Shire hints at ADHD spinoff, but could someone step in and buy the neuro franchise?

Drugs to treat attention deficit hyperactivity disorder (ADHD) have been a mainstay for Ireland’s Shire, so it’s no surprise that the company’s second-quarter earnings report was overshadowed by the revelation that the franchise may be on the block. Even though the company somewhat buried details of the news towards the end of its earnings release, the potential spinout or sale of Shire’s neuroscience assets dominated Wall Street’s attention.

“Shire is assessing strategic options for our neuroscience franchise to derive even greater value from this franchise,” the company said in the earnings release. “These options may include the independent public listing of the neuroscience franchise.”

The reasoning? Shire has completed its integration of Baxalta, which it acquired last year for $32 billion, picking up a portfolio of hemophilia products. It wasn’t the smoothest of deals—Shire’s combined hematology assets disappointed in the quarter after the acquisition closed—raising questions about the future of that franchise. But the combined product portfolio delivered 7% sales growth last quarter and the company announced it’s on track to realize $700 million in cost synergies within three years of picking up Baxalta.

RELATED: Shire's new Baxalta hemophilia meds drop the ball in first combined quarter

The acquisition "has now more than ever established Shire as the leading biotech company focused on rare diseases," Shire CEO Flemming Ornskov said during a call with analysts following the earnings announcement. "As part of our ongoing work to optimize Shire's portfolio and Shire's strategic focus we emphasize that now is the right time to formally assess potential strategic options for the neuroscience business." 

All told, Shire reported stronger-than-expected sales and earnings for the quarter. Its revenue of $3.74 billion beat estimates of $3.71 billion, and its non-GAAP operating earnings of $1.49 billion, or $3.73 per share, sailed past the average estimate of $3.60. This, despite the fact that sales of ADHD drug Vyvanse came in below estimates last quarter at $518 million.

With total sales last year of $2 billion, Vyvanse is the flagship asset in Shire’s neuroscience portfolio. The company also markets Adderall XR, a long-acting amphetamine, but it has been overtaken by generic competition. Problem is, Vyvanse is expected to lose its patent protection in 2023. So the question of just how valuable the portfolio might be—and more importantly, who might want to buy it—has been a major discussion point among analysts.

In late June, Shire finally won approval for Mydayis (formerly SHP465), its long-acting ADHD drug that was initially spurned by the FDA but was greenlighted after Shire presented a remarkable 16 studies to back it up. Shire estimated Mydayis, which will be launched in September, would pull in $500 million in sales by 2020, but analysts on average are expecting sales to peak at $288 million.

During the earnings call, Ornskov said the company is already marketing Mydayis on a limited basis and the response has been positive.

Still, competition is a worry. The same week the FDA approved Mydayis, it also approved Neos Therapeutics' Cotempla, an extended-release ADHD drug that melts in the mouth—a key feature that’s likely to appeal to young patients.

RELATED: Can Shire's new Mydayis, its latest Adderall iteration, really nab $500M in sales?

Last year, Bernstein analyst Ronny Gal suggested Allergan might buy Shire’s ADHD business. Allergan could extend the product reach of Vyvanse, he suggested, and boost the launch of Mydayis. But in a note to investors, Gal questioned whether Allergan would really benefit from acquiring Shire’s neuroscience business, given “what Allergan will be buying is yet another patent cliff (in 2023) and further, that its positioning as 'growth pharma' will be discredited by betting on reformulation of an 80-year-old drug class.”

That said, Gal couldn’t argue with the idea that Shire might be better off without the ADHD franchise. “First and foremost, it would remove an overhang for the stock and the only major patent cliff facing the company,” he wrote.

RELATED: Should Allergan and Shire pull off an ADHD deal?

During the earnings call, Ornskov was pressed by analysts to justify the spinout of the neuroscience business and explain how the company would be able to get a decent valuation on it.

"I'm very confident that this is a homogenous integrated business that will do well even if we spun off the neuroscience business," he replied. As for the value of the neuroscience unit, he expressed confidence in the continued growth of the market, especially outside of the U.S. "I think this will be an incredibly attractive franchise," he said.