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Shire Release: PO Increased To 4500p.

6/25/2014 9:33:29 AM

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PO increased to 4500p. Maintain Buy on fundamentals

We maintain our Buy and increase our PO to 4500p from 3859p based on greater investor appreciation of Shire’s fundamental growth prospects following its rejection of AbbVie’s c£46 per share offer, presentation of its long range plan targets and removal of Vyvanse litigation risk (summary judgment in Shire’s favour issued last night). Specifically, we now expect shares to trade on 21x FY15E EPS, a 25% premium to the sector, justified by superior growth (15-18E EPS 14% vs sector 9%). This remains 2 PE points lower than Novo’s current rating for similar growth. We maintain our Buy as, in the absence of a renewed/counter bid, we expect limited downside and see upside potential from: 1) De-risk adjusting pipeline (42% 23E EPS upside); 2) Shire’s $9bn in M&A firepower (15-25% EPS upside); 3) Investors gravitating to Shire’s long-term sales targets (15% above ours).

Theoretical takeout valuation of £50-62. Blue-sky £73

We estimate the upside theoretical takeout valuation for Shire by AbbVie at up to c£73, based on: 1) Base case DCF value of £45 per share; 2) Achieving Shire’s long range forecasts of +£6; 3) NPV of cost synergies £5-9; 4) NPV of a potential tax-inversion £4-13. We believe AbbVie’s tax rate of 22% is driven by repatriation of US cash to pay its dividend and potential tax synergies are underappreciated. Our estimates assume 100% of M&A benefits accrue to Shire and no pipeline and M&A upside from Shire. Assuming benefits are shared equally yields a range of £50-£62.

Key differences to AZN/PFE but far from a “done-deal”

Despite similarities of a potential tax inversion and a new CEO who believes the company is fundamentally undervalued, we see differences between the Shire/AbbVie bid scenario and the recent PFE bid for AZN. Some aspects favour a deal (smaller size/potential for multiple bidders, less political risk, higher target US shareholder base; more US cashflow) but others do not (strong investor support for CEO and standalone strategy, peak sales guidance closer to consensus/seen as more realistic, reputational risk in ADHD, lack of discovery R&D in spec pharma).

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