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Hikma hit after profit warning

Created:
21 July 2008
Written by:
Richard Hemming

Shares in Hikma, a Middle Eastern producer of generic pharmaceuticals, plummeted as much as 26 per cent after it said that its US operation was experiencing "significant margin erosion" due to "deteriorating market conditions".

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The company expects its Generics business to realise an operating loss of about $6m (£3m) in the six months to 30 June. On top of this, it needs to take one-off provisions totalling $5m, relating mainly to discounts it had been making to generate sales.

But the overall impact on the group is not as great as the share price decline would suggest. The US generics business represents about 20 per cent of Hikma's total sales. The company said it expects sales growth for the year of between 30 and 35 per cent, instead of its previous range of 35 per cent to 40 per cent.

"Although the share price reaction suggests shock, my view is that it's been coming for some time," said Charles Stanley head of research, Jeremy Batstone-Carr.

He is referring to the pressure on the US generics business ever since the US Department of Veterans Affairs failed to renew a contract for its lisinopril product (hyper-tension) this year.

Mr Batstone-Carr said he would be downgrading his forecasts by between 10 and 20 per cent. Prior to the announcement, he forecast Hikma to make 45c EPS for this, year, which increases to 63c the following year. But he retains a positive stance on the stock on the basis of its fast growing injectables and its branded businesses.

IC VIEW:

GoodValue

The market has over-reacted. The premium investors put on the high growth forecast for Hikma has been reduced considerably, so at 421p the company is trading on a current year PE of about 19 times, increasing to 26 times the following year. For a relatively big company growing at a rapid rate, that's good value.

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