Should you buy this growth company after profits soar 40%?

The market reacted negatively to this company’s explosive profit growth today. One Fool takes a closer look.

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I’m sure many investors’ eyes glaze over when they stumble across the Bioventix (LSE: BVXP) investor relations page. The company specialises in “the creation and supply of high-affinity sheep monoclonal antibodies (SMAs) for use in immuno-diagnostics,” which very few of us can claim is within our wheelhouse. 

Yet the company’s financial results for FY17 deserve our attention. Revenues grew 31% to £7.2m, with profit before tax up 37% to £5.7m. 

Its most significant revenue stream is from a vitamin D antibody called vitD3.5H10 (catchy, I know). Used by companies around the world in vitamin D deficiency testing, it accounts for around 40% of revenues. Sales of this crucial product increased 24% in the last year, but the company is expecting pricing pressure to dampen returns from this profitable source over time. 

This, combined with the loss of a technology license worth £1m, likely explains the market’s lukewarm response to today’s results. 

Magnificent margins

The company is valued at £136m, or 28 times last year’s earnings, so I’m not surprised that the uncertainty of surrounding vitamin D antibodies and the loss of the license have hit the shares to the tune of 4.5%. 

Still, with eye-watering 79% operating margins, I can understand why many are willing to pay up for the shares. If profitability can be maintained, it won’t take much revenue growth before the shares look reasonably priced. That said, the company does not own patents on all of its products and I fear pricing pressure could increase as others grow envious of its incredible margins.

Unless you have an extensive scientific background, an investment in Bioventix will always have a speculative element to it – and I’m no scientist. Therefore, I won’t be making an investment at today’s prices, but I can understand why others would.

If you are considering a purchase, I’d suggest you do your homework and size your position accordingly. If Bioventix can hold margins steady and keep growing, it could be one of the best investments on AIM. 

Another medical play

Advanced Medical Solutions (LSE: AMS) is another cash-generative healthcare stock that I believe has a good chance of making its investors rich. The company is a leader in the wound care and wound closure niches, supplying the NHS and other healthcare providers with bandages, sutures and the like. 

Its Liquiband glue-gun range is the dominant brand in A&E across the UK and Europe. The impressive product range, which outperforms other healthcare solutions, helped the company earn a 25% operating margin in the first half of this year. 

I believe its patented range of products can continue to grow revenues in the US, where Liquiband increased its market share by 4% to 24% over the last year. 

At last count, the company boasted a £55m net cash position which makes the PE of 38 a little more palatable. Still, at these prices I’d expect the business to grow sales faster than the 8% constant currency increase on show in the first half. Reported revenue growth was 20%, so I fear the shares could be knocked by a strengthening of sterling. 

For now, the shares occupy a place on my watch list. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zach Coffell has position in any shares mentioned. The Motley Fool UK has recommended Advanced Medical Solutions. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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