Should you ditch these Footsie pharma stocks right now!

Are these blue chips now too dicey to hold?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of FTSE 100 drug-makers Hikma Pharmaceuticals (LSE: HIK) and Shire (LSE: SHP) fell heavily on Friday, following a report that the US Department of Justice could bring criminal charges against generic manufacturers as part of an investigation into suspected price collusion.

What does this news mean for Hikma and Shire? Should you ditch these stocks right now or is this a good opportunity to buy?

Uncertainty

A story by Bloomberg, sourced from “people familiar with the matter”, said that the Justice Department’s antitrust investigation, which began two years ago, “now spans more than a dozen companies and about two dozen drugs”.

Hikma was not among the 12 companies named by Bloomberg, which included industry giants Mylan and Teva Pharmaceutical Industries, but the Footsie firm is the number six generics company in the US. Furthermore, it is a manufacturer of two drugs referred to in the Bloomberg story — doxycycline and digoxin — although, according to the Financial Times: “Analysts said the two medicines are now relatively unimportant to Hikma’s US generics division”.

Hikma may or may not be drawn into the investigation, but in any case antitrust inquiries are fairly common and when fines are levied they represent a one-off hit and rarely lead to any lasting damage to a company.

Long-term value

I’m more interested in Hikma’s long-term prospects and current valuation after a 6.8% fall in its shares on Friday. In fact, at 1,620p, the shares — now down 40% since August when the company downgraded current-year earnings guidance — are at a two-year low.

As far as prospects are concerned, I believe Hikma has a bright future. The group generates 60% of its revenue from the US, while 34% comes from the Middle East and North Africa, which is an attractive region for high, long-term growth. The business is also nicely diversified across generics (30%), branded (30%) and injectables (40%).

As far as valuation is concerned, 2016’s depressed earnings represent a bit of short-term indigestion as a result of a major acquisition. Looking ahead to 2017, and cautiously taking earnings forecasts from the lower end of analyst expectations (110p versus a consensus of 125p), we get a price-to-earnings (P/E) ratio of 14.7 and earnings growth of 25%, giving a highly attractive P/E-to-earnings growth (PEG) ratio of 0.6.

This wide margin of safety persuades me that Hikma offers excellent long-term value at the present time and I rate the shares a ‘buy’.

Another very buyable stock

Shares of Shire were not hit as hard as Hikma’s on Friday, falling 2.4%. They’ve recovered a bit today, but at 4,500p are nevertheless about 15% down from their peak last month.

Shire was not mentioned in the Bloomberg article and, indeed, doesn’t have the level of exposure to the generics market as Hikma. For example, it supplies an authorised generic version of its attention deficit hyperactivity disorder drug Adderall XR on which it receives royalties.

Like Hikma, Shire has made a large acquisition this year, and in Shire’s case the integration of the new business is progressing smoothly. As the leading global biotechnology company focused on rare diseases, this is another company whose growth prospects I like. And the shares look very buyable to me at a consensus 2017 P/E of 10.9 and PEG of 0.6.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »