Shares in stem cell therapy company ReNeuron (LSE: RENE) have surged by over 10% today after the company announced that it has extended its research collaboration with Australian peer, Benitec. The decision to do so comes after the two companies yielded positive results from early stage studies and, looking ahead, they are optimistic regarding the future potential of their collaboration.
In fact, ReNeuron stated today that it is excited about the prospects for its exosome platform, especially as a potential new therapeutic approach that targets cancer. Furthermore, the company believes that its CTX-derived exosomes may eventually become a new pipeline of cancer therapeutic candidates, which is excellent news for ReNeuron’s long term growth outlook.
Transitional Period
Of course, ReNeuron remains a loss-making company. In fact, during the last four years its bottom line has been in the red and, looking ahead to the next two years, it is expected to see its pretax loss widen from £7.8m to almost £12m.
However, looking ahead to financial year 2017, ReNeuron is forecast to post a pretax profit of £26m, as it is expected to see revenue increase from a very small amount to around £40m. As such, investor sentiment in the company could rapidly improve and push the company’s share price higher. In fact, it appears as though investors are already beginning to price in the company’s anticipated top and bottom line transition, with ReNeuron’s shares being up 65% already this year.
There could, though, be much more to come over the medium to long term. That’s because ReNeuron is expected to post earnings per share of 1.56p in financial year 2017 and, with its shares currently trading at 5.75p, it equates to a forward price to earnings (P/E) ratio of just 3.7. This is extremely low and, while there is a good chance that ReNeuron’s guidance will change over the next couple of years, there appears to be a sufficiently wide margin of safety to make the risk/reward ratio appear to be highly appealing.
Sector Peers
Of course, it could be prudent to combine ReNeuron with other, larger health care companies such as BTG (LSE: BTG) and Shire (LSE: SHP) (NASDAQ: SHPG.US). That’s because they offer greater stability and a more robust earnings profile, so a combination should be able to provide reduced company specific risk and greater consistency over the medium to long term.
And, looking ahead, both Shire and BTG appear to offer considerable potential rewards, too. Like ReNeuron, BTG is expected to rapidly improve its bottom line, with it set to rise from a pretax profit of £26m last year, to as much as £130m next year. If met, that would represent growth of 5x in just two years, which would be a stunning performance and could stimulate investor sentiment in the company moving forward.
Meanwhile, Shire trades on a price to earnings growth (PEG) ratio of just 1.1, which is relatively low for such a large company and compares very favourably to its large pharmaceutical peers. Therefore, it could be a strong performer even though its shares have already risen by 17% during the course of 2015.