JPMorgan cuts Shire to 'neutral', says Neuro spin-off wouldn't create value

The bank said that while the valuation remains undemanding, there are few 2018 or 2019 catalysts beyond the potential spin-off of the Neuroscience division, which it does not see as creating fundamental value.

"We believe a spin could highlight the disproportionate earnings contribution from the short-lived Neuroscience franchise," it said, as it remodelled the split company following the full-year results last week. It now reckons the Neuroscience division has a 60% EBITDA margin, which implies that the remainder Rare Disease division has a 37% EBITDA margin, with expansion potential.

"Modelling Neuroscience standalone highlights the disproportionate earnings contribution from fairly short-lived Vyvanse cashflows," said JPM, which estimates that Vyvanse - the flagship asset in Shire's neuroscience portfolio - is around 25% of group EBITDA.

"With the key possible 2018 catalyst being a potential Neuroscience spin-off that we do not see creating fundamental value and with the haemophilia overhang likely to still weigh on the Rare Disease business in 2018/19, we downgrade," it said.

Shire said in its full-year results last week that it had completed the first stage of the strategic review of the Neuroscience division and concluded that the business warrants additional focus and investment. "There is a strong business rationale for creating two distinct business divisions within Shire: a Rare Disease division and a Neuroscience division," it said.

The company said at the time that it expects to report the operational performance metrics of each division separately beginning with the first quarter of 2018. Meanwhile, the second stage of the review will continue to evaluate all strategic alternatives, including the merits of an independent listing for each of the two divisions.

At 1335 GMT, the shares were down 1.8% to 3,054.50p.