Clinigen Group PLC (LON: CLIN) – Demonstrating strong organic growth despite the difficult trading conditions

Clinigen Group PLC is a FTSE AIM UK 50 index listed global pharmaceutical and services Company. Through three areas of medicine supply - unlicensed, clinical trials, and licensed medicines; it ensures the delivery of the right medicine at the right time to the right patient. It has sites in Europe, Asia Pacific, North America, and Africa. The Company employs over 1,100 people in 14 countries across five continents. It serves 22 of the 25 largest pharmaceutical Companies, by interacting with over 15,000 registered users and ships nearly 6.4 million units annually. It is operating as a global leader in specialist supply for clinical trials. Moreover, it has evolved significantly since the IPO by expanding the portfolio of products and services of niche medicines. In October 2018, the Company completed the acquisition of CSM and iQone to extend the geographic capabilities.

The Company expects to publish the results for FY20 on 17 September 2020.


 (Source: Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

According to the publication from Grand View Research, the market size of global pharmaceutical logistics sector was valued at US$69.0 billion in 2019, and projected to reach US$118.9 billion by 2027, representing a CAGR of 7.3% from 2019 to 2027. However, the fast-paced growth can be impacted in the short-term due to the impact of Covid-19. The market growth is dependent on various factors, such as increasing demand for OTC (over the counter) medicines, growing and ageing population, regulatory policies, the prevalence of diseases, urbanization, and taxes,

Adjacently, the increased prevalence of counterfeit and substandard medicines due to rising demand creates substantial opportunity for Clinigen to serve across key stages of pharmaceutical product’s lifecycle.


(Source: Company Website)

Growth Prospects and Risk Assessment

Clinigen has built a global supply chain and distribution network organically, through partnerships and acquisitions. Also, it has an experienced management team at the regional level with a track record of delivering robust growth since inception. It has established the market position as the global leader in the specialist supply and management of quality-assured comparator medicines and services. Moreover, it has a deep and longstanding relationship with large pharmaceutical and biotech companies as customers. It also has a strong cash generative business model which are underpinned by tight credit control and working capital management.

Overall, Clinigen, through the wide-ranging scope, has accelerated growth organically and through strategic acquisitions. Regarding the division, the Company has around 458 clients in Clinical Services division, which provides synergy benefits to other two divisions as well. Under the Unlicensed Medicine division, there has been an excellent growth in Europe and AAA region and having an extensive pipeline in place to reap the benefits in future. Further, the Commercial Medicines division continues to enhance commercial footprints and licensing opportunities. Despite the global disruption caused by the pandemic, it has been working closely with hospital pharmacist customers and pharmaceutical clients to ensure that the supply of critical medicines to patients.


(Source: Company Website)
 
However, the Company’s performance is subject to various kinds of risk, such as loss of market share with rising competition, shortage of supply during the Covid-19 crisis, failure to comply with regulatory policies, and high dependency on technology can put risk to data. Further, it is anticipating higher cost and customer delays due to the Brexit implications. Moreover, it has significant operations outside the UK, which make them exposed to foreign exchange risk. Also, failure to integrate acquisitions can disrupt operations and reduce returns.
 
Segment Analysis

The Company evaluates the business performance by segregating into three operating segments:

Commercial Medicines: It acquires global rights to supply critical care products around the world.

Unlicensed Medicines: It manages the supply of unlicensed medicines to innovate new medicines for high unmet medical need.

Clinical Services:It caters to specialist supply, distribution and packaging of medicines and services to clinical trials.

The geographic breakdown of operations based on H1 FY20 period can be seen in the image below:

(Source: Presentation, Company Website)

Synopsis of Recent Developments

13 July 2020: US Food and Drug Administration (FDA) granted Orphan Drug Designation for aldesleukin for the treatment of ALS (Amyotrophic Lateral Sclerosis). CLIN is also exploring other therapeutic areas where aldesleukin can be used.
10 June 2020: The Company issued 50,013 fresh equity shares to get admitted to FTSE AIM Index. Following the admission, the total issued share capital of the Group stood at 132,898,771 ordinary shares.

Key Shareholders

Operational Key Performing Indicators in 2019

During the FY19, the Company expanded the product portfolio by acquiring branded generic products in the AAA region and new local marketed licences. However, the number of supply agreements were slightly down.


 (Source: Annual Report, Company Website)

Trading Update for FY2020 - Delivered a Robust Performance, with Decent Cash Generation Capabilities

On 14 July 2020, the Company provided an unaudited trading update for the year ended 30 June 2020, with strong organic growth and in line with the previous guidance, despite the difficult trading conditions in the last few months of the financial year 2020.During Q4 FY20, it experienced a disruption in the Company’s activities due to COVID-19 but continued to deliver good progress. Clinical Services was also impacted as clinical trials being cancelled or delayed. While Unlicensed Medicine and Commercial Medicines have shown a decline in volume demand, due to treatments in the hospital setting being slowed (particularly for oncology). It also witnessed a sign of recovery in various regions with material contract wins.

The Company has shown a good performance in Commercial Medicines, albeit growth in Q4 FY20 was impacted due to COVID-19 disruption. Despite the increased competition from a novel product, Foscavir has performed well. The exclusive supply agreements will improve materially in the financial year 2021, with a pipeline of near-term opportunities under evaluation. In Managed Access (comes under Unlicensed Medicines), the Company has shown an improvement in the second half of 2020, with a material number of program wins. In Clinical Services, the performance of both CSM and CTS were encouraging. The Group’s ERP project, ClinigenOne, has also shown good progress, with digitization expected in FY21.

The Company’s revenues for FY20 are expected to increase by at least 13% on a gross reported basis and at least 17% on a net constant currency basis. In FY20, the gross profit is expected to increase by at least 9% on organic basis and at least 20% on both reported and constant currency basis. The adjusted EBITDA expects to increase at least 29% in the financial year 2020, with an increase in organic EBITDA. The Company witnessed a strong balance sheet, with a net debt of £312 million and the positive cash generation capabilities.

Financial Highlights (H1 FY2020): Sound Business Model with Robust Balance Sheet


(Source: Company Website)

On 25 February 2020, the Company provided a half-year results for the six months ended 31 December 2019, with double-digit growth in revenue and profit. Net revenue surged by 24% year-on-year (6% on an organic basis and 24% on a constant currency basis) to £224.6 million in H1 FY20. The gross profit rose by 35% (9% on an organic basis and 35% on a constant currency basis) year-on-year to £108.1 million (H1 FY19: £80.0 million), driven by both strong underlying performance and the acquisitions made in FY19. Adjusted EBITDA was up by 42% (10% on an organic basis and 42% on a constant currency basis) year-on-year to £62.1 million (H1 FY19: £43.7 million), driven by improvement in operational leverage and the benefits of previous year acquisitions. Operating cash flow stood at £10.1 million, down by 71% year-on-year, which was impacted by an outflow in working capital in the final month of the period. The interim dividend per share stood at 2.15 pence, an increase of 10% year-on-year.

Financial Ratios (H1 FY20 ended 31 December 2019): Decent Profitability Margins versus the Industry Median

On the profitability front, Clinigen Group Plc’s gross margin and EBITDA margin were higher than the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry median. In H1 FY20, ROE (Return on Equity) stood at 4.3%, which was higher as compared to the corresponding period of the last year of 2.5%, reflecting effective utilization of equity capital. The Group has a robust liquidity profile to meet the short-term obligations in the near term. On leverage front, the debt-equity ratio stood at 0.82x, which was higher as compared to the industry median.

Share Price Performance Analysis

 

Daily Chart as on 20 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 20 August 2020, at the time of writing (before the market close, at 8:35 AM GMT+1), Clinigen Group Plc shares were trading at GBX 710.00, down by 1.32% against the previous day closing price. Stock 52 week High and Low were GBX 1,000.00 and GBX 350.40, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Clinigen Group Plc Vs FTSE AIM UK 50 Index (10 Years)

 
(Source: Refinitiv, Thomson Reuters)
 

In the last ten years, Clinigen Group Plc share price has delivered around 297.53% return as compared to 76.27% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last ten years.

Valuation Methodology

EV/Sales Approach (NTM)  
 


To compare Clinigen Group Plc with peers, EV/Sales multiple has been used. The peers are UDG Healthcare Plc (EV/NTM Sales was 1.90x), Vectura Group Plc (EV/NTM Sales was 3.36x), Hikma Pharmaceuticals Plc (EV/NTM Sales was 3.12x), Spire Healthcare Group Plc (EV/NTM Sales was 1.60x), ConvaTec Group Plc (EV/NTM Sales was 3.33x) and Advanced Medical Solutions Group Plc (EV/NTM Sales was 4.19x). The Average of EV/NTM Sales of the Company’s peers was 2.92x (approx.).

Business Outlook

The Company estimates the impact of at least £8 million to EBITDA in FY20, and the headwinds are expected to continue at least in the Q1 FY21. However, Clinigen has already seen signs of recovery with lockdown easing. Despite the disruption, it is expected to report at least 13% growth in reported revenue, 20% growth in gross profit, and 29% growth in organic gross profit. Further, it is projecting organic gross profit growth guidance of 5% - 10%. Moreover, it is planning to bring down net debt within a range of 1.0x to 2.0x EBITDA within 12-18 months. In a nutshell, it has developed a strong pipeline of opportunity from the producing assets and is making an investment in those assets to fetch higher returns in the long-term. With the commercial platform in the US and EU now established, the Company is actively seeking further acquisition opportunities.


(Source: Presentation, Company Website)

Over the course of 4 years (FY15 - FY19), the Company's revenue surged from £184.36 million in FY15 to £456.90 million in FY19. Compounded annual growth rate (CAGR) stood at 25.47%.

Based on the decent trading outlook for FY2020 with sustainable growth rate trajectory, we have given a “Speculative Buy” recommendation on Clinigen Group at the current market price of GBX 710.00 (as on 20 August 2020, before the market close at 8:35 AM GMT+1), with lower-double digit upside potential based on 2.92x EV/NTM Sales (approx.) on FY20E sales (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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