Is Shire’s Dividend Safe?

Is Shire’s dividend safe?

• ~$5 billion in annual sales– Up 9% year-over-year in 2013.– Products sold in 50 countries.– Market leadership in ADHD

• Adderal XR• Intuniv• Vyvanse

– Growing rare disease product line.

However, Shire faces patent risk.• Adderall lost patent protection in 2012

– Sales declined 12% year-over-year to $375 million.• Intuniv loses patent protection in December 2014.

– Intuniv sales totaled $335 million in 2013.

Shire is one of the largest global drug manufacturers.

Patent RiskLet’s consider the patent threat.

Shire’s ADHD product lineup generated $1.9 billion in sales in 2013, including $375 million from Adderall XR (currently facing generic competition) and $335 million for Intuniv, which goes off-patent in December.•Aggressive pricing is helping stabilize the rate of decline for Adderall XR sales.•Sales of Vyvanse are offsetting risk to Adderall.While Adderal and Intuniv sales are at risk, Vyvanse is more important to Shire given that its market share totaled 17% exiting 2013.

Shire’s revenue has climbed despite patent expiration.

Reasons for dividend optimism

Fast growing therapies in the first quarter:

– Vyvanse (ADHD): Sales grew 18% YoY to $351 million in Q1.

– Firazyr (hereditary angioedema): Sales up 80% to $75 million in Q1.

– Lialda (ulcerative colitis): Sales up 28% to $129 million.

– Elaprase (Hunter syndrome): Sales up 13% to $129 million in Q1.

– Cinryze (Hereditary Angioedema): Generated $86 million from Jan. 24th to Mar. 31st.• Acquired in buyout of ViroPharma.

A rich platform of products and a solid pipeline of potential new therapies.Pipeline opportunity:

Goal to double neuroscience sales by 2010.•Opportunity to grow market share in adult market.• Adderall IR and XR account for 58%

market share of adults.• Vyvanse market share is 15%.

•SHP465: long-lasting adult ADHD drug.• Potential launch in early 2015.

•Vyvanse label expansion to include binge-eating.• Filing pending.

Reasons for dividend optimismA rich platform of products and a solid pipeline of potential new therapies.

Sales and earnings growth opportunity:

•Total product sales forecast to grow mid to high teens percentages this year.•EPS growth forecast to grow mid to high twenty percent range.•Revenue and EPS analyst estimates reflect future growth opportunity.

Cash dividend payout ratioShire’s focus has been on reinvesting profit into growth rather than dividends. As a result, Shire’s cash dividend payout ratio, which measures the percent of cash used to pay dividends after capex and preferred dividend payments, is only 6.2%, far below potential suitor AbbVie (49%) and industry peer Novartis (75%). That suggests substantial room may exist for future dividend increases.

Dividend growthShire doesn’t pay a lot in dividends, but it is steadily increasing its payout. The board has increased the dividend by 15% annually since 2008.

Current yieldShire’s dividend yield is anemic at just 0.26%, suggesting dividend investors may want to consider other dividend stocks, like Novartis, instead. However, Shire has demonstrated a commitment to growing its dividend and the company’s shareholder friendly free cash flow grew from $113 million last year to $231 million this year. That suggests the company has plenty of dividend flexibility.

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