To say 2014 has been an interesting year thus far for investors in Shire (LSE: SHP) is a vast understatement. That’s because it has delivered over 60% of capital gains (versus zero for the FTSE 100), has been the recipient of bid approaches and has gone into more detail than is usual about what it feels is the long-term potential of its pipeline.
Despite this, there could still be more mileage left in Shire’s tank — here’s why.
Another Bid Approach
At the time of writing, there are rumours surrounding the CEO of AbbVie (the company that has approached Shire three times, only to be rejected each time) who is apparently heading to Europe to speak to key shareholders. If true, this appears to indicate that another bid could be forthcoming, which could help to push Shire’s share price higher.
A Great Pipeline
As mentioned, Shire took the decision to lay out details of its drug pipeline in response to AbbVie’s bid approach. The reason for this could have been to achieve a higher price for shareholders, or management at Shire could have been responding to criticism that they turned down three offers. Either way, Shire’s pipeline holds a great deal of promise and the company has stated recently that it expects to deliver $10 billion in product sales per annum by 2020. To put this in perspective, Shire’s revenue in 2013 was just under $5 billion.
Strong Growth Potential
Unlike sector peers such as AstraZeneca (LSE: AZN) (NYSE: AZN.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), Shire doesn’t offer investors a decent yield. Indeed, having risen by 60% in the last six months alone, shares in Shire now yield just 0.4%. This doesn’t compare favourably with AstraZeneca or GlaxoSmithKline’s respective yields of 3.9% and 5.2%.
However, Shire does have the potential to deliver much stronger earnings per share (EPS) growth over the short run, in addition to the longer term potential already mentioned. Indeed, Shire is forecast to increase EPS by 27% this year and by 10% next year, which is far in excess of GlaxoSmithKline’s forecast fall of 8% this year and increase of 9% next year. And it’s even more favourable when compared to AstraZeneca’s forecast falls of 15% this year and 3% next year.
Looking Ahead
So, while shares in Shire do trade on a relatively high price to earnings (P/E) ratio of 23.9 — versus 17.2 for AstraZeneca and 15.1 for GlaxoSmithKline — they offer superb growth potential over the short term and longer term. In the pharmaceutical world, that’s worth paying for and, with the potential for more bids and a great drug pipeline, Shire could prove to be a winning stock.
