United Drug: Industry Knowledge And Global Expansion

United Drug (UDG.L) benefits from outsourcing trends as industry-wide pressures force the re-evaluation of non-core activities. A combination of acquisition and organic growth has established a global presence and it is approaching critical mass in its selected niches. It is much less dependent on its historic UK and Ireland wholesale business and is expanding in higher growth areas such as clinical trial supplies and contract sales and marketing support. This global reach and industry knowledge helps make it a partner of choice for multi-national pharmaceutical companies.

In-depth industry knowledge and global expansion
United Drug’s intimate knowledge of the healthcare industry, particularly the rigorous quality protocols and how to comply with them, has been a major competitive advantage. Five acquisitions in 2012 alone (costing €140m, including €111m in cash) have accelerated the diversification of profits outside Ireland. These businesses are expected to initially contribute €9m operating profit per year.

Diversification into profitable niches
Acquisitions are an important element in the Group’s strategy. The Pharmexx acquisition will help to build a global contract sales outsourcing operation within the sales and marketing division (26% of operating profit). The packaging division (19% of profit) is gaining significant US market share. The healthcare supply chain business (55% of profit) continues to suffer from government austerity measures, although there are signs of this abating slightly.

Consensus estimates: Challenges in place
United Drug needs to manage its existing broad portfolio of businesses while integrating acquisitions at a fast pace. Pharmexx (acquired from Celesio in 2012) is in need of turnaround, while the existing wholesale and EU packaging businesses within United Drug face individual challenges that are denting overall profitability. Nonetheless, 2013 estimates appear achievable, especially as the impact from recent acquisitions feeds through. Further out, growth hinges on the successful integration of the acquisitions and an improving economic environment.

Valuation: Remains undemanding
The stock trades on P/Es of FY13 10.5x and FY14 9.3x, with EV/EBITDAs of 8.1x and 7.4x respectively. This is realistic for a company with earnings projected to grow in the double-digit range over the next five years, improving market positions in each of its business areas and a strong balance sheet.


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