Gout is a painful condition, as sufferers will be all too aware, and it was causing investors in Hikma Pharmaceuticals considerable discomfort yesterday. The FTSE 100 company issued a profit warning concerning its Mitigare generic product, which was launched against the market leader in the United States in January.
That leader is Takeda, which makes a product called Colcrys. Both drugs are based on a plant-derived product called colchicine. The matter went through the US courts, with Takeda also taking aggressive action on pricing to try to keep Hikma out of a market that some calculate is worth $700 million a year.
Meanwhile, Hikma has experienced some delays in getting its own compound to market. The result is that sales of Mitigare, which analysts had been expecting to reach as much as $60 million this year, will hardly register, being pushed into 2016.
This is not a huge disaster, although margins in generics will come in significantly worse than had been expected, but this market does not like profit warnings, as has been well demonstrated over recent weeks.
Hikma, which bought Baxter Healthcare’s injectables division in 2011 and Bedford, an American maker of generic injectables, in 2014, is pushing ahead with its latest deal in this area, Roxane Laboratories. The seller is Boehringer Ingelheim, which sold Bedford. Under the terms of the latest deal, that company will end up with 12.5 per cent of the voting rights in Hikma shares, although the founding family trust will retain a near-30 per cent controlling stake.
Many drug companies are chasing generics as US authorities squeeze healthcare costs, so there may not be too many more deals out there.
The rest of Hikma’s trading update was positive enough, with two more products being rolled out from the Bedford stable. Inevitably, markets such as Iraq and Sudan are tricky — the company’s roots are in the Middle East, which is why it has been diversifying in the US.
Analysts moved down earnings forecasts for the current year by about 7 per cent, so the share price fell 112p to £20.52. The shares still sell on a hefty 23 times’ earnings, which suggests the upside may be limited.
$2.65bn price of Roxane Labs
$150m Latest generics revenue guidance
MY ADVICE Avoid for now
WHY Profit warning is not an especially significant one, with revenues merely deferred, but the shares are trading on a fairly high multiple
But for an accident of timing, DCC would be a constituent of the FTSE 100. Its £4.6 billion market capitalisation qualifies, but the share placing to fund the biggest deal in the company’s history came just too late to be taken into account in the last reshuffle of the index.
It almost certainly will take its place when the FTSE is rejigged again next month. The €464 million deal to buy Butagaz, of France, was completed yesterday, earlier than expected.
DCC has pulled off 39 acquisitions from the big oil companies. Shell was the seller of Butagaz, which has about a quarter of the French market for liquefied petroleum gas. With those oil companies desperate to cut debt by selling downstream assets, more are likely to come along. Earlier deals for its energy business have involved petrol stations, for example.
The company has indicated that it will expand outside Europe over the long term. Analysts reckon that its strong cashflow will allow for something like £200 million a year to be spent on deals. The inclusion in the FTSE 100 should aid visibility and, on 16 times’ earnings, the shares, up 45p at £52.50, do not look expensive.
€464m cost of Butagaz deal
MY ADVICE Buy long term
WHY DCC has the ability to grow further by acquisition
There must be some relief that e2v technologies did not follow various other companies with exposure to the global economy by issuing a profit warning. This is one of Britain’s high-tech pioneers, making sensors and systems generating radio frequency power. Its products, therefore, have the advantage of being in niche markets.
Its sensors, for example, were on Nasa’s New Horizons probe that has been sending back pictures from Pluto. The space business has provided a few pitfalls in the past, but the company is well engaged with space agencies and satellite makers.
Its order book at the halfway stage held up at £187 million, with a large three-year contract likely to be renewed in the second half. Revenues were up by 5.1 per cent at constant exchange rates and analysts had expected 7 per cent for the year at the interim stage to September 30. Operating profits on the same basis were ahead by 9.9 per cent to £15.7 million, although there was a significant foreign exchange hit to the reported figure.
E2v is about halfway through a restructuring being carried out by Steve Blair, its chief executive for the past 18 months. This involved a big Spanish acquisition a year ago. Mr Blair has set some challenging goals, to double operating profits by 2020, but this will require further deals that are, given their niche nature, hard to predict.
I have tipped the shares before and over the past year they have been strong performers. Up 4½p at 238p, they sell on 17 times’ earnings. If those targets can be hit, they look like good value in the long term.
Revenue £110m
Dividend 1.6p
MY ADVICE Buy long term
WHY Niche products offer protection from downturn
And finally . . .
When RWS Holdings updated the market last month, there were indications that another big deal might be in the offing. It arrived yesterday, the $70 million purchase of Corporate Translations, which serves the growing life sciences industry and is within RWS’s core area of operations. It is a useful bolt-on deal because biotech, as much as any industry, needs to protect its intellectual property. RWS continues to look like a good long-term bet because that core market can only grow.
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