Shire Could Divest ADHD Treatment, Other Assets, for More Upside Post-Baxalta
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While Shire plc's (SHPG) - Get Report promising dry eye treatment has the potential to be a major driver for the Dublin-based drugmaker, analysts are starting to take into account other growth catalysts, including possible divestitures of higher risk divisions after agreeing to purchase Baxalta earlier this year, the buyer's largest deal ever.
Shire revealed earlier this week that the U.S. Food and Drug Administration had approved its Xiidra eye drops—the first prescription treatment for both the signs and symptoms of dry eyes in the U.S. Importantly, Xiidra is differentiated from a comparable product offered by Allergan (AGN) - Get Report , Restasis, which despite being the first to market isn't approved for the signs or symptoms but only "tear production." Even so, the market remains highly unpenetrated, suggesting there's room for a few competitors.
With Shire set to introduce a potential $1.5 billion-to-$3 billion in sales product, Cowen & Co.'s Ken Cacciatore wrote in a note following the announcement that "with Baxalta now in place—and a growth asset like Xiidra approved—the strategic options for Shire are now greatly enhanced."
When Shire in January agreed to pay $32 billion for Baxalta in one of the largest healthcare deals of the year, the move reflected CEO Flemming Ornskov's push to expand the group's rare disease portfolio. The Baxalta purchase came on the heals of its $5.9 billion deal for rare-diseases specialist Dyax Corp. in November.
More specifically, Cacciatore said that he believes Shire management is exploring such strategic options as divestitures that will enable it to focus on longer-duration products. The sale of its Neurology division, which includes its Vyvanse franchise for the treatment of ADHD (attention deficit hyperactivity disorder), would represent the most aggressive path it could take, he said.
According to Cacciatore, Shire's Neurology division—which besides Vyvanse includes second generation SHP465, Intuniv and Adderall XR—is potentially worth between $11 billion and $13 billion. The divestiture would have a neutral impact to earnings if it captures at least $10 billion in value and could fit well with potential buyers such as Johnson & Johnson (JNJ) - Get Report , Pfizer Inc. (PFE) - Get Report , Otsuka Holdings Co. and Novartis AG (NVS) - Get Report , according to the analyst.
Shire shares traded up 50 cents to $192.99 per share Thursday afternoon.
Other followers of Shire view a divestiture of Vyvanse as a less likely scenario, but acknowledged that nothing's off the table for the right price.
"I personally don't think they'll divest Vyvanse," David Steinberg of Jefferies LLC said of Shire's ADHD therapy. "It's a $2 billion drug and units are still growing in the high single digit range. It's hard to imagine that it's worth more to someone else than it is to Shire. It's Shire's largest cash flow generating asset."
Tim Chiang of BTIG LLC also expressed doubt that Shire would sell its Neurology division given that it's currently positioned as the leading company for ADHD treatment. Unlike immuno-oncology company Medivation Inc. (MDVN) , for instance, Chiang added that the Shire division is not a business "that every drugmaker would be lined up to necessarily want to acquire."
But the financial capacity to pursue additional M&A could very well be reason enough to pursue a divestiture of the division, according to Cacciatore. Doing so would allow Shire to "monetize its largest portfolio risk of the eventual loss of the Vyvanse exclusivity", he said, while positioning the pharma company to rapidly pursue additional orphan, longer-duration assets from a more stable earnings base.
"Certainly some value could be unlocked if they separate the two, but cash flow is the name of the game at this point," Steinberg added. "If growth is the objective, [Shire's] trajectory may be lower if they divest [Vyvanse]. On the other hand, they could pay off a lot debt and pursue larger acquisitions."
Other catalysts coming down the pike are seemingly more clear-cut.
The next big event for Shire will be guidance on its upcoming Q2 call, as it will be the first time the company will give a set of projections in the post-Baxalta era, Steinberg said. While the analyst suspects management may unveil potentially greater synergies than previously discussed, he noted that concern about the hemophelia market will probably be around for several years.
Shire is scheduled to report its second quarter results on Aug. 2.
While newly-approved Xiidra could become Shire's largest product given the huge unmet market need, let's not forget the company's pipeline of assets.
Recently acquired Dyax, a Phase 3 injection for the treatment of hereditary angioedema, represents a potentially $2 billion in sales product beyond 2030, while recently launched hypocalcemia treatment Natpara has been an overlooked asset in Shire's portfolio, according to Cacciatore.
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