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Is Vernalis plc The Perfect Partner For BTG plc In Your Portfolio?

Shares in pharmaceutical company Vernalis (LSE: VER) have surged by over 15% today as the company received very positive news flow regarding a drug approval. In fact, the company has received approval from the US Food and Drug Administration (FDA) for a New Drug Application (NDA) for Tuzistra XR, which is an extended release oral suspension combination of codeine and chlorpheniramine used to treat the symptoms of the common cold.

Commenting on the approval, Vernalis’ CEO, Ian Garland, said it is a ‘very significant moment in the evolution of Vernalis to a commercial stage speciality pharmaceutical company’. Investors in the company certainly agree, as evidenced by today’s share price rise. And, with Vernalis having delivered capital gains of 80% in the last year, is it the perfect partner for larger sector peer, BTG (LSE: BTG), in your portfolio?

Track Record

Looking back at the two companies’ track records of profitability, BTG offers much more stability than its smaller peer. That is, of course, to be expected, since BTG is a more mature company, while Vernalis is still transitioning towards being a commercial stage pharmaceutical company. As such, for investors looking for greater stability, BTG appears to be a sound play, since it has delivered growing profitability over the last two years, while Vernalis remains a loss-making company.

Looking Ahead

For investors in BTG, the future appears to be very bright. That’s because it is forecast to deliver a rapid growth in its bottom line, with an increase of 22% pencilled in for next year, followed by growth of 48% in the year after. And, despite this, investor sentiment in BTG has remained relatively weak, with shares in the company being down 9% since the turn of the year. This has helped to push them, however, to a valuation that indicates the company’s share price could be set to move considerably higher. For example, BTG has a price to earnings growth (PEG) ratio of just 0.5, which equates to growth at a very reasonable price.

Meanwhile, Vernalis is set to see its losses widen over the next two years as it continues to seek approval for its appealing pipeline. However, the company has a relatively strong cash position and so is likely to be able to cope with anticipated pretax losses of around £36m over the next two years. Furthermore, with investor sentiment in the company being so strong, further rounds of financing are likely to be well-supported and mean that Vernalis can continue to progress with new drugs and additional approvals moving forward.

Risk

Clearly, all pharmaceutical companies carry a degree of risk, since the outcome of regulatory approvals is a known unknown. However, larger firms such as BTG offer more stability than smaller peers such as Vernalis, since (as mentioned) it is a highly profitable company with strong growth potential. And, looking ahead, this could prove to be a catalyst that pushes its share price higher.

Meanwhile, Vernalis remains a company with considerable future potential in the form of an improving pipeline and adequate financing. So, while it is a relatively risky stock, it could be worth buying alongside BTG – especially if you have a long term timeframe.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended BTG. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.