Clinigen: Cash Not Clarity

Updated: Mar 4

Clinigen is a small, UK-listed company specialising in pharmaceutical products and the provision of services to pharmaceutical clients and healthcare organisations. Listing on the London AIM market in 2012, Clinigen has grown from its roots in clinical services providing unlicensed medicines to acquiring products in rare disease areas and building its global distribution network. The last few years have seen Clinigen transform from a primarily service-led business to a product-led business, with pivotal acquisitions in the likes of Proleukin (their largest product for treatment of Renal Cell Carcinoma — a form of Kidney Cancer) and the distribution agreement recently signed for Erwinase, which aims to treat Acute Lymphoblastic Leukaemia. The Proleukin acquisition is notable as it allowed Clinigen to build a distribution network in the USA, which is the highest value pharmaceutical market. With an increasing global footprint, the foundations have been set for Clinigen to continue acquiring products that align to its strategy.

The Clinigen corporate structure has recently been simplified, and the infographic below from the latest quarterly earnings presentation helps explain how the company operates. The two main business lines are Services and Products. Services, the smaller arm of the business, is focused on the supply of difficult to access medicines and unlicensed products to predominantly hospital pharmacists as well as providing services in early access schemes. The product arm of the business, which has been the focus for recent acquisitions, is split into three segments:

  • On Demand: Clinigen Direct, Clinigen’s online portal, gives healthcare providers access to over 1200 products

  • Partnered Products: Clinigen operates distribution of 178 pharmaceutical products on license from the product owner

  • Owned Products: Clinigen has full ownership of 19 specialist pharmaceutical products and facilitates distribution through their network

Clinigen's Business Model

In terms of recent performance, results for the half year to the 31st December were released on the 23rd February. The official company line to explain performance was ‘resilient but not immune’ to the pandemic and its effects on business. I think this is a fair summary, as revenue for the half year was up 4% on an organic basis with expectations for the upper end of 5-10% growth for the full year. Profits were slightly impacted with a 10% reduction in EBITDA due to the coronavirus. Their flagship product, Proleukin, suffered a notable decline in performance as cancer patients were kept away from hospitals due to their susceptibility to the coronavirus. In terms of cashflow, Clinigen’s cashflow prowess was on full show turning £54.6m of EBITDA into £50.7m of Free Cash Flow in the half year, for which the majority was used to make a final payment to CSM (a company it has recently acquired). This is the last payment Clinigen owes related to acquisitions. Therefore, it expects future cashflows to go towards re-investing in the business and bringing the total debt down to 1.0-2.0x EBITDA by the year end.

In terms of sector performance, there was quite a difference between the Services business and the Product business. Revenues in the Services business were up 22% YoY powered by multiple contract wins, a surge in Cliniport users and a total of 18 new Managed Access schemes. EBITDA for Services was down slightly due to investment in future growth and a negative sourcing mix, which can only be explained by weakness in the non-Covid-19 clinical trial space. Products on the other hand saw a revenue decline of 9% in the half due mainly to lower contribution from oncology medicines. Foscavir, Clinigen’s very first owned product, now has generic competition in Europe and the US, however, sales held up reliably in the first half. Proleukin is expected to resume growth and return to its normal trajectory, and a pivotal trial in August could lead to the approval of the drug for ALS and drive significant growth. Looking further down the line in 2022, Erwinase, Clinigen’s recently licensed product, is expected to deliver large revenue growth to the Products business.

To summarise outlook, here are some key highlights for Clinigen in the coming year and onwards:

  • Return to growth for Proleukin, with possibility for ALS data to increase total opportunity

  • 5-10% growth is expected for full-year revenues and revenues are scheduled to accelerate into 2022

  • Building on new contract wins in Services

  • Wider adoption of Clinigen Direct online portal

  • Debt paydown to 1.0-2.0x EBITDA, increasing possibility for acquisitions or returning capital to shareholders

Acquisitions have led to a spaghetti bowl of financials that are difficult for even experienced investors to digest. Clinigen has been making acquisitions for most of its incorporated lifetime and thus adjusts acquisition-related costs and amortisations from its underlying (adjusted) profits. Using these adjusted measures, we can get a picture of how the underlying business performs on a like-for-like basis over a period of time, but we need to be careful to make sure the adjustments are reflective of the company’s actual financial position. By taking a holistic approach to financial reporting and using a few different metrics, we are better able to understand the fundamentals. So firstly, looking at the top line, revenues are growing. Some organic growth is baked in, but as already discussed, Clinigen is an acquisition vehicle, so a large proportion of revenues are likely to be derived from these purchases. These purchases have been mostly funded upfront with debt, raising the leverage ratio to 2.8x Net debt/EBITDA. On an adjusted basis, operating profit has trended up with the general increases in revenue and operating margins are solid at around 20% on average. However, when you look at an official reported basis, operating profits are much lower due to acquisitions and the slump in reported profits in 2019 is due to the purchase of Proleukin. Looking into the adjustments to underlying profits in the company’s annual report, there is a list of adjustments that derive the final underlying profit figure. Looking deeper into these, I think it is fair to include some exceptional items such as the amortisation of intangibles for acquisitions as this will be a balance sheet write off and be rebased going forwards. However, there are some costs related to acquisitions that Clinigen will repeat every year as they are an acquisitive business. By removing these adjustments, I have calculated a fair value operating profit, more reflective of actual financial position. On a fair value basis, operating margins still achieve above 15% on average, although ROCE slips to a less impressive figure. Despite these slightly confusing financials, we do know Clinigen is very good at converting EBITDA into free cash flow, so whilst reported operating profit may be hampered due to balance sheet write downs, the cash coming into the business is strong. This cash is going to be used to further improve the financial position with debt repayments.

So, in summary of the financials, reported operating profits are currently being written down by acquisition-related items. The picture is somewhat unclear as to what investors should judge from its reported figures, and I believe Clinigen is a little heavy handed with its adjustments. That being said, even looking at non-adjusted figures, Clinigen is still profitable, and fair adjustments show a very solid level of profitability too.

In terms of valuation, I think the market is a little sceptical of the adjusted earnings figure too, as if the 2020 adjusted EPS figure of 65p were to be taken in verbatim, Clinigen would have a P/E of 10.9, which is critically undervalued for a small, fast growing, profitable business in a reliable sector. However, reported EPS of 10p in 2020 would derive a P/E of 71, and I am not sure the market would pay this price for the company either! Reported (unadjusted) EPS in 2021 is estimated to be 36p, deriving a P/E of 19 falling to around 16x reported earnings in 2022. Due to the lack of acquisitions on the ticket for 2021, and Clinigen’s focus on debt repayment, I would consider this figure to be a more reflective evaluation of the business and a more likely multiple the market would be willing to pay for such a company. Valuation aside, you can take some solace in the cash generative ability of the company and the focus on debt repayments.

In conclusion, I think Clinigen has interesting prospects for investors. Financially, the situation is less clear than I would appreciate due to all of the acquisitions, however, it is the nature of a small operator like Clinigen trying to grow its platforms. Therefore, I think the investment case for Clinigen relies on:

  • The operating performance of the business

  • The platform for future growth

  • Its diversified business model in a typically resilient sector

  • Strong cash free cash flow conversion.

The nature of the business makes it difficult to find a firm footing on the financial metrics, and the company's adjustments can be taken with a pinch of salt. I think the operating performance of the business is strong enough to outweigh the slightly unclear financials, but I think investors need to understand why they are buying the business, what the caveats are and that the valuation ratios you will likely see on pre-populated finance websites or low-quality financial journals probably do not reflect the operating position for the company or the price paid by the market for the shares.

I personally own a small position in Clinigen for my family fund because I believe in its future growth prospects and the niche area of the market it has carved out for itself.