| Illustration by Renaud Vigor. |
For the past few years, Shire has been defined by two things: popular niche drugs and failed M&A. That changed in June of this year, when the Irish-based drugmaker pulled off the biggest acquisition in its history by buying Illinois-based biopharmaceuticals company Baxalta. Purchasing the $6 billion business gave Shire a new portfolio of profitable specialty drugs and the ability to be a big player in the biotech sector.
Then the third quarter happened. Shire’s earnings came in slightly weak but still on par with what Wall Street expected. With the Baxalta deal, Shire is sitting at approximately 4 times leverage at a time when investors are starting to worry about pricing pressure and promising new competitors taking business away from the company’s market-leading hemophilia treatments. The Street believes Shire will be able to shake off pricing worries and repay the debt it took on for Baxalta, but that could take a few years.
Some investors aren’t sticking around to find out how it will go. But a number of hedge funds are.
Paulson & Co., John Paulson’s battered, $12 billion hedge fund is going all-in on a health care M&A thesis as part of its core strategy and has been steadily amassing a large position in Shire since 2014. Paulson started building the stake after a failed merger between AbbVie and Shire, and currently has about 9 percent of his fund’s portfolio in the company.
Paulson’s thesis is that companies like Shire will be bolstered by consolidation in the pharmaceuticals industry regardless of what happens with drug pricing at the policy level. At the end of October, Shire was down 19 percent for 2016. Paulson was betting on deals like Baxalta to lead to a rebound, but that purchase was so big, says BTIG analyst Tim Chiang, that the company will have a hard time doing other deals until it can bring down its leverage.
More-immediate external events have been favorable to Shire. The company was a breakout winner as drug stocks rebounded sharply on the news of Donald Trump’s election and the feeling on Wall Street that his administration is unlikely to push for drug companies to lower their prices. On November 9, Shire closed up 8.3 percent for the day. But the big question is whether the sector, and specifically Shire, will be able to hold on to that outperformance. Market observers have cautioned against reading too much into a one-day rally on perceived policy choices that could easily change once the Trump administration takes over in earnest.
Lone Pine Capital, Marshall Wace, Suvretta Capital Management, and Dan Loeb’s Third Point all have positions in Shire, but they aren’t necessarily backed by an M&A thesis. Those firms apparently are less spooked than other biotech investors about the company’s leverage or the danger of new treatments cutting into Shire’s market share. A recent Cowen and Co. research note may highlight why: “The Shire legacy products are demonstrating continued solid growth . . . The Shire/Baxalta combination is now an execution story.”
Paulson, Loeb, and their hedge fund brethren who are betting big on Shire now must watch — with bated breath, in some cases — to see how that execution plays out.
