It’s been a rough year so far for pharma stocks. After a record-breaking 2015, when valuations across the industry spiked following a wave of M&A activity, the sector has been on the back foot ever since the beginning of 2016.
Deals gone wrong
Hikma Pharmaceuticals (LSE: HIK) is the worst performing UK pharma large-cap. Shares in the company have fallen by 17% year-to-date thanks to its botched acquisition of Roxane Laboratories from Boehringer Ingelheim. It emerged last month that Roxane Laboratories’ sales weren’t as high as initially expected and even though the deal had been agreed between the two parties, Hikma declared that it was renegotiating the purchase price.
Last week, alongside its full-year 2015 results, Hikma announced that it was paying $535m less cash for Roxane Laboratories to reflect lower sales. Still, the company’s results for 2015 marginally beat expectations with pre-tax profits falling 12% on revenues down 3.3%.
Even after recent declines Hikma’s shares trade at a forward P/E of 21.1 and City analysts expect the company’s earnings per share to contract by 14% this year as a result of the Roxane deal. A rich valuation of 21.1 time forward earnings leaves little room for error if the company slips up again.
Similarly, shares in Shire (LSE: SHP) have fallen 16.5% year-to-date on concerns that the company is overpaying to acquire peer Baxalta. However, these declines have left Shire’s shares looking extremely attractive on a valuation basis.
When the deal between Baxalta and Shire completes, the enlarged group will be the world’s largest producer of rare disease treatments. And after recent declines, Shire trades at a forward P/E of 14 for the year ending 31/12/2015 and 12.5 for the year ending 31/12/2016. The shares currently support a dividend yield of 0.5%.
Plenty of uncertainty
AstraZeneca’s (LSE: AZN) shares have lost 15% of their value so far this year, following the wider pharma sector lower.
Astra’s future depends on its ability to bring its pipeline of treatments to market. If the company can successfully bring a wave of new products to market to replace the drugs that are losing patent protection this year, then Astra’s future could be bright. But there’s plenty of execution risk here. Astra’s shares currently trade at a forward P/E of 13.9 and yield 5%. With so much uncertainty about Astra’s future, there could be better investments out there.
A year of growth
Finally, GlaxoSmithKline (LSE: GSK), which is the best performing large listed UK pharma stock. Shares in the company have gained 1.5% excluding dividends so far this year, and there could be further gains to come.
Management expects Glaxo’s core earnings per share figure to grow by double-digits this year, the first such increase the company has been able to achieve for five years.
If Glaxo can hit this target, then it will have shown investors that it’s on track with its restructuring programme, which should then spark a rally in the company’s shares. Glaxo’s shares currently trade at a forward P/E of 16.2 and support a yield of 5.9%.
