Consort Medical’s FY16 results reflected the first full year of consolidation of Aesica. Revenues of £277m evidenced the scalability of its full-service contract development and manufacturing operations, as well as the impact of ongoing operational efficiencies, with improved operating margins at both Bespak (+170bp) and Aesica (+210bp). Consort is making good progress with building scale and is well placed to capitalise on the strong growth in outsourcing development and manufacturing in the sector.
Aesica integration on track
Consort has delivered on its key strategic goals following the Aesica acquisition, including securing a first drug/device development and manufacturing collaboration with Precision Ocular. Aesica restructuring is largely complete and EBIT margin improved to 7.4% in 2016 (targeting low double digits in the next one to two years), reflecting active cost management and the curtailment of negative/low-margin work. Consort’s positioning as a single-source supplier for medical device contract development and manufacturing is a key differentiating factor for customer engagement.
Growing pipeline and customer diversification
The disclosed pipeline has expanded with the addition of the Aeropharm VAL050 MDI contract and Precision Ocular’s joint Aesica/Bespak project (with a £3.3m equity investment). Uncertainty remains over the launch of the Voke nicotine inhaler (DEV200), potentially in the next year, although the revelation that DEV610 is Mylan’s Advair generic with a GDUFA date of 28 March 2017 brings clarity to its launch timeline and sales potential.
Financials: Better margins and scope for investment
49.8% higher FY16 revenues (before special items) reflected growth in all Bespak segments and Aesica. Operating profit (before special items) grew to £37m (FY15: £25.1m) with margin broadly maintained (13.4%). Strong operating cash flows are expected, although investment in growth opportunities means capex will remain high (£25m FY17-18).
Valuation: Range of 1,350-1,403p per share
Our updated valuation range (previously 1,292-1,399p) reflects updated peer group multiples and a revision of our assumptions for DEV200 and DEV610 following recent disclosures. We value Consort using a combination of peer comparables and a risk-adjusted NPV for the pipeline. On a calendarised 11.5x FY17e EV/EBITDA, our equity valuation is 1,130p/share. Adding 220-273p for the product pipeline results in a group valuation of 1,350-1,403p/share. On DCF, we value Consort at 1,248p/share.