It’s been a challenging year for Hikma Pharmaceuticals (HIK), whose share price has more than halved since March following a series of disappointments for its division producing generic versions of drugs.
Harsh pricing conditions in the US continue to inflict pain on Hikma, with revenues in generics now set to be in the region of $600 million and margins in the low single digits. The annual revenues forecast for the division had been as high as $800 million just a few months ago.
But there have been other frustrations for Hikma, not least its ongoing failure to secure regulatory approval for a generic version of GlaxoSmithKline's (GSK) asthma and lung drug Advair.
Completing the “perform storm” — as Cantor Fitzgerald analyst Brian White put it today — has been the threat of increased competition for Hikma’s injectables business, which makes hospital products used in critical care.
Hikma’s third operating division, which sells branded drug products across the Middle East and North Africa, has reported a steadily improving performance despite some impact from currency fluctuations.
Trading in branded and injectables has provided some comfort for investors as Hikma stuck by its full-year guidance for $2 billion of group revenues today.
This figure, alongside the recent slump in the Hikma share price, prompted Numis Securities analyst Paul Cuddon to suggest that the time may now be right to buy into Hikma as a recovery prospect.
The shares traded as low as 934p Thursday, their worst in more than four years.
Cuddon said: “The generics industry is clearly going through a cyclical downturn, and Hikma is one of the companies well-positioned to emerge the other side in a stronger position, with the cash-flow from injectables and branded providing the sustainable platform to take a longer-term view.
“How long the downturn lasts, and how aggressive the more heavily indebted companies become is uncertain, and caution is warranted.”
He said his analysis supported a 1,300p target, adding that shares now trade on 12x FY18 price/earnings (PE), a significant discount to global peers and Hikma’s five-year average. “We therefore see the weakness as an excellent entry point.”
Himka shares are also approaching a significant level of technical support as seen on the chart above. Between 890p and 900p has been both a resistance point (2011) and then then both support and resistance in 2013. There’s a good chance this level may be tested again before a reliable share price recovery can begin.
Cantor Fitzgerald’s White is more cautious and has placed his price target of 1,670p under review. He said: “The principal risks to our forecasts and recommendation include a more significant delay to an Advair generic, greater challenges in delivering margin expansion in generics and more substantial erosion of margins in injectables.”
The start of the weaker trading conditions in generics coincided with Hikma’s 2015 transformational deal to buy Ohio-based Roxane Laboratories. At the time Hikma said Roxane represented a “scarce asset” which would be difficult for it to replicate on the same scale and to the same level of quality.
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