2020 has been a tough year for the FTSE 100 index, as well as for the market in general. The pandemic created massive disruption across many major industries and as good as brought the whole world to a standstill at some points.
Despite the chaos, Hikma Pharmaceuticals (LSE:HIK) continued to outperform the FTSE 100 as demand for its products skyrocketed. But does the firm have an even more incredible opportunity for growth in 2021?
Outperforming the FTSE 100
Hikma is a leading manufacturer of generic medicines. It doesn’t invest heavily in developing new drugs. Instead, it focuses on recreating existing ones at a much lower price to make them more accessible and affordable worldwide.
The revenue stream is broken up into three categories – Injectables, Generics, and Branded. They represent 40%, 33%, and 27%, respectively, of total revenue. The firm’s medicines are typically sold either to hospitals or directly to consumers via the retail market, primarily within the US.
In total, the business’s drugs portfolio currently stands at over 760 generic medicines sold worldwide. International operations do introduce some currency exchange risks. But despite this, the FTSE 100 stock has continued to perform exceptionally well.
The 2020 half-year results uncovered a 9% increase in core revenues combined with a 16% increase in underlying profits. This growth primarily originated from its Injectables segment, which saw operating profit jump by 22% due to cost-cutting and new product launches.
A hidden growth opportunity for 2021
While the recent financial results are impressive, something else in the report caught my eye. Hikma has signed a non-exclusive supply agreement with Gilead Sciences Inc.
The contract states that Hikma will manufacture the injectable drug Remdesivir on behalf of Gilead. Why does this matter? Remdesivir is an approved treatment for severe cases of Covid-19.
There are already multiple Covid vaccines available on the market, with more expected to be approved in 2021. However, for those suffering from symptoms and who have no access to one of these approved vaccines, Remdesivir could be almost the only viable option.
In June 2020, Gilead announced its intention to treat more than two million Covid patients with Remdesivir. And it has formed partnerships with more than 40 companies – including Hikma – in order to achieve that goal.
While the revenue from manufacturing the drug is unlikely to last longer than a few years, it does provide a valuable surge in revenue growth. But beyond the increased income, this agreement also bolsters Hikma’s reputation as a quality drugs producer and may lead to future manufacturing agreements with other pharmaceutical giants.
The bottom line
The pandemic is slowly nearing its end, but it could be months until normality is restored to everyday life, and longer in some locations. In my opinion, Hikma now plays an essential role in controlling the pandemic, but it’s far from a one-trick pony.
Ignoring the manufacturing revenue from Remdesivir, the business’s financial performance continues to impress and expand at double-digit rates. It has seen 43 new products this year and has another 67 in development. So its growth rates could potentially rise even higher in 2021. Combining this potential with a P/E ratio of less than 20, the stock looks to me like a cheap (relatively speaking) growth opportunity for my portfolio.
