Liam Ferguson of Vindon Healthcare speaks to Stockopedia

An unassuming business park just off the M62 on the outskirts of Rochdale might seem an unlikely home for some of the country’s prized historical records. Yet for the British Library, the site offers one of the most advanced storage facilities in the UK and the perfect place to protect rare documentary film footage from the early part of last century. For Liam Ferguson, the chairman of environmental control specialist Vindon Healthcare (LON:VDN), the contract marks the latest move in his efforts to broaden the company’s market reach. But while protecting the nation’s heritage is now all in a day’s work, he is also keen to build Vindon’s presence in its core pharmaceuticals market as well as explore new areas such as cryogenic storage of stem cells.

When Ferguson brought Vindon to the Alternative Investment Market in April 2005, the seasoned engineering entrepreneur set about plans to breathe new life into its ageing operations whilst nurturing its hard-won reputation among big pharma clients. Vindon manufactures environmental control products where careful management of temperature, humidity and light in controlled storage is essential. Not only does it make and sell these systems but it also runs expansive storage facilities where the likes of pharma customers can outsource the long term storage of ingredients, which is often a vital part in the testing of new drugs.

For investors eyeing the wider sector, Vindon’s presence in the Medical Equipment segment of the AIM market means that its peers range from the likes of Deltex Medical Group (LON:DEMG) , Lidco Group (LON:LID) and Surgical Innovations Group (LON:SUN) .

Over the last five years Ferguson and his team have overseen the construction of the flagship facility in Rochdale, the opening of a similar site in Ireland in 2007 and in January this year acquired their US sales agent, Westech Instruments. The move in the US represents the first step in building a much stronger presence on the other side of the Atlantic and is now the immediate focus for the company, with plans to open a storage facility there later this year. In the six months to June 30, Vindon reported a slight increase in revenues to £2.6m with pre-tax profits down marginally at £0.4m. Stockopedia spoke to Liam Ferguson about the company’s performance so far in 2010 and his ambitions for the group as it expands into new markets.

Liam, what were your plans for Vindon Healthcare when it came to AIM back in 2005 and how have your markets changed over that time?

The original plan was to strengthen the offer we had and expand geographically, and that is still the strategy. I was hoping we could do all of that and keep the profits at exactly the same level or better but the UK recession has really stopped that happening. Even the pharmaceutical sector has not been immune from this recession and it has particularly affected our equipment sales. That now seems to have turned around but certainly during the last two or three years it has been harder to keep the equipment sales at a level we’d like them. But I think the results are still respectable and I think the strategy is clear.

When we first listed we were operating from a relatively dilapidated old mill in Oldham, which was making reasonable profits as a percentage of sales. But it was very much a windfall situation where it had won work from the pharma industry often because its customers were having new facilities coming on stream, but it wasn’t, in my view, very sustainable. Other people were coming in on our market to try and store drugs so I felt that it was not sustainable without actually having a much more impressive offer and having a facility that was better than any potential competitors and as good as our quasi competitors – namely the drug companies themselves.

We took the view that we had to invest in a state of the art facility, which was the first thing we did. We trebled the size of our facility so we can now handle a lot more bulk storage and we have doubled the size of the manufacturing facility and brought it into the 21st century, and we raised £2m with new shares to do that. We have also opened up an operation in Ireland, which has generated a good percentage of our profits this year, it has done very well, even though the Irish economy has been virtually in the doldrums. Latterly we have built a facility in the States, which will come on stream in the fourth quarter of this year. We bought a business that was essentially our agent and we are now looking at trying to expand the storage offer in the States. We’ve also broadened the work we do, instead of just storing drugs we’ve gone into storing artefacts, for example. We’re working with the British Library on storing archive documentary film footage from the early part of last century. The British Library want to keep the original film and it has got to be held in very specific conditions. It takes up a fair amount of space, it is not as high margin but it is there for 25 years. We have also recently gone into cryogenic storage of stem cells.

Presumably you see stem cell storage as a growth market for you?

For sure. It is a fairly early market in the UK but it’s more matured in some of the other countries in Europe and we’re just steadily working our way into that. But it is not just stem cells, we’re also into low temperature storage of things like yeast samples and things that have got to be kept at well below refrigerator temperature but not necessarily near to absolute freezing, like stem cells. So, again, it’s all about trying to broaden what we do so we’re not as reliant on big pharma and in-house storage of research drugs, which was our base business.

But that pharma business is still a very significant part of what you do?

It’s still our core business but I think we’ve got to move geographically and we’ve got to move across the storage offer. It’s all about offering value added services that are repeatable into the health service and the drug industry, that’s the strategy in broad terms. Trying to take advantage of the fact that we have got a very long reputation for providing very high levels of services into those industries; we’ve got a very good client base.

When I became Chairman, and when we bought the business from the previous owner, the thing that really struck me was how highly regarded the business was within some pretty big businesses in the pharma industry. I was really struck at how much client loyalty there was towards Vindon, the fact that it was very well thought of and highly respected within its relatively niche business and we’re obviously going to take advantage of that but offer other services. As a Board we’re not a sort of business for going into things in a mad rush. I very much take the view that in this particular business it’s about doing things in an orderly, steady, professional way and growing organically because we’re dealing with clients that will be long time forgetting your mistakes. So we took what is a good business and we’re just trying to build it into something that’s a strong, long term business that isn’t as reliant on any one or two clients or one or two little geographical sectors. While the recession has affected us it hasn’t stopped us carrying on with our strategy.

Has the level of competition in the market changed over time?

There is more of it but the main competitor for our core business is actually the drug companies themselves – it is them deciding to build a facility as opposed to sending the storage for us to do in house. So it is a question of their mood for wishing to do that and I think that has ebbed and flowed a little bit. We don’t have anybody that is like us, nobody has got a specialist storage facility of anything like our size, but there are laboratory companies that do testing for drug companies that would do storage as an ancillary product and there are one or two smaller companies that are obviously trying to do storage. Okay, this year we haven’t made as much money as we made last year but it is still a relatively a high margin business and so it is attractive to other companies. So we have got competitors trying to get in on what we do and we have got to keep them out by constantly investing in better facilities and having a more comprehensive offer and keeping our customers satisfied, it’s as simple as that.

What was the thinking behind your decision to buy out your US distributor in January?

The decision to buy it was partly a protective measure because the company that owned our distributor were in trouble and we felt it was going to affect our plans in the States. They were just selling equipment, it was just essentially a sales office, but we had always felt that there was a big market for storage in the States, which we probably would have done ourselves rather than through our agent. We thought it made a lot more sense to buy the agent and safeguard the equipment sales side – it wasn’t a huge investment and they had a good sales team – and then control that operation. As soon as we acquired it we set work on building a storage facility, for two reasons. One is the storage market in the States is huge and it is a good margin business so we think it’s an easier business to make profits from in the long term. In addition, having a facility there with our own equipment in it makes it somewhat easier to sell that equipment whereas previously they had been essentially operating out of an office selling our equipment based on photographs and brochures. In the UK our clients can come down to our facility, they can look at the sort of stuff we do, they can see how it works, they can see the control systems that we have put in, and that does help the buyer decision. So we do think we’ll have a spin off benefit from the storage facility of having a showcase for selling equipment.

So we are excited about the US market, it’s huge and as long as you can get the price point right I think clients are more than willing to give you a go. It is easy for us to get references from the UK and to some degree we are going to be selling storage to some of the same customers. These pharmas are multi national companies so a lot of the clients we deal with in the UK and Ireland are the same companies, ultimately when you get to the top, in the States, so we’ve got pretty good steer to get established in the States. I’m not saying it is going to be easy, it is never easy in the States, but we feel very confident that we have got a good offer in a big market.

Are there any other territories that would be of interest to you?

Yes, we’re interested in the Benelux countries, they seem to do quite a bit of outsourcing and storage, and there is quite a big pharma market in the likes of Belgium and Holland. We have had some reasonably encouraging signs from one or two clients about whether it would be worthwhile having a place in the Benelux countries, but I see that as a next year thing, 2011. I think the focus is really on the States; to get that up and running and profitable and maybe looking for a leap-frog operation elsewhere over there, one in maybe Boston or somewhere. The fact of the matter is that there are clusters of states in the US that are effectively the same as countries and it’s a big enough market to potentially have two or three places without even thinking about it. When we have spoken to pharma companies, sometimes Atlanta is just not near enough for them because they’re based in Chicago. The investment isn’t huge so I think if we got one good client that was prepared to give us some sort of long term agreement to have a place that more or less funded itself then we’d take that decision. But we are not going to chance the business on the US market; it will be all very much about steady growth, that’s how we operate as a business. I don’t want to turn Vindon into a risky business by trying to expand something into areas too quickly.

How confident do you feel then looking further ahead that there is scope in the market for you to continue to grow organically?

I’m very confident. I went through a period, like most businesses probably did, when I wondered what the recession was going to do to us and it was obviously having an effect in the pharma market. A lot of pharmaceutical companies are merging and that obviously has an impact on our equipment business. But that does seem to have bottomed out and, in fact, we’ve been very pleased with the order intake for the last few months. We know we’re going to have a good six months on equipment sales in the UK and we have had good order intakes. The order book as at 30th June this year is £1.1m, which is the highest it has been for the first six months for three years.

We’re generating cash, which is important, we’re comfortable in our banking arrangements, we got very good banking arrangements established two or three years ago when we built the Rochdale facility. We have bought the business in America, we set it up without having to go back to the bank or go back to our investors, so yes, I think it’s a good business and I think that we’ve got good plans. This is a good team, we know the business well enough now and I think it has been about essentially taking a little bit of a windfall business, as it was when we acquired it, and turning it into something more substantial. Ultimately we either have to grow or we’ve got to be attractive to a big business that is going to pay the share value that is going to make our investors happy.

You raised new money through AIM to fund the Rochdale facility. Do you still consider that the market is working well for you?

A lot of our investors were day-one people that essentially invested in this business when it was first purchased and then put immediately on the AIM market. So although we’re on the AIM market a lot of our stock is held by 20 high net worth people, often based in Manchester, who knew Zeus Capital, who were one of the big shareholders. It has worked, there’s a cost associated with it and it’s not easy to get a market for your shares in the AIM market but we raised £2m of new shareholders’ funds in one day. I went down to London, spoke to the big potential shareholders, told them the story and we got the £2m that we needed to build a new facility in one day. Now that was prior to the sky falling in two years ago, but it worked when we needed it. I’d like to feel that if we made an acquisition we could go and raise more money and we regularly test the market for that – if we needed a couple of million pounds could we get the funding from the bank and could we get the funding from new shares? I’m confident on both those fronts.

Thank you for talking to Stockopedia.

You’re welcome.