Last week we recommended selling shares in pets pharmaceuticals supplier Dechra Pharmaceuticals as it struggles against bigger competitors. It could be smart to switch the proceeds into a similar company – shares in Dublin-based pharmaceuticals distributor United Drug, which offers investors a way to buy into the growing trend for pharmaceuticals companies to outsource their activities.
- Successful diversification
- Opportunity in pharma outsourcing
- Dominant market position in UK and Ireland
- Competition from logistics firms
- Reorganisation of Eire's health sector
The speed at which United has reinvented itself is impressive – from a glorified logistics company, with white vans scurrying all over Ireland delivering medicines to pharmacies, to a broad-ranged pharmaceuticals services operation, with its centre of gravity tilting towards the US.
The company is using the profits from its core business to buy bolt-on acquisitions that sell services to the major drugs companies. These include legal and regulatory services, in addition to operating call centres that offer patients and doctors sales and product advice. This takes advantage of the pressures on pharma companies to cut costs through outsourcing functions, while it requires limited capital spending by United.
In fact, this process began in 2003, but the latest set of results really show the benefits. The proportion of operating profits generated by pharma wholesaling has fallen from 89 per cent to 58 per cent during that period. And the geographic spread of profits has changed radically as the company has broken its reliance on the Irish market; the republic's contribution to total profits fell from 64 per cent to 34 per cent last year. This is an important and timely shift. Not only is Ireland facing its worst economic conditions in decades, but the country's health sector is being reorganised, which could erode wholesalers' profitability in the long term.
UNITED DRUG (UDG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 178p | MARKET VALUE: | £425m | |
| TOUCH: | 176-178p | 12-MONTH HIGH: | 221p | LOW: 155p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 129p | NET DEBT: | 32% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 1.72 | 39.1 | 14.2 | 8.00 |
| 2010 | 1.73 | 54.4 | 18.7 | 8.40 |
| 2011 | 1.75 | 44.2 | 15.1 | 8.66 |
| 2012* | 1.78 | 54.9 | 18.5 | 8.66 |
| 2013* | 1.82 | 59.1 | 19.9 | 8.66 |
| % change | +2 | +8 | +8 | nil |
Normal market size: 1,400 Matched bargain trading Beta: 0.4 *Peel Hunt estimates £1 = €1.19 | ||||
The impending loss of patent protection on many leading drugs is a threat to pharma majors, but an opportunity for United. Even though generic drugs command lower prices than branded ones, they are more profitable for distributors to handle, especially those with a dominant market share. And United is as dominant as it gets within the UK and Ireland. In effect, it shares those markets with privately owned Alliance Boots, the recession having helped to squeeze out smaller rivals.
The chief bear points for United Drug revolve around the emergence of competition to its core business. This could come from either big logistics companies using their existing infrastructure to undercut United, or from big pharma companies distributing medicines themselves. US drugs giant Pfizer caused consternation in the industry some years ago with just such a plan. That said, most pharma companies seem to have decided that it makes little sense for them to own a vast fleet of trucks.
