A Neil Woodford recovery stock I’d buy alongside AstraZeneca plc

Bolstering the risk of smaller-cap stocks by combining them with giants like AstraZeneca plc (LON: AZN) could be a winning strategy.

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Ace investor Neil Woodford likes the look of IP commercialisation company Allied Minds (LSE: ALM). And so do I, now.

Mr Woodford holds it in his LF Woodford Equity Income Fund but hasn’t had a great deal of success with it so far. At 140p, the shares have lost 80% of their value since their peak in April 2015 — but he holds them in a well-diversified portfolio with a long-term vision.

On Monday, Allied Minds shareholders got some favourable news, with its SciFluor Life Sciences subsidiary announcing good results for its SF0166 candidate for the treatment of ‘wet’ age-related macular degeneration.

Headlines announced “improvements in vision along with significant decreases in central retinal thickness and fluid levels reported” in nine out of the 42 patients in the study, and “demonstrated safety with no drug-related serious adverse events.” It might sound obvious, but those two outcomes — it works, and it’s safe — can be remarkably hard to achieve.

Age-related macular degeneration can be seriously debilitating for its sufferers, so this has got to be seen as a positive step forSciFluor and for Allied Minds.

Wider technology

Looking at the bigger picture, Allied Minds — which is involved in technology and communication developments as well as life sciences — is starting to attract the funding it will need if it is to get as far as making a profit. A number of big investors took part in a funding round for subsidiary Federated Wireless in September which raised $42m.

There are no forecasts for profits on the horizon just yet, but today’s Allied Minds looks a significantly more attractive prospect after the decision to dump some of its subsidiaries earlier in the year. A bit speculative, but there could be great potential here.

Safety in size

Neil Woodford offsets risk by investing in established companies in similar sectors to his smaller investments — as well as the financial sector (including firms investing in technology), he holds a sizeable chunk of AstraZeneca (LSE: AZN).

And AstraZeneca had some welcome news the same day too, after the FDA in the US accepted a supplemental New Drug Application for the company’s cancer drug Tagrisso relating to the treatment of metastatic non-small cell lung cancer. The submission is based on the results of an earlier Phase III trial which showed significantly improved progression-free survival in patients with advanced metastases, and it comes after the European Medicines Agency had accepted a similar application.

It’s early days for the new development, but Tagrisso is already an approved drug for specific cancers in more than 60 countries, including the lucrative markets of the US, EU, China and Japan.

I’d buy now

Looking at the bigger picture for AstraZeneca, we’re still not back into forecast earnings growth territory yet, and the downturn that was driven by the expiry of some key patents a few years ago is lasting longer than many of us thought. 

But Q3 results make me think this year could turn out better than expected, with reported EPS for the first nine months looking flat overall (+3% at actual exchange rates, -4% at CER), with a fall in the underlying figure of between 4% and 7%.

Operating profit seems to be turning around nicely, and the predicted dividend looks reliable with a yield of 4.4%. I still see AstraZeneca as a dependable long-term investment.

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The Motley Fool UK has recommended AstraZeneca. 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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