Is this the best healthcare stock money can buy after today’s update?

Should you buy this stock or a sector peer following today’s news?

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Today’s interim results from Midatech (LSE: MTPH) have sent its shares down around 8%. While disappointing, this could present a buying opportunity and its performance and outlook provide clues about whether it’s the right time to buy it versus healthcare peers such as AstraZeneca (LSE: AZN), Hikma (LSE: HIK) and Smith & Nephew (LSE: SN).

Midatech’s first-half performance was upbeat. It was able to successfully integrate and deliver impressive sales performance from its recently acquired US commercial business. This helped it to grow sales by over 1,000% from £0.32m in the first half of 2015 to £3.8m in the first half of 2016. Furthermore, the launch of its anti-nausea product Zuplenz in the US in April has provided a boost to Midatech’s sales and this bodes well for its future performance.

In fact, Midatech is confident on its second-half outlook and in its longer-term prospects. It’s investing heavily in a number of R&D programmes as well as in platform technologies and candidate pipelines. They have the potential to turn Midatech from a lossmaking business to a profitable one over the long run. And with the company’s pre-tax losses set to narrow from £12m to £9m between 2016 and 2017, Midatech is moving in the right direction.

Lower risk?

However,Midatech remains a small and relatively high-risk buy. Therefore, other healthcare companies offer lower risk as well as high potential rewards. Among them is Smith & Nephew. It has a very stable business model owing to its dominant position within wound care and orthopaedics, both of which are more consistent arenas than pharmaceuticals. As such, Smith & Nephew has a low risk profile and with it due to increase earnings by 13% next year, it offers sound growth prospects too.

Hikma is also expected to record upbeat financial performance over the medium term. Its earnings are due to rise by 41% in the next financial year. This puts it on a lower price-to-earnings growth (PEG) ratio than Smith & Nephew, with its PEG being 0.5 versus 1.4 for Smith & Nephew. This indicates that Hikma offers significantly greater upward rerating potential, although with Hikma forecast to record a fall in its earnings of 23% this year, its financial performance is much more volatile than its sector peer.

Think long term

One healthcare stock that offers stunning long-term growth potential is AstraZeneca. Its bottom line has come under pressure due to patent losses, but it’s expected to return to positive growth over the medium term through its acquisition programme. Despite investing billions in its pipeline, AstraZeneca’s balance sheet and cash flow are strong and lower its risk profile significantly.

Alongside this is the potential to make further acquisitions to boost future growth. Due to this, AstraZeneca’s growth potential is hugely appealing even when compared to the likes of Hikma, Smith & Nephew and Midatech.

Furthermore, AstraZeneca yields 4.3% versus 1.9% for Smith & Nephew and 0.8% for Hikma, with Midatech paying no dividend. This means that as well as a low risk profile and strong growth potential, AstraZeneca has the most income appeal of the four stocks. So, despite being attractive, AstraZeneca is the most enticing of this healthcare quartet right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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