Hikma funding needs prompt downgrade

Jordanian company prefers to grow through acquisition

The Jordanian company Hikma Pharmaceuticals, which is listed in Dubai and London, prefers to grow through acquisition. As the company strengthens its presence across the MENA region's markets, the probability of Hikma issuing new shares to fund its shopping spree has risen. The subsequent danger of dilution to shareholding has convinced analysts at Morgan Stanley to cut the firm's rating from "overweight" to "equal-weight", and recommend a target range of Hikma's shares on the London Stock Exchange between 700 pence and 750 pence. "While the balance sheet can accommodate US$300 million of debt finance we believe the probability of Hikma's needs to issue equity to entice sellers to the table has increased," Peter Verdul, an analyst at Morgan Stanley, wrote in a research note. "Given recent share price strength and risk of dilution, we look for more attractive entry points."

But investors have been encouraged by the fundamental strength of the company. Hikma shares rose as much as 1.3 per cent in London trade yesterday, where the shares were up close to 50 per cent since June 22 last year. On NASDAQ Dubai, where the firm is primarily listed, it closed unchanged yesterday at $19.99, just a notch below where it traded at the start of this month. The downside for investors is that Morgan Stanley does not see major scope for earning upgrades for Hikma. The analyst sees a pricing pressure and increasing competition as major threat.

The firm in April acquired a 50 per cent stake in the Algerian firm Al Dar Al Arabia Pharmaceutical and in March raised its interest in Industries Pharmaceutiques Ibn Al Baytar, a Tunisian drug maker, to 66 per cent of the issued share capital. Hikma has a 3.7 per cent market share across MENA and is posting double-digit growth. "The focus for management is gaining entry into Morocco and increasing its presence in Egypt. The assets being sought are privately held with the onus on Hikma to persuade the owners to sell," Morgan Stanley noted.