Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Alliance Pharma: Strong Growth From 2018 Expected To Continue

|About: Alliance Pharmaceutical Corp. (ALLP)
Summary

Alliance Pharma is a UK-based pharmaceutical company with a strong growth outlook in the mid to long term.

String of acquisitions and in-licensing of branded drugs key driver for international growth, particularly in APAC region.

Drug portfolio includes a combination 'International Stars' with high revenue growth potential and 'Local Brands' providing a stable revenue stream.

Company Overview

Alliance Pharma PLC is a UK based pharmaceutical company listed on the AIM sub-market of the London Stock Exchange since 1998.  They are a profit generating firm that focuses on acquisition and in-licensing of established pharmaceutical products. The company has labelled their business model as ‘buy-and-build’, referring to their strategy of acquiring pharmaceutical products and building its consumer base, as opposed to R&D pharmaceutical companies.  The firm’s focus is on marketing, business and regulatory activities whilst capital intensive processes such as manufacturing are outsourced.

 The firm has a diversified portfolio of approximately 90 products including prescription only medicines, over the counter medications, medical devices, cosmetics and nutritional supplements.  Products are sold globally through direct sales and partnership with international distributors.

Portfolio of ‘International Stars’: Products with a global consumer base with high growth potential.

Internationally Focused Growth:  Alliance Pharma has made a string acquisition and in-licensing in recent years for internationally focused products and they have so far showed very promising potential.  The 5 ‘International Stars’ as labelled by the firm include: Kelo-cote, Nizoral, MacuShield, Vamousse and Xonvea.

Portfolio of Local Brands: Stable revenue generators with an established consumer base.  Local Brands accounted for 77% of total sales in 2017 but with the emergence of its ‘International Stars’ the proportion is set to decrease.  Previously divided into two sub-categories by the firm.

Non-Promoted Local Products:  Established UK consumer base providing the firm stable revenues with low marketing costs.  Products include ISIB 60XL (Isosorbide mononitrate), Nu-Seals 75 (Aspirin) and Variquel (Terlipressin acetate).

UK Focused Growth: The firm has previously labelled Aloclair, Oxylastine and Hydromol as ‘Local Heroes’ that provide substantial revenue growth locally in the UK.

Local to Multi-National: With the string of acquisitions and in-licensing in the past 2 – 3 years Alliance has transformed into a global company and we can expect, along with substantial revenue growth, a growing proportion of its revenues to be generated outside of the UK.  Sales outside of UK was 20% in 2015, growing to roughly 50% by the end of 2017.

Analysis of ‘International Stars’ Products

KELO-COTE™

Product Summary Scar treatment gel to prevent formation of hypertrophic and keloid scars.

Background

Kelo-cote was acquired in December 2015 as one of 27 products through acquisition of Sinclair IS Pharma. 

*Conservative estimate based on projected growth of the market for scar treatment.

Revenue

In the 2017 report, management forecasted revenues to reach £25 million within 5 years.  Kelo-cote sales exceeded such expectations in 2018 by nearly reaching its target, at £22.5 million, in just a year.  The surge in growth was supported by strong demands from China and mainland Europe.  Estimated sales figure beyond 2018 is based on average projected growth of the general scar treatment market.  However, given the continued marketing and expansion efforts, we can be hopeful for a growth that exceeds its market average.  Further, Kelo-cote is patent protected until 2023 which gives Alliance Pharma the confidence to maintain its momentum for the next 4 years.

NIZORAL™

Product Summary Anti-dandruff shampoo containing an antifungal, ketoconazole.

Background

Acquisition of the Nizoral brand in the Asia Pacific Region from Johnson & Johnson in June 2018 for £60 million.  Nizoral will allow Alliance Pharma to diversify in two ways.  Firstly, Nizoral will diversify the products sold in the APAC region.  Based on the 2017 report Kelo-cote alone generated 57% of sales in the APAC region, which may be unsustainable in the long term given the patent expiry in 2023.  Secondly, Nizoral currently has 88% of APAC sales coming outside of China and allows Alliance Pharma to diversify its consumer base.  Alliance Pharma’s APAC sales is currently supported by China which accounts for approximately half of total sales in Asia.  The acquisition complements the firm’s current strategy to continue expansion of its international business, particularly in Asia.

Revenue

Historical sales of Nizoral show £20.1 million, £21.1 million and £18.5 million in 2015, 2016 and 2017 respectively.  The lower sales in 2017 was largely due to a change in the distributor in China and is expected to recover.  Preliminary 2018 report showed a revenue in the second half of 2018 at £10.9 million, slightly exceeding the average of the previous years.  Given the long established brand of Nizoral, sales is expected to remain stable at around £20.6 million.

MACUSHIELD™

Product Summary Tablet based supplement to treat and prevent age related macular degeneration.

Background

Gained rights to MacuShield trademark outside of the US through acquisition of MacuVision Europe Limited in February 2015.

Revenue

*Estimate

Report in 2017 stated an estimate of £15 million in sales by 2022.  Based on this estimate a projected annual growth of 21% was calculated.  The growth will be achieved by planned expansion into new regions in the first half 2019 as well as continued marketing efforts both locally and internationally.

VAMOUSSE™

Product Summary Treatment for human head lice.

Background

Acquired in December 2017 from TyraTech.  Acquisition marked the entrance of Alliance into the US healthcare market, the largest in the world.

Revenue

Sales in 2018 was £5.8 million, a 16% increase compared to 2017 (whilst under previous ownership).  This growth has come within its existing consumer base in the US and UK.  With future marketing efforts and planned international expansions, we can be hopeful for a growth that will match the 16%, if not more.

XONVEA™

Product Summary Anti-emetic specifically for pregnancy related nausea and vomiting.

Background

The newest addition to the ‘International Stars’, Xonvea is the first and currently the only licensed anti-emetic for pregnancy in the UK.  Xonvea was in-licensed from Duchesnay Inc (company based in Canada) in 2015 and was approved by MHRA, the UK health regulators, in mid-2018.  The launch was recently in Q4 of 2018.

A challenge for Xonvea is the public scepticism towards anti-emetic use in pregnancy.  This stems from the Thalidomide scandal in the 1950s and 1960s.  Thalidomide was an anti-emetic considered safe for use in pregnancy until it was discovered to cause severe congenital defects.  However, outside of the UK, Xonvea has been in use for over 40 years to treat over 33 million women and has consistently been shown to be safe.  Initial resistance may be felt, but Alliance projects to achieve peak sales of £10 million in the UK and a further £30 million in mainland Europe.

Revenue

The firm estimate peak annual sales of £40 million in Europe.  US sales reached a peak of approximately £160 million within 3 years of launch which makes for a promising prospect in Europe.  Projected timeline to reach £40 million is 5 years.

Analysis of the Local Brands

The Local Brands provides stable revenue, albeit with minor fluctuations due to short-term factors.  It is currently responsible for majority of sales, but its proportion is set to decrease as the newly acquired ‘International Stars’ are projected to expand significantly.  Marketing and promotional costs are minimal for this group of products and major growth is not expected.  The average sales from the Local Brands in 2017 and 2018 was £79.7 million.  For valuation purposes £79.7 million will be used when considering the Local Brands.

Discounted Cash Flow (NYSE:DCF) Model and Analysis

 Revenue Forecast(£ million)

2019E

2020E

2021E

2022E

2023E

Kelo-cote™

24.75

27.23

29.95

32.98

36.28

Nizarol™

20.60

21.01

21.43

21.86

22.30

MacuShield™

8.47

10.25

12.40

15.00

18.12

Vamousse™

6.73

7.80

9.05

10.50

12.17

Xonvea™

5.00

17.26

27.35

34.51

40.00

Local Brands

79.70

81.30

82.93

84.58

86.27

Total

145.25

164.85

183.11

199.43

215.14

Key Ratios(%)

2015

2016

2017

Average

EBIT/Sales

24.97

25.96

25.41

25.45

Tax Rate

N/A

18.57

16.4

17.49

Depreciation/PPE 1

27.63

23.75

43.24

31.54

PPE 1/Sales

3.27

0.91

2.1

2.09

NWC 2/Sales

-11.31

-1.02

-8.25

-6.86

CapEx 3/Sales

2.16

1.16

1.34

1.55

1 Property, Plant and Equipment

2 Net Working Capital

3 Capital Expenditure

Free Cash Flow(£ million)

2019E

2020E

2021E

2022E

2023E

Revenue

145.25

164.85

183.11

199.43

215.14

EBIT

39.96

41.95

46.6

50.75

54.75

Unlevered Net Income

30.50

34.51

38.45

41.87

45.17

Depreciation

0.96

1.09

1.21

1.32

1.42

CapEx

2.26

2.56

2.84

3.1

3.34

Change in NWC

1.67

1.35

1.26

1.13

1.08

Free Cash Flow (NYSE:FCF)

27.53

31.79

35.55

38.97

42.17

 Weighted Average Cost of Capital = 9.85%

Based on 2017 Annual Report

Discounted FCF

25.49

27.25

28.22

28.64

28.70

Terminal Value(£ million)

Terminal Value

256.62

Discounted Terminal Value

174.65

Terminal value estimated using long term growth rate of 7.88%

Extrapolated from forecasted growth between 2022 and 2023.

Estimated enterprise value based on DCF analysis: £312 million.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a professional investment adviser. I am an amateur. Article for information only.