Global Specialty Pharma Services Expansion Will Drive Long Term Earnings Power

Catalysts

About Uniphar

Uniphar is a global healthcare services platform connecting pharma, medtech and biotech manufacturers with hospitals, pharmacies and patients across more than 160 countries.

What are the underlying business or industry changes driving this perspective?

• Scaling of global specialty pharma services, including clinical trial supply, early access and commercialization support for biotech, is expected to deepen manufacturer relationships and expand higher margin revenue streams. This may support sustained double digit gross profit growth and rising earnings.
• Expansion of the Medtech platform into Northern Europe, Benelux, the Nordics, Austria and additional U.K. specialties, supported by long term outsourcing by device makers, may translate recent headcount investment into stronger top line growth and operating leverage. This could lift divisional EBITDA.
• Completion and ramp up of the new Irish distribution center and S/4HANA platform, combined with a push toward paperless pharmacy and digital process automation, may materially improve efficiency, enhance service density and support margin recovery in Supply Chain and Retail. This could boost group EBITDA and free cash flow conversion beyond 2028.
• Global build out of integrated hubs in the Netherlands, North Carolina and the planned U.K. facility positions Uniphar as a cross continental launch and distribution partner for complex therapies. This may enable higher value contracts across both pharma and medtech and drive mix led improvement in group net margins and earnings per share.
• Disciplined capital allocation, with ROCE reported above the 12 to 15 percent hurdle and leverage maintained below 2.5 times, combined with a growing M&A pipeline in pharma services, may allow accretive bolt ons and organic investments to support revenue growth and progress toward the 200 million euro EBITDA target.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Uniphar's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.3% today to 2.1% in 3 years time.
• Analysts expect earnings to reach €70.0 million (and earnings per share of €0.28) by about December 2028, up from €66.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €56.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the IE Healthcare industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 4.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The multi year rollout of the new Irish distribution center and S/4HANA platform, including a six to nine month period of dual running with duplicate staffing and IT support, may experience delays or operational issues that extend elevated costs beyond 2028, which could depress Supply Chain and Retail EBITDA margins and slow earnings growth.
• Significant upfront investment in Medtech field specialists and back office teams to support expansion into Benelux, the Nordics, Austria and new U.K. specialties could fail to translate into sufficient incremental contracts. This could lead to lower than expected revenue growth and weaker operating leverage in divisional EBITDA.
• The strategy to shift Pharma away from lower margin parallel trade toward higher margin global sourcing, clinical trial supply and commercialization services depends on winning and ramping sizable manufacturer contracts with long sales cycles. Any slowdown in biotech funding or fewer European launches for rare disease therapies could limit revenue growth and constrain net margin expansion.
• The EUR 200 million EBITDA target by 2028 assumes robust double digit organic growth across all divisions and a largely cooperative M&A environment. If macroeconomic conditions, healthcare reimbursement pressures or competitive responses in Europe and the U.S. reduce pricing power, Uniphar may miss its target, which could weigh on earnings and the valuation multiple.
• Large capital commitments to Greenogue 2, the Netherlands hub and the North Carolina facility, with projected returns above a 12 to 15 percent hurdle, could prove overly optimistic if volume ramp up is slower than planned. This could result in subscale utilization that drags on free cash flow conversion and limits deleveraging capacity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €4.95 for Uniphar based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €3.4 billion, earnings will come to €70.0 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of €3.67, the analyst price target of €4.95 is 26.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.