- Revenues up across all three business segments
- Increased capabilities in the injectables space
Hikma Pharmaceuticals (HIK) delivered a 12 per cent increase in core operating profit through 2021 on the back of an increase in the generics margin, up 300-basis points to 24.36 per cent at the operating level. Statutory earnings decreased marginally, though revenues were up across all three business segments and the group expanded its specialty product offering in the US.
At the half-year mark, we argued that the pandemic had revealed the benefits of truncated medical supply chains and cheaper medicines – “attributes epitomised by Hikma” – but we neglected to highlight the growing importance of biosimilars (pharmaceutical treatments modelled after drugs that use living organisms as critical inputs). According to IQVIA, a North Carolina-based healthcare data science specialist, the global market in biosimilars is expected to grow at a compound annual growth rate of 15 per cent through to 2030. Hikma is looking to tap into this heady growth rate through collaborative deals with Bio-Thera and Gedeon Richter, designed to bring complex injectable medicines to the highly lucrative US market. It is already a top-two supplier of generic injectable medicines by volume, and revenue for this segment is expected to grow in “the low to mid-single digits” through 2022, with a core operating margin in the range of 35-37 per cent.
Despite increased unit profitability in the generics business, the group gross margin reduced slightly. Sales and marketing costs ticked-up as activity moved into line with pre-pandemic levels and seven new products were launched from the generics business. Overall, selling, general and administrative expenses were up 10 per cent to $561mn (£413mn).
Given the nature of its business, R&D hasn’t been as important to Hikma compared with its research-focused pharma peers, but there is now more emphasis on this function as it ramps up its capabilities in the injectables space, partly driven by the $425mn acquisition (subject to approval) of Custopharm Inc, one of the largest suppliers of generic injectable medicines in the US.
Companies have been in a giving mood this results season and Hikma is no exception. A 38 per cent increase in operating cashflow to $638mn has enabled management to earmark $300m for a share buyback. A lowly leverage multiple of six times net debt to core cash profit leaves the group with ‘optionality’ on the M&A front.
Recovering volumes in elective surgeries should benefit the injectables business through 2022, while revenue growth in generics is guided at 8-10 per cent. So, with the shares trading at a 33 per cent discount to the consensus target price of 2,823p, we retain our buy call. Buy.
Last IC view: Buy, 2,533p, 06 Aug 2021
|HIKMA PHARMACEUTICALS (HIK)|
|ORD PRICE:||1,897p||MARKET VALUE:||£4.39bn|
|TOUCH:||1,894-1,898p||12-MONTH HIGH:||2,703p||LOW: 1,911p|
|DIVIDEND YIELD:||2.1%||PE RATIO:||14|
|NET ASSET VALUE:||1,060¢||NET DEBT:||17%|
|Year to 31 Dec||Turnover ($bn)||Pre-tax profit ($mn)||Earnings per share (¢)||Dividend per share (¢)|
|£1 = $1.35 *Includes intangible assets of $892m, or 385¢ a share.|