It’s been a great first half of 2014 for investors in Hikma (LSE: HIK), with the pharmaceutical company seeing its share price rise by 47%, while the FTSE 100 is up just 1.5%. Indeed, its performance is not far off that of sector peer, Shire (LSE: SHP) (NASDAQ: SHPG), which is up 62% year-to-date and has benefited from bid approaches from Abbvie. Of course, with allegations regarding its operations in China continuing to dominate headlines, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is down 1.6% over the same time period.
So, that’s the past. Now what about the future? Which company could be the best buy over the medium to long term?
Bid Potential
Of course, while Shire has been the subject of a bid approach in 2014, rumours have been swirling regarding a potential offer for Hikma, too. The major attraction of the company is its considerable exposure to emerging markets, which could (it is speculated) be a perfect bolt-on acquisition for the likes of US firm, Mylan. Certainly, a further bid from Abbvie for Shire looks more likely, but both companies could continue to benefit from a buoyant share price caused by bid speculation over the short to medium term.
Growth Potential
Another key reason why Hikma may prove highly attractive to pharmaceutical sector peers is its long-term growth profile. However, it appears as though all three companies offer strong prospects on this front. For example, Shire’s senior management laid out recently their plans to double revenue by 2020, with a diversified and lucrative pipeline of drugs. Similarly, GlaxoSmithKline has an enviable pipeline of new drugs and also has cash to burn after the sale of key brands such as Ribena and Lucozade.
Of course, a key attraction of Hikma is the fact that its main focus is on generic drugs. This could mean more stable sales and profits than for Shire and GlaxoSmithKline in future. On the flip side, it also means that the company may struggle to deliver market-beating earnings growth that attract many investors to pharmaceutical stocks in the first place.
Looking Ahead
Clearly, GlaxoSmithKline’s share price is the most attractive of the three, since it has suffered from weak market sentiment in recent months, while Shire and Hikma have been boosted by bid speculation. Indeed, trading on a P/E of 24.9 and forecast to grow earnings by just 5% next year, it’s difficult to justify Hikma’s current share price unless there is continued bid speculation. So, while Shire also trades on a relatively high P/E of 24.3, the fact that it is aiming to double revenues within 6 years and also is forecast to grow earnings by 27% this year and by 10% next year means that it looks more attractive at present.
Meanwhile, GlaxoSmithKline, with its relatively low P/E of 15.4 and strong pipeline, could turn out to be the best investment of the three over the medium to long term. Certainly, there may be further short term weakness, but this does not change the fact that it has considerable long term potential.
