Shire's Q2 Earnings Strong but Overshadowed by AbbVie Deal

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Shares of Shire (SHPG) gained 1.43% following the news of an acquisition agreement with AbbVie (ABBV) as well as better-than-expected second quarter results. Thereafter, shares lost 1.6%. Overall, shares are down 0.2% since the company released second quarter results.

Shire reported second quarter 2014 earnings (excluding special items and amortization) of $2.67 per American Depositary Share (ADS), up from $1.88 per ADS in the year-ago quarter and beating the Zacks Consensus Estimate of $2.41.

Quarterly revenues increased 20% to $1.5 billion, beating the Zacks Consensus Estimate. The increase in revenues was driven by a robust growth in product sales.

Quarter in Detail

Product sales went up 22% y/y to $1.5 billion. Growth was driven by attention deficit hyperactivity disorder (ADHD) drug Vyvanse (up 20% to $360 million), hereditary angioedema (HAE) drug Firazyr (up 80% to $89 million) and Fabry disease drug Replagal (up 14% to $131 million).

The addition of Cinryze from the erstwhile ViroPharma contributed $130 million to product sales. In total, sales of products from ViroPharma contributed $141 million to the total. We remind investors that Shire acquired all of the outstanding shares of erstwhile ViroPharma in Jan 2014 for $50 per share in cash or approximately $4.23 billion.

Royalties declined 20% to $29.2 million in the second quarter. Adjusted research & development (R&D) costs declined 10.0% to $209.1 million in the reported quarter. Selling, general & administrative (SG&A) expenses increased 10.0% to $392.6 million.

2014 Outlook Updated

Shire expects product sales growth in high teens in 2014 compared to the previous guidance of mid-to-high teens growth. Royalties and other revenues are expected to decline 10%–15% in 2014 from 2013 levels. Shire now expects earnings in 2014 to grow at a low-to-mid 30% range as compared to the previous guidance of a mid-to-high 20% range.

Pipeline Update

In Jun 2014, Shire agreed to conduct pediatric clinical studies following FDA’s request to investigate the potential use of Vyvanse for the treatment of ADHD in children aged between 4 and 5 years.

Shire also plans to submit a New Drug Application (:NDA) for pipeline candidate lifitegrast in the first quarter of 2015, following a meeting with FDA in May 2014.

During the quarter, Shire decided to discontinue further development of Vascugel for the treatment of acute vascular repair in patients undergoing hemodialysis.

Shire completed the acquisition of biopharmaceutical company, Lumena Pharmaceuticals in the second quarter thereby adding two candidates, SHP625 and SHP626, to Shire's pipeline. Earlier in the month, Shire acquired privately-held, biotechnology company, Fibrotech which focuses on the development of small molecules for the treatment of renal diseases and fibrosis. The acquisition of Fibrotech has added another candidate, SHP627 (formerly FT011), to Shire's pipeline, which is being developed for patients suffering from renal impairment.

Shire Agrees to be Acquired by AbbVie

Concurrent with the second quarter results, Shire announced that it finally agreed to AbbVie’s acquisition proposal. Under the terms of the offer, shareholders of Shire will receive £53.19 for per Shire share (£24.44 in cash and 0.8960 ordinary shares of the merged company for each Shire share held).

Our Take

Shire currently carries a Zacks Rank #3 (Hold). We view the acquisition by AbbVie as positive given the price offered. AbbVie’s proposal of £53.19 per Shire share represents a significant premium of 53% over the unaffected stock price of Shire of £34.67, before the merger talks surfaced on May 2, 2014. Moreover, Shire shareholders will have a 25% stake in the merged company.

Investors looking for better-ranked stocks may consider companies like Allergan (AGN) and Pfizer, Inc (PFE). Both carry a Zacks Rank #2 (Buy).

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