Shares in Circle Holdings (LSE: CIRC) have slumped by more than a fifth today, after the company revealed that it was pulling out of the contract to Hinchingbrooke Health Care NHS Trust. Management has determined that the contract to manage the hospital is no longer sustainable, citing a cut in funding for the hospital as the main reason why the franchise is no longer viable.
According to Circle, government funding for Hinchingbrooke has been cut by 10% this year. Management believes that, after this funding cut, Circle would have to make a substantial investment in the franchise on top of the £5m it is already required to provide.
Of this £5m investment, Circle has already provided £4.8m. So, under the contract Circle is require to provide an additional £160,000 to Hinchingbrooke in addition to contract termination and re-procurement costs, which are capped at £2m.
According to City analysts, this move by Circle will have no effect on pre-tax profit for 2015 and 2016. — the company is currently forecast to report a pre-tax loss of £7m for 2015 and loss of £6.8m for 2016 — however, pre-tax profitability for 2017 and 2018 is expected to be affected by £3m and £4m respectively.
And it remains to be seen how this move will affect Circle’s ability to win additional contracts with the NHS in future. As well as Hinchingbrooke, the group has also been awarded a £125m contract to provide musculoskeletal services for 440,000 patients in Bedfordshire for five years and is in the running to manage George Eliot hospital in Nuneaton.
Until the repercussions of this move are clear, Circle’s future is uncertain.
As Circle slumps, GW Pharmaceuticals (LSE: GWP) is charging higher today, after announcing yesterday that one of three Phase III cancer pain trials of its Sativex compound failed to meet its primary endpoint. After releasing the news yesterday, GW’s shares fell as much as 21% at one point but they quickly recovered and they ended the day unchanged.
Even though one of GW’s trails has failed, the company still has two additional trials under way. If these trials yield positive results, GW would be able to submit a new drug application with the US Food and Drug Administration.
Furthermore, within yesterday’s update, GW said that all of its trials in its Epidiolex programme for treatment-resistant childhood epilepsies are on track. Phase III data from at least one of its trials now expected by the end of 2015.
Overall, even though one of GW’s trails failed to yield the desired results, the company still has plenty of irons in the fire. That being said, investors should keep in mind that only 7% of all new drugs successfully make it from the research and development stage, through to commercial production. So the odds are stacked against GW.
Nevertheless, only you can decide if GW fits in your portfolio and I thoroughly recommend that you do some additional research before making a trading decision. And if you do decide to buy GW, or Circle, a basket approach will work best.
Simply put, a basket approach combines a selection of risky growth stocks with a core portfolio of defensive dividend paying companies. Using this method allows you to reduce risk and sleep soundly at night.
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Rupert Hargreaves has no position in any shares mentioned. 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.