Shire shares are up 2.8 % following the announcement of second quarter results. The group announced an interim dividend of 4.63 cents per share (H115: 4.21 cents), translating into 3.51 GBp (an increase of 30% compared to 2015).
Total revenue grew 57% at constant exchange rates (CER), driven largely by the incorporation of revenues from Baxalta and Dyax. Strong sales across the portfolio saw Shire legacy product sales up 19% in the quarter with Baxalta legacy sales up 12%. Underlying operating income, including the effects of Baxalta and Dyax, rose 57% (CER).
During the quarter the group received US regulatory approval for its XIIDRA (Liftegrast) dry eye disease treatment, which is expected to launch in Q3 2016. Preparation for the launch, as well as additional costs from Baxalta and Dyax, contributed to a 36% increase in Selling, General and Administrative costs.
Other pipeline developments include; a positive regulatory opinion for pancreatic cancer drug ONIVYDE, steps towards European approval for immunodeficiency treatment CUVITRU and progress on the resubmission of ADHD product SHP465 to the US regulator for later this year.
Following significant progress with the integration of Baxalta, the group has upgraded expected operating cost savings by 40% to at least $700m in the first three years. Full year guidance has also been updated to incorporate Baxalta. The group now expects to deliver underlying product sales of $10.8bn - $11bn, and diluted underlying earnings per ADS of $12.70 - $13.10.
Sales of key products such as Vyvanse, up 22% in the quarter, may be rising rapidly but come the early 2020s a number of Shire's key drugs (including Vyvanse) lose patent protection. Bolt on deals can only go so far to plug these lost revenue streams 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 acquisition significantly strengthens and diversifies Shire's drug pipeline. This should help to take up the slack from future patent expiries. The combined company has 40 programs targeting areas of "significant unmet medical need" with the most recent drug to emerge from the labs, XIIDRA (liftegrast), expected by some analysts to see peak annual sales in excess of $2bn.
The deal also bumps up Shire's exposure to rare diseases, and reduces its dependence on individual treatments, although Vyvanse still accounts for 22% of sales this quarter. The combined group has market leading presence in haemophilia and positions in immunology and cancer; as well as substantially increased global scale, with operations in 100 markets.
Despite today's upbeat statement, there are headwinds out there for Shire. 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 (although today's increased target should help to allay some of those fears). Shire's balance sheet has been stretched by the deal, with net debt jumping from $1.5bn in December 2015 to $23.7bn today, which further increases the risk to investors. These concerns probably explain why the shares still trade at a c.20% discount to their long term average P/E rating (14.1x).
If all goes to plan, Shire could do well. Earnings would benefit from the $700m of synergies, and new product launches offer the prospect of double digit revenue growth as far out as 2020. But big deals always bring risks and Shire is noticeably more leveraged now than it was. That might hinder dividend growth if all does not go smoothly. For now though investors should enjoy the benefits of strong product sales allowing a higher dividend, with a nice fillip from lower Sterling.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.