This week’s gamble is a minnow in the massive $60bn global market for outsourced drug development and regulatory compliance services for the healthcare industry. However, while most large drug companies carry out development in-house, smaller firms tend to lack the skills to tap the full potential of their discoveries. Such companies turn to specialists, such as this company:
Gamble of the Week: Fulcrum Pharma (AIM:FUL)
Fulcrum’s strength is its ability to source high-calibre experts, while at the same time cutting development costs for new drugs. It specialises in treatments for cancer, anti-inflammatory conditions, the central nervous system and malaria. The group’s tried-and-tested approach can cut costs by 25%. For the year to 31 August 2006, Fulcrum turned its first profit after six years of mixed fortunes. Last month saw an encouraging set of interims, with net fees up 32% to £4.9m in the first half – with 71% generated in Europe, 12% in the US and 17% in Japan. Earnings per share for the first half were 0.05p, with net cash of £1.5m as at 31 March 2007.
The company’s performance has improved as it has expanded and it has also made two astute acquisitions over the past 18 months that will boost its regulatory services business. Fulcrum acquired Quadramed in February 2006 and Unicus in March 2007, with the latter funded by a £2.1m placing at 4.25p. This area – covering clinical trials through to approval by US authorities and product launch – is growing rapidly as regulatory requirements become ever more onerous. Navigating these processes requires expert knowledge and can make a crucial difference when it comes to being the first to launch a new drug.
As a result, Fulcrum is now seeking to enter the US regulatory market to add to its leading position in Europe. House broker Seymour Pierce expects net fees to grow from £11.5m this year to £20.4m in 2008, generating earnings per share of 0.24p and 0.52p respectively. It rates the stock a buy, with a target price of 6.6p.
So far so good, but what do investors need to watch out for? Being a small company in such a large industry, there are obviously risks that Fulcrum could get squeezed by the competition. And with further acquisitions planned, it is likely that future share issues will be required in order to fund growth. But with the global research and development outsourcing market growing at 15% a year, and the stock trading on a 2008 p/e of less than seven, Fulcrum’s shares look good value for the adventurous investor.
Recommendation: Speculative BUY at 3.62p (market cap £6.45m)