Join our community of smart investors

The time is ripe to buy Shire

Shire's shares have fallen heavily since it announced its interest in rival drugs group Baxalta, creating an opportunity to buy the shares at a great price.
March 17, 2016

There is a great deal of uncertainty surrounding speciality pharma group Shire's (SHP) proposed acquisition of US-based Baxalta. Since Shire made its initial bid approach last August, its share price has fallen 18 per cent compared with a 2.5 per cent decline by the the FTSE 100 pharma sector. We think this has created an excellent buying opportunity and believe the market could quickly wake up to the value on offer once the current bid process comes to an end - regardless of whether the deal goes ahead or not.

IC TIP: Buy at 3830p
Tip style
Growth
Risk rating
High
Timescale
Short Term
Bull points
  • Strong pipeline of products
  • Two successfully integrated acquisitions that will enhance earnings
  • Shares trading at low rating
  • Potential to generate $20bn revenue by 2020
Bear points
  • Waiting on green light for acquisition
  • Threat from competition

Shire revealed its interest in a tie-up with Baxalta last August, only a month after the target group was spun out of US giant Baxter. Shire's approach was rebuffed, causing chief executive Flemming Ornskov to go straight to Baxalta's shareholders with a $32bn (£22.3bn) cash and stock deal. But the deal is yet to get the green light from Shire's shareholders, who have raised concerns over the price (which values Baxalta's shares at a 37 per cent premium to their August share price) and the large cash component. As the combined group will create the world's largest rare diseases focused pharmaceutical company, Shire is also waiting on approval from the Competition Markets Authority (CMA).

 

 

But we are of the opinion that whether the deal goes through or not (and we expect to know by the summer), Shire is in a good position. In 2015, the group generated record levels of sales, driven by a $1.7bn contribution from Vyvanse. This drug, which was initially marketed for the treatment of attention deficiency hyperactivity disorder (ADHD), has recently tapped into the adult market due to its approval as a treatment for binge eating disorder. The pipeline is also progressing well, particularly for the new ophthalmology franchise which centres on dry-eye treatment Lifitegrast. Following good clinical trial results for this drug, Shire has applied for Food and Drug Administration (FDA) approval for the commercialisation of the product in the US, with results expected in July.

Shire, like many big pharma companies, has been no stranger to the threat of competition from cheaper alternatives to its drugs. But any severe loss of revenue has been sidestepped by two multi-billion dollar acquisitions in the year. While this provides us with confidence in Shire's ability to successfully identify and integrate acquisitions, Baxalta is also likely to come under competitive pressures. Shareholders have flagged up concerns that the group's haemophilia products, which in 2015 generated $2.8bn of revenue, will imminently face competition. However, the complexities of the disease means that patients are more likely to stick with trusted drugs and therefore Baxalta's dominant market position is less likely to be impacted by new products. However with the haemophilia products generating just under half of total group revenue, the threat of competition does add to the risk of the acquisition.

Shire has stated that it anticipates that the Baxalta deal will help it grow revenue to $20bn by 2020. Analysts are also bullish on their forecasts for the combined group, anticipating that though initially dilutive, Baxalta will be earnings enhancing by 2017. Broker Cantor Fitzgerald anticipates that post-acquisition Shire will see adjusted EPS rise to 525.2ȼ in 2017, valuing the shares at just 10 times forward earnings, which looks extremely cheap for a company with Shire's track record and prospects.

SHIRE (SHP)
ORD PRICE:3,830pMARKET VALUE:£22.7bn
TOUCH:3,829-3,830p12-MONTH HIGH:5,870pLOW:L 3,423p
FORWARD DIVIDEND YIELD:0.6%FORWARD PE RATIO:11
NET ASSET VALUE:1659ȼ*NET DEBT15%

Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)**Earnings per share (ȼ)**Dividend per share (ȼ)
20135.021.2424419.9
20146.023.3435422.9
20156.421.3939026.4
20167.191.4842032.0
20178.032.0851834.0
% change+12+41+23+6

Normal market size: 300

Matched bargain trading

Beta: 0.9

*Includes intangible assets of $13.3bn, or 2,248ȼ a share

** JPMorgan Cazenove forecasts, adjusted PTB and EPS figures

£1=$1.43