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Shire - Sale of oncology business

Nicholas Hyett | 16 April 2018 | A A A
Shire - Sale of oncology business

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Shire Plc Ord 5p

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Shire has announced the sale of its oncology business to Servier for $2.4bn. The deal includes in-market products with annual sales of $262m and drugs that are still underdevelopment or awaiting regulatory approval.

The shares rose 1.7% on the news.

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Our View

It's all going on at Shire.

The $32bn acquisition of Baxalta is still being digested. Shire is itself now the subject of takeover speculation, after Japanese rival Takeda confirmed it was looking at a potential bid for the rare disease specialist.

Takeda has until 25 April to make a formal offer for Shire. If it doesn't make a bid, the shares will likely fall significantly. That's where the oncology sale comes in.

CEO Flemming Ornskov has suggested the proceeds from the $2.4bn sale of Shire's oncology assets could be used to buy back shares if the 25 April passes without an offer. A buyback should support the share price to some extent.

We've previously said we felt Shire hadn't received the credit it deserved for the progress it's made. The shares were trading on an undemanding 8.1 times price to earnings ratio before the Takeda approach, a potentially attractive entry point.

The Baxalta deal means Shire has strong positions in several attractive markets. Sales of recently developed drugs are rising rapidly and major patent expiries aren't scheduled until the 2020s. Meanwhile, the labs are looking productive, which should secure revenue streams for the future.

However, the group's valuation doesn't reflect those strengths, and there a couple of reasons for that. First is a balance sheet that's still weighed down with $19bn of debt following the Baxalta deal - equivalent to about 3 years of cash profits as measured by EBITDA - that will soak up cash for years to come. Second is the looming threat of competition in the important haematology business which accounts for $3.8bn of annual sales.

Takeda clearly feels that a fairly unambitious PE rating undervalues Shire. While the jump in share price following the offer means the group is no longer as attractively valued as it once was, it also suggests the offer is being taken seriously. However, Shire is still a big meal to swallow. We'll just have to wait and see if Takeda can make the numbers stack up for an offer.

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Takeda approach

On 28 March Japanese pharmaceutical group Takeda announced it's considering making a bid for Shire - although has yet to approach the board with an offer.

Shire shares jumped 16.6% on the announcement

In a short statement Takeda said a deal would strengthen its core oncology, Gastrointestinal and neuroscience therapy areas while also highlighting the attractiveness of Shire's rare diseases unit.

The group also highlighted Shire's pipeline of drugs in development as a potential attraction.

Takeda must make an offer, or announce that it does not intend to make an offer, by 25 April 2018.

Full Year Results - Constant Exchange Rates (14 February 2018)

Healthy product sales were driven by a particularly strong performance in Immunology, where sales hit $4.4bn. Sales of immunoglobulin therapies, acquired as part of Baxalta grew, 19% to $2.2bn while Shire's own hereditary angioedema treatments saw sales rise 9% to $1.4bn.

The key Haemophilia and Neuroscience businesses saw sales grow by 3% and 7% respectively, reaching $3bn and $2.7bn, while Genetic Diseases saw sales rise 3% to $1.4bn. $259m in its first year and continues to grow steadily.

Among the smaller divisions, the newly launched Opthalmic division delivered sales of $259m, while the fledgling Oncology business grew sales by 21% to $262m.

Internal Medicine was the only division to see sales fall, down 5% to $1.7bn. This was led by a significant decline in sales of ulcerative colitis treatment Lialda, as generic alternatives entered the market.

Following the Baxalta deal, underlying cash flow from operating activities rose 63% to $3.4bn. As a result, net debt fell $3.4bn to $19.1bn - around 3 times EBITDA.

Shire announced a final dividend of 21.46p per share, up 4% on the previous year.

Management expect to deliver mid-single digit product sales growth in 2018, with profit growth expected to be slower as a result of increased capital expenditure and generic competition.

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