Why Shire PLC’s Takeover Response Is Highly Unusual

shireJust over two months ago, shares in Shire (LSE: SHP) had made next to no gains in 2014. However, following various takeover rumours and then a bid from US healthcare giant, Abbvie, Shire has now posted capital gains of over 50% during the last six months. Great news for shareholders (especially when the FTSE 100 is up only 1% over the same timeframe).

However, things could be about to get a whole lot better for investors in Shire, since management in the company has outlined the sales potential of its pipeline in order, it says, to show Abbvie’s bid significantly undervalued the company.

Accurate Projections?

Of course, Shire’s decision to lay out the potential sales figures from its pipeline is unusual because outcomes from pipelines are notoriously difficult (if not impossible) to accurately predict. For example, a pharmaceutical company could have ten drugs in its pipeline, with all of them showing strong prospects in early stage trials. However, when more stringent trials are undertaken, a number of those drugs could fail to deliver when put under greater scrutiny and, more importantly, there seems to be only a limited scope to ascertain which ones could make it through clinical trials and become blockbusters.

In addition, while Shire may be accurate in its sales projections for its pipeline, it may not be able to accurately predict what other drugs will be marketed by the time its own drugs are approved. For example, Shire’s pipeline may contain two drugs that perform well throughout trials and are approved. However, a competitor may have a drug approved during that time that is either cheaper or performs better, thus sidelining Shire’s own, new drug.

Is Shire Worth More Than Its Current Share Price?

Having risen by 50% already this year, there could be better value elsewhere since Shire currently trades on a price to earnings (P/E) ratio of 22.6. This does not compare favourably to sector peers, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US), which have P/Es of 15.2 and 17.5 respectively.

Furthermore, GlaxoSmithKline and AstraZeneca offer yields of 5.2% and 3.8%, while Shire’s yield of 0.4% is very low indeed. As with Shire, GlaxoSmithKline and AstraZeneca both have strong pipelines that could also prove to be targets for sector peers (as shown by Pfizer’s recent bid for AstraZeneca). Certainly, they may not be able to match Shire’s growth potential over the short term, but appear to offer sufficient diversity and resilience in their respective pipelines to ensure that they deliver impressive earnings growth in the long run.

As such, while Shire could yet be the recipient of further bids, GlaxoSmithKline and AstraZeneca could prove to be long-term winners for investors.

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Peter owns shares in GlaxoSmithKline and AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline and Shire.