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.
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|
|4||Dr. Reddy's Laboratories||821||1,999||14%||0.1%||0.3%||87||63|
|10||Taro Pharmaceutical Industries||313||891||16%||0.1%||0.1%||132||108|
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.