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By Karen Andersen, CFA | 01-08-2018 02:00 PM

Defensible Portfolio Makes Undervalued Shire a Standout

The narrow-moat biotech firm's financial health doesn't worry us as its approved therapies help drive growth.

Karen Andersen: Morningstar recently completed a pipeline review for 20 of our largest pharma and biotech stocks with moats. Among the undervalued drug firms, narrow-moat Shire stands out for its defensible portfolio of approved therapies, and the firm trades at more than a 20% discount to our fair value estimate.

The market has punished Shire's shares over the past year, as competition heats up in hemophilia, and investors remain concerned about higher debt levels, which were elevated after the firm acquired Baxalta in mid-2016. Shire's Baxalta acquisition gave them key hemophilia therapies Advate and Feiba, which will begin to decline as new competition from Roche enters the market in 2018. However, we think the market is overly bearish on Shire's hemophilia franchise, as Advate should remain the foundation of on-demand treatment for bleeds in hemophilia and should see strong sales in many markets outside of the U.S. and Europe.

Beyond hemophilia, Shire's Baxalta acquisition also gave them what we see as the best portfolio of plasma-derived therapies, which are seeing strong, durable growth and don't have any new competitive threats on the horizon. Shire also has several rare disease franchises where it either offers the only treatment on the market or dominates with the best treatment options. We think Shire will strongly defend these portfolios, helping it drive growth despite expected hemophilia losses. We're not concerned about Shire's financial health, and we expect the market to begin to realize the strength of Shire's core businesses as debt levels decline and profits grow.

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