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FTSE 100 pharma star: can the Hikma share price climb higher?

Hikma Pharmaceuticals (LSE:HIK) is enjoying a positive year thanks to the success of its global injectables business, which includes chemotherapy treatments and muscle relaxants. On Friday it reported revenue for the injectables business grew 13% to $485m. It also revealed a pre-tax profit of $274m for the first six months of the year, which is a 21% rise compared with the equivalent period in 2019. In response, it announced a dividend hike to distribute its good fortune among shareholders. As a result, the Hikma share price enjoyed an 11% rise on Friday but remains down nearly 10% from its May high.

Profitability in generics

The FTSE 100 company makes almost 700 high-quality, affordable drugs for customers around the world. Some of these are branded and many are generic.

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Hikma is a contract manufacturer for US drug giant Gilead and has begun manufacturing Remdesivir on behalf of the firm. Remdesivir is an anti-viral drug, approved to treat Covid-19, which has gained wide media coverage and much speculation since the Trump administration hyped its effectiveness.

Hikma’s earnings per share are £1.52 and results for the first half of the year were strong. Revenue was up 8% and operating profit rose 15%, both ahead of the board’s expectations. Delivering positive results to shareholders on the back of conservative predictions seems to me to be a responsible way to run a business, rather than getting shareholder hopes up, only to possibly dash them.

It has improved profitability in its generics division, which has served it well in recent years. However, it faces an increasing challenge as pressure on pricing in the US retail generics sector increases. The US accounts for 62% of its business and Hikma operates in a competitive and highly regulated industry.

Risk and value

Hikma has a varied geographic presence, which on one hand gives it diversified scope for growth, and on the other creates risk in certain regions. For instance, there is political instability in the Middle East and North Africa, which could pose a challenge to efficient distribution. Meanwhile, the US is facing many problems amid the coronavirus pandemic.

With a £5bn market cap and price-to-earnings ratio (P/E) of 15, I think Hikma still offers shareholder value though. There are many pharma stocks trading on far higher ratios. Abcam for example, with a market cap of £2.7bn has a P/E of 58 and Bioventix with a market cap of £221m has a P/E of 37. AstraZeneca with its £111bn market cap has an astronomical P/E of 108!

Is the Hikma share price a good investment?

I think the Hikma share price could have further to climb. Pharmaceuticals are hot stocks this year, particularly those involved with helping combat coronavirus. However, rises may be slow and we should expect volatility along the way. Hikma’s share price has climbed 67% in the past three years and is now around a level it previously enjoyed five years ago. I think Hikma is a good investment to add to a diversified portfolio.

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Kirsteen has no position in any of the shares mentioned. 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.

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