Hikma Pharmaceuticals is one of the biggest UK biotech stocks, only trailing giants like AstraZeneca and GlaxoSmithKline. Hikma was founded in 1978. Over the years, it has been able to establish itself as an industry leader, focusing on manufacturing non-branded generic and licenced pharmaceutical products.

However, the past few months haven’t been pretty for the firm, with the Hikma share price falling 24% year-to-date. It has also fallen around 30% in the past year. It has underperformed the wider FTSE 100 index during this period by a wide margin.

There have been several factors behind this decline. Firstly, in the recent trading update, it was announced that the company’s treatment for narcolepsy would be delayed until late 2022 or early 2023. This will impact the performance of Hikma’s Generics division this year. Indeed, revenues are now expected to total around $730m, against previous guidance of $820m. Operating margins in this division are also expected to be around 20%, falling from previous estimations of 24%.

Secondly, the Generics business is also expected to be hit by increased competition and a challenging pricing environment. As the division contributes towards around 32% of the firm’s revenues, this is a major issue.

Despite these worries, the company has good prospects. Indeed, the delay to the narcolepsy drug doesn’t affect its long-term outlook as it simply shifts the revenue and profit contribution from the drug to the first half of 2023, instead of 2022.

In addition, Hikma’s other divisions are performing well, which should offset the current disruptions in Generics. For example, injectables revenue is expected to grow in the mid-to-high single-digits, which is higher than previous expectations of low-to-mid single-digits. As the injectables business contributes 41% of the group’s revenues, this is great news.

Finally, the company’s high return to shareholders is impressive. For example, in 2021, its dividend totalled 54 cents per share, around a 3% dividend yield. Although this isn’t among the highest in the FTSE 100, it remains a compelling reason to buy, especially as it’s very well covered by profits. The group also has a share buyback programme of $300m running throughout 2022, which suggests that the Hikma share price may be undervalued.