Shares of AIM-listed coughs-and-colds specialist Vernalis (LSE: VER) have moved lower this morning after results for the 12-month period to 30 June meaning that at 40.5p, the company is valued at 228m.
Master investor Neil Woodford owns 28% of the business. It represents a relatively small 0.45% of his flagship equity income fund, but is a top 15 holding in his growth-orientated Woodford Patient Capital Trust with a weighting of 2.25%.
Exciting prospect
Vernalis reported revenue of 12m, but an operating loss of 24m. The was largely down to substantial investment to support the launch of the first product from the companys cough-cold franchise, Tuzistra, into the US market. In particular, sales and marketing costs were 20m, having been zero in the previous period.
The investment will also support the upcoming launch of the companys once-a-day antibiotic Moxatagin and there are two further products on track for potential approvals in 2017.
Back in April, Vernalis added to its cash resources by raising 40m at 50p a share through a placing in which Woodford participated. At 30 June, cash stood at 84m. This should be sufficient to see Vernalis through to sustainable profitability by 2020, if the business delivers the growth potential about which management is very excited.
Woodford and his team are also excited, saying in advance of todays results: We remain very confident that the company offers significant upside potential as it successfully executes the US cough-cold opportunity.
Significant upside potential
On the only concrete valuation metric we can apply, Vernalis looks expensive on 19 times trailing 12-month sales. But its all about the future.
As a major shareholder with access to the company, Woodford is better placed than humble private investors to take an informed view on the prospects for the business. However, despite his confidence in the significant upside potential of the stock, he holds a host of other companies at a similar stage of development, and accepts therell be some failures among them.
Thus, Vernalis represents an opportunity at the high risk/high reward end of the investing spectrum. Its not a stock to put a lot of money into and, like Woodford, spreading your bets across a basket of such prospects would be a sensible approach.
Core buy
Imperial Brands (LSE: IMB) is a very different proposition. This FTSE 100 tobacco giant, which released a trading update this morning, is a core holding of Woodfords equity income fund, ranked at number three in the portfolio with a weighting of 7.6%. Its also more amenable than Vernalis to conventional valuation metrics.
Imperial said today its on track to meet full-year expectations for its financial year ending 30 September. Those expectations include a 15% rise in earnings and a 10% increase in the dividend the latter being in line with managements commitment to lift the payout by at least 10% a year over the medium term.
At a share price of 3,970p, Imperial is trading on 16.3 times this years expected earnings, and with forecasts of further double-digit growth next year, the multiple falls to 14.6. The valuation is attractive for such a dependable business, and with a 3.9% dividend yield, rising to 4.3% next year, I rate the stock a buy as a core holding for a portfolio.
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G A Chester 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.
