Earnings upgrades are expected at pharmaceutical services and delivery device specialist Consort Medical (CSRT) as 2016 will see several product launches and likely new contract wins.

Up to seven new products are expected to hit the market in the next 12 months. Analyst Julie Simmonds at broker Panmure Gordon notes that e-cigarette DEV200 and DEV610, a dry powder inhaler for the respiratory market, have significant potential for revenue upgrades. She anticipates peak sales of £8 million for each product, but believes there is room for the company to exceed her estimates.

Consort makes nicotine inhaler Voke for British American Tobacco (BATS) and its launch is expected imminently. The device has secured regulatory approval and can be prescribed by the NHS for those wishing to quit smoking. DEV610 has been pencilled in for a market launch in the second half of 2016.

Pre-tax profits are forecast to improve by 27.3% to £29 million in the 12 months to 30 April 2016 and by 12.8% to £32.6 million in the following financial year as momentum builds in the company.

Growth: High

Up to seven new products to reach the market in 2016 while pipeline looks attractive

Risk: High

Growth is reliant on new contract wins and getting new products to market. Any delays could see earnings downgrades.

Quality: Medium

Margins are rising, especially at Consort’s Aesica division, which have grown by 1% in 12 months after the cancellation of some zero margin contracts.

In the pipeline

As a provider of services to the pharmaceutical industry, Consort is a play on the trend for research and development. It also taps into demand for manufacturing outsourcing by larger drug companies looking to reduce development risks associated with the industry.

Consort seeks long-term contracts with large pharmaceuticals that provide a low risk and repeatable revenue stream, which Simmonds expects will grow by some 5% a year.

Margins will improve thanks to new products and Aesica, the business it bought towards the end of 2014 which gave it Finished Dose formulation services expertise. The deal is expected to be a key contributor to Consort’s earnings progression. The Panmure analyst forecasts that earnings per share will increase by 28.6% in the three years to April 2018.

The first contracts for VapourSoft, a compact energy source of contained liquefied gas to power drug delivery, are expected this year. The technology platform has the potential to add significant upside to Simmond’s estimates as she had not built any contracts wins into her forecasts.

A premium rating

Consort trades on more than 20 times earnings but the premium is justified thanks to what looks like a transformative few years for the company. The 1.9% dividend paid this year could look disappointing for a company expected to report such huge growth, but cash is being re-invested to help generate shareholder value by winning new contracts and making more products.

The core business is Bespak, a medical device contract manufacturer specialising in respiratory treatments. This has long-term contracts and regulatory tie-ins with product owners, providing barriers to entry as it is considered difficult to switch manufacturers.

Further opportunity could come from Consort diversifying into new areas, such as packaging, biologics manufacturing and diagnostics.

The Hemel Hempstead-based company employs more than 2,000 people globally, many of which are based in the UK. It has sites in King’s Lynn, Cambridge, Milton Keynes and Nottingham as well as operations in Germany and Italy.

Consort Medical (CSRT) £10.09

Stop loss: 807.2p

Market value: £495.1 million

Prospective PE Apr 2016: 20.8

Prospective PE Apr 2017: 18.9

Prospective dividend yield: 1.9%

Bid/offer spread: 0.49%

Analyst price target: £11.45*
*Panmure Gordon, 19 January 2016