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Hikma Pharmaceuticals (LSE: HIK), the London-listed drugmaker, has reported results for the first half of 2024, painting a mixed picture for the company. Although the group's revenue grew a solid 10%, core operating profit was disappointingly low year-on-year.
However, I think that a closer look at the data suggests that there may be reasons for investors to be optimistic about future prospects – and a possible rise in Hikma Pharmaceuticals' share price.
Important takeaways
Top-line performance was strong, with revenue growth across all three business segments – Injectables, Branded, and Generics.
Encouragingly, growth was driven by strong demand for products, new launches, and strong performance in key markets. From the looks of it, the company's diverse portfolio and geographic background seem to be working well for it.
However, gross operating profit was lower year over year. Management cited higher costs, including raw materials and supply chain disruptions, as the main factors weighing on profits. That said, the Branded division was the standout, with an impressive 24% increase in core operating profit.
The company has maintained a strong balance sheet. Looking ahead, management has raised its full-year guidance, now expecting group revenue growth of 6-8% and core operating profit of $700m-$730m. This optimistic view suggests that the company's management is confident in its ability to face current challenges and deliver sustainable growth.
Reasons for optimism
Despite the mixed financial results, I think there are several reasons to be optimistic about the company's long-term prospects – and the possibility that the shares will bounce back from the lethargy of the past few years.
The company's diversified business model, with operations including generics, injectables, and brand-name drugs, offers multiple avenues for growth. This was reflected in the report, where the strong performance of the Branded division offset challenges in the entire Generics sector.
The company has a very strong pipeline of new product launches, with 36 strong filings with the US Food and Drug Administration (FDA) in the first half of the year alone. I think this should help drive excitement, and solve any challenges with existing products.
Lots of power, but also danger
Shares currently trade at about 12 times earnings, which is below the company's historical average and the broader industry average. The discounted cash flow (DCF) calculation also suggests that the shares are about 47% below the estimated market value.
However, when stocks are trading so far below fair value, there is usually a reason. The pharmaceutical industry is incredibly competitive, and any failure or misstep in a startup can be a huge risk for investors.
The company may also face increased pricing pressures and competition in all key product categories. Additionally, the company's reliance on its Branded segment for a large portion of its revenue means that any decline in that segment could have a disproportionate impact on the rest of the business.
One to watch
So while the company's half-year results were mixed, I think the diversified business model, strong pipeline of new products, strategic acquisitions, and attractive valuations suggest the shares may be due for a jump. The sector can be incredibly volatile, but with the right risk profile, I think the stock is worth a close look. I will be adding it to my watch list for now.
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