Inhaled airways disease specialist Vectura (LSE: VEC) has released an impressive update today. It shows that the company has made good progress in the first nine months of the year and has the potential to deliver improved performance in future. But is this enough to make it a more enticing investment option than healthcare sector peer AstraZeneca (LSE: AZN)?
Vectura made further progress in December after the step change in financial performance announced in its half-year results in November. The announcement of a programme with Mundipharma, the first approval of the handheld smart nebuliser as part of a referenced labelled product, and confirmation of the US commercialisation of two key drugs show that the company’s long-term outlook is positive.
In terms of financial performance for the current year, sales are expected to be in line with expectations. There has been positive momentum from the seven recently launched inhaled products, which also provide a strong base of recurring revenue.
The Brexit effect
Vectura has benefitted from weaker sterling versus the euro and US dollar. This trend looks set to continue and with uncertainty surrounding Brexit likely to increase as negotiations commence in March, it would be unsurprising for sterling to weaken further. This could provide an uplift to the company’s guidance and lead to a higher share price than today.
In this sense, the company has an advantage over AstraZeneca. The latter reports in dollars and so could see its profit hurt by a stronger dollar over the medium term. The Federal Reserve is adopting an increasingly hawkish stance and could raise rates as many as three times this year. This could lead to the dollar strengthening versus the pound and euro, which may lead to downgrades in AstraZeneca’s financial outlook.
The better buy?
Vectura is forecast to grow its bottom line by 69% this year and by a further 54% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that it offers growth at a very reasonable price. By contrast, AstraZeneca is expected to struggle in the next year as patent losses weigh on its financial performance. Its bottom line is due to slump by 9% this year, but then recover to rise by 13% in 2018. This puts it on a PEG ratio of one.
While AstraZeneca has lower growth prospects and a higher valuation than Vectura, it appears to have greater investment appeal. That’s largely down to its more diversified pipeline and stronger financial standing, which should allow it to make further acquisitions and improve its financial performance. As such, AstraZeneca seems to have a lower risk profile than its sector peer. Given the uncertainty ahead due to Brexit and changes in the US government, lower-risk stocks could become more popular in 2017. Therefore, AstraZeneca seems to be the better buy.
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Peter Stephens owns shares of AstraZeneca and Vectura Group. 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.