Shares in Clinigen (LON:CLIN) are trading too low, according to broker N+1 Singer.
Analyst Elizabeth Klein, who starts covering the stock with a ‘buy’ rating, points out that the drug development group’s services revenues are lumpy, which appears to have put investors off buying the shares this year.
However, she thinks the improving margins should start tempting investors back to the company, which is still worth more than £300mln after 2013’s strong share price run.
Klein says that with gross margins of 70-80%, the specialty pharma division “should help to grow Clinigen’s profits faster than revenues”.
She notes that this part of the business is still early in the growth phase, with four drugs and with plans to acquire around six more over the next three-five years.
Her target price for the stock is 439p, which is some 70p higher than the current price of 374p.
“The model is still evolving for Clinigen but we expect the highly experienced management team to manage the uneven Services revenue streams over the next few years, and at the same time to acquire new drugs for its rapidly growing Specialty Pharmaceuticals division,” says Klein.
She adds: “We believe the 3m underperformance of the shares may have been due to the expected risk associated with the lumpy Services divisions and the founder’s overhang: 6.4% of the c31% stake was recently sold and performance subsequently improved.
“Even though there remains significant risk with the timing of Services revenues, the improving margins and the upside to the valuation moderates this.”