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Why I’d snap up this FTSE 100 pharmaceutical provider alongside GlaxoSmithKline

For years, big pharmaceutical companies such as GlaxoSmithKline and AstraZeneca have been struggling against an onslaught of generic competition. Me-too providers have swooped into previously profitable markets as soon as branded medicines time-out on patent protection.

Struggling to rebuild earnings

The situation has hit profits and cash flows hard for the major pharmaceutical companies, and they’re almost all struggling to rebuild earnings and growth by commercialising new formulations from their development pipelines, or by buying up smaller drug research and development outfits.

However, I like the generally cash-generating, defensive characteristics of the sector, which is fuelled by constant and predictable demand from customers needing medicines. So I’m still keen on the big pharmaceutical companies and their often quite large dividend yields.

However, I’m also keen to have a foot in the competition that has been causing the larger pharmaceutical firms so much financial pain, which is why I like FTSE 100 company Hikma Pharmaceuticals  (LSE: HIK).

The company produces what it describes as “a broad range of branded and non-branded generic medicines,” which makes it one of big pharma’s antagonists!

The dividend has risen around 90% over the past five years and, with the share price close to 1,756p, the dividend yield runs close to 1.7%. That seems quite low, but earnings cover the payment around three and a half times, which suggests to me that the directors see plenty of opportunities to invest in growth going forward. Otherwise, they would probably pay more of the firm’s cash out in the dividend.

A positive update

Today’s trading update is positive. Chief executive Siggi Olafson said in the report the firm experienced “strong” growth in revenue and profitability last year. 2019 “is off to a good start.” The three divisions of Injectables, Generics and Branded are all making decent progress driven by a “broad product portfolio and recent product launches.”

I think the update is encouraging, but I’d be the first to admit the company’s record of trading has been a bit patchy at times, as you can see from this table:

Year to December

2013

2014

2015

2016

2017

2018

Revenue ($m)

1,365

1,489

1,440

1,950

1,936

2,076

Operating cash flow per share ($)

1.70

2.13

1.82

1.25

1.85

1.78

Normalised earnings per share ($)

1.47

1.57

1.45

1.46

0.99

1.91

Dividend per share ($)

0.20

0.22

0.32

0.33

0.34

0.38

Revenue has risen steadily, suggesting there has been no problem with sales. However, operating cash flow and earnings have been volatile, which could indicate the firm has had trouble squeezing profits from its operations.

Nevertheless, the directors kept the dividend growing over the past five years or so and things seem to be on track now. Today’s report talks about how the firm has been working hard to control costs. So it could be that inefficiencies crept into operations causing the profit wobbles of recent years, which is a challenge that most growing businesses face.

We’ll find out more from Hikma with the interim results for the six months to 30 June, due on 9 August.  

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and 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.