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Should you be investing money in pharma stocks?

The healthcare and pharmaceutical industry has been growing steadily for years. The UK in particular is home to pharma giants like GlaxoSmithKline and Astrazeneca, with market caps of over £80bn. But there are also some small caps that I think deserve attention when it comes to investing money in the sector.

Allergy Therapeutics (LSE:AGY) is a long-established specialist in the prevention, diagnosis, and treatment of allergies.

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The company has a three-part strategy for growth. First, it will continue to develop its European business via investment or opportunistic acquisitions. Then, it has an opportunity to expand its Pollinex Quattro immunotherapy platform in the US market. Finally, it has a pipeline of therapies to develop.

Allergy Therapeutics’ Pollinex is the only subcutaneous immunotherapy (SCIT) pollen product currently registered in the UK. SCIT is the most commonly used and most effective form of allergy immunotherapy. It’s the only treatment available that actually changes the immune system, making it possible to prevent the development of new allergies and asthma.  

Before even considering investing money in the company, let’s see how it has performed recently.

Analysis

Allergy Therapeutics’ European business has expanded in recent years, with particularly strong growth in Austria, the Netherlands, and Spain. In terms of products, Venomil, Acarovac Plus, Pollinex and Pollinex Quattro were the top performers – driving net sales growth of 8% to £73.7m in 2019. The operating margin for the last 12 months is around 12%. That’s lower than GSK (18.5%) but higher than Astrazeneca (10%). Obviously, comparing Allergy Therapeutics to the giants isn’t meaningful; its market cap is 1,000 times lower at just £89m, but it does give us a good comparison for a healthy margin in the pharmaceutical industry.

Management expects this financial year to show further growth in sales, too. Gross margin percentage growth is likely to be similar to the 2019 financial year, though other operating costs are likely to rise reflecting additional cost in technical support needed in preparation for Brexit.

According to a 2018 report published by Credence Research, Inc., the global allergy immunotherapy market was valued at US$1,499m in 2017, and is expected to reach US$3,602m by 2026 – expanding at a compound annual growth rate of 10.1%. Could Allergy Therapeutics capitalise on that potential growth with their products currently in the pipeline? It’s certainly possible.

Key drivers

So, what are the risks, if you’re thinking of investing money in Allergy Therapeutics? Over the next two years, the company will be running several important clinical trials. These have binary outcomes – either success or failure. The company’s long-standing operations will mitigate this risk to some extent. A second wave of the Covid-19 pandemic would also like have a big impact on forecasts.

The company is likely to invest heavily in research and development as it puts new products though each phase of the pharmaceutical pipeline. This is essential to meeting the demand they are expecting for immunotherapeutics in the future. However, success hinges on whether that demand will actually be there when the products become available.

With a small and lesser-known business like this, you should only be investing money that you can afford to lose. That said, Allergy Therapeutics does look like it has a solid plan to make a lot of money in the future.

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Toby Aston has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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