Rapid changes in the pharmaceuticals industry over the past two years have helped prove that god is not always on the side of the big battalions. As big pharmaceutical firms close, outsource or cease many of their peripheral, but still important, testing and research functions, smaller research and testing companies are coming into their own. Cyprotex is one such, specialising in testing drugs and cosmetics for toxicity. The firm's profile is still small, but it is making inroads into key markets that could make it extremely valuable in the long term.
- Pharma outsourcing favours specialists
- Growing faster than its market
- Becoming more diversified
- Potential bid target
- Expansion will need cash
- Shareholders' interests could be diluted
The crucial change for Cyprotex was the decision to invest significantly in toxicity testing for pharma majors in 2010. Not only did this boost its appeal, but the timing was excellent as many of the larger research companies had started to wind down their toxicity-testing services. The downsizing of pharma research & development budgets has meant that older methods of testing are no longer efficient or cost-effective, and this has opened an opportunity for smaller companies that can do sophisticated tests at cheap prices.
This trend means that contract research providers are a fast-growing part of the pharmaceuticals industry. Broker Singer Capital Markets reckons that Cyprotex's sales will grow at over 13 per cent for the next few years, while the rest of the pharma industry will grow at between 3 and 4 per cent. That growth will come, in part, from Cyprotex adding new tests to its existing service, such as its recent expansion into genomic testing, which assesses the impact of enzymes on new products.
CYPROTEX (CRX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 5.25p | MARKET VALUE: | £11.7m | |
| TOUCH: | 5.00-5.25p | 12-MONTH HIGH: | 6.75p | LOW: 2.75p |
| DIVIDEND YIELD: | nil | PE RATIO: | 12 | |
| NET ASSET VALUE: | 3p | NET CASH: | £0.1m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 5.0 | 0.46 | 0.26 | nil |
| 2010 | 5.9 | 0.20 | 0.31 | nil |
| 2011 | 7.9 | 0.59 | 0.39 | nil |
| 2012* | 9.1 | 0.63 | 0.28 | nil |
| 2013* | 10.3 | 1.02 | 0.45 | nil |
| % change | +14 | +62 | +61 | - |
Normal market size: 6,000 Market makers: 5 Beta: 0.4 *Singer Capital Markets forecasts | ||||
Diversification is also important if Cyprotex is to prosper and management has broadened the customer base so that Cyprotex's largest customers now makes up just 13 per cent of sales, compared with 34 per cent a few years ago. The expansion into the US, via the acquisition of Apredica, looks sound move as the country is the world's largest market for pharmaceutical outsourcing by some distance. The company now generates 44 per cent of its sales in the US, up from 29 per cent four years ago. Boosting sales in emerging markets is likely to be the next move, although analysts expect that Cyprotex will go for partnerships, rather than building up an in-house operation.
The obvious exit for shareholders will probably be a buyout or a merger with a similar-sized company. Specialist companies in this area are fairly close knit; Cyprotex has a research partnership with Chantest Corporation, while others, such as Fluofarma, have important contracts with big companies, according to Singer Capital's research.
