Respiratory drugs and devices specialist Vectura (LSE: VEC) today released its first results since completing a merger with Skyepharma in June. The market has pushed the shares up 2.7% to 150p, valuing the FTSE 250 firm at just over £1bn.
Numbers and valuation are currently a little messy, due to the merger, but I believe Vectura has the potential to follow in the footsteps of Hikma Pharmaceuticals (LSE: HIK) and grow into a FTSE 100 company within 10 years.
Today’s half-year results are for the six months ended 30 September. As the merger with Skyepharma was completed midway through the period, the statutory numbers don’t tell us much. However, Vectura helpfully provides pro forma numbers, giving a picture of performance as if the two businesses had been combined throughout the six months and in the corresponding previous period.
On a pro forma basis, revenue increased 31% to £89.5m and EBITDA climbed 63% to £30.8m. There’s sustained momentum in the business and the company says it’s making “excellent progress” with the merger integration process, which is on track to deliver “at least £10m annual synergy savings by 2018”.
The increased scale of the combined group enables it to participate across all the major respiratory classes, do more deals (such as a third collaboration with Hikma Pharmaceuticals announced yesterday) and more rapidly advance the commercialisation of its wholly-owned niche assets.
Backed by cash of £92m with no debt, there is also considerable scope for growth to be further accelerated by targeted acquisitions and for the group to develop into a respiratory powerhouse.
Vectura is changing its financial year from a 31 March end to a 31 December end to align with its partners and peers. For calendar 2017, I think we can expect revenue of around £200m, pre-tax profit of over £40m and earnings per share of about 6.5p, giving a forward price-to-earnings (P/E) ratio of 23.
I believe Vectura merits such a P/E due to the strength of its growth prospects. Indeed, I wouldn’t be surprised to see the company make it into the FTSE 100 within 10 years.
Is that really possible? Well, Hikma Pharmaceuticals first gained promotion to the FTSE 100 in March 2015, having grown its revenue from £152m to £957m and pre-tax profit from £37m to £249m over the previous 10 years. I see Vectura as having a similar growth opportunity from a 2017 base of £200m revenue and £40m+ pre-tax profit. As such, I rate the shares a buy.
More growth to come
Hikma also continues to have strong growth prospects in my view, and its shares look very buyable at their current level of 1,670p.
Like Vectura, Hikma has made a large acquisition this year. The benefits won’t come through as quickly as originally anticipated — something that always puts the market in a bit of a funk — but looking ahead to next year the P/E is an undemanding 14.5. An attractive rating for a company with an excellent track record of delivering long-term shareholder value.