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Cello Group goes for growth in pharma

Published: 19:45 27 Jul 2015 AEST

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From now on, there will be an increasing additional emphasis on pharma.

The immediate growth opportunity for Cello Group (LON:CLL) lies in what chief executive Mark Scott calls “web-based community management and activation”.

This is an area to which the healthcare industry has been slow to adapt.

But it’s now catching up fast, and Cello is in pole position to cash in.

That’s because its primary focus is in providing marketing and consultancy services to pharmaceutical companies through ‘Cello Health’ and digital solutions through ‘Cello Signal’.

It’s Signal that does the web-based community management and activation services, although in the past its focus has not been sector specific.

From now on though, there will be an increasing additional emphasis on pharma.

Chief executive Mark Scott is keen to differentiate Cello from other more diverse marketing services companies.

Instead, he brackets Cello with United Drug Group (LON:UDG), a company that’s grown exponentially in value over the past few years and is now worth more than £1.2bn.

Cello’s market capitalisation is some way short of that, at just over £86mln, but it’s clear that the aspiration for growth is very strong.

So, the focus will be on pharma, and the emphasis within that space will be on what Cenkos in a recent note called “a more digital proposition”.

The idea is to help pharma and biotech companies influence what Mark Scott calls the “key decision-making audience”, the buyers of products and services.

How rapidly will the move towards emphasising the online “community management and activation” capability have an impact on revenues and profits?

That’s hard to say.

Mark Scott has no doubts that Cello will manage to meet the existing forecasts that are already out in the market.

For example, Cenkos expects gross profits for the year to December 2015 of £84.8mln, and gross profits for the following year of £90.1mln.

“Either we’ll do fine or we’ll really break out,” says Scott. “Signal will be a key driver because it doesn’t require acquisitional funding.”

That’s because it’s already up and running. “We should have the wherewithal to do what we need with what we’ve got,” continues Scott.

“The opportunity is clear. We will be the only listed player to focus on this, and we’ve got a lot of expertise to do it well.”

The wider pharmaceutical industry is growing at around 5% per year, according to Scott, so as its constituencies gradually migrate online, the opportunity is only going to grow.

“The aim is to get bigger contracts,” says Scott.

Growth will naturally follow.

There are other routes, of course.

The company has just started up an office in Boston, aiming to capitalise on the East Coast biotech market, and it’s acquired a business in San Francisco, aiming to capitalise on the West Coast biotech market.

Further acquisitions may well be on the cards, with the US, the world’s largest pharma market by far, well and truly in the company’s sights.

“The group is acquisitive,” says Scott.

But he’s not putting all his eggs in that basket. “We don’t want to premise our future growth on acquisition. We have a lot of opportunities for organic growth. If we can succeed in executing what is an obvious strategy then we will.”

So, acquisitions, possibly, organic growth definitely, backed up by a continuation on the current course.

“The group is cash generative,” says Scott. “The business will do the profits it needs to do.”

So, how have investors been reacting to this proposition of steady sales with the upside of a potential breakthrough in web-based community management?

The answer, to coin a phrase, is with “cautious optimism”.

As earnings have risen, so the company’s shares have risen too.

Over the past 12 months they’ve traded from between a low of 84p up to a high of 104p, and are currently sitting comfortably at around 100p.

Cenkos doesn’t set a price target, but it does argue that on around 12 times earnings the shares are trading at an “undemanding rating”, which it says, “fails to fully reflect the forecast growth in earnings and the attractive dividend yield on offer.”

On the current price that yield stands at around 3%, which isn’t bad in these days of stagnant interest rates.

“It would be nice to raise the dividend at some stage,” concludes Scott. But all in good time.

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