Shire PLC (SPHG, Financial) is a Dublin-based biopharmaceutical company that operates in Ireland, the UK, North America and the rest of the world. It is focused on meeting the needs of the specialist physician. Its business operates in three different units: Specialty Pharmaceuticals, Human Generic Therapies and Regenerative Medicine.
All of them concentrate on developing and providing health care in rare diseases, neuroscience, gastrointestinal, regenerative medicine, internal medicine, and a research and development group. Namely, Specialty Pharmaceuticals' focus is on small-molecule medications within the therapeutic areas of behavioral health and gastro intestinal disease, and others. Human Genetic Therapies is dedicated to the research, development and marketing of novel products and services that profoundly enhance the life's quality of patients suffering from rare genetic diseases. Regenerative Medicines, as its name indicates, is devoted to providing regenerative medicine solutions for people with life-altering conditions. This last division was created in 2011 after the company acquired San Diego's Advanced BioHealing.
However, Shire's vision has changed and the pharma's plans for regenerative medicine have came to an abrupt end after the company announced by the end of last month that it would sell Advanced BioHealing's Dermagraft Business to Organogenesis of Canton, MA. Thus, the company has stated that "the RM (regenerative medicine) business unit no longer exists" and that the company would record a $650 million loss on the Dermagraft sale. Summed up to the fact that the company has very disappointing returns on equity, will this type of strategy boost growth? Or is it time to sell?
Keep Calm
Despite Organogenesis paid nothing upfront for acquiring the Dermagraft business, it agreed to pay Shire up to $300 million over the next four years if the division meets certain sales targets from now on. The sale of Advanced BioHealing happens after Danish physician Flemming Ornskov took over as CEO last year and amongst wider efforts to realign Shire's business structure in order to drive growth and innovation where its noteworthy. Now, the company will have on the one hand an "In-Line" marketed products group, which will consist of five business lines and focus on the commercial delivery of Rare Diseases, Neuroscience (formerly Behaviourl Health), Gastrointestinal, Regenerative Medicine, and Internal Medicine. On the other hand, the "Pipeline" group will consist of R&D and Business Development (BD) with pre-clinical development focus being primarily on rare diseases. The BD unit will focus on identifying later-stage development programs and in-market products in target specialist areas. The company expects $0.25 billion in cost savings in 2013 from these actions.
Truth is, the company has completed 12 major mergers and acquisitions in the eighteen years through 2012. Shire has concentrated its efforts largely on acquiring new businesses as to increase its products portfolio and expand its pipeline. In 2005 it acquired Transkaryotic Therapies, establishing its rare-disease business with Replagal and Elaprase. In 2007, the company merge red with New River and brought full rights to attention deficit and hyperactivity disorder (ADHD) drug Vyvansse. This being said, Shire PLC comes up as a firm that knows when a purchase is right -and also when a sale is. Furthermore, Shire's reported revenues are up 10 percent year over year, having increased 12 percent to $1.2 billion last quarter. Now, in early 2014, Shire completed the acquisition of ViroPharma -focused on rare diseases-, an acquisition that is expected to bring current levels to an upside.
Looking forward to broaden it, Shire's current economic moat is composed largely by its specialty pharma -in ADHD and gastrointestinal disorders- and its human genetic therapies business. Shire holds mainly a strong position in the ADHD market. At first, it was driven by Adderall XR, which represented 36 percent of the company's total revenue in 2009 and which sales fell more than 40 percent when its patent expired in that same year. However, back then, Shire's portfolio was able to prevent the firm's overall sales from crashing -proof of how powerful the company's diverse portfolio is- and virtually no harm was suffered. Now, its ADHD business is driven by key drugs like Vyvanse, Intuniv, as well as Adderall XR. Newer drugs -such as the ones mentioned previously, ulcerative colitis therapy Lialda, and rare-disease therapies Elaprase, Replagal, Vpriv, and Firazyr- have contributed recently to strong growth and have served well its diversification efforts. However, Vyvanse and Intuniv patents are currently being challenged by several generic firms, and the first Intuniv competition will arrive in 2014. In spite of this putting significant pressure on Shire's deep pipeline to perform, former experiences have shown that in similar situations it did so- and it did well. On top of that, Shire has recently patent wins against Impax (Adderall XR), Teva (Intuniv) and Actavis (Intuniv and Lialda), which has removed a major overhang on the shares by delaying the entry of generic competition for these products.
Geographic expansion is another aspect that bodes well for the company. Along with a continuous work to develop its business in Asia and Latin America, the company has recently opened an office in Japan, having in mind a potential launch of Vyvansse there. This drug could also benefit from geographic expansion to Europe and by indication (into areas such as depression and binge-eating disorder). Other areas that continue to be key geographic areas of focus are China and Brazil and its large markets.
And Take a Long Position
Shire's strong portfolio provides it with the potential to grow immensely. The company also has a strong commitment to share holders. It has recently authorized buyback program and a new share repurchasing program of $500.00 million in 2012, and has repurchased share for $143 million. Value for shareholders was boosted that year for shareholders as well when Shire paid $81.5 million dividends. It still isn't time to give up on this stock.
| Â | Shire PLC | Industry Median | Novo Nordisk A/S (NVO, Financial) |
|---|---|---|---|
| P/E | 43.50 | 29.50 | 22.80 |
| Market Capital | 26.67 b | - | 89.16 |
| ROE | 19.60 | -24.50 | 52.70 |
Although the company trades at a premium valuation in relation to its peers and still has low returns on equity, its strengths and potential can be seen in other areas, such as its revenue growth, largely solid financial position with reasonable debt levels, increase in net income, good cash flow from operations and, most of all, a solid stock price performance. Investment guru Andreas Holversen seems to think this way too; he has been investing in this company, and is –also- probably expecting an improved operating leverage this year and next, mainly driven by the company's realignment.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
