Description:
Shire is a small Irish based specialty bio-pharmaceutical company with a focus on developing therapeutic treatments for central nervous system, metabolic and gastro-intestinal conditions. The company is organized into six units and during the last 18 years has completed dozens of acquisitions. The most featured have been the acquisitions of Transkaryotic Therapies in 2005, which established Shire’s rare disease business with the enzyme replacement therapies Replagal and Elaprase, and the takeover of New River in 2007, which gave Shire full rights to the ADHD drug, Vyvanse.
In addition to Vyvanse (ADHD), Elaprase (Hunter syndrome) and Replagal (Fabry disease), other product lines include: Pentasa (Ulcerative Colitis), VPRIV (Gaucher disease) and Agrylin/Xagrid (thrombocytheamia). In the past, Shire’s core business was related to ADHD which it tried to develop further, but failed to do so to some extent. Therefore, the company has recently moved its focus to a broader segment of products; however, this process is not complete, and building the more regenerative medicine sector is still a work in progress.
The company has experienced a number of critical clinical failures in recent years due to adopting a high risk approach. The present research pipeline is less risky and hence investors should rediscover the stock with the objective of taking advantage of awaited market introductions across a number of fields.
Aside from the ADHD application, Shire is making progress on increasing its product pipeline. Further catalysts include a number of Phase II & III assets. They are: a) SPD602 for iron overload, (which can be considered a low risk introduction; nevertheless with an important impact), b) Lifitegrast for Dry-Eye, (which can be considered a medium risk introduction, with an annual patient count in the region of 75,000 for the US and Europe), and d) Vyvanse for binge eating (a medium to high risk introduction, but the GTM could be realized much faster than expected). Outside the product pipeline, the Intuniv patent settlement could become a major driver of short-term appreciation. Given the present product pipeline, Shire offers good long term value from its ADHD franchise (47% of the revenues), the orphan drugs business and other specialty franchises.
Longer-term growth drivers for the company include strong dynamics and greater visibility in the neurology, rare diseases and gastrointestinal (GI)franchises, favorable tax conditions in Ireland, further cost savings and another round of business acquisitions. Based on projected sales and taking into consideration some of the assumptions mentioned, Shire’s net cash in 2016 could equate to 40% of the current market value.
The firm has a small and efficient marketing and sales team and operating expenses are expected to stay low because of their specific competence – market know-how; this in turn also results in a high product hit rate. By 2020 operating margins are expected to grow to over 20% and ROI is expected to grow to over 30%. Furthermore, generated cash-flow should bolster the late-stage of pipeline development, which should finally lead to annual EPS growth in excess of 10%.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- The earliest patent expiry is in 2016 and represents only 6% of Shire’s sales,
- Vyvanse is a key product for pediatric and adult ADHD treatment. The company’s pricing power is excellent,
- Clinical data for Vyvanse (covering ADHD for children and adolescents) is due out shortly and a positive outcome is expected,
Weaknesses:
- 69% of Shire’s sales occur in the United States which is introducing major healthcare reforms,
- The Vyvanse label expansion may fail,
- Sales of Sanofi’s key products Cerezyme (for Gaucher disease) and Fabrazyme, (for Fabry disease) are falling short of expectations; this could also result in severe damage to Shire’s corresponding products VPRIV and Replagal,
- Acceptance of highly priced medicine is low in Europe, hence sales for Vyvanse may fall short of expectations there.