Today’s update from pharmaceutical company Allergy Therapeutics (LSE: AGY) shows that it’s making strong progress. It also provides guidance as to whether it’s a better buy than healthcare sector peer Shire (LSE: SHP).
Allergy Therapeutics’ revenue increased by 19% at constant currency to £51.5m in the year to 30 June. This was aided by a rise in market share to 12% in the company’s main European markets. This was up from 10% in the previous year and shows that Allergy Therapeutics’ strategy is progressing well.
The company’s core business showed an 11% increase in operating profit to £4.4m. This excludes money spent on R&D, which amounted to £16.2m. This was up significantly from the £3.1m which was spent in the prior year, reflecting the investment in PQ registration and pipeline. With Allergy Therapeutics having a strong cash balance of £23.4m at year end, it’s in the position to continue to invest heavily in product development.
Looking ahead, Allergy Therapeutics has significant growth potential. It’s due to remain lossmaking in the next couple of years but due to its strong balance sheet, its financial standing seems to be sound. Therefore, it could deliver upbeat share price performance, although it remains a relatively risky buy at the present time.
For this reason, buying a lower risk and larger sector peer could be a sound move. Shire is better diversified than Allergy Therapeutics. This reduces its risk profile, while its combination with Baxalta provides scope for significant synergies over the medium term that could boost the company’s bottom line.
In fact, Shire is expected to increase its earnings by 87% in the current year and by a further 19% next year. This is a stunning growth outlook and despite this, Shire trades on a very appealing valuation. It has a price-to-earnings growth (PEG) ratio of just 0.7, which indicates that now is an excellent time to buy it.
One reason for Shire’s low valuation is concern among investors regarding the acquisition of Baxalta. There are fears that the two companies will not prove to be a good fit and that the synergies that are anticipated to be realised from the deal will disappoint. And as with any merger, there are concerns that the integration process will be lengthier than planned. This could cause Shire’s guidance to be downgraded.
However, Shire’s valuation includes a very wide margin of safety. This means that its share price could rise even if its profit growth is slightly lower than expected. And with it having wide geographical exposure as well as a very encouraging pipeline of new treatments, even if the integration process with Baxalta causes some short-term pain, the long-term prospects for the business are bright.
As such, and while Allergy Therapeutics could be worth buying for the long term, Shire has the better investment offering at the present time.
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Peter Stephens 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.