James Faulkner is back on the value trail with Alliance Pharma

Alliance Pharma (APH) specialises in acquiring and marketing drugs whose patents have expired – a niche market where it has developed a considerable talent for spotting a bargain. This can be a highly lucrative business model, as an astute acquirer can benefit from the cashflows of these branded drugs without the need to carry out any R&D itself.

Indeed, in some cases Alliance can actually extend a product’s life or increase its sales through clever sales & marketing. For example, one product, Deltacortril, was snapped up for just £1 million and has since generated over £13 million in cash for the company. That is pretty good going for a company that is supposedly picking over the scraps from the pharmaceutical majors’ table.

Of course, the firm’s ability to pick winners in its acquisition strategy is crucial here and represents a key risk. However, the firm’s portfolio management strategy mitigates this to some extent, as the company outlines:

“Our successful business model is based on running a well balanced portfolio. The majority of the brands we acquire are well established in their market niches and require no promotion in order to maintain sales. Within the portfolio we have identified several products with growth opportunities that provide an economic return on promotional investment. In recent years we have been broadening the growth element of our portfolio to include consumer healthcare products, which typically require some modest marketing investment but offer potential for organic growth. They also help to balance risk across the portfolio because they are not exposed to government price control.”

Another downside is that revenues can be a little volatile from year to year as some products see sales decline, to be replaced by sales growth from others.

This was evident in the first half of 2014, with sales of the firm’s cyclical toxicology product having reduced to a minimal level, compared with £3.2 million in the first half of 2013, in line with the two-and-a-half year replacement cycle of the product. Competitors have now come into this market and the price has dropped substantially. The main replacement contract has been awarded to competitors, and so revenues from the product “are likely to remain very low”.

However, the impact of the reduction in toxicology product sales was balanced by strong growth elsewhere in the portfolio. This was led by the continuing advance of the Hydromol dermatology range, where sales rose by 15% year-on-year to £3 million in the first half. Hydromol has plenty of room for further progress as its share of the highly fragmented prescription emollient market is only 4%.

Elsewhere, sales of Ashton & Parsons Infants’ Powders have picked up strongly, reaching £0.7 million in the first half compared with £0.1 million in H1 2013 – with further growth expected given that the firm has overcome the production problems that had limited its ability to meet demand. 

What’s it worth?

Such an acquisitive strategy necessitates a certain amount of gearing, with net debt at £25.5 million as at 30th June. However, free cashflow was £4.4 million in the first half alone, so the firm looks well placed to support this level of borrowing. What’s more, net debt was stable despite several acquisitions during the first half, which were paid for from internally generated cashflow.

With some £22 million of the firm’s acquisition bank facility still undrawn, there is “ample headroom for deals” and an “attractive pipeline of opportunities”. With the shares having made little headway since 2010, further acquisitions could prove the key to drive a re-rating.