Sinclair Pharma ( SPH ) is unlike most small healthcare stocks, in that it focuses on late-stage therapies rather than blue-sky drug discovery. This has two very important advantages. Firstly, its treatments carry much less risk over future side-effects because they have already been tried and tested on patients before being approved by the regulatory authorities. Secondly, they do not require vast amounts of money to push them through expensive clinical trials.
Better still, you won’t be overly exposed to any one single medicine. Indeed, Sinclair’s top five products account for less than 40% of revenues. Having just merged with IS Pharma, the firm now owns a cabinet stuffed full of potions, pills and powders to treat niche conditions in dermatology, oral/critical care, neurology and cancer.
For instance, its two crown-jewel medicines are skin cream Flammazine, used to prevent infections caused by burns, and its varicose-vein solution Variquel, which stops the oesophagus (food pipe) from bleeding in chemotherapy patients. Furthermore, most of its other products either possess loyal customer bases, or are not unduly exposed to imminent patent expiration dates.
So what is the company worth? Broker Finncap expects the group to move into the black next year, and correspondingly deliver turnover and EBITDA of £56.8m and £5.7m for the year ending June 2012. However, this could merely be scratching the surface, since sales are set to expand rapidly in overseas territories for many years to come.
Given the right promotional support, I think that in five years’ time, Sinclair could be knocking out revenues and an EBITDA of £100m and £27m. On this basis, I would value the stock on a ten times 2016 multiple, which – discounting back at 12% – gives a fair value of around 40p per share. Clearly, as with any investment, nothing is risk-free. Being a small company, Sinclair carries a higher level of risk than if it were a larger and more established firm.
Sinclair could also be hit by future cuts to NHS spending, or turbulence in the foreign-exchange markets, or it could require fresh capital to fund new acquisitions. All the same, with its niche positions and attractive valuation, the firm looks well placed to benefit from the long-term tailwinds of ageing populations and improved healthcare.
The next trading statement is due in July. Finncap has a share price target of 45p.
Recommendation: Speculative BUY at 29p (market cap £109m).