Will Shire PLC Acquisition Help It Beat GlaxoSmithKline plc And AstraZeneca plc?

News that Shire (LSE: SHP), known for its high-tech approach to rare diseases, is to buy US biotechnology company NPS Pharmaceuticals for $5.2bn (approximately £3.4bn) resulted in a 22p fall to 4,719p in early trading, but knowledge that the deal was afoot had been common since mid-December.

With plenty of the folding stuff on its books, Shire is able to snap up NPS for cash, paying $46 per share for the gastrointestinal disorder specialist, with the takeover coming just a couple of months since a a bid for Shire from US firm AbbVie failed — AbbVie had been looking for a way to reduce its taxes.

Growing quickly

With a market capitalization of £28bn, Shire is still a little way behind AstraZeneca (LSE: AZN) (NYSE: AZN.US) at £58bn and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) at £69bn, but with its share price up 63% over the past 12 months it’s getting there.

Over five years, the Shire share price is up 288% compared to only 53% for AstraZeneca and an almost negligible 13% at GlaxoSmithKline. Shire isn’t really paying proper dividends yet, with yields of less than 0.5% expected, but that rate of growth for a FTSE 100 company is really quite remarkable.

GlaxoSmithKline and AstraZeneca have been struggling with loss of patent protection on key drugs in recent years, and one way to compensate for that is by acquisition of smaller companies with promising new drugs and technologies. But neither of the two big pharmaceuticals has been especially successful there either.

Greater expectations

Glaxo’s earnings per share (EPS) has been stagnating for a couple of years and there’s an 18% fall expected for December 2014 — and there’s no growth expected before a 6% rise in 2016.

At Astra we’ve seen two years of falling EPS and there are three more expected, although the company’s turnaround strategy looks set to bring a return to growth sooner than originally anticipated.

But turning to Shire, we see a near doubling of EPS over the past four years culminating in a 77% rise in 2013, and we have three more years of double-digit growth on the cards.

Shire shares are on forward P/E multiples of 19 and 17 for 2015 and 2016 respectively, which is about the same level as Astra and not too far ahead of Glaxo’s 15 or thereabouts.

Competition hotting up

While the big two are set to lead the sector into the future, with Shire’s rapid growth in recent years and great-looking prospects for the smaller Hikma Pharmaceuticals, the pharmaceuticals business could get a whole lot more exciting in the coming years.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.