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Shire - solid Q2 results, Takeda takeover still looms

George Salmon | 31 July 2018 | A A A
Shire - solid Q2 results, Takeda takeover still looms

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Revenues in Shire's second quarter results are slightly ahead of consensus forecasts, helping earning per share (EPS) rise 4% to $3.88.

The shares were little moved on the news.

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Our view

2016's $32bn acquisition of Baxalta is still being digested. But Shire is now being acquired itself, after the board said it would support a proposed merger with Japanese rival Takeda. Subject to regulatory and shareholder approvals, the acquisition is expected to close in H1 2019.

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 should help to pay down some of the considerable amount of debt the combined group will be left with after the deal completes.

Takeover aside, 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.

The deal still requires regulatory and shareholder approval before it completes, but assuming it does, Shire shareholders will retain a very sizeable chunk of the combined business.

On the one hand that means investors get to keep hold of Shire's enviable rare disease portfolio. While also benefitting from an estimated $1.4bn in cost synergies and the groups' complimentary expertise in Gastroenterology and Neurology.

On the other they will be exposed to a very heavily indebted pharmaceutical business listed abroad. That's likely to increase risk, create additional trading costs and increase exposure to movements in exchange rates.

Having received support from the Shire board the deal is now very likely to go through. Investors need to decide whether they want to hold onto their shares or take advantage of the jump in share price to sell before the deal completes.

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Second quarter trading details

Product sales increased 4% at constant exchange rates, to $3.8bn.

Sales growth was driven by the Immunology division, where sales rose 12% to $1.1bn as demand for immunoglobulin therapies increased. Strong growth from bowel treatment GATTEX, as well as hormone treatment NATPARA led Internal Medicine sales 58% higher, to $232m. Ophthalmics, sales rose 75% to $100m, driven by higher sales of dry eye treatment XIIDRA.

Elsewhere in the portfolio, while most other areas saw steady growth, increased competition led Haematology sales down 4% and Established Brands saw sales dipped 36% to $219m, as a result of the launch of generic competition for ulcerative colitis treatment LIALDA.

Higher tax obligations reduced free cash flow 23% to $940m on Q2 last year, however the group was still able to reduce its debts by $1.4bn over the half. Net debt now stands at $17.7bn.

The group's R&D spend increased 6%, due to continued investment in late stage and launch programs. The $408m spend equates to 10% of revenue.

Looking ahead to the rest of the year, Shire expects total revenue of $15.4-$15.9bn, and EPS of $14.90-$15.50. Longer-term, the group continues to target revenue of $17-$18 billion in 2020.

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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.