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Shire Slips As Rivals Production Problems Look Set to Ease

Shire has come under pressure on a renewed competitive threat to one of its key drugs.

Its Replagal treatment for Fabry disease has seen a boost to its sales following manufacturing problems at competitor Genzyme, which makes the rival drug Fabrazyme. There have been shortages of Genzyme's product since June 2009 when the issues at its Allston Landing plant in the US emerged.

In the meantime Shire has capitalised on the shortfall, with its market share of the Fabry disease treatment in Europe jumping from 45% in 2008 to around 80% now. With revenues of $435m, up from $293m, Replagal now represents around 10% of Shire's sales and more than 12% of profits, according to analysts.

But now the European Medicines Agency has approved Genzyme's Framingham plant for the production of Fabrazyme, although US approval is still awaited.

Shire's shares are down 17p at ?21.96, and Savvas Neophytou at Panmure Gordon said:

We remain conviction sellers of Shire, and point to a regulatory update by competitor Genzyme, which should result in significant head-winds for the company's Replagal franchise. We reiterate our sell recommendation.

We believe the market is not using the appropriate discount rate for the company's future cash flows in light of market dynamics in its core business of Human Genetic Therapies, which may face price pressures in the long-term. Teasing out low quality Adderall XR profits, which we assert are worth 3 times PE, allows us to compute implied valuation of 1,780p, which values the rest of the business at 17.6 times. This confirmed by the discounted cashflow valuation of 1,800p.

Posted: January 2012