Orphans Thriving In Shire's Labs

4/27/2015


  Recent Price
$254
  Dividend
$0.69
  Yield
0.3%
  P/E Ratio
24
  Shares (millions)
197
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$264.98 - $155.54

For a moment, investors lost hope in Shire ($254; SHPG). On Oct. 15, AbbVie ($65; ABBV) retracted its $53 billion offer to purchase Shire. In response, the drugmaker's stock plunged 30%, wiping out nearly $15 billion in market value. But Shire's shares have rallied 17% in the past three months to eclipse their level when AbbVie reneged on the deal.

Credit that recovery to Shire's unique position among drugmakers, which has helped sustain strong operating momentum. Many of Shire's products are classified as orphan drugs, which tend to enjoy tax incentives, easier approval, longer patent exclusivity, and faster growth than traditional pharmaceuticals.

Shire's per-share profits, sales, and operating cash flow each grew by more than 20% last year to set record highs. Free cash flow has grown in five straight years, more than tripling to $4.03 billion in 2014. Five of six Quadrix categories score 75 or higher. Shire, earning an Overall rank of 95, is a Focus List Buy and a Long-Term Buy.

Business breakdown

Shire's drug portfolio is geared toward neurological, gastrointestinal, and rare diseases. No single drug accounts for more than one-fourth of revenue, though some of Shire's strongest growth comes from its two largest drugs. Vyvanse (24% of 2014 sales), a drug for attention-deficit hyperactivity disorder, posted 18% higher sales last year. Lialda (11%), used for ulcerative colitis, grew 20%.

Shire has projected annual sales will reach $10 billion by 2020, implying compound annual growth of 9%. Existing products should contribute about $7 billion, with the remainder coming from the pipeline, which features seven experimental treatments in late-stage trials and 26 more in earlier stages of development. So far this year, U.S. regulators have expanded the usage of Vyvanse to include binge-eating disorder and accelerated their reviews for products that treat Hunter syndrome and dry eyes.

The 2020 revenue target has upside potential following Shire's $5.2 billion acquisition of NPS Pharmaceuticals, completed in February. With 2014 sales of $224 million, NPS expands Shire's portfolio of specialty drugs aimed at rare diseases.

Still, several key drugs face emerging threats. Orphan-drug exclusivity ends in October for Cinryze (9% of 2014 sales), which has an estimated 53% market share for treating hereditary angioedema, a disease with symptoms that include swelling limbs and airways. Moreover, a hedge fund is challenging the patent protection of both colitis drug Lialda and Gattex, a treatment for short-bowel syndrome.

Conclusion

Shire trades at 24 times trailing earnings, 14% below its industry median, and also looks cheap versus peers based on price/operating cash flow and price/free cash flow ratios.

Scheduled to post March-quarter results on April 30, Shire is expected to report 9% higher per-share earnings on 9% revenue growth. An annual report for Shire PLC is available 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
Dec '14
2.63
vs.
2.26
19%
263.24
-
156.25
26 - 15
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
6.02
10.60
0.62
264.98
-
138.78
25 - 13
2013
4.93
7.66
0.52
141.88
-
86.01
19 - 11
2012
4.69
6.10
0.46
108.79
-
80.09
18 - 13
2011
4.26
5.34
0.40
105.53
-
72.37
20 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
87
50
99
94
75
88

   * Earnings exclude special items.
   † Quadrixscores are percentile ranks, with 100 the best.


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