You may have noticed that on Christmas Eve, I bought into Quantum Pharma (Epic Code: QP.) at 105p. This might have been a surprise because recently I wrote a Blog entitled ‘A Ropey looking Chart - featuring Quantum Pharma QP.’, however, if you managed to get to the end you might have noticed that I was actually quite taken by the pure Numbers on the ShareScope ‘Details’ Screen and this led me to do further Research because I could sniff Money and the Stock looked on the cheap side.
Ever since doing that Blog, I have been waiting for the Technical Position to improve and particularly for the Downtrend Channel to Break as I explained. There was a lot of moving around as with any Stock and it kept grinding lower (and therefore getting cheaper !!) but finally the Price Broke-out of the Downtrend and it was time for me to pounce, as I will show clearly in the ‘Technicals’ bit further down.
QP. is niche pharmaceutical manufacturer, developer and supplier to retail pharmacy, pharmaceutical wholesale, hospital, homecare, and care home markets. As such, it is clearly a highly diversified business (both by Customer type and Product type) as the information on products below will demonstrate further.
QP. has 7 Business Units:
- Quantum Pharmaceutical
- Quantum Asceptic Services (these seem to be sterile intravenous products and very specific or customised for patients)
- UL Medicines
- Biodose intelligent medication management
- Biodose Services
- Lamda Laboratories
QP. services markets in the UK in the main but also supplies some products to Germany via the Lamda Business Unit - in fact on the 30th November the Company issued an RNS announcing 3 new ‘out-licencing’ agreements.
For simplicity, QP. now classifies its Businesses in these Groups:
- Specials - Quantum Pharmaceutical, UL Medicines, NuPharm and the Aseptics Unit
- Niche Pharma - Colonis and Lamda
- Medication Adherence - Biodose and Protomed.
QP.’s Website can be found here:
QP. is listed on AIM (no, come back, don’t run away yet, not all AIM companies are Woofers, contrary to what some Vested Interests would have you believe).
The NOMAD (Nominated Adviser and Broker) is Zeus Capital Limited, who have Offices in Manchester and London and I don’t recall them being involved in any of the Scandals like QPP, GBO etc.
- 2004 - Core Business, Quantum Pharmaceutical founded (see section below)
- 2009 - Management Buy Out (MBO) backed by Private Equity - Andrew Scaife, CEO, joins.
- 2012 - Acquisition of ULM (UL Medicines - manufacturer, importer, supplier of unlicensed medicines supplying over 200 hospitals.) Acquisition of Colonis (51%) - pipeline of niche pharmaceuticals and development expertise with focus on getting Regulatory approval for unlicensed medicines.
- 2013 - Acquisition of Protomed (Biodose) dosage and monitoring system. Quantum Aseptics manufacturing facility operational.
- 2014 - QP. Listed on AIM December 2014. Acquisition of remaining 49% of Colonis. First Licenced Medicine launched December 2014.
- 2015 - Further Licenced Products expected to be launched. Acquisition of Lamda for 9.7m Euros. Acquisition of NuPharm a UK-based, outsourced manufacturer for solid and liquid dose small batch-made specials and niche licensed pharmaceutical products. In addition, it has product development expertise and is a clinical trials product manufacturer.
This is important because it clearly shows the acquisitive history of the company - obviously this carries risks but it can be an effective way to grow a Business if cashflows are supportive and the Integrations are carried out well.
I have pretty much copied the text below from the website with some minor deletions.
Andrew Scaife - Chief Executive Officer
Joined Quantum as Finance Director as part of the MBO in 2009, and became Managing Director in 2010. Since then, Andrew has guided the business through a period of significant organic and acquisitive growth, as well as setting and delivering the strategy which is currently being followed.
Prior to joining Quantum, Andrew spent 12 years at KPMG, qualifying as a Chartered Accountant in 1999, following which he spent 10 years in the corporate finance team, latterly leading KPMG's corporate finance business in Newcastle.
As well as knowledge of the markets in which the Group operates, Andrew has expertise in finance, corporate transactions, corporate finance, integration of acquired companies and crisis management (that last one made me laugh - hopefully he won‘t need to use his ‘crisis management‘ skills too much with QP. - or I might need to use my own !!)
Martin Such - Chief Financial Officer
CIMA qualified accountant and had 17 years' experience in various manufacturing sectors including steel, oil and gas, plastics and electric vehicles before moving to Quantum and the pharmaceutical sector.
Immediately prior to joining Quantum, Martin spent a year at the AIM quoted Tanfield Group as head of management accounting. Martin joined Quantum in 2008 as financial controller and was promoted to Finance Director in 2009. Initially overseeing the transformation of the Finance, Purchasing, I.T. and H.R. functions, Martin's role has expanded significantly as the Group has grown organically and through acquisition.
Having primary responsibility for delivery of four acquisitions since 2010, Martin's focus since then has been to integrate business unit support functions from various sites into the Burnopfield head office, delivering significant cost synergies.
John Clarke - Non-executive Chairman
Extensive experience of the healthcare sector, having worked at GlaxoSmithKline plc for more than 35 years. John was global President of GSK Consumer Healthcare from 2006 to 2011, and was a member of the GlaxoSmithKline plc Corporate Executive Team until March 2012. Under John's leadership, GSK Consumer Healthcare was the fastest-growing business in the industry, growing by 60 per cent and reaching sales of £5 billion, despite recessionary environments in the majority of its business' markets.
John was responsible for the Lucozade brand including strategy, innovation programme, portfolio and global expansion for 15 years from 1996 to 2011. Lucozade achieved growth of 13 per cent. CAGR throughout this period.
Sheila Kelly OBE - Non-executive Director
Over 40 years experience in healthcare policy regulation. She was chief executive of Proprietary Association of Great Britain ("PAGB"), the trade association for over the counter manufacturers of medicines and food supplements for 24 years and was a member of the boards of the European and World bodies representing this sector.
Sheila led the Cabinet office Red Tape Challenge programme for the pharmaceutical sector working with the MHRA (Medicines and Healthcare products Regulatory Agency) to reduce the regulatory burden on industry. A pharmacist by training, before she joined PAGB she worked with the medicines regulatory agency for five years and spent five years with Glaxo in pharmaceutical development bringing to market several major dermatological products.
Her contribution to the pharmaceutical industry was recognised in 2008 when she was made an OBE.
(This Non-Exec looks very useful to have on board as she clearly will know how Regulation works and will probably be able to call on some useful contacts.)
The Major Shareholders and Director Holdings can be seen here:
Sadly I am not seeing any of the ones I like, particularly Mark Slater - this is not a killer to me investing, but it is clearly a detractor from the Investment Case. It is a bit confusing as I had heard reports that Mark Slater was in QP. but I have found no actual evidence of this.
However, there was an interesting RNS announcement on the 10th December 2015 which showed that Oryx International Growth Fund Limited had added to their Stake and gone over 3%. I don’t know anything about Oryx but interest by these kind of Institutions probably isn’t a bad thing.
I wrote this section of the Blog thinking I was looking at the QP. PLC website, but I was just looking at the Business Unit bit. Anyway, I was going to delete it but figured I might as well leave it in as it has some useful stuff.
Quantum Pharma Claims to be the “UK’s leading manufacturer and supplier of unlicensed medicines (or Specials) and hard-to-source products, sometimes known as ‘obtains’.”
They have tens of thousands of Products and claim 8,000+ special formulations and 14,000+ special obtains - clearly this is a very Product Diversified business. When I first looked at it I thought of Alliance Pharma APH which I used to hold but found incredibly frustrating because it never seemed to move - however, there is a huge difference, APH probably only has about 50 products. This Product Diversification is very important - it means that QP. is a very stable business and will have the Cash Flows to support a fair old chunk of Debt. This is good because it means more Returns for Shareholders and better use of Capital - issuing more Shares means dilution so Debt is better for Shareholders provided it is controlled.
Quantum Pharma claims they supply UK’s largest:
- Pharmacy Multiples
- Pharmaceutical Wholesalers
- Independent Pharmacies
- Group Pharmacies
- Dispensing Doctors.
If you poke around on the Company Website you can find more details about this, particularly with regard to what the products actually are at an Item level.
Quantum Pharma’s customer facing Website can be found here:
Specials and Special Obtains
The text below is from the website and gives a high level of the definitions:
Specials are prescribed to patients either when the licensed form of a drug does not meet their specific clinical need, or when there is no licensed form of drug available on the market suitable to treat their condition. A Special is created either when the licensed form of a drug is altered in some way, or it is manufactured directly from the active pharmaceutical ingredient(s).
Special Obtains is a term used to cover a wide range of niche prescription products. Typically a Special Obtain is any product listed within the Chemist and Druggist Monthly Price List or Drug Tariff, which is unusual, expensive, perishable or ordered infrequently and, therefore, is not a stock line at the mainline pharmaceutical wholesalers. As such, it is difficult for pharmacists to source.”
If this still makes no sense, you can find more detail here:
Specials and Special Obtains Market and Competition
I copied chunk below from the website cos I liked it…..
“The Directors estimate that Specials and Special Obtains account for 0.8 and 1.5 in every 1,000 prescriptions fulfilled respectively. Research by NHS Prescription Services indicates that overall prescription volumes grew year on year by 4.1 per cent. in the year to 31 December 2013, to just over one billion items, supporting the Directors' belief that there is a trend for overall growth, including in the market for Specials.
NHS spending on Specials in England in 2013 was approximately £100 million, representing just over 1 per cent. of the total NHS prescription spend in England (£8.6 billion). Based on this, the Directors estimate that NHS spending on Specials in the UK was approximately £180 million, of which approximately £60 million is spent by hospitals.
The Directors estimate that the Special Obtains market is approximately £50 million per annum. The UK Specials manufacturing market is consolidated, with the five main operators being Boots Contract Manufacturing, The Specials Laboratory Limited, Martindale Pharmaceuticals, Vertical Pharma Resources and Quantum.
The licensed products being developed by Colonis will sit outside the Specials market, giving Quantum access to the much larger, niche licensed medicine market.”
I thought this was interesting because it plays into the Risks in the Business - it is clear that the UK Specials and Special Obtains markets are not huge and that QP.’s strategy to expand via Colonis makes sense. In other words, it looks like QP. has no option but to expand into other areas if it wishes to grow - this brings in risk. The text below expands on this and shows that it is not a huge departure from their current Business:
“Moving Specials to MHRA (Medicines and Healthcare products Regulatory Agency) Licensed Status:
Once a Special has been granted a licence, all other Specials manufacturers are required to stop supplying that medicine as a Special. The licence holder can therefore potentially increase its volumes, which should lead to improved margins.
Quantum has excellent visibility of trends in the UK pharmacy and hospital markets and, through Colonis, a team with significant licensing expertise with a pipeline of 31 products in development. These are expected to be launched over the next two years.”
Pricing Dynamics and the Drug Tariff
Again I have copied the following text from the website cos it is important:
“In 2007, a review of the UK unlicensed medicines market was initiated by the Department of Health ("DOH"). Key aims of the review were to harmonise pricing across the industry and, ultimately, reduce government spending on Specials.
As a result of the review, in November 2011 a new section of the Drug Tariff was created, Part VIII B (the "Tariff"). This set the price to be paid by the NHS for the most frequently prescribed and highest value Specials (by cost to the NHS). Initially, 58 Specials were included in the Tariff. As at 1 November 2014, there were 261 Specials in the Tariff. The products listed on the Tariff can be amended by the DOH every 6 months, with reimbursement prices of listed products being reviewed quarterly. Specials manufacturers provide pricing data on specified products (both existing Tariff products, and those that are being considered for inclusion) to the DOH periodically. The DOH takes this data into account when reviewing the pricing of Specials in the Tariff and deciding whether to add or remove Specials from the Tariff.
The price of non-Tariff medicines is not regulated in the UK.”
QP. released Half Year Results on 20th October 2015 for the six months to 31 July 2015. The numbers look ok with good growth in Revenues (up 22% which obviously results in part from the Acquisitions) and ‘Adjusted’ Profit before Tax and Earnings Per Share look good but there are a lot of Adjustments.
However, the historic results are one thing, what spooked the market and caused the Shares to fall heavily was the following bit on the Outlook:
Andrew Scaife, Chief Executive Officer of Quantum Pharma, commented:
"The Group has had a good first half and continues to take significant strategic steps, broadening its product and service offerings and penetrating new markets, all whilst continuing to generate growth across the Group.
During the period we continued to develop all key aspects of the Group, from infrastructure to management, and now have in place a very strong platform from which to further develop and deliver our strategy. Although there have been some delays in product launches, the number of products in the Niche Pharmaceuticals product pipeline has nearly doubled during the period. The exact timing of approvals and launches of any development pipeline is hard to predict precisely, however, we look forward to a very busy next 18 months as the front end of our product pipeline comes to market.
We anticipate a number of these product launches in the remainder of the financial year and as such we expect to trade in line with the market expectations for the year ending January 2016. Furthermore, as a result of the possibilities provided by the recent acquisitions of Lamda and NuPharm, the increased Niche Pharmaceuticals pipeline and the focused divisional structure, I believe that the Group has greater growth potential now than at the time of the IPO, and I am excited by the future."
I have put in Bold some key bits of the Outlook stuff - the first bit is clearly a negative and this is what caused the Sell off, however, the later bits I have highlighted actually look pretty positive for Investors willing to see further ahead than the next Quarterly update !!
Something else to add here is that I have noticed a Trend among recent IPOs for the Share Prices to rise very strongly for some time (often around 6 months or a bit more) and then for them to break to the downside and keep going down. It is not clear why this happens but it is probably something to do with Management Lock-In Periods (they are not allowed to sell Shares they got at IPO until a certain amount of time has passed), and of course once the Price starts to fall off, many Investors and Traders will be sat on big Profits that they have got quite fast and they will be keen to Sell and bank the gains.
The Half Year Results can be read here:
- As per the earlier Section, the Specials and Special Obtains market in the UK looks pretty small and moving into other areas will introduce Risk. I guess they could expand into Europe etc. in the future, but their movements in this direction are pretty limited at the moment. As long as they stick to small Bolt-on Acquisitions they might be able to grow a very nice Business Group over a few years.
- Healthcare is always likely to be a highly Regulated area and it probably will not get any easier for businesses to comply with various legal requirements. Conversely, this could be viewed as a positive because Regulations tend to favour Big Business and help create Economic Moats - however, QP. May be too small to really benefit from such advantages.
- The acquisition of NuPharm brings more capacity particularly in the manufacturing area and efficiency savings from Batch Processes, along with improved sourcing in-house. It will also enable QP. To manufacture in-house Licenced Products developed by Colonis which would otherwise need to be outsourced. The Risk arises from the following text I have copied from the website, and it is clear that QP. has bought NuPharm at a difficult period for the company:
“In April 2014 NuPharm reduced their manufacturing activities to a smaller range of lines, with resulting loss of revenues, following the result of a routine MHRA inspection. Quantum will work with the MHRA, following completion, to overhaul NuPharm's systems, to invest in new equipment and resources and to implement the Group's high standards and procedures with a view to increasing production levels. In 2015 Quantum will be making a net investment in NuPharm in order to enhance its capabilities to support the wider group into the future. As a consequence of this investment, it is expected that NuPharm will be earnings enhancing from early 2016.”
- I have heard from a mate that when NuPharm was owned by Phoenix it was seen as a bit of a ‘problem’ and there was a lot of cross-charging and internal revenues that went Nupharm’s way - this may be an issue that QP. can deal with but the concern is that NuPharm may struggle as a Standalone outfit. In mitigation, it is only a small part of QP.’s overall Business so even if it does have problems it is unlikely to be a catastrophic issue for the Company. Perhaps the real benefit to QP. will be the extra Manufacturing Capacity that NuPharm brings - as they claim.
- On a specific area of Regulation, there has been a lot of attention recently on ‘Price gouging’ by Drug Companies, where they are perceived to be taking abnormal profits from Drugs where they effectively have monopolies of supply. This is something to monitor with regard to QP. and its products.
- MHRA Regulation is a big issue in this sector - however, with the broad range of Products QP. supplies, this risk is to some extent diversified away.
- There is quite a jump in the Earnings Forecasts for 2017 from 2016 - I think this is because Analysts are factoring in the Acquisitions and their affect on Earnings. However, it is quite a jump and it is something that introduces the risk that Earnings might be missed and we get a Profit Warning - obviously that would hit the Shares hard. Conversely, I would not be surprised if QP. did one or two more small Acquisitions and this could of course add to Earnings in future and mean Broker Upgrades.
- QP. is AIM listed and that brings with itself many Risks. These can include very sparse Liquidity which can mean huge swings in the Price and it could be difficult to Sell a large position in a falling Market - so it is not a Stock that I would want to hold a Huge Stake in. AIM Stocks seem to be more and more prone to Short Sellers Attacks (Bear Raids) lately and the best approach is to understand the Quality of what you own and to ride these out (obviously this does not work if you are holding lots of Loss-making Junk). Of course, Liquidity Risk can work both ways and a benefit of such Stocks is that when they are rising and you are already in them, they can move up very fast.
- QP. has expanded pretty fast since Listing on AIM via several Acquisitions of Companies that operate in the same Sector. It is possible that QP. runs out of such opportunities and then pursues Higher Risk Acquisitions such as Overseas buys and/or diversification into different segments of the Medical Market. This might work out really well, but of course it could be a disaster - it is hard to predict such things in advance, but as time goes on it is an important Risk to keep in consideration.
- With QP. being such a recent Listing, there is not much to go on with regard to assessing the capabilities of the Management Team. They appear to have done a good Job in recent years and the CEO appears to be pretty good but this is pure conjecture on my part. Hopefully in time this Risk will reduce as I get to know more about how the Company goes about things.
- I used to hold Alliance Pharma APH for many tedious years and it was probably the most irritating and frustrating Stock I have ever held. I think this was really because it had a very high level of debt (but this was not a problem because it has strong, reliable, Cash flows) and the Markets just don’t like things with a lot of Debt - it is easier to avoid them than to try and understand them (yet more Kahneman lazy ‘Fast Thinking‘). My worry is that perhaps QP. could get treated the same way and turn out to be a very annoying Investment - however, it does not have the kind of Debt levels that APH has and has a much wider Product Range.
Firstly look at this Screen which gives some history. Note the progression in Revenues over the years but also the Losses made in recent years. However, I suspect these Losses were largely a function of the big Debt Pile the Company used to carry - the IPO has reduced this to manageable levels.
If you look just below, you should see a Dividend of 1.8p is expected for the same year, 2017, this gives a Dividend Yield of 1.7% on my Buy Price of 105p.
If we go forwards one year (remember, in a few days we will be in 2016 so it is not unreasonable to do this), the ‘Norm EPS (P)’ figure for ‘Jan 2018 Forecast’ is 12.20p. On my Buy Price of 105p this gives a Forward P/E for 2018 of 8.6 - seems pretty low to me. In a similar way, the Forecast Dividend of 2.22p in 2018 would give a Forward Dividend Yield of 2.1% (note, the Dividend is being forecasted to grow quite nicely - it’s not hard to see a future a few years down the line where the Divvy could be quite a decent size - obviously this would drive the Share Price up).
In terms of the PEG Ratio (Price Earnings Ratio divided by the Growth in Earnings), based on the growth expected between 2017 and 2018 of around 18% (I did this on a calculator - 12.20 minus 10.3, divided by 10.3, times 100%), we get a PEG Ratio of about 0.6 (10.2 divided by 18%). This is great value - convention is that a PEG of 1.0 or below is Super Super Cheep Cheep. This is clearly Growth at a Reasonable Price (GARP).
It seems fair to me that a Stock like QP. could easily be on a Forward P/E of 15 for next year, and on this basis a Target of 154p (15 x 10.3p) is justifiable.
Perhaps in a couple of Years, if QP. Can prove itself to be a consistent and reliable operator, maybe it can justify a Forward P/E around 18 - using the Earnings per Share Figure for ‘Jan 2018’ of 12.20p, this would give a Target of 219p - obviously this is a top end target.
It is clear from looking at the Chart that the Peak reached back in June 2015 was about 170p, and this is a realistic Initial Target for me. This is about 60% upside on my Buy Price.
As a comparison, Alliance Pharma APH has some similarities to QP. (although APH has a tiny number of Products relatively speaking and has a huge debt pile) and is on a Forward P/E of 12.1. This is pretty low but of course they recently entered into a Reverse Takeover situation which has hit their Share Price hard. I used to hold APH and it reminds me a lot of QP. but I really think that QP. has considerable advantages from the hugely larger Product Offering and the reasonable level of Debt (which is a bit silly on APH).
Clinigen CLIN is also similar and is on a Forward P/E of 16. This is interesting because if you put QP. on a P/E of 16 you get a Target Price of 165p.
As ever, the ShareScope screenshots here are all as they looked to me on the night before I bought my QP. Shares and Spreadbet (Evening of 23rd December 2015). In other words, this was the information on which I based the timing of my Buy Decision.
If you look at my previous Blog about the QP. Chart, you will recognise the Black Circle in my Chart below. Note how the Price has continued to fall down the Channel marked by the Green Parallel Lines as the Breakouts have successively failed to materialise. On a general point, it is worth thinking about the Power of Downtrends as it was many weeks ago we were discussing how this Chart looked ropey and it has taken all that time to finally give us a Breakout.
The Blue Circle might help a bit as well.
It strikes me that many of QP.’s products are very specialist and niched and I suspect they have quite a dominance within certain niche markets - this is an Economic Moat that I like the sound of.
It is clear that QP.’s Strategy is very much about Acquisition-led Growth following the Management Buyout and the IPO in December last year. The beauty of these kind of Products is that they have very stable demand and lots of repeat business - this means steady Cashflows to support such an Acquisition Strategy. Obviously there are limits to how much Debt-fuelled growth a company can do, but I see no issues with the Debt Levels on QP. at the moment - indeed, Debt is about 2 times Next Year’s forecast Profit and only just over once the following year’s Profit forecast.
Part of the Strategy is also a move to Licenced Medicines and products - this caused the Trading hiccup this year but is clearly a good move. In fact, this could be a big Upside Risk - I understand QP. has about 70 Products in the Pipeline and at least 10 should get approved in the Current Financial Year. Sentiment has been hit by the delays on Product Approvals but on the other hand, if the Newsflow on Approvals starts to get positive (pretty likely) then the Share Price could respond very well as sentiment changes.
I have some concerns around the Forecasts for coming years but I think QP. is on a very attractive Valuation and I am happy to accept this Risk as part of the Investment Case - remember there is no such thing as a ‘Perfect Stock’ and you have to accept some small negatives if the overall Case stacks up - otherwise you will never buy any Stocks and you cannot make money behaving like that - ‘Paralysis by Analysis‘……..
Robbie ’Naked Trader’ Burns is a big fan of QP. and recently bought in again after selling as it fell in the Downtrend Channel - he seems to view it as one of those Stocks he can hold for many many years. It strikes me that QP. is ‘under the radar’ as is often the case with Stocks which IPO’d fairly recently - a lot of people on Twitter were telling me they had not been aware of it before. With luck as people wake up to the opportunity here, there will be a lot more upside.
On any Valuation Metric it looks pretty undervalued to me - I fully expect it to get back up to its previous Peak and with luck it can do this in 2016.
Hopefully the Share Price will take a Quantum Leap upwards……………….sorry.
Happy New Year !! WD.