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Should I Buy Shire plc?

I’m out shopping for shares again. Should I add Shire (LSE: SHP) to my wish list?

Shire on fire

Shire isn’t like other pharmaceutical stocks. At least, it isn’t like those comfy, familiar names AstraZeneca and GlaxoSmithKline. For a start, it’s much smaller, with a market cap of just £15 billion, against AZN’s £40 billion and Glaxo’s £80 billion. And while the big two are known for their juicy yields, 5.3% and 4.5% respectively, Shire gives you just 0.4%. But investors aren’t complaining, because they want growth, and that’s what they’ve got.

Shire is up a heady 58% over the past 12 months, against AZN’s 14% and Glaxo’s 19%. Shire has enjoyed a barnstorming five years, growing 240% in that time. It shares have constantly topped their all-time highs in recent months to hit £27.79, helped by October’s expectation-bashing Q3 results, which included a 12% rise in revenues to $1,237 billion. That was enough to bump up the share price by 7% on the day.

R&D & M&A

Shire has also trimmed its research and development spending by squeezing its three divisions into a single business, and further pleased markets by forecasting earnings growth in the “mid-to-high teens” across full-year 2013. Shire can boast healthy revenues, earnings, cash flow and an exciting product pipeline. It is also targeting focused M&A activity, to further boost growth. The management team has had a long tenure at Shire, and is shows.

Analysts have been excited by recent findings that Shire’s Vyvanse drug, currently used to treat attention deficit hyperactivity disorder, is also effective for binge-eating disorder (BED). Shire is now applying to the US Food and Drug Administration for approval to treat patients with BED. This is a completely new market, and a potentially lucrative one.

A patently strong investment

Pioneering new treatments is a risky business, however, and drugs can quickly fall out of favour. Sales of diabetic foot-ulcer treatment Dermagraft, for example, fell 29%, and several other products saw sharp falls in sales. But Shire’s focus on specialist areas and niche diseases has served it well, protecting it from patent expiries and drug pricing pressures in cash-strapped Europe.

Shire’s strong growth prospects means it defies standard valuation metrics, which would normally deem it expensive at 34 times earnings. With forecast earnings per share growth of a whopping 76% this year and 20% in 2014, I reckon that’s a price worth paying.

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> Harvey owns shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.