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Why Are Shire PLC And Hikma Pharmaceuticals Plc Wiping The Floor With GlaxoSmithKline plc?

Eyes have been turned towards AstraZeneca and its Q1 update this week, but a look at the rest of our FTSE 100 pharmaceuticals firms shows something perhaps surprising.

GlaxoSmithKline (LSE: GSK)(NYSE: GSK.US) has long been the benchmark against which the others are judged, but over the past 12 months its shares have been soundly beaten by Shire (LSE: SHP) and Hikma Pharmaceuticals (LSE: HIK).

Racing ahead

While Glaxo has dropped 7% to today’s 1,524p, Hikma has gained an impressive 36% to 2,143p. Shire, meanwhile, has soared by 73% to 5,570p, even after November’s slump when the approach from AbbVie was called off. So what have the two smaller companies been doing right?

Part if it is indeed down to size, and a successful new drug for Shire could make a proportionately bigger difference than a new product set against the background of Glaxo’s huge portfolio. In fact, in 2014 Shire reported record revenue, up 23% to $5.8bn, with record non-GAAP earnings. The firm told is it was starting 2015 with its “strongest-ever pipeline“, after CEO Flemming Ornskov had said that “2014 was a transformational year for Shire“.

With a forward P/E of 22 for 2015, dropping to 19 a year later, and very little in the way of dividends right now, Shire is clearly priced as a growth stock. But its growth premium is not all that stretching, and a few good pipeline years could generate a lot of wealth.

Another great year

Hikma also had a pretty good 2014, recording a relatively modest 9% revenue growth, but a more impressive 30% rise in EPS. And where the bigger companies are suffering from the loss of patent protection and subsequent competition from cheaper substitutes, Hikma’s Generics division is cashing in, although 2014 did see a fall in Generics revenue. CEO Said Darwazah told us that “Our global Injectables business was the key growth driver this year, demonstrating the attractiveness of our product portfolio in the US…

Hikma is also priced for growth, with almost exactly the same forecast P/E ratios as Shire, and only slightly higher dividends.

GlaxoSmithKline, on the other hand, is looking very much like the classic mature blue-chip company, able to turn most of its earnings over to dividends to provide forecast yields of 5.1% this year and next. And its P/E is only a little over the long-term FTSE average at 17 this year dropping to 16 next. It’s vital that dividend cover does not drop too low, but with a number of positive updates coming from the firm’s pipeline in the past few months, the cash looks safe.

Which is best?

Which should you buy? I reckon you’d get a very nice income stream from Glaxo over the next few decades, and the shares are good value at today’s price. But if you fancy a bit more excitement with the possibility of stronger growth, Shire and Hikma deserve serious consideration.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.