Clinigen lowers profit growth forecasts

Investors in Clinigen (CLIN) must have struggled to catch their breath of late. A June profits warning was swiftly followed by news of the departure of the pharma group’s finance chief. And last week, speculation mounted that Elliott Management was taking a distinctly active interest in the business.    

What impact, if any, the activist investor will have on operations is difficult to gauge, but the group posted a 10 per cent drop in adjusted cash profits for its June year-end, as Covid-19 and a change in gross profit mix took their toll, with the cash margin contracting by 490 basis points to 25 per cent. On the flip-side, operating cashflow was on the rise, underpinned by an 86 per cent conversion rate, achieved despite the working capital demands from the earlier than expected integration of Erwinase - Clinigen’s acute lymphoblastic leukaemia drug.

Net debt narrowed over the period, falling to 2.8 times cash profits, though management is committed to reducing it further.

Part of the Elliott speculation centred on a possible sale of the group’s pharmaceuticals services division. It registered a 15 per cent increase in net revenue in the period, and the order pipeline is encouraging, so the commercial rationale isn't immediately obvious. At any rate, Clinigen has already been hiving off non-core assets, chiefly its UK Specials Manufacturing and Aseptic Compounding business, and has simplified its business structure into two divisions during the early part of the year.

Shares in the group pulled back sharply on these numbers, effectively eliminating any gains brought about by the Elliott speculation. Lower-than-anticipated sales of Erwinase prompted management to reduce its cash profit growth forecast to 5 to 10 per cent from double digits. But we retain our buy call with the shares trading at an undemanding 11 times Numis Securities’ EPS forecast for 2022. Buy.

Last IC view: Buy, 659p, 17 Sep 2020