Now that the world is in the grip of a downturn, smart investors should be clinging to sectors that are traditionally protected from recessions. One such sector is healthcare, but this industry is not entirely immune.
For example, manufacturers of generic drugs are more likely to face pricing pressure during a recession as competitors sell substitute drugs (or even the same drugs if the patents have expired) for less money. Safer havens for pharmaceutical investors are those companies that sell early-stage, specialist drugs. One such firm is Sinclair Pharma, which is quoted on London’s Alternative Investment Market.
Sinclair Pharma is focused on the areas of dermatology and oral health. It has more than 20 products registered in the European Union, 11 in the United States and has a strong pipeline.
Sinclair’s business model involves it entering the healthcare product cycle once the initial high-risk research phase has been completed. It aims to acquire innovative products that are late in the development cycle, have intellectual property (patent) protection or are able to be IP protected.
Of course, the company focuses on acquiring products that it believes are undervalued. It then applies its regulatory expertise to gain registration for these products in order to unlock their commercial potential. So far, it has managed to grow a broad range of pharmaceutical products that are divided into two portfolios: Oral Health and Dermatology.
The Oral Health portfolio consists of eight products. A significant revenue generator among these is Aloclair, Sinclair’s treatment for relieving mouth ulcers, which contributed £1m to the company’s turnover during the first half of the current financial year – a 150% increase on H1 2008.
The Dermatology portfolio comprises prescription, over-the-counter and “dermo-cosmetic” products. A key revenue generator among this portfolio is Atopiclair, a non-steroidal cream registered in the US and the EU for the management of symptoms of atopic dermatitis and contact dermatitis.
In H1 2009 Atopiclair produced £1.1m in revenues for Sinclair, compared with £0.9m. More significantly, the company signed an agreement in January this year to sell the US distribution rights and licence for Atopliclair to its US marketing partner Graceway for £2.1m – this amount is the equivalent to royalties Sinclair would have expected to have received from Graceway over the next five years.
Sinclair’s dermo-cosmetic products generated combined revenues of £2.3m in H1 2009 (H1 2008: £1.3m). Dermo-cosmetics are products that may be promoted to doctors, pharmacists and the public.
Significant among Sinclair’s dermo-cosmetics range are: Papulex, B.lift and B.derm.
Papulex is a line of cosmetics products specifically targeted at cleansing, protecting and keeping acne-prone skin in good condition. B.lift is a range of corrective dermatology products that are applied as cream and gels, and which contain matrices to facilitate the penetration of the active ingredient, Hexapeptide B – a ‘botox’-mimicking molecule designed to reverse skin wrinkles. B.derm is a range of patented products that contain hyaluronic acid for sensitive and hyper-reactive skin.
In the first half of 2009, Papulex generated revenues of £0.5m (H1 2008: £0.4m), while B.Lift and B.Derm produced combined revenues of £0.3m (H1 2008: £0.05m).
During H1 2009 Sinclair’s combined revenues from its own sales and marketing effort in selling these, and other, products increased by 5% to £6m.
But while Sinclair, which employs 150 people around the world, runs an active sales and marketing operation in France, Italy, the UK, Spain and Portugal, it also has a complementary marketing partner network that spans 82 countries. This partner network has, so far, enabled Sinclair to launch its products in more than 40 countries, and in H1 2009 the network contributed the majority of Sinclair’s revenues.
However, the £10.2m (H1 2008: £4.7m) of revenues generated via Sinclair’s marketing partners included not only the £2.1m Atopiclair distribution and licensing deal with Graceway, but also a £3.3m deal with BMG Pharma to out-license early-stage gynaecology technology possessed by Sinclair.
The company has also put in place a sales collaboration agreement with fellow AIM-quoted pharmaceutical business York Pharma. The deal, arranged last December, means that each company is now co-promoting selected products from their respective portfolios to dermatologists and GPs.
Meanwhile, as well as its agreement to license out gynaecology technologies to BMG Pharma, Sinclair has also recently entered into a separate agreement with BMG to license in a range of skin anti-infection products. The deal means that BMG will license to Sinclair the products and patented technology for a range of skincare products, including creams, lotions, foams and cleansers.
These products include silver that has been incorporated into nanospheres. Silver nanotechnology is designed to provide enhanced and stabilised antimicrobial activity, rapidly killing most organisms associated with skin infections. According to Dr Michael Flynn, Sinclair’s chief executive officer, the deals with BMG enable the company to broaden its portfolio and further develop its pipeline of products without using significant cash resources, “allowing Sinclair to continue building revenues and profits from its existing dermatology and oral health portfolio”.
In H1 2009, Sinclair’s total revenues came in at £16.2m – a 56% improvement over H1 2008. Its pre-tax profits were £3.2m (H1 2008: £0.9m loss). And the company has a cash balance of £2.4m (equivalent to 2.3 pence per share).
For the year as a whole, house broker Teathers forecasts sales to increase to £32.5m (2008: £30.3m), with an adjusted pre-tax profit of £0.7m (2008: £0m), translating to adjusted earnings per share of 1.8 pence. In 2010, the broker expects sales of £37m and pre-tax profits of £2.5m, translating to EPS of 2.4 pence per share.
These forecasts seem appropriate, especially given Sinclair benefited from two one-off deals in the first half. But given the company’s share price of 27p – equivalent to 15 times prospective earnings – Teathers suggests that 34-38p is fair value based on Sinclair’s peers.
Sinclair is undoubtedly an interesting small cap play in the pharmaceutical sector and one to watch.