Orphans Find Home With Shire

5/12/2014


  Recent Price
$170
  Dividend
$0.60
  Yield
0.4%
  P/E Ratio
20
  Shares (millions)
196
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$180.91 - $86.01

Shire ($170; SHPG) generates about 70% of its sales in the U.S., though the drugmaker is based in Ireland, a haven for companies seeking to minimize corporate taxes.

Shire scores above 85 in five of the six Quadrix categories for an Overall rank of 95. With a Value score of 41, the shares look expensive using several backward-looking valuation ratios, including price/earnings and price/sales.
However, the stock looks better relative to its profit outlook, which calls for growth of 31% in 2014 and 14% annually over the next five years

Shire trades at 17 times estimated 2014 earnings, a 14% discount to the median for S&P 1500 pharmaceutical stocks. Its PEG ratio (forward P/E ratio divided by estimated five-year earnings growth) of 1.1 also is below the peer-group median of 1.5. Shire is a Long-Term Buy.

Business breakdown

Shire may be best known for its focus on orphan diseases, so called because they afflict fewer than 200,000 patients. Orphan drugs often face few rival medications and enjoy unusually long patent shelters. Shire's drug portfolio is grouped into neurology (41% of 2013 sales), rare diseases (33%), gastrointestinal (17%), and other (9%).

The company's neurology drugs, which include Adderall and Vyanse, treat attention-deficit disorder. About 25% of Shire's 2013 revenue came from Vyvanse, which enjoys U.S. patent protection until 2023. None of Shire's other drugs accounts for more than 12% of revenue.

Shire shares have advanced 20% this year, most recently rallying on a strong March-quarter profit report. Excluding special items, Shire earned $2.36 per share, up 38% and $0.14 above the consensus. Total sales surged 16% to $1.35 billion, Shire's fourth straight quarter of accelerating growth. Operating profit margins have expanded in five consecutive quarters.

Cash from operations jumped 53% to $246 million in the quarter, while free cash flow more than doubled to $231 million. Shire has generated higher free cash flow in 14 of the past 17 quarters.

Favorable cash-flow trends seem poised to continue. Research and development has ranged from 18% to 21% of sales in the past five years. However, that rate could fall in 2014; sales are projected to climb 15%, and R&D spending could decline by more than 10% as several drug trials end.

To bolster its portfolio of treatments for rare diseases, Shire bought ViroPharma for $4.2 billion in January. ViroPharma, a U.S. company, generated $428 million of sales in 2012 and could boost orphan diseases to 40% of Shire's annual revenue.

Deal activity within the health-care sector has surged in recent months, and Shire itself could attract a fresh takeover offer from Allergan ($166; AGN) or other health-care companies seeking to take advantage of its low tax rate. Allergan has attempted to acquire Shire before, and it may see a combination as the best way to fight off a takeover attempt from Valeant Pharmaceuticals ($133; VRX). We see speculation about a takeover of Shire as a potential kicker to a stock already worth purchasing on its own merits.

An annual report for Shire PLC is available at 5 Riverwalk, Citywest Business Campus, Dublin 24, Ireland; www.shire.com.

SHIRE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '14
2.36
vs.
1.72
16%
172.27
-
138.78
22 - 18
Dec '13
2.26
vs.
1.66
9%
141.88
-
113.59
20 - 16
Sep '13
1.83
vs.
1.40
6%
124.96
-
94.82
19 - 14
Jun '13
1.88
vs.
1.68
6%
100.73
-
86.01
16 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
4.93
7.66
0.53
141.88
-
86.01
19 - 11
2012
4.69
6.21
0.46
108.79
-
80.09
18 - 13
2011
4.26
5.34
0.40
105.53
-
72.37
20 - 14
2010
3.47
4.23
0.35
74.30
-
56.60
18 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
96
41
98
94
91
89

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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