 3.1 pence respectively.

FinnCap expects sales of £44.9 million this year, with pre-tax profits of £10.8 million (translating to EPS of three pence). For next year, it forecasts sales of £45.8 million, with pre-tax profits of £11.3 million (EPS of 3.2 pence).

Both brokers have a ‘buy’ rating for Alliance’s shares.

Market: AIM

Symbol: APH

Price: 26.5p

Market cap: £63m