Shares of AstraZeneca (LSE: AZN) and Hikma Pharmaceuticals (LSE: HIK) have struggled this year. After rallying throughout 2014 and the first three months of this year, since the end of February, Astra and Hikma have seen their shares decline by 6% and 20% respectively.
Over the same period, the FTSE 100 lost 3.2%.
Correction
It really is no surprise that Astra and Hikma have struggled this year. Last year the two companies notched up an impressive performance that would have been hard to replicate two years in a row.
Indeed, during 2014 Hikma gained 55% while Astra added 27%, excluding dividends.
And after this stellar performance, it’s clear that some investors have decided to take profits, which explains recent declines.
Luckily, for the astute investor, these declines have presented an opportunity that could be too hard to pass up.
Profitable generics
Generic drug producer Hikma is one of London’s most successful companies. The group was founded in 1978, listed on the London stock exchange during 2005 and was recently promoted to the FTSE 100.
Over the past five years, Hikma’s earnings per share have tripled, and pre-tax income has risen by 210%. Unfortunately, you need to pay a premium to get your hands on this kind of growth. Hikma currently trades at a demanding forward P/E of 21.3.
However, only a few months ago investors were paying 27 times forward earnings to get their hands on the company’s shares — clearly Hikma is worth more than its current valuation.
Undervalued
Hikma is a truly global pharmaceutical company. The group generates 54% of its revenue from the US, 40% from the Middle East and North Africa, with the remainder coming from Europe and the rest of the world.
With this being the case, the company should be valued against its global peers. Specifically, Aspen Pharmacare, Mylan and Teva Pharmaceutical, three of the world’s largest generic drug producers.
These three international giants trade at historic P/E’s of 27.2, 33.4 and 17.4 respectively. If anything, Hikma appears to be undervalued.
Further, Hikma’s earnings per share are set to expand by 15% next year, implying that the company trades at a 2016 P/E of 18.7.
It’s easy to see that after recent declines, Hikma is undervalued compared to its international peers.
Similarly, Astra looks attractive at present levels.
Long-term pick
After recent declines, Astra is trading at a forward P/E of 15.2, which seems expensive, especially considering the fact that the company’s earnings are falling.
However, Astra is a long-term play. While the company’s sales are currently falling, they are expected to return to growth by 2017. What’s more, the group has 119 projects in its clinical development pipeline.
During 2015-2016 alone, around a third of these will progress to the next stage of development. And Astra is currently conducting 72 trials for its oncology or cancer treatments. Some of these trials have already yielded substantial results.
So, with Astra you have to be prepared to wait for the company to turn its fortunes around.
But the good news is that, after recent declines, the company’s forward dividend yield has risen to 4.4%, an attractive level of income for investors who are prepared to wait.
