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One ‘secret’ growth stock I’d buy alongside this FTSE 100 growth monster

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When my Foolish colleague Kevin Godbold last covered Motif Bio (LSE: MTFB) at the end of last year he concluded that, after a recent fundraising supported by a specialist pharmaceutical lender, the firm’s outlook had improved significantly.

Nearly four months on and it looks to me as if this assessment remains accurate.

About to pay off 

Motif raised $20m in debt financing from Hercules Capital, a firm specialising in customised debt financing for companies in life sciences and technology-related markets, at the end of last year. This additional cash has helped the company push forward with the development of its flagship iclaprim treatment. 

Iclaprim is designed to fill a gap in the traditional antibiotic market by providing a standard of care not currently available to patients who have other health issues, specifically, kidney problems. The size of the potential market for this treatment is growing as more and more people become exposed to issues that may impact kidney function, such as obesity and diabetes. 

2018 and 2019 will be a transformational year as the company seeks to get this treatment approved for sale by the US Food and Drugs Administration. It has already met FDA standards in Phase 3 clinical trials conducted throughout 2017, so management is hopeful that it won’t be long before it can start booking revenue from sales. 

However, the firm is facing the prospect of a cash crunch. 

Motif is generating no revenue and lost a total of $44.8m last year. With cash and cash equivalents of $22.7m at the end of December 2017 (and $15m of the $20m drawn down from debt financing), the firm has less than six months of cash left before new funding is required. 

Indeed, today’s full-year earnings release from the company states: “The Group will be required to raise additional capital within the next year.” Still, with Iclaprim on the verge of being approved by regulators, it looks as if the risk/reward is skewed in investors’ favour. 

More predictable outlook 

Motif is a high risk, high reward secret growth stock and to reduce the risk of holding it in your portfolio, I would buy it alongside Shire (LSE: SHP).

In my opinion, Shire is one of the most undervalued FTSE 100 stocks on the market today. Despite the company’s position as one of the world’s leading rare disease drugs producers, shares in Shire currently trade at a depressed forward P/E of just 10. By comparison, the median P/E of the UK pharmaceutical sector is 19.7. 

It seems investors are avoiding the company due to concerns about its highly geared balance sheet and haematology franchise. After an acquisition spree, Shire’s gearing has jumped to 54%, which is hardly disastrous, but is a substantial change from the positive cash balance of $2.1bn reported for 2014.

Meanwhile, peers are edging in on the firm’s haematology franchise, which has historically been a money spinner for the group. More competition means the company will most likely suffer from falling profit margins going forward, which is bad news when you factor in Shire’s increased debt. 

Nevertheless, despite these concerns, Shire continues to grow. City analysts have pencilled in earnings per share growth of 67% for 2018 and 8% for 2019. On top of this, Japanese peer Takeda has expressed interest in launching a full takeover of the company, which would be a fantastic result for investors.

Capital Gains

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Shire. 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.