Shire shares screen cheap

Drug giant Shire has largely tracked the market downwards since the stockmarket sell-off last month. It's pursuit of American rival Baxalta has been a bit of a distraction, too, and it will cost a lot more than the all-paper $37-a-share Shire currently has on the table. There's talk that Shire is also looking elsewhere, but one analyst likes the potential for near-term catalysts and thinks the shares are significantly undervalued.

"At current levels Shire looks cheap from a PE (16x) and PEG (0.9x) perspective, offering nearly double the growth of its EU peers (15% vs 8%) and with an attractive risk-reward, near-term newsflow and EPS 6% ahead of consensus," writes Barclays. "We upgrade to 'overweight', increasing our price target to £57."

"Offering 19% 3yr EPS [compound annual growth rate] CAGR, the downside from here is limited especially in light of our mid-2016 Lifitegrast approval expectations."

If they're right, there's 17% upside based on current prices and Shire would be back trading at levels last seen before the Baxalta bid was made public on 4 August. Barclays reckons Shire cannot afford any more than $55 for Baxalta. That gives it legroom to raise its offer, but obviously the economics begin to deteriorate the more they pay.

There's no need to panic, but whether it's Baxalta or possibly Actelion, another potential target mooted since June, Shire must get a major deal done. One look at the list of Shire's drugs facing patent expiration between 2018 and 2023 – that includes binge-eating drug Vyvanse and gastrointestinal product Lialda - or patent challenges tells you that. In all, they represent 61% of group revenue.

However, away from the M&A discussion, Barclays reminds investors of the upcoming catalyst surrounding the potential approval of dry eye disease (DED) drug Lifitegrast on 25 October. Having consulted the experts, Barclays has quadrupled its own forecasts for peak sales to $1.2 billion, and expects approval mid-2016 following a phase 3 safety and efficacy study, likely in December.

In a best-case scenario, Lifitegrast sales could be as high as $3 billion, worth 880p per Shire share.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.