Shire’s ‘Sore Thumb’ Growth May Catch Eye of Drugmakers
Shire Plc (SHP)’s chief executive officer says the Irish drugmaker is content to remain independent. Analysts and investors aren’t convinced of its ability to do so.
Shire’s stock has climbed 27 percent this year, touching a record price of 1,987 pence today, buoyed by takeover speculation and rising sales from the Replagal and Vpriv therapies for genetic disorders. Exane BNP Paribas, Kepler Capital Markets and Nomura Holdings Inc. (8604) each have listed the Dublin-based company as among those drugmakers likely to be acquired.
A purchase of Shire would give large drugmakers access to the company’s portfolio of medicines at a time when the industry is facing patent expiries and struggling to generate new products. Shire dominates the market for attention-deficit treatments and is expanding its therapies for rare diseases.
“Shire stands out like a sore thumb,” said Navid Malik, an analyst with Matrix Corporate Capital LLP in London who also named Shire as one of the top takeover targets in the health- care industry, in an interview. “The big pharma companies have issues with generics and Shire is sitting there saying they have a target of 15 percent revenue growth. How can a pharma company ignore that?”
Drugmakers face generic competition this year to products with $34 billion in annual sales, up 34 percent from 2010 levels. Sales at risk from patent losses will climb to $147 billion by 2015, according to data compiled by Bloomberg.
Shire last month reported a 24 percent increase in first- quarter profit, boosted by revenue from its attention-deficit medicines. The company also reiterated its forecast for 2011, saying product sales are expected to grow “in line” with the pace set last year. The shares rose 3 pence, or 0.2 percent, to close at 1,961 pence in London trading, giving the company a market value of 11 billion pounds ($17.8 billion).
“We have great prospects for the future by ourselves,” Shire Chief Executive Officer Angus Russell said in a May 11 interview with Bloomberg Radio in New York. “We’re an independent company, but we’re a public company as well, and on behalf of our shareholders obviously we always have to entertain approaches that are significantly value-enhancing.”
Russell declined to comment when asked if Shire was in talks with or had received expressions of interest from potential buyers in an interview on Bloomberg TV’s “Street Smart.”
“The markets determine what they will about companies, but I think my shareholders are pretty happy with life,” he said in the interview. “The growth in the stock has a lot to do about the great earnings. We’re growing in the mid-teens, we’ve been doing that for the last seven years consistently. That’s a standout performance against an industry that’s struggling to find growth right now.”
Lack of Appetite
Not everyone agrees that Shire is attractive at its current price. UBS AG analysts removed Shire from their M&A Watch List in March, citing a lack of appetite among drugmakers for big acquisitions. The shares have risen as the risk of generic competition to the Adderall XR treatment for attention deficit hyperactivity disorder has eased, making a takeover too expensive, the analysts wrote in a March 23 note.
Including net debt, buyers paid a median of 15 times earnings before interest, tax, depreciation and amortization for drug companies in purchases of $1 billion or more over the past five years, data compiled by Bloomberg show. Shire sells for 16.2 times profit.
Shire’s top-selling product, the Vyvanse medicine for ADHD, generated revenue of $202.3 million during the first three months of 2011. The drug, along with the Intuniv treatment, is aimed at replacing sales of Adderall XR.
Wider Vyvanse Use
The company is seeking to widen use of Vyvanse by testing it against depression and schizophrenia. Shire also has experimental medicines in mid-stage studies as therapies for heartburn and fluid build-up in the abdomen.
Shire has benefited from production delays at U.S. biotechnology company Genzyme Corp. (GENZ), which makes competing treatments for rare diseases that affect fewer than 200,000 people globally. Sanofi, France’s largest drugmaker, paid $20.1 billion for Genzyme this year to offset generic competition to the Plavix blood-thinner and Taxotere cancer medicine.
A virus contamination in 2009 at a factory in Boston cut the supply of two key Genzyme drugs, one known as Fabrazyme to treat Fabry disease and one called Cerezyme for Gaucher disease. The disruption boosted demand for Shire’s Replagal, which helps Fabry disease patients, and Vpriv, a medicine for Gaucher. Both ailments are rare genetic illnesses. Genzyme has said it expects to return to normal output of Fabrazyme during the second half.
“The rare disease space is one of the areas least invested in and the lowest in terms of new drugs on the market. It’s a huge opportunity,” Malik said. “Shire would be ideal as a strategic fit for any large pharma that wants to capture that market. It’s high quality and delivering an excellent growth story.”
Both Pfizer Inc. (PFE) and GlaxoSmithKline Plc (GSK) may be potential buyers of Shire given that both are expanding into rare diseases, Malik said. Teva Pharmaceutical Industries Ltd. (TEVA), which agreed to buy Cephalon Inc. (CEPH) for $6.2 billion, and AstraZeneca Plc (AZN) may also be interested in Shire, said Jeremy Batstone-Carr, a analyst for Charles Stanley & Co. in London, in an interview.
Shir Altay, a Teva spokeswoman; Abigail Baron, an AstraZeneca spokeswoman; and Alex Harrison, a Glaxo spokeswoman, said their companies don’t comment on market rumors. Joan Campion, a spokeswoman for Pfizer, declined to comment.
Shire has been relying on its human-genetics unit to reduce dependence on ADHD products, which accounted for about 34 percent of sales last year. Shire in November acquired Belgium’s Movetis NV for 428 million euros to gain a constipation treatment and experimental drugs for gastro-intestinal diseases.
‘Young and Growing’
“Shire’s orphan drug portfolio is young and growing,” Goldman Sachs Group Inc. (GS) analysts including Keyur Parekh wrote in a Feb. 28 research note. “We believe it is now in a position of growing meaningfully in this segment and has the potential to be a major player both with its currently marketed portfolio as well as its pipeline.”
Sanofi’s purchase of Genzyme last month and speculation that Switzerland’s biggest biotechnology company, Actelion Ltd. (ATLN), is a takeover target may signal a wave of acquisitions in the drug industry, according to Tero Weckroth, an analyst at Kepler in Zurich.
“There will be more,” Weckroth said in a telephone interview. “There’s so much cash in big pharma and they’ll somehow need to spend it.”
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