It’s been quite a year for shareholders in fast-growing pharma firms Shire (LSE: SHP) (NASDAQ: SHPG.US), Hikma Pharmaceuticals (LSE: HIK) and SkyePharma (LSE: SKP):
|
Company |
Share price gain 2014 YTD |
|
Shire |
+59% |
|
Hikma Pharmaceuticals |
+66% |
|
SkyePharma |
+194% |
|
FTSE 100 |
-6% |
Will these companies deliver more gains in 2015, or is it time to lock-in some profits and look elsewhere?
Shire
Shire has an attractive 37% operating margin, minimal debt, and generates a lot of free cash flow, which it can use to fund R&D and shareholder returns.
The latest consensus forecasts suggest that adjusted earnings per share (eps) will rise by around 45% this year, but that earnings growth will slow to around 9% next year.
In this light, the firm’s 2015 forecast P/E of 18 isn’t too unreasonable, given that AstraZeneca trades on a 2015 P/E of 17 despite its earnings being expected to fall next year.
The big difference, of course, is that Shire’s yield of 0.5% is pretty poor, compared to AstraZeneca’s 3.8% payout.
Hikma Pharmaceuticals
For investors who saw the patent cliff coming and wanted to cash in, Hikma was a fantastic choice. The firm produces generic drugs for a number of markets and has increased sales by an average of 18% per year over the last five years.
Profits have risen even fast, climbing by an average of 29% per year since 2009. Hikma’s success proves that generic medicines can be profitable — it has a 30% operating margin and very little debt.
However, earnings are expected to fall next year, leaving the firm’s forecast P/E of 23.5 looking a bit high, for me — Hikma could be a good company to buy following a major pullback.
SkyePharma
SkyePharma’s share price almost doubled this year, thanks to the sharp rise in profits from key products such as EXPAREL and flutiform.
However, the next two years could be even better: sales are expected to rise by around 20% this year and by 33% next year, while earnings per share are expected to jump to 16.2p this year and then climb a further 70% to 27.5p in 2015.
The surprising part is that this growth doesn’t seem to be priced into the stock: SkyePharma currently trades on a 2015 P/E of 12.
This suggests to me that the market wants further evidence that the firm’s meteoric growth can be sustained — but if it can deliver, I think that a share price of 450p-500p wouldn’t be an unreasonable target, and SkyePharma could still be a buy.
