Alliance Pharma: standing the test of time

As a whole, the Alternative Investment Market has had a terrible time during the past two years. Since the financial crisis broke in the summer of 2007, shares on London’s junior market have fallen some 55%.

Of course, some AIM subsectors have fared better than others and AIM’s Pharmaceuticals & Biotechnology subsector is one that has proved more robust than most. A quick survey shows that the average AIM Pharmaceutical & Biotechnology share has fallen by only 24% during the past two years, with eight out the 30 shares that make up the subsector seeing an increase in their respective prices.

The most important finding of this survey is that, of the eight that have gone up, six have enjoyed a gain of 100% or more during the past two years. Meanwhile, there are seven shares that have lost in excess of 90% of their value.

So, although pharma and biotech clearly offer some defence for investors compared with other sectors during turbulent times, if you are investing in an AIM life science company it is highly important you do your research. Yes, you can make a hefty gain, but you can just as easily lose your shirt.

One AIM Pharmaceutical & Biotech share that has done very well during the past two years is Alliance Pharma. The company’s shares have doubled and this, no doubt, is due to it having a particularly defensive business model.

Alliance Pharma is a speciality pharmaceuticals business that focuses predominantly on niche prescription brands. The focus on prescription drugs means a stable revenue stream, while the fact that Alliance has a portfolio of 35 of these brands means that it is not overly dependent upon any one product for its overall revenues.

The company’s business model involves the acquisition of prescription medicine brands “that have stood the test of time”. To Alliance Pharma, this means brands that have a long history of sustainable sales where demand is largely unaffected by the economic cycle; on average, the medicines it sells have been around for 39 years.

A key benefit of owning longstanding, proven prescription brands is that Alliance Pharma does not need to invest in sales support for many of the medicines in its portfolio. Sales of these medicines have remained stable, and have even increased, so that the company can focus its marketing effort on brands where it sees greater opportunities for growth.

Another key part of the company’s business model is its focus on niche brands, rather than generic drugs. This means it avoids price competition from the very large pharmaceutical firms that exploit economies of scale to make money by manufacturing and selling low-margin, high-volume medicines.

In 2008, the company increased revenues by 20% to £21.8m thanks strong sales of products like Nu-Seals, a low-dose aspirin for the prevention of heart attacks and strokes that increased its sales by 30% last year, and Deltacortril, a treatment for inflammatory and auto-immune conditions. These two medicines are classic examples of the company’s business model, having been launched by other firms in the 1970s and 1950s respectively but acquired by Alliance Pharma earlier this decade.

Nu-Seals tablets exploit the fact that aspirin has an anti-thrombotic action, which has been shown to be useful in patients prone to heart disease. But, unlike most aspirin tablets, they have an enteric coat that is intended to resist gastric fluid whilst allowing disintegration in intestinal fluid, so prolonging the dosage of aspirin. The outcome of this is that while the patient gets a longer dose of aspirin, so helping to reduce the risk of a heart attack or stroke, Nu-Seals tablets are not suitable for short-term relief of pain because of the delay involved.

Deltacortril is a steroid-based medicine prescribed for many different conditions. These include: allergies (including severe allergic reactions); inflammation of various parts of the human body; skin conditions; some infections; and some cancers. It can also be used to prevent organ rejection after a transplant. Like Nu-Seals, it comes in the form of a gastro-resistant tablet. Alliance Pharma reported in May that profits from Deltracortril in 2009 would likely be significantly higher than last year.

The company has also benefited from the demand in recent years for dermatological products, where because of the opportunity here it has been prepared to invest in sales support. Hydromol – a treatment for eczema and other dry skin conditions – saw sales increase by £0.6m last year to £2.2m, and sales are continuing to grow this year.
Other significant sellers in Alliance Pharma’s portfolio include: micro-nutrients supplement Forceval (which sold £3.4m last year); childbirth drugs Syntocinon and Syntometrine (£2.4m); Parkinson’s treatment Symmetrel (£1.7m); and nasal antibiotic cream Naseptin (£0.9m).

Alliance Pharma has strong track record of sales growth going back to 2003, when it floated on AIM. Between 2003 and 2008 its revenues increased at an average rate of 16% (including 6% organic growth).

But the company’s growth through acquisitions should be boosted further thanks to the recently-announced deal to buy for £7.5m the worldwide rights to the Buccastem and Timodine brands from Reckitt Benckiser Group. Buccastem is a prescribed treatment for nausea and vomiting, as well as other conditions such as vertigo, while Timodine is an anti-fungal and anti-bacterial skin cream used to treat inflamed and infected skin conditions such as severe nappy rash and eczema.
The acquisition of these two brands is being paid for by £3.7m of shares, issued at 12.5 pence each, and £3.8m cash. “We are delighted to bring a further two well-established and profitable prescription brands into our portfolio,” said Alliance Pharma’s CEO John Dawson. “Timodine fits well with our existing dermatology brands, as area that we are actively promoting, and both brands bring the potential to extend our international business.”

For 2009, Alliance Pharma is forecast to deliver revenues of £26.7m and pre-tax profits of £4.7m, which translates to earnings per share of 2.4 pence. At the time of writing the share price is 17.75 pence, which means Alliance Pharma’s shares certainly seem good value. However, results for last year showed that long-term debt amounted to more than £20m at the end of December, which seems high when compared to the company’s market cap of £34m and after the recent brand acquisitions this debt appears set to increase.

The company is due to report interim results covering the first half of 2009 on 9 September. Last month it issued an update that revealed trading had been strong, with H1 sales of approximately £13.2m – representing an increase of 33% over H1 2008.

Meanwhile, the business has seen an improvement in average gross margin rates as a result of changes in the sales mix. Consequently, profit before tax for H1 2009 is now expected to be not less than £2.7m, which would be an increase of 170% over H1 2008’s pre-tax profit of £1m.