Hikma rises on sentiment change

From disappointing in the summer after issuing a shock profits warning following difficulties in its US generics business, Hikma is staging a recovery as investors are again looking at the Jordanian company, thanks to forecast impressive growth in its home markets of the Middle East and North Africa (MENA). 

Shares in the group, which specialises in branded generics and injectable copy-cat drugs, have risen sharply in the last few days following a change in sentiment from some of the analysts covering the company, most notable was Citi upgrading its rating from 'hold' to 'buy'.

What impressed the investment bank and other industry watchers is the growth potential of the MENA region compared with that of generic companies operating in EMEA. The region is also increasingly popping up on the horizon of large pharmaceutical companies anxious to get a foothold in what they see as a big growth market as wages and the standard of living rises.

Increased investment

Hikma itself is gearing up to meet this demand with its heavy investment in infrastructure, which will allow it to launch more products in 2009, a number that is expected to rise to 118 with the addition of 43 new drugs, focused on the high growth area of oncology and cardiovascular. Most of the launches will also occur in MENA, where given the low penetration of generics margin pressures are very low.

Additionally, in a welcome evolution of the business model, rather than just rely on generic drugs Hikma is looking to in-license a number of proprietary drugs, a change of direction that should impact positively on margins. Citi estimates the moves could raise margins from an estimated 15% this year to 20% by 2016.

Consensus forecasts from EvaluatePharma also show that thanks to growth in its core markets, Hikma is set to show an impressive escalation in sales, which are predicted to grow from $444m in 2007 to $1.23bn, increasing the group’s ranking in the entire pharmaceutical market from 112th to 88th.

Worldwide Prescription Sales for Mid Cap Generic Companies
     
Rank    Sales ($m)  CAGR  Market Share  Market Rank
     2007  2014    2007  2014  2007  2014
 1  STADA Arzneimittel  1,947  3,245  8%  0.3%  0.4%  47  46
 2  Ranbaxy Laboratories  1,504  2,941  10%  0.3%  0.4%  55  49
 3  Watson Pharmaceuticals  1,734  2,129  3%  0.3%  0.3%  51  61
 4  Dr. Reddy's Laboratories  821  1,999  14%  0.1%  0.3%  87  63
 5  Zentiva  689  1,496  12%  0.1%  0.2%  97  82
 6  Glenmark Pharmaceuticals  409  1,453  20%  0.1%  0.2%  120  84
7  Hikma Pharmaceuticals  444  1,255  16%  0.1%  0.2%  112  88
 8  Egis Pharmaceuticals  436  962  12%  0.1%  0.1%  116  101
 9  KV Pharmaceutical  583  931  7%  0.1%  0.1%  102  103
 10  Taro Pharmaceutical Industries  313  891  16%  0.1%  0.1%  132  108
 11  Alpharma  168  839  26%  0.0%  0.1%  154  114
 12  Piramal Healthcare  427  836  10%  0.1%  0.1%  117  115
 13  Bioton  99  792  35%  0.0%  0.1%  165  117
 14  Par Pharmaceutical  711  763  1%  0.1%  0.1%  94  121
 15  Zydus Cadila  395  717  9%  0.1%  0.1%  122  125
 16  Lupin  319  670  11%  0.1%  0.1%  131  129
 17  Alapis  38  630  50%  0.0%  0.1%  194  135
 18  Wockhardt  259  576  12%  0.0%  0.1%  140  143
 19  Torrent Pharmaceuticals  294  558  10%  0.1%  0.1%  135  145
 20  Pharmstandard  58  386  31%  0.0%  0.1%  181  163
Total   11,648 24,068 11% 2.0% 3.2% - -

US turnaround

But alongside planning for future growth, there have been concerted efforts to deal with some of its historic failures. The management team that was drafted in earlier this year to run the US generics business and initially disappointed with the July profits warning, have started to earn their supper again, pushing the business back into the black on a month by month basis since the start of the third quarter.

The division, like other players in the US, is expected to continue to experience challenges in a space where the increased competition has pushed down both profits and margins. The relatively small size of the US business, compared with the dominant players in the market also means that despite management support for the division it is unlikely to be a sustainable business in the longer term.

As such, some analysts, who have been pushing for the sale of the business, are still reluctant to assume any profit contribution from the division for this year.

While the division still has the power to disproportionately affect the shares its influence is waning. The proportion of group sales fell from 36% in 2006 to 28% this year and could be a low as 20% by 2010.

With this reversal of its problem division for now and plans for rapid expansion next year, what some analysts are now speculating is that the group could, thanks to its unique positioning in the MENA and forecast growth rates, become a take out target or partner for a big pharma company looking to cash in on its success.

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