Investment thesis – 2017 PE <10x offering a 2017-22e EPS CAGR of 19% (sector
on 14x offering 9%). A push back to our bullish call has been Shire’s high leverage
(>4x net debt/ pro-forma EBITDA though we forecast 2.7x in 2017). We note Shire
is now on a 2017e EV/EBITDA of 10.9x, offering a FCF yield of 8-13% (10%
discount to sector offering 5-8%). With a DCF valuation of £70 and bull-bear of £84-
35 we find the risk-reward compelling. Other favoured pharma plays include
AstraZeneca, Bayer, BMY, Genmab, GSK, LLY, Merck KGaA, and Roche.
Post-Q3 EPS cuts still leave us 7-15% ahead of 17-19e consensus – we
prudently reduce our Hematology forecasts to reflect potential
pricing/reimbursement pressures. We model faster delivery of the $700m Baxalta
synergies, and a stronger outlook for the ADHD and GI franchises. We maintain our
Xiidra estimates; $1.1bn in 2020, $1.8bn in 2025e and a peak in 2030e of $2.5bn.
Given prodigious cash flow we continue to model buybacks of $3-6bn from 2019e.
Share price discounting an overly bearish Hematology outlook. Safety
concerns for ACE910? – we forecast Hematology revenues of $4bn in 2017, with
growth thereafter of 0-3% per annum. All else being equal one needs to assume
Hematology revenue declines of -10% per annum from 2018, at a 100%
contribution margin, for our NPV valuation to fall to the current share price. We view
this as overly pessimistic given underlying volume growth, pipeline considerations
and potential ACE910 safety concerns. Roche has confirmed 4 serious adverse
events in patients treating breakthrough bleeds with a bypassing agent (we assume
FEIBA vs. NovoSeven). A Dear Investigator letter has been issued advising not to
use FEIBA when treating ACE910 patients experiencing breakthrough bleeds.
Thoughts into Nov 10th CMD - We expect Shire to deep dive its Hematology and
IVIG franchises (40% of sales), as well as highlight pipeline assets SHP647 (modsevere
IBD), SHP607 (RoP) and SHP621 (eosinophilic esophagitis). Our current
peak sales forecasts are modest at $400m, $100m and $80m (2% of group).