Is there value in small and mid-sized pharmaceutical companies? Three popular choices with solid profits are Shire (LSE: SHP), SkyePharma (LSE: SKP) and Indivior (LSE: INDV).
Are any of these stocks a buy in todays market?
Skyepharma
Shares in SkyePharma have climbed another 5% this morning after the firm said that full-year revenues for 2015 are likely to be ahead of expectations.
The main reason for this is that Skyepharma is set to receive a 7.4m sales milestone payment for sales of its flutiform product earlier than expected. This payment wont generate any extra cash for Skyepharma as the firms flutiform licence partner, Mundipharma, will use this money to recoup previous development costs.
However, this news suggests to me that sales of flutiform products may be growing a little faster than expected. Todays news doesnt make any mention of profit, but in my view it seems fair to assume that profits are more likely to rise than fall over the next year.
On this basis, Skyepharmas 2016 forecast P/E of 18 doesnt seem excessive, especially considering the 35m net cash balance. As a growth buy, Skyepharma could be worth a closer look, in my view.
Shire
Shares in rare disease specialist Shire have fallen by 20% over the last six months. This has left Shire stock looking cheaper than it has done for some time. Is this a buying opportunity?
Shire has been busy splashing the cash over the last year. The firm has spent a total of $11.1bn acquiring Dyax Corp and NPS Pharma in order to build its biotech business. Shire has also proposed a $32bn merger with US peer Baxalta International. Press reports since the New Year suggest a deal could be imminent.
Where does this leave shareholders? Shire appears to be a company on the verge of a major transition. Im not sure Id buy into Shire stock until more concrete information on the Baxalta deal is available, but if its successful then the groups profits could rise steadily.
Anyone considering a fresh purchase needs to remember that this is a growth stock. Shires dividend yield is only about 0.5%, so shareholders do have to rely on a rising share price for their returns.
Indivior
Indivior was spun-off from consumer goods group Reckitt Benckiser in 2014. The new firms shares promptly doubled in value to a high of 271p, but have since fallen by 33% to their current level of 181p.
Indiviors problem is that it makes most of its money from an opiate addiction product whose patent protection has expired. We dont yet know how, or if, Indivior will be able to rebuild this fading profit stream.
Indivior stock may currently look cheap, with a 2015 forecast P/E of 8.6 and yield of 4.2%. The catch is that earnings are expected to have halved in 2015 and to fall by a further 28% in 2016.
Indivior does have some new products under development and has very little debt. This means that the firm is in a position to use cash and fresh debt to make acquisitions, should a suitable opportunity arise.
What we dont know is how far the firms earnings will fall before the picture starts to improve. I dont know how to call this one.
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If you’re interested in investing in fast-growing pharmaceutical stocks then I’d urge you to take a look.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
