Investment Thesis

We’re appraising biopharma and rare disease specialist company, Shire, whose stock is approaching Fat Pitch territory. The stock is trading near 3 year low, with forward Price-to-earnings of 8.5. Fair value estimate is GBP 45-50 a share whilst stock is trading at GBP38 a share, offering 25% margin of safety. With 30% margin of safety, we’re adding to the positions between GBP31-35 per share (vs GBP38 current price).

Shire plc is Dublin based biopharmaceutical company operating in 5 key Genetic Diseases (25% of 2016 product sales), Neuroscience (23%), Hematology (21%), Internal Medicine (16%), Immunology (14%). The headline sales are forecasted at $15bln in 2017.

Focus on rare diseases

Shire’s core therapeutic areas include attention deficit hyperactivity disorder (ADHD), Hemophilia, and Immunoglobulin therapies, coupled with other expanding Rare Disease franchise. These well-defined market segments, protected by significant entry barriers, have enabled the company to secure market shares with dominant high prices, intellectual property, and tightly controlled expenses.

Growth through value creating acquisitions

With its leading position in ADHD attention deficit disorder, niche status in rare genetic disorders along with the acquisitions of Viropharma, NPS Pharma, Dyax Corp, and Baxalta, Shire has grown into a leading biotech pharma company focused on rare diseases, with strong pricing power. Shire maintains a highly acquisitive strategy targeting new therapeutic areas internally and externally.

Patent portfolio

Shire has deftly expanded the patent portfolio through acquisitions and in-house R&D efforts in order to build-up scale in a focused set of therapeutic areas and as a springboard for further product development. The company has built up a diverse portfolio of both small-molecule and biologic products focused generally on niche markets. This diversity allows the company to better withstand specific product risks while using a specialist-focused sales force to penetrate markets, keep expenses down, and maintain strong operating margins.

Vyvanse, the company’s only blockbuster drug with over $1bln sales, has patent protection until 2023; however, as a small molecule it will quickly be genericized when its exclusivity ends.

Underserved market & large runway

There are over 7000 rare diseases characterized by small number of patients, lacking or non-existent standard of care, little competition from other pharma companies for research, efficient scale opportunity to establish presence and deter future competition.

M&A track record and future M&A opportunity set

Shire’s reliance on acquisitions for growth, as well as an uneven M&A record, makes this an uncertain strategy, as increasing competition for promising products and high valuations for smaller drug-development companies make successful acquisitions increasingly challenging and expensive, weighing on returns on invested capital.

Shire’s reliance on acquisitions for growth, as well as an uneven M&A record, makes this an uncertain strategy, as increasing competition for promising products and high valuations for smaller drug-development companies make successful acquisitions increasingly challenging and expensive, weighing on returns on invested capital.

Efficient scale & Pricing power

By their nature, rare diseases only offer small population of patients, making it less attractive for competing companies to invest in R&D and develop alternative drugs for same or similar indicators, as is often the case for diseases with

By their nature, rare diseases only offer small population of patients, making it less attractive for competing companies to invest in R&D and develop alternative drugs for same or similar indicators, as is often the case for diseases with large patient population. This gives Shire a distinct competitive advantage and pricing power.
Barriers to entry: Baxalta’s dominant hemophilia franchise and plasma-derived proteins–particularly immunoglobulins for rare immunological and neurological disorders–also build on Shire’s rare-disease portfolio, and while Shire is realizing more synergies from the deal than anticipated.

Disruption

Baxalta Hemophilia business is facing upcoming hemophilia competition from Roche (emicizumab) and future gene therapies (from firms such as BioMarin and Spark).

Orphan diseases niche

Shire’s focus on orphan diseases brings about many benefits in form of small patient population, extraordinarily high unmet needs, no or limited established standard of care, few or no effective therapies, very high revenues per patient often in many hundreds’ of thousands of dollars per patient. In order to make drug development attractive, company enjoys sales exclusivity for 7 years in US and 10 years in

Shire’s focus on orphan diseases brings about many benefits in form of small patient population, extraordinarily high unmet needs, no or limited established standard of care, few or no effective therapies, very high revenues per patient often in many hundreds’ of thousands of dollars per patient. In order to make drug development attractive, company enjoys sales exclusivity for 7 years in US and 10 years in EU, and further benefits from accelerated approval processes associated with orphan drug designations.

Sourcing of ideas internally and externally

Shire has historically been open to collaboration and partnering with external research institutions and emerging “start-up” companies for novel therapeutic approaches.

Development and trials

Shire has tailored its R&D organization to grow specialized expertise to address the challenges of developing new medicines in rare disease indications, such as recruiting hard-to-find patients, navigating ill-defined current standards of treatment, and pioneering regulatory pathways. Similarly, once new therapies are approved, Shire can then apply sophisticated approaches to increase diagnosis rates, support patients as they initiate therapy, and productively engage with patients and specialist treatment centers.

Shire has tailored its R&D organization to grow specialized expertise to address the challenges of developing new medicines in rare disease indications, such as recruiting hard-to-find patients, navigating ill-defined current standards of treatment, and pioneering regulatory pathways. Similarly, once new therapies are approved, Shire can then apply sophisticated approaches to increase diagnosis rates, support patients as they initiate therapy, and productively engage with patients and specialist treatment centers.

Baxalta Synergies

Shire is delivering on the Baxalta integration and cost synergies are ahead of expectations. Accelerated synergies have cushioned

Shire is delivering on the Baxalta integration and cost synergies are ahead of expectations. Accelerated synergies have cushioned initial impact of earlier than expected Lialda generic competition. Importantly, strong performance of the Immunology and solid Hemophilia growth underline the quality of the performance.