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Shire Plc: Buy, Sell Or Hold?

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Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

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I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Shire

Today I’m evaluating Shire (LSE: SHP), a specialty biopharmaceutical company focusing on rare diseases, which currently trades at 2246p. Here are my thoughts:

1. Financial strength: Shire is in excellent financial health, with a net cash position of £254m and interest cover a hefty 28 times. Also, the company is a cash machine generating around £400m in free cash flow per year during the last 5 years and with a 10-year average free cash flow margin of 20%.

2. Profitability: During the past 10 years, Shire has grown revenue per share and operating profit per share quite consistently by 15% and 18% per year respectively; while adjusted-earnings per share growth has been very variable ranging from around 10% to 140% and a number of years with negative growth. Operating margin has averaged a healthy 19% per year, ranging from the low-teens to mid-twenty percent range and has been expanding the last few of years; while return on invested capital (ROIC) has been stellar at 19% per year over the last 5 years.

3. Management: Angus Russell, the company’s CEO since 2008, has retired after 13 years with the company and has been replaced by Flemming Ornskov, who took the helm on April 30, 2013. Ornskow seems to be a capable replacement — he was the former chief marketing officer at Bayer, a practising physician and has extensive pharmaceutical experience with stints in Novartis, Merck and Bausch & Lomb.

4. Long-term prospects: During the past 18 years, Shire has built itself into a truly global pharmaceutical company through key acquisitions and innovative product development focusing on specialty treatments for rare diseases. The company operates in three main business segments: Specialty Pharmaceuticals, Human Genetic Therapies ((HGT) and Regenerative Medicine. The company’s best selling products include attention-deficit-hyperactivity disorder (ADHD) treatments, where in Shire has 27% share of the US market valued around $8bn and which has delivered more than £1.5bn in revenue in 2012, and HGT medications, which delivered £1.2bn in revenue also in 2012.    

However, sales of the company’s top product Adderall XR — which accounted for 50% of product sales in 2008 — has been dwindling ever since it lost patent protection in 2009. But the company has regained its footing since then. The US ADHD market has grown by an average of 21% per year over the last 3 years — according to IMS, a leading global provider of business intelligence for the pharmaceutical and healthcare market. Also, the company’s other products — Intuniv, an adjunct ADHD treatment for children and adolescents, and HGT treatments Replagal, the market leading treatment for Fabry disease and Vpriv — have shown excellent growth the past few years.

Furthermore, the company has recently gained marketing approval for Elvanse — Shire’s blockbuster ADHD treatment and marketed as Vyvanse in the US — in several countries in Europe earlier this year. This is the first stimulant pro-drug treatment to be launched in Europe for the treatment of ADHD.

On the other hand, the company faces some headwinds in the coming years. Some of the company’s top products will soon deal with generic competition; while performance of the company’s recent acquisitions have been weak.

5. Valuation: The shares look underrated with a price-to-earnings-growth (PEG) ratio of 0.56, a prospective (P/E) of 14, which is below its 10-year P/E average of 16; Also, its trailing price-to-free cash flow ratio (P/FCF) of 16 is well below its 10-year P/FCF average of 24.

My verdict on Shire

Shire has done well with its strategy of focusing on treatments for rare diseases and catering to needs of specialty physicians. It has built a strong portfolio of specialty products and continues to invest in its pipeline. Also, with its huge cash pile, it can continue making acquisitions to boost further growth. Therefore, I think the company can grow around at least high single-digit to double-digit rates for the next few years. Furthermore, its shares looks cheap compared to its historical valuations.

So overall, I believe Shire at 2246p looks like a buy.

More FTSE opportunities

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

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