Shares in Hikma Pharmaceuticals had rallied strongly ahead of its first-half results yesterday and the drug company duly rewarded recovering investor optimism with a set of forecast-beating numbers.
The London-listed drug maker posted encouraging performances in its main generics and injectables division, prompting it to raise its full-year forecasts.
Group revenue was up 10 per cent to $989 million at constant currencies in the six months to the end of June, leaving pre-tax profit at $141 million compared with $100 million at the same time last year.
The results soothed investors who had nursed a slump in the shares over the past two years since peaking at almost £27 in August 2016.
Hikma, founded in Jordan in 1978, spans more than 50 countries and sells generic, branded and injectable products. Under Siggi Olafsson, the former boss of the Israeli rival Teva, it is recovering from a tough year when it repeatedly cut forecasts, suffered a setback on the launch of a generic version of Glaxosmithkline’s blockbuster Advair inhaler and was demoted from the FTSE 100.
Hopes that Hikma may have hit its nadir are illustrated in the V-shaped recovery in its share price in the past six months and yesterday’s figures helped support the bull case.
Revenue in its injectables division, its biggest business, rose 13 per cent to $414 million and 11 per cent to $338 million in its generics business.
The results were comfortably ahead of management and City analyst forecasts, which as Stifel, the broker, pointed out highlights the difficulty in forecasting the US markets. America is Hikma’s biggest market, accounting for 66 per cent of group revenue during the period, and is in a state of flux.
A supply shortage of pain relief drugs, largely due to production problems at Pfizer, the biggest supplier of injectable opioids, has left a gap in the market that Hikma has moved to fill, boosting production and building stronger relations with hospitals.
That, new product launches, a decent performance in Saudi Arabia and a foreign exchange tailwind in Europe, prompted Hikma to raise its full-year revenue forecast to between $775 million and $825 million. Its previous range was $750 million to $800 million.
Underlining the short-term boost from the supply shortage, however, Hikma has cautioned that it does not anticipate the same level of demand for some injectables next year.
The US generics market is also volatile. Competition from a lot of generics businesses, a step up in the pace of approvals of medicines by the Food and Drug Administration, the US regulator, and the concentration of three big buying groups in the market have squeezed prices and margins. Cost management and a diverse portfolio have helped Hikma to weather these pressures.
Mr Olafsson is a 25-year veteran in selling generic drugs and is used to these pricing cycles but thinks it is premature to call the bottom of the market. Pricing has also become a big political issue in the US, driven by pressure from President Trump, but Hikma stands to benefit from this momentum as the criticism is of branded drug suppliers. As Mr Olafsson says: “Trump has highlighted generics as part of the solution.”
Although Hikma has a branded business accounting for almost a quarter of group revenue, the bulk of it is outside the US.
The shares had rebounded 45 per cent this year and rose another 6 per cent to £17.45 yesterday, suggesting the recovery, for now, is priced in.
ADVICE Hold
WHY Management remains cautious, the core US market is volatile and there is uncertainty around approval for generic Advair
CLS Holdings
As March 2019 creeps around the corner with no firm negotiations between the UK and the EU in sight, it is an uncertain time to invest in British property companies, especially ones that specialise in offices. CLS Holdings, however, is worth some consideration (Tom Knowles writes).
The company owns and renovates office buildings in the UK, Germany and France that are situated in suburbs of busy, well-connected towns. Its £1.8 billion portfolio does not consist of glamorous buildings — we are talking the Jobcentre in Bromley — but CLS usually gets a yield of 6 per cent on its properties and it has more than 700 occupiers.
In the six months to the end of June, net rental income increased by 8.7 per cent to £55 million, while the interim dividend was raised by 7.3 per cent to 2.2p per share.
Granted, the company said that the performance of the UK market was likely to be “somewhat subdued” before March, when Britain formally leaves the European Union. This acknowledgment did no favours for its share price, which closed down 15p to 220½p. But really, this is a case of the markets mistakenly lumping CLS in with central London developers. The company has no exposure to the financial sector.
Crucially, the FTSE 250 company is geographically diverse. Just under half its portfolio is in Germany and France. It is trying to position itself more towards the former, where the office market is now booming. CLS has also made £46.8 million worth of disposals in the year to date, 6 per cent ahead of book value, and hopes to have £150 million worth next year.
There are some warning signs. Competition for space in Germany has meant that it lost out on two bids for portfolios, and despite the booming market vacancy rates in its German portfolio are at 7.1 per cent, compared with 3.5 per cent in France. Yet CLS Holdings’ ability to drive cash continues to deliver.
The net initial yield of its portfolio was 5.25 per cent at the end of June, almost 300 basis points above the group’s cost of its debt of 2.42 per cent. It is estimated to bring in a dividend yield of 2.9 per cent by the year end, which is quite low, but that is due to reach 3.4 per cent by 2020.
ADVICE Buy
WHY Strong geographical diversification will help it weather any Brexit storms