James Faulkner’s small cap of the week is Clinigen

Specialty pharmaceuticals firm Clinigen (CLIN) is a stock I have covered here from time to time, and in fact it was one of my tips for the second half of 2014, during which time they put in a solid performance.

In a half-year update for the six months ended 31st December 2014, Clinigen said performance is currently in line with expectations and “puts us in a good position to meet our full year targets”. The firm announced a 17% increase in revenues, to £72.6 million, versus H1 2014, and an 11% rise in gross profit, with overall margins at 30%. Net cash has more than doubled to £12.9 million from £5.3 million at 30th June 2014.

Revenue growth has been driven by a combination of significant organic and new customer growth in CTS (Clinical Trial Supply) with the additional contribution from new product acquisitions within Clinigen SP (Specialty Pharmaceuticals) including Savene and Ethyol. Also within SP, Foscavir in-market sales are up 5%, in line with disease treatment activity. CTS reported strong progress across a number of activity measures including growth in current customers, number of customers, number of products shipped and the sales pipeline.

Meanwhile, the number of units shipped by GAP (Global Access Programmes), the primary measure of growth in that business, continues to increase and a number of new programmes will go live in Q3 FY15. H1 FY15 GAP revenues were affected by the closure of the French Enzalutamide programme, as expected, but this also led to an improvement in gross margins, which returned to expected 40% levels from 28% in H1 FY14. Clinigen continues to evaluate new opportunities for both product acquisitions and global expansion.

This update from Clinigen not only provides reassurance that the group’s strong record of organic growth continues apace, but also that growth is backed by strong levels of cash generation. I retain my belief that Clinigen has a unique combination of businesses that delivers a whole greater than the sum of the parts, which sets it in good stead to realise its ambition of becoming the number one global provider of CTS and GAP services and a major global specialty pharmaceutical company. Furthermore, the cash generative nature of the business means that acquisitions, for the most part, should be able to be funded internally from cashflow.

House broker Numis has noted the potential for “over 100% upside to its 5-year forecasts”, should the company meet its stated ambition to become the market leader in both CTS and GAP through organic growth, and to add a further 5-7 specialty pharmaceutical (SP) products over the next 3-5 years. In this context, I believe the current rating of c.19 times 2015 Numis’s forecast earnings looks like good value, especially when one factors in the rapid earnings growth anticipated over the foreseeable future. With the majority of earnings being retained in the business, there will be plenty of scope for further acquisitions to augment growth in the near term.