Using biotech to diagnose Covid-19

Abcam (LSE:ABC) manufactures pharmaceutical reagents and provides research tools to companies engaged in diagnostics and drug development. Over the years, the firm has built up a vast portfolio of over 450 antibodies that are commonly used in blood tests (including those used to diagnose Covid-19) as well as the development of new medicines.

I discovered an impressive figure from 2019. Almost half of the scientific papers published related to drug development cited one of Abcam’s products as critical to the research. Needless to say, the firm’s products are well known and widely used. And they have even led to 20 new treatments that are either FDA approved or in clinical trials today.

The business generates revenue from several sources. The bulk comes from the direct selling of reagents to customers worldwide. The other — currently much smaller — sources include service fees, licenses of its technology, and royalties from approved treatments.

The latter component is what I find most fascinating as Abcam continues to receive a portion of each sale of a treatment that was developed using its reagents. Due to the typical 10-year drug development cycle, the number of FDA approved medicines using Abcam’s products is currently quite low. But over the long term, I expect this revenue source to become far more substantial.

The biotech stock is not risk-free

Beyond its shares being AIM-listed, Abcam is exposed to multiple risks. Its international operations did help make it a globally recognised brand within the biotech industry. But as a result, most of the revenue now originates from outside the UK, primarily coming from North America. This exposes the firm to fluctuating currency rates that may have a notable impact on the bottom line.

This global presence also introduces some additional complications regarding regulatory compliance. As I’ve previously discussed, the pharmaceutical industry has some of the world’s strictest regulations. Different countries have different regulatory standards. And while most are similar to FDA, there are some differences that Abcam needs to comply with.

If the business fails to do so, its products would no longer be allowed to be used in certain countries. And it would likely have a significant impact on the business from both a legal and reputational standpoint.

The bottom line: should I buy shares in this AIM Stock

Despite the impressive and vital technology that Abcam provides, it’s not a stock I’ll be adding to my portfolio. At least not at the current price.

The firm’s net income has recently been dropping as it has begun increasing spending to expand faster. Sacrificing profits in the name of growth is a perfectly acceptable strategy, in my opinion. However, this promise of growth has elevated the share price to a level that seems unsustainable to me.

With a P/E ratio of nearly 280, Abcam just looks too expensive. But I’ll be keeping a close eye on it for any potential buying opportunities throughout 2021.

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Acquisitions and partnerships

At the end of last year, it acquired Expedeon’s proteomics and immunology business and more recently announced the acquisition of Marker Gene Technologies. Both these acquisitions complement Abcam’s business and should help increase its capabilities.

This week it was announced that Abcam will be partnering with Cancer Research UK to generate new cancer-fighting therapies. Abcam will develop and supply unique antibodies exclusively to CRU’s funded researchers. The intention is to accelerate cancer research using custom protein-based reagents to enhance the understanding of cancer biology and potentially discover novel therapies. This is a prestigious partnership to have, but just last month, Cancer Research said £150m could be cut from its annual research funding as the pandemic decimates its income.

Is the Abcam share price sustainable?

Abcam operates an interesting business with many facets, but its growth has partly been fuelled by acquisitions. This, along with renewed enthusiasm for the future of healthcare, has led to much speculation around the future of this stock. I think this has led to its ridiculously high price-to-earnings (P/E) ratio of 61, which makes plain the Abcam share price is expensive.

It has been somewhat affected by the coronavirus crisis and temporarily closed several labs. It now says full-year revenues will be between £14m to £16m lower than expected. Its margins were being squeezed earlier in the year and the downturn could cause further pressure. Abcam offers a dividend yield of 0.9% but this is at risk of a cut if its revenues continue to fall. With coronavirus cases still rising, I imagine uncertainty will continue for some time. As I think this is an overpriced stock, I will not be rushing to buy.

Fighting a losing battle

Indivior (LSE: INDV) is a £634m drug company specialising in the development of Suboxone Film, an opioid addiction treatment. Indivior has a P/E of 6 and earnings per share are 14. It does not offer a dividend. Unfortunately, it is wrangled in a legal dispute in which its former CEO recently pleaded guilty to mismarketing the product in the US. Legal proceedings in relation to allegations of fraud surrounding the Suboxone product continue. It recently estimated this may cost the group $621m to settle.

It has been around for over 25 years and has considerable expertise in fighting the opioid crisis, which is far from being eradicated. Prior to 2014, Indivior was a subsidiary of Reckitt Benckiser Group. They are now entirely separate.

Two years ago, the Indivior share price was peaking over £4.90 a share. It then fell to a low of 30p in April 2019 and is now languishing at around 85p a share. Despite fighting a rising health crisis in opioid addiction, it does not look like Indivior will be rolling in profits soon. I would steer clear of both these life science stocks.

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But there’s another way of losing money that’s almost as dangerous and is often overlooked. I’m talking about valuation. Paying too much for a stock can leave you sitting on a loss for years, while the wider market steams ahead.

The two companies I’m looking at today are good businesses, but they look too expensive to me.

Pharma buzz

FTSE 100 pharmaceutical firm AstraZeneca (LSE: AZN) may seem an unlikely choice for this article. Surely this company is conservatively valued, produces reliable profits and pays a generous dividend?

Unfortunately, this isn’t the case. AZN shares have risen by 47% over the last five years to an all-time high of more than £63, despite falling profits and rising debt.

This has left the group trading on 22.2 times 2019 forecast adjusted earnings, with a dividend yield of 3.5% — well below the FTSE 100 average of 4.3%.

In my view, this valuation is pricing in a lot of future progress. I’m also concerned that the company’s preferred measure of adjusted earnings may be flattering its performance, something my colleague G A Chester covered recently in more detail.

Worse than it looks?

Over the last four years, AstraZeneca’s net debt has risen from $7.8bn to $16.3bn. I believe one reason for this is the maintenance of the group’s $2.80 per share dividend.

You see, the company has paid out about $14bn in cash distributions to shareholders since 2015, but has only reported shareholder profits of $11.5bn.

These numbers tell me that Astra is relying heavily on borrowed cash to fund investments in new medicines, while paying out all of its profits (and more) to shareholders.

The situation reached a new low in March, when Astra decided to raise $3.5bn from shareholders just days after paying a dividend of $2.4bn. This seems ludicrous to me — if cash really is that tight, the dividend should be cut.

My verdict: AstraZeneca has an exciting pipeline of new products, but I think the price is far too high, given the group’s weak cash generation and steep valuation. I’d wait for a better opportunity to buy.

Down 13% as spending climbs

My next stock also operates in the pharmaceutical sector, producing antibodies for research labs. Shares in Abcam (LSE: ABC) have risen from about 140p to 1,221p over the last 10 years, valuing this business at over £2.5bn.

However, the stock is down by more than 14% at the time of writing. Today’s fall came after the company announced plans to increase spending on expansion and said its chief financial officer had resigned.

Slowdown?

I should explain that Abcam has delivered high profit margins and strong growth for some years. Profits doubled between 2013 and 2018, for example.

However, earnings per share for the year that ended on 30 June are expected to be broadly unchanged from the previous year. Looking ahead, analysts expect modest earnings growth of 7% for the current year.

With spending rising, it’s not clear to me whether Abcam will be able to maintain its historic operating profit margin of nearly 30%. This risk — plus slower growth — suggests to me that the stock’s forecast price/earnings ratio of 35 is rather high.

As with AstraZeneca, I think this is a good business, but in my view it’s too expensive at the moment.

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Personally, I don’t like to take too much risk with my money. I like companies that have a proven track record of creating value for investors, that operate in defensive industries such as healthcare.

That’s why my first pick is Abcam (LSE: ABC).

World leader

If you’ve never heard of it before, you’re probably not alone. The company flies under the radar of most investors, but that doesn’t mean it’s any less attractive. The business sells antibodies and research tools to life-science groups, a highly specialist and unique industry. 

It has carved out a niche for itself in this market over the past two decades, and while the journey hasn’t been easy, investors who stuck with the business for the tour have seen impressive returns. After going public at around 42p per share in November 2005, today the shares are changing hands for 1,140p, a compound annual return of 19.3% according to my figures.

And it doesn’t look as if it is going to slow down anytime soon. Management believes the company can maintain double-digit revenue growth in the medium term as demand from the world’s ever-growing healthcare market remains robust.

Opportunity to buy 

Back in September, management announced that the company would be increasing the amount it spends on research and development to make the most of the opportunities it has available to it. Unfortunately, the market took a dim view of the decision because it means profit margins will fall slightly (analysts are expecting a contraction in the firm’s EBITDA margin of 3%). The shares have slumped 25% over the past four months following this news.

However, I think this presents an opportunity for investors to acquire shares in a world-leading, defensive business at a favourable valuation. If you are looking for stocks to include in your portfolio, I think Abcam is indeed worth a closer look.

Explosive growth

The second stock I’d buy with my £5,000 fund is NMC Health (LSE: NMC). Once again, this is a healthcare business that has generated impressive returns for shareholders in the past and looks set to continue doing so. 

This company, which operates private healthcare facilities across the Middle East and in several other attractive markets around the world, has produced a total return for investors of 45% per annum over the past five years.

I see no reason why this trend cannot continue. In October last year, the group surprised the market by announcing growth for 2018 would surpass expectations with revenue rising 24% and EBITDA jumping 36%. New facilities in its key UAE market, coupled with the acquisition of Aspen Healthcare — one of Britain’s biggest private hospital providers — are responsible for the improved growth.

City analysts believe the expansion will continue into 2019. They’ve pencilled in earnings per share growth of 29% for 2019, and they also reckon the company will reward investors with a 30% increase in its modest dividend distribution to $0.32 per share, a yield of around 0.9%.

Right now, shares in the hospital provider are expensive, but I think it is worth paying a premium for the growth the business offers. The stock is trading at a forward P/E of 25.6, falling to 19.7 for 2019.

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Cleaning up in the USA

Ashtead (LSE: AHT) the construction equipment rental company, is one of my favourite stocks that I’m not invested in (only due to a lack of cash). It’s a business that has done very well for investors with research by AJ Bell showing that total return on a £1,000 investment made a decade ago would now be a staggering 5,399% higher. I expect the company’s growth to continue (although not at the astronomical rate of the last decade), despite fears around Brexit, a US/China trade war and other macroeconomic factors.

This is because, as I’ve written before, Ashtead has major market share in both the US and the UK. It is the second largest and the largest company, respectively, in its sector by market share in those countries, giving it huge economies of scale and bargaining power and providing a protection against challengers. The company also invests heavily in its equipment to sustain growth. During the three months to July of this year, Ashtead spent £465m on new equipment. This was up from £377m in the same period of the year before.

With the share price having fallen 22% over the last six months, this stock is looking better value than it has for a long time, the P/E is down to just under 14 now. I believe it this means Ashtead is now great value for investors and could be a winner if there’s a Santa Rally. 

Margin concerns hit this AIM stock

Shares in the life science research company Abcam (LSE: ABC) have also been struggling. The company has a market-leading position as a supplier to the growing and ever more important life sciences market. Despite this, the shares have been faltering and have followed the market downwards.

Since October the share price has dropped nearly 18%. Partly general market conditions are to blame as market sentiment has fallen taking many share prices down. But a warning in September that margins would be lower due to increased investment also upset investors. The actual financial picture for the company looks much better though, as preliminary results for the year ended 30 June showed profit before tax grew 33.1% to £69.1m with revenue and EBITDA also up strongly, 7.4% and 15.9% respectively.

The margin downgrade is most likely just a temporary blip, as it was due to investment and not pricing pressures, and the company is still growing strongly. The P/E for Abcam is above 35 meaning it will need to show strong growth to keep investors happy, but investment in growth means the knocked down shares could now rise if there’s a Santa Rally and beyond that through 2019. 

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Abcam (LSE: ABC) is a great example of a successful and profitable AIM company. It provides the tools needed by life science researchers across the globe, and it’s a market leader in the field.

The company’s upward share price trajectory was recently abruptly reversed. Alongside results, it stated that its profit forecast for the new financial year will be “well below” expectations.

That’s always a catalyst for an immediate share price fall. Abcam was no exception. However, it may also provide a perfect entry point for picking up the stock at a cheaper price.

Providing the right ingredients for growth

Being a supplier to the life science market is a fundamentally attractive market to be in, with high margins, a global marketplace and significant barriers to entry. Abcam enjoys and profits from established relationships and reliance on its expertise to help researchers in the industry with their work.

The company has certainly made the most of its position within the market, and rewarded shareholders with a share price that had been rapidly climbing consistently for several years.

Despite the warning on expectations, the company’s results were actually pretty good and analysts have not rushed to downgrade the stock, which is a reassuring sign. The preliminary results for the year ended 30 June saw revenue up 7.4% on the previous year at £233.2m, EBITDA up 15.9% at £81.7m and profit before tax growing 33.1% to £69.1m.

As a dividend-paying AIM stock Abcam should continue to reward its investors, and already the share price is starting to recover from its recent plummet.

Another AIM success

Boohoo (LSE: BOO), the fast fashion retailer, is another AIM success story and has seen its share price rise even more quickly than Abcam’s since it listed on the stock exchange. This week the company announced the appointment of Primark’s chief operating officer, John Lyttle, for the role of chief executive. He’ll start in March 2019, which should boost growth and the share price in my opinion.

The latest results from Boohoo back in June saw it posting a 53% jump in first-quarter revenue. In the three months to the end of May, total group revenue rose to £183.6m from £120.1m the year before.

Investors will also have been buoyed by the strong performances from the group’s other brands, PrettyLittleThing and Nasty Gal. Their revenues grew by 158% and 149% to £79.2m and £7.2m, respectively.

When it comes to finding AIM stocks that will enhance your wealth, it can be tricky. Boohoo and Abcam, however, are both established companies with strong growth potential.

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The firm produces, distributes and sells “high-quality” protein research tools to life-science researchers who analyse components of living cells at the molecular level, which is “essential” in a wide range of fields including drug discovery, diagnostics, and basic research. Abcam reckons it serves around two thirds of the 750,000 life-science research organisations operating in the world today.

Good figures

At first glance, today’s adjusted full-year figures look quite good. Revenue moved 7.4% higher than the equivalent period last year, and diluted earnings per share shot up just over 27%. The directors appear to be pleased too, and pushed up the total dividend for the year by almost 18%, which strikes me as a sign of their confidence in the outlook.

Indeed, the firm hit its growth targets for the year with revenue from recombinant antibodies up 22.3% at constant currency rates compared to a forecast of 20-25%. Revenue from immunoassay products also rose 25.4%, against an expected +20-25%.

Chief executive Alan Hirzel told us in the report that strong cash generation and a robust balance sheet justify the “continued investments” the firm is making in “our teams, systems and facilities to sustain our double-digit growth rates.” Meanwhile, the company expects the current year’s adjusted EBITDA margin to come in around 36%, which is lower than the 39% or so City analysts following the firm were reportedly expecting. I reckon that margin shortfall could be the cause of the share-price markdown.

It’s an age-old problem. In order to stay ahead of their games with growth, firm’s must invest. And when they invest in growth initiatives, there’s often a short-term hit to profits. However, as long as growth remains likely, share-price reversals like the one we are seeing today with Abcam can be decent opportunities for us to hop aboard a long-term growth story.

A quality outfit marked with a robust valuation

Abcam trades on a hefty price-to-earnings ratio close to 40, which has likely arisen because of the firm’s well-balanced track record of steady annual growth in revenue, earnings and cash flow. When valuations are riding high, the stock market can be unforgiving on earnings misses. But I wouldn’t write off Abcam yet. There’s no doubt that profit margins have been slipping lately, but I reckon the firm has every chance of making its growth investments work, which could boost profits down the line.

A high P/E rating is often a mark of quality earned by strong businesses and Abcam will not have lost all the attributes that made it great overnight. One indicator is that the shares are bouncing back up strongly today, which gives me confidence that there’s plenty of potential in the stock for investors from here. I think Abcam is one to watch closely with a view to buying into if the shares weaken again.

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Here are two growth stocks I reckon are worth considering adding to your portfolio in September.

A price worth paying

You might not have heard of research tool provider Abcam (LSE: ABC) before, but this company provides a vital service to biotech laboratories around the world. The group provides research outfits with research-grade antibodies that they need to conduct experiments.

This is a highly specialist market, and Abcam is taking it over. Growth has been explosive over the past six years. Revenue has expanded from £98m in 2012, to £217m for 2017. Analysts are expecting sales to hit £234m in 2018 and £261m in 2019. Profit has grown just as fast. Since 2012, net profit has doubled and is expected to triple by 2019.

The one thing that puts me off this company is its valuation. Right now, shares in Abcam are changing hands for 48 times forward earnings. Usually, I wouldn’t recommend a stock that commands this kind of premium. However, I believe Abcam’s unique business model is worth coughing up for.

Indeed, the long-term growth potential of the business could be tremendous. It is only just starting to break into the Chinese market, and nearly £100m of cash on the balance sheet provides plenty of firepower for acquisitions. Sales in China only accounted for 13% of total group revenue in 2017, but expanded 24% year-on-year in the first half — this gives some idea of how big the Chinese opportunity could be for the firm.

With demand for Abcam’s services exploding, now might be the time to consider adding this stock to your portfolio.

International expansion

My other growth pick for September is Homeserve (LSE: HSV). Like Abcam, Homeserve’s growth over the past five years has been astounding. Net profit has leapt from just £10m in 2014, to £96m for fiscal 2018. And analysts are expecting further growth in 2018 and 2019. Earnings per share (EPS) are projected to rise 22% in 2019 and 11% in 2020. If the firm hits these targets, net profit will have grown by 1,220% in five years.

I believe there is also plenty of scope for the company to grow further after 2020. The group, which provides home emergency, repair and heating installation services, has only just started to expand in the United States where management sees plenty of scope for growth through acquisitions. 

It has only really scraped the surface of the global home care market. For the year to the end of March 2018, the company reported 8.4m customers worldwide. With a total of 126m households in the US alone, the sky is the limit for Homeserve’s growth.

With this being the case, I reckon that even at a P/E of 28, shares in Homeserve are worth snapping up. There’s also a dividend yield of 2.2% on offer.

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But with no signs of spending slowing down in the US, UK or anywhere else, investors looking to benefit from this trend will find plenty of potential opportunities. One that I’ve got my eye on is UDG Healthcare (LSE: UDG), which is a provider of non-core services such as commercial marketing, packaging and communications for global drug makers.

UDG has benefited from these customers moving to outsource these essential but non-core services as a means of improving margins under relentless shareholder pressure. This trend, together with a slew of acquisitions that have turned it into a global leader in its markets, has sent the group’s share price up 25% over the past year alone.

Judging by the company’s Q1 trading update released this morning, investors have been right to be bullish as management is guiding for a whopping 18%-21% uplift in earnings per share for the full year to October. The group’s commercialisation division, Ashfield, is the main driver of growth and management said its operating profits were significantly ahead of the prior year’s due to acquisitions and organic growth as drug makers continue to bring huge volumes of new treatments to market.

While there were short-term issues with the packaging division, management expects these to reverse in H2 which, alongside falling US tax rates and growth in other divisions, should still leave investors very happy for the full year. With industry tailwinds at its back, a healthy balance sheet providing ammunition for further acquisitions, and massive growth opportunities, I think UDG Healthcare is still attractively valued even at 25 times forward earnings.

Underpinning critical research the world over  

Another healthcare stock on my radar is research tool provider Abcam (LSE: ABC). It provides academic pharma and biotech laboratories with research-grade antibodies that they need to conduct experiments.

This proposition has proven very attractive to scientists in recent years and as a result, Abcam has been growing very rapidly. In H1 alone revenue was 10% ahead of the year prior as each of its product categories grew sales faster than overall market growth.

Future growth opportunities also exist in broadening the group’s geographic reach, particularly in the massive Chinese market. Last year China accounted for only 13% of group revenue, but the country is becoming increasingly important with sales in the region up 24% year-on-year in H1.

There’s also the possibility of organic growth continuing to be buttressed by selective acquisitions that are well within the group’s capabilities. At year-end it had a pile of cash totalling £84.8m. And closing cash balances were well ahead of the year prior due to the highly profitable nature of the company’s business, with EBITDA margins of 32.5% recorded last year.

Abcam’s shares aren’t cheap at 39 times forward earnings, but with significant cash generation, impressive margins and continued double-digit sales growth, I think the business is still one I’d love to own for the long term.

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The Irish homebuilding firm today announced that for the year to 31 December, revenues increased significantly to €149m from €40.9m and the company is expected to report EBITDA for the full year of €15m at the high end, up a staggering 290% from the €3.8m reported for 2016. 

And it looks as if this growth trend is set to continue as according to today’s press release, the company is starting 2018 with a “with a strong forward sales pipeline with a net sales value of €134.3m…which underpins H1 2018 sales.” What’s more, CEO Michael Stanley is highly optimistic about the group’s future growth potential thanks to the “historical cost of our land bank” as well as the firm’s “focus on competitively priced houses and premium apartments.” 

Cheap growth

City analysts appear to agree with management’s outlook. Indeed, analysts have pencilled in revenues of €344m for full-year 2018, and a pre-tax profit of €58m, up five-fold from 2017’s predicted figure of €10m. Based on these numbers, analysts have the shares trading at a deeply discounted forward earnings multiple of 7.7, which to me seems too cheap for such a rapidly growing business. That’s why I’d buy the stock for 2018. 

One of a kind 

Shares in Abcam (LSE: ABC) have surged by more than 126% excluding dividends over the past five years, and despite this expansion, I believe that the company still has plenty of room left to grow (although my Foolish colleague Roland Head seems to disagree). 

Today the supplier of life science research tools reported a half-year trading update for the six months ended 31 December showing revenue growth of 11%. All product categories saw sales up “ahead of estimated underlying market growth rates.” 

Life sciences is a niche market, so those companies that have established a reputation for themselves have a substantial competitive advantage. And for Abcam, a business well-established in the specialist market of life science research tools this advantage isn’t going to disappear anytime soon. The company is investing heavily in improving its offering to customers, devoting funding to researching new devices and product lines for customers. This spending should help keep the firm ahead of competitors and ensure stable growth going forward. 

Growth through research 

City analysts are expecting the firm to report earnings per share growth of 19% for the year ending 30 June 2018 on a pre-tax profit for £75m. These figures might come in above expectations, however, as today the group warned that it will see a tax benefit of up to £7m due to changes in US tax law. 

Unfortunately, shares in Abcam are not cheap. They currently trade at a forward P/E of 34.6. Still, while most companies do not deserve such a lofty valuation, considering the firm’s substantial competitive advantage, and double-digit earnings growth, I believe that this is a premium worth paying. 

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