Why did shares in Hikma Pharmaceuticals plc and GlaxoSmithKline plc crash last week?

Since the beginning of October, shares in GlaxoSmithKline(LSE: GSK) and Hikma (LSE: HIK) have been on the retreat. After a rally during the first six months of the year (shares in Glaxo and Hikma rose 20% and 15% respectively in H1), since the beginning of October Glaxo has lost approximately 7% and Hikma is down 20%. 

This sell-off accelerated last week. Over the past seven days, shares in Hikma have lost 6% and Glaxo’s shares are down by 4%, both exceeding the FTSE 100’s decline of 2.3% over the same period. 

The big question is, what’s the reason for these declines and will they continue? 

Pharma falling out of favour 

One of the developments that could be to blame for the recent declines is the buzz around the US election. Healthcare reform has been a key debating point among all candidates since the beginning of campaigning. There’s a fear among investors, especially over in the US, that the incoming president could force companies to lower their drug prices, decimating profitability. These concerns have sent the shares in major US pharmaceutical companies plunging. During the past two months, the SPDR S&P Pharmaceuticals ETF has dropped by 18%. 

Alongside election concerns, shares in Glaxo and Hikma have come under pressure from a stronger pound. When the value of sterling plunged, their shares jumped as weak sterling means higher profits. But a stronger sterling will erase some FX-induced profit boost, and with profits set to come in lower than expected, it makes perfect sense that the shares would fall. Since the beginning of November, sterling has strengthened by around 3%-4%. 

Still attractive 

Glaxo and Hikma may have fallen out of favour with investors during the past few weeks, but these companies remain attractive long-term investments. 

City analysts expect Hikma’s earnings per share to fall by 24% this year due to one-off effects, before rebounding by 35% during 2017 as the company’s revenue and profitability hits an all-time high. Based on 2017 forecasts, shares in the company are currently trading at a forward P/E of 13.8, which looks cheap for a fast-growing defensive company like Hikma.

City analysts expect Glaxo’s earnings per share to jump by 31% this year and a further 9% during 2017 as the company benefits from a weaker sterling and organic growth. What’s more, management has stated that the firm’s 80p share dividend payout is here to stay for the foreseeable future, so that market-leading yield of 5.2% isn’t at risk in the near term.

The bottom line 

So overall, it would appear that shares in Glaxo and Hikma dropped last week due to outlook concerns. However, for the time being, the outlook for these companies remains bright and after recent declines, the shares trade at extremely attractive valuations. For the long-term investor then, now might be the time to buy Glaxo and Hikma on weakness.