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Hikma Pharmaceuticals : Generic Generation

10/04/2013 | 11:44am

LONDON STOCK EXCHANGE
Pharmaceuticals

Hikma Pharmaceuticals is an international company, based in London, which manufactures generic pharmaceuticals and in-license patented products.

The company operates in three activities: "Branded" which represents branded generics and in-license patented products across the MENA Region (Middle East and North Africa), "Generics" for oral generic products across the United States alone, and finally "Injectables" which concerns injectable products for the world.

The "Branded" business includes 606 products. Many patents concern anti-infective drugs but the company is also increasingly focused on cardiovascular, diabetes and central nervous system (CNS) products. The best known are Amocian, Blopress, Omnicef, Suprax and Zomax.

The activity "Generics" represents 41 products. The most popular are Amoxicilline, Doxycicline, Isosorbide mononitrate, Methocarbamol and Prednisone.

Finally, the activity "Injectables" includes 179 products. It covers a wide range of products including treatments against infection, CNS (central nervous system), cardiovascular and oncology problems. The best known are the Morphine, Fentanyl, Hydromorphone, Iron gluconate and Ondansetron.

The company constantly expands its range of products with a significant acquisition policy. The group recently acquired EPCI (Egyptian Company for Pharmaceuticals and Chemical Industries).

Sales by products:
- Branded: 47.7%
- Injectables: 42.4%
- Generics: 9.4%

Geographical distribution
- MENA: 55.8%
- United States: 36.1%
- Europe and rest of the world: 8.1%


Figures

- Sales up 35% by 2015 and EPS doubled
- Return on equity (ROE) estimated at 20.5% in 2013, against 17.2% for sector average


Sector

The pharmaceutical sector is strongly linked to the aging population, the expansion of health services in the world, the increase in long-term diseases and the emergence and identification of new diseases.
This sector includes many large players such as Novartis ($54 billion of sales), Merck (41.3 billions), Sanofi ($ 37 billion) ... Hikma Pharmaceutical appears as a smaller player (with a turnover of only 1 billion for 2012.

The research and development is a key point for this industry (Hikma Pharmaceutical allocates 3.1% of its revenues for R&D).

Furthermore, the pharmaceutical industry employs more than 1.3 million people worldwide (Hikma Pharmaceutical employs over 6,000 people).


Strength

- The founder is still at the head of the company (for 35 years)
- Hikma Pharmaceuticals has doubled its sales between 2010 and 2013 (development of its products and its production centers linked to important external growth, acquisition of eight companies since 2005)
- The stock largely outperforms the FTSE 350 pharmaceuticals and biotechnology (130%)
- Remodeling of the strategy for the "Generics" business, following disappointing results for 2012, leading to a gradual resumption of the activity on their production site Eatontown and a significant cost reduction
- Presence of research laboratories and production centers in different regions of the world to create proximity
- Strong presence on the generic (which limits the research and patent applications)


Weaknesses

- P/E ratio estimated for 2013 at 20.5x, in the sector average


Opportunities

- Increase its sales in Europe, South America and Asia
- New products development


Threats

- Many market players
- Regulatory changes
- Depending on brands for licensing agreements


Conclusion

Hikma Pharmaceuticals offers a large range of products for different markets. Its intensive policy of acquisition enables the company to constantly increase its range to face the diseases and infections development. The international expansion of the company is already relatively well underway but it always tries to continue this development.

We have, therefore, a buyer bias on the stock. Taking into account the current level of valuation, we expect for the next 12 months a target price of GBp 1240, which represent an increase of 18% (compared to over 20 September 2013).

This research note is part of the conviction buy list selected by the 4-traders equity research desk, based on fundamental and technical criteria. This stock is likely to be included in our European portfolio by the investing team. To be informed of our trades on this stock subscribe to one of our portfolios.



Sandra Pinturault
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Financial Ratios

Size 2014e 2015e
Capitalization 5 840 M$ -
Entreprise Value (EV) 6 155 M$ 5 934 M$
Valuation 2014e 2015e
PER (Price / EPS) 22,9x 22,6x
Capitalization / Revenue 4,01x 3,69x
EV / Revenue 4,23x 3,75x
EV / EBITDA 13,4x 12,7x
Yield (DPS / Price) 0,89% 0,92%
Profitability 2014e 2015e
Operating Margin (EBIT / Sales) 27,7% 25,2%
operating Leverage (Delta EBIT / Delta Sales) - -
Net Margin (Net Profit / Revenue) 17,7% 16,2%
ROA (Net Profit / Asset) 12,2% 12,7%
ROE (Net Profit / Equities) 23,4% 20,3%
Rate of Dividend 20,3% 20,9%
Balance Sheet Analysis 2014e 2015e
CAPEX / Sales   5,86% 5,41%
Cash Flow / Sales (Taux d'autofinancement) 21,0% 18,8%
Capital Intensity (Assets / Sales) 1,45x 1,28x
Financial Leverage (Net Debt / EBITDA) 0,68x 0,20x
Income Statement Evolution
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