Shire still offers 50% upside, reckons Morgan Stanley

Analysts at Morgan Stanley took a fresh look at rare diseases specialist Shire on Monday, revisiting their bear case as the investment bank reiterated its 'overweight' rating on the group.

Morgan Stanley, which snipped its target price on the to 4,700p from its previously issued 5,700p mark, reassessed is bull-bear base values by around 20%, citing setbacks for Lialda generics for the ulcerative colitis drug, challenges for Xiidra's dry-eye market access, threats to the haematology unit, and low visibility on a potential separation of neurosciences, driving a 12% cut to the 2018 consensus EPS forecast.

"We also consider different valuation methodologies to gauge a support level for the stock. Our stress test suggests that £29/sh appears to be a floor, slightly above our £27 bear case derived from a less granular approach," Vincent Meunier and his team of analysts said.

With the shares changing hands for not much more than 3,000p, analysts' 4,700p price offered a 50% upside and reflected a lower long-term discounted cash flow assumption, even if Shire could still suffer from increased competition in its rare diseases wing, which had so far not been perceived as a risk, as well as the potential of failing to fully integrate Baxalta and extract planned cost synergies from the former Baxter International business.

"Shire has undoubtedly suffered from negative newsflow and the overhang of competition. We struggle to justify significant absolute downside from here; the stock remains undervalued and underappreciated for its strong delivery," the Monday note read.