Buy ahead of Clinigen re-rating

There are two main reasons Clinigen won rapturous support from investors when it arrived on the London Stock Exchange. The clinical trials market into which Clinigen supplies third-party material is growing at about 15 per cent a year. Secondly, Clinigen's management had a proven track record in understanding the complex regulation surrounding specialist access to certain drugs - encompassed by its global access programme (GAP) division.

But at the start of 2014, when Clinigen released half-year results for the six months to December, concerns started to build about the shares overheating. The clinical trial supply (CTS) division - responsible for more than 64 per cent of first-half sales - revealed a 13 per cent fall in sales to £39.5m, and it didn't help that management admitted that a near four percentage point rise in the CTS gross profit margin - to 16.5 per cent - was 'unsustainable'. Consequently, the shares crashed 17 per cent on the morning the news came out.

But the company still holds substantial promise for future growth and increasing shareholder returns. The specialty pharmaceuticals division, which provides a solid backbone and accounted for just over half gross profits for the first six months of the year, is still in an early stage of development, with management aiming to add six new drugs over the next three to five years. Meanwhile, the CTS segment is forecast to grow 5 per cent in 2015, and GAP, which accounted for 16 per cent of first-half sales, continues to be Clinigen's fastest-growing division.

Encouragingly, chief executive Peter George says the lumpy nature of the CTS business and the drop in half-year sales was solely the result of strong comparative figures last year, which included a large number of low-margin anti-viral study sales. He also believes an overdependence on CTS revenues as the bulk of sales will soon be a thing of the past.

A bullish trading update released at the end of July has already begun the re-rating of the stock. In it, Clinigen said it expects like-for-like sales growth of more than 7 per cent for 2014, with total revenues of no less than £126m. The GAP division is expected to report 50 per cent sales growth, and CTS should see revenues up more than 11 per cent in the second half compared with the first half.

Continued improvement in gross margins across all the divisions also contributed to a 17 per cent improvement in underlying cash profits as at the end of June, suggesting full-year results should beat analysts' expectations. Such a solid performance could be down to lower operational costs, and the keen prices paid for two newly acquired speciality pharma drugs: Cardioxane and Savene. And management says there is also significant potential in Clinigen's new business pipeline for CTS and GAP which broker N+1 Singer puts at about £200m.