Covid-19 brings generics to the fore

In a rare coup for Downing Street during the Covid-19 saga, more than 15m people have now been vaccinated against the deadly virus. This puts the UK well ahead of other Western economies where jab rollouts have been hampered by bureaucracy and supply issues. Yet Boris Johnson has urged caution. “This is an unprecedented national achievement but it’s no moment to relax”, the Prime Minister said at a briefing on 15 February.

While the government hopes to give all over 50s a first vaccine dose by the end of April, such a target could be scuppered by manufacturing or logistical challenges. Moreover, despite three injections being approved in the UK – developed by AstraZeneca (AZN) and Oxford university, Moderna (US:MRNA), and Pfizer (US:PFE) and BioNTech (US:BNTX) – data are still insufficient to gauge the extent to which these shots prevent disease transmission.

The road to large-scale immunity will be long with many a winding turn. In the meantime, those falling seriously ill with Covid-19 still need emergency care. Hospital admissions are running at 1,600 a day and there are more patients in wards than at the virus’s peak last spring.

Generics in the spotlight

Big pharma has led the vaccine movement over the past 12 months. But on the treatment front, the pandemic has arguably shone a spotlight on the benefits of cheap, readily available drugs and flexible in-country supply chains that can adapt to patients’ urgent needs.

Westminster hailed a major breakthrough last June when the steroid dexamethasone was cleared as the first medicine in the world proved to cut the risk of Covid-19-related death. It garnered even more attention in October when it was used to treat Donald Trump’s virus symptoms.

But far from being an expensive, trademarked therapy, dexamethasone is a generic: a drug comprised of the same ingredients as a branded equivalent, which can enter production when exclusive patents expire – typically at a much lower price-point. It is also one of the medicines supplied by FTSE 100 company Hikma Pharmaceuticals (HIK), whose annual results are due on 25 February.

Full-year projections

Hikma, a family-led business founded in Jordan just over four decades ago, is one of the main producers of dexamethasone. But its portfolio is broad and several of its other products have also been prescribed for Covid-19 patients. In March and April last year Hikma supplied 11 of the 13 drugs used on ventilated patients in the US. It helps that the group is America’s third-largest generic injectables manufacturer and has local manufacturing and research sites.

Fluctuating virus case numbers and a developing understanding of the disease mean that treatment patterns have changed. In November, Hikma flagged lower second-half demand for Covid-related injectables in the States. It also said elective surgeries (for which it supplies injectables) weren’t expected to recover fully from lockdown delays until the new year.

Still, the group maintained its full-year guidance for injectables, its largest business by sales. It also raised its outlook for the generics division, which makes oral and non-injectable drugs – pointing to sales here of $720m-740m (£518m-£532m). Analysts’ latest consensus puts the group’s overall net sales at $2.3bn for 2020 with a core operating margin of 25 per cent, rising to $2.5bn with an unchanged margin in 2021.

Complex pipeline

Generics companies are themselves vulnerable to generic undercutting. For the last two years Hikma has spent roughly 7 per cent of revenues on research and development (R&D), ploughing money into a more complex medicine pipeline which should, by its nature, be harder for rivals to match.

Such expenditure is important in a competitive arena which includes the world’s largest generics company Teva Pharmaceuticals (US:TEVA). Israel-based Teva – whose fourth-quarter revenues of $4.5bn topped market estimates last week – has also been heavily involved in coronavirus efforts, managing all of the logistics for its home country’s vaccination programme.

Next steps

Hikma’s numbers should shed light on anticipated pipeline developments and the performance of newly-launched products. It secured a long-awaited approval in the US in December for the generic version of a GlaxoSmithKline (GSK) inhalant therapy, although the launch was paused last month pending a change to its regulatory filing. In any case, the wider generics opportunity could be substantial – with one estimate valuing the market at more than $100bn by 2026. On Hikma, buy.

Last IC view: Buy, 2,685p, 15 Oct 2020