Two defensive growth stocks I’d buy and hold for 10 years

These two stocks are struggling today but the future could still be bright.

| More on:

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.

Shares in Hikma Pharmaceuticals (LSE: HIK) and Vectura (LSE: VEC) have taken a battering over the past 12 months falling 60% and 50% respectively following the failure to get their generic version of the Advair Diskus treatment to market. Vectura and Hikma had a lot riding on this treatment. It is designed to grab market share from Advair’s owner, GlaxoSmithKline as it will offer the same treatment at a fraction of the cost. 

However, regulators do not believe that the product is currently ready for market. At the beginning of May 2017, the partners received a Complete Response Letter from the US Food and Drug Administration, laying out the regulator’s concerns about the product and why it wouldn’t be approving it for sale. The partners responded to this letter at the end of last year, to try and resolve the regulators’ concerns. The critical point of contention is around the results from the Clinical Endpoint Study, which shows the effectiveness of the drug. 

Unfortunately, after some consideration, it has been announced today that the FDA has upheld its original decision and has requested that Hikma completes an additional clinical study. This now means the product won’t be on the market until at least 2020, several years behind schedule. 

Massive opportunity 

Advair was one of Glaxo’s best-selling drugs pulling in £5.1bn for the company in 2012. Income has since fallen to nearly £3bn, but there’s no denying that it remains a massive moneyspinner for the firm. And now that the treatment has lost patent protection, competitors are rushing to get in on the action. As well as the Vectura/Hikma partnership, generic drugs giant Mylan is also pursuing an alternative. While this treatment has also been knocked back by the FDA, Mylan still has a chance to win a US green light for its version of generic Advair in 2018. 

Realising that time is of the essence, Hikma has already finalised the planning of a new clinical study and expects to start patient enrolment in the coming weeks, putting it on track to submit a new study to the FDA in 2019. 

In the meantime, these two companies have other products that will pick up the slack. 

Safety in diversification 

For the first half of 2017, Vectura reported recurring revenues increased £71m up 26% year-on-year and adjusted earnings before interest, tax, depreciation and amortisation more than doubled to £11.1m. A further update at the beginning of 2018 revealed that sales of the firm’s Ultibro and flutiform inhaled airways products increased 18% to $101m and 12% to €47.8m respectively during the third quarter, and the group ended the year with cash and equivalents of £104m. What’s more, there’s speculation that Glaxo may take advantage of Vectura’s weak share price to launch a 175p per share bid for the company.

Meanwhile, Hikma has just brought in a new CEO, Sigurdur Olafsson with 25 years of experience to help ignite sales growth at the producer of generic drugs, although it seems the market is unconvinced that he will be able to instigate a turnaround. The shares are currently trading at a forward P/E of only 14 and EV/EBITDA ratio of 7.6, less than half the sector median of 16.6. And in my view, despite undeniable issues to face, this valuation severely undervalues Hikma’s potential as one of the world’s leading generics producers. 

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 shares in Vectura and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »