Shire bounces back with strong Q3 earnings

Goodbye AbbVie, we never really needed you

Shire Plc., the UK drug maker jilted by AbbVie Inc. this week just days before the deadline of a $54.5bn merger, announced sparkling third-quarter earnings, raised full-year guidance and a generally bullish outlook for its pipeline and strategic focus.

Shire stock, which has largely traded within a narrow range this week, leapt in response to the results, to trade as much as 3.6% higher, the strongest rise on the UK’s main FTSE 100 stock index.

The Dublin-based, Jersey-registered group said EPS was 60% higher at $2.93 whilst revenue was $1.6bn, about third more than the level of cash Shire generated in the same quarter a year ago.

On top of the results, Shire seemed to go out of its way to emphasise it is strong enough to thrive as a standalone company after the failure of the merger with AbbVie.

The firm, which produces drugs to treat hyperactivity and rare diseases, said it now expected percentage earnings growth for the full year to be in the high 30s up from its expectations in July of growth in the low-to-mid 30% range.

Shire had in fact put expansion plans in place months ago, when it initially rejected the takeover deal from Chicago-based AbbVie.

Had it been completed, the takeover would have been the biggest amongst a spate of so-called ‘tax inversion’ deals seen so far, in which US firms seek to essentially re-domicile to regions with lower taxation.

Shire had said it planned to double sales to $10bn by 2020, $7bn, from existing products and $3bn from  pipeline.

Huge acquisition ‘firepower’ at the ready

Shire this afternoon continues to remain mum on the potential for the group to turn from prey back into hunter, although it has around $9bn in cash which had originally been earmarked for the purposes of making acquisitions.

Shire is also due a fee of $1.635bn from AbbVie in compensation for the uncompleted takeover.

Once the euphoric reaction to Shire’s solid earnings subsides, the market is likely to consider the prospects that Shire may again seek to enter the realm of buying firms in the rare diseases segment that has been a strong (and profitable) focus for the Irish group in  its current phase.

Shire’s CEO Flemming Ornskov said in a statement accompanying the results the group “has significant firepower to do any M&A deals in target areas”, with “M&A team and other operations not adversely affected by the failed AbbVie takeover”.

NPS Pharmaceuticals, which is trialling medicines for rare digestive diseases that are eligible for potentially lucrative ‘orphan drug’ regulatory status in the US, is one potential mooted acquisition target for Shire.

NPS had a relatively modest tangible book value of $101.2m at the end of its quarter that finished in June 2014.

Shire pre-tax profit for the third quarter to the end of September was $593.48, below consensus expectations of around $598.1m, though with the group posting EPS approaching two times consensus, the market will probably look past the pre-tax result.

A further small negative highlighted by Shire was that it expected its gross margin to ease back by a percentage point compared to the full year of 2013.

On balance, whilst the market has responded well to Shire’s first results after the group was recast as a standalone company, investors do not display any tendency to add back the value that took the firm to lofty values above the price gap from the middle of this month, when the stock traded as high as 5470p.

Still, this afternoon’s inarguably firm earnings, a moderate foray into acquisitions and the continuation of its astute strategic product focus would argue for at least moderate gains from here, at least until the extent of Shire’s rekindled taste for acquisitions is fully quantified.

Shire’s prospective price-to-earnings ratio at 17.8 looks fairly balanced against a selection of its close peers.