Heres my quick take ontwo very different companies carrying completely different risk profiles, both operating in the pharmaceutical sector Omega Diagnostics(LSE: ODX) andShire(LSE: SHP).
OmegaGets Hammered
Omega stock took a dive in early trade today, and it is still down 18% around midday, for an implied market cap of 20m.
Thats not something you are likely to experience with Shire, which is a much bigger and diversified pharmaceutical business, and whose shares arent particularly expensive right now.
In short, Shire is an investmentthat deserves attention, whileOmega is a speculative bet that Id rather not consider until its development stage is completed.
Omegas Trading Update
The group reported today itsfinancial resultsfor the year ended 31 March, but something else caught investors by surprise.
Omega said that following itslast update onVisitect CD4thatconfirmed completion of the internal investigation phase it had moved into the process of verification and validation.
The validation stage focused on testing the longer-term stability of in-house manufactured finished devices, which is a key step to production on a larger scale.
Visitect is atesting kit at a development stage that is expected to be a money-spinner.
Bad News, But Its Financials Are Ok
Unfortunately, Omega has determined that there is a stability issue with finished product that manifests after a period of five weeks of storage at room temperature, and this matter requires further investigation.
On 1 June, Omegas share price rose significantly in the wake of an upbeat trading updatefor Visitect CD4and other allergy developments.
As I pointed out back then, when its shares traded at around 24p,the commercialisation of Visitect CD4 may or may not make it to the market, so Omega stock carries a huge amount of risk today, even atits current level of 18.7p a share.
That said, itended the year with cash reserves of 1.97m (2014: 3.12m), and a 1m undrawn credit line from its bank enough to satisfy its funding needs for some time.
Consider that, as it said today, it incurred in 1.5m of capitalised development costs duringtheyear, bringing the cumulative spend to date to3.1m on the Allergy iSYS project and 1.1m on the Visitect CD4 project, neither of which has been amortised so far.
Still, Id look for value elsewhere.
What Do I Like About Shire?
Firstly, it has the backing of financial analysts, which is a good thing. The average price target from brokers stands at 5,800p, for an implied upside of 11.5% from its current level. Consensus estimates have risen 30% since July 2014.
Secondly, its management team has delivered on its promises in recent quarters, and Shires projected growth rate for earnings and dividends both at about 10% annually are truly appealing based on forward multiples of 24x and 20x earnings in 2015 and 2016, respectively.
By comparison, Omega isnt much cheaper.
Finally, in the light of a market cap and an enterprise value of $48bn, Shires balance sheet could carry more leverage to support a more aggressive acquisition strategy or toundertake shareholder-friendly activity.
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Alessandro Pasettihas 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 makesus better investors.