When Clinigen delivered a painful surprise profit warning last month, the pharmaceutical company’s shares slumped by more than a quarter, rekindling speculation in the City that it was vulnerable to a takeover (Alex Ralph writes).
Yesterday’s latest trading update, for the year to the end of June, contained no new unhealthy shocks but lacked any catalyst to lift the shares. The stock traded down 0.8 per cent, to 620p.
With the mid-cap drugs sector attracting a flurry of takeover bids in recent months — UDG Healthcare, Vectura and Spire Healthcare — there is uncertainty over whether a predatory takeover could be launched. Advent, the private equity firm, looked at Clinigen last year.
Clinigen, which listed on Aim in 2012, has expanded through a series of acquisitions to employ more than 1,000 people in 16 countries.
After last month’s profit warning, Clinigen has continued to simplify its structure. It offloaded its UK business sourcing and manufacturing specific unlicensed medicines, known as “specials”, acquired by its purchase of Quantum Pharma in 2017.
The disposal, for up to £7.75 million to Target Healthcare, including two facilities in the North East and 198 employees, leaves Clinigen with two divisions. It operates a products business, which includes Proleukin, a key cancer drug administered in hospitals, which it acquired from Novartis, and a services business.
The latter provides logistics, packaging and distribution and products for clinical studies, as well as managed access programmes enabling pre-approval access to innovative new medicines for the treatment of unmet medical needs.
It was delays to clinical trials and disruption to oncology treatments because of the pandemic that were blamed for June’s profit warning. Clinigen reiterated yesterday that reduced demand for Proleukin will remain until normal hospital and cancer centre services have resumed.
It means the company expects annual adjusted earnings of £116 million, down 10 per cent on a reported basis and consistent with the £114 million to £117 million range guided to at the time of the profit warning. The market was expecting about £130 million before that.
Net revenue is expected to be £455 million, a 12 per cent rise on a constant currency and organic basis.
In addition to reviving takeover speculation, the profit warning drew criticism. Analysts at Davy said that they were “taken aback” by its scale and timing and that “after a period of rebuilding confidence, management credibility has, unfortunately, taken another severe blow”.
Shaun Chilton, Clinigen’s chief executive since November 2016, believes the reorganisation simplifies the company, leaving a “strong platform across the product life cycle and synergies across the business”.
Management has launched a further cost-cutting review and Chilton, 53, points to positives, including faster-than-expected progress launching Erwinase, a leukaemia treatment made available in the UK in April, and is forecasting a return to double-digit earnings growth in the next financial year. However, as Peel Hunt noted, that is “off a substantially lowered 2021 base” after the profit warning.
Net debt is expected to come in at up to £317 million, giving Clinigen leverage of 2.8 times, below its banking covenant of 3.5 times. It aims to reduce its ratio to below 2 times by 2023, which Peel Hunt also noted was revised from February’s target of by the end of 2021.
Adding to uncertainty are plans for Peter Allen, the chairman, to leave in November. Clinigen said that it was in “advanced discussions with a potential successor who would bring to Clinigen significant international experience in pharmaceutical products and services”.
Advice Hold
Why Potential for takeover bid at a premium and Proleukin sales to recover
Howden
Whizzy tech groups and fusty builders merchants are rarely mentioned in the same breath. But companies in both sectors have been big beneficiaries of lockdown (Emma Powell writes).
Howden Joinery, the kitchen supplier, has raised pre-tax profit guidance for 2021 as the home improvement boom led to stronger than expected sales during the first six months of the year. Unlike toppy tech valuations, Howden’s premium market rating is easier to justify.
Analysts at Peel Hunt reckon the renovation market will remain strong well into next year and expect to upgrade forecasts for 2022 pre-tax profits by between 4 and 6 per cent.
Howden shrewdly positioned itself to capitalise on any bounceback in sales, investing last year in ensuring stock levels were high enough not to have to turn business away. That could help Howden take further market share and hold it as its customers — small builders — tend to be stickier than consumers.
Increased raw material and freight costs could provide a challenge to margins, although in February management said it planned price increases to offset the headwind. The rapid rebound in sales volumes should also combat this pressure further, Peel Hunt thinks.
Over the longer term, the FTSE 250 group hopes to continue building its market dominance by opening more of its industrial estate depots. A sector-leading return on equity of 22 per cent even amid last year’s pandemic provides good evidence that its long-standing expansion strategy has paid off.
Howden’s shares have more than doubled in value since last March and trade at 24 times forecast earnings this year. That’s a premium to peers Grafton, Tyman and Travis Perkins, but one that makes sense, given its much superior operating margins and return on equity. The shares are valued a touch above their three-year average forward price/earnings multiple and considerably below October’s record high.
The question when the group announces interim results next week is whether a richer cash pile is sent into shareholders’ back pockets via more share buybacks.
Advice Buy
Why Margin recovery should prompt further rerating in the shares
