Alliance Pharma’s business model “misunderstood” by stock market, says Investec

Alliance Pharma (LON:APH) is a defensive and cash-generative firm whose business model is misunderstood by the stock market. So says independent broker Investec Securities, in a research note on the pharmaceuticals business today. 

In particular, investors have been wrong about the implications of lost sales from Alliance’s Deltacortril product – its enteric-coated gastro-resistant tablet that is used for a wide range of disorders.

This, said the broker, has created an opportunity for investors. “The shares have been weak on the back of competition from generics in the Deltacortril market,” said the broker. “We believe that the Deltacortril issue is a one off, with Alliance being a victim of its own success. We don’t think that any of Alliance’s other products are large enough to attract generic competition.”

As Investec pointed out, Deltacortril was acquired by Alliance in 2006 and once production issues were resolved in 2008 it quickly gained a significant position – about 50 per cent of the market, which was the equivalent of £13.5 million of revenues by 2010. But Alliance’s success meant that Teva, a major pharmaceutical firm, was attracted to the market and became the third supplier – along with Alliance and Actavis – to supply a generic Deltacortril drug in the UK.

Further upside from Deltacortil for Alliance, said Investec, “is now limited with two large generic manufacturers as competitors and we expect Alliance’s market share to drop to 10 per cent by 2013 [from around 50 per cent in 2010] with price only partially impacted as we think that Alliance will be able to hold brand status”.

However, the broker stressed that Alliance’s 50 other products do not lend themselves to a similar scenario. “Whilst we forecast a deterioration of Deltacortril revenues (£3 million in 2012) we believe the underlying business remains intact and the share price fall from May’s AGM represents a buying opportunity,” it said.

For this year, Investec estimates that Alliance will generate revenues of £45.2 million (2010: £49.9 million) along with pre-tax profits of £11.6 million (2010: £16.4 million), which should translate to earnings per share of 3.3 pence (2010: 4.6 pence). For 2012, the broker expects revenues of £46.2 million with pre-tax profits of £11.5 million and EPS of 3.2 pence.

Investec has a 37 pence per share price target for Alliance, although it added that if the firm uses the “£15 million of firepower” that it has via a revolving credit facility for further acquisitions this “could add around three pence to our price target”.

At 9:59am today, Alliance’s shares were changing hands for 29.6 pence each – 1.3 per cent down on the day.