Citi downgrades Hikma Pharmaceuticals after company´s pre-announcement

Analysts at Citi downgraded their recommendation on shares of Hikma Pharmaceuticals in the wake of the company´s trading update which was issued after the close of trading in London on 3 August.

Hikma flagged new drug approvals were arriving more slowly than expected and the phasing of litigation costs at US generics.

On the basis of the above, the broker´s analysts lowered their recommendation on the shares from 'buy' to 'neutral' and set a target price of 2,600p.

They also lowered estimates for the drugmaker´s core 2016 earnings before interest and taxes and earnings per share by 9.0% to $367m and $1.08, respectively - below the equivalent figures of $420m and $1.22 expected by the consensus.

EPS estimates from 2017 onwards were cut by between 2% and 5% from 2017 onwards, with rates in foreign exchange markets expected to be an "incremental headwind".

What was Citi´s view? "Developments at US Generics at best can be described as a ‘short term hiccup’. At worse, sentiment concerns around the revenue/margin potential from the Roxane pipeline will increase, which is not helped by the lack of clarity on the pipeline given commercial sensitivities until 2017."

If one were to cut his Roxane pipeline estimates by half, that would lead to EPS downgrades of between -15.0% and -20.0%, Citi said.

Citi estimated the company´s net present value (NPV) at 2,900p, with a weighted average cost of capital of 8.0%, a terminal growth value (the rate at which free cash flows are expected to grow for eternity) of 2.0% and cable´s exchange rate at 1.32.

As of 10:23 BST shares in Hikma were falling 13.61% to 2,305p.