Shire has released Q3 results which show product sales rising by 6% and diluted earnings per share (EPS) growing by 15% (both at constant currency), with the latter benefitting from a lower effective tax rate. Vyvanse, Shire's ADHD and Binge Eating Disorder treatment, again performed strongly with sales rising by 20% in the quarter. The results are broadly as expected and full year earnings guidance has been maintained. The shares rose by 3% in afternoon trading.
Shire's share price has fallen sharply over the last few months, from a high of around £57 at the start of August to £46 at the time of writing. There are several factors behind this. Shire's unsolicited offer to acquire Baxalta has unnerved investors, given the potential size and complexity of the deal; as has recent news that the FDA has delayed approval for lifitegrast, its dry eye disease product. These issues have been compounded by a wider sell-off in the biotechnology sector, centring on concerns over US drug pricing.
We think these concerns are probably over-done. The core business continues to perform strongly and the drug pipeline is said to be strong. Shire's focus on niche therapeutic areas such as Attention Deficit Hyperactivity Disorder (ADHD) should mean it is less prone to pricing pressures than its larger rivals. Shire can still choose to walk away from the Baxalta deal, but clearly feels it has strategic merit, with the ability to create a global leader in rare diseases and considerable scope for synergies.
Whether or not the Baxalta deal goes through, we think Shire's growth prospects over the next few years look rather more promising than its UK peers. Analysts are forecasting 7% EPS growth for Shire this year, followed by c. 15% growth in FY16, 17 and 18. By contrast, analysts are expecting little in the way of earnings growth for GlaxoSmithKline or AstraZeneca out to 2018, with both still suffering from loss of patent protection on key drugs.
Unlike its peers, Shire doesn't offer much in the way of income. But with all three companies trading on a similar price-to-earnings multiple (15-16.5x), investors no longer have to pay much of a premium for Shire's superior medium term growth prospects.
Q3 highlights (constant currency, unless stated):
- Product sales were up 2% on an actual basis and up 6% at constant currency, despite significantly lower Intuniv sales (down 81%) following the entry of generic competition in December 2014. Excluding Intuniv, product sales grew by 12%.
- Operating income increased by 6%.
- Net debt at 30 September was $2,045 million (31 December 2014: net cash of $2,119 million), reflecting the acquisition of NPS.
The pipeline continues to advance, with European approval for Intuniv and US Fast Track designation for the study of Cinryze in antibody-mediated rejection ("AMR") for transplant recipients. Multiple Phase 3 trials are scheduled for Q4 2015/early-to-mid 2016.
On 16 October 2015, the US Food and Drug Administration issued a complete response letter requesting an additional clinical study to support the new drug application for lifitegrast dry eye treatment. An additional Phase 3 study has recently been completed, and topline results are expected before year-end. If positive, data will be used to support resubmission in the first quarter of 2016.
Proposed combination with Baxalta:
On 4 August 2015 Shire announced that it had made a proposal to combine with Baxalta, the US-listed rare disease specialist. Shire continues to support this "highly strategic combination to create a global rare disease leader delivering an expected $20 billion in sales by 2020, with an opportunity to create significant shareholder value." Thus far, Baxalta has resisted Shire's overtures.
Shire has reiterated full year guidance for mid-to-high single digit EPS growth in 2015 at constant currency. Foreign exchange headwinds are seen holding back reported product sales growth by 3-4%.
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