Who is the real competitor to AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK)? In an obvious way they’re competing with each other and with the other major blockbuster drug researchers around the world. But it was a very different kind of competition that laid them low a few years ago and has led to increased efforts to get their development pipelines stuffed with as many candidates as possible.
It was the ending of patent protection on key drugs that did it, followed by competition from makers of generic alternatives that can be sold for much lower prices. And one such company, Hikma Pharmaceuticals (LSE: HIK), reported a strong first half on Wednesday, with its shares picking up 3% on the day to reach 2,496p — and over 12 months they’re up 33%, easily beating AstraZeneca and GlaxoSmithKline’s, erm, nothing.
Small fish
With a market capitalization of around £4.8bn, Hikma is small fry compared to its big cousins, but it’s risen from its debut on the London Stock Exchange in 2005 to the lower reaches of the FTSE 100 today. And if things continues as well as CEO Said Darwazah, who described the period as “an excellent start to the year” seems to think, it’s surely still on its way up.
The manufacture of branded medications saw a revenue jump of 16% to $282m (in constant currency), although overall revenue fell by 4% — largely because of an expected fall in revenue from unbranded generics. Adjusted earnings per share dropped 20% to 71.4 cents, and the overall interim dividend was maintained at a very well covered 11 cents per share.
The key thing for Hikma is its acquisitions progress, and we heard that the integration of assets acquired from US injectables firm Bedford Laboratories has gone smoothly, and that the acquisition of Roxane Laboratories and Boehringer Ingelheim Roxane should make it the sixth largest generics manfuacturer in the US — not bad for a company founded as recently as 1978 in Amman in Jordan.
Great growth potential?
Looking forward, Hikma’s P/E of 27 clearly includes a greater growth premium than either AstraZeneca’s 16 or GlaxoSmithKline’s slightly headier 18, and Hikma offers a much smaller dividend yield — under 1%, while Astra is set to pay 4.2% and Glaxo 6.6%.
Glaxo’s dividend, however, won’t be covered by earnings, and it’s set to keep paying it out of cash reserves while it continues its pipeline-growing activities. And Astra’s dividend will only be covered around 1.5 times, with boss Pascal Soriot’s impressive drive for recovery still not likely to bring about a return to earnings growth before 2017 — some had been hoping for 2016, but that’s looking less and less likely.
And while the two biggies are still fighting to get back on track, if Hikma can carry on successfully reinvesting its cash to grow its business and expand globally — well, looking back in another five years could show something very different to today.
