# Hikma Pharmaceuticals deliver strong H1 results with core group revenue up 9%

- Link: https://www.directorstalkinterviews.com/hikma-pharmaceuticals-deliver-strong-h1-results-with-core-group-revenue-up-9/412849001
- Published: 2020-08-07T07:21:44+01:00
- Author: Amilia Stone

**[Hikma Pharmaceuticals PLC](https://www.directorstalkinterviews.com/ftse-company/hikma-pharmaceuticals/hik.l)**(
LON:HIK), the multinational pharmaceutical company, has reported its interim results
for the six months ended 30 June 2020.

**Highlights:**

| **Core results^(1) (underlying) **
**$ million** | ** H1 2020 ** | **H1 2019** | **Change** | **Constant currency^(2) change** | 
| Core revenue | 1,132 | 1,043 | 9% | 9% | 
| Core operating profit | 284 | 246 | 15% | 16% | 
| Core profit attributable to shareholders | 205 | 176 | 16% | 18% | 
| Core basic earnings per share (cents)^(3) | 85.3 | 72.7 | 17% | 18% |

| **Reported results (statutory)**
**$ million** | ** H1 2020** | **H1 2019** | **Change** | **Constant currency^(2) ****change** | 
| Revenue | 1,132 | 1,047 | 8% | 8% | 
| Operating profit | 297 | 238 | 25% | 26% | 
| Profit attributable to shareholders | 212 | 185 | 15% | 16% | 
| Cashflow from operating activities | 292 | 187 | 56% | – | 
| Basic earnings per share (cents)^(3) | 87.6 | 76.4 | 15% | 16% | 
| Interim dividend per share (cents)^(3) | 16.0 | 14.0 | 14% | – |

**Response to COVID-19**

·    Health and well-being of all employees has been greatest priority through the
pandemic

·    Supply chain fully maintained, providing our customers with critical drugs

·    Manufacturing sites remained open with operations enhanced to support increase
in demand

**Financial highlights**

·    Core Group revenue up 9%, reflecting growth in all three businesses

·    Core operating profit up 15%, driven by a strong performance in Injectables

·    Significant increase in cashflow from operating activities to $292 million,
up 56%

·    Continued investment in R&D with growing pipeline of complex products

·    Healthy balance sheet maintained, with net debt of $511 million and low leverage
at 0.8x net debt to core EBITDA^(4,5)

·    Repaid $500 million Eurobond due in April and issued new $500 million Eurobond
in July

·    Announced interim dividend of 16 cents per share, up from 14 cents per share
in H1 2019

**Strategic and business highlights**

·   Injectables: Delivered double digit core revenue growth, driven by increased
demand for COVID-19 related products in the US and EU

·   Generics: Maintained core operating margin, supported by a better than expected
performance from new launches

·   Branded: Achieved a strong performance in our tier one MENA markets resulting
in 6% growth in core operating profit in constant currency

·   78 new products launched across our markets

·   Signed a non-exclusive supply agreement with Gilead Sciences, Inc. to manufacture
remdesivir for injection

·   Repurchased 12.8 million shares from Boehringer Ingelheim, representing approximately
5.3% of issued share capital

**Revised 2020 outlook**

·   Injectables revenue now expected to be between $950 million and $980 million,
with core operating margin in the range of 38% to 40%

·   Generics revenue now expected to be in the range of $720 million to $760 million
and core operating margin to be around 21% (including assumed launch of generic 
Advair Diskus^(®) in H2)

·   Branded revenue expected to grow in the mid-single digits in constant currency

> **Siggi Olafsson, Chief Executive Officer of Hikma, said: **
> “We have delivered strong first half results, which are ahead of our initial expectations
> and reflect good progress in each of our three businesses.  These results are 
> a testament to the steadfast commitment of our people, who are working hard to
> ensure high quality and affordable medicines are available to patients throughout
> the COVID-19 pandemic.  Our performance demonstrates the breadth and resilience
> of our portfolio, as well as the vital role of the generic medicines we supply.
> We have a positive outlook for each of our three businesses and look forward to
> the second half with confidence.”

**Further information:**

An analyst presentation will be available at www.hikma.com at 0800 BST this morning
and management with host a Q&A for sellside analysts at 0930 BST. A recording of
the Q&A will be made available on the website. For further information please contact
Tiina Lugmayer – Tiina@hikma.uk.com.

**Response to COVID-19**

Hikma makes hundreds of important and affordable medicines that save lives and improve
the health of millions of people every day. This has never been more important. 
As the COVID-19 pandemic continues to impact people and communities around the world,
the health and safety of our people, and the millions who count on our medicines
remain our top priority.

We are fully committed to providing our customers and their patients the quality
medicines they need and have prioritised the manufacture of medicines that have 
been in highest demand, such as respiratory, pain, anaesthetics and sedatives.  
Where necessary, we have been operating at the highest capacity possible under the
circumstances to meet the increased demand we have experienced.

Due to the nature of our business, our manufacturing sites are already very hygienic,
or sterile where required, and staff in those facilities follow a strict hygiene
regime. However, we are regularly undertaking additional levels of cleaning in all
of our facilities and offices as a further precautionary measure.

We have been proactively managing our inventory and stock levels, transportation
options and the availability of raw materials and component parts. We continue to
work closely with our supplier networks and have not encountered any supply chain
issues to date.

Our long-standing commitment to our local communities remains strong and we have
been providing funding, medicine donations, food and other essentials.

We are grateful to our teams across Hikma for their commitment to the needs of front-
line hospitals, doctors, pharmacists and patients during this very difficult time.
This is a complex situation which we are continually monitoring, and we are committed
to the health of our people, and the needs of our customers.

**Business and financial review**

The business and financial review set out below summarises the performance of the
Group and our three main business segments, Injectables, Generics and Branded, for
the six months ended 30 June 2020.

**Group**

| **$ million ** | ** H1 2020** | **H1 2019** | **Change** | **Constant currency change** | 
| Revenue | 1,132 | 1,047 | 8% | 8% | 
| Core revenue | 1,132 | 1,043 | 9% | 9% | 
| Gross profit | 602 | 548 | 10% | 10% | 
| Core gross profit | 602 | 544 | 11% | 10% | 
| Core gross margin | 53.2% | 52.2% | 1.0pp | 0.8pp | 
| Operating profit | 297 | 238 | 25% | 26% | 
| Core operating profit | 284 | 246 | 15% | 16% | 
| Core operating margin | 25.1% | 23.6% | 1.5pp | 1.6pp | 
| EBITDA | 328 | 297 | 10% | 11% | 
| Core EBITDA | 328 | 288 | 14% | 15% |

Group core revenue grew 9% to $1,132 million (2019: $1,043 million).  Group core
gross profit grew 11% to $602 million (H1 2019: $544 million), reflecting growth
in all three businesses and particularly the strong performance from Injectables.
Group core gross margin was 53.2% (H1 2019: 52.2%).

Group operating expenses were $305 million (H1 2019: $310 million).  Excluding adjustments
related to the amortisation of intangible assets (other than software) of $21 million(
H1 2019: $17 million) and net income from exceptional items of $34 million (H1 2019:
$5 million), Group core operating expenses were $318 million (H1 2019: $298 million).

Selling, general and administrative (SG&A) expenses were $251 million (H1 2019: 
$237 million). Excluding the amortisation of intangible assets (other than software)
and exceptional items, core SG&A expenses were $229 million (H1 2019: $216 million),
up 6%, in part related to higher legal and professional fees. The impact of COVID-
19 on SG&A expenses was broadly neutral with related increases in employee benefits
offset by lower marketing and travel costs.

Research and development (R&D) expenses were $62 million (H1 2019: $72 million).
Excluding exceptional items,^(6) core R&D expenses were $62 million (H1 2019: $58
million).  This reflects increased investment in R&D programmes across our businesses,
as we build our pipeline of more complex products. 

Other net operating income was $6 million (H1 2019: $(1) million expense).  Excluding
exceptional items,^(7) core other net operating expenses were $29 million (H1 2019:
$24 million), which primarily comprised inventory related provisions and foreign
exchange-related costs.

The Group reported operating profit of $297 million (H1 2019: $238 million).  Excluding
the impact of amortisation (other than software) and exceptional items, core operating
profit increased by 15% to $284 million (H1 2019: $246 million) and core operating
margin was 25.1% (H1 2019: 23.6%).

**Injectables**

| **$ million** | **H1 2020** | **H1 2019** | **Change** | **Constant currency change** | 
| Revenue | 485 | 432 | 12% | 13% | 
| Core revenue | 485 | 428 | 13% | 14% | 
| Gross profit | 290 | 258 | 12% | 13% | 
| Core gross profit | 290 | 254 | 14% | 15% | 
| Core gross margin | 59.8% | 59.3% | 0.5pp | 0.7pp | 
| Operating profit | 192 | 160 | 20% | 21% | 
| Core operating profit | 204 | 167 | 22% | 23% | 
| Core operating margin | 42.1% | 39.0% | 3.1pp | 3.3pp |

Injectables core revenue increased by 13% to $485 million (2019: $428 million). 
In constant currency, Injectables core revenue grew by 14%. 

US Injectables core revenue grew 10% to $347 million (H1 2019: $317 million), reflecting
strong demand for our in-market products, particularly those used in the treatment
of COVID-19. These sales, as well as growth from recent launches, more than offset
increased competition on certain products and lower demand as a result of a slow
down in elective surgeries.

MENA Injectables revenue was $75 million, up 25% (H1 2019: $60 million).  In constant
currency, MENA Injectables revenue increased by 23%, reflecting good demand across
our portfolio and continued growth of our biosimilar products.

European Injectables revenue was $63 million, up 24% (H1 2019: $51 million).  In
constant currency, European Injectables revenue increased by 27%, reflecting a good
performance from new launches, an increase in demand related to COVID-19 and higher
demand for contract manufacturing.

Injectables core gross profit increased by 14% to $290 million (H1 2019: $254 million)
and core gross margin increased to 59.8% (H1 2019: 59.3%), primarily reflecting 
the change in product mix in the US and increased opportunities to capture additional
market share by leveraging our broad portfolio and flexible manufacturing.

Injectables core operating profit, which excludes the amortisation of intangible
assets (other than software) and exceptional items,^(8) was $204 million (H1 2019:
$167 million).  Core operating margin was 42.1% (H1 2019: 39.0%), reflecting the
increase in gross profit and stable operating expenses.

During H1 2020, the Injectables business launched 6 products in the US, 17 in MENA
and 18 in Europe.  We submitted 150 filings to regulatory authorities across all
markets.  This primarily reflects our efforts to expand our EU portfolio and register
products in new EU markets. We further developed our portfolio through new licensing
agreements, including an exclusive licensing and distribution agreement for the 
MENA region with Sun Pharmaceuticals for ILUMYA^(TM), an innovative biologic product.

In recent years, we have invested significantly to expand our Injectables manufacturing
capacity and to improve our capabilities.  During the period, we announced that 
we have received US FDA approval for the first product from our new high containment
facility in Portugal, which can now begin to supply the US market. 

This increased manufacturing capacity is enabling us to better supply the US and
EU markets with both our own products and those of our third party contract manufacturing
customers.  In particular, we have signed a non-exclusive supply agreement with 
Gilead Sciences, Inc. to manufacture remdesivir for injection.  Remdesivir is an
investigational drug that has been granted conditional marketing authorisation in
the EU and emergency use authorisation in the US for the treatment of COVID-19. 

We now expect our Injectables business to deliver revenue of between $950 million
and $980 million, reflecting our strong performance in the first half of the year
and expectations for continued demand for COVID-19 related products. We expect core
operating margin to be in the range of 38% to 40%.

**Generics**

| **$ million** | **H1 2020** | **H1 2019** | **Change** | 
| Revenue | 369 | 368 | 0% | 
| Core revenue | 369 | 368 | 0% | 
| Gross profit | 178 | 168 | 6% | 
| Core gross profit | 178 | 168 | 6% | 
| Core gross margin | 48.2% | 45.7% | 2.5pp | 
| Operating profit | 102 | 88 | 16% | 
| Core operating profit | 72 | 71 | 1% | 
| Core operating margin | 19.5% | 19.3% | 0.2pp |

Generics revenue was $369 million (H1 2019: $368 million).  We saw good demand for
our in-market products and had a better than expected contribution from new launches
in the period, including the first-to-market generic launch of everolimus tablets(
a generic version of Zortress^(®)).  We also saw some additional demand related 
to COVID-19.  This was offset by increased competition on certain other products.

Generics core gross profit grew 6% to $178 million (H1 2019: $168 million) and core
gross margin increased to 48.2% (H1 2019: 45.7%).  This improvement was primarily
a result of a change in product mix. 

Generics operating profit increased to $102 million (H1 2019: $88 million) and Generics
core operating profit, which excludes the amortisation of intangible assets (other
than software) and exceptional items,^(9  )increased by 1% to $72 million (H1 2019:
$71 million).  Exceptional items include a $34 million impairment reversal of specific
product related intangibles related to the Columbus business, which reflects a better
than expected performance of certain marketed products.  Core operating margin increased
to 19.5% (H1 2019: 19.3%), reflecting the improvement in gross profit, which was
largely offset by higher legal fees and inventory related provisions. 

During H1 2020, we launched 3 products from our R&D pipeline.  Our launches included
generic Zortress^(®) and generic Afinitor^(®), which have performed well to date.
As previously announced, we successfully invalidated six US patents as asserted 
by Amarin for their Vascepa^(®) capsules.  We also received US FDA approval for 
our generic Vascepa^(®) and continue to evaluate our options for launch.  Our submission
for generic Advair Diskus^(®) remains under review by the US FDA and we expect to
receive a response and launch in the second half of the year.

We now expect Generics revenue to be in the range of $720 million to $760 million
and core operating margin to be around 21% for the full year.  Our guidance includes
$20 million to $40 million from generic Advair Diskus^(®), which we continue to 
expect to launch in the second half of the year.  If we do not launch generic Advair
Diskus^(®) in 2020, we would now expect the core operating margin for the Generics
business to be between 17% and 19%. 

**Branded**

| **$ million** | **H1 2020** | **H1 2019** | **Change** | **Constant currency change** | 
| Revenue | 275 | 242 | 14% | 13% | 
| Core revenue | 275 | 242 | 14% | 13% | 
| Gross profit | 133 | 120 | 11% | 9% | 
| Gross margin | 48.4% | 49.6% | (1.2)pp | (1.8)pp | 
| Operating profit | 46 | 31 | 48% | 52% | 
| Core operating profit | 51 | 49 | 4% | 6% | 
| Core operating margin | 18.5% | 20.2% | (1.7)pp | (1.2)pp |

On a reported basis, Branded revenue was $275 million, up 14% (H1 2019: $242 million).
On a constant currency basis, Branded revenue increased 13%. 

Our largest markets, Saudi Arabia and Egypt, performed well, reflecting good demand
for our marketed products.  Algeria delivered a strong performance, recovering from
lower sales in 2019 due to political and economic disruptions. We also delivered
a good performance across most of our other MENA markets and saw a good contribution
from new launches.  While we did see some disruptions across our MENA markets related
to COVID-19, including a reduction in demand for pharmacy products such as anti-
infectives, this was offset by an overall resilient performance from the broader
portfolio.

During H1 2020, the Branded business launched 34 products and submitted 43 filings
to regulatory authorities.  Several of these launches were carried out virtually,
with much of our promotional activity moving away from in-person interaction during
the period due to social distancing measures.  Revenue from in-licensed products
represented 46% of Branded revenue (H1 2019: 36%), reflecting a pull-forward of 
demand for certain products.

Branded gross profit was $133 million, up 11% (H1 2019: $120 million) and gross 
margin was 48.4% (H1 2019: 49.6%).  In constant currency, gross profit increased
by 9% and gross margin was 47.8% (H1 2019: 49.6%). The decline in gross margin primarily
reflects a change in product mix.

Core operating profit, which excludes the amortisation of intangibles (other than
software) and exceptional items,^(10) was $51 million, up 4% (H1 2019: $49 million),
and core operating margin was 18.5% (H1 2019: 20.2%).  This margin reduction reflects
lower gross margin, foreign exchange losses and a slight increase in operating expenses.
In constant currency, core operating profit grew 6% and core operating margin was
19.0% (H1 2019: 20.2%).  _  _

As anticipated, we continue to expect full year Branded revenue growth of mid-single
digits in constant currency.

**Other businesses**

Other businesses primarily comprise Arab Medical Containers, a manufacturer of plastic
specialised medicinal sterile containers, International Pharmaceuticals Research
Centre (IPRC), which conducts bio-equivalency studies and Hikma Emerging Markets
and Asia Pacific FZ LLC.  These businesses contributed revenue of $3 million (H1
2019: $5 million), reflecting the temporary closure of IPRC due to COVID-19. These
other businesses made zero operating profit in the period (H1 2019: $(1) million
loss). This slight improvement in profitability is primarily due to the 2019 closure
of our emerging markets division as we focus on our core markets, in line with our
strategy. 

**Research and development**

Our investment in R&D and business development enables us to continue expanding 
the Group’s product portfolio.  During H1 2020, we had 78 new launches and received
79 approvals.

|   | **H1 2020 submissions^(11)** | **H1 2020 approvals^(11)** | **H1 2020 launches^(11)** | 
| Injectables |   |   |   | 
| US | 3 | 5 | 6 | 
| MENA | 14 | 17 | 17 | 
| Europe | 133 | 6 | 18 | 
| Generics | 0 | 7 | 3 | 
| Branded | 43 | 44 | 34 | 
| **Total** | **193** | **79** | **78** |

To ensure the continuous development of our product pipeline, we submitted 193 regulatory
filings.

**Net finance expense**

Reported net finance expense was $23 million (H1 2019: $10 million). Core net finance
expense was $19 million (H1 2019: $22 million) primarily due to a reduction in interest
rates across our markets. 

We continue to expect core net finance expense to be around $47 million in 2020.

**Profit before tax**

Reported profit before tax was $274 million (H1 2019: $226 million). Core profit
before tax was $265 million (H1 2019: $225 million), reflecting the strong performance
of our three business segments. 

**Tax**

The Group incurred a tax expense of $62 million (H1 2019: $41 million). Excluding
the tax impact of exceptional items, the Group core tax expense was $60 million 
in H1 2020 (H1 2019: $49 million). The core effective tax rate for H1 2020 was 22.6%(
H1 2019: 21.8%).  We continue to expect the Group´s core effective tax rate to be
around 22% to 23% for the full year.

**Profit attributable to shareholders**

Profit attributable to shareholders was $212 million (H1 2019: $185 million).  Core
profit attributable to shareholders increased by 17% to $205 million (H1 2019: $
176 million).

**Earnings per share**

Basic earnings per share was 87.6 cents (H1 2019: 76.4 cents).  Core basic earnings
per share increased by 17% to 85.3 cents (H1 2019: 72.7 cents) and core diluted 
earnings per share increased by 17% to 84.8 cents (H1 2019: 72.4 cents). 

**Dividend**

The Board is recommending an interim dividend of 16 cents per share (approximately
12 pence per share) (H1 2019: 14 cents per share). The interim dividend will be 
paid on 21 September 2020 to eligible shareholders on the register at the close 
of business on 21 August 2020.

**Net cash flow, working capital and net debt**

The Group generated operating cash flow of $292 million (H1 2019: $187 million).
Group working capital days were down 4 days to 227 days, primarily driven by strong
sales in the US.

Cash capital expenditure was $66 million (H1 2019: $48 million).  In the US, $38
million was spent upgrading equipment and adding new technologies for our Generics
and Injectables businesses.  In MENA, $22 million was spent strengthening and expanding
manufacturing capabilities. In Europe, we spent $6 million, expanding our facilities
in Portugal. We expect Group capital expenditure to be around $120 million in 2020–
the lower end of our previous guidance range.

The Group’s total debt increased to $927 million at 30 June 2020 (31 December 2019:
$685 million). This increase reflects the full utilisaton of the Group´s $150 million
International Finance Corporation facility and its purchase of 12.8 million ordinary
shares from Boehringer Ingelheim (BI) for $371 million, in connection with BI´s 
disposal of its 16% stake in Hikma, which was paid for through a combination of 
cash and existing facilities.

During the period, the Group used its revolving credit facility to repay its $500
milion Eurobond, which came due in April.  Post the period-end, the Group issued
a new five year $500 million Eurobond, which carries an annual coupon of 3.25%.

The Group’s cash balance was $416 million (31 December 2019: $443 million).  The
Group’s net debt  was $511 million at 30 June 2020 (31 December 2019: $242 million).
^(12) We continue to have a very strong balance sheet with a net debt to core EBITDA
ratio of 0.8x. 

**Balance sheet**

Net assets at 30 June 2020 were $1,900 million (31 December 2019: $2,129 million),
reflecting the impact of the share buy back in the period.  Net current assets increased
to $808 million (31 December 2019: $377 million) due to a change in the debt maturity
profile as a result of the repayment of the Eurobond during the period.

**Outlook for 2020**

We now expect our Injectables business to deliver revenue of between $950 million
and $980 million for the full year, reflecting our strong performance in the first
half of the year and expectations for continued demand for COVID-19 related products.
This compares with previous guidance of low to mid-single digit growth, We now expect
core operating margin to be in the range of 38% to 40%, up from our previous guidance
of 35% to 37%.

We now expect Generics revenue to be in the range of $720 million to $760 million,
up from $700 million to $750 million, and core operating margin to be around 21%
for the full year, up from 20%.  Our guidance includes $20 million to $40 million
from generic Advair Diskus^(®), which we continue to expect to launch in the second
half of the year. If we do not launch generic Advair Diskus^(®) in 2020, we now 
expect the core operating margin for the Generics business to be between 17% and
19%, up from 16% to 18%. 

We continue to expect Branded revenue to grow in the mid-single digits in constant
currency in 2020.

We expect Group net finance expense to be around $47 million in 2020 and the core
effective tax rate to be around 22% to 23%.  We expect Group capital expenditure
to be around $120 million.

**Responsibility statement**

We confirm that to the best of our knowledge:

·   the condensed consolidated set of financial statements has been prepared in 
accordance with IAS 34 Interim Financial Reporting as adopted by the European Union
and as issued by the International Accounting Standards Board, and;

·   the interim results announcement includes a fair review of the information required
by:

a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of 
important events that have occurred during the first six months of the financial
year and their impact on the condensed set of financial statements; and a description
of the principal risks and uncertainties for the remaining six months of the financial
year; and

b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions
that have taken place in the first six months of the current financial year and 
that have materially affected the financial position or performance of the enterprise
during that period; and any changes in the related party transactions described 
in the last annual report that could do so.

By order of the Hika Pharmaceuticals Board

Sigurdur Olafsson Chief Executive Officer 6 August 2020

Khalid Nabilsi Chief Financial Officer 6 August 2020

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