Why Motif Bio plc is a growth bargain I’d buy and hold for 25 years

Motif Bio PLC (LON: MTFB) has a bright outlook but growth will take time.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Developing new drugs is a risky business. Only around 7% of treatments make it through the approval process. With the average cost of production per treatment amounting to more than £1bn, it’s both a risky and costly process. 

However, the payoff can be enormous, which is why small-cap biotech stocks like Motif Bio (LSE: MTFB) often attract plenty of attention. 

Motif is developing several antibiotic treatments for niche diseases and management is planning to submit its first therapy for approval early next year. 

First drug opportunity 

This first drug is for patients with Acute Bacterial Skin and Skin Structure Infections (ABSSSI). The firm already has two required Phase 3 trials in ABSSSI necessary to submit a new drug application to the US Food and Drug Administration, which is planned to take place before the end of Q1 2018. 

Unlike existing ABSSSI treatments, Motif’s product, Iclaprim, is not toxic to the kidneys. Around 26% of ABSSSI sufferers also have kidney disease, so this is a promising development. Nearly 4m patients are diagnosed with ABSSSI every year in the US, so Iclaprim could become a blockbuster seller for the firm. If it does, investors should be well rewarded for their patience. 

Undervalued 

The total addressable market value is estimated at $2.8bn, capturing just 10% of this would see Motif’s shares surge as the current market value is only £100m. 

Shares in its larger rare disease treatment peer Shire (LSE: SHP) currently trade at a price-to-sales ratio of 2.9. If Motif can achieve sales of $280m, roughly £207m, the same valuation would indicate a market cap of £600m — a gain of 500% from current levels. 

Shire also looks undervalued to me. The company has recently fallen out of favour with investors due to its rising debt pile, but management is working hard to bring down these obligations, and over the long term, the company should produce steady returns for investors. 

Making progress with growth 

For the fiscal first quarter (July to September), Shire reported that net cash generated by operating activities doubled to $1,055m, helping to reduce its net debt by $920m, a sizable decline, although even after this reduction, the group still holds a net debt balance of $20.4bn, a net gearing ratio of 62%. 

Still, the company’s pricey acquisition of US firm Baxalta is paying off. For fiscal Q1 the group reported a 20% increase in adjusted earnings per share, which rose to $3.81 off the back of a 20% increase in adjusted net profit

After recent declines, Based on broker forecasts the stock trades on a forecast P/E of 8.7 for 2017, which is cheap even after accounting for the company’s debt pile. The rest of the pharmaceutical industry trades at a median forward P/E of 17.  As the company continues to pay down debt and grow earnings, this valuation gap should quickly close. 

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.

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.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »