Breathe in

Vectura is a specialist in the design and development of inhaled medicines but is currently a company on hold as it awaits US regulatory approval for a number of upcoming products, in particular the generic formulation of GlaxoSmithKline’s asthma big seller Advair Diskus, planned with Hikma Pharmaceuticals. 

Today’s interims were headlined “Vectura regaining momentum with continued inhaled revenue and adjusted EBITDA growth”, although clearly investors do not share management’s excitement. Total reported revenue for the period rose a modest 1.4% to £79.9m. Inhaled portfolio revenue rose 7.1% to offset a sharp 17.4% drop in non-inhaled portfolio revenues, due to non-recurrence of 2017 post patent royalties and lower product supply revenues.

Future stock

Guidance for R&D costs of £55m-£65m for 2018 remains unchanged, reflecting the group’s “refocused portfolio prioritisation and initiatives to transform R&D productivity.” Adjusted EBITDA rose 51.9% to £24.6m on productivity initiatives. Vectura’s cash balance has dipped from December’s £103.7m to £83.9m, although this reflects its completion of a share buyback programme, capital investment and annual cash flow phasing. 

This stock is all about the future, with management “progressing a series of new pipeline projects with significant potential future value.” The share price is down 60% over three years yet it still trades at a pricey 23.9 times earnings. Earnings per share (EPS) dropped 53% last year and City analysts are warning of a further 20% in 2018, then a 51% rebound next year.

Vectura confirmed that Hikma plans to submit data on their generic Advair to US regulators next year and anticipates a launch in 2020, with potential annual sales topping $250m. To show what this means, 2017 revenues totalled $148m. This stock is all about tomorrow, not today. You might want to build your retirement on more solid foundations.

Shire higher

Shire Pharmaceuticals (LSE: SHP) is a giant by comparison, a £40bn FTSE 100 pharma behemoth that is now bouncing back after falling out of favour following its $32bn acquisition of Baxalta in 2016. The stock is up a hefty 36% in the last six months on more takeover talk, only this time it is the target, with Japan’s Takeda Pharmaceutical lining up a $62bn deal. Throw in the company’s debt and the deal is worth closer to $80bn.

Takeda management reckons that Shire’s product portfolio and pipeline are highly complementary and will make it a leader in providing targeted treatments in gastroenterology, neuroscience, oncology, rare diseases and plasma-derived therapies. Takeda gets access to the US market, Shire gains Japan and emerging markets. Sounds fun all round.

As Kevin Godbold points out, Takeda may have to dig deeper into its pockets to secure the company or withdraw. However, he says that even if it does back out, this may alert other investors to the group’s undervaluation and trigger further bids. Shire currently trades at just 11 times forward earnings. I’ll be keeping a close eye on the bid, in case it throws up a buying opportunity.

The post Could these 2 pharma growth stocks help you retire early? appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Hikma Pharmaceuticals, and Shire. 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.

The FTSE 100 pharma play, which was 6% higher from Monday’s close at pixel time, has so far resisted the overtures of its Asian peer. How far Takeda will chase Shire’s share price higher remains to be seen, but given the determination it has shown so far — allied with Shire’s still cheap valuation — this story could well have much more distance to run.

It isn’t difficult to see why it is such a peach in Takeda’s eyes. The British company is a giant in the growing field of rare diseases, and its fast-improving pipeline provides plenty of revenues opportunities in the years ahead. Indeed, the number of programmes in its pipeline doubled in the four years to 2017 and now stands at around 40. What’s more, the sale of the oncology division to Servier for $2.4bn this month provides it with greater resources to dedicate to keep developing its core operations.

Shire is expected to report earnings growth of 7% in both 2018 and 2019, forecasts that leave it dealing on a dirt-cheap forward P/E multiple of 11.2 times. I reckon this is a bargain given that its strong pipeline could well deliver titanic profits growth later down the line.

Shop around

I am a lot less confident over fellow Footsie member Next’s (LSE: NXT) ability to generate strong earnings progression in the years ahead.

I myself used to own shares in the clothing giant, drawn in by the large dividend yields on offer. But I sold out several years ago as soon as the intense competitive pressures became apparent, putting stress on the retailer’s sales-driving Next Directory online and catalogue division.

These strains have become even more apparent as Next’s rivals have invested heavily in their own e-commerce operations in an effort to stay relevant in our increasingly-digitalised world. And since I held my shares, conditions on the high street have become that much more difficult as shopper budgets have become more and more constrained.

Against this backcloth, Next has seen earnings dip for the past two consecutive years, putting paid to its esteemed growth record.

And while a marginal earnings bounceback is forecast for the year to January 2019, leading to a predicted 4% rise in fiscal 2020, I am not convinced. As a consequence a low forward P/E ratio of 12.5 times fails to attract me.

In fact, I would consider a reading below the bargain watermark of 10 times to be a fairer reflection of sustained profits gloom as consumers continue to tighten their pursestrings. Chairman Michael Roney commented last month that “the wider economy, clothing market and high street look set to remain challenging.”

And with Next also battling against a rising cost base, I reckon the company is far too risky right now, and wouldn’t be surprised to see current forecasts heavily downgraded in the months ahead.

The post One dirt-cheap FTSE 100 stock I’d buy today and one I’d sell appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

Still undervalued?

It seems that Takeda Pharmaceutical Company Limited was listening. Takeda submitted four escalating conditional proposals to take over Shire, on 29 March, 11 April, 13 April and on 20 April. The fourth proposal comprises £26 per share in new Takeda shares, and £21 per share in cash, which values Shire at a potential £47 per share, some £44bn in terms of market capitalisation. As I write, the share price runs around 3,874p and the market capitalisation sits just over £35m, so there’s still value to play for.

If Shire rises to 4,700p, the forward price-to-earnings ratio for 2019 would sit just above 12. The directors are considering Takeda’s fourth proposal and will issue “a further announcement in due course.” But even at 4,700p, I reckon Shire will be undervalued. My guess is that Takeda will need to dig yet deeper into its pockets or withdraw, but we’ll see.

Based on Takeda’s current market capitalisation, Shire shareholders would own around 49% of the enlarged firm. But whether or not the deal goes through, I think Takeda has woken the market up to Shire’s possible undervaluation. Maybe others will pitch for the company, or perhaps speculation based on the potential for bid approaches will keep the shares perky.

Meanwhile, Arix Bioscience (LSE: ARIX) released its full-year results today. The UK-based healthcare and life science company aims to generate value by acquiring interests in healthcare and life science businesses focused on developing and commercialising technologies and discoveries.

Great expectations

Chief executive Dr Joe Anderson said that 2017 was “transformational,” based mainly on raising a lot of money from investors and spending it. But here we have the opportunity to get in early with a firm that could go on to grow, perhaps being another success story along the lines of Shire over time.

The firm’s Initial Public Offering (IPO) in February delivered £112m of new capital, allowing the company to “identify and support” eight new “innovative” life science companies, raising the total at the end of the year to 13 investments, which the firm calls “Group Businesses.” Arix raised a further £87m in March, to take advantage of a pipeline of opportunities that “continues to grow, supported by our broad international network.” The firm has also “secured strategic partnerships with leading global pharmaceutical companies Takeda, UCB, Fosun and Ipsen.”

Today’s share price close to 203p throws up a market capitalisation of £274m or so, which compares to net funds raised of £199m. However, the firm expects “multiple clinical and financing catalysts in our Group Businesses and we are also planning to build interests in more exciting young companies.” I like the diversified approach to the market that the operational set-up offers investors, which should spread the risks. If things go well, Arix could earn its premium valuation and I reckon the company is worth keeping a close eye on with a view to investing.

The post Why I’d pile into FTSE 100 takeover candidate Shire along with this promising life science play appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

With that in mind, here are two shares that appear to offer strong growth prospects for the long run. When combined with valuations that could move higher, this means they may be worth buying right now.

Takeover prospects

It’s been a busy few weeks for the management of rare diseases specialist Shire (LSE: SHP). The company has been the subject of takeover talk, with Takeda making three separate bids for the company. All of those have been rejected by the company’s management. However, a further bid from Takeda could be ahead, with industry peer Allergan announcing that it’s not considering making an offer.

One reason for the rival interest in Shire could be its relatively low valuation. Since it merged with Baxalta, investor sentiment towards the stock has been relatively weak. Even after a share price gain of 23% in the last month, it still has a price-to-earnings (P/E) ratio of around 11.

Given the company’s forecast growth rate of 7-8% over the next two financial years, it may prove to be undervalued. If a further bid is made, the company’s shares could deliver additional capital growth in the short run. And, should no further bids appear, its appeal from a value and growth perspective appears to be high. As such, now could be a sound moment to buy the stock for the long term.

Consistent growth

With the FTSE 100 having been volatile in recent months, investors may begin to place premium valuations on stocks that can offer consistent performance. One such company is medical devices sector specialist Smith & Nephew (LSE: SN). Unlike pharmaceutical stocks, it doesn’t experience a ‘boom and bust’ sales performance. Its sales are usually relatively consistent and this could provide a greater degree of certainty regarding its long-term performance.

Smith & Nephew is forecast to post a rise in its bottom line of 4% in the current year, followed by further growth of 7% next year. While not the highest rate of growth on offer in the FTSE 100, there’s a good chance of it meeting its prospects over the medium term. This reliability could become more highly sought-after by investors if market volatility remains high.

Beyond next year, the company appears to have a solid growth outlook. Demand for its range of products is likely to increase over the coming years as the world’s population increases in size and age. Given this potential tailwind, a P/E ratio of 21 seems to be a fair price to pay for the stock relative to its industry peers.

The post Two FTSE 100 growth stocks I’d buy with £2,000 today appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

Nearly four months on and it looks to me as if this assessment remains accurate.

About to pay off 

Motif raised $20m in debt financing from Hercules Capital, a firm specialising in customised debt financing for companies in life sciences and technology-related markets, at the end of last year. This additional cash has helped the company push forward with the development of its flagship iclaprim treatment. 

Iclaprim is designed to fill a gap in the traditional antibiotic market by providing a standard of care not currently available to patients who have other health issues, specifically, kidney problems. The size of the potential market for this treatment is growing as more and more people become exposed to issues that may impact kidney function, such as obesity and diabetes. 

2018 and 2019 will be a transformational year as the company seeks to get this treatment approved for sale by the US Food and Drugs Administration. It has already met FDA standards in Phase 3 clinical trials conducted throughout 2017, so management is hopeful that it won’t be long before it can start booking revenue from sales. 

However, the firm is facing the prospect of a cash crunch. 

Motif is generating no revenue and lost a total of $44.8m last year. With cash and cash equivalents of $22.7m at the end of December 2017 (and $15m of the $20m drawn down from debt financing), the firm has less than six months of cash left before new funding is required. 

Indeed, today’s full-year earnings release from the company states: “The Group will be required to raise additional capital within the next year.” Still, with Iclaprim on the verge of being approved by regulators, it looks as if the risk/reward is skewed in investors’ favour. 

More predictable outlook 

Motif is a high risk, high reward secret growth stock and to reduce the risk of holding it in your portfolio, I would buy it alongside Shire (LSE: SHP).

In my opinion, Shire is one of the most undervalued FTSE 100 stocks on the market today. Despite the company’s position as one of the world’s leading rare disease drugs producers, shares in Shire currently trade at a depressed forward P/E of just 10. By comparison, the median P/E of the UK pharmaceutical sector is 19.7. 

It seems investors are avoiding the company due to concerns about its highly geared balance sheet and haematology franchise. After an acquisition spree, Shire’s gearing has jumped to 54%, which is hardly disastrous, but is a substantial change from the positive cash balance of $2.1bn reported for 2014.

Meanwhile, peers are edging in on the firm’s haematology franchise, which has historically been a money spinner for the group. More competition means the company will most likely suffer from falling profit margins going forward, which is bad news when you factor in Shire’s increased debt. 

Nevertheless, despite these concerns, Shire continues to grow. City analysts have pencilled in earnings per share growth of 67% for 2018 and 8% for 2019. On top of this, Japanese peer Takeda has expressed interest in launching a full takeover of the company, which would be a fantastic result for investors.

The post One ‘secret’ growth stock I’d buy alongside this FTSE 100 growth monster appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Shire. 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.

Two legs bad, four legs good

Just look at FTSE 100-listed rare disease specialist Shire (LSE: SHP). This is a major UK company, even if it doesn’t have the profile of AstraZeneca or GlaxoSmithKline, with a £30bn market cap. It was a lot higher before, but its share price has crashed from a peak of 5,550p in 2015 to just 3,258p today, a precipitous 41% drop.

That may scare some investors, but others will be tempted. They may consider now a cut-price entry point. If so, they should also look at FTSE 250 stock Dechra Pharmaceuticals (LSE: DPH), which specialises in prescription-only pet medicines and has a much smaller market capitalisation of £2.6bn. Its share price has performed very differently to Shire’s, soaring 53.8% in the past year, and 243% over five years. 

Dechra is up, Shire is down. Which is the better prospect? Or is there a strong case to buy both of them?

Animal magic

Last month Dechra showed its teeth to post a strong set of first-half numbers across its European and US operations, with reported group revenue up 12.5% at actual exchange rates to £194.1m. Revenue growth in North American pharmaceuticals was particularly strong at 20.7%.

Underlying operating profit grew of 22.3% at constant exchange rates while operating margins expanded by 220 basis points to 24.6%. Before these results my Foolish colleague Royston Wild called it a no-brainer pharma stock to buy today, and he called it correctly. 

Momentum play

Dechra is growing through acquisitions, recently bolting on RxVet in New Zealand, and announcing larger acquisitions of AST Farma and Le Vet. My concern is a predictable one: years of soaraway growth have pushed its forward valuation to a hefty 33.4 times earnings. Its PEG stands at a toppy 2.6. However, forecast earnings per share (EPS) growth of 17% in the year to 30 June 2018, then 18% the year after, appears to justify this. Momentum is on its side and soon those acquisitions will be bedding in too.

Contrarian investors may prefer Shire. In January, it posted an impressive 33% jump in full-year revenues but it is the future that counts, and markets were unnerved by warnings that revenue growth is set to weaken. This is mainly due to costs from its new US plasma manufacturing site start-up, as well as growing competition from rival generic treatments and lower royalties. Shire warned of a 3% cut in EPS projections for 2018.

Contrarian buy

Several brokers have downgraded Shire but private investors who take a longer term view, and are willing to sit tight for a few lean years, could benefit as a result. Trading at a forecast valuation of just 8.8 times earnings, Shire’s entry price certainly looks right. GA Chester certainly thinks this is the case, rating it a bargain basement buy. If I had £2,000 to invest, I might split my money evenly between the two of them.

The post Looking to invest £2,000? Here are 2 pharma stocks I’d buy today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Shire. 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.

The are two main reasons Reckitt Benckiser’s shares have performed significantly worse than the FTSE 100 year-to-date. The first was a weak 2017 in which organic revenue growth was nil following a cyberattack that severely disrupted supply chain operations, and troubles in a few markets. The second issue was the company’s $18bn acquisition of infant formula maker Mead Johnson, which left some investors scratching their heads. 

However, I believe these issues can be worked through over the medium term by Reckitt’s highly successful management team. In fact, Q4 results show the group is already returning to positive organic growth with like-for-like sales up a respectable, if not noteworthy, 2%. There’s room to build on this trend as the company focuses on higher-growth personal care items and invests in expanding its brands’ market share in high-growth developing countries.

And the Mead Johnson deal, while executed at a high price, is already paying off. Reckitt’s laser-like focus on costs has already led management to increase projected annual cost savings from $250m to $300m, leading the acquired firm’s margins significantly higher within the first months of ownership. On top of this, management has pushed the division back into positive sales momentum with Q4 sales up 3%.

With a series of market-leading brands across an array of developed and developing countries, impressive operating margins of 27.1%, and a steadily increasing dividend, I think Reckitt Benckiser’s current valuation is mightily attractive for conservative investors seeking non-cyclical sales growth and high shareholder returns.

A rare bargain?

Meanwhile, from the dizzying heights of above £58 just a few years ago, shares of rare drugs maker Shire (LSE: SHP) have shrunk in value down to just over £32 per share today. This means the company is now valued at under nine times forward earnings.

This dramatic share price contraction isn’t down to poor results, because Shire continues to post impressive sales and profit growth. But rather it was a much-ballyhooed takeover bid collapsing under political scrutiny, Shire itself taking on a massive amount of debt for its own multibillion-dollar acquisition two years ago, and then a downward revision to medium-term growth targets.

However, I think it is now attractively priced given these risks and offers long-term investors an attractive entry point to a stock that has unbelievable pricing power due to focusing on orphan drugs, high and rising cash flow that’s already reducing debt to sustainable levels, and the ability to immediately realise significant shareholder returns by spinning off its highly profitable, but generic-threatened, neuroscience division.

And despite investor negativity, this positive thesis is already largely playing out with pro forma revenue growing 8% to $15.5bn last year, net cash from operations jumping 60% to $4.3bn and year-end net debt falling to 2.9 times EBITDA, from 3.5 times at the end of Q2. With an enviable stable of rare disease treatments and a fast-improving financial situation, Shire is one dirt-cheap stock I’d love to own for the long-term.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

Two companies in particular have caught my eye: a FTSE 100 giant whose shares have performed even worse than the sector average and a FTSE 250 firm whose shares have bucked the trend.

Blue-chip bargain

Rare diseases specialist Shire (LSE: SHP) completed a $32bn acquisition of US firm Baxalta in June 2016 and its shares went on to reach a post-acquisition high of over 5,200p a few months later. However, market sentiment has since waned conspicuously. The shares started this year at under 4,000p and annual results a fortnight ago failed to arrest a further decline. The shares are currently trading at little more than 3,000p.

At the time of the Baxalta acquisition, Shire had projected over $20bn annual revenues by 2020. It’s disappointing this has since been revised down to $17bn-$18bn but I believe the share price has fallen much too far.

The company’s 2018 earnings guidance is for between $14.90 and $15.50 per American Depository Share. Converted to ordinary shares at current exchange rates, the range is 355p to 370p, giving a price-to-earnings (P/E) ratio of between 8.5 and 8.2.

The P/E makes Shire cheaper than its sector peers and net gearing of 53% is also relatively low. Strong free cash flow during 2017 reduced net debt by $3.4bn to $19.1bn, while year-end shareholder funds stood at $36.2bn. With its market capitalisation of £27.5bn ($38.5bn) and bargain basement sub-10 P/E, I rate this Footsie blue-chip a ‘buy’.

Mid-cap marvel

Also on my ‘buy’ list is FTSE 250 veterinary pharmaceuticals specialist Dechra (LSE: DPH). The company announced strong half-year results today and the shares are up over 5% to 2,450p, as I’m writing. This is a new all-time high and takes the return over the last 12 months to more than 50% to value the business at £2.5bn.

Dechra reported a 12.5% rise in first-half revenue (11.2% at constant exchange rates), with North America contributing 20.7% and Europe 5.8% at CER. Higher profit margins fed down to a 20% increase in earnings per share (EPS).

Continued growth at this rate would see EPS of 77.6p for the company’s current financial year ending 30 June. On the face of it, the resulting P/E of 31.6 looks expensive, but the company has just completed two exciting acquisitions, of AST Farma and Le Vet Beheer, for a total consideration of €340m.

These two companies have been a primary target for Dechra for a number of years. The board said the deals realise “a rare opportunity to strengthen our EU segment in all the major European countries in which we operate.” I believe the springboard this provides Dechra for both expanding its pipeline and improving its reach makes the premium P/E worth paying and I rate the stock a ‘buy’.

The post 2 pharma stocks I’d buy in March appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

However, I still think that Shire has a lot of good qualities. So I’ve taken a fresh look following last week’s final results. Today I’ll explain why I’m now prepared to consider buying.

I’ll also highlight a smaller pharma stock I own that I believe could be a good dividend growth investment.

Strong medicine

In October I flagged up two key risks that were keeping me away from Shire. The first was the challenge of integrating US pharma firm Baxalta, which was acquired for $32bn in 2016.

The second was the group’s net debt of $20.4bn. In my view, this mountain of obligations meant that the stock’s then-P/E ratio of 9.3 wasn’t as cheap as it might have seemed.

Good progress

I’m pleased to report the Dublin-based firm has made good progress in both of these areas. A strong performance from Shire’s Immunology division plus good international growth helped lift product sales by 8% to $14.4bn last year. Adjusted earnings rose by 16% to $15.15 per share. The group’s net profit margin rose by 3% to an impressive 28%.

There was also a worthwhile reduction in debt. Thanks to a 63% increase in free cash flow, net debt fell by $3,370m to $19,069m, despite a $152m rise in capital expenditure.

Although borrowings are still slightly higher than I’d like to see, I believe the speed at which net debt is falling suggests that profit margins could rise steadily over the next couple of years.

With this in mind, I think Shire’s 2018 forecast P/E of 8.4 could be a good level at which to buy for a long-term position.

A specialist growth play

Alliance Pharma (LSE: APH) is a firm you may not have heard of. But this £321m business floated in 2001 and its shares have risen by 750% over the last 10 years.

This specialist company buys up niche medicines and consumer healthcare products. These are then sold through retailers, pharmacies and the group’s own distribution network.

Activities such as manufacturing and warehousing are outsourced to keep capital expenditure to a minimum. The result is that Alliance is very profitable — the Wiltshire-based firm’s operating margin has averaged 28% since 2011.

This business model isn’t without risk. Many of the firm’s products are quite mature. In the future they may be replaced by more effective or cheaper alternatives. Relying on acquisitions for growth is also a risk. A few bad deals could cause profit margins to collapse.

A successful formula

But my assessment of Alliance Pharma’s track record suggests that the firm has found a successful formula and hasn’t tried to diversify too much.

Broker forecasts suggest earnings per share growth of 5% in 2017 and 13% in 2018. A forward dividend yield of 2.1% should be covered three times by earnings, suggesting plenty of scope for dividend growth.

The shares trade on a forecast P/E of 14.9 for 2018, with a PEG ratio of 1.3. I believe attractive gains should be possible from current levels. I continue to hold the shares.

The post 2 bargain pharma stocks I’d buy today appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.

The FTSE 100 pharmaceuticals play has shed a third of its market value during the past 12 months and more recently, Shire’s stock hit the skids in January after it was forced to downscale its medium-term revenues targets.

Sales are now predicted to register at $17bn-$18bn by 2020, down from its prior target of $20bn a couple of years back. This was not the only cause for investors to hit the exits, however, as it also poured cold water on talk of an immediate spinning off of its Neuroscience division into a separate listed entity.

A risky pick

I’m not surprised that Shire continues to flounder. While this week’s full-year financials showed total revenues leaping 33% during 2017, to $15.2bn. Product sales rose by the same percentage, to $14.4bn, the Footsie firm cautioned: “We expect to deliver mid-single-digit product sales growth in 2018 after absorbing the anticipated impact of generics.”

These intense competitive pressures, allied with costs related to its new plasma manufacturing site in the US, as well as lower royalties, could all smack profits in the current year, it added.

Meanwhile, concerns over Shire’s colossal debt pile following the 2016 mega-acquisition of Baxalta. Although net debt fell $3.4bn last year, it still ended December at an eye-watering $19.1bn.

City analysts believe 2017 will prove to have been the first step on Shire’s path back to sustained earnings growth, and rises of 14% and 9% are forecast for 2018 and 2019 respectively.

These projections leave the medicines giant dealing on a forward P/E ratio of 8.3 times, a pretty tempting valuation given the strength of its late-stage pipeline as Shire currently has 15 products in Phase III testing.

A better selection?

Clearly only those with a high tolerance of risk should be prepared to invest in Shire, even if the long-term rewards could be colossal should its development targets be met and global healthcare investment continue to climb at a terrific rate.

Its FTSE 100 colleague AstraZeneca (LSE: AZN) is another share being smacked by revenues disappointment on the back of generic competition.

Indeed, the Cambridge-based firm advised this month that the loss of protection on blockbuster drugs like its Crestor cholesterol battler will see “a low-single-digit percentage increase” only in 2018. And this is expected to cause yet another earnings drop in 2018, this time by 18%.

However, AstraZeneca’s decision to overhaul its R&D strategy in recent years is finally beginning to deliver the goods. The business rolled out five new products in 2017 alone, with sales of Farxiga and Brilinta both moving past the $1bn sales barrier.

On top of this, sales to emerging markets are also clicking through the gears. Last year, sales to these lucrative regions rose 6% year-on-year, helped by a 12% improvement in China.

With the firm also working hard to slash costs across the business, City brokers expect AstraZeneca to report a 12% earnings jump in 2019. It’s expensive on paper, but I reckon AstraZeneca’s much-improved pipeline makes it worthy of an elevated forward P/E ratio of 18.6 times.

The post Is now the time to buy this battered Footsie pharma stock? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca and Shire. 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.