One of the market’s most defensive sectors is the pharmaceuticals business. However, investors often forget that there are two sides to this industry, the one for humans and the one for animals.
The manufacture and sale of animal feed and drugs is probably more profitable than the human sides of these businesses because there’s less competition and the market is much more substantial.
Eco Animal Health Group (LSE: EAH) is a great example. Over the past five years, as the company’s revenue has expanded by just over 100%, pre-tax profit has exploded 310% and earnings per share have risen 210%. On the back of this growth, shares in the company have gained 285% over the past three years.
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Expanding into new markets
Eco sells animal health products around the world, and as the company figures show clearly, this is a lucrative and rapidly expanding business.
The firm’s latest product release is Aivlosin, a drug to control of both acute and chronic respiratory and enteric diseases. In the past year, Eco has received approval to sell this treatment in Egypt, Turkey, the US, Malaysia, Mexico, and Brazil.
These new approvals should allow the group to continue on its growth trajectory. City analysts are predicting earnings per share growth of 42% for the year ending 31 March 2018, following earnings growth of 68% for the last fiscal year.
So, even though the shares look expensive at 25.7 times forward earnings, when you factor in Eco’s growth, the stock is actually cheap. Specifically, the shares trade at a PEG ratio of 0.6. A yield of 1.3% is also on offer and the payout is growing steadily.
Investing for the future
Benchmark Holdings (LSE: BMK) could be a future giant. Even though the company is expected to report revenues of £135m (up 24% year-on-year) for the year ending 30 September 2017, profit remains elusive and a loss of £12.5m is expected. Still, this performance is a reversal of fortunes for the group after warning on sales in the first half.
However, the company has a medicines and vaccines pipeline of 46 products, of which five are in regulatory phase, and 10 are in pre-regulatory development trials. Benchmark is essentially two businesses, a nutrition business (animal feed) and a pharma one. The latter is growing rapidly with sales up 49% to the end of September according to a trading update from the company published today. The feed business is growing at only half this rate.
A course for growth
As Benchmark’s new products hit the market, the group’s growth should explode and this will be good news for investors. So, while the business might not look to be a great buy today (as it is currently lossmaking) over the next decade or so, as new treatments hit the market, earnings should surge.
I’m more positive on its outlook than most other early-stage pharma companies in the same position as the business is already producing a steady stream of revenue, which will support it through the development stage.
If the firm can bring all of the products currently in its pipeline to market, this certainly looks to be one stock you might regret not buying.
