Why I'd buy AstraZeneca plc over this soaring growth stock
These two stocks both operate in the pharmaceutical sector but could not be more different. One is a growth minnow, the other an income behemoth. But they have risk in common. One is quite evidently high-risk, the other has become unexpectedly risky. Which would you buy?
Bioventix(LSE: BVXP) manufactures and supplies high affinity sheep monoclonal antibodies for use in diagnostic applications such as clinical blood testing. Founded in 2003, the Surrey-based biotechnology company has traded on AiM since 2014, and has a current market capitalisation of £125m.
Recent share price performance has been meaty, with the stock up 275% in the past three years. Last year it was booming thanks to continued demand for its monoclonal antibodies, favourable currency shifts and encouraging developments from project partner Siemens Healthcare Diagnostics on its new troponin antibody. Some reckon it could even be the UK's most exciting investment opportunity.
Peak or plateau?
Bioventix posted more good news last month, raising annual pre-tax profits more than a third due to rising sales of its vitamin D antibody. Annual revenue rose 30% to £7.2m and its cash balance climbed from £5.3m to £6.1m. However, it also warned that the vitamin D market would plateau in the near future, and may only record a "modest further increase" in the coming fiscal period.
I have personally developed antibodies against soaring biotech companies because of the danger that you come to the party too late! My concerns are magnified by the fact that after three years of double-digit EPS growth around the 40% mark, City forecasters are pencilling in a drop of 18% in the year to 30 June 2018. A forward valuation of 26 times earnings is also a concern. After the peak, the plateau.
Pharmaceutical giant AstraZeneca(LSE: AZN) is a very different creature with a current market cap of nearly £66bn. It has also done well lately, its share price up 77% over five years, and almost 15% over three months. However, it has been a bumpy ride, with the stock plunging 15% in July after the failure of its Mystic drug, a first-line chemotherapy alternative.
I wrote at the time that this was a buying opportunity for the brave and it has since rallied strongly, so yay me. You need to understand the ongoing risks, though. Investors have had to be patient with the company, and put a lot of faith in CEO Pascal Soriot, who is developing the company's long-term pipeline of treatments.
On Wednesday we had the good news that the US Food and Drug Administration has granted accelerated approval to Calquence (acalabrutinib) for adult patients with mantle cell lymphoma (MCL), combined with disappointing results for new treatment tralokinumab aimed at patients with severe asthma. You can expect a lot more of this.
AstraZeneca's EPS have fallen in four out of the past five years. Another 13% drop is forecast for this year, followed by a measly 1% rise in 2018. The prize, however, is further down the line, with Soriot projecting revenues of more than $45bn by 2023, now just six years away. That's quite a leap from 2017's projected $16.06bn. The forecast yield of 4.2% should help settle your nerves as you wait to see if his strategy is a winner.
Favouring high-risk growth stocks over long-term dividend heroes can turn out badly but this is by no means the worst mistake you can make.
This BRAND NEW Motley Fool report, Worst Mistakes Investors Make, looks at some of the costliest investment blunders and sets out how you can avoid them.
Click here to read this no-obligation report. It will be yours in seconds and won't cost you a penny.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.