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Should You Buy, Sell or Hold Hikma Pharmaceuticals Plc And London Stock Exchange Group Plc After Today’s News?

Shares in FTSE 250 pharmaceutical group Hikma Pharmaceuticals (LSE: HIK) dropped 5% in early trade this morning after the group said that a sharp fall in sales of a generic gout treatment had dented profits.

Diluted earnings

However, the market seems to have warmed to Hikma’s results as the day has progressed. At the time of writing, the shares are modestly higher. So was it good news or bad for this highly-rated stock?

Hikma’s total sales were down 3% while core operating profit was down 4%, to $409m. Post-tax profits were down by 9% to $252m, but the dividend was held unchanged at 32 cents for the full year.

This leaves Hikma stock trading on a trailing P/E of 18 and a trailing yield of 1.3%. On the face of it this is not especially cheap. However, the outlook for Hikma is dominated by the recent $2.1bn acquisition of Roxane, which is expected to add around $600m to revenue in 2016.

Market confidence in this deal was shaken in February when Hikma announced a $535m reduction in the price it would pay for Roxane. The revised deal was triggered by Hikma’s first sight of Roxane’s 2015 financial results. These showed that Roxane’s 2015 profits were likely to be slightly lower than in 2014.

Although Roxane is expected to add significantly to Hikma’s revenue in 2016, the firm now estimates that the acquisition “will be slightly dilutive to adjusted earnings per share in 2016”. What this means is that additional profits from Roxane will not be enough to offset the dilutive effect of the new shares which were issued in part-payment for Roxane.

This situation is expected to reverse in 2017, when Hikma expects earnings per share growth as a result of the Roxane deal. However, it does highlight the risk involved in major acquisitions. Hikma trades on a 2016 forecast P/E of about 18. This is probably reasonable, but I’d rather know more about Roxane’s contribution before deciding whether to buy.

A waiting game

The London Stock Exchange Group (LSE: LSE) published the long-awaited details of an all-share merger with Frankfurt stock exchange owner Deutsche Börse this morning.

The deal would give existing LSE shareholders a 45.6% share of the combined group, with existing Deutsche shareholders owning the remainder. Today’s statement claims that ongoing cost savings of €450m could be achieved, which would reduce the group’s combined operating costs of €2,200m by nearly 20%.

A second benefit would be that many big investors would also benefit from having to provide lower levels of collateral to the exchanges. This is because their open positions on the two exchanges would offset each other to some extent. This would reduce the level of margin payments that would be required.

However, the LSE-Deutsche Börse deal may not proceed. US Group Intercontinental Exchange (ICE) has already indicated its interest in making an offer. Analysts expect that such a deal might include a cash element, which could be more appealing to LSE shareholders.

Today’s deal seems sound enough to me, but an ICE offer could be more generous. If I was a London Stock Exchange shareholder, I would hold on and wait for further news.

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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.