Rare Diseases, Unusual Growth

11/24/2014


  Recent Price
$208
  Dividend
$0.62
  Yield
0.3%
  P/E Ratio
20
  Shares (millions)
198
  Long-Term Debt as % of Capital
12%
  52-Week Price Range
$264.98 - $129.58

Irish drugmaker Shire's ($208; SHPG) best-known drug and biggest seller is Vyvanse, a treatment for attention deficit hyperactivity disorder. While Vyvanse's sales rose 19% in the nine months ended September, ADHD medicines aren't Shire's best feature.

Treatments for rare diseases accounted for 42% of product sales in the September quarter (up from 33% a year ago) and two-thirds of companywide growth. Many of these treatments enjoy orphan-drug status, which can yield tax incentives, easier approval, and longer patent exclusivity.

Shire's solid organic growth and ability to acquire high-growth drugs with modest issuance of new shares and debt give us confidence in aggressive growth targets. Yet the shares trade at 20 times trailing earnings, 21% below the average drugmaker in the S&P 1500 Index and 4% below its own five-year average. Shire, already a Long-Term Buy, is being added to the Buy List.

Second chance

If Shire sounds familiar, you're not making a mistake. We first recommended the stock back in April, but we were not the only ones interested.

Several companies plied Shire with takeover offers. In July, the company accepted a $54 billion proposal from U.S. drug giant AbbVie ($66; ABBV). The stock leaped, and we sold it from our recommended lists, booking gains of 41% on the Buy List and 74% on the Long-Term Buy List. Since then, the U.S. government took steps to prevent American firms from using foreign acquisitions to lower their tax rates, and AbbVie backed out of the deal, paying a $1.64 billion breakup fee.

Shire shares shed $74 the day the news broke, a plunge that represented the loss of a takeover premium, nothing more. Shire's still-excellent growth potential is now available at a reasonable price; we added it back to the Long-Term-Buy List in the Nov. 17 issue.

Strong growth medicine

In the nine months ended September, Shire grew sales 23%, per-share profits 44%, and operating cash flow 96%. Acquisitions contributed to that growth, but strong demand for Shire's core drugs played a major role. In the September quarter, Shire's seven best-selling drugs (76% of total product sales) averaged 30% growth, with none below 19%.

We expect the growth to continue. Last month, after exceeding quarterly profit estimates by 18%, Shire boosted its profit guidance for full-year 2014. Since then, consensus growth estimates have risen to 44% for this year and 9% next year.

Shire expects product sales to reach $10 billion by 2020, equating to 10% annual growth. To achieve that target, Shire will rely on strong growth from existing franchises, acquisitions, and a pipeline of new products the company expects to generate $3 billion in annual sales by 2020 and peak above $7 billion a year.

In recent quarters, Shire has focused most of its dealmaking efforts on its fastest-growing segment, rare drugs, a trend likely to continue. Obtain an annual report for Shire PLC at 5 Riverwalk, Citywest Business Campus, Dublin 24 Ireland,
(353) 1-429-7700, www.shire.com.

SHIRE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '14
2.93
vs.
1.83
32%
264.98
-
229.18
29 - 25
Jun '14
2.67
vs.
1.88
20%
236.27
-
141.66
28 - 17
Mar '14
2.36
vs.
1.72
18%
172.27
-
138.78
22 - 18
Dec '13
2.26
vs.
1.66
9%
141.88
-
113.59
20 - 16
           
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
97
51
99
92
90
58

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


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