Nigel Wray has an enviable record as an entrepreneur and a shrewd eye for an investment. So when he began adding to his already sizable stake in Alliance Pharma (LON:APH) people sat up and took notice.
In a three-month spending spree starting on May 6 he bought more than 6 million shares in the company, taking his holding in the Wiltshire based group to 13.4 per cent.
A record set of interims earlier this month appears to vindicate his decision.
Pre-tax profits were up 167 per cent at £7.7 million on sales of £23.4 million.
And its prodigious capacity for generating cash meant it was able to hike the dividend 143 per cent to 0.17p.
The one third/two thirds split in the divi puts the speciality pharmaceutical on course for 0.5p a share total payout.
The business model is very simple. Founder John Dawson and his team buy low risk, cash generating drugs that are off patent and require no marketing and promotion spend to support sales.
The average age of Alliance Pharma’s top ten products is around 37 years. Their maturity means the effects of any previous sales and marketing efforts have washed through the system.
They are prescription pad staples that are too small to interest the generic drug producers and of marginal value to big pharma.
Britain’s changing demographics (the baby boomers are now growing older) mean that rather than flat line, sales of these “non-promoted products” grow at an average annual rate of 3 per cent.
"The business model is buying low risk cash generating assets that are prescription medicines," chief executive Dawson told Proactive Investors.
"We covet them as much for their financial performance as their medical performance."
With such a pedestrian rate of organic growth, acquisitions are important - the company has made 18 in the last 12 years.
Cambridge Labs, the last of these buys, was its biggest at around £15 million. The deal brought in Immucyst, a therapy for bladder cancer. Its sales were £3.5 million last year and are growing 20 per cent a year – so it doesn’t seem to fit the Alliance mould.
And it is one of two major products Alliance actively promotes. The other is Hydromol, used to treat eczema.
This is a deliberate policy, Dawson says.
"If you have a business model that is dependent on acquisitions and you don’t make an acquisition, where’s the growth coming from? You need some internal growth somewhere," the Alliance chief executive explains.
"In both these instances if we find new acquisitions or in-licence opportunities that fit within those therapy areas, we can put them through the marketing machine.
"We are a speciality pharma company. But we are different from most in that we have this bedrock of mature products that don’t need promotion.
"Most speciality pharma companies rely on growth and therefore have much higher marketing spends relative to their sales."
Dawson says he is unable to tell us when we can expect the next acquisition, though finance director Richard Wright gives us a hint of the company’s ambition.
"We have the funding capacity to do deals of up to £50 million using a mix of debt and equity," he reveals.
That said, the group has some fairly exacting acquisition criteria. "We can’t predict the next acquisition, we can only point to our track record of 18 deals in 12 years," Dawson adds.
"We are very selective. We are only looking for assets that are stable and well needed in medicine.
"If you are going to finance assets you have to be pretty sure they are going to pay off with five or ten year’s regular earnings."
Net debt currently stands at £22 million and financing costs were £1.3 million in the first half.
"The cost of borrowing is relatively high for two reasons," says Wright. "We put the facilities in place in 2007 when we were more highly geared and we put in place some interest rate hedges, and interest rates were quite a bit higher then."
The company generated £5.7 million of cash in the first half, so Wright isn’t losing sleep over the company’s net debt.
But he admits: "But we’ll need to refinance and when we do we should see an improvement in the margins we pay and get lower Libor rates."
Even without renegotiating its agreement with Lloyds, Alliance’s interest bill is coming down with convertible bondholders swapping debt for equity.
"Around a third have converted in the last few months," says Wright. "That gives us a nice little saving on the interest bill as it converts."
While the outlook for Alliance Pharma looks exceedingly bright, there is one dark cloud on the horizon. Along with results the company warned that competition to steroid pill Deltacortril will hit sales of its biggest product.
"We are warning that another competitor is coming into the market," Dawson said. "We have over 50 per cent (market share). When the competitor comes into the market we exepct to end up settling at a market share of about 30 per cent."
Even so, Dawson and Wright appear quietly confident about the remainder of the year.