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Discount to mid-cap rivals looks unwarranted
Thursday 19 Jan 2017 Author: Lisa-Marie Janes

Investors should buy into the long-term momentum at leading biotechnology firm Shire (SHP). Now one of the 15 largest companies on the FTSE 100, its market cap has surged eight-fold from approximately £5bn to £43.7bn over the last decade.

Weak share price

Shire is currently experiencing short-term share price weakness following a settlement with the US Department of Justice.

The pharmaceutical giant was accused of using illegal rewards such as cash and expensive dinners to push sales to doctors and clinics, and recently agreed a $350m settlement (11 Jan).

The stock is trading at £46.58 compared to its all-time high of £56.85.

In April 2005, Shire acquired Transkaryotic Therapies to facilitate a move into the rare diseases business, which signalled the beginning of its rise to the top.

Treatments for rare diseases target a very small patient population as these types of diseases affect less than five in 10,000 of the general population according to the European Union.

As the number of rare diseases is between 6,000 and 8,000 and 80% have a genetic component, this is an urgent area of unmet medical need.

As a result Shire benefits from less competition, enabling pricing power and market exclusivity. Rare disease drugs also require fewer sales personnel which is a significant cost saving compared to other healthcare companies.

Larger companies

JP Morgan Cazenove analyst Richard Vosser notes the stock is trading at a 41% discount to its mid-cap peers and a 2017 price-to-earnings ratio of 11.6 is also substantially below the long-term average.

This relatively lowly valuation is at odds with the 14% earnings per share (EPS) compound annual growth rate from 2017 to 2020 pencilled in by JPMorgan.

Vosser says he is confident in his estimates despite the competitive threat to Shire’s haemophilia franchise from Roche’s (ROG:VTX) haemophilia A drug ACE190.

Currency tailwind

Over the last 12 months, the stock has been volatile as a result of a mixed reception to the $32bn acquisition of Baxalta, but rallied following the Brexit vote as sterling weakness increased the weight of its overseas earnings.

This currency tailwind looks set to continue into 2017 as the UK moves towards Brexit.

In our view the Baxalta deal is beneficial to Shire. Management expect it to deliver more than $20bn in annual projected revenue by 2020, with cost savings of at least $500m over the next two and a half years.

At current levels Shire looks highly attractive.

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