Are these bombed-out pharma stocks worth buying?

Shares in both Hikma Pharmaceuticals (LSE: HIK) and Vectura (LSE: VEC) are sliding today after the two companies received a response from the US Food and Drug Administration regarding the approval of the generic version of their product, which is designed to replace GlaxoSmithKline‘s Advair Diskus.

Although the FDA stopped short of outright refusing to approve the product, the letter means that it is unlikely the generic treatment will receive approval this year. While no material issues were raised by the Federal agency it will take some time for Hikma to assess what is required from the agency in order to get the treatment through to customers.

Drug problems 

The drug in question is Hikma’s VR315, a generic asthma treatment that uses a powder formulation licensed from Vectura. If approved, it would have been a huge boon for both companies as it is estimated the size of the market the treatment is targeting is worth nearly £2bn. Hikma is set to manufacture the drug while partner Vectura would have received royalties and milestone payments.

While today’s news is a setback for both companies, it is not the end of the world as both Hikma and Vectura have well diversified product portfolios. But there was a lot of expectation built into the share prices of both companies, which is why today’s declines are so severe.

So what’s next for these two pharmaceutical producers? Well, VR315 isn’t the first Advair replacement to get a cold shoulder from the FDA. Peer Mylan has also submitted its own version and the FDA responded in a similar manner, by stating that the company needs to make a “major” amendment to its application. According to agency guidelines, a “major” amendment means a delay of 10 months for an FDA response. With this being the case, it looks as if Vectura and Hikma are not out of options just yet, and the partners will likely make the required amendments to their applications and resubmit. This means that over the next 12 months, the firms may have some good news for investors, or if things don’t go to plan, more bad news may be on the horizon.

Put simply, today’s news means there’s more uncertainty ahead for Vectura and Hikma but investors should not concentrate on just this one setback.

Steady growth

Over the past five years Hikma’s earnings per share have nearly doubled and City analysts are expecting earnings growth of 14% this year followed by growth of 28% for 2018. Analysts were cautious about VR315’s potential heading into the FDA announcement, so it’s likely these forecasts do not include a significant contribution from the treatment. And after today’s declines, shares in Hikma have fallen to a valuation of only 18.5 times forward earnings, below the company’s long-term average of 19.4. 

Vectura is slightly more speculative than Hikma, but the company has enough cash on hand to be able to wait for further comment from the FDA over the next 12 months. At the end of 2016 the company had £92.5m in cash and equivalents as well as a packed pipeline of other treatments the firm is trying to develop.

Overall, while today’s news is a setback for both, it’s not the end of the world for either company.

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Rupert Hargreaves owns shares of GlaxoSmithKline and Vectura. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.