The pharmaceutical industry continues to offer significant growth potential for the long run. With the world population forecast to continue growing, there could be higher demand for a wide range of treatments. And with the demographics of the world shifting towards an older population, demand for medicines could increase substantially in the long run.
As such, GlaxoSmithKline (LSE: GSK) could prove to be a worthwhile purchase for retirement. However, it’s not the only pharma stock that could be worth buying right now.
Reporting on Monday was specialised pharmaceutical services and drug development company Ergomed (LSE: ERGO). Its share price fell by around 7% following the release of a trading update. The main reason for this seems to have been the fact that its EBITDA (earnings before interest, tax, depreciation and amortisation) is set to miss expectations. It is due to be £0.9m lower than guidance of £6m due to foreign exchange fluctuations and higher-than-expected R&D expenses.
Despite this, the stock appears to be performing well overall. Its service business saw revenue growth of 35% in 2017, while an order backlog of £88m is up on the previous year’s figure of £70m. This suggests that the company continues to have growth potential over the medium term.
In fact, Ergomed is due to deliver a rise in its bottom line of 77% this year, followed by further growth of 54% next year. Despite such rapid growth potential, it trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it could offer growth at a reasonable price – especially with the long-term growth potential that seems to be on offer within the healthcare industry.
Margin of safety
Clearly, GlaxoSmithKline does not offer the same level of earnings growth potential as Ergomed. However, it does appear to have a solid risk/reward ratio due to the diversity of its pipeline. This could mean that it offers resilient growth potential in the long run, and that its share price performance is less volatile than for many of its sector peers.
In addition, GlaxoSmithKline has strong income prospects. It currently has a dividend yield which is over 6% and that is expected to be covered 1.4 times by profit next year. This suggests that there could be scope for increasing dividends over the long run. This could help investors to not only overcome heightened levels of inflation, but may also mean that it can provide a high level of income into retirement for many investors.
With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of around 12, it seems to offer excellent value for money. Its low rating relative to the wider sector suggests that it could have a wide margin of safety, while providing the potential for significant share price growth in future years. As such, now could be the perfect time to buy it.
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Peter Stephens owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.