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

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Hikma Pharmaceuticals PLC (LON:HIK), the multinational pharmaceutical company, has reported its interim results for the six months ended 30 June 2020.

Highlights:

Core results¹ (underlying) $ million	H1 2020	H1 2019	Change	Constant currency² 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 currency² 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 – [email protected].

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.

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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,⁹increased 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 submissions¹¹	H1 2020 approvals¹¹	H1 2020 launches¹¹
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