Cello Health's US opportunity

Last year the group grew net revenues by a steady 2.3 per cent to nearly £105m, with more than 40 per cent of that accounted for by its top 20 clients. The group has also established marketing services agreements (MSAs) with 24 out of the top 25 pharmaceutical companies as rated by pharmaexec.com’s Top 50 list. That hands Cello decent forward visibility on its top line – around four or five months in Mr Scott’s view. Furthermore, the US accounts for nearly half of group revenues, with services equally split between commercial support for clinical processes, science-based writing and data gathering, and more traditional management consulting.

The group also offers digital marketing and communication services from its smaller Signal division. This business didn’t fare as well last year, with net revenues down 2.4 per cent and operating profits contracting by 3.4 per cent. But the reasons for this are twofold. First, the division is largely UK-centric and as Britain prepares to leave the European Union (EU) corporate activity has slowed. This has prompted the group to cut back on capacity. But Mr Scott says Signal still accounts for close to £40m-worth of net fee income, and the intention is to "maintain and polish" the existing client base before trying to migrate some of those customers on to healthcare contracts.

And although Signal is under some pressure, overall group operating margins are improving. Last year, group headline operating profit margins expanded from 11.6 per cent to 12 per cent. The group's headline numbers exclude amortisation, acquisition, restructuring and start-up costs, which totalled £3.7m last year, or 31 per cent of headline pre-tax profits.

In healthcare, headline operating margins rose from 17.7 per cent to 18.5 per cent, reflecting a growing client base, new contract wins and contributions from acquisitions made in 2017. And while margin growth is to be welcomed, it’s interesting to hear Mr Scott’s view on the subject. Margins will fluctuate, he admits, per the timing of projects and the number of staff needed to complete those jobs. To that end, if margins look too strong, it suggests the company hasn’t added sufficient headcount to successfully run and deliver contracted work.

Indeed, costs – and therefore margins – could also be affected by acquisitions, something that might be a possibility this year. But given Cello’s modest size in a crowded market, we wouldn’t be surprised if its progress has caught the eye of larger players, including London-listed UDG Healthcare (UDG). Regardless, having ended last year with nearly a £4.7m increase in net cash to £6.3m, the group clearly has the financial firepower to pursue its own deals.