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Morningstar | Maintaining Our Shire FVE Following Solid 3Q and Takhzyro Launch

Shire reported solid third-quarter results despite headwinds on gross margin due to product mix and foreign exchange effects, and we're maintaining our fair value estimate as we approach the expected close of the acquisition by Takeda (we assume first quarter of 2019). Third-quarter product sales grew 6% to $3.8 billion driven by immunology (12% growth), which showed strong continued demand for plasma-derived immunoglobulin and albumin (8% growth) and also hereditary angioedema drugs (23% growth). Management slightly lowered 2018 guidance to account for the recent sale of its oncology business, and now expects revenue of $15.3 billion-$15.8 billion and non-GAAP EPS of $14.77-$15.37; our estimates are at the high end of this range. We continue to award Shire a narrow moat and positive moat trend rating, based on its diversified plasma and rare-disease business.

Diving further into immunology, we think Shire is well-positioned, despite the evolving competitive landscape. Immunoglobulin growth was slower than in the first half of the year, largely due to the timing of large international orders. That said, we think the firm is in a solid position to achieve growth slightly higher than market growth in the near term, given the strength of the firm's subcutaneous portfolio. In hereditary angioedema, Firazyr was impacted by de-stocking in the quarter, and Cinryze should see de-stocking in the fourth quarter, but the launch of Shire's new HAE therapy Takhzyro ($51 million in the third quarter) helped Shire significantly increase growth from the prior two quarters. We remain bullish on Shire's HAE franchise, and expect Takhzyro to help the firm regain patients from CSL's Haegarda and expand the treated HAE market.

The long-term potential of Shire's plasma-derived portfolio could see headwinds and tailwinds from competitor data. Grifols is on track to generate data from its subcu immunoglobulin product late this year, so it will very likely compete by 2020 (CSL was first-to-market with subcu option Hizentra). In addition, Momenta's early-stage programs could compete with immunoglobulin in autoimmune indications in the long run; Momenta recently noted that 50% of immunoglobulin use is in autoimmune indications, and they believe it could launch its novel antibodies M281 and M254 as early as 2024. However, we note that the exact indications to be pursued in phase 3 are still uncertain, and immunoglobulins treat dozens of rare autoimmune conditions, both labeled and off-label. Unless these new therapies are significantly more effective than plasma-derived immunoglobulin, we would expect Momenta to struggle to commercialize its new treatments, and Shire has several years to develop its own novel treatments (the firm licensed AB Biosciences' PRIM technology in January) to defend its franchise. Grifols also recently reported promising data for an albumin/immunoglobulin combination in patients with moderate Alzheimer's disease, but we think it's too early to assume significant uptake in this large indication, and we expect additional studies will be needed to support this initial efficacy study.