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Questor: Covid knocked demand for its drugs so Clinigen now looks poised for recovery

·4 min read
Doctor checking patient notes - Sturti/Getty
Doctor checking patient notes - Sturti/Getty

This research idea must come with a health warning, not least because Clinigen doled out a trading alert only last week and the shares promptly plunged by 25pc in a day.

There is always the chance that there could be further disappointment ahead – profit warnings do tend to come in threes, as the old saying goes, and the company’s short-term fortunes do to some degree depend on Covid-19.

Nevertheless, it is tempting to take a closer look at the speciality pharmaceuticals and services business now. On an underlying basis, the firm generates double-digit returns on capital and makes positive cash flow, while interest cover easily exceeds the four-times level required by banking covenants.

There is some debt but little is due for repayment within two years. Clinigen is also still trading within the 3.5 times net debt to adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) covenant laid down as part of its banking facilities, even after the trading alert, although this is now undeniably getting a little tighter.

Cautious investors may therefore be inclined to wait but more aggressive ones may prefer to take a closer look now in the belief that the current difficulties will pass at some stage. Clinigen cited delays in hospital-based cancer treatments and clinical trials for the unexpected shortfall in sales and profits.

Once the pandemic is beaten off, it is not hard to see the number of operations and trials returning to previous levels to the benefit of Clinigen’s Proleukin kidney cancer drug, for example. The firm paid $120m (£85m) for the rights to the treatment in 2019 and demand has weakened markedly of late.

The company’s financial year ends on June 30 and the results may not be published until early autumn, but analysts believe that sales and profits will start to rebound in the year to June 2022. That could be a catalyst for a share price that is no higher than it was in 2013 and a stock that has suffered a substantial fall in valuation relative to earnings.

When the shares peaked at nearly £12 in autumn 2017 the stock was on around 25 times adjusted earnings per share (and nearly 50 times stated earnings per share). Those multiples have retreated to barely 10 and about 22.

Again, the risk is that the pace of recovery remains uneven, thanks to the pandemic, but patient and contrarian investors can begin to weigh up the potential rewards relative to that danger.

The company’s acquisitive history may deter some, but it has recovered from setbacks before.

Questor says: buy

Ticker: CLIN

Share price at close: 615p

Update: British American Tobacco

Investors who run rigorous screens for environmental, social and governance (ESG) factors will not think so, as they will exclude tobacco companies from their thinking as a matter of course, but shareholders are likely to see last week’s profit forecast upgrade from British American Tobacco as a welcome change.

One regular problem at the FTSE 100 firm has been its failure to deliver on (admittedly lofty) growth expectations for next-generation products such as vaping. The chief executive, Jack Bowles, is determined to kick that bad habit and the latest update shows that more smokers are switching to less harmful alternatives, with the result that BAT can now upgrade its profit forecasts for the year.

Higher-than-forecast profits should underpin cash flow and in turn help the company to both reduce its debt pile and continue to pay the dividends that for many form the basis of the investment case. A forecast yield of 7.8pc will catch the eye of income seekers, while value hunters will also ponder the merits of a forecast price-to-earnings ratio of less than nine.

That fat yield and low multiple reflect the risk posed by ongoing regulatory pushback against smoking, a pastime whose merits may have to be reassessed by many as the world grapples with an ongoing respiratory disease pandemic. But value hunters are already circling BAT, as evidenced by the 6.6pc stake snapped up Kenneth Dart’s Spring Mountain Investments.

Ethical investors will just shrug but income seekers will warm to the profit upgrade.

Questor says: hold

Ticker: BATS

Share price at close: £27.96

Russ Mould is investment director at AJ Bell, the stockbroker.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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