Shire Pharmaceuticals (SHP) has positioned itself as the plucky newcomer in the UK pharmaceutical scene with a portfolio of fast-growing specialist medicines that put it ahead of its more traditional competitors. The company has built its reputation by avoiding the large-scale research and development budgets common at other big pharmaceutical companies and by building up a stable of proven and tested medicines that it can sell aggressively in developed markets. However, recent disappointments have resulted in the shares now trading at a 21 per cent discount to their five-year average forward PE. We believe that the situation is not as desperate as that rating suggests and that plans set out by Shire's new chief executive should address the market's growth fears over the coming year.
- New boss takes the reins
- Re-organisation under way
- Emerging markets a priority
- Share buy-back
- Acquisition risks
- Generics threat
Many believed Shire's strategy would perpetually deliver the mid-teen EPS growth that had propelled the shares to a premium share rating in the UK. However, the story has started to look more nuanced this year as the earlier onset of generic competition to key products proved to be a drag on its attention deficit disorder franchise and the recent first-quarter results demonstrated a distinct lack of momentum - full-year sales growth was downgraded to mid to high single digits.
Shire is currently suffering due to a number of product-related problems that have combined to hold back its sales growth. Chief among these is the incredibly disappointing Dermagraft, a treatment for diabetes-related ulcers, bought in 2011 by the previous management, and whose sales fell 62 per cent in the first quarter. In addition, it faced renewed competition to its specialist medicines portfolio from a resurgent Sanofi-Aventis, which has managed to solve its long-running manufacturing problems in the US.
Overall, new chief executive Flemming Ørnskov might be tempted to look at his in-tray after his first few weeks in the job and wonder why he left the relative comfort of Bayer. However, the Danish doctor has set out his stall right from the beginning of his tenure by scrapping Shire's early-stage research projects to focus on late-stage products, and he is reorganising the company into five clear therapeutic divisions. The reorganisation should help return various specialist products to growth without them being swamped within a broader portfolio of medicines and should end the anomaly where one or two products grab the lion's share of marketing resources.
SHIRE PHARMACEUTICALS (SHP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,870p | MARKET VALUE: | £10.4bn | |
| TOUCH: | 1,870-1,872p | 12M HIGH: | 2,173p | LOW:1,682p |
| DIVIDEND YIELD: | 0.8% | PE RATIO: | 11.6 | |
| NET ASSET VALUE: | 681¢ | NET CASH: | $342m | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 3.12 | 0.76 | 108 | 13.1 |
| 2011 | 4.26 | 1.09 | 157 | 15.1 |
| 2012 | 4.68 | 0.91 | 134 | 17.3 |
| 2013* | 4.94 | 1.56 | 224 | 19.0 |
| 2014* | 5.24 | 1.68 | 251 | 22.0 |
| % change | +6 | +8 | +12 | +16 |
NMS: 1,000 Matched bargain trading Beta:0.68 *Deutsche Bank forecasts profits and earnings not comparable £1=$1.55 | ||||
Mr Ørnskov has also gone much further in outlining how Shire intends to break into emerging markets. The company has always been very US-centric, partly because this is where it finds the greatest acceptance for its attention deficit disorder products. Shire will now open a new office in Brazil, and China has been flagged up as a priority.
One area Mr Ørnskov is unlikely to change is Shire's traditional acquisitiveness. For example, in the first quarter it has branched out into eyecare with the purchase of SARcode Bioscience for $150m (£96m) and Swedish company Premacure for $31m - Mr Ørnskov's own medical background is the treatment of eye diseases - which should help broaden its product base without sacrificing profitability.
True, Shire has its share of problems, not least - as the case of Dermagraft proves - that an aggressive acquisition strategy can throw up its share of failures. Dermagraft only failed on the basis that it didn't work with certain types of hard-to-treat venous ulcers, so it wasn't a complete disaster, but venturing so far away from Shire's normal area of expertise in specialist pharmaceuticals is a lesson that must be heeded. Shire is also subject to the increasing rise of generic competition, but it has until at least 2016 before this starts to seriously threaten its core products.
