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Why I see 50% upside in this pharmaceutical firm in 2017

When it comes to stock picking, UK-focused investors seeking income from within the pharmaceuticals sector will no doubt be fully aware of the generous dividends available from FTSE 100 giants GlaxoSmithKline and AstraZeneca. Both these multinational drugmakers are currently handing out substantial payouts to shareholders, with chunky dividend yields around the 5% mark, and there’s certainly nothing wrong with that.

Industry leader

However, growth-focused investors will tell you that over the years the pharmaceuticals sector has also been home to some spectacular growth plays, with previously unheard of companies like Hikma Pharmaceuticals and Shire plc finding their way into the blue-chip index on the back of rapid sales and earnings growth. Consequently, the share price of both these firms has tripled within the last five years.

But don’t worry, while both Hikma and Shire continue to offer attractions for growth seekers, there are other smaller and often overlooked firms that I believe could have similar growth potential in the coming years. One such firm is FTSE 250-listed Vectura Group (LSE: VEC). The Chippenham-based business is an industry leader specialsing in inhaled therapies for the treatment of respiratory diseases, with last reported revenues of £72m and a market value just shy of £1bn.

Step-change

In June last year Vectura completed its merger with rival SkyePharma, and consequently decided to move its year-end-date from 31 March to 31 December, leaving a shortened post-merger year of just nine months. Full-year results for the year ending 31 December aren’t due until March, but in a pre-close trading update last week the company said it has made significant business development progress following on from the step-change in financial performance announced in its interim results in November.

During the first six months of the shortened year Vectura boasted a massive 183% rise in revenue to £73.9m, compared to the same period a year earlier, helped in no small part by the £441m merger with SkyePharma. The group continues to see sustained momentum in recurring revenues from recently launched inhaled products, and now owns or is partered with seven assets that are currently in Phase III development or under regulatory review.

Strong start to 2017

Vectura starts 2017 in a very strong position, with significant progress made with the pipeline and sustained growth in recurring revenues driven by seven recently launched inhaled products. Sales have risen sharply in recent years, and the City expects revenues to double by 2019. The group is forecast to report pre-tax profits of £15m for 2016, rising to £47m for 2017, and £93m for 2018.

The valuation isn’t too demanding either, with the P/E ratio dropping to just 11 by 2019 after anticipated earnings growth of 69% and 54% for the next two years. I believe the current P/E rating significantly undervalues the company given its longer-term growth appeal. If all goes well, investors willing to take on a higher level of risk could be sitting on terrific gains by the end of the year.

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Bilaal Mohamed 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.