2 shining pharmaceuticals stars to challenge the big guns?

The pharmaceuticals sector has provided rich pickings for investors for many decades now, with the FTSE 100 big firms like GlaxoSmithKline and AstraZeneca handing over healthy dividends year after year. But for those who like to add a bit of smaller-cap growth to the mix, we have two companies offering updates today.

Veterinary profits

Shares in Dechra Pharameceuticals (LSE: DPH) have been performing well, with a 46% gain over the past 12 months to 1,374p, and a five-year climb of 210%.

Today the veterinary specialist updated us on the day of its AGM, telling us that the first quarter is in line with expectations and that its recent acquisitions are performing well — the most recent was the acquisition of Apex Laboratories in Australia for £31.3m, the completion of which was announced just a week ago.

And there’s further good news in the shape of FDA approval for the firm’s generic antibiotic Amoxiclav — two dosage strengths have been approved, with approval for the other two expected by the end of the year.

Dechra’s shares are on a forward P/E of around 26 at the moment, based on forecasts for the year to June 2017, and some might think that’s a bit high, especially with current dividend yields of under 2%.

But we’ve had several years of strong earnings growth, and there’s a further 25% pencilled-in for this year — giving a PEG ratio of 1, which doesn’t suggest a super bargain but isn’t bad for long-term growth expectations. And that dividend is very well covered by earnings and is strongly progressive, being lifted by around 10% per year.

I reckon we could be looking at a very nice long-term investment here.

Small-cap stumble

The much smaller Immunodiagnostic Systems Holdings (LSE: IDH), with a market cap of only a little over £50m, saw its shares tumble by 14% to 178p this morning after the release of a first-half trading update.

Revenue for the half is expected to edge up to £19.5m, from £19.4m earned last year. But on a constant exchange rate basis, that would slip to a 9% fall — the difference is purely down to exchange rates, so we’re seeing more fallout from the UK’s Brexit decision. The company, which makes manual and automated diagnostic testing kits, expects cash of around £28.7m at 30 September, up a little from £23.5m a year previously.

With the shares having slumped by 86% since their high in July 2011, to 172p today, investors must now be questioning the recovery that looked to have been taking hold since June this year.

There’s a big EPS rise forecast for the year to March 2017, to 8.5p per share, which would give us a P/E of 20, though that would be well behind the heady days of just a few years ago when we were seeing around 28p per share. Dividends peaked at 8.5p in 2014 too, before crashing to just 1.2p last year, but analysts suggest that will just about double this year.

The company says its “next intermediate goal is to stabilise the revenue line on a like-for-like basis,” and if it can do that and keep improving its earnings, that longer-term share price recovery could still be on.

But it’s not without risk, and I’ll be waiting to see interim results due on 25 November.

Other growth areas

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