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Is this stock the best buy in its sector following today’s update?

Shares in Midatech (LSE: MTPH) have soared by 21% today after the international speciality pharmaceuticals company issued an upbeat trading update. Midatech expects revenue of £3.8m for the six months to 30 June, which is a rise of more than 10 times from its sales of £0.32m in the first half of the previous year. This is in line with revised market expectations for the period, which stated that Midatech was performing ahead of expectations.

During the period, Midatech has also enjoyed multiple positive advances including the launch of Zuplenz in the US to provide relief from the side effects of common cancer treatment, while its outlook for the second half of the year remains as per previous guidance.

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Midatech also stated in today’s update that it’s too early to assess the long-term impact of Brexit. However, it hasn’t experienced an immediate impact following the EU referendum.

Stability and resilience

Of course, the weakening in sterling since the vote has been good news for a number of Midatech’s healthcare peers, including GlaxoSmithKline (LSE: GSK). It reports in sterling but derives a major part of its sales from abroad. As a result of this, GlaxoSmithKline’s outlook is positive, since sterling is forecast to weaken yet further against the US dollar and other major currencies.   

Clearly, GlaxoSmithKline has more appeal than just currency exchange effects. Its business model is exceptionally stable and well-diversified, with it essentially being three world-class businesses in one. Its pipeline of around 40 potential treatments is robust and should provide multiple blockbuster drugs over the medium term, while its consumer goods and vaccines businesses also have bright long term growth potential.

As such, GlaxoSmithKline has significantly greater stability and resilience than Midatech and while the smaller firm has a bright long-term growth outlook, it remains high risk. It also lacks income prospects due to it being lossmaking, while GlaxoSmithKline has a yield of 4.7% and the potential to raise dividends over the long run as its pipeline begins to deliver on its potential.

GlaxoSmithKline is also a superior income stock compared to FTSE 100 peer Hikma (LSE: HIK). The latter yields just 0.8% at the present time, but with its bottom line forecast to rise by 53% next year, dividends are expected to grow by 36% in 2017. Hikma’s growth rate puts it on a forward price-to-earnings (P/E) ratio of 18.5 and while this represents fair value for money given its strong balance sheet, long-term growth prospects and sound strategy, GlaxoSmithKline is cheaper.

It trades on a forward P/E ratio of 16.5 and when its treatment pipeline is factored-in, as well as its diverse business model, GlaxoSmithKline seems to offer the perfect mix of defensive characteristics, upward rerating potential and growth prospects. Therefore, while Hikma is a sound buy and Midatech has long-term potential, GlaxoSmithKline is the best buy of the three at the present time.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.