Faron Pharmaceuticals Oy (AIM:FARN), a GBP£239.15M small-cap, operates in the healthcare industry, which faces key trends such as rising demand fuelled by an aging population and the growing prevalence of chronic diseases. The growth in development of new drugs for unmet needs, as well as the ongoing and increasing need for biotech drugs as Baby Boomer generation continues to age, are growth drivers for the positive outlook in the biotech industry over the long term. Healthcare analysts are forecasting for the entire industry, an extremely elevated growth of 32.43% in the upcoming year , and a massive growth of 68.16% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Should your portfolio be overweight in the biotech sector at the moment? In this article, I’ll take you through the sector growth expectations, as well as evaluate whether FARN is lagging or leading its competitors in the industry. See our latest analysis for FARN
What’s the catalyst for FARN’s sector growth?
New R&D methods and big data analytics are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth in the twenties, beating the UK market growth of 11.30%. FARN lags the pack with its negative growth rate of -58.20% over the past year, which indicates the company will be growing at a slower pace than its biotech peers. Moreover, the trend of below-industry growth rate is expected to continue in the future with FARN poised to deliver a -10.86% growth compared to the industry average growth rate of 32.43%. As an industry laggard, FARN may be a cheaper stock relative to its peers.
Is FARN and the sector relatively cheap?
The biotech industry is trading at a PE ratio of 27x, higher than the rest of the UK stock market PE of 19x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 14.91% compared to the market’s 12.78%, which may be indicative of past tailwinds. Since FARN’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge FARN’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? FARN is a biotech industry laggard in terms of its future growth outlook. If your initial investment thesis is around the growth prospects of FARN, there are other biotech companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how FARN fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If FARN has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth is expected to be lower than its biotech peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at FARN’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Faron Pharmaceuticals Oy’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other healthcare stocks instead? Use our free playform to see my list of over 1000 other healthcare companies trading on the market.