Hikma Pharmaceuticals (LSE: HIK) and Shire (LSE: SHP) are two of the most exciting biotechs trading on the London market today. However, investors seem to have forgotten about Hikma and Shire’s larger, more experienced peer GlaxoSmithKline (LSE: GSK).
Year to date, Hikma and Shire have seen their shares jump by 20.2% and 6.7% respectively, while Glaxo’s shares have fallen 6.1%.
As a contrarian value investor, I’m attracted to Glaxo as it seems the market has turned its back on the company. But Glaxo may not be suitable for all investors.
Bright outlook
Shire and Hikma have brighter outlooks than Glaxo. Both companies are still growing their top and bottom lines with the release of new drugs and bolt-on acquisitions.
Meanwhile, Glaxo’s management has refused to do any deal in the current environment. What’s more, the company has been unable to release any new ‘blockbuster’ treatments during the past few years. As a result, sales are falling as the company’s exclusive manufacturing rights for existing treatments expire.
So, by investing in Glaxo, investors need to take a leap-of-faith, which may not suit everyone. That said, Glaxo’s drug development pipeline is the best in the business. The company has 258 new products under development more than any other big pharma group. Around 40 of these products are in advanced clinical trials and management expects at least half of its drugs currently under development will be on the market by 2020.
Even though less than 10% of all new drugs make it from the initial development stage, to market, Glaxo’s chances of striking gold are better than average due to its eclectic mix of new products under development.
Glaxo’s shares currently support a dividend yield of 6.2%, so investors are being paid handsomely while they wait for the company to return to growth.
Rapid growth
Unlike Glaxo, Hikma and Shire are growing rapidly.
According to current City figures, Hikma is set to report earnings per share of 99p for full-year 2016, meaning that the company is trading at a 2016 P/E of 22.9. This might seem expensive, but over the past five years Hikma’s earnings per share have increased by 200%, and the company’s shares have outperformed the FTSE 100 by 186%.
If Hikma’s management can keep this performance up for another five years, the company’s shares are certainly worth paying a premium for.
Rare disease specialist
Shire is currently trying to acquire Baxalta, another specialist in rare disease treatments. Unfortunately, Baxalta’s management has rejected Shire’s first “low-ball” offer for the company but it’s unlikely Shire will give up the chase.
Shire’s figures show that the combined Baxalta-Shire group will be a global leader in rare disease drugs with projected product sales of $20bn by 2020. The enlarged group could launch more than 30 new products by 2020 with an incremental sales potential of $5bn.
Still, even without Baxalta, Shire’s earnings per share are forecast to expand by around 17% during the next two years. The company currently trades at a forward P/E of 19.9.