By Ben Hirschler and Paul Sandle
LONDON (Reuters) – Shire has come a long way since 1986, from selling calcium supplements from above a shop in southern England to becoming a poster child for a nimble global drugs firm, driven by deals and smart bets on specialty medicines.
Now, though, some investors wonder if it is running out of steam.
A year after completing its biggest ever deal, the $32 billion acquisition of Baxalta, investors are fretting over weakened margins and big challenges in the hemophilia business it inherited with the U.S.-based group.
Chief Executive Flemming Ornskov recognizes the risk, but told Reuters an overnight slump in the company’s share of the $11 billion-a-year hemophilia market was highly unlikely.
The threat will be crystallized next week when Roche reports detailed results for its new drug ACE910, which tackles the inherited bleeding disorder in an innovative way and could displace conventional hemophilia therapies.
Early generic competition to flagship gastrointestinal drug Lialda has added to Shire’s problems, offsetting positive news on treatments against rare diseases and attention deficit disorder.
Another worry is Shire’s debt pile in the wake of Baxalta, which has put on hold the Dublin-based firm’s past business model of regular bolt-on deals of up to a few billion dollars.
Daniel Mahony, a fund manager at Polar Capital, who has sold his Shire shares in recent months, says that leaves sales and profit growth unclear.
“Historically, Shire has derived more growth from M&A than organically, but they’ve got to a point now where they seem to be running out of deal runway,” he said.
With the one-time stock market darling underperforming the European drugs sector by around 20 percent this year, Ornskov admits he doesn’t get many compliments from investors – but he insists Shire is on track with Baxalta.
“This is a totally different scale and you need a bit more patience, you need a bit more time. In the end we will deliver the same outcome: we will pay off the debt and we will improve margins,” he said.
“The Street is wanting to see quarter-by-quarter that we can actually integrate this business, that we haven’t over-stretched and can pay down debt.”
With analysts not expecting Shire to repay all its debt from the Baxalta acquisition before the end of the decade, Ornskov said large-scale M&A was not on the agenda for now, although he would continue to shop for individual products.
Margins would return from today’s high 30s percent to pre-Baxalta levels in the mid 40s, he added.
SANGUINE ON ROCHE DRUG
Ornskov is sanguine about the threat from Roche, pointing out that ACE910 is likely to take time to win widespread adoption, especially outside the United States, where many contracts are based on long-term supply tenders.
The notion that a new drug, which still faced questions about safety and tolerability, could damage Shire’s hemophilia franchise overnight was not “super realistic”, he added.
“The proof will be in the pudding. What I am most focused on is to build out the business, because outside the U.S. there’s significant growth … in just getting more patients treated.”
Similarly, Shire’s $800 million-a-year gut drug Lialda will still retain “significant” market share because other generic manufacturers are unlikely to follow Zydus Cadila’s lead in winning approval for copies any time soon.
Ornskov said many companies had tried to copy the formulation, and Zydus had only won approval by conducting its own clinical trials.
“To make a comparison from Zydus to all the other ones, is I think a stretch of the imagination,” he said.
(Editing by Mark Potter)