Consort Medical blames Dutch drug for share price crash

A great performer over the past eight years, Consort Medical is in the midst of a crisis. Graeme Evans talks us through both the plunge and recovery prospects.

A four-year run of growth for shares in Consort Medical was wiped out in a flash today after the drug delivery devices maker warned of a £3 million hit to profits.

The share price slump of 21%, which left the stock at its lowest point since December 2014 and took its decline since June to over 40%, will come as a shock to investors who have grown to regard the company as a safe haven performer with a steadily rising dividend.

They will now be asking whether today's slide represents a fantastic opportunity to pick up a heavily discounted stock, or just the risk of catching a falling knife.

Blame for the profits shortfall was pinned on delays in Dutch pharmaceuticals customer Mylan gaining regulatory approval for Wixela, its generic version of GlaxoSmithKline's best-selling lung disease treatment Advair.

Mylan, which is partnering with Consort, has been building inventory ahead of the imminent launch, but these delays mean that demand for Consort devices are now anticipated to reduce in the near-term.

Consort said:

"We remain excited about the programme but anticipate that the demand for our devices in the remainder of this financial year and next financial year will be significantly lower than previous expectations after taking into account the level of inventory that Mylan are carrying."

Analysts at N+1 Singer do not share the company's optimism that the peak sales opportunity offered by Wixela is unchanged, pointing out that further delays risked substitution into other products or the threat of new generic entrants.

Even before today's slide N+1 analyst Chris Glasper said shares were trading at a 30% to 40% discount to Consort's peers, which he blamed on a "lack of growth and repeated setbacks" involving various pipeline projects.

Source: TradingView weekly chart (*) Past performance is not a guide to future performance

Glasper said:

"Consort is in desperate need of a positive catalyst to prompt a re-rating and narrow this discount. Failing that, the group could be vulnerable to a bid in what remains a consolidating industry."

N+1 Singer had a target price of 1,164p prior to today. In the wake of the profits downgrade, RBC cut its price target to 1,320p from 1,430p and Investec Securities reduced to 1,214p from 1,400p.

Investec said today's interim results showed "solid underlying progress", albeit offset by the Mylan delays and lower sales from the Aesica division responsible for the manufacture of active pharmaceutical ingredients.

Consort delivered 2.5% growth in overall underlying earnings to £20.8 million in the six months to October 31, reflecting margin improvement in both Aesica and the Bespak division responsible for medical devices.

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Investec lowered its forecasts for the whole financial year by 10% today, with cuts of 12% and 11% in the following two years. However, they said:

"We still see reasons for optimism, flagging the potential launch of generic Advair as a possible, near-term, positive catalyst for the stock."

Hertfordshire-based Consort generates strong operating cash flows that have supported investment in organic growth and has allowed it to lift the dividend in recent years. 

The interim award rose 2.2% to 7.6p a share, with Investec seeing the pay-out for this financial year lifting to 21.2p to give a projected yield of 2.2%.

*Horizontal lines on charts represent levels of previous technical support and resistance.