Hikma Pharmaceuticals (LSE: HIK),Shire (LSE: SHP) andSkyePharma (LSE: SKP) are three of the most exciting biotechs trading on the London market today.
All three companies have achieved astounding returns for shareholders during the past few years, and all three have rosy outlooks, as they gofrom strength to strength.
However, the shares of Hikma, Shire and SkyePharma arent cheap. As these companieshavegone from strength to strength, investors have been willing to pay a premium to get in on the action.
Shireis the cheapest of the three. The company trades at a forward P/E of 18.5. SkyePharma trades at a forward P/E of 24 and Hikma trades at a forward P/E of 28.4.
But the big question is,should investors be paying such a hefty? Would long-term investors be better off buyingAstraZeneca (LSE: AZN),which currently trades at a forward P/E of 15.2, but is struggling with fallingsales.
Trouble brewing
Over the past two years, Hikma and Shire have drastically outperformed the FTSE 100 by 125% and 90% respectively but this outperformance is unlikely to continue. Indeed, investors as a group are now becoming more cautious about where they invest in the biotech sector, and many are shying away from the companies trading at a premium to the sector as a whole.
Whats more, these a growing chorus of lawmakers who are calling for price caps on specialistdrugs produced by the likes of Shire, and to a lesser extent, Hikma. Its unclear how regulation of drug prices would affect these companies directly, although its clear that price caps would make investors think twice about paying a premium price for the shares of the companies affected.
Put simply, as the threat of regulation grows, Shire and Hikmas upside could be limited.
Waiting for growth
Astras shares have fallen 3.2% year to date and investors are clearly apprehensiveabout the companys prospects. Astras earnings are set to shrink 2% this year, and around 30% of group sales come from three drugs, which Astra is set to lose the exclusive manufacturing rights for by 2017 at the latest.
However, for investors with a long-term outlook Astra could be one of the best bets in the pharma sector. The company is expected toreturn to growth by 2017, and the group has119 projects in its clinical development pipeline. And while investors are waiting for Astra to return to growth, the companys forward dividend yield of 4.4% provides an attractive level of income for investors.
Set for rapid growth
SkyePharmas growth is only just starting. The company isploughingcash into R&D, and it already hasseveral new products set to hit the market during the next few years.These include SKP-2075, for chronic obstructive pulmonary disease and Soctec, a concept for a novel, proprietary gastro-retentive drug delivery platform. R&D spendingtotaled0.5m during 2013 but has risen twenty-fold. R&D spending is expected to hit 10m during 2015.
According to City forecasts, SkyePharmas earnings per share are expected to increase 43% next year. Based on this projection the company trades at a 2016 P/E of 15.6.
The Motley Fool’s top analysts are so excited about SkyePharma’s outlook that they’ve labeled it as one of themarket’stop small caps. What’s more, our analysts believe that the company’s shares could jump by as much as 45%!
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Rupert Hargreaves owns shares of AstraZeneca. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.