The pharmaceutical sector has a track record of creating some big winners — and some big losers. For investors hoping to build a million-pound ISA I think some exposure to this sector is probably useful.
However, in my view there are only a limited number of attractive buys among UK-listed pharma stocks at the moment. Today, I want to take a look at two companies I’ve been considering recently.
Hitting new highs
Big pharma firm AstraZeneca (LSE: AZN) has reported falling sales every year since 2014. But in 2018, chief executive Pascal Soriot said that the tide had turned. Sales of new medicines rose by $2.8bn compared to 2017. In 2019, total sales and underlying earnings were expected to return to growth.
The news has given a shot of adrenaline to the shares, which have risen by 35% over the last year. AstraZeneca now trades at an all-time high of more than £64 and its dividend — once a high-yield favourite — now offers a return of just 3.3%.
The story behind this transformation is that Soriot’s investments since 2013 mean sales from new products will now start to replace sales lost from older, patent-expired medicines.
The right time to buy?
Ultimately, growth depends on companies like AstraZeneca developing blockbuster new drugs that will provide $1bn+ sales for years to come. It’s hard to predict how likely this is, but City analysts are backing Soriot’s forecasts.
They expect sales to rise by 6.6% to $23.5bn this year, with earnings climbing by 5.5% to $3.65 per share. Earnings are then expected to rise by 20% in 2020, as new product sales gain momentum.
These forecasts put AstraZeneca stock on a 2019 forecast price/earnings ratio of 23, falling to a P/E of 19 for 2020. For an £81bn company, this isn’t cheap. But Soriot hopes to double sales to $45bn by 2023. If he can come close to this goal, then I think the stock would look cheap at today’s price.
AstraZeneca isn’t going to make me a millionaire quickly. But I think it could help me get rich slowly. A long-term buy.
This stock has doubled in four years
One smaller pharmaceutical firm that I’ve followed for a number of years is Alliance Pharma (LSE: APH). This specialist firm buys up established medicines and healthcare products and sells them through its distribution network.
Sales have doubled since 2015 and so has the group’s share price. Although I’m generally cautious about growth strategies which depend on acquisitions, Alliance’s strategy appears to work well.
A millionaire maker?
Figures published by the company today show that 2018 was another solid year for the firm. Like-for-like sales rose by 4% and total sales climbed 16% to £118.2m, as new products including Vamousse and Nizoral made a contribution. Underlying pre-tax profit was 17% higher at £28.1m.
Reported profits — including one-off costs — were hit by impairment charges on two products where sales have fallen below expectations, or been suspended. Although unfortunate, I don’t think this should be a big concern.
After rising by 5% on Tuesday morning, Alliance shares are trading on about 13 times 2019 forecast earnings, with a 2.5% dividend yield. If the company can continue to expand at a steady rate, I could see the shares doubling from this level.
