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Why I might buy this soaring stock alongside the Glaxo (GSK) share price

Alan Oscroft
Compass pointing towards 'best price'

Biotechnology hopefuls come into and go out of fashion from time to time, and the one hitting the headlines at the moment is PureTech Health (LSE: PRTC).

PureTech shares climbed 20% at one point Tuesday, after the share price of Karuna Therapeutics multiplied more than five-fold overnight on the back of a positive clinal trial result. Karuna’s KarXT treatment for schizophrenia is in phase II trials and has reported above-average results, and that’s expected to help clear the way for regulatory approval.

PureTech shares responded with their own gain because the company owns 31.6% of Karuna. PureTech’s holding in Karuna is now worth around $580m, up from $130m last week. To me, it doesn’t look as if the PureTech rise fully incorporates the jump in Karuna’s valuation.

Not to be missed?

Analysts appear to agree, and have been wasting no time in reaffirming their buy ratings on the stock – with Liberum Capital and Peel Hunt among those getting in on the bullish optimism.

According to the perfect markets theory, it’s impossible to get ahead of the market because all new information is instantly available to all players and is immediately factored into share prices. In the wider sense, the theory ignores all sorts of factors that drive share prices, but in this case there could well be a short-term anomaly that hasn’t worked its way through yet.

In the short term, we’ll have to see what happens to the PureTech share price over the next few days, but looking at the bigger picture it seems possible that this could be the breakthrough that puts PureTech on the road to profit – current forecasts for further losses make it otherwise very difficult to value.

Safe cash

If I ever did invest in a blue-sky biotech prospect, it would only be a small amount of cash and it would be alongside a bigger investment in an established pharmaceuticals company like GlaxoSmithKline (LSE: GSK) – to sort of balance the overall risk of investing in the medical field.

Glaxo, in fact, is one of those perpetual Buy stocks that I’ve always seen as a great long-term investment, but I’ve never actually got round to picking up any shares.

Over the past five years I’ve missed a fairly modest 24% gain as the company has really only just started back on the road to earnings growth after having to invest heavily to rebuild its drug development pipeline. But that’s still around twice the performance of the FTSE 100, and Glaxo has been paying annual dividends yielding more than 5% for the period.

Still cheap?

Though the share price has appreciated strongly over the past two years, I still reckon we’re looking at very good value with forward price-to-earnings multiples of around 14 being pretty much bang on the Footsie’s long-term average.

Under the leadership of current chief executive Emma Walmsley, the company is well on its way to transforming itself with a long-term plan to separate its pharmaceuticals and consumer businesses, and I think that’s a sound way forward.

To be fair, there’s not much to choose between Glaxo and FTSE 100 rival AstraZeneca, but I think either should provide great long-term rewards.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. 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.

Motley Fool UK 2019