A rare opportunity to buy high-quality Clinigen

Importantly, Clinigen’s higher-margin, recurring products division, commercial medicines, continues to perform very well. The division accounted for just shy of half first-half adjusted gross profits – the best measure of Clinigen’s top line – following growth of 37 per cent to £31m thanks to strong demand for all of the five core medicines.

This division specialises in acquiring unloved drugs and giving them a new lease of life by improving marketing or increasing distribution efficiency. In February 2018, the group negotiated the first ever price increase in Japan for its anti-viral treatment Foscavir (the single largest contributor to the division’s revenue), meaning sales here should pick up again in the second half. The division is also set to benefit further from the suite of commercial and pipeline drugs acquired with Quantum Pharma. The new business has a particularly impressive pipeline of unbranded drugs, which Clinigen is hoping to launch, thus adding a new platform of expertise.

Quantum has had an even more pronounced impact on Clinigen's other division, unlicensed medicines. This involves the sale of drugs in parts of the world where the owner chooses not to apply for a licence. Quantum’s products offset the underlying decline in revenues in the first half, as two of the division’s largest programmes came to a natural end. An impressive number of new contracts – including several large programmes – should lift gross profits to £37.8m in the second half, compared with £26.3m in the first. This is expected to contribute to a 17 per cent increase in annual gross profits for the entire company.

Broker Numis has forecast compound annual gross profit growth of 10 per cent until 2022. Meanwhile, cost synergies from the Quantum acquisition of roughly £1m a year should help widen adjusted cash profit margins to 24.3 per cent by 2021, from 21.6 per cent last year. Adjusted EPS is expected to increase by 9 per cent in the 2018 financial year, rising to 15 per cent in 2019.

The current impressive growth forecasts could be pepped up further by acquisitions. When Mr Chilton took over from the group’s founder as chief executive in late 2016, he set out a list of companies and drugs he hoped to bring into the portfolio. Considering Clinigen’s strong balance sheet and excellent ability to generate cash, there remains plenty of headroom to fund those acquisitions. At the half-year stage, net debt stood at two times adjusted cash profits and is expected to fall to 1.7 times by the year-end, well below banking covenants of 3.2 times.