Numis upgrades rating on Hikma Pharmaceutical but cuts target price

Numis on Friday upgraded its rating on Hikma Pharmaceutical to ‘buy’ from ‘hold’ but cut its target price to 2,350p from 2,660p.

Hikma’s shares have fallen 35% over the past three months and significantly underperformed UK Mid-Cap Healthcare and Global Specialty Pharma, Numis highlighted.

“The key risk to the investment case following the downgrades in August to fiscal year 2016 forecasts are margin expectations from Generics that have disappointed since the acquisition of Roxane, which completed in early 2016,” the broker said.

“A third quarter update is expected next week and in the short term, a reduction to group revenue expectations for fiscal year 2016 would be a disappointment, but in the absence of competition for Glycopyrrolate, view this as unlikely.”

Numis said a further reduction in margins for generic medicines in 2016 is “entirely possible” but argued this is now reflected in the price.

However, Numis is taking a “more cautious stance” on margins for generics into 2017, and reduced its earnings per share forecasts by 13% to $1.36.

The key drivers of 2017 include the relaunch of Bedford's injectable products, the maintenance of Injectables margins, the approval of a generic version of asthma treatment Advair and operating leverage in the generics business.

For 2016, Numis sees profit before tax falling to $315.5m after an “exceptional” year in 2015 at $355m. The broker expects to see a return to profit growth in 2017 with pre-tax profit of $413.6m.

However, the expected EPS of $1.36 in 2017 would compare to $1.42 in 2015. In 2016 EPS is forecast to fall to $1.11.

“The shares now trade on 16x our downgraded 2017 EPS forecast and offer 23% EPS growth, with peers trading on >21x for 20% growth.”

Shares fell 5.85% to 1,643p at 1054 GMT.