Full-year financials from Shire (LSE: SHP) were not enough to inject a much-needed dose of jet fuel into the companyâs share price this week.
The FTSE 100 pharmaceuticals play has shed a third of its market value during the past 12 months and more recently, Shireâs stock hit the skids in January after it was forced to downscale its medium-term revenues targets.
Sales are now predicted to register at $17bn-$18bn by 2020, down from its prior target of $20bn a couple of years back. This was not the only cause for investors to hit the exits, however, as it also poured cold water on talk of an immediate spinning off of its Neuroscience division into a separate listed entity.
A risky pick
Iâm not surprised that Shire continues to flounder. While this weekâs full-year financials showed total revenues leaping 33% during 2017, to $15.2bn. Product sales rose by the same percentage, to $14.4bn, the Footsie firm cautioned: âWe expect to deliver mid-single-digit product sales growth in 2018 after absorbing the anticipated impact of generics.â
These intense competitive pressures, allied with costs related to its new plasma manufacturing site in the US, as well as lower royalties, could all smack profits in the current year, it added.
Meanwhile, concerns over Shireâs colossal debt pile following the 2016 mega-acquisition of Baxalta. Although net debt fell $3.4bn last year, it still ended December at an eye-watering $19.1bn.
City analysts believe 2017 will prove to have been the first step on Shireâs path back to sustained earnings growth, and rises of 14% and 9% are forecast for 2018 and 2019 respectively.
These projections leave the medicines giant dealing on a forward P/E ratio of 8.3 times, a pretty tempting valuation given the strength of its late-stage pipeline as Shire currently has 15 products in Phase III testing.
A better selection?
Clearly only those with a high tolerance of risk should be prepared to invest in Shire, even if the long-term rewards could be colossal should its development targets be met and global healthcare investment continue to climb at a terrific rate.
Its FTSE 100 colleague AstraZeneca (LSE: AZN) is another share being smacked by revenues disappointment on the back of generic competition.
Indeed, the Cambridge-based firm advised this month that the loss of protection on blockbuster drugs like its Crestor cholesterol battler will see âa low-single-digit percentage increaseâ only in 2018. And this is expected to cause yet another earnings drop in 2018, this time by 18%.
However, AstraZenecaâs decision to overhaul its R&D strategy in recent years is finally beginning to deliver the goods. The business rolled out five new products in 2017 alone, with sales of Farxiga and Brilinta both moving past the $1bn sales barrier.
On top of this, sales to emerging markets are also clicking through the gears. Last year, sales to these lucrative regions rose 6% year-on-year, helped by a 12% improvement in China.
With the firm also working hard to slash costs across the business, City brokers expect AstraZeneca to report a 12% earnings jump in 2019. It’s expensive on paper, but I reckon AstraZeneca’s much-improved pipeline makes it worthy of an elevated forward P/E ratio of 18.6 times.