The best time to buy companies with big potential is often when everyone seems to have lost interest.
The simple truth is that the majority of blue sky companies fail. And the ones that do succeed usually seem do so a few years later than originally promised. By this time, investors seem to have lost interest, the valuation is at an all-time low, but the balance sheet is strong and the directors have been picking up shares on the cheap.
Sinclair Pharma (LSE: SPH) ticks a lot of these boxes. The shares are thinly traded and there's precious little excitement on the various discussion boards these days. This is understandable; the share price performance hasn't exactly been stellar. But the company has generated more than its fair share of excitement from jam-tomorrow investors in the past when the share price was much higher.
Market niche
It isn't really out and out blue-sky, though. Instead, its niche lies in acquiring or further developing undervalued products, registering these products and bringing them to market quickly.
Today, Sinclair has some pretty exciting stuff in its suite covering dermatology and oral health. The company seems to operate in the hinterland between health and beauty products. So if you're worried about acne, wrinkles, dry skin, eczema, age spots, stretch-marks, bad breath, or gum disease, it's well worth having a look at the website.
Its revenues come in three roughly equal ways: From licensing agreements with larger drug companies, sales from its own sales force and from independent distributors in 80 different countries.
Milestone
The interim results for the second half of 2008 marked a significant milestone for the company as it turned in its first EBITDA profit (excluding £3m in foreign exchange gains) since its introduction to the market in December 2003. Perhaps more significantly, Sinclair was optimistic about its future development.
But the interim management statement of 18 May was a bit of a mixed bag. We were told that the potentially exciting Decapinol mouthwash is to be launched in the U.S. during the next year and that the company has secured a new £10m credit agreement in exchange for equity. On the downside, sales have been affected by de-stocking among drug wholesalers, though this has been offset by stronger revenue from licensing and the benefits of the weak pound.
Now mouthwash may not sound very exciting, but apparently Decapinol works differently from other antiseptic mouthwashes which can trigger secondary mouth infections such as thrush and which can stain teeth. Clinical trials confirm its superiority and, as you can imagine, the potential market is huge.
Long-term value
Only time will tell. But at today's price of 24.5p, Sinclair is valued at just £25.3m. Two years ago, the shares stood at 125p. Revenues are growing quickly and consensus broker forecasts for 2010 show earnings per share of 2.2p, so it isn't screamingly cheap -- particularly in today's depressed markets where picking tiny forward P/E ratios is like shooting fish in a barrel. But placing accurate forward valuations on anything with such big potential is fraught with difficulty. It looks far more significant to me that the company is now profitable, has the funds to continue its operations and has a net asset value of around three times the market cap.
The directors have shown significant confidence in their company, buying shares at prices ranging from a rock-bottom 16p, to 23p late last year. It looks like they have long-term confidence in the business and it's not hard to see why.
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