Scope for big growth at Alliance Pharma

Since it was founded in 1998 the group has completed 28 deals, the last of which in December 2015 was by far its largest to date. At the end of last year, Alliance bought the entire consumer healthcare division of fellow Aim group Sinclair Pharma (SPH). Considering the group's strong track record for earnings-enhancing acquisitions, we think this recent deal provides an exciting opportunity for rapid expansion.

The 27 new Sinclair treatments, which are principally focused on dermatology, takes the group's entire portfolio up to 90 products. They also help to further internationalise the business, expanding its reach from 40 to 100 countries including footholds in new jurisdictions such as the US, Brazil and the fast-growing Asia Pacific region.

Despite this, the market has been slow to recognise the potential upside of the deal, and the group's share price has fallen 15 per cent since it was completed in December. It may be that there is some negative investor sentiment concerning the increased net debt position that Alliance now finds itself in. The £132.5m acquisition was funded in part by a vendor placing, which raised £78.5m, but also by extended banking facilities, which pushed net debt up by £45m to £71.5m in the six months to the end of 2015. This represents almost three times cash profits, which does look high. But Alliance has a cash-generative business model and broker Numis expects net debt to be down to £28m by the end of 2018.

There has also been some concern surrounding the costs associated with the integration of the new products which are expected to persist in 2016. But, according to management, integration is "progressing successfully" and the plan is to take out £5m in costs. Meanwhile, chief executive John Dawson assured that the group would be in a position to return to its old buy-and-build strategy by 2017.

Recent trading also looks encouraging. Kelo-Cote, a scar reduction product from the Sinclair portfolio, is now the group's largest selling brand, with sales of £3m in the first four months of 2016. This was in line with management expectations, despite a slower than expected initial uptake of the products. Organic growth has also been strong with Hydromol, the largest brand in the Alliance range, realising sales growth of 7 per cent compared with the same period of the prior year.