Shares of Shire (NASDAQ: SHPG) have rallied nearly 75% over the past 12 months, handily outperforming the broader market and many of the company's biopharmaceutical industry peers. Shire posted 18% revenue and 38% adjusted earnings growth last quarter, and its five-year PEG ratio of 1.2 suggests the stock may still have room to run.
Source: Ycharts.
Investors probably wonder if Shire's rally can continue. I believe that it can, for three key reasons: strength in rare diseases, solid returns from its attention deficit hyperactive disorder drugs, and its attractiveness as a buyout candidate.
Strength in rare diseases
Investors should pay attention to two orphan drugs in Shire's rare-disease portfolio: Cinryze and Firazyr.
Cinryze and Firazyr are both treatments for hereditary angioedema, or HAE, a rare genetic disease characterized by acute attacks of swelling. Cinryze is the sole approved preventive treatment for HAE. Firazyr, along with Dyax's Kalbitor and CSL Behring's Berinert, are only administered when attacks occur.
Shire added Cinryze to its portfolio via the $4.2 billion acquisition of ViroPharma last year. The drug generated $85.6 million in sales last quarter, which included its first two months of reported sales under Shire. Analysts at J.P. Morgan expect Cinryze to eventually generate peak sales of $700 million.
However, investors should note that BioCryst (BCRX +1.01%) recently reported positive midstage trial results for its experimental HAE preventive treatment BCX4161. Patients given BCX4161 had an average rate of 0.82 attacks per week, compared to 1.27 attacks in the placebo group.
Roth Capital believes BCX4161, if approved, could generate peak sales of $1 billion. It's still too early to determine if BCX4161 could threaten Cinryze without a head-to-head study, but it's a potential competitor to watch.
Sales of Firazyr jumped 80% year-over-year last quarter to $74.9 million, and were up 102% to $234.8 million in 2013. Although the drug faces more competitors than Cinryze, analysts believe it can generate peak sales between $350 million and $450 million. That would put the potential value of Shire's HAE treatments at over $1 billion.
ADHD drugs remain a solid pillar of growth
While HAE treatments represent exciting growth potential for Shire, ADHD drugs remain a solid source of revenue. Shire's three ADHD drugs -- Vyvanse, Intuniv, and Adderall XR -- control a combined 25% share of the U.S. ADHD market, according to IMS Health. They comprised 40% of the company's top line in the last quarter.
Vyvanse is the growth engine among the three drugs, with sales rising 18% last quarter to $351.2 million and 19% in 2013 to $1.23 billion. That constant double-digit growth could help the drug eventually achieve peak annual sales of $3.5 billion, according to Morgan Stanley. Shire is also testing Vyvanse as a binge-eating treatment.
Sales of Intuniv rose 6% to $82.3 million in the last quarter and 16% to $335 million in 2013. While sales of Intuniv are still climbing, the drug could face generic competition later this year. Sales of Adderall XR, Shire's former blockbuster, fell 15% last quarter to $85.1 million due to generic competition.
Although sales of Intuniv and Adderall XR could fall in the face of generic competition, rising sales of Vyvanse, which remains patent protected until 2023, should more than offset those losses.
An attractive buyout target
While I never recommend purchasing a stock on solely on buyout speculation, Shire's attractiveness as a buyout candidate is a nice bonus to its aforementioned strengths.
Shire is based in Ireland, which has an average corporate tax rate of 12.5%, compared to 35% in America. To take advantage of this huge difference in tax savings, many U.S. companies -- including Actavis, Perrigo, and Endo Health Solutions -- bought out Irish companies and moved their headquarters to Ireland.
Allergan (NYSE: AGN), the California-based maker of Botox, is reportedly interested in acquiring Shire. Such a move would diversify Allergan's portfolio away from cosmetic drugs and lower its tax rate, while also boosting its defense against Valeant Pharmaceuticals, which launched a hostile bid for Allergan after the company rejected its $47 billion takeover earlier this month.
In late April, Reuters reported that Allergan was gearing up for a new takeover bid for Shire, although neither company has confirmed the news. The combination of the two companies would create a pharmaceutical giant with a market cap of $84 billion and annual sales of $11 billion.
The Foolish takeaway
Shire is defined by attractive fundamentals, has promising drugs with strong growth potential, and is a highly attractive buyout candidate. Although the stock is near its 52-week high, I believe it still has considerable upside potential.
