A Shire set to grow

This week's beauty parade of the UK's biggest pharmaceuticals companies produced a definite winner. AstraZeneca, by general agreement, looks decidedly shaky unless it can find some new drugs; yet its dividend payout and share buyback programme are exceptionally generous. GlaxoSmithKline looks promising as it starts to see the benefits of its turnaround strategy; although surely there is only so far it can go by relying on toothpaste and energy drinks. No, the real winner of the parade was Shire, which broke the barrier of $1bn sales in a trading quarter for the first time.

Shire's performance in the first half of 2011 lent credence to the view that, among the big three, its shares are the only ones that can be labelled growth. First-half sales grew by 22 per cent to $2.03bn. They were propelled by products that meet Shire's liking for hard-to-copy specialist medicines; for example, enzyme replacement product Replagal (sales up 50 per cent to $225m), and ulcerative colitis treatment Lialda (sales up 40 per cent £186m). Even off-patent products, such as Adderall XR, which treats hyperactivity, did better than expected with fewer rebates helping to boost the numbers. Much of the sales growth fed through to pre-tax profits, which were 23 per cent higher at $532m, making Shire's profits the fastest growing of the UK's pharma majors by some distance.

Acquisitions are likely to play an important role in Shire's growth, and the $750m acquisition earlier this year of Advanced Biohealing (ABH) shows management's preference for niche areas with few competitors. The ABH deal will add about 20 per cent to administration costs in the short term, as well as some dilution to profit margins. But management believes that ABH's Dermagraft product has the potential to add $500m to sales. In addition, there is the second half US launch of Firazyr, to treat hereditary angiodema (skin inflammation), to come and at least two additional enzyme replacement therapies with $500m of sales potential (for Hunter syndrome and Duchenne muscular dystrophy). And, compared with the other pharma majors, Shire has few worries about the effects of patents expiring.

Shire's overall business has a balanced look, with attention-deficit disorder drugs delivering steady cash flow, while the enzyme replacement therapies are wonderfully profitable - a year's treatment for these specialist drugs can cost up to $100,000. The strong patent protection on these products means manufacturers of generic drugs will be hard-pressed to copy them.

Shire also has an advantage in that it has never employed large numbers of sales people to get its products accepted by GPs. It concentrates instead on selling to specialists. This is reflected in a far lower proportion of advertising costs to sales compared with other pharma giants. For example, US giant Pfizer spends about 6 per cent of its $67bn turnover on advertising; Shire, by contrast, spent only £93m in 2010, or 3 per cent of its revenues.