Shire is less than half the size of the UK pharmaceutical giants Astrazeneca and Glaxosmithkline but, with three $2 billion-a-year drugs across three therapy areas, it is much less dependent than its bigger rivals on single blockbuster drugs. This means that when the patents start to expire and competition from generic rivals is unleashed, the pain will be more bearable.
However, Shire is not completely immune to the threat from copycats. Key products, including Lialda, used to treat ulcerative colitis, Vyvanse, which treats attention deficit hyperactivity disorder (ADHD), and Firazyr could face generic competition when their patents expire, starting from next year. Accounting for nearly $3.5 billion in revenue, they make up a significant portion of sales. Roche, a competitor, has recently launched a haemophilia treatment, Helimbra, that could dent Shire’s dominant position in this area and disrupt $3.8 billion of sales.
The FTSE 100 company yesterday reported better than expected full-year results for 2017, with total revenues up by a third to $15.2 billion, ahead of forecasts of just under $15 billion. Growth was driven by strong trading in its immunology drugs division and good sales outside the US. The Trump administration’s recent tax cuts also helped to boost the bottom line.
Despite this, investors seemed to be spooked by a warning from Flemming Ornskov, the chief executive, that profits could be lower this year, with sales growth in the mid-single digit range, owing to “the anticipated impact of generics”. Shire’s share price, which has fallen 31 per cent in the past 12 months, declined 1.4 per cent to £31.35½.
That’s not the only pressure the company will face this year. It also warned yesterday that investment in its new plasma manufacturing plant in Georgia in the US will be a drag on overall growth.
It is partly with pressures from generics in mind that Shire bought its leading American rival Baxalta in 2016 to strengthen its portfolio. It remains heavily indebted since the deal, with debt repayments likely to swallow up considerable cashflows in coming years. But on the positive side, the acquisition almost doubled Shire’s revenues and helped it to expand its international footprint as well as its expertise in advancing regulatory and commercial activities.
One of Shire’s greatest strengths is its promising pipeline of drugs that could replace sales when its present bestsellers reach their patent cliffs. Recent products to emerge from the labs have been performing well, according to analysts at Hargreaves Lansdown, and have continued to broaden Shire’s range of therapy areas, with the dry eye treatment Xiidra a particular success.
Last year Mr Ornskov said the company was considering spinning out its ADHD drugs division into a separate business, having decided that its rare diseases and neuroscience businesses had “distinct strategic priorities”. Roughly translated, this means that the neuroscience business needs more investment in R&D and less is needed for the rare diseases business, which has a strong pipeline. In preparation for this, Shire has pledged to publish separate financial metrics for each division from the first quarter of the current financial year.
Yesterday Mr Ornskov said Shire would continue to weigh up the pros and cons of a split, adding that he would provide an update on the company’s thinking at the time of its next half-year results. He did not comment on rumours circulating late last year that Shire could be a takeover target, with Pfizer, the American group, reportedly a potential buyer.
Advice Hold
Why Despite short-term headwinds, it has a deep pipeline of commercial and development-stage drugs
Galliford Try
There are many ways to spook investors as a FTSE 250 company. Informing the markets that you are looking to raise £150 million in equity after booking at £25 million exceptional charge from the collapse of a business partner is certainly one of them.
Shares in Galliford Try fell 19 per cent yesterday after the group said it would be turning to the markets for more equity to cover cost overruns from the Aberdeen bypass project, in which Carillion had been a key partner.
The Aberdeen Western Peripheral Route has plagued Galliford Try. The group agreed to the project in 2014 when it was looking to boost its construction arm and take on bigger projects, but it was entered into on a fixed-price basis. Rising costs on the scheme have led to eroding margins and Galliford had already booked an exceptional charge of £98 million last May to cover this and other legacy projects that were taken out between 2011 and 2014.
Shareholder sentiment has also been undermined by the group bringing forward its plans to restore a two times dividend cover on pre-exceptional earnings. That has led to the half-year dividend being cut by 13 per cent to 28p a share.
Yet to dismiss the growth prospects of Galliford would be foolish. Take out the impact of this Aberdeen project, which is due to finish in the summer, and the interim results look particularly strong.
Underlying profits are up 29 per cent to £83 million while net debt in the first half of the year has dropped to £203 million, down from £231 million the previous year.
That growth has been driven by the group’s vibrant housebuilding division. Linden Homes, which accounts for just under a third of group revenue, is benefiting from the soaring demand for new-build properties. Operating profits rose 9 per cent to £80.9 million, while margins increased to 18.5 per cent.
Galliford Try shares have been one of the poorer performers among housebuilders, with a 23 per cent decline in value in the year to date, largely driven by the collapse of Carillion. But even with the rise in dividend cover, the yield is set to be 9 per cent for the full year to June 2018.
Advice Hold
Why Housebuilding strength should see it ride out the storm
