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Shire - Sales up, with integration ahead of plan

Nicholas Hyett | 3 August 2017 | A A A
Shire - Sales up, with integration ahead of plan

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Combined product sales rose 7% at Shire in Q2, supporting operating cash flow of $1.2bn. The interim dividend has been set at 5.09 cents per share.

The shares rose 2.7% following the announcement.

Our View

Sales of key products such as ADHD treatment Vyvanse may be healthy; but come the early 2020s a number will lose patent protection. Bolt on deals can only go so far to plug these lost revenue streams and management clearly felt that Shire's own pipeline wasn't looking too promising. Cue the Baxalta deal - by far the biggest in Shire's history.

The acquisition significantly strengthened and diversified Shire's drug pipeline. The combined company has a significant batch of drugs in late stage testing, with the most recent drug to emerge from the labs, Xiidra, delivering a strong performance and racking up sales of $57m this quarter. That should take some of the pressure off when the patents begin to fall.

The deal also bumps up Shire's exposure to rare diseases, a section of the market where there are few existing treatments and competition is less heated. The combined group has a market leading presence in haemophilia and positions in immunology and cancer; as well as substantially increased global scale, with operations in more than 100 markets.

However, Baxalta isn't a magic pill.

There are competitive threats in haematology, which accounts for 19% of sales, and while the pipeline is strong there's no guarantee trials will convert into successful drugs. However, it's Shire's balance sheet that is perhaps the greatest source of concern. It has been dramatically stretched by the deal, with net debt increasing, further increasing the risk to investors.

These concerns probably explain why the shares still trade at a more than 30% discount to their long term average P/E rating, at just 10.3 times next year's earnings. The lack of a meaningful dividend probably doesn't do the stock any favours either, and until debt is back under control that's unlikely to change.

Nonetheless, if all goes to plan, Shire should do well. Earnings will benefit from $700m in synergies, and new product launches offer the prospect of double digit earnings growth in the years to come. As with any pharmaceutical stock though, pipeline drugs are a bit of a binary bet - they either deliver or they don't. Not delivering is likely to be painful.

Second Quarter Results

Product sales hit $3.6bn, with the legacy Shire and Baxalta portfolios growing by 7% and 8% respectively.

The immunology business was an area of particular strength, up 18% to $683m, while Internal Medicine saw revenues jump 15% to $484m. The two largest contributors to group sales, Hematology at $965m and Genetic Diseases at $705m, saw revenue growth of 1% and 2% respectively.

Neurosicence was the only therapy area to see sales decline, down 3% to $635m, as sales of Adderall XR fell 30% amidst increased generic competition. Shire is carrying out a strategic review of the division, including considering an independent listing, which it expects to have completed by the end of the year.

One year on from the acquisition, the integration of Baxalta is progressing well. $400m of cost synergies have been recognised to date, versus a target of $300m by this point. Shire remains ahead of schedule to deliver at least $700 million in cost synergies from the Baxalta integration by Year 3.

Pipeline developments in the quarter include positive test results from the SHP643 hereditary angiodema treatment and US approval for ADHD drug Mydayis.

Strong cash generation saw the group repay $1.4bn of debt, with net debt now standing at $21.3bn. Shire now expects full year product sales to be between $14.3bn and $14.6bn, with diluted earnings per share of between $14.80 and $15.20.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.