Hikma Pharmaceuticals (LSE: HIK), Shire (LSE: SHP) and SkyePharma (LSE: SKP) are three of the most exciting biotechs trading on the London market today.
All three companies have achieved astounding returns for shareholders during the past few years, and all three have rosy outlooks, as they go from strength to strength.Â
However, the shares of Hikma, Shire and SkyePharma aren’t cheap. As these companies have gone from strength to strength, investors have been willing to pay a premium to get in on the action.Â
Shire is the cheapest of the three. The company trades at a forward P/E of 18.5. SkyePharma trades at a forward P/E of 24 and Hikma trades at a forward P/E of 28.4.
But the big question is, should investors be paying such a hefty? Would long-term investors be better off buying AstraZeneca (LSE: AZN), which currently trades at a forward P/E of 15.2, but is struggling with falling sales.Â
Trouble brewingÂ
Over the past two years, Hikma and Shire have drastically outperformed the FTSE 100 by 125% and 90% respectively but this outperformance is unlikely to continue. Indeed, investors as a group are now becoming more cautious about where they invest in the biotech sector, and many are shying away from the companies trading at a premium to the sector as a whole.Â
What’s more, these a growing chorus of lawmakers who are calling for price caps on specialist drugs produced by the likes of Shire, and to a lesser extent, Hikma. It’s unclear how regulation of drug prices would affect these companies directly, although it’s clear that price caps would make investors think twice about paying a premium price for the shares of the companies affected.
Put simply, as the threat of regulation grows, Shire and Hikma’s upside could be limited.Â
Waiting for growth
Astra’s shares have fallen 3.2% year to date and investors are clearly apprehensive about the company’s prospects. Astra’s earnings are set to shrink 2% this year, and around 30% of group sales come from three drugs, which Astra is set to lose the exclusive manufacturing rights for by 2017 at the latest.
However, for investors with a long-term outlook Astra could be one of the best bets in the pharma sector. The company is expected to return to growth by 2017, and the group has 119 projects in its clinical development pipeline. And while investors are waiting for Astra to return to growth, the company’s forward dividend yield of 4.4% provides an attractive level of income for investors.
Set for rapid growth
SkyePharma’s growth is only just starting. The company is ploughing cash into R&D, and it already has several new products set to hit the market during the next few years. These include SKP-2075, for chronic obstructive pulmonary disease and Soctecâą, a concept for a novel, proprietary gastro-retentive drug delivery platform. R&D spending totaled £0.5m during 2013 but has risen twenty-fold. R&D spending is expected to hit ÂŁ10m during 2015.
According to City forecasts, SkyePharma’s earnings per share are expected to increase 43% next year. Based on this projection the company trades at a 2016 P/E of 15.6.