Credit Suisse ups Shire to 'outperform' on Baxalta merger

Shire got a boost on Tuesday after Credit Suisse upped the stock to ‘outperform’ from ‘neutral’, following the proposed merger with US peer Baxalta.

Shire announced on Monday that it had agreed a $32bn takeover of Baxalta.

CS said the deal provides a solid strategic fit and mitigates the significant generic risk at Shire from drugs such as Vyvanse, Lialda and Firazyr, at the end of the decade.

The bank said the combined group will be a leader in rare diseases with strong positions in haematology, lysosomal storage diseases and immunology.

In addition, it said Baxalta's position in haematology complements Shire's hereditary angioedema franchise and should provide cheaper manufacturing options for best-selling drug Cinryze over time.

The bank reckons the negative reaction to the deal on Monday reflects investor concerns on haemophilia completion, the integration of Baxalta’s employees and Baxalta’s $8bn IRS tax overhang from the spin-out of Baxter.

CS pointed out that Baxalta's ex-US footprint is much greater than Shire's, offering the potential for the London-listed company to expand its rare diseases infrastructure more rapidly with less incremental investment.

Credit Suisse said that while all these concerns are valid, the associated risks are overdone.

The bank cut its price target to 5,000p from 5,400p, which assumes the combined group trades at a 15% discount to the European major pharma peers on price-to-earnings multiples in 2014.

“While the deal diversifies much of the generic risk at Shire, the continued uncertainty over future potential disruptive technology, especially in haemophilia, will result in the stock trading at a discount to the sector for some time.”

At 1300 GMT, Shire was up 5.3% to 4,131p.