TheChek News Flow

* Cover story: Barron's first annual list of the Top 200 Sustainable Mutual Funds is topped by Transamerica Large Cap Value, Davis Opportunity, American Century Equity Income, Loomis Sayles Growth, and Skybridge Dividend Value; The list is comprised of U.S.-based large-company, actively managed funds with the most sustainable portfolios, ranked by one-year returns.

- euro zone economic outlook has stabilized 

Baxalta Could Help Boost Shire Shares More Than 25%

The purchase will fill the biotech’s pipeline with products that will help earnings and revenues for years.

Since its $54 billion sale to Abbvie unraveled in 2014, the Irish pharmaceuticals company Shire has gone back to its tried-and-true formula: making acquisitions.

Best known for its drugs such as Adderall XR and Vyvanse that treat attention-deficit hyperactivity disorder, or ADHD, Shire (SHP.UK) has jumped back into action with several purchases, most notably Baxalta, which nearly doubles its revenue. The acquisitions have swelled a pipeline already brimming with treatments capable of propelling sales and profits for years.

“If you look across our pipeline and products, we have many first in class, best in class, new to class, so we are clearly playing the innovation game versus the me-too game,” says Shire’s Danish CEO Flemming Ornskov, who practiced medicine before joining the corporate world.

Although the American depositary receipts ( SHPG ) have risen 60% in the past three years, the promise of the new drugs doesn’t seem fully reflected in their recent price of $194. They trade for just 12.6 times estimated 2017 earnings. At the sector average multiple of about 16 times, Shire’s ADRs could be worth about $245, or more than 25% above the latest price. Each ADR is equivalent to three of Shire’s London-listed ordinary shares, which traded last week at 52 British pounds ($64.33).

The shares were hurt by the on-again, off-again AbbVie deal. They climbed on news of the talks in mid-2014 and subsequent higher offers, but dropped more than 20% a few months later when the transaction collapsed after U.S. Treasury officials closed a loophole, making the “tax inversion” much less attractive to U.S.-based AbbVie (ABBV). The company had planned to shift its headquarters to Shire’s Dublin home.

The United Kingdom’s vote to leave the European Union has also unsettled investors. The dollar-based ADRs and sterling-based London shares have at times headed in different directions, based on the pound’s post-Brexit moves. Shire generated almost three-quarters of its revenues last year in the U.S., and it reports in dollars, so the pound’s weakness won’t have much effect on business fundamentals.

But investors may have overreacted. The drugmaker’s recent deal making gives it more long-lived assets, offering sustainable double-digit earnings growth, says Samantha Pandolfi, a portfolio manager at Eaton Vance Worldwide Health Sciences fund (EMHSX), which owns the stock. “I like the way it looks at the moment,” she says.

Shire was formed in 1986 by a team of entrepreneurs, and its first products included calcium supplements to treat osteoporosis. In 2005, it acquired Cambridge, Mass.–based biopharmaceuticals company Transkaryotic Therapies, and adopted its focus on rare diseases. The biotech today also treats specialized conditions ranging from ulcerative colitis, a chronic illness that affects the large intestine, to Hunter syndrome, a genetic disorder caused by a missing or malfunctioning enzyme.

Last year, Shire’s sales totaled $6.4 billion. ADHD treatment Vyvanse, which can also treat binge-eating disorders, accounted for more than a quarter of that. Shire completed several bolt-on acquisitions in 2015, but it bulked up this year with the $32 billion purchase of Baxalta, which will lift 2016 sales to an estimated $11.3 billion.

Baxalta, spun off from Baxter International (BAX) only last year, broadens Shire’s geographical reach to 100 countries and reduces its reliance on its ADHD franchise, thanks to Baxalta’s strengths in hematology and immunology and a growing presence in oncology. By 2017, Shire’s sales are estimated to hit $15.3 billion.

Management is betting the Baxalta combination will allow Shire to crank up sales to $20 billion by 2020. Analysts think that’s too ambitious, with most forecasting $18 billion to $19 billion, but Shire’s chief Ornskov is confident he can win them over.

“As our second-quarter numbers demonstrated that we continue to exceed expectations, I think the gap between our expectations and the Street’s expectations is rapidly narrowing,” he told Barron’s.

Ornskov’s optimism is fueled by a pipeline with more than 50 products in clinical development, including potential new treatments to tackle infection in transplant patients, inflammatory bowel disease, and eosinophilic esophagitis, an inflammatory condition of the esophagus.

Adding to this elixir are products like Xiidra, a treatment for signs and symptoms of dry-eye disease, approved by the Food and Drug Administration in July. In its first three weeks after launch, Xiidra claimed 2.1% of the market that is dominated by Allergan ’s (AGN) Restasis. Xiidra is expected to reach $200 million in sales in 2017, and could attain blockbuster status with sales above $1 billion in 2020.

That’s not to say Shire has a wide-open field. Roche Holding ’s (ROG.Switzerland) emicizumab, formerly known as ACE910, threatens to disrupt the market for hemophilia treatment, where Baxalta has a strong product, Advate.

But the Baxalta deal has the potential to speed earnings growth. Shire recently upped its estimate of operating-cost savings from the combination by 40%, to at least $700 million, over three years. Ebitda margin, estimated at about 42% this year, could hit the mid-40s in 2018, says Deutsche Bank analyst Richard Parkes. Shire is expected to post 2016 net income of $3.3 billion, or $12.90 a share. In 2017, net income could climb to $4.6 billion, or $15.32.

The company, which doesn’t pay a dividend, is focused on reducing the debt accumulated to fund its acquisitions—more than $23 billion, a worrisome ratio of over four times net debt to earnings before interest, taxes, depreciation, and amortization.

Ornskov is confident Shire can cut that ratio to two to three times in 2017, but he could be tempted by “attractive, rare, or highly specialized compounds that are available at interesting prices.” But they won’t be big deals: “Large-scale M&A is not in the cards for us,” says Ornskov. And that should improve the health of the stock.

Drawing a Bead on the Post-Brexit Pound

The Asian flash crash highlights the weakness of sterling since Brexit. Stocks have soared but inflation and the current account could be a problem.

The British pound on Friday tumbled sharply before recouping most of its losses, taking its retreat against the dollar in October to more than 4%. Sterling fell more than 6% in Asian trading, from $1.26 to $1.18, in a move that surprised markets. It recovered and late in the day traded at $1.24.

However, even before Friday’s gyrations, the pound was trading at its lowest level against the greenback since 1985, off 22% from its June high just before the United Kingdom voted to leave the European Union. Weakness in the value of sterling makes U.K. assets cheaper when priced in other currencies. The currency’s frailty has contributed to a stellar performance for British stocks in recent months. London’s FTSE 100 index hit an all-time high this week and closed on Friday at 7044.39, 30 points off the record.

It is bad news for U.K. government bonds, though, as the currency’s weakness foreshadows higher inflation eroding future coupon payments. Ten-year sovereign bonds rose to 0.88%. Bond yields rise when prices fall.

Currency traders struggled to explain Friday’s move, suggesting it could have been the result of “fat fingers”—an incorrect number entered in a computer trading program—triggering algorithm-based trading strategies and automated sell orders that limit losses once prices move beyond a specified range. Timing was another issue. The event occurred at the start of the Asian trading day when market volume typically is thin. “We don’t really know what caused all this, but the basic problem is illiquidity,” says James Binny, head of currency for Europe, the Middle East, and Africa at State Street Global Advisors in London.

Analysts suggest that last week’s decline may have been fed by Prime Minister Theresa May’s speech on Oct. 2 that the U.K. would start the process of exiting the EU no later than March 2017, and that immigration controls are a higher priority than access to the single European market.

BUT SOME EXPERTS ARE SKEPTICAL. The predicted meltdown in the economy following the Brexit vote hasn’t materialized. The Bank of England cut interest rates in August to aid the economy, and it stands ready to take further action if necessary. “As long as there are no more political bombshells, I think we can continue to trade the economic data,” says Mark Farrington, a portfolio manager and head of Macro Currency Group, a specialist currency investment boutique owned by Principal Global Investors.

Farrington and State Street’s Binny both view the pound as undervalued in the longer term. Binny estimates fair value for sterling at $1.50, but he says there could be further downside in the near term as investors focus on the U.K.’s current account deficit. At the end of the second quarter, the current account deficit was 5.9% of gross domestic product, up from 5.7% in the first quarter. The country relies on inflows of foreign capital to sustain the current account, the sum of the trade balance; income, such as interest and dividends; and transfer payments, like foreign aid.

“[The British pound] used to be a relatively simple currency that traded on cyclical events and data, but now it has become a political and structural currency,” says David Bloom, global head of foreign-exchange research at HSBC. “This is a recipe for weakness, given its twin deficits.” Bloom predicts sterling could weaken to $1.20 by the end of this year and to $1.10 by the end of 2017.

Canada Goose Preparing for IPO

Maker of trendy down-filled parkas could be valued at $2 billion and could go public early next year