Today, I’m taking a look at two fast-growing healthcare shares. Biotech company Shire (LSE: SHP) has an excellent growth track record, boosted by a series of M&A transactions and internal drivers such as its successful innovation strategy and sound management. The firm has been able to succeed where others have failed by targeting the unmet medicals needs of those suffering from rare diseases through the development of highly specialised treatments.
Although the rare diseases market has a small target patient population, many patients suffer from debilitating, and often life-threatening conditions, which creates an opportunity for innovation. And given that there’s limited competition in the sector, Shire’s speciality medicines command high prices and generate phenomenal margins for the company. This explains why Shire’s near-40% adjusted EBIDTA margin compares very favourably to GlaxoSmithKline’s margin of around 25%.
That said, there are growing concerns that growth for the company is due to slow because of the tougher approvals requirements established by regulators in a bid to secure more favourable pricing and greater market access for patients. Shares in Shire have already lost around 12% of their value over the past month, but I feel the lower share price may provide a great opportunity to buy its shares at a discount.
Shares in Shire currently trade at 12.8 times its forecast 2016 earnings, a far cry from its five-year historical average of 20.6. This means that although growth may be about to slow, valuations seem to more than fully reflect that.
Meanwhile, generic drugs maker Hikma Pharmaceuticals (LSE: HIK) benefits from its big exposure to fast-growing markets in the Middle East and North Africa. Its focus on affordable medicines in key therapeutic areas has earned it a strong market position in the MENA region, which uniquely positions the firm towards long-term sustainable growth as emerging markets begin to deliver on their expected potential.
The company’s shares have been on the slide for quite some time, and in November, sank to a 52-week low of 1,575p. That was after its disappointing first-half results, in which the Jordan-based firm reported a 32% fall in core earnings per share. Management remains sanguine though, as the fall in earnings was mostly due to the slower than expected approval process for a few of its new generic products in the first half. These products have since been approved, and so management expects its full-year results to be significantly weighted to the second half and has reiterated its full-year revenue guidance of $2.0 and $2.1bn.
Hikma does seem more expensive than Shire, with shares trading at 20 times its forecast earnings. However, that’s due to the delay in the approvals process, which will have a non-recurring impact on earnings this year. Looking further forward, valuations seem more reasonable – with shares in Hikma trading at just 14.7 times its 2017 earnings, as City analysts expect the firm to generate earnings per share of 117.6p in 2017.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.