Alliance Pharma plc Q&A with Hardman & Co (LON:APH)

Hardman & Co

Alliance Pharma plc (LON:APH) is the topic of conversation when Hardman and Co’s Analyst Dr Martin Hall caught up with DirectorsTalk for an exclusive interview.


Q1: Alliance Pharma has grown into very decent business over a number of years, how has it achieved this?

A1: At incorporation, management’s stated aim was to adopt a buy and build strategy with the intention of generating a profitable cash-generative company. Initially, this was only in the UK and Ireland, but more recent acquisition has seen it expand into Europe, South-East Asia and there is one product that is sold in the United States. To date, Alliance Pharma, with this strategy, has built a portfolio of over 90 products.


Q2: What are the main drivers going forward?

A2: The more recent acquisitions have seen them develop a small portfolio of what are turned international stars, these have high growth prospects and also carry better margins. There are five products in this portfolio at the moment and they are expected to drive the company forward in the future.

Without mentioning all of them, one for example is KELO-COTE for treating scars is certainly the star performer, annual sales of just under £20 million are already well above the peak indicated by management at the time of the product’s acquisition.

In addition to this, we feel that the recently approved Xonvea, which is for the treatment of nausea and vomiting in pregnant women, that also has very good growth prospects. This is a slightly different product for them as they will have to develop their own market from scratch, it is not as though they’re buying a product which already has an established marketplace. It will be very interesting to see how the company gets on with this.


Q3: Looking at the growth in 2018, it looks to be a little sluggish, why is that?

A3: The company obviously has to report figures on a statutory basis however the 2017 results were biased by a significant one-off gain but in contrast, the 2018 results will contain again a small one-off gain but much much smaller than last year but in addition a non-cash write-down. So, these two when looked together seem to be damaging the results.

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In addition, the company has been investing in readiness for the launch of Xonvea. There are some important regulatory changes that are being introduced and, I suppose, to a lesser extent, Brexit. Even with all of these investment, the company will still have solid high single digit underlying growth in earnings in 2018 and 2019.

I think it’s also worth mentioning that its largest product acquisition to date, which was the marketing rights to Nizoral in the APAC region, will not be consolidated by the company for about 2 years in the way that we know it. There’s going to be a transition period during which the vendor, which was Johnson and Johnson, will continue to manufacture and sell the product on Alliance’s behalf and they will only get a net profit that will be included in the statutory results.

Now, to overcome this, what we’ve provided in our recent report is what we call a see-through set of accounts showing the picture as if all the sales and the costs of Nizoral, were being born by Alliance Pharma and included in the numbers. This gives you a much fairer picture of what’s really going on within the company.


Q4: From an investment point of view, what do you consider to be the main attributes of the company?

A4: I think the main investment attributes are very clear. The company offers solid topline growth driven by the higher margin international star brands. Secondly, the company is profitable and does generate very good levels of cash and it’s using those to rapidly pay down its debt. Thirdly, it has a secure and growing dividend, it’s currently running at about 2% at today’s share price.


Q5: How has the Alliance Pharma share price performed?

A5: We saw the stock run up quite significantly around the time of the Nizoral acquisition, but it has subsequently faded on the slightly distorted lower growth profile for 2018, however, more recently it has stabilised.

As greater awareness of the underline growth figures and forecasts demonstrating the growth prospects for the company becomes better understood, I think the company will represent a solid long-term investment.

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