Circassia Pharmaceuticals – these shares could double over the next year

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Circassia Pharmaceuticals – these shares could double over the next year
Master Investor Magazine

Master Investor Magazine Issue 58

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Circassia shares have been in the doldrums for some time now, but brokers are expecting a turnaround in fortunes for this specialty pharmaceutical company, writes Mark Watson-Mitchell. 

Circassia is a world-class specialty pharmaceutical business focused on respiratory disease. The company’s strategy is to build a high growth, profitable specialty pharmaceutical business meeting the needs of patients around the world.

To implement this strategy, it has established a platform to commercialise its current portfolio of respiratory products, and it is seeking additional products to leverage these capabilities through in-licensing, partnering and/or acquisition.

Circassia Pharmaceuticals (LON:CIR) sells its market-leading NIOX asthma management products directly to specialists in the US, the UK, China, Germany and Italy, and in a wide range of other countries through its network of partners.

For the US market, it has licensed the commercial rights from AstraZeneca (LON:AZN) to their chronic obstructive pulmonary disease treatments Tudorza and Duaklir.

Furthermore, it also has the US and Chinese commercial rights to the late-stage ventilator-compatible nitric oxide product LungFit PH.

In a business update declared in the second week of January, Circassia stated that it expects revenues for the year to end-2019 to fall in the mid-range of its previously issued guidance of £60-65m, representing significant growth of around 30% when compared with the previous year’s £48.3m.

Additionally, at the year-end, cash, cash equivalents and short-term deposits were approximately £27m.

Circassia stated that it expects to report growth in both NIOX and Tudorza sales, as well as a modest contribution from Duaklir, which was launched at the end of October 2019.

I would expect to see a finals results date being announced shortly, with the figures actually due in late April.

In the last couple of weeks there has been a slight change in the share ownership as CIP Merchant Capital (LON:CIP) put together a 12.8m share stake, costing some £2.8m.

Based in Guernsey, CIP is a quoted closed-ended investment company, whose targets of sub-£500m capitalisation are deemed to be undervalued and generally below the radar of larger institutional investors.

With 375m shares in issue Circassia has an impressive list of larger holders, including AstraZeneca (18.9%), Harwood Capital (9.35%), Lombard Odier Asset (5.08%), Neptune Investment (4.77%), Invesco Asset (4.17%), CIP Merchant Capital (3.41%), Touchstone Innovations (2.99%), Aviva Investors (2.60%), and HSBC Bank (1.87%).

However, the biggest shareholder, with a 28.6% stake, is Richard Griffiths, former boss of the Evolution Group.

In a recent comment on the company, finnCap, its corporate broker, declared that it is looking for the company to be EBITDA positive this year. And it is going for compound annual growth at a rate of 30% over the next two years.

Their estimates are for £62.6m revenue in 2019, and a loss before tax of £24.3m. But this year already the brokers are estimating £84.4m revenue and just a small £3.6m loss.

Just how strongly this group is capable of developing becomes very clear when we note that finnCap are looking for £105.8m revenues next year, which should produce healthy profits of £11.2m, worth 3.2p in earnings per share.

Furthermore, the year to end-2022 could see £134m of sales, a stunning £31.2m of pre-tax profits, with 8.5p of earnings per share.

Considering that the shares are currently trading at around the 25p level, that puts them out at a minimal 7.8 times 2021 earnings and a mere 0.8 times 2022 earnings.

That is why the brokers are looking for the shares to rise to 80p.

I see these shares easily doubling over the next year or so, while my target price by end-2020 is a cautious 40p.

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