Hikma’s generics business is holding it back

It can be difficult for a company to know exactly when to give up on an underperforming division and attempt to find a willing buyer. Management at Hikma Pharmaceuticals (HIK) is no doubt asking itself some difficult questions about the fate of the company’s generic medicines arm after a tricky 2022. 

Revenue for the year was broadly flat, despite single-digit growth in both its injectables and branded drugs divisions. Generics was the outlier, with revenue declining by 18 per cent to $672mn after significant price and volume erosion, as well as a slower-than-hoped rollout of new products. The “challenging” competitive environment in the US was cited as an additional factor.  

Hikma also recorded net operating expenses of $192mn last year – a serious increase on 2021’s $15mn – following changes in longer-term expectations for generic sales. At last month’s JPMorgan Healthcare Conference, one of the most important events in the pharma calendar, Hikma executives indicated that they weren’t ruling out a divestment in future. However, a sale is not likely to be imminent given difficult conditions in the wider pharmaceutical market.

In its results, the group also said it would focus on broadening its generics portfolio “with [a] focus on higher-barrier-to-entry speciality products”. The company invested 6 per cent of its sales in R&D last year, and launched 182 products. 

For the coming year, the injectables business is expected to deliver 7-9 per cent revenue growth with margins of 36-37 per cent. Generics, on the other hand, will post sales growth in the low double digits, with margins of 16 to 18 per cent. 

Given that the shares are currently trading around 10 times forward earnings, some analysts are inclined to take a glass-half-full view of Hikma’s forgettable 2022. Broker Numis wrote that the company “remains good value with each division expected to grow in FY23”. 

Meanwhile, Stifel analysts are optimistic that the January launch of a generic version of narcolepsy treatment Xyrem will boost performance in the current financial year. “Hikma continues to drive good organic growth in its injectables and branded divisions, with generics poised for (potentially strong) regrowth in 2023 on the back of [generic Xyrem],” they wrote.

Although Hikma might look like a bargain, we’d like to see how the business fares in the coming months before buying in. Hold.

Last IC view: Buy, 4 August 2022