Hikma Pharmaceuticals PLC (Hikma) recorded another year of good growth in 2007. Total revenue in 2007 increased by 41.6% to reach US$448.8mn, up from US$317.0mn in 2006. In 2007, 44.3% of revenue was generated by Branded business, 27.7% of revenue was generated by Generic business and 27.0% by Injectables business. Geographically, 51.1% of revenue was generated in the MENA region, while 32.0% of revenue was generated in the United States and 17.0% in Europe and the rest of the world.
The value of Hikma’s shares derived from the weighted average of the DCF and peer comparison methods is GBP5.47 per share. The stock closed at GBP4.64 on the LSE on April 28, 2008, which implies that the weighted average value of Hikma’s shares is 17.9 per cent higher than the current market price. We, therefore, maintain our 'BUY' recommendation on the Hikma stock at its prevailing price levels.
Financial Performance
Total revenue in 2007 increased by 41.6% to reach US$448.8mn, up from US$317.0mn in 2006. The growth during 2007 was mainly driven by increases in revenue in the Injectables and Branded businesses. The organic growth of the company (i.e. excluding the acquisitions of Ribosepharm, Thymoorgan and Alkan Pharma) was 28.0% during the year 2007. Revenue in the Branded Pharmaceuticals business increased by 52.9% to US$198.9mn in 2007, up from US$130.1mn in the prior year. The Branded business continued to show good growth in view of strong performance drivers in MENA market. Introduction of new products and strengthening of sales force contributed to this growth. The company continued to grow in each of major markets of Algeria, Saudi Arabia, Jordan and Sudan.
Injectable Pharmaceuticals segment registered 79.3% growth in sales in 2007. Revenues of this business increased to US$121.2mn in 2007, up from US$67.6mn in the prior year. Strong performances in Europe and the MENA region contributed to this growth. In the MENA region, the Injectables business derived maximum growth from Algeria, Saudi Arabia and Sudan. The growth in MENA region was mainly due to increased product launches and strengthening of sales forces.
Chart: Segment-wise Sales (US$ mn)
Source: Company reports
Generic Pharmaceuticals segment registered a growth of 9.3% in sales in 2007. Revenues of this business increased to US$124.2mn, up from US$113.7mn in the prior year period. The company was able to grow in this segment, despite high pricing pressure, on account of new products launches, increased sales focus and growth in key products. However the sales contract with the Department of Veterans Affairs, an agency of the government of the United States, for the supply of Lisinopril was not renewed during the year. This is expected to affect margins of this segment going forward.
Gross profit of the company was US$221.5mn for the year 2007, 39.7% up from US$158.5mn for 2006. However the gross profit margin declined to 49.4% during 2007, compared to 50.0% for 2006. This was on account of decline in gross margin for the Generic businesses as the margin for Branded and Injectables segments improved during the year.
For 2007, Hikma’s operating profit increased by 22.8% to reach US$92.4mn. However the operating margin declined to 20.6%, down from 23.7% in 2006. The operating margin was impacted due to above-mentioned factors like higher sales and marketing expenses due to acquisition of Ribosepharm (a sales and marketing organization) and consolidation of JPI.
Net profit for the year 2007 was US$62.6mn, up 14.8% from the 2006 level. The net profit margin for 2006 was 13.9%, down from 17.2% in 2006. The effective tax rate was 23.4% in 2007, a year on year decrease of 2.6 percentage points. The tax rate decrease was due to a shift in the geographic mix towards lower tax countries, particularly in the MENA region. Basic EPS for the year to 31 December 2007 were 37.0 cents, up 13.5% from 32.6 cents in 2006.
The total asset base of the company was US$892.5mn at the end of 2007, compared to US$488.4mn at the end of 2006. The significant jump in the asset base was due to acquisitions made by the company during the year. Current assets constitute major share of company’s asset base. Its share in the total assets was 42.1% for 2007. Accounts receivable as on 31st December, 2007 was US$190.7mn, compared to US$121.8mn at the end of 2006. For the year 2006, the average accounts receivable period was 127 days, up from 118 days in 2006.
On the liabilities side, the accounts payable totaled US$84.3mn at the end of 2007, compared to US$53.9mn at the end of 2006. For the year 2007, the average accounts payable period was 111 days, marginally down from 113 days in 2006. The long-term and short- term debt of the company has gone up to US$334.2mn at the end of 2007, compared to US$61.0mn at the end of 2006. Hikma had raised debt in 2007 to pay for its acquisition of APM. This also resulted in higher interest expenses fore Hikma in 2007. The owners’ equity amounted to US$418.5mn at the end of the 2007, an increase of US$73.4mn over that at the end of 2006.
We expect the company to grow at a healthy rate on the back of Branded and Injectables businesses. We believe that the company will continue to benefit from its diversified pharmaceutical businesses, which will sustain its high growth. We expect Branded business to grow at a higher rate as the growth drivers remain intact. The acquisitions made by the company will help it in the key markets like Egypt and Saudi Arabia. However the benefit of these acquisitions will depend to a great extent on the successful integration of these companies with Hikma. In view of increasing pricing pressures in some of the segments, Hikma might have to improve on its sourcing strategy. The product pipeline of Hikma looks healthy, which the company needs to maintain to keep up the growth momentum.
Table: Investment Indicators
Price on April 28, 2008 Shares in Issue ('000) Market Cap 52-week price range
GBP4.64 188,290 GBP873.7mn GBP3.45-GBP5.41
Total Revenue (US$ mn) Net Profit (US$ mn) EPS (US$) Book Value (US$) ROAE P/E (x)* P/BV (x)*
2009 F 750.9 98.4 0.52 3.80 14.5% 17.6 2.4
2008 F 610.9 77.9 0.41 3.42 14.6% 22.3 2.7
2007 A 448.8 62.6 0.37 2.49 16.2% 25.5 3.8
2006 A 317.0 54.5 0.33 2.08 17.1% 21.9 3.4
Source: Annual Reports, Global Research estimates
* P/E & P/BV multiples for future years are based on the company's market price as no April .28, 2008.
