Shire's Baxalta Vision May Be Fading

Shire's manufacturing facility in Lexington, Massachusetts, pictured last year. U.S. regulators have asked for more information on the London-listed speciality pharmaceuticals company’s dry-eye disease treatment. ENLARGE
Shire’s manufacturing facility in Lexington, Massachusetts, pictured last year. U.S. regulators have asked for more information on the London-listed speciality pharmaceuticals company’s dry-eye disease treatment. Photo: Reuters

Shire is suffering from blurred vision. U.S. regulators have asked for more information on the London-listed speciality pharmaceuticals company’s dry-eye disease treatment, rather than handing it an early approval.

That needn’t be a huge blow. But it adds to the anxiety around Shire since its surprise hostile bid for Baxalta in August.

To be sure, Lifitegrast, which some analysts forecast could generate annual sales of up to $ 1.5 billion, is a key part of Shire’s pipeline and growth outlook. The good news is that Shire has a trial already completed that could address regulators’ questions; it could even enable a push for broader usage of the drug. But success, with results due before year’s end, now becomes crucial. And this is in an area where difficulties in diagnosis and reliance on patients’ reporting of results make outcomes unpredictable.

Meanwhile, it still isn’t clear how Shire can force the issue with Baxalta, with the target showing few signs of engaging. Chief Executive Flemming Ornskov has been meeting investors to persuade them of the cost savings on offer in the combination. But, financial appeal aside, questions linger over the strategic merits of Baxalta’s hemophilia business, as well as the risks of digging in for a protracted hostile battle.

There are some comforts for investors. One is that the Baxalta situation may be resolving itself: the further Shire shares fall, now down more than 20% since the bid was announced, the less likely it seems the all-stock deal goes ahead. Given Baxalta would own 37% of the combined company, a Lifitegrast approval might also be required for any deal to progress.

And, while its recent performance owes something to Baxalta angst, Shire has also got caught in the U.S. biotech downdraft. The stock tracks the Nasdaq NDAQ 0.11 % biotechnology index much more closely than European pharma peers. But Shire isn’t exposed to heightened scrutiny of biotech drug pricing in the same way: its biggest business, and near-term growth engine remains attention-deficit-hyperactivity disorder drugs, which aren’t an obvious target.

At about 15.5 times 2016 forecast earnings, Shire is now trading at a discount to the large-cap European pharma sector. It has generally commanded a healthy premium and offers double the sector’s three-year earnings per share growth, notes Barclays. BCS 1.35 % For the moment, given U.S. woes, a bounce-back seems unlikely without clarity on Lifitegrast, Baxalta or both.

Write to Helen Thomas at [email protected]


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