Mergers and acquisitions continue in the pharma sector with Shire (SHPGY) recently announcing its intention to acquire the privately held regenerative medicine company Advanced BioHealing.
The closure of the deal, which is valued at $750 million, is subject to antitrust clearance and attainment of other closing conditions. Following the closure of the deal, Advanced BioHealing’s operations will be incorporated into Shire’s Specialty Pharmaceuticals segment. Shire intends to finance the deal through available cash balance.
The acquisition, which will allow Shire to set up a segment dealing with regenerative medicines, is expected to bolster Shire’s portfolio with the addition of Dermagraft. Dermagraft — skin substitute is marketed for treating patients suffering from diabetic foot ulcers (DFU) for more than six weeks.
The product, which recorded US sales of $146 million in 2010 in the US, currently holds about 5% of the highly lucrative market, which is characterized by a huge unmet need. Slow-healing DFUs affect more than 500,000 people in the US every year.
We note that Dermagraft is a product with huge potential and offers scope for label expansion into other indications such as venous leg ulcers (VLU). Dermagraft is currently being evaluated for VLU in many countries. Data is expected by year-end and approval from the US Food and Drug Administration is expected to be sought in the first quarter of 2012. Approval of Dermagraft for the additional indication would further boost the top-line of the merged entity.
Management at Shire stated that the acquisition would have no impact on its previously announced guidance for 2011. Shire continues to expect impressive revenue and earnings growth in 2011.
Product sales are expected to register growth in line with that witnessed in 2010. The company expects the year-over-year increase in 2011 adjusted research & development and selling general and administrative expenses (combined) to be at the upper end of the 10%-13% range.
Our Recommendation
We currently have a long-term Neutral recommendation on Shire. The company carries a Zacks #3 Rank (Hold) in the short-run.
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