Alliance Pharma Plc (LON:APH) has developed through a series of 28 acquisitions as part of a buy and build strategy, culminating in the most recent £127.5m acquisition of 27 primarily dermatology and woundcare products and assets from Sinclair IS Pharma. Not only is this acquisition doubling the size of the company and enhancing EPS by 14%, it should provide the foundations of a more internationally oriented business that can more easily exploit the growth opportunities of its existing products (eg. Hydromol, MacuShield, Diclectin) as well as presenting itself as a credible partner for attracting in–licensing/M&A opportunities.
► Acquisition – largest to date: The acquisition of 27 products and related assets for £132.2m (inc. £4.7m inventory) represented a step change in the scale of its ambition. Funded by way of a Vendor Placing raising £83.5m (gross) including a £5m over-allotment option, and the draw-down of £51m (net) of Loan Notes.
► Strategic rationale: This acquisition accelerates growth – adding 14% to EPS short-term – and sustains the growth vs. bedrock sales model of APH. It also internationalises the business, providing a launch platform for key APH drugs; and more attractive for corporate development – both in-licensing and M&A.
► Outlook: We have upgraded our forecasts to reflect the acquisition with FY’16 sales and EBITDA doubling to £96.0m and £28.8m, respectively. We have increased EPS forecasts by 14% to 4.2p (previous 3.7p). Our forecasts do not include any contribution from Diclectin which should launch in the UK in 2016.
► Risks: Doubling the size of the Alliance Pharma Plc business creates potential integration risk. However, extensive planning, human resource reallocation and the provision of transitional services with the Vendor should help mitigate this. Individual product risk (eg Nu-Seals) now becomes less meaningful.
► Investment summary: The shares are trading on a 2016 P/E of 13.2x with a CAGR growth rate of ca.9%. With a dividend yield of 2.5% (2016E), cover of 3.3x, it has the capacity to pursue its progressive dividend policy. After a period of no/low EPS growth the outlook is much more favourable, with the prospect of including Diclectin into forecasts once clarity on timing is better understood.
