How good is the investment case for Hikma Pharmaceuticals (LSE: HIK), Circassia Pharmaceuticals (LSE: CIR) and Hutchison China MediTech (LSE: HCM) after all three firms released news today?
Hikma Pharmaceuticals
Hikma Pharmaceuticals has grown so big since listing on the stock market in 2005 that it was promoted to the FTSE 100 earlier this year. Acquisitions have been part of Hikma’s growth strategy, but today it announced its biggest deal to date.
Hikma is to acquire Roxane Laboratories and Boehringer Ingelheim Roxane (together “Roxane”) from parent company Boehringer Ingelheim for a total consideration of $2.65bn: $1.18bn in cash and 40 million new Hikma shares at £23.50 a share.
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Roxane is a US generics company, and the acquisition will catapult Hikma to the no. 6 position in the US generics market. Last year, Hikma made $763m revenue from the US and $633m from its other major territory, the Middle East and North Africa. Hikma expects Roxane to achieve revenue of $725m-$775m in 2017, and, assuming the acquisition completes in the last quarter of this year, the Board expects the deal to be accretive to adjusted earnings per share (EPS) in 2016 and “strongly accretive” to adjusted EPS from 2017 onwards.
Hikma’s shares are up over 6% in the wake of the news, but at just over £22 are below the £23.50 Boehringer Ingelheim sees as an acceptable valuation. I rate Hikma a buy at this level.
Circassia Pharmaceuticals
Circassia Pharmaceuticals is developing a pipeline of allergy treatments that are superior to traditional treatments by building up immunity quicker and without the risk of anaphylactic shocks. Circassia is in the FTSE SmallCap index, but raised £275m in June for two acquisitions and to fully fund its pipeline. As a result, the company’s market capitalisation has risen to well over £800m (at a current share price of a little under £3), putting it firmly in line for promotion to the FTSE 250 at the next quarterly review, in September.
On the face of it, this seems to be an over-elevated status for a company that is expected to be loss-making for some time to come. Circassia today reported a half-year loss widening to £22m from £16m in the same period last year, but said its “late-stage programs and phase III studies are on track” — and its share price is little changed on the day.
It’s difficult to put a valuation on Circassia, but renowned fund manager Neil Woodford was happy to participate in the June fundraising, which was at a level not much below the current share price.
Hutchison China MediTech
Hutchison China MediTech (“Chi-Med”), whose vision is to become a major China-based pharmaceutical company, reported a “strong outlook for full year and beyond” in its half-year results today. Nevertheless, the shares fell more than 7% to under £16 in early trading this morning — and well down from a high of close to £20 in May.
Chi-Med is one of the bigger companies on the AIM market, being valued at over £900m. In contrast to Circassia, the company is growing revenues fast, and is profitable. In its first-half results today, Chi-Med reported revenue on continuing operations up 117% to $65.7m. Net profit to equity holders fell to $2.3m from $5.6m, but I don’t see this as any cause for concern. Chi-Med is using cash from its profitable “Commercial Platform” of healthcare and consumer products to fund its exciting drug “Innovation Platform” — in particular, during the first half, “pushing our oncology and immunology clinical pipeline as hard and fast as we could”.
Chi-Med’s Commercial Platform already has 1,800 medical sales staff, covering about 13,500 hospitals and over 80,000 doctors — a ready-made network for commercialising the company’s own Innovation Platform drugs once approvals start to come through. With profits currently being recycled into clinical activity, valuing the company on earnings is not particularly helpful. Strong forecast revenue growth, though, and price-to-sales ratios, suggest the stock could be worth buying at the current level.
