A new Alzheimer’s treatment from US firm Eli Lilly was approved for use this week by the UK drug regulator MHRA, although disappointingly for its maker, the drug won’t be available on the NHS as it fails the test of being good value for money.
The goal of every pharmaceutical company — and Britain punches well above its weight in this sector — is to develop drugs and vaccines that perform better than current ones or that deliver valuable new benefits, and to secure licences for use in multiple markets.
The years-long development and approval process means that regardless of whether the tablets prescribed by your GP, or the packet of painkillers you picked up off the pharmacy shelf, have a US, UK or European manufacturer, you can rest assured that the product has been through pre-clinical and clinical trials, and safety and efficacy tests before being licensed for sale.
The success rate for products rises as they pass through the various stages but they can still fail at the final hurdle, and a negative regulatory outcome will affect the company’s share price, particularly where smaller biotechs are concerned.
A green light from the FDA, the US body that licenses treatments and biological products for domestic use, is typically hugely significant given the size of that market. But even when approval is granted, companies will face additional hurdles as they break into that market, as Tristel is finding to its cost.
HOLD: Tristel (TSTL)
The disinfectant manufacturer has reported “bureaucratic” hold-ups in its US business, writes Jemma Slingo.
Disinfectant maker Tristel achieved double-digit revenue and profit growth in the past financial year, but its progress in the US has been slower than expected.
Aim-traded Tristel sells proprietary chlorine dioxide products to hospitals for the decontamination of medical devices. Demand for these products is proving strong, with revenue rising by 16 per cent to £41.9mn in the year to June 2024. Adjusted profit before tax jumped by nearly a third to £8.2mn in the same period, and the total dividend has been hiked by 29 per cent to 13.52p a share.
Growth was a result of higher volumes and price hikes (prices were increased by an average of 11 per cent in the period, driven primarily by the UK, where supply agreements require fixed pricing extending into future years).
The first sales of Tristel ULT — a foam disinfectant for ultrasound probes — in the US also marked an important milestone, following approval by the Food and Drug Administration (FDA) in 2023. However, management said its manufacturing partner in the US had encountered “more purchasing bureaucracy” than originally expected, which has “slightly extended the timeline for some adopters to come on board”.
Analysts at Panmure Liberum were concerned by this. “Royalty revenue for the year was £75,000 vs our forecasts of £500,000 so the delta is quite material,” they said, lowering their target price from 420p to 360p.
There are other areas of uncertainty that investors should be aware of too. After 31 years at the helm, founder Paul Swinney has stepped down as chief executive and has been replaced by Matt Sassone. He has more than 27 years of experience in the medical industry, but any boardroom handover involves risk and this comes at a crucial juncture in Tristel’s US expansion plans.
Meanwhile, the customer base remains relatively concentrated: 27 per cent of the group’s total revenues were earned from a single customer in full-year 2024, compared with 22 per cent in 2023.
Tristel remains committed to its three-year plan, which ends in June next year. This plan targets average sales growth of 10-15 per cent per annum, a consistent Ebitda margin of 25 per cent, and year-on-year increases in pre-tax profit. So far, margins have been widening and revenue growth has been picking up pace.
This is a testament to the strength of Tristel’s business. However, its forward price/earnings ratio of 25 reflects its quality and growth opportunities, and Panmure Liberum argues that slow progress in the US has increased forecast risk.
BUY: Bloomsbury (BMY)
Shares in Bloomsbury jumped by 10 per cent after the publisher reported its interim results, writes Jemma Slingo.
It is easy to see why. Full-year figures are now expected to be ahead of consensus forecasts, following a bumper period for fantasy fiction.
Group revenue rose by 32 per cent to £180mn in the six months to August, and most of this growth was organic. Adjusted profit before tax increased by 50 per cent to £26.6mn.
Growth was fuelled by Bloomsbury’s consumer division, which saw revenue leap by 47 per cent to £131mn. Sales of Sarah J Maas books more than doubled in the period, while the Harry Potter series continues to be a bestseller 27 years after publication. No new Maas book is scheduled for the second half of the year, which will make for tough year-on-year comparisons. However, Bloomsbury has six future books under contract, suggesting the pipeline is strong.
Meanwhile, Warner Brothers Discovery plans a seven-season run of a new Harry Potter streaming series, which should sustain interest in the boy wizard.
The non-consumer side of the business has had a tougher time. Organic revenue in the academic and professional division fell by 14 per cent as a result of “UK and US budgetary pressures and the accelerated shift from print to digital”.
Within this segment, Bloomsbury Digital Resources (BDR) only managed to increase revenue by 2 per cent to £13.7mn. The acquisition of US academic publisher Rowman & Littlefield is expected to accelerate growth, however, and management said it is still on track to meet its target of £41mn BDR sales in 2027-28.
The acquisition of Rowman & Littlefield in May was Bloomsbury’s biggest to date, and means the group now has £28.4mn of borrowings on its balance sheet. However, it still has a net cash position of £9.7mn (before lease liabilities) and is generating plenty of cash from its operations.
Bloomsbury’s interim results contained another interesting development. Chief executive Nigel Newton has been vocal in his criticism of tech giants, but the group is now “exploring the opportunity to monetise content through AI deals in a responsible and ethical manner”.
The deals are still in their “infancy”, and Newton stressed that the group “emphatically won’t do deals with anyone that would be antithetical to the interest and wishes of our authors”. Over the longer term, however, it will be interesting to see how this plays out.
In the meantime, investors will be watching for signs of improvement in Bloomsbury’s non-consumer arm — particularly after such a large acquisition, which introduces new integration risk. However, the strength of Bloomsbury’s consumer arm should not be underestimated.
HOLD: Midwich Group (MIDW)
Adjusted operating profit for 2024 is expected to be significantly below the previous year, writes Mark Robinson.
The share price of Midwich Group has fallen by a third over the past 12 months as conditions in the audiovisual (AV) market have deteriorated. Indeed, the share price went into downtrend four months after the Bank of England started cranking up interest rates. So, it wouldn’t be unreasonable to draw a link between AV demand and tightening discretionary spending. It’s the type of business expenditure that can be deferred.
The group has released revised guidance for 2024 following on from September’s half-year figures. Although trading remains generally favourable in the group’s North American markets, and matters have “stabilised” in the UK, “broader market conditions have not improved as anticipated”. This has been particularly noticeable in Germany, where mainstream demand from educational and corporate customers remains subdued.
The good news is that because the product mix is being slanted towards technical video, audio and lighting products, the group’s gross margin will remain at record levels through the second half of the year. Management has continued to focus on efficiency measures in a bid to support profitability, yet this will take time to work through to the bottom line. So, although revenues are now expected to be “marginally ahead of the prior year”, the group now expects “adjusted operating profit for 2024 to be significantly below the prior year, reflecting the operational gearing of the business”.
The group has been on a mini-M&A spree in recent weeks, adding three higher-margin technical businesses engaged in the live events and fire security markets. The deals are expected to feed through to a year-end leverage multiple of around 2.2 times adjusted cash profits, which management maintains is well within debt covenants. It also believes that Midwich is well placed to increase market share in its target markets, while long-term profitability will be supported by a more favourable business mix. The group expects to release a scheduled year-end trading update on January 20 2025. We move back to “hold” at 273p a share, although the price could retrace rapidly because of pent-up demand combined with the operational gearing dynamic.