Shire (LSE: SHP) is bouncing back from its recent lows, but some risk still remains for its shareholders. The same holds true for AstraZeneca (LSE: AZN), yet I do not think that downside risk is any greater for Hikma (LSE: HIK) than for its two larger rivals.
Shire
Its shares have traded in the 3,448p–5,870p range over the last twelve months, and currently change hands at around 4,800p . Shire’s performance since early August has been very poor but was not unexpected. As I argued last month, its stock was a straightforward investment until 4 August, but has since become a less obvious pick due to the ‘Shaxalta risk’ — the risk that Shire’s hostile approach for US biotech rival Baxalta will cost it north of $50 a share.
There’s been talk that Baxalta may pursue acquisitions to prevent a takeover from Shire, so the biggest threat to value is that uncertainty may well persist into 2016, with Shire looking at similarly expensive targets if it fails to acquire Baxalta. Regardless of the outcome, Shire remains a strong long-term buy at this level based on fundamentals, trading multiples, geographical mix and several other factors — but if you are after short-term gains, it’s possible that your Christmas shopping may have to be financed by alternative sources!
Hikma & Astra
Hikma’s strength has not surprised me at all over the last few weeks of trade. Indeed, its corporate strategy makes a lot of sense, while its capital allocation strategy — where it deploys cash, how much cash deployment costs to the firm, and what kind of capital is being deployed — is superb. Its equity value is up 25% this year spurred by deal-making, and its valuation has been resilient all the way through the summer. At 2,490p, its share price is only slightly lower than a 52-week high of 2,617p, but is much higher than a one-year low of 1,580p.
Some pundits argue that Hikma is expensive based on its trading multiples, fundamentals and a few other elements, but I argue that you should gladly hold its stock as part of a diversified portfolio even if it were to trade north of 30x its forward earnings. Its balance sheet is sound, its core margins are rich and there’s plenty of growth kicking around — far from being a potential sell, this is a compelling buy in my view. End of story.
Over the last month, its performance on the stock exchange has been matched by that of Astra (+12%), but I’d not hold Astra stock instead. It’s priced at 30x forward earnings, which is a very high valuation for a defensive business that offers little growth and whose pipeline of drugs is not particularly attractive.
I am bearish on Astra also because if I were to single out a truly appealing, mature pharmaceutical business whose stock trades at a significant discount to fair value right now, another obvious name would spring to mind.
