Questor share tip: keep hold of Shire to realise long-term benefits

Now the takeover rumours have come true, investors may be tempted to take the money and run, but Questor believes shareholders could realise even more value from this drug maker if they hang onto their investment.

Shire shareholders face two possible scenarios, both of which provide a case for holding the stock.

FIrst, AbbVie could come back with a higher offer that wins the approval of the Shire board. Any fresh bid from the US company will need to be substantially higher than its latest offer of £46.26 per share. One analyst reckons AbbVie would need to offer £55 per share in order to get the Shire board round the table.

So as long as the prospect of a fresh assault from AbbVie remains in play, Shire investors would do well to hold on to the stock. AbbVies’s latest offer comprised 44pc in cash and 56pc shares.

Then again, Shire may successfully fend off an approach and remain independent. And if the company sticks to its pledge of doubling sales by 2020, then this is no bad thing for investors, either.

Flemming Ornskov, chief executive, yesterday (Mon))fleshed out his strategy for achieving this heady goal. He told analysts that Shire, which made around $4.8bn in 2013, could rake in $6.5bn in 2016 and $10bn in 2020.

Shire is expecting its rare disease and psychiatric drug units to each bring in $3bn in 2010, with most of the remaining $4bn coming from a combination of its new opthalmology drugs and its medicines for gut disorders.

The plan is not without risk. Shire is currently facing sales erosion on one of its major hyperactivity drugs, Adderall XR, after a generic competitior entered the market. Intuniv, which also treats ADHD, will become subject to generic competition this year. Shire hopes it can increase sales of a newer ADHD drug Vyvanse, which is protected until 2023, by expanding its use into binge-eating disorder, a newly recognised psychiatric disease. It is also hoping another drug, known as SHP465, will win regulatory approval to treat adults with ADHD, a fast-growing market.

Shire is also betting that its new dry eye treatment, Lifitegrast, will bring in $1bn by 2020. Mr Ornskov said he was confident the medicine will be approved by US regulators since it was the first medicine to relieve the physical symptoms of the disease. However, Lifitegrast also failed to show a significant improvement in the external signs of the disease, so its approval may not be a sure thing.

Still, Mr Ornskov did not factor in any future upside from the fact that Shire is likely to make further acquisitions. He also omitted the benefits of Shire’s two most recent acquisitions.

Shire’s share price may have been artificially pumped up by takeover rumours i the last two months, but it looks to Questor like this has simply brought the share price in line with Shire’s long-term prospects. Hold.

more