FTSE 100 biopharmaceutical company Shire (SHP) has been fighting negative investor sentiment for more than a year amid concerns over debt pressures and competitive threats.

The decision to potentially spin off part of its business hasn’t helped to reverse the negative share price trend, down 36% to £34.02 since October 2016. So what’s going on?

The loss of investor confidence can be traced back to summer 2016 when Shire completed the $32bn acquisition of Baxalta. Although that deal helped to boost revenue, it also increased the company’s debt by a considerable level.

After the deal was completed, net debt stood at an eye-watering 4.5 times earnings before interest, tax, depreciation and amortisation. By the end of 2018, Shire aims to lower the ratio of debt to earnings to a more comfortable 2.5 times.

In addition to the high debt levels, investors have also been worried about the threat to Shire’s haemophilia business.

Roche’s haemophilia injection Hemlibra is threatening to steal market share from Shire’s Factor VIII treatment.

Liberum analyst Roger Franklin warns the biopharma company is at risk of suffering further erosion as positive interim results suggest Hemlibra is stronger than Factor VIII.

WHAT DOES SHIRE DO?

Shire’s core focus is treating rare diseases. These affect less than five in 10,000 of the general population, according to the European Union.

The company last month decided to split its business into two, comprising rare diseases and neuroscience. The bulk of the group’s revenue – 70% in the year to 30 September 2017 – comes from the rare disease division.

The neuroscience business ‘warrants additional focus and investment’ according to Shire. It will make a decision later this year whether to list the neuroscience arm on the stock market.

Investment bank Piper Jaffray claims getting rid of the high-margin neuroscience division would not be a game-changer. It would also make the remaining business less attractive due to haemophilia pressures.

A downgrade in mid-term sales guidance from $20bn in 2020 to between $17bn and $18bn was also announced last month. While this was disappointing, bearish analysts had already forecast lower sales, dubbing the original guidance a ‘stretch goal.’

WHY IS SHIRE INVESTING IN NEUROSCIENCE?

Shire wants to focus investment in the neuroscience division and specialise in neuropsychiatry to help alleviate mental disorders that can be linked back to brain malfunctions. It hopes to achieve this through bolt-on acquisitions, while growth in rare diseases will be organic.

The neuroscience division is one of the leaders in attention deficit hyperactivity disorder (ADHD) where sufferers struggle with hyperactivity and impulsiveness.

Splitting Shire into two parts could accelerate development of key pipeline programmes in neuroscience, including SHP 680, by focusing resources on this treatment. SHP 680 aims to tackle multiple neurological conditions with high unmet need.

By 2020, Shire aims to deliver $4bn in neuroscience sales with nearly three quarters of growth comprising neuropsychiatry. For the rare diseases division, Shire is aiming to drive sales to $13bn by 2020.

Shire’s rare disease arm has multiple franchises poised for growth in 2018. Overall, the company has seven franchises with treatments to help tackle immunology, ophthalmics, haematology, oncology, genetic diseases, neuroscience and internal medicine.

With the exception of oncology and ophthalmics, the remaining franchises generate in excess of $1bn in annual sales.

WHY IS IMMUNOLOGY IMPORTANT TO SHIRE?

One of the most exciting franchises is immunology, which is expected to grow thanks to increased demand for primary immunodeficiency treatments HYQVIA and CUVITRU.

Primary immunodeficiency is a chronic disorder that occurs in people whose immune systems do not work properly or have parts of it missing. This means people affected with this type of deficiency get more infections and it can take longer for them to get better, according to PID UK.

In the first three quarters of 2017, the immunology franchise grew 21% on a pro-forma basis.

Investment bank Jefferies says the neuroscience division has strong cash flow and is enjoying international sales growth of between 30% and 40%.

Through Baxalta, Shire can take advantage of its leading position in a potential $14bn plasma products market. It could also help immunology become the firm’s fastest growing franchise.

Since September 2015, Shire’s global immunology sales have rocketed 27% to $2.2bn, driven higher by geographic expansion, demand for subcutaneous delivery and a growing diagnosis rate.

Subcutaneous delivery is an injection delivered under the skin, which is highly effective for medications.

Shire has a valuable pipeline in immunology, particularly SHP643, a treatment for hereditary angioedema, which can be life-threatening if the associated swelling obstructs breathing. A potential US launch is pencilled in this year.

WHAT DO ANALYSTS THINK?

The analyst community is generally positive with 16 ‘buy’ ratings, six ‘hold’ ratings and one ‘sell’ rating according to Reuters data.

Investment bank Liberum says the company is worth between £37 and £40 per share depending on various scenarios for the haemophilia arm. It thinks the consensus market forecast for earnings per share (EPS) is too high, particularly for longer term forecasts out to 2021.

The consensus expects $5 EPS in 2017, $5.35 in 2018 and $5.85 in 2019, according to Reuters – we don’t have access to earnings forecasts beyond that period. In comparison, Liberum forecasts $4.94 EPS in 2017, $5.24 in 2018 and $5.49 in 2019.

Investment bank Berenberg is more enthusiastic, arguing that Shire is significantly undervalued compared to large cap peers with strong cash generation and debt reduction on track.

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