The Motley Fool

Could SkyePharma PLC Outperform Shire PLC And Hikma Pharmaceuticals Plc?

Shares in small-cap pharmaceutical firm SkyePharma (LSE: SKP) popped 5% higher this morning, after the firm said that sales had risen by 19% during the first half of 2015 and that underlying trading for 2015 is expected to be “ahead of previous expectations”.

The firm said that in-market sales of its flagship new product, flutiform, were up by 129% compared to the same period last year. Sales of flutiform are now expected to be ahead of expectations during the second half of 2015 thanks to a recent increase in manufacturing capacity.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

In total, 65% of SkyePharma’s revenue now comes from products launched since March 2012. This highlights the growth potential and long expected life of the firm’s current product range.

First-half earnings of 8.7p per share are exactly 50% of current full-year forecasts for earnings of 15.4p per share. On this basis, any improvement in the second half will see the firm beating current expectations, as promised.

What about the competition?

Investors looking for profitable and established pharma stocks will probably have SkyePharma on their radar. The firm’s shares have fallen by 15% so far this year, despite, evidence of strong operational progress.

Two larger alternatives which both have a focus on growth are Shire (LSE: SHP) and Hikma Pharmaceuticals (LSE: HIK). Could SkyePharma’s smaller size enable it to outperform these peers over the next year or two?

Here’s how the three firms compare at the moment:

 

SkyePharma

Shire

Hikma Pharmaceuticals

Operating margin

50.2%

26.6%

24.6%

Trailing P/E

n/a (loss in 2014)

14.2

26.6

2015 forecast P/E

18.2

19.4

26.2

2016 forecast P/E

13.1

16.7

22.6

SkyePharma’s forecast P/E is expected to fall sharply in 2016. This indicates that earnings per share are expected to rise rapidly next year. Today’s results suggest that momentum is building across the SkyePharma’s product range, so this doesn’t seem an unreasonable expectation, to me.

All three firms boast a strong balance sheet, with low levels of debt or net cash. SkyePharma looks the strongest, with net cash of £20.9m. However, this theoretical advantage is probably outweighed by Shire and Hikma’s’ larger size, which gives them much more affordable and reliable access to debt markets.

Could things change?

Shire’s earnings per share are expected to fall this year after a bumper performance in 2014. However, the FTSE 100 firm is hoping to negotiate a deal to merge with US-listed firm Baxalta Incorporated.

After being rebuffed in private by Baxalta’s management, Shire made the proposal public at the start of August, in the hope that Baxalta’s shareholders would apply pressure to their board to begin negotiations with Shire.

Shire’s initial proposal is for an all-share merger that would create a business Shire believes could generate $20bn of annual sales by 2020. For comparison, Shire is expected to report sales of $6.4bn in 2015.

There’s no certainty of a deal at this point, but for Shire shareholders this is worth keeping an eye on, as it could boost long-term earnings growth.

Today’s best buy?

I wouldn’t rule out continued strong growth from Hikma and Shire, but I believe SkyePharma has the potential to outperform both firms over the next years, and rate the smaller company as a buy.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended 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.