Shire has announced a strong increase in revenues and profits in FY15, and issued an upbeat outlook for 2016. The shares rose by 1-2% on the news. Total revenues and adjusted operating profits both rose by 11% at Constant Exchange Rates (+7% at actual rates). Adjusted earnings per share increased by 14% at CER, while the full year dividend rose by 15% to 26.37 US cents per share.
- Product sales rose by 9% to $6.1bn, driven by strong performance from Vyvanse, up 21% to $1.7bn.
- The drug pipeline is "the most robust in Shire's history", with 14 programs either in Phase 3 or Phase 3 ready.
- Closed acquisitions of NPS (Feb 2015) and Dyax (Jan 2016). Reached merger agreement with Baxalta (expected to close mid-2016) to create global leader in rare diseases; expected to deliver over $20 billion in annual revenues by 2020.
- Net debt of $1.5bn at period end (December 2014: net cash of $2.1bn).
Shire is guiding for product sales to increase by 13-17%, and diluted EPS to rise by 9-13% in FY16, both at CER. Foreign exchange is seen as a 2-3% headwind. This guidance includes the effect of the Dyax acquisition, but does not include the Baxalta combination.
Come the early 2020s, 40% of Shire's revenues will be exposed to a patent cliff. Bolt on deals can only go so far to plug this gap and management obviously felt that something more radical was needed to secure the company's long term future. The Baxalta deal - by far the biggest in Shire's history - is the chosen medium.
The deal bumps up Shire's exposure to rare diseases, and reduces its dependence on individual treatments like Vyvanse, which last year accounted for around a quarter of total sales. The combined group would have market leading presence in haemophilia and positions in immunology and cancer; as well as substantially increased global scale, with operations in 100 markets.
The acquisition will also significantly strengthen and diversify Shire's drug pipeline. The combined company will have 60 programs in development, with over 50 of these addressing rare diseases. This is the largest pipeline of rare disease programs in the industry and management anticipate over 30 new product launches by 2020. This should help to take up the slack from future patent expiries.
The deal has been met with scepticism from investors. Concerns centre on growing competitive threats from new drugs in the haematology market; and question marks over whether the anticipated cost synergies can be delivered, given the lack of overlap between the two businesses. Shire is also taking on $18bn of debt as part of the deal, which further increases the risk to investors.
If all goes to plan, Shire could do well. Earnings would benefit from the $500m of synergies, and those new product launches offer the prospect of double digit revenue growth as far out as 2020. The shares trade on a prospective P/E of 12.3x, which is the lowest P/E rating we have seen for the stock, barring the depths of the 2008/09 financial crisis. Big deals always bring risks and Shire will be noticeably more leveraged after the merger. But if it can successfully integrate Baxalta, while deleveraging, investors may start to reappraise their view of the group.
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