Broker snap: Hikma purchase gets thumbs up

29th Oct 2010 12:02

The purchase of a multi-source injectables business by Hikma Pharmaceuticals looks a good one 'at first glance' and has prompted KBC Peel Hunt to up its price target for Hikma, but not by enough to justify changing its neutral stance on the stock. The biotechnology and pharmaceuticals company announced Friday it has acquired the business from Baxter Healthcare for $112m.The purchase includes a warehouse and distribution centre specifically designed to handle pharmaceutical products, and a high-quality manufacturing facility for Drug Enforcement Agency-controlled substances, which complement Hikma's growing oncology product range.Peel Hunt analyst Paul Cuddon highlights that the acquisition has "added over 41 products across 150 different dosage forms covering 23 therapeutics areas".Cuddon expects the deal to add around $10m in adjusted pre-tax profit in 2011, equating to an 8% earnings per share upgrade to 64c, from 60c.The broker believes that its adjusted target price offers "fair value" of 18 times the estimated 2011 earnings per share.However the broker's enthusiasm for the deal "is tempered by Hikma's relative valuation against peers, where it trades in line with the five highest rated Indian generic peers on PER [price/earnings ratio] despite delivering lower returns on equity (12% for Hikma vs 20% on average for peers)", said Cuddon.The broker suspects consensus forecasts will rise by around 8% as a result of the deal.The price target has been raised to 720p from 640p. The broker's 'hold' rating is maintained.