ii view: FTSE 100 drugs firm Hikma beefs up US ops

Acquisition of business assets

President of Injectables Riad Mishlawi said:

"Hikma has grown to become a top-three US supplier of sterile injectable medicines thanks to our strong record of successfully making value-enhancing acquisitions like this one. This acquisition will add significant scale to our US operations and will enhance our US injectable manufacturing capabilities and portfolio by adding complex technologies. 

“I am confident that this transaction will deliver significant future value to our Injectables business, supporting growth over the medium term."

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

ii round-up:

Drugs maker Hikma Pharmaceuticals (LSE:HIK) today detailed plans to expand its injectable medicines business, buying parts of Xellia Pharmaceuticals, a Danish company focused on anti-infective treatments, for up to $185 million.

The acquisition will add eight approved and marketed injectable products to Hikma's US portfolio and 11 pipeline products, as well as significantly expanding its US manufacturing capacity.

Shares in the FTSE 100 company rose 0.5% in UK trading having come into this latest news up by around a tenth year-to-date. That’s similar to fellow drugs maker GSK (LSE:GSK) over that time, although behind a near one-fifth increase for AstraZeneca (LSE:AZN). The FTSE 100 index itself is up almost 6% in 2024. 

Hikma supplies a wide range of generic, speciality and branded pharmaceutical products to markets across North America, Europe and the Middle East and North Africa.

The acquisition for an initial $135 million and up to another $50 million subject to conditions includes Xellia’s manufacturing facility in Cleveland, Ohio, as well as sales and marketing capabilities and a Research & Development (R&D) centre in Zagreb, Croatia.

Products being acquired include Xellia’s ready-to-use Vanco injection for the treatment of Septicemia. Acquired products will add around $75 million in annual sales with the acquisition expected to prove earnings neutral in its first year of ownership before generating meaningful longer-term benefits. 

In February, Hikma reported revenue in 2023 jumped 15% to $2.87 billion, helping drive adjusted core operating profit up 19% to $707 million. 

First-half results are scheduled for 8 August.   

ii view:

Started in Jordan in 1978, Hikma today provides a portfolio of over 760 injectable, oral, nasal and inhalable generic and branded treatments. Its therapeutic categories include anti-infectives, pain management and oncology. Employing over 9,000 people, it operates across more than 25 manufacturing plants and eight R&D hubs. 

Injectable products generated its biggest slug of sales in 2023 at 42%, followed by generic drugs at 33% and branded items the balance. Geographically, the US accounts for 61% of sales, the Middle East and North Africa 32%, and Europe and the ROW around 8%. 

For investors, sales exposure to the Middle East and North Africa could leave the company vulnerable to political unrest and change. Costs for businesses generally remain elevated, exposure to potential legal action regarding drug side effects is an industry issue, while Hikma’s forecast dividend yield of around 2.9% is modest compared to other pharma companies such as GSK and Roche Holding AG (SIX:ROG) at over 3.5%. 

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• The Week Ahead: Ashtead, Whitbread, Berkeley Group, DS Smith
• How to become an ISA millionaire

On the upside, Hikma offers both geographical and product diversity, and revenue for the current fiscal year is forecast by management to grow by 4-6%. Acquisitions, such as the latest deal, continue to expand Hikma’s operations and potential future earnings, while exposure to more affordable generic drugs is likely to remain attractive to buyers as healthcare costs more broadly continue to rise. 

In all, and despite ongoing risks, this FTSE 100 pharma company operates in an attractive area of the market and currently trades at a discount to consensus analyst fair value above £22.50 per share.

Positives: 

• Diversity in both product and geographical location
• Relative defensiveness given exposure to healthcare

Negatives:

• Currency translation can hinder performance
• Key Middle Eastern markets can suffer political instability

The average rating of stock market analysts:

Buy