14

Apr

2018

HIKMA Pharmaceuticals Financial Analysis

By : EpicResearchers


Introduction

HIKMA Pharmaceuticals is a UK based multinational pharmaceutical company that was founded in 1978 in Amman, Jordan by Samih Darwazah. The company despite being headquartered in Amman, Jordan, its main activities is in its London based company that manufactures non- branded and branded generic and in- licensed pharmaceutical products. The company has grown immensely to be listed in the FTSE 250 as a publicly traded company in the London stock exchange market. The company in 1996 was listed as the first Arab pharmaceutical company to export the pharmaceutical products to the United States. The company grew from its founding country in Jordan, to beco0me a multinational company, with London being its main point of operation. This saw it go public in the United Kingdom in 2005, where it was listed on the London Stock Exchange.

Acquisitions

The company has acquired several companies in the sector that include: Instituto Biochimico Pavese Pharma which is based in Italy in the year 2005 and Jazeera Pharmaceutical Industries in Saudi Arabia in the year 2006. In the year 2007, the company went ahead to acquire APM Co. that is based in Jordan, Alkan Pharma that is based in Egypt, APM Co. and Al Jazeera Pharma which is based in Saudi Arabia. In the year 2010, the company acquired Thymoorgan Pharamaceuticals which is based in German, Ribosepharm which is also based in Germany, and Multi- Source Injectables Co. which is based in the United States. The major acquisition by Hikma Pharamaceuticals PLC was in May of 2011, when it acquired the Baxter Healthcare Corporation; a United States based generic injectables business (MSI- Multi- Source Injectables). In October of 2011, Hikma Pharmaceuticals gained entry into the Moroccan pharmaceutical market when it completed the acquisition of Promopharm, which is ranked as the ninth largest pharmaceutical company in Morocco. Hikma pharmaceuticals continued its major acquisition journey in 2011 when it inaugurated the Algerian based comoany, Al Dar Al Arabia Pharmaceutical Manufacturing Company. This was Hikma’s second company in Algeria after Hikma Pharma Algeria. It is in the same year that Hikma was honored with the ICSA/ Hermes Transparency in Governance Award for having the best audit disclosure for a FTSE 250 company in the United Kingdom. In the preceding year of 2012, Hikma Pharmaceuticals expanded its operations in the Egyptian Market when it acquired Egyptian Pharmaceuticals and Chemical Industries (EPCI). It is in these major and vast acquisitions that have seen Hikma Pharmaceuticals operate in 12 countries namely: Jordan, United Kingdom, United States, Germany, Egypt, Tunisia, Portugal, Morocco, Sudan, Algeria, Italy, and Saudi Arabia.

Hikma’s Business Segment

Hikma’s business segment is divided into three main units that comprise of the branded units, the injectables, and the generics. The branded segment section is comprised of the sales and development of in- licensed and branded generics products in the MENA region. Hikma Pharmaceuticals boasts of over 499 products and 1,256 dosage strengths with its top products being: Actos, Blopress, Prograf, Amoclan, Suprax, and Omnicef. In the injectables segment, Hikma specializes in the production of; fentanyl, robaxin, argatroban, iron gluconate, and phenylephrine in markets across Europe, the United Kingdom, and MENA. The company boasts of over 379 dosages and 200 products and strengths. Hikma Pharmaceuticals sells its generic products in the United States and these products span across: doxycycline, methocarbamol, cephalexin, prednisone, and amoxicillin.

Financial Performance and Analysis

A company’s financial performance is well analyzed using key financial ratios that determine whether the company is on the right track or it is losing in regards to its market share, revenue, and profitability.

 

Source: Reuters.com/Hikam- Pharmaceuticals

Hikma Pharmaceuticals Plc ::Expect full year group revenue to be in range of $2.0-$2.1 billion in constant currency in 2017.Updated guidance reflects changes in outlook for Generics business; revised expectation for launch timing of generic version of Advair Diskus.Maintain full year guidance for our Injectables and branded businesses.Expect Generics revenue to be around $670 million in 2017.Expect global Injectables revenue to be between $800-$825 million for FY, core operating margin in high 30s, reflecting step-up in research and development (Reuters.com, 2017).

In looking at the above growth rates, it is evident that Hikam Pharmaceuticals is performing impressively as compared to the industry performance at large. This is to say that Hikam depicts a competitive edge mark on its growth rate. In looking at the current market price of its share growth as compared to that of the market, Hikam has recorded a growth rate of over 10 percent annually and has recorded a EPS (earnings per share) growth rate over a 5- year period of 19.49 percent. The industry’s EPS 5- year growth rate was recorded at 9.91 percent indicating at par growth rate between the industry and Hikam Pharmaceuticals. The quarter performance of Sales (MRQ) vs. Qtr. 1 year ago performance the sector’s figure stood at 6.79, the industry’s figure stood at 6.31, while the company’s figure stood at 1.47 indicating a poor performance by Hikam Pharmaceuticals in regards to its marginal figures. The total figures were impressive though, as the sales (TTM) vs. TTM 1 year ago stood at 21.7, while the industry recorded 5.15, and the sector 5.62 on average. This shows how great the sales of Hikam pharmaceuticals have been in the past one year.

The sufficiency and adequacy within which a firm maximizes the shareholders’ value are analyzed using profitability ratios such as Earnings per Share, dividends per share, Return on Capital Employed and Return on Equity (Bodie 2013). Dividends per share are the earnings in shares that shareholders are paid through dividends (Brooks 2015). Dividends are paid from the profits a firm makes in a financial year period (Eunice and Ibe 2016). In looking at the financial records of Hikma Pharmaceuticals PLC, there is an increasing trend on dividends per share which is a reflection of increased profits (Damodaran 2015). This is portrays a certain point of reflection of confidence by the investors as a result of increased earnings from their investment. DPS stood at 11.0, in the 1st half of the company’s financial year, which is a similar amount that was reflected on the company’s financial records in a similar period in 2016.

Earnings Per Share

The earnings per share of a company is depiction by the investors on the amount that they will earn on the share amount that they have invested (Goh et al., 2016). It reflects the productivity and profitability of the firm per share basis. EPS is the ratio that is obtained from the Earnings attributable to the shareholders’ equity/ capital to the total number of the ordinary shares (Grant 2016). The consolidated profit and loss account of Hikam Pharmaceuticals reflect an upward trend, with a constant increase over a five year period. The recent upward trajectory of the shareholders wealth is reflected with a 12% increase from 25.7 in the first half of 2016 results to 28.8 in a similar half of the company’s 2017 results (Hunjra 2014).

Return on Capital Employed

Return on capital employed is a ratio of determination of a firm’s ability to use long- term assets and capital to increase revenue and maximize profits (Jorsegen 2016). It is the ratio obtained from the earnings before interest and tax to total of capital employed. There is an increasing trend on the ROCE (return on capital employed) over a five year period in Hikam Pharmaceuticals. This is a reflection on the maximization of revenues and profits of a firm’s capital and long term assets.

Net Asset Turnover

Net asset turnover is used to measure how well assets are utilized to generate revenue and profits within a firm. How many dollars are produced for every dollar invested in assets? It is obtained through calculation of ratio of the total revenue to the total amount on capital employed (Moore 2017 P 1-5). Capital employed consists of general reserves, equity, non- current liabilities, share premium, and revaluation reserves (Periasamy 2009). Therefore, we can ultimately conclude that the effectiveness and efficiency levels are high within Hikma Pharmaceuticals PLC.

Return on Equity

Return on equity is used to determine the how effective a business uses other supplier‘s fund to make optimum returns to shareholders (Damodaran 2012). Hikma pharmaceuticals plc. interim dividend 0.11 usd per share. Interim dividend of 11.0 cents per share, in line with interim dividend for h1 2016 and the group revenue of $895 million realizes a 1% increase in h1 2017 and up 5% in constant currency. Now, expect 2017 group revenue to be around $2.0 billion in constant currency after lowering guidance for generics business. h1 group core operating profit of $176 million, in line with h1 2016 and up 3 pct in constant currency. now expect generics revenue to be around $620 million and core generics operating profit to be around $30 million in 2017.h1 group core basic earnings per share of 45.4 cents, down 6 pct and down 3 pct in constant currency.interim dividend of 11.0 cents per share, in line with interim dividend for h1 2016 (reuters.com, 2017).

Source: reuters.com/hikam-pharmaceuticals

Total Shareholder Return

Total shareholder return is a ratio in which investors use to measure the gains that they have made on shareholding in a particular firm. It is obtained by calculating the variance that exists between the ending price of a firm’s stock, and the beginning price that is added to dividends received (Kontes 2010). If the TSR is steady in growth, it is an indication that both the investors and the shareholders realize a gain from the company (Park and Jahn 2013 P 51-63). BTG PLC is used as the comparative firm in the industry in which Hikam Pharmaceuticals operate in. Computation of the TSR of BTG reveals a trend which is declining which is an indication that the shareholders and investors of the firm do not realize actual gains in their shareholding. An investor is therefore advised to invest in the competitor firm Hikma PLC.

Source: Reuters.com/Hikma-Pharmaceuticals

Economic Added Value

Economic added value is use to determine a company’s ability to effectively and adequately finance its activities. It assists in assessing whether a company has the ability to finance its activities by adequately employing its assets (Eisenhut 2008).  A positive EAV is an indication that the firm has adequate capability of meeting its costs of production while a negative EAV denotes that a company does not have the capability of financing its costs (Schön 2007). The Economic added Value of the of the company is positive in a span of three years, which is an indication of its ability to finance its day to day operations ( Moghaddam and Talebnia, 2016).

Despite the positive economic added value in its overall financial activity, it is still struggling with economic pressures in most of its substituent firms. This can be attributed to increased inflation in the countries Hikam Pharmaceuticals operate in.

 

Net Assets Method

This method basically involves determining a firm’s valuation, which involves determining the total net worth of a firm. Essentially, it is the total market value of a company at the current prevailing economic and market conditions (Pearl and Rosenbaum 2013). This method involves calculating the difference that is between the total assets of a firm and its total liabilities.

 

Price to Earnings Ratio

Price to earnings ratio is ratio that is obtained by dividing the company’s share price by its earnings per share (Von Mises 2016). Hikam Pharmaceuticals P/ E has been impressive, with a 20.89 point compared to the industry’s 32.20 points. A higher ratio is an indication of good performance.

 

Enterprise Value

The ratio of the Enterprise value to earnings before taxes, interests and depreciation assists investors in determining the total value of a firm using a market capitalization in including the debt and also incorporating the non- cash items such as depreciation. It is the most preferred method because it is not affected by equity structure of the firm (Baker & Martin, 2011). Therefore, it is a fair approach in valuing firms that employ structures of capital which vary within the industry. Investors in this regard prefer a ratio that is quite low as it shows that the stock is undervalued and has enormous potential.

 

Free Cash Flow

Discounted cash flow is a process of projecting the company’s revenue and earnings for next five years. An income statement is often extracted, and the percentage variation is obtained between the 1st half of 2016 and the 1st half of 2017. The rate obtained as a result is used to compute the projected figures in the income statement. Amortization and depreciation are added back to earnings because they are non-cash expenses (Upadhyay 2016). The present value of the projection is computed. The assumption is that there will be a sustained growth of 3% and the discount rate will be 15%. It involves finding the present value of future cash flows based on the forecast.

Assumptions of Free cash flow

  • The rate of growth varies between all years as represented in the percentages.
  • The discount rate is 15%. The discount rate is set to take care of economic variations such as inflation. The average rate of return of Informa Plc is 12% and the rate to be used must be higher than the required rate of return and accommodate inflation too.
  • The variation between 2015 and 2016 will be consistent in all the projected years.
  • The assumption that there is a perfect capital market.

 

 

Reasons for Differences in Valuation

The variation has occurred as a result of inclusivity of an estimated discounted rate, it is therefore imperative that it is affected by the market and economic conditions. Undervaluation is incorporated as an addition to the figure that has been acquired as a result of estimation so as to equate the two. Assumptions in this case may necessarily not be as realistic such that it leads to a variation.

Recommendation

The net assets method is the easiest and most understood method, and I recommend Hikma Pharmaceuticals PLC to adopt the method in its financial reporting (Taani 2017 p.227). The net assets method allows the total assets to be easily traced in the income statement as it does not rely on discount rate utilization. Hikma Pharmaceuticals PLC should utilize the assets well to ensure that they maximize on the value of the shareholders and the investors. The financial estimations and projections should be realistic in nature and should rely on historic performance as well as the industry and competitors performance (Piketty 2017). The inflation rate should be well incorporate din the financial statements and reporting as well as in projections using the adjusted discounted rate for acquisition of accurate reports.

Critical Analysis

The results and analysis that has been aforementioned show all positive signs that the Hikam Pharmaceuticals PLC is performing extremely well as compared to the industry and sector performance. The results have also been compared to that of its major competitor in the market and it is conclusively impressive. There is an positive trend in all the ratios which are increasing at a commendable rate, an indication of the firms positive growth every year. The efficiency ratio is high which translates to the effective utilization of the firm’s assets. The cashflow statement indicate a positive discounted cashflow, an indication of increasing investors return as well as positive net benefit. The company has incorporated various acquisitions so as to utilize economies of scale to a point that they increase their capital and market share. Therefore, an investor is better off investing in Hikam Pharmaceuticals as opposed to other competitors in the market to realize maximization of his/her investment.

Conclusion

In conclusion, Hikma Pharmaceuticals PLC is perfoming well in their industry and sector of operation and is on the verge of being a market leader in the near future. It is therefore conclusive to advice any rational investor to invest in the firm.

 

 

 

 

 

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