One of my favourite hunting grounds is healthcare. Due to ageing populations, the sector is set to grow by about 5% a year over the next decade, reaching a value of $10trn by 2020. One beneficiary of this trend is IS Pharma (ISPH), which supplies pharmaceuticals (60% sales) and medical devices (40%) – mainly aimed at critical care, neurology and oncology – to the specialist hospital sector in Britain (60%) and Europe (40%).
The firm focuses on late-stage niche therapy areas that are below the radar screen of major drug companies, offer lucrative returns, and can be easily targeted by its small sales force. By outsourcing its research and development, manufacturing, warehousing and distribution, IS Pharma only employs up to 25 staff, keeping fixed costs low.
That’s only half the story. The company also has an enviable portfolio of treatments already generating profits. For example, its flagship varicose vein product (Variquel) has been approved across Europe and should deliver substantial growth. IS Pharma also sells Aloxi, which combats acute nausea in cancer patients, a catheter maintenance product called Optiflo, and Cryogesic, a leading anaesthetic freeze spray. What’s more, the firm recently struck a deal to in-license Episil, an oral spray that creates a protective film over damaged mouth surfaces, and Aequasyal, which is used to treat cancer patients who develop dry-mouth problems during chemotherapy.
These products are starting to deliver serious bucks as well. Last week the group said its results would be “significantly above expectations”, sending the stock 19% higher on the day. House broker Piper Jaffray expects 2009/2010 sales and adjusted earnings per share of £14.5m and 6.82p respectively, rising to £18.1m and 9.92p in 2010/2011. So at 74p each, the shares look a steal for such a science-rich firm possessing defendable positions in niche markets. It trades on cheap p/e ratios of only 10.8 and 7.5 for the next two years, and is supported by net funds of £1m.
So what are the potential banana skins? The firm is a relative minnow in a gigantic pond. It is aiming to buy new treatments, and also has £5.5m of earnout payments still to settle from past acquisitions, so there’s a chance the company will have to raise fresh capital. Its reliance on the NHS is also a concern, although a much higher proportion of future revenues will be derived from Europe. Piper Jaffray has a 105p price target on the stock, and preliminary results are due out on 2 June.
Recommendation: speculative BUY at 74p (market capitalisation £23m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments