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After its 25%+ fall, what am I doing about Clinigen shares?

Image: Dechra Pharmaceuticals

Clinigen (LSE: CLIN) is a pharmaceutical and services company that provides access to medicines on a global scale. While this business model has proved effective over the last few years, with consistent strong financial results being the evidence of this, the pandemic has adversely affected the company. Today, this resulted in the pharmaceutical company issuing a profit-warning, causing the Clinigen share price to fall 25+%. It’s down by 24% over 12 months. Does this present the perfect opportunity to buy or is there further to fall?

Profit warning

Due to the pandemic, the main focus of healthcare was fighting the virus, and this often came at the expense of fighting other diseases. For Clinigen, this has been detrimental due to weaker demand for its kidney cancer drug Proleukin.

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Clinigen became the exclusive owner of Proleukin in 2019 when it paid $120m for the rights. But that looks like bad timing as the pandemic led to a significant reduction in hospital-based oncology treatments, thus denting Proleukin sales. Management has also assumed that this “weaker demand” will continue until normal hospital services have resumed.

As such, although revenues are expected to remain in line with previous guidance, adjusted cash profits are expected to be in a range of £114m-£117m for the year. This is a 12% drop against consensus forecasts. This is why investors have reacted so severely and the Clinigen share price has fallen so much in a day.

Has the market overreacted?

When a stock falls so significantly in one session, there is always the chance that the market has overreacted. I believe that this is one of these occasions.

Indeed, as already mentioned, revenues are expected to be in line with previous guidance. In February, Clinigen said that it expected net revenue growth of around 5%-10%. Accordingly, it is clear that there are still growth opportunities for the company.

Furthermore, there is optimism that profits will be able to return, and this should help a rebound in the Clinigen share price. Management has offered a positive outlook, stating that it anticipates a return to double-digit growth in the next financial year. This is backed up by strong growth in the company’s services sector, which is gaining market share.

Nonetheless, there is always the possibility that there is worse to come. For example, while the poor performance of Proleukin has been blamed on the pandemic, it may signal the continuing decline of the product. If such demand cannot return, the Clinigen share price may suffer in the long term.

Am I buying Clinigen shares?

Yet I still believe that the market has overreacted to this profit warning. Accordingly, although a profit warning is never good news, such a big fall in the Clinigen share price does not seem warranted to me. Therefore, I am now very tempted to buy the stock. This is especially because I believe it has significant recovery and growth potential. Nonetheless, due to the risks of contrarian investing, I would only buy Clinigen shares as part of a balanced portfolio.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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