Analysts' Choice: Buy Shire For Its Pipeline

7/18/2016


  Recent Price
$192
  Dividend
$0.79
  Yield
0.4%
  P/E Ratio
16
  Shares (millions)
198
  Long-Term Debt As % Of Capital
31%
  52-Week Price Range
$270.63 - $147.60

Investors considering the purchase of a biotech company can and should consider historical growth trends, specifically sales of its key medicines. But the real value of these stocks often lies in their drug pipelines. By that metric, Shire ($192; SHPG), a Long-Term Buy, has much to offer.

In the 12 months ended March, Shire's sales rose 8%, powered by double-digit gains for four of its five best-selling drugs. While Shire owns an impressive portfolio of treatments for both orphan and mainstream diseases, we like Shire more for what it will do in the future than for what it has already done. In April, Shire had 27 research programs in the preclinical stage and another 26 in testing, mostly for rare diseases.

Drug development is inherently risky, and not all of Shire's projects will bear fruit. Late last month, a midstage clinical trial of a compound called SHP607 failed to meet its primary endpoint, reducing the severity of an eye disease for premature babies. However, the drug showed promise for treating other complications of prematurity, including types of lung disease and brain injury. SHP607 is considered chancy enough that some (probably most) analysts don't include it in their revenue models. Of course, such thinking leaves lots of room for upside surprises when the occasional longshot hits.

Plenty of Shire's initiatives have moved beyond the longshot stage. Here are a few potential growth catalysts for the next two or three years:

1) Earlier this month, the Food and Drug Administration approved dry-eye treatment Xiidra. In October, the FDA rejected the drug and requested more clinical data. Analyst targets suggest Xiidra has the potential to generate $1 billion a year in sales at its peak. Shire expects to launch the drug in the September quarter, its first offering in the opthalmics category.

2) Late last month, Shire announced another successful clinical trial for SHP465, a treatment for adult attention-deficit hyperactivity disorder (ADHD). The company plans to submit the drug for FDA approval this year, with the goal of approval in the second half of 2017.

3) In April, Shire had 12 projects either in Phase 3 (final-stage) testing or ready for such testing.

4) One of those Phase 3 projects is SHP643, a treatment for hereditary angioedema (HAE), a genetic condition that can cause swelling in the extremities, as well as the face and even the airway. Shire hopes to launch this drug in 2018 and believes it could generate peak revenue of $2 billion a year.

Last month, Shire closed the $32 billion acquisition of Baxalta, which will expand its rare-disease pipeline. Shire expects the combined company to account for 30 recent and planned product launches, enough to generate $5 billion in annual revenue by 2020. 

Per-share profits rose 9% over the last 12 months. Analysts expect profit growth of 7% this year and 19% next year. Despite its growth, Shire trades at 15 times projected 2016 earnings, a 32% discount to the average biotech stock in the S&P 1500 Index.

Shire is based in Ireland, but the U.K.'s exit from the European Union should have little effect on its operating results. Obtain an annual report for Shire PLC at 300 Shire Way, Lexington, MA 02421, (617) 349-0200, www.shire.com.

SHIRE
 
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
3.19
vs.
2.84
15%
201.48
-
147.60
17 - 13
Dec '15
2.97
vs.
2.63
9%
231.32
-
184.69
20 - 16
Sep '15
3.24
vs.
2.93
4%
270.63
-
196.45
25 - 18
Jun '15
2.63
vs.
2.67
4%
261.74
-
226.51
24 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
6.42
11.68
0.70
270.63
-
184.69
23 - 16
2014
6.02
10.60
0.62
264.98
-
138.78
25 - 13
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
73
38
59
90
89
73
36

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


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