AIM-listed pharmaceutical and clinical testing services provider Clinigen (LSE: CLIN) is far from a household name, but shares of the £1bn market cap have gained over 50% in the past year alone. And after the company's full-year trading update this morning suggested a fifth straight year of double-digits earnings growth was just notched up, I reckon the firm's shares have plenty of room to continuing skyrocketing.
The trading update didn't disclose any hard financial data except for a 22% year-on-year (y/y) rise in gross profit, which is the best way to measure top-line growth. However, with adjusted earnings per share rising 34% y/y in H1 to 19p, it's almost inconceivable that full-year profits didn't match the 16% rise analysts pencilled in for the period.
Management has achieved this stellar growth through acquisitions and solid organic expansion across all of its three main divisions; clinical testing services, unlicensed medicines, and licensed medicines. What attracts me to its business model is that rather than undertaking expensive, time-consuming and a hit-or-miss process of designing drugs from the ground up, Clinigen simply signs agreements with pharma firms to manage access to their drugs for hospitals and physicians across the globe.
And Clinigen has built itself into the leader in the niche market for access to unlicensed drugs, which is a huge and completely legal market across the globe. This segment accounted for 42% of gross profit in 2017 and is experiencing strong growth, especially in Asia and Africa where doctors need access to off-label pharmaceuticals but need to ensure their reliability and safety.
An added benefit of this business model is that it is highly profitable. In H1 the company reported £30m in EBITDA off of £59.1m in gross profit. This ratio should only improve as acquisitions are integrated and SG&A as a proportion of sales falls. With a market-leading position, bumper cash flow and only £35m in net debt, I'm very interested in Clinigen shares today at their valuation of 23 times forward earnings.
Building a strong base for future growth
Another niche business performing very well is lightweight foam manufacturer Zotefoams (LSE: ZTF). Shares of the £134m market cap firm have risen 16% over the past year as the company has sold more of its specialist product for everything from the soles of running shoes to protecting critical products during shipping and military aeroplane ejector seats.
In the quarter to March, the company's global sales rose 16% y/y when stripping out the positive effects of the weak pound, which shows just how popular its new high performance designs have proven with customers. Looking ahead, there is plenty of potential for growth as markets outside the US, UK and Europe still only account for roughly a quarter of group sales. A new factory in the US is also set to come on-line in Q3 and will raise global production capacity by a full 20%.
Even after paying for this new factory, the company is still in a great position financially as well, with net debt at year-end of just £12.56m. Operating margins last year rose to 13.3% and as the business scales up there's plenty of growth potential here as well. At 20 times forward earnings and with high growth potential and strong competitive advantages, I see Zotefoams as very attractively priced.
But if Zotefoams is still too expensive for your taste I reckon the Motley Fool's Top Small Cap of 2017, which trades at just 8 times earnings, is worth checking out. And this stock isn't a low-growth tiddler either as it has posted four consecutive years of double-digits earnings growth.
To discover why the Fool's analysts love this value growth option, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any shares mentioned.The Motley Fool UK has recommended Clinigen. 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.