* FY17 saw results ahead of consensus, (on higher sales) guidance for 2018
was below consensus expectations (on a lower gross margin from the
Covington new plant ramp, directionally signaled at 3Q17, but not quantified
at the time.) Top line growth over 2018-19 will be limited by continued
hemophilia uncertainty (where our sales were already in line with new long
term guidance) and the short term trajectory of HAE franchise sales where
CSL’s US launch of Haegarda has so far made a minimal impact on sales.
We believe that Shire has filed their follow-on drug lanadelumab and can
achieve a 2H'18 launch. We have trimmed the price target to £40 to reflect
the 3% cut in 2018 EPS, but retain our Outperform rating.
* Our enthusiasm for Shire comes from our view of the sustainability of the IG
franchise (where Shire is adding a stronger commercial focus globally), and
the strong cash flow currently being used to pay down debt. Plasma derived
products where Shire is now an equal player, with the more highly rated
competitors Grifols and CSL accounting we estimate for around one-third of
group sales, with an 8% plus sustainable growth rate, and very high barriers
to entry. Shire has a search and develop approach with limited internal R&D
(c 11% of sales) and so we do expect more deals over time to leverage
infrastructure. In the meantime Shire pointed to product disposals to
accelerate debt pay-down/increase shareholder returns. Within our universe
we believe that Shire has the strongest cash flow not already earmarked for
R&D, dividend or buybacks and now that their competence in managing
Baxalta is more assured could, post '19, utilise this cash flow more creatively.
* Catalysts: 1Q18: acceptance of US filing of lanadelumab in HAE; 2Q:
HAVEN-3 data presentation of Roche’s Hemlibra in non-inhibitors patients.
* Valuation: Shire trades on a 2019 PE of 8.3x vs EU pharma peers of 17.6x a
52% discount. Downside risk is from M&A execution risk, greater sales loss
of the hemophilia franchise, less successful ex-US rollout of Shire's ADHD
franchise, regulatory/execution risk on Xiidra, and early stage pipeline
losses.