Pharmaceutical stocks SkyePharma (LSE: SKP), Shire (LSE: SHP) (NASDAQ: SHPG.US) and Hikma Pharmaceuticals (LSE: HIK) have risen by an average of 212% over the last two years.
The gains haven’t been equal, though. Investors in SkyePharma can rightfully feel smug, as their company has risen by 370% since June 2013, compared to 104% for Hikma and 165% for Shire.
The only problem is that SkyePharma shares are down by 17% so far in 2015. Is it time to take profits, or can this smaller firm continue to outperform its larger peers?
Going ex-growth?
All three of these firms have been impressive growth buys. Yet there are signs that earnings per share (eps) growth may be slowing at each firm:
|
Company |
2015 eps growth* |
2016 eps growth* |
|
Shire |
-39% |
+17% |
|
Hikma Pharmaceuticals |
-9% |
+15% |
|
SkyePharma |
+125% |
+9% |
*Reuters consensus forecasts
SkyePharma still has the most promising growth outlook. The firm issued a trading update on Thursday morning confirming that it expected to match full-year guidance.
However, it looks like next year could see SkyePharma’s rapid growth rate slow to quite pedestrian levels.
In a similar vein, both Shire and Hikma are expected to have a tough year in 2015, mainly due to falling profits from established products and exchange rate effects. Although earnings are expected to pick up in 2016, it’s not clear to me whether either company will regain its former momentum.
Key buying signal
We can’t forecast the future, but we can use the valuation of each of these firms to help decide which, if any, are currently an attractive buy.
|
Company |
2015 forecast P/E |
2016 forecast P/E |
|
Shire |
22.1 |
18.8 |
|
Hikma Pharmaceuticals |
21.5 |
19.0 |
|
SkyePharma |
15.5 |
14.2 |
Based on these forecasts and current expectations for earnings growth, I don’t think that any of these companies are obviously cheap.
Share prices tend to rise and fall when companies exceed, or miss, expectations. These expectations are already high for Shire and Hikma, so there’s a greater risk of disappointment.
I’d be tempted to pick SkyePharma as the pick of the bunch, because its more modest valuation and smaller size leaves more room for outperformance.
The firm’s current valuation reflects the market’s more measured expectations. These should be easier to meet and perhaps beat. SkyePharma’s core new product, flutiform, is still being rolled out globally, and should drive earnings growth for some time to come.
It’s worth commenting that if you ignore exceptional variations, all three of these companies have historically generated an operating profit margin of 20-30%. SkyePharma has been a little less consistent in this department, but I think that its more stable outlook and strong finances should now mean that profitability becomes more consistent.
Today’s best buy?
In today’s trading update, Peter Grant, SkyePharma’s chief executive, said that “further launches and product approvals” were building momentum for the future.
Although this remark could equally have been made by the bosses of Shire and Hikma, both of which I rate as a hold, I believe that SkyePharma’s much more modest valuation provides investors with the opportunity to profit from this growing momentum.
As a result, I’d say that SkyePharma is an attractive buy and well worth holding onto for existing shareholders.
