The Hikma Pharmaceuticals (LSE:HIK) share price is up 48% over 12 months, but it retreated slightly on Thursday (2 November) after the company’s trading update.
Despite some hurdles in its injectables business related to the opening of new facilities, the Amman-founded firm raised its guidance for the year.
Including the retreat following the trading update, Hikma shares have fallen 12% over three months. So, is this a buying opportunity? Are the shares starting to look cheap?
Trading update
Hikma Pharmaceuticals reported strong global growth in its injectables business, driven by robust customer demand in North America.
However, due to short-term supply and capacity constraints, the company anticipated that revenue and operating margin growth in this segment would align with the lower end of guidance.
These constraints were gradually easing as new manufacturing lines became fully operational in Cherry Hill and Portugal. The board remained confident in its ability to meet demand in 2024.
In other regions, the company was positive on growth in the Middle East and North Africa (MENA), Europe, and its generics business.
As a result, Hikma upgraded its full-year guidance in two of its three business segments, with total revenue expected to fall within the range of $920m to $940m and a core operating margin of around 20%.
Valuation
So, the guidance has improved, but are the share looking cheap? Well, let’s take a closer look. In 2022, earnings per share (EPS) came in at $1.81, down from 2021.
This downward trend was attributed in part to the underperformance of Hikma’s generics division in the US and issues with its operations in Sudan.
This downward trend is expected to continue in 2023 before picking up across the medium term. Consensus is now for EPS to come in at $1.50 for the year, putting the price-to-earnings (P/E) ratio at 15.9 times.
The below table shows the EPS share forecasts and the respective forward P/E based on the current share price.
| 2023 | 2024 | 2025 | |
| EPS Forecast | $1.50 | $1.92 | $2.03 |
| P/E ratio | 15.9 | 12.4 | 11.7 |
A value play
The forward P/E ratios highlight a discount to the wider pharmaceuticals industry, which trades at 25.1 times forward earnings.
However, it’s worthwhile recognising that Hikma focuses on generics manufacturing rather than new drug development.
As such, it’s less innovative that companies like Pfizer, AstraZeneca, and Novo Nordisk. These companies spend billions developing new products and generate sales from their proprietary, patented drugs.
Resultantly, it makes more sense to compare Hikma with peers like Perrigo, which broadly trades at similar valuation metrics.
However, with demand expected to grow throughout the medium and long term for pharmaceutical products — due to ageing populations — investors may view Hikma as a relatively inexpensive way to gain exposure to the industry.
It’s clearly a stock I’m keeping an eye on, although investors shouldn’t expect the company to deliver growth comparable to Pfizer, AstraZeneca, and Novo Nordisk.
