* Maintain Neutral, M&A upside offset by downside risk
Shire's share price is up c. 35% YTD on the back of improved EBIT margin, the
Viropharma acquisition and the bids AbbVie made recently. Although we believe
AbbVie could come back with a higher offer, we also believe the downside risk –
should a higher offer not materialise – offsets the upside AbbVie could offer over the
current valuation, and we maintain our Neutral rating. We believe there are more
fundamentally undervalued opportunities that offer a sounder strategy for nonspeculative
investors.
* Management bullish on pipeline, we are not fully convinced yet
Shire management provided a target of USD10bn in revenues by 2020, including
USD3bn of probability-weighted pipeline, excluding Fibrotech and the expected
USD3bn in Lumena peak sales potential (non-probability weighted). Based on
management target of USD7bn in pipeline non-probability-weighted peak sales (not
specifically in 2020), this makes us believe that management is assuming a pipeline
probability of success of between 50% and 75%, which appears much higher than
typical Biotech chance of success and even higher than Shire's historical success rate.
We also believe that some expectations, notably the USD1bn in Lifitegrast US sales,
appear highly optimistic, whereas a few other (like Binge Eating) appear conservative.
* Who will be next to follow: Celgene and BIIB probably to be discounted
We previously gave a range of US companies that looked of appropriate size to be able
to potentially achieve a tax-inversion strategy. We must stress that Celgene and Biogen
Idec are very unlikely bidders in our view: Celgene already benefits from a very low tax
rate; BIIB already expects sustained growth and has no need to patch any slowdown.
This leaves, in our view, only AbbVie and Allergan as likely suitors: AbbVie's latest offer
and Shire's bullish aspirations may make Shire unaffordable for Allergan.
* Valuation: adding a 30% M&A premium to DCF
We usually value using a DCF-based model that yields our 3,450p fair value but add a
30% M&A premium to reflect the AbbVie rejected offer to yield our 4,500p Price
Target and Neutral rating.