Broker tips: AstraZeneca, Hikma Pharmaceuticals

AstraZeneca's strategy of disposals and 'externalising' revenues from selling licensing rights to its drugs will hit revenues and earnings more than the market realises, Jefferies said on Monday, downgrading its rating on the shares to 'hold' from 'buy'.

Jefferies cut its price target to 5,050p from 5,350p.

Adjusting its forecasting model due to the cumulative impact of future revenue externalisations and disposals, combined with lower durvalumab and tremelimumab sales estimates for non-small cell lung cancer (NSCLC) that are less than offset by increases to durva/treme in SCLC and Lynparza, Jefferies cut its revenue estimates by up to $1.5bn, around 6%.

This equated to core earnings per share estimates being cut by up to 9% to $3.77 in 2018 and by 11% to $4.16 in 2019.

"We and consensus have been guilty of failing to reflect the impact of future revenue externalisation and asset disposals on revenue and EPS growth," Jefferies analyst Jeffrey Holford wrote, saying consensus may overestimate
revenue by up to $2.5bn.

The analyst warned the dividend may also not be covered until 2021 by cash flow from underlying operations based on his updated estimates.

Although Holford saw significant potential for durva/treme in NSCLC, he suggested the design of the Mystic study may be an underappreciated risk for investors.

"The shift to a co-primary endpoint could be a mistake, given cross-over will likely confound Overall Survival and the study may already be underpowered," he added, lowering peak sales estimates for durva and treme in NSCLC by $1.7bn and $1.1bn, respectively, though this is primarily due to competition from rival combinations of chemotherapy and immuno-oncology combos.

Hikma Pharmaceuticals

Hikma Pharmaceuticals got a boost on Monday as Numis upgraded the stock to 'buy' from 'add'.

It said that following Mylan’s Complete Response Letter, the market is now overly discounting Hikma’s prospects for gaining approval of its generic version of GlaxoSmithKline's bestselling asthma drug Advair this year.

In addition, the share price is now also heavily discounting the core business, Numis said.

"If Hikma gains FDA approval this year, most likely with minor deficiencies in a complete response letter, we see potential for a slight upgrade to our low-end FY17 forecasts, and a material upgrade to our low-end FY18 forecasts (potentially more than 10%), and envisage a higher multiple being warranted post upgrades (14x FY18 EV/EBITDA well underpinned versus peers)."

Numis reckons Hikma has a stronger chance of approval than Mylan because it included 12-18 year olds in its study and has benefited from the expertise of Vectura, a business that, unlike Mylan, has a generic version of Advair Diskus approved in Europe in partnership with Sandoz.

"In our opinion the current share price is well underpinned by the core business (more than 25% upside), with a free option on generic Advair. This is an asymmetric risk worth taking, with the catalyst now a month away and potential for more than 50% returns if Hikma's generic Advair is approved first time, or with minor deficiencies."

In its final results on 15 March, Hikma said it expected revenue for the Generics business to be around $800m this year, with an improvement in the mix of sales and new product launches more than offsetting the impact of increased competition on the marketed portfolio and a reduction in contract manufacturing revenue.

The group said certain new launches were expected to contribute around 15% of Generics revenue in 2017, primarily generic Advair, which was assumed to be launched in the second half of the year.

Numis has a 2,350p price target on Hikma.