Shire is less than half the size of the UK pharmaceutical giants Astrazeneca and Glaxosmithkline but, with three $2 billion-a-year drugs across three therapy areas, it is much less dependent than its bigger rivals on single blockbuster drugs. This means that when the patents start to expire and competition from generic rivals is unleashed, the pain will be more bearable.
However, Shire is not completely immune to the threat from copycats. Key products, including Lialda, used to treat ulcerative colitis, Vyvanse, which treats attention deficit hyperactivity disorder (ADHD), and Firazyr could face generic competition when their patents expire, starting from next year. Accounting for nearly $3.5 billion in revenue, they make up a significant portion of sales. Roche, a competitor, has recently launched a haemophilia treatment, Helimbra, that could dent Shires dominant position in this area and disrupt $3.8 billion of sales.
The FTSE 100 company yesterday reported better than expected full-year results for 2017, with total revenues up by a third to $15.2 billion, ahead of forecasts of just under $15 billion. Growth was driven by strong trading in its immunology drugs division and good sales outside the US. The Trump administrations recent tax cuts also helped to boost the bottom line.
Despite this, investors seemed to be spooked by a warning from Flemming Ornskov, the chief executive, that profits could be lower this year, with sales growth in the mid-single digit range, owing to the anticipated impact of generics. Shires share price, which has fallen 31 per cent in the past 12 months, declined 1.4 per cent to £31.35½.
Thats not the only pressure the company will face this year. It also warned yesterday that investment in its new plasma manufacturing plant in Georgia in the US will be a drag on overall growth.
It is partly with pressures from generics in mind that Shire bought its leading American rival Baxalta in 2016 to strengthen its portfolio. It remains heavily indebted since the deal, with debt repayments likely to swallow up considerable cashflows in coming years. But on the positive side, the acquisition almost doubled Shires revenues and helped it to expand its international footprint as well as its expertise in advancing regulatory and commercial activities.
One of Shires greatest strengths is its promising pipeline of drugs that could replace sales when its present bestsellers reach their patent cliffs. Recent products to emerge from the labs have been performing well, according to analysts at Hargreaves Lansdown, and have continued to broaden Shires range of therapy areas, with the dry eye treatment Xiidra a particular success.
Last year Mr Ornskov said the company was considering spinning out its ADHD drugs division into a separate business, having decided that its rare diseases and neuroscience businesses had distinct strategic priorities. Roughly translated, this means that the neuroscience business needs more investment in R&D and less is needed for the rare diseases business, which has a strong pipeline. In preparation for this, Shire has pledged to publish separate financial metrics for each division from the first quarter of the current financial year.
Yesterday Mr Ornskov said Shire would continue to weigh up the pros and cons of a split, adding that he would provide an update on the companys thinking at the time of its next half-year results. He did not comment on rumours circulating late last year that Shire could be a takeover target, with Pfizer, the American group, reportedly a potential buyer.
Why Despite short-term headwinds, it has a deep pipeline of commercial and development-stage drugs"
Our US GAAP diluted earnings per ADS outlook reflects anticipated amortization and integration costs.
Full Year 2018 U.S. GAAP Outlook Non GAAP Outlook(1)
Total product sales $14.9 - $15.3 billion $14.9 - $15.3 billion
Royalties & other revenues $500 - $600 million $500 - $600 million
Gross margin as a percentage of total revenue(2) 71.0% - 73.0% 73.5% - 75.5%
Combined R&D and SG&A $5.2 - $5.4 billion $4.9 - $5.1 billion
Net interest/other $450 - $550 million $450 - $550 million
Effective tax rate 15% - 17% 16% - 18%
Diluted earnings per ADS(3) $7.30 - $7.90 $14.90 - $15.50
So around USD 5.00 (~355p) EPS expected for this year?
Moi aussi -- I underestimated the negative sentiment towards the company and the fact that few seem to have liked the Baxalta decision.
Still if they keep throwing off £1Bn a quarter and paying down the debt, it should get recognised in the medium to long term.
Looks like this is a precursor to splitting the company into two :-
"""Target Non GAAP Net Debt to EBITDA* ratio of less than 2.5x by end of 2018
Dublin, Ireland - January 8, 2018 - Shire plc (LSE: SHP, NASDAQ: SHPG) ('Shire' or the 'Company'), continues to progress its strategy as the leading global biotech company focused on rare diseases. Shire expects continued revenue growth driven by a diverse portfolio of leading brands including those within its Immunology franchise, which grew 21% in the first three quarters of 2017 on a pro forma basis. In addition, Shire continues to have a promising late stage pipeline with fifteen programs currently in Phase 3. The Company projects total revenues to reach $17-18 billion by 2020.
In August 2017, Shire announced that it was conducting a strategic review of its neuroscience business. Following the first stage of this review, the Board has concluded that the neuroscience business warrants additional focus and investment and that there is a strong business rationale for creating two distinct business divisions within Shire: a Rare Disease Division and a Neuroscience Division. Each division will benefit from sharper management focus, greater strategic clarity, and an increased ability to deploy resources to key growth priorities. The Board believes this will be an important first step in enabling both divisions to maximize mid- to long-term product sales, cash generation, and innovation."""
"US tax reform could push forward Shire takeover, says Jefferies
Takeover speculation pushed up Shire (SHP) on Tuesday and Jefferies believes US tax reforms could be the catalyst for a bid.
Analyst David Steinberg retained his buy recommendation on the shares, referencing reports US and European pharmaceutical names were circling Shire, whose shares recently fell to 15-month lows.
He reduced his price target to £49, down from £52.50. The shares fell 23.5p to £38.95 yesterday.
In our view, US tax reform legislation which includes far lower US corporate tax rates and access to ex-US cash via repatriation could drive a mergers and acquisitions reacceleration in the broader healthcare arena, said Steinberg.
This dynamic could potentially result in another bid for Shire we have long had Shire on our takeout list. That said, we think the potential group of buyers to be very limited. "
I must say this is looking tempting in view of the fact that the stock is now about 1200 below Questor's last tipping price and recent broker comments: The valuation of pharmaceutical group Shire (SHP) is still attractive despite overhanging concerns around its haematology division, says Berenberg.
Analyst Klara Fernandes retained her buy recommendation and increased the target price from £59 to £60 after third quarter results that reported mixed product sales coupled with good cost control and earnings 3% ahead of consensus. The shares were up 23.5p at £37.47 yesterday.
She also noted the outcome of a manufacturing network review that uncovered cost synergies of $100 million [£76 million] in 2019, increasing to $300 million in 2023.
Shire has been one of the stocks most under pressure in our covered as overhangs around haematology have created uncertainty, she said.
We expect data from phase III Haven [a haemophilia drug trial] before the end of the year and believe that this could act as a clearing event. Furthermore, we expect the outcome of the neuroscience review before the end of the year to clarify deleveraging plans and capital allocation from 2018 onwards.
Liberum has upgraded pharmaceutical group Shire (SHP) after falls in the share price that has made the company too cheap.
Analyst Roger Franklin upgraded his recommendation from hold to buy with a target price of £42. The roses rose 2.1% to £35.73 yesterday.
Franklin was upbeat about the prospects for Shires haemophilia drug trials, with haemophilia worth £8 a share, he said.
Shire is down 21% since we downgraded the name on 1 June, he said. We have resisted upgrading it twice since then as we were insufficiently excited by the valuation for a stock with limited near term pipeline catalysts and the double overhangs of haemophilia and M&A.
However, with the stock now below £35.00, we believe almost the entire value of haemophilia has been discounted from the shares.
"A few years ago, Anglo-Irish group Shire was facing a problem. While sales of blockbuster ADHD treatment Vyvanse were still growing, the question of what happened when the patent finally expired was a pressing one.
For answers, management focused their search on deal-making. Initially, it looked like Shire itself would be a target, but a proposed tie-up with American giant AbbVie fell through. This led Shire to put the boot on the other foot.
The first step was the $5.2bn acquisition of NPS, which was swiftly followed by the $32bn Baxalta deal. At current exchange rates, the sum of these two price tags equates to around 85% of the current market cap, showing how crucial the successful integration of these rare disease specialists is for Shire.
While a niche focus should help Shire avoid some of the intense competition in the sector, Baxalta was also at the other end of the development spectrum at the time of the deal. With numerous products either recently launched or in the latter stages of development, revenue growth should be impressive in the next few years.
The early signs have been promising. Cost saving synergies are now set to exceed $700m a year, comfortably ahead of the original $500m+ guidance. All the while, profits have risen handsomely.
However, the cloud hanging over the group is the debt it took on to finance the deals. Despite falling $2.1bn so far this year, Shires net debt position is still over $20bn. This means that analysts expect the groups dividend to remain at token levels for now.
Limited near-term dividend prospects, plus the ongoing task of integrating Baxalta mean the shares trade on the lowest rating of the three, at 9.1 times expected earnings. "
"Look past the uncertainty and buy Shire for its growth and takeover prospects:
Chief Executives rarely enter the debate about the performance of their own share price. A bit like their pay package, the appropriate value is for someone else to decide. To imply that the market doesnt understand the path a company is on is dangerous. If investors havent got the story, shouldnt you be telling it better?
It was a sign of frustration that Flemming Ørnskov, the Shire Boss, waded into this area over the summer. Although he said he did not comment on the share price because he was biased, he went and did it anyway. Growth, profitability, improving margin and the product pipeline: investors had yet to fully grasp how well the drugs giant was positioned. They still havent.
When Ørnskov made the remarks, Shire shares were just north of £41. Since then the group with a £35 billion market value has posted second quarter results and the stock has carried on drifting.
Chief among concerns is Shires digestion of Baxalta, a rare diseases firm that specialises in
immunology and treating blood disorder haemophilia, which it paid £25 billion for last year. The announced departure of finance Chief Jeff Poulton has not improved sentiment either. Ørnskov is driving Dublinbased Shire deeper into rare diseases, which are more resistant to pricing pressure and copycat competition that targets massmarket blockbusters created by the likes of
GlaxoSmithKline. Baxalta was a big bite for a company that had grown fast by acquiring
a series of smaller rivals. Now it is undergoing a transformation aimed at developing more of its own drugs to drive top-line growth. That could take a while to bear fruit.
In the meantime, the City has focused on the risks. The launch by Roche of a rival haemophilia drug has rattled some investors. For others, there is concern over Shires ability to pay down the debt it took on to seal the takeover. Pointing to early generic competition for gastrointestinal drug Lialda, the group trimmed its sales outlook but nudged up earnings per share guidance for the year.
This was significant, pointed out analysts at Goldman Sachs, given there had been concerns in the market about a downgrade. The financials were reassuring. Shire has squeezed an extra $100 million (£77 million) of synergies in the first year after the Baxalta deal. During the quarter, it reduced borrowings by $880 million and says net debt a chunky $21 billion is on
track to fall to less than three times underlying earnings by the end of the year.
Ørnskov also unveiled a review of thedivision on which Shire was built. The group will decide by the year-end whether to spin off its nEuroscience arm, which treats attention deficit hyperactivity disorder (ADHD). The patent for its original key drug in this area, Adderall, expired in 2009, but Mydayis, a new once-a-day ADHD medication for adults, shows promise for the future. However, its biggest seller in this category, Vyvanse, is heading towards a
patent cliff in 2023. Recent sales of the binge eating disorder treatment came in below City expectations. Goldman Sachs expects the division to contribute 18% of group sales this year and values it at up to $14 billion, or £12 per share at the top end.
Berenberg is less bullish, suggesting $8.5 billion, although it points out a listing would
inject cash to Shires balance sheet and help its debt reduction drive.
Shire accepted a £32 billion bid in 2014 from rival AbbVie but the deal was called off when so-called inversion deals suffered a clampdown. Since Johnson & Johnsons $30 billion
takeover of Swiss rare diseases firm Actelion in January, the breakneck pace of deals in the pharmaceuticals sector has paused for breath. But if Shire stock continues to languish it is not impossible that someone with deep pockets will pounce. Questor has been a fan of Shire,
tipping the shares in April at £47.52.
"Questor: Look past the uncertainty and buy Shire for its growth and takeover prospects
2 September 2017 2:01pm
hief executives rarely enter the debate about the performance of their own share price. A bit like their pay package, the appropriate value is for someone else to decide. To imply that the market doesnt understand the path a company is on is dangerous. If investors havent got the story, shouldnt you be telling it better?
It was a sign of frustration that Flemming Ørnskov, the Shire boss, waded into this area over the summer. Although he said he did not comment on the share price because he was biased, he went and did it anyway. Growth, profitability, improving margin and the product pipeline: investors had yet to fully grasp how well the drugs giant was positioned.
They still havent. When Ørnskov made the remarks, Shire shares were just north of £41. Since then the group with a £35bn market value has posted second quarter results and the stock has carried on drifting.
Chief among concerns......."
Could someone with access post he full article?
Hello Eadwig, if you want a play on the ageing population then you might want to look at Convatec which is currently suffering from negative sentiment and post IPO hangover. Another way to play it is Dignity but I personally have avoided that one because I am concerned about the company's liabilities. A completely different approach is to invest in AIM stocks which enable you to reduce your inheritance tax liability. I am sure their popularity amongst the elderly is one reason why so many of the safer ones (such as James Halstead, Nichols, AB Dynamics, Abcam etc) are on such high ratings and as the population ages, perhaps they will become even more popular.
Thanks for responding. I certainly have no argument with your Shire price. I'm persuaded that there is potential growth here in the out years that the market will be prepared to pay a premium for, IF management execute well.
If that happens and a growth premium starts to be put on the price I'll be selling at that point, before we ever see if the thesis plays out.
I'll also try and trade the position so that I'm going forward with as low an average as possible (currently @3745 two tranches in). Delighted to find SHP has no stamp duty which makes that process much easier (I did own years ago, but don't remember there being no stamp duty then. Probably just forgotten, it was a long, long time ago).
Good luck with the health care play. I've struggled very hard to find a way to play the ageing population thesis, especially in the UK. I do have an investment in a new REIT (LXi) which is aimed at commercial property and has a number of care homes in its mix already, but there was yet another warning from the industry on the news today that UK health care, for the aged especially, is approaching crisis levels - and I'm not arguing.
I've been tempted to buy Walgreen-Boots but the fx rate is so bad right now that if I'm risking US stocks I want fast growth stocks (not a long-term thesis play) plus they've run into some difficulties recently - although that is an opportunity to get them below $80 perhaps if you are in for the long haul. I think they can only keep growing being the biggest chemist in the US and now in the UK (I assume Boots is).
I've had your WWH Investment Trust on my watchlist for a while, but there's always been a reason to not go with it - sometimes just that I fancy something else more and I'm trying to keep a reasonable amount of cash on hand at the moment (15% minimum) for bargains when the next (overdue) correction comes.
Its also not exactly what I'm looking for in terms of 'health care' - my idea of what that means anyway - I.e. a play on the ageing population. It has a bit too much general big pharma in it, and replicates many of my biotech holdings, so isn't the greatest fit for me. It also misses some obvious ones if they were aiming at health care for the elderly also.
I spoke with someone else about WWH a while ago and they reckoned that it was the best I.T. for healthcare and is, of course, diversified globally. That means not going to suffer from the UK-specific doldrums that we have managed to create here (living wage, business rates, cost of land and premises, employment contract standards, lack of skilled medical staff etc etc). WWH hasn't yet been through a downturn though, which is often the best measure of a fund.
I don't know anything about AMS or BVXP off hand, but I like the look of the returns to date, so I shall be making a note of them and looking into them.
Good luck and thanks again for getting back to me.
Your charts showing the general pharma decline indicates my shift to wider healthcare. Big Pharma seems to be increasingly hidebound by regulations in new drug approvals, price controls and SHP's rapid growth days seem behind it.
I agree that UK Care homes are struggling but in a wider context I have now made four purchases of the WWH (World Wide Health) Investment Trust (+18% YTD plus small divi). I also have wound treatment company AMS (+48% YTD) and biotech/medical firm BVXP (+43% YTD).
However the recent big falls in SHP's SP will see a reversal soon, but today's rise may not be the start. I'll stick with my view that 3500 or less would be a good purchase point as long as the charts show support.
dazurtrader, "I'm reinvesting the cash in health care rather than pharma"
What's your play, or plays, in health care? Its a very obvious thesis - especially care for the elderly, but it seems an awful hard business to make money in. I'd be interested to know if you've found a profitable niche.
Its a proper managed departure though, not a sacking or 'leaving to spend more time with the garden'. It shouldn't have impacted the share price so strongly if the price was seen as robust.
There's some other weakness here, possibly just sector weakness on future US price clampdowns, which are likely to hit Shire and rare disease drugs more than the big boys - although generics are going to be hit hard too, it seems.
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.