AstraZeneca and this small growth pharma stock could make you brilliantly rich

Harvey Jones finds a racy little pharma stock to sit beside dividend and growth monster AstraZeneca plc (LON: AZN) in your portfolio.

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The UK pharmaceuticals sector is exciting and varied, covering everything from fast-growing start-ups to FTSE 100-listed dividend behemoths. If you are looking for both income and growth, one of each type could be the perfect combination. Here are a couple to consider.

Cogito ERGO sum

Specialised pharmaceutical services and drug development company Ergomed (LSE: ERGO) is up a healthy 4% after reporting preliminary full-year results for calendar year 2017 this morning. Its numbers showed impressive 36% growth in net service revenue, driving total revenue growth of 21%.

New business wins rose 29% to £54m, with its contracted backlog of £88m up more than 25% from £70m one year earlier. The £85m market cap minnow also reported positive PeproStat Phase II results. CEO Stephen Stamp hailed another very strong year” for its pharmacovigilance business as it continues to outperform a fast-growing market. The group aims to become a leading global provider in this field by 2020. 

Ergo to grow

Ergomed is now looking to grow both organically and through strategic acquisitions, having refined its corporate strategy to focus on services businesses. In February, an institutional placing raised £3.9m for further acquisitions and working capital.

My Foolish colleague Peter Stephens alighted on the stock last month, praising its rapid growth potential and lowly forecast PEG ratio of just 0.3 (it now stands at an even lower 0.2). City analysts are optimistic about its prospects for this year, predicting whopping earnings per share (EPS) growth of 172% in 2018, then 31% in 2019. That will shrink its current heady valuation of 44 times earnings to a more amenable 15.8.

This could be the start of something exciting after two consecutive years when EPS fell 28% and 38%. This one could fly, but brace yourself, as small growth pharma firms like this one are inevitably risky.

We were giants

Pharmaceuticals giant AstraZeneca (LSE: AZN) is at the other end of the scale with a market cap of a dizzying £64bn. But its recent share price history has also been choppy as investors grit their teeth and wait to see if chief executive Pascal Soriot’s long-term pipeline refreshment strategy will send profits gushing.

His turnaround strategy still has some way to run and 2018 could prove bumpy, with EPS forecast to drop 18% this calendar year. However, it is looking to accelerate new product launches, and this should help fuel a predicted 13% EPS growth in 2019. Operating margins are also expected to improve, from 18.2% to 22.9%.

Woodford sells

Not everyone is impressed by Astra’s prospects, long-term backer Neil Woodford has recently been selling down his stake. Cynics might suggest this makes now a good time to buy, since everything Woodford touches turns to dust at the moment, but that would be cruel.

I was disappointed to see it trading at a valuation of 20.3 times earnings, and this could also be a key reason for Woodford’s sale. AstraZeneca’s forecast yield of 4.1% is of course tempting, and it remains a great long-term hold for income and capital growth, if you have the patience to stay the course. However, today’s valuation makes it look expensive given current uncertainties, and you may find a better buying opportunity further along the pipe.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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