There are few things that hammer home the risk of investing in small hi-tech hopefuls than a 50% share price crash. But sadly, that's what's just happened to Quantum Pharma(LSE: QP), after the firm issued a shock profit warning along with its first-half results, and its share price has slumped to 34.5p -- knocking around £45m off the value of the AIM-listed company.
Sales from recent product launches now look like they won't be as healthy as anticipated, moving new chief executive Chris Rigg to say that "performance will be materially below market expectations". This comes after the firm "instigated and completed a review of a number of key areas of the business" just after Mr Rigg's appointment in August. It's not uncommon for a new boss's arrival to be seen as a good opportunity to get the bad news out and let the blame fall on the previous management.
First-half revenue actually rose, by 25% to £42.8m, though adjusted pre-tax profit dropped by 42% to £2.6m, and the firm's debt stood largely unchanged at £23.8m. The year was always likely to be weighted towards the second half, but forecasts for a modest 8% fall in EPS (to be followed by a 17% rise the following year) have now vanished in a puff of smoke.
Quantum is to close its lossmaking NuPharm business, and it reckons the remaining divisions are looking good -- the speciality pharmaceuticals maker says its resulting "simplified business ... offers the best opportunity for value creation".
The difficulty for investors now is that the company's next couple of years are unquantifiable, and there's really no way to put a measure on the worth of the shares -- we might know more when forecasts are reworked. On the other hand, crisis-led share price slumps often lead to overselling, so Quantum might be a worthwhile (if risky) punt now.
Balance the risk
Looking further afield, our big FTSE 100 pharmaceuticals companies are a lot safer than a high-risk small-cap, and I like the look of Shire(LSE: SHP) as a low-risk alternative. Shire, specialising in rare illnesses and perhaps best known for the attention deficit disorder treatment Vyvanse, has had a few years of ups and downs in its earnings.
But forecasts of an 82% rise in EPS this year, followed by a further 19% next, put the shares on a forward P/E multiple of 15.5, dropping to 13 -- and give us PEG ratios for the two years of 0.2 and 0.7 respectively, which is a strong growth indicator.
The downside is very low dividends, yielding only around 0.5%, but with the firm having taken on extra borrowings to fund the acquisition of Baxalta, which was completed in the first half, it's understandable if handing out cash isn't a big priority right now -- net debt stood at $23.7bn at 30 June.
Shire's shares are up 150% over five years, but could the modest 10% over the past 12 months be giving us a buying opportunity? The City's analysts are putting out a very strong buy consensus, and I think they're on the money. In fact, I think a pairing of Shire and Quantum shares could turn into a nice long-term investment.
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Alan Oscroft 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.