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 company’s 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 company’s 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 today’s 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 it’s 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 there’ll be some failures among them.
Thus, Vernalis represents an opportunity at the high risk/high reward end of the investing spectrum. It’s 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 Woodford’s equity income fund, ranked at number three in the portfolio with a weighting of 7.6%. It’s also more amenable than Vernalis to conventional valuation metrics.
Imperial said today it’s “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 management’s 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 year’s 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.
