Full Year Results
Results for the year ended 31 December 2016
Alliance Pharma plc (AIM: APH), the specialty pharmaceutical company, is pleased to announce its results for the year ended 31 December 2016.
- Revenue up 102% at £97.5m (2015: £48.3m)
- Reflecting a full year's ownership of the products acquired from Sinclair Pharma plc ("Sinclair") in December 2015
- EBITDA* up 102% to £26.0m (2015: £12.9m)
- Pre-tax profit up 103% to £22.2m (2015: £11.0m (underlying))
- Diluted EPS** up 11% at 3.82p (2015: 3.44p)
- Free cash flow*** up 110% to £13.0m (2015: £6.2m) - £10.9m generated in the second half of the year
- Net bank debt**** of £76.1m (2015: £71.5m) - a reduction from £79.0m at 30 June 2016
- Gearing at year end of 2.8 times (Net debt to adjusted EBITDA ratio)
- Proposed dividend:
- Final dividend up 10% to 0.807p per share (2015: 0.734p)
- Full year dividend up 10% to 1.210p per share (2015: 1.100p)
*See note 3 **See note 8 ***See note 13 ****See note 12
Commenting on the results, Andrew Smith, Alliance's Chairman, said:
- Successfully integrated 27 products acquired from Sinclair, effectively doubling the size of the Group
- Achieved strong growth with Kelo-cote™ and MacuShield™, our key international growth products. Kelo-cote became our first £10m brand
- Negotiated the in-licensing of Diclectin™ across a further nine EU territories - a unique opportunity for nausea and vomiting of pregnancy
- Agreed settlement post year-end with Sinclair, including £5m cash compensation, in relation to the material reduction of business in Kelo-stretch™, as announced on 21 March 2017
"2016 has been transformational for Alliance following the acquisition of the Sinclair healthcare products business. Sales and profits have broadly doubled and our geographic reach extends to more than 100 countries. Having successfully integrated the acquisition, we are now focused on our three international growth opportunities - Kelo-cote, MacuShield and Diclectin.
"The current year has started well and we look forward to building on our foundations: an attractive, balanced portfolio, an expanded geographic footprint and a strong team."
For further information:
Alliance Pharma plc + 44 (0) 1249 466966
John Dawson, Chief Executive
Andrew Franklin, Chief Financial Officer
Buchanan + 44 (0) 20 7466 5000
Mark Court / Sophie Cowles / Jane Glover
Numis Securities Limited + 44 (0) 20 7260 1000
Nominated Adviser: Michael Meade / Freddie Barnfield
Corporate Broking: James Black / Toby Adcock
Notes to editors:
Alliance, founded in 1998, is an international speciality pharmaceutical company based in Chippenham, Wiltshire, UK. The Company has sales in more than 100 countries worldwide via direct sales, joint ventures and a network of distributors. Alliance has a strong track record of acquiring the rights to established niche products and it currently owns or licenses the rights to approximately 90 pharmaceutical and consumer healthcare products. The Company continues to explore opportunities to expand its product portfolio.
Alliance joined the AIM market of the London Stock Exchange in December 2003 and trades under the symbol APH.
Chairman's and Chief Executive's Review
We are pleased to report a year of significant progress for the Group, including the successful integration of our transformational acquisition announced in December 2015.
Significant achievements in the year
We successfully integrated the ex-Sinclair products into Alliance - effectively doubling our size - while at the same time achieving our growth targets. One of the successes of the acquisition has been the establishment of a meaningful infrastructure across the 'big 5' EU markets. An early example of the value of this is the signing of an in-licensing agreement for Diclectin for the EU. This is our first pan-European deal, and would not have been possible prior to the acquisition of the Sinclair products. Our new offices in Milan, Madrid, and Singapore, along with the enlargement of our Düsseldorf office, the major refurbishment of our Paris office and the significant broadening of our distributor base, give us a strong platform for further international growth.
Kelo-cote, our scar reduction product, passed a milestone to become our first £10m brand. MacuShield, our nutritional supplement product for age-related macular degeneration (AMD), also performed strongly, growing by 40% to achieve sales of £5.3m. Hydromol™, our emollient range, achieved sales of £7.0m in a competitive market (+6% vs. 2015). We also saw strong growth from our UK consumer health products as a result of marketing and distribution initiatives, including Ashton & Parsons Infants' Powders™, whose sales grew by 34% to £2.0m (2015: £1.5m).
These achievements, and more, are testament to the calibre and hard work of our 175 colleagues, who are now part of stronger, more capable teams working to a common set of values. We are proud of our 'can do' culture and progressive approach to employment practices, and our enlarged business and international footprint provide greater opportunities for development and growth.
Delivery of such growth performance is only possible with a supply chain that is robust and flexible, for which we wish to thank our partners with whom we work closely.
We operate in the international market for healthcare products, of which global prescribed medicines had estimated sales of €853 billion in 2015, up 29% from 2013 (Source: IMS MIDAS WRPWW). Healthcare is set to remain an attractively growing market, underpinned by longstanding factors such as on-going medical advances and aging populations in many developed markets in which we operate.
There has been a theme of budgetary control from the funders of prescription healthcare in several of our markets. In the UK, Clinical Commissioning Groups are exerting strong budgetary influences on the prescribing of general practitioners. Similarly, in Germany, the Krankenkassen health insurance funds are employing price control measures. Despite such cash constraints in European healthcare, the sector remains attractive.
The diversity of our portfolio (with a balance between consumer and prescription products) and our international footprint together position us well to benefit from trends in specific segments and geographies and equally to reduce risk.
Our vision is to be the rising star of European specialty pharma, and with the establishment of our pan-European infrastructure we have laid down a strong foundation to achieve this ambition.
Our growth strategy comprises two key strands:
Acquisitions and in-licensing
- Buy (acquisitions and in-licensing); and
- Build (maximising and extending brand potential, and international expansion).
Our focus in 2016 was the integration of the very large acquisition of Sinclair's Healthcare Products business, which was approximately equivalent in size to Alliance Pharma. For that reason we did not make any acquisitions in 2016, although we kept in touch with the market through our networking activities, and have a pipeline of opportunities to evaluate in 2017.
The principal in-licensing opportunity was the European rights for Diclectin, and we expect to submit for regulatory approval for nine EU territories later in 2017, following the anticipated UK approval in Q3 2017. We are excited about the opportunity to serve this unmet market, as there is no licensed treatment for nausea and vomiting of pregnancy in the UK, nor in most European markets. Extensive market research points to the large unmet need for such a treatment.
Maximising and extending brand potential
Our portfolio has grown considerably to more than 90 products. Naturally we focus our brand-building efforts where we see the greatest potential.
Our key international growth brands are Kelo-cote, MacuShield and Diclectin (to be launched). Kelo-cote grew by 24% to become our first £10m brand with China being it's largest market and we were delighted last year to sign a new agreement with our distributor there. Additionally we were also pleased to see good performance in other territories of the Asia Pacific region, where the market for advanced personal care products is strong and growing. MacuShield also performed well, growing from £3.5m in 2015 (11 months) to £5.3m in 2016. A feature common to both Kelo-cote and MacuShield is the two-pronged approach to promotion. We promote the advantages of the products to clinicians who give a recommendation to their patients to purchase the product from a retailer, where our consumer marketing ensures distribution and availability on the shelf.
At the national level, key products that are a focus for brand-building include: Hydromol for eczema (2016 sales £7.0m mainly in the UK, vs £6.6m in 2015), Aloclair™ for mouth ulcers, where the major markets are Italy and Spain (2016 total brand sales of £6.3m); Oxyplastine™ for nappy rash/eczema, where the major markets are France and N. Africa (2016 total brand sales £2.8m); and Ashton & Parsons for teething infants in the UK (2016 sales £2.0m vs £1.5m in 2015).
Finally, completing our portfolio is a bedrock of over 70 products that deliver stable and reliable sales without any significant promotional expenditure. These products are predominantly prescription medicines, occupying niche positions and are engrained into prescribing practice.
We have greatly expanded the number of territories to which we distribute. Our teams are now exploring opportunities in countries where our brands are not currently sold, within the constraints of the regulatory environment, clinical practice and the competitive backdrop in those markets.
Delivering efficiency gains
Efficiency and operational capabilities are further core elements of our strategy to build value. As part of the integration of the acquired Sinclair products we have taken the opportunity to develop our internal structures to manage the expanded and more international business, and have brought in new functions and capabilities such as treasury and international tax management. The refurbishment of several of our offices will ensure we continue to provide an attractive working environment for our valued colleagues.
We are also embarking on the implementation of an ERP system, having evaluated the options with a highly skilled project team that included third party specialists. The ERP system will cover all of the Group's financial and supply chain planning and fulfilment activities, and we expect this to be operational in 2018.
Group revenue for 2016 is more than double the prior year at £97.5m (2015: £48.3m). The ex-Sinclair products delivered sales of £43.8m and represented 45% of total sales, with the remaining Alliance portfolio performing strongly and delivering a sales increase of 13% to £53.7m for the year (2015: £47.5m).
Group sales were enhanced by approximately £4.2m due to the weakening of Sterling that occurred over the year, primarily against the Euro and US Dollar. However the effect on operating profits was much lower at approximately £0.6m due to the natural Euro hedge that exists, whereby Euro-denominated movements in sales are matched by corresponding movements in Euro-denominated cost of goods and operating costs.
Gross profit was up 91% to £54.8m (2015: £28.7m), giving a gross margin for the year of 56.3% (2015: 59.4%). The reduction to the margin on the rate achieved in 2015 was due to the change in sales mix in the expanded portfolio. We expect to maintain an average gross margin in the range of 55-60% of sales.
EBITDA increased to £26.0m from £12.9m (see note 3) representing a 102% increase. Operating expenses were £29.2m in 2016 against £16.3m (underlying) in 2015. The increase resulted from the full-year effect of the ex-Sinclair products' cost base and increased promotional support given to our key growth brands.
The tax charge for the year of £4.1m is based upon the prevailing tax rates in the relevant countries, after taking into account the impact of the planned reduction in the UK corporation tax rate on our deferred tax balances, and equates to an effective rate of 18.6%. The Group's underlying effective tax rate for 2016, in the absence of the UK tax rate reduction impact on deferred tax, was 22.0% which better reflects our effective tax rate forecast.
Diluted earnings per share grew by 11% to 3.82p (2015: 3.44p (underlying)).
The build-up of trade receivables and trade payables in 2016 was a result of the acquisition of the Sinclair Healthcare Products Business.
As such, trade receivables increased from £11.6m to £26.7m and trade payables increased from £13.9m to £22.0m. These increases primarily occurred in the first half of 2016 and have now stabilised.
Inventories increased over the period from £12.9m to £15.4m as a result of the strategic build-up of certain key products whilst they were transferred to new manufacturing partners.
Cash flow and net debt
The increase in cash and cash equivalents over the year was £4.0m.
The first half of 2016 was affected by the normalisation of working capital movements. Full year free cash flow (cash generation from operating activities less interest, tax and capital expenditure) was up 110% increasing to £13.0m (2015: £6.2m). Cash conversion was particularly good in the second half of the year with the generation of more than £10m of free cash flow.
Net debt was £71.5m as at 31 December 2015, £79.0m as at 30 June 2016 and reducing to £76.1m as at 31 December 2016. This is despite the adverse translational effects on the conversion of US Dollar and Euro debt following the weakening of Sterling. Expressed at 31 December 2015 currency rates, net debt would have been £69.1m.
At the year-end, the adjusted net debt/EBITDA ratio was 2.8 times and comfortably below our banking covenant of 3.0 times.
We expect net debt and leverage to progressively reduce during 2017 driven by the Group's strong cash generation, including utilising our surplus US Dollar position, to service debt repayments.
In addition, as announced on 21 March 2017, the Group reached a settlement with Sinclair, in connection with the material reduction of business in Kelo-stretch, which was acquired in the prior year. The result of the settlement is a £5.0m cash payment to Alliance (£4.0m to be received before 30 April 2017 and £1.0m on or before 30 June 2018) and also the retained rights to Flammacerium (US) to be relinquished, with immediate effect. This will be treated as exceptional income in the 2017 financial statements and the cash element of the compensation will be used to reduce the Group's current bank loans.
The Group has a total bank facility of £100.0m of which £66.5m (2015: £65.0m) remains drawn on the Term Loan and £18.0m (2015: £10.0m) utilised from the Revolving Credit Facility (RCF) as at 31 December 2016. In addition to this facility, the Group also has access to a £4.5m overdraft which was undrawn at 31 December 2016.
Future currency movements are clearly an unknown. However the Group is broadly naturally hedged against movements in the Euro as our sales and costs are largely balanced, but we have some exposure to the US Dollar. We monitor this closely, and also keep a close eye on the possible implications of the UK leaving the EU. The balance of our business in both the UK and EU spreads our exposure, and it is important to note that our licences to trade are local to each member state. As previously mentioned, there is a trend that funders of prescription products are becoming increasingly budget-conscious. This is mitigated, to a certain degree, by the breadth of our portfolio, which includes a large and growing proportion of consumer products where pricing can move with the market.
The Directors propose to maintain a progressive dividend policy and are recommending a final payment of 0.807p per ordinary share to give a total for the year of 1.21p. This represents an increase of 10% on 2015.
The final dividend will, subject to approval at the Company's AGM on 25 May 2017, be paid on 12 July 2017 to shareholders on the register on 16 June 2017.
The level of dividend cover in 2016 remained ample at over three times. The total dividend payment for 2016 will be approximately £5.7m including the £1.9m interim payment.
We anticipate continued growth from our key international growth brands, Kelo-cote and MacuShield, where we have been strengthening our brand strategies and distribution arrangements. This will be supplemented by various growth initiatives that are being implemented for our key local brands in many territories.
The Group continues to generate good levels of free cash flow, as demonstrated by the £10.9m generated in H2 2016. The net debt/EBITDA ratio has reduced in Q1 and we project the downward progression to continue in 2017. This has been assisted by the funds to be received from Sinclair in relation to the Kelo-stretch settlement.
A major growth initiative is the launch of Diclectin to meet the unmet need for an approved treatment of nausea and vomiting of pregnancy. This depends on regulatory approval which is anticipated to be in Q3 2017 for the UK and approximately one year later for our other EU territories.
We look forward to building on our foundations: an attractive, balanced portfolio, an expanded geographical footprint and a strong team.