Find Both note attached :
>>> Shire Pharmaceuticals Baxalta's risk from ACE910: under-estimated (say our patients) or over-estimated (says Shire)?
--> ACE910 is a clear risk, but Baxalta could be ~EPS neutral even in a 'worst case'
For the last year, we've highlighted the potential for Roche's ACE910 to be a gamechanger in haemophilia. This drug could have a major impact on Baxalta – which should derive 59% of Op Profit from competing haemophilia therapies at the time of ACE910 launch in 2018. Our Evidence Lab haemophilia survey, discussed in our Roche notes today, indeed confirms major patient interest in ACE910. If the responses in our survey are representative - and if ACE910 reaches market with the strong profile seen so far - it implies 60%+ of patients would consider switching to ACE910 in 2 years. Our downside scenario would take 40% off Baxalta stand-alone consensus from 2021, reducing EPS accretion for Shire/Baxalta by 12% & 23% in 2020 & '23. However, surprisingly, the original proposal (inc buyback) would still be almost EPS neutral for Shire from 2018-23, even in this downside scenario with no cost synergies. Cost synergies will be modest, but could add another 8% accretion
Shire takes a view on Factor VIII market stability; our survey says more risk
The billion-dollar question in haemophilia is: how 'sticky' are patients in reality – would patients really switch to ACE910 as quickly as they claim? Despite enthusiasm for long-acting Factor VIII (37% of pts said they'd switch in ~1 year), Biogen's Eloctate has in fact taken 1 year to gain just 5% market share, supporting Shire's argument. Shire has also seen first-hand the loyalty of rare disease patients (Genzyme's 2009 manufacturing woes). However, in total contrast, new long-acting Alprolix has taken a full 33% of the Factor IX market in 1 year (see p9). Shire's strategy of capitalising on uncertainty in Baxalta's valuation looks plausible, but by no means risk-free. Shire is
openly willing to take on this risk – and the low absolute downside to earnings accretion, in our view, makes this deal just about logical.
Plenty of other logic for Shire's interest. But still looks hard to get a deal done
Buying a broad pharma pipeline (inc new Hyqvia IVIG) that is likely under-valued within a MedTech company makes sense to us. The logic for long-duration revenues, and diversifying away Shire's patent cliff is also clear: this deal could be 22% accretive to Shire by 2023 (post-Vyvanse). More intriguing: could this be a precursor to Shire divesting some of the 'old, spec-pharma' Shire, like GI or ADHD? Certainly that would fit the strategy. Shire still faces huge difficulty in getting the deal done, we think.
Valuation: Buy, PT of £62
Our valuation is based on 22.2x 2016E EPS.