Specialist pharmaceutical company Midatech Pharma (LSE: MTPH) is a firm with big ambitions. The company’s chief executive, Dr Jim Phillips, declared in a recent investor presentation that Midatech aims to be another growth success story like London-listed peer Shire (LSE: SHP).
That’s quite a target because Shire is now a FTSE 100 constituent with a market capitalisation of around £24.64bn, which dwarfs Midatech’s market capitalisation of just £55m. Midatech has a long way to travel but looks as if it’s up to the challenge.
The firm focuses on the development of multiple targeted therapies for major diseases in the areas of oncology, endocrinology and neuroscience, which have unmet medical needs. A three-pronged approach means the company will develop its own products in-house, acquire them, or partner with other organisations.
Last year’s acquisition of DARA BioSciences Inc gave the firm a commercialisation arm, now called Midatech Pharma US, through which it plans to roll out its commercialisation strategy. Right now, the company has four products in fast growth and two mature products in the US that are driving revenue growth.
In 2015, the company generated around £1.4m in revenues and the chief executive reckons he’s comfortable with the top end of City analysts’ expectations of around £9m in revenue for 2016. Beyond that, Midatech targets £15m during 2017 and at that point expects to break even. However, the top man puts his neck on the block to predict that Midatech’s strategy will lead to revenues counted in the hundreds of millions within five to seven years.
Shire shows the way
Midatech’s business model seems very similar to Shire’s, so I can see why Midatech compares itself with the FTSE 100 giant. In 2015, Shire’s revenue was around £4.35bn, more or less doubling over five years. However, in the earlier stages of Shire’s development revenue growth was more rapid. Shire’s profitable growth certainly shows what might be possible for its smaller peer and if things work out as hoped Midatech’s shareholders could see considerable capital appreciation as the firm’s shares shoot up.
Key to Midatech’s success as an investment from here is whether the firm manages to break even and get into profit without raising funds that could dilute existing investors’ interests. At the moment, Midatech has around £2m in debt, which is low, and £16m or so in cash, which gives the firm a bit of room to wiggle as it moves towards generating profits. I’ll be keeping a close eye on the firm’s losses and looking for a trend that shows they’re reducing.
Higher risk, higher potential reward
Getting into a growth story early before the firm even makes a profit can be lucrative if things go well, but if costs rise as fast as revenues and profits remain elusive, results can be disappointing for investors. That’s why I would classify Midatech as a higher risk investment with potentially higher rewards.
Today’s share price of 165p is more attractive than the 320p or so Midatech reached a year ago and during that time, operational progress has added more value to the investment proposition. There’s a good chance that Midatech could delight its investors in the years to come as Shire did previously.
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Kevin Godbold owns shares in Midatech Pharma. 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.