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Time to buy recovering Shire

The fast-growing pharma group has had a tough 2016, but we expect a recovery early next year
December 15, 2016

It's been a tough year for the pharmaceutical industry. Although it certainly emerged a winner from political upsets on both side of the pond, sentiment is still poor due to negative drugs-pricing rhetoric and a dearth of new product launches. Indeed, the MSCI World Pharma and Biotech Index is down 14 per cent since the start of the year. However, we think 2017 could bring clarity on some key issues aiding a recovery, and UK-listed rare-disease specialist Shire looks in a prime position to benefit.

IC TIP: Buy at 4344p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Incredibly strong drugs pipeline
  • Recent earnings-enhancing acquisitions
  • 'Blockbuster' drug potential
  • Low rating
Bear points
  • Drugs pricing controversy
  • Baxalta acquisition costs

Shire (SHP) has been one of the casualties of the year, which we think also makes it one of the stocks most likely to benefit from a recovery in sentiment. Even as 2016 got under way, the acquisitive company faced negative sentiment based on concerns over its mega $32bn Baxalta takeover. More recently, the company's high proportion of US earnings, exposure to areas of medicine that have attracted extensive pricing negativity and an uncharacteristic quarterly earnings miss have come at a cost. But we see share price weakness as an excellent buying opportunity for a company with great long-term prospects. With its shares trading at just 11 times 2017 forecast earnings, it is cheaper than all but AstraZeneca (AZN) and AbbVie (us: ABV) in the US. And yet forecasts by a number of city analysts suggest Shire can achieve a double-digit compound annual earnings growth rate all the way out to 2020.

A considerable amount of that growth is expected to come from new drugs, courtesy of the Baxalta haemophilia franchise. Broker JPMorgan expects Baxalta's "heritage" products alone to contribute $6.6bn of revenue in 2017. Shire is looking to expand the potential of the global haemophilia marketplace by helping increase diagnosis (only a quarter of haemophilia patients are diagnosed globally at present) and encouraging patients to use repeat prescription preventative treatments rather than taking a one-off pill after a bloodclot appears. There is also an opportunity for expansion into the personalised medicine market with recently launched drug Adynovate. The drug has already captured two-thirds of the patient population prescribed with long-acting haemophilia treatments in the US and launch into paediatric and surgical markets in 2017 should enhance sales.

Although there have been some concerns that the high price of haemophilia drugs may soon be targeted by regulators, we don't think this will affect Shire's products and clarity on the matter next year should help sentiment. Prices here are relatively modest compared with many other rare disease drugs and switching haemophilia patients to cheaper drugs can cause substantial safety issues. Safety concerns could also play in Shire's favour when it comes to the competitive advances of ACE910 - a new experimental drug developed by Swiss group Roche - which is regarded as a major potential threat but has recently reported unwanted side-effects in a late-stage clinical trial.

Aside from the new products brought in with the acquisition, Shire's legacy portfolio remains solid. In recent third-quarter results, sales of the group's two top-selling drugs, Vyvanse and Lialda, grew at 20 per cent and 8 per cent, respectively - ahead of analyst expectations. Newly launched dry eye treatment Xiidra has performed well to date and broker JPMorgan expects peak annual sales of $1.7bn, which would make it a so-called "blockbuster". Meanwhile, supply issues for Cinryze have been resolved.

But, despite a solid top-line performance, third-quarter earnings came in below expectations. Although shareholders initially responded badly to this, we don't feel this should prove a major concern as the company has also said it expects full-year earnings to come in at the top end of expectations. Indeed, the earnings disappointment was due to increased costs relating to the Baxalta deal, which the company has said reflects the fact that integration is actually ahead of schedule, which should benefit the group in 2017. Shire has also recently been able to allay some concerns about the debt taken on to pay for the acquisition by refinancing borrowings on attractive terms.

SHIRE (SHP)

ORD PRICE:4,343.5pMARKET VALUE:£39.3bn
TOUCH:4343-4344p12-MONTH HIGH:5,377p3,423p
FORWARD DIVIDEND YIELD:0.5%FORWARD PE RATIO:11
NET ASSET VALUE:3,295c**NET DEBT:82%

Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
20135.01.2424418
20146.03.3435423
20156.41.3939023
2016*11.3-0.2442825
2017*15.1-0.9652329
% change+34+297+22+16

Normal market size:500

Matched bargain trading

Beta: 0.99

*Broker JPMorgan forecasts

**Includes intangible assets of $54bn, or 5,943c a share

£=$1.27