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3 Healthcare Stocks With More Downside Than Upside? Shire PLC, Alliance Pharma plc And Genus plc

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A good deal?

The last six months have been hugely disappointing for investors in Shire (LSE: SHP). That’s because the pharmaceutical company has posted a fall in its share price of 27% and, with its deal to merge with Baxalta creating a considerable amount of uncertainty regarding its future prospects, many investors are now wary about buying a slice of the business.

Certainly, Shire is of the view that the deal will be a good one and that the combined entity will assume a much more dominant position within the pharmaceutical space. However, others argue that the potential synergies are limited and that the two companies are simply not a good fit. As such, Shire’s valuation has come under pressure even though its long term sales growth potential remains high.

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With the company currently trading on a price to earnings growth (PEG) ratio of 1.4, it appears to be attractively priced. However, with other healthcare stocks offering less risk and enticing valuations, there appear to be better options available elsewhere.

Not without risk

Also engaging in major M&A activity recently is Alliance Pharma (LSE: APH). It has purchased the healthcare products arm of Sinclair IS Pharma for around £130m. This includes 27 products which will greatly diversify Alliance Pharma’s sales in future, while also increasing its non-UK exposure.

Clearly, the deal is not without risk, but Alliance Pharma has an excellent track record of successfully integrating acquisitions in the past. This deal is a major one for the company it is likely to positively stimulate its top and bottom line over the medium to long term.

With Alliance Pharma trading on a price to earnings (P/E) ratio of just 13.8 it appears to offer excellent value for money at the present time. Although it yields just 2.5%, dividends per share are expected to rise by 10% this year and with Alliance Pharma having a payout ratio of just 34%, there is clear scope for further double-digit rises in shareholder payouts which could make it a very appealing income play in the coming years.

Lacking appeal

Meanwhile, Genus (LSE: GNS) continues to offer a relatively unappealing risk/reward ratio. Certainly, it is a high-quality company which has a very bright future, but much of this potential appears to have already been priced in. For example, Genus trades on a P/E ratio of 24 and yet is only expected to increase its bottom line by 3% in the current year. This equates to a PEG ratio of 8 and indicates that its share price could come under pressure over the short to medium term.

Furthermore, Genus lacks dividend appeal due in part to its high share price. It yields only 1.5% and with its shares having fallen by 9% since the turn of the year, now does not appear to be the right time to buy them.

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Peter Stephens owns shares of Alliance Pharma. 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.

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