Our two big FTSE 100 pharmaceuticals companies have had a mixed 12 months — GlaxoSmithKline (LSE: GSK)(NYSE: GSK.US) has seen its shares lose 16% to today’s 1,374p, while AstraZeneca (LSE: AZN)(NYSE: AZN.US) has enjoyed a rise of 26% to 4,500p.
But they’ve both been blown away by Hikma Pharmaceuticals (LSE: HIK), whose shares are up a massive 181% to 2,151p.
Over five years the comparison is similar, with Glaxo up just 6%, Astra up 54% and Hikma up a staggering 314%! So what’s the secret?
It’s about generics
GlaxoSmithKline and AstraZeneca have been facing a tough problem for years, known as the “patent cliff”. As patents on blockbuster drugs expire, so do the high-margin profits to be had from them. Unless there are new big hitters regularly popping out of the development pipeline, profits are inevitably going to fall, but that takes billions in reinvestment.
At the same time, competition from generic replacements for the expired-patent drugs is increasing year-on-year, and making and selling those requires a lot less investment in research and development — the drugs are already proven.
And that’s what Hikma does. It manufactures generic drugs, as well as manufacturing branded drugs under license from other companies. It’s a bit of a picks-and-shovels business really, leaving others to take the high-risk development path and profiting no matter who comes out ahead in the blockbuster stakes.
Rising profits
And it’s certainly been paying off, with pre-tax profit growing from $95m in 2009 to $298m by 2013, although forecasts are suggesting a couple of flat years for 2014 and 2015 — results for December 2014 are likely to be out in March.
Some of Hikma’s growth has come through acquisition, and investors need to be a little cautious when that happens. But in its latest update in November, the company told us its “financing position remains very strong and will enable us to make further strategic acquisitions and investments, as opportunities arise“. And at its last year-end it had net borrowings of only around £170m, which is tiny for a company with a market cap of £4.3bn.
Highly valued
Hikma shares are relatively highly valued, on P/E ratios of 25 and 22 based on 2015 and 2016 forecasts, and dividend yields are low at only around 1%. But the dividends are more than five times covered by earnings, leaving plenty to be invested in future acquisitions which should hopefully keep growth going over the longer term.
Having said that, analysts are fence-sitting at the moment, with most of those offering their opinions sitting on a Hold stance rather than advising us to buy or sell.