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Shire - Profits pop on sales strength

Nicholas Hyett | 26 April 2018 | A A A
Shire - Profits pop on sales strength

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Shire saw underlying product sales rise 3% in the first quarter, reaching $3.6bn. With operating and finance costs declining, profits of £551m were up 47%.

The shares were little moved following the announcement.

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Our View

The $32bn acquisition of Baxalta is still being digested. But Shire is itself now the subject of a potential takeover, after the board said it would support a proposed merger with Japanese rival Takeda.

Nor is that the only deal on the table. The sale of Shire's Oncology business is expected to generate proceeds of $2.4bn. That could be used to buy back shares, supporting the share price if a final deal isn't forthcoming.

Ignoring the takeover noise, Shire continues to deliver some solid results. A portfolio of young drugs is seeing sales grow rapidly, with major patent expiries not scheduled until the 2020s. The portfolio is broad based as well, with strong positions in several attractive markets. That should avoid it becoming too dependent on a few blockbuster drugs.

Following the Baxalta deal the group has a sizeable pipeline of drugs in development, and recent results have been promising. As with all pharma companies there's always a risk trials will fail at the final hurdle, but successful results from the labs would secure revenue streams for the future.

It's not all plain sailing though. The balance sheet is still weighed down with $18bn of debt, and that will soak up cash for years to come. There's also a looming threat of competition in the important haematology business which accounts for $3.8bn of annual sales.

Nonetheless Takeda clearly felt Shire's undemanding 8.1 times price to earnings ratio presented an opportunity. The jump in share price following the offer means the group is no longer as attractively valued as it once was, and if a firm offer doesn't emerge the shares may fall again.

What's currently on the table is a proposal, rather than a formal offer, so there are still hurdles to clear before this is a done deal. However, a takeover by Takeda is now looking more likely than not.

A firm offer will settle the matter.

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Takeda Offer (25/04/18)

Shire has announced it has received a revised takeover proposal from Takeda.

The proposal values Shire at £46bn, and would see each Shire shareholder receive £27.26 in new Takeda shares and £21.75 in cash. Shire shareholders would own approximately 50% of the combined business.

The Shire board have said that, subject to final due diligence, it would be prepared to recommend the proposal to shareholders.

First Quarter Trading Update (Constant Exchange Rates)

Growth in product sales was driven by the Rare Diseases business, which saw sales rise 6% to $2.7bn.

Within Rare Diseases, the $1.1bn Immunology portfolio saw sales grow 6%, with the smaller Internal Medicine and Ophthalmic divisions delivering growth of 31% and 61% respectively. Sales of Genetic Disease treatments slipped 7%, due to the timing of Elaprase shipments.

Shire's Neuroscience unit saw sales fall 4%, after the introduction of generic competition to Lialda sent sales tumbling 66%. All the other drugs in the portfolio continued to grow strongly.

Cash generation jumped 120% to a little over $1bn. Net debt fell $866m over the quarter to $18.2bn.

Also during the quarter, Shire agreed to sell its Oncology business to Servier for $2.4bn. The board is considering returning that $2.4bn to shareholders through a buyback if a deal with Takeda does not go ahead.

Full year guidance remains unchanged.

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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.