* Upcoming catalysts suggest more downside than upside risk Shire has diversified its pipeline and appears ideally positioned to benefit from strong underlying growth but we believe a few upcoming clinical trial read-outs carry more downside risk than upside risk. Indeed, we believe the Lifitegrast Phase III trial and the Vyvanse in Major Depression Disorder may not have selected the right type of patients and could lead to disappointing results. Moreover, we believe Shire could face negative sentiment risk around the challenge of the Vyvanse patent in mid-2014 and prefer staying on the side-line for now, downgrading to Neutral.
*Lifitegrast remains high risk; PIII design could be selecting the wrong endpoint We believe the main short-term sentiment risk lies with Lifitegrast with Phase III expected by end 2013. Over the last decade, 14 projects for dry eye have failed and we believe most of these failures were due to the difficulty of identifying patients with pure dry eye and excluding patients with dry eye like symptoms. As we fear Lifitegrast Phase III could have failed to exclude these patients, we see the chance of success as low. Also, Eleven Biotherapeutics EBI-005 Phase II data shows a lack of correlation between OSDI and Eye Dryness improvement. This makes us believe that Shire decision to switch the symptom endpoint from OSDI to Eye Dryness in the second Phase III could be falling into the trap of selecting the wrong endpoint.
* Vyvanse patent seen as main sentiment risk – reviewing pro-drugs patent risk Although we believe the uncertainty around the validity of the Vyvanse patent could lead to sentiment headwind in 2014, our included analysis of the pro-drug patent history indicates that the historical trends are supportive of Vyvanse and we do not assume generic competition before patent expiry.
* Valuation: blend 2014 PE and probability weighted DCF We value Shire using a blend of Specialty Pharma 2014 PE (19.8x) and a DCF-based model, and fine tune our price target to 3,060p from 3,100p. We add ViroPharma to our DCF, adjust the pipeline and increase the weight of the 2014 PE to 40% (from 30%) as we believe the ViroPharma acquisition diversifies the revenues away from Vyvanse which is facing patent challenge in 2014.