Drugs developer Hikma Pharmaceuticals (HIK) continues to struggle with its generics business. The £2.35bn FTSE 250 company has cut its sales guidance for the third time this year sparking a major sell-off in its shares.
The stock fell as much as 8% in early trading before recovery modestly. At 981p, the shares are close on 6% lower.
LOW SINGLE-DIGIT OP MARGINS
Hikma says generics sales will be approximately $600m for the full year to 31 December 2017, as core operating margins dwindle to ‘low single-digits.’ This is down from $620m guidance in August.
Overall, full year revenue is still expected to be $2bn, after stripping out the effects of volatile currencies.
HEADWINDS IN THE US
Hikma is partly blaming challenging conditions in the US, its key market. Equally worrying is talk of greater than expected price and volume erosion, which is expected to continue into 2018.
Talk of pursuing new commercial opportunities and focusing on its pipeline is par for the course, and it looks like attacking the cost base with vigour is Hikma's best hope of changing its fortunes in the near-term.
MORE ASTHMA DELAYS
But generics is not Hikma's sole trouble spot. It is also hoping to get a generic version of GlaxoSmithKline’s (GSK) asthma treatment Advair Diskus launched. But the US Food and Drug Administration (FDA) blocked the launch the treatment, called VR315, in its current form in May.
Hikma has been able to address the majority of questions raised by the FDA except for its clinical endpoint study, which remains a point of disagreement. This has resulted in a dispute resolution progress, which is expected to be completed in the first quarter of 2018.
Struggles with VR315 are also bashing smaller pharma peer Vectura (VEC), which provided some of the technology. Its stock has been marked down 7% today to 89.7p.
WEAKNESS ‘OVERDONE’
Numis analyst Paul Cuddon believes weakness this morning is ‘overdone.’ He argues Hikma is one of the firms that is well-positioned to emerge in a stronger position from a ‘cyclical downturn’ in generics.
The analyst also flags cash flow from the injectables and branded divisions should provide a ‘sustainable platform’ for a longer term view, while organic growth and acquisitions could ignite growth.
Cantor Fitzgerald analyst Brian White is also optimistic, highlighting that sales guidance in injectables is stable at approximately $775m.
FINGERS CROSSED ON MARGINS
Hikma says that competition is expected to intensify next year but margins should return to more normalised levels.
While White concedes that margins in injectables will probably weaken, he is convinced the division remains ‘the jewel in the Hikma crown’.
