Morningstar recently initiated Shire with an A+ credit rating, read more here.
Through several acquisitions, Shire has transformed from a neurology-focussed specialty pharma to a more diversified firm with exposure to biologics manufacturing and a global marketing strategy. While its business took a hit from generic competition in 2009, we think recent and upcoming product launches will allow Shire to return to growth in 2010.
Shire's specialty pharma focus has historically been heavily tied to one product. In 2008, $1.1 billion of Shire's $3 billion total revenue stemmed from Adderall XR for attention-deficit hyperactivity disorder (ADHD). The entry of generic competitors in 2009 drastically reduced sales of Adderall XR, and we expect 2010 sales to be only 30% of the drug's 2008 peak.
New additions to Shire's ADHD franchise could help the firm recover from the loss of Adderall sooner rather than later. Vyvanse launched as a pediatric treatment in the US in 2007, and sales have soared since approval in the adult indication in 2008. Shire also launched Intuniv for more difficult-to-treat children in late 2009. We think this drug--a non-stimulant that appears to have a better safety profile than Lilly's LLY Strattera--could be complementary to Vyvanse, and could even be used in combination in certain severe cases. In the long run, we think both products could also see sales outside the US, but we caution that the European market for ADHD is much smaller, and reimbursement may not be as favourable if the drugs are lumped together with other unbranded products.
Shire's overall business has already taken a more global turn with the acquisition of Transkaryotic Therapies in 2005. This move laid the foundation for its Human Genetic Therapies segment, and both Elaprase and Replagal are becoming core products in Shire's portfolio. Shire is also capitalising on Genzyme's manufacturing woes; it gained FDA approval of Gaucher disease drug Vpriv in February, and could get US approval for Replagal (in Fabry disease) by the end of the year. We think Shire could gain a significant share in both markets if Genzyme stumbles further. However, 80% of Cerezyme patients in the US had already returned to treatment by early 2010, and we expect Genzyme to continue to dominate these markets. We think Shire's Elaprase holds the highest sales potential within its genetic therapies portfolio.
Overall, we think Shire's growing portfolio will provide strong top-line growth over the next few years, but we worry that Vyvanse and other branded drugs could see competition as early as 2012, and the window to capitalising on Genzyme's drug shortages may be closing.
Fair Value Estimate: 1,268p ¦ Uncertainty Rating: Medium ¦ Economic Moat: Narrow
Valuation
We are raising our fair value estimate to 1,268p per share from 1,227p, based on a new exchange rate factor of 65.58p per 1 US dollar as of May 3, 2010. We expect continuing uptake of Vyvanse and Elaprase as well as the launches of Intuniv and Vpriv to contribute to strong sales growth over the near term, and we model 6.6% compound annual revenue growth from 2009 through 2014. We expect Shire's operating margin to remain in the mid-20s through the duration of our ten-year explicit forecast period. We think the timing of generic Vyvanse competition and sales growth of velaglucerase alfa remain the biggest uncertainties in our fair value estimate. We assume a 10.5% cost of equity.
Risk
Sales of Shire's leading drug Adderall XR plummeted in 2009 in the face of generic competition, and several of Shire's other specialty pharma products are also vulnerable to generic competition in the near future. While Vyvanse sales are growing quickly, Shire was subpoenaed by the Department of Health and Human Services on marketing of its ADHD drugs in September 2009; Shire could be forced to pay steep penalties if accused of off-label marketing in depression and schizophrenia. Shire could struggle to grow its ADHD franchise in Europe if regulators choose to reimburse its products in the same class as generic alternatives. Shire's launch of human genetic therapies Vpriv and Replagal in the US could falter if Genzyme resolves its manufacturing challenges in 2010.
Management & Stewardship
Longtime Shire CFO Angus Russell took the role of CEO in 2008, and former CEO Matthew Emmens (now CEO of Vertex VRTX) acts as board chairman. We remain disappointed in the levels of internal share ownership at Shire; all directors and executive officers combined own just 0.6% of outstanding shares, and the majority of Emmens' and Russell's stakes are in the form of options. In addition, we think returns on invested capital would be a better measure of performance for bonus determination than sales growth, which can be boosted through acquisitions. While the board scores low marks for independence (four of the eight directors are current or former members of management), the independent board members are highly qualified. Dr. Jeffrey Leiden is a former chief scientific officer at Abbott Laboratories, and newest board member David Stout acted as President of Pharmaceutical Operations at GlaxoSmithKline.
Overview
Growth: Absent a sizeable acquisition, we think Shire will struggle to reach its goal of mid-teens top-line growth in the 2009-2015 timeframe. We model 6.6% compound annual revenue growth from 2009 through 2014.
Profitability: Despite the entrance of generic Adderall XR competition, we think Shire's newest ADHD drugs Vyvanse and Intuniv will help the firm retain a gross margin in the mid-80s, and we expect Shire's operating margin to remain in the mid-20s.
Financial Health: Shire had $684 million in cash and equivalents at the end of the first quarter of 2010, and $1.1 billion in convertible debt. We think Shire is in a strong position to continue boosting its dividend, save for additional acquisitions that complement its specialty pharma strategy.
Profile: Shire is an Ireland-based specialty biopharmaceutical firm with two key segments: Specialty Pharmaceuticals and Human Genetic Therapies. Shire completed nine major mergers and acquisitions in the 15 years through 2009, including the Transkaryotic Therapies acquisition in 2005 which established its genetic disease business with Replagal and Elaprase, and the merger with New River in 2007 which brought full rights to ADHD drug Vyvanse.
Strategy: Shire seeks to continue to grow its business through acquisitions, focusing on ADHD, gastrointestinal diseases, and human genetic therapies. The firm uses small, specialist-focused sales forces to penetrate markets, and prefers to develop low-risk candidates that don't require lengthy development timelines.
Bulls Say
1. While Adderall XR's generic competition is a drag on the top line, Vyvanse is experiencing strong growth in both paediatric and adult markets, which helps to stem the bleeding in Shire's ADHD franchise.
2. Shire launched its newest ADHD drug Intuniv in late 2009. This non-stimulant ADHD drug could complement sales of Vyvanse, and strong data should allow it to build upon sales of Lilly's Strattera.
3. Genzyme has experienced shortages of core rare disease therapeutics Cerezyme and Fabrazyme, allowing Shire to speed the development of Vpriv and capitalise on its competitor's weakness for the US launch of Replagal.
Bears Say
1. Prior to the arrival of generic competition, Adderall XR sales represented 36% of Shire's revenue in 2008. The entrance of generics in 2009 has put significant pressure on the rest of Shire's pipeline to perform.
2. Royalty income from GlaxoSmithKline for infectious disease drugs has provided a nice boost to operating income, but many of these drugs are beginning to face generic competition.
3. Shire has seen its share of disappointments with past acquisitions and partnerships; the firm ceased marketing in 2008 of Dynepo (from Transkaryotic Therapies) after lacklustre sales, and terminated a rare disease partnership with Amicus FOLD in 2009 following weak clinical data.
