Under breakup pressure, Shire cheers grumpy investors with Q3 earnings beat

Sachem Head Capital Management has raised the possibility of a large-scale breakup with Shire execs, an October report said.

Shire shares have taken a beating this year, but they got a boost Friday from third-quarter earnings results investors viewed favorably.

While revenues of $3.7 billion came in a shade below Wall Street’s $3.75 billion estimate—hurt in part by manufacturing-driven Cinryze shortage that’s now been resolved—profits topped estimates by 3%. A stronger gross margin brought diluted earnings per share to $3.81, passing the consensus $3.69 forecast.

The earnings beat comes amid a rocky stretch for the Dublin drugmaker, whose shares have struggled in the wake of its $32 billion Baxalta. Major executive exits—including that of CFO Jeff Poulton, who will leave at the end of the year—have only made matters worse.

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And just last week, a court ruling paved the way for generics for Allergan’s eye medication Restasis, meaning new Shire launch Xiidra could soon have cheaper competition. CEO Flemming Ornskov, though, stressed on a Friday call with reporters that Xiidra is the only FDA-approved medication that specifically bears a dry eye indication, and that “with or without generic competition we will do extremely well.”

While the company has looked at a divestment of its neuroscience business to cheer shareholders—it’s currently weighing its options for the unit, and it expects to make a decision by year’s end—to some investors, that move wouldn’t be enough. Earlier this month, reports said activist hedge fund Sachem Head Capital Management had raised the possibility of a large-scale breakup with Shire management.

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The way Bernstein analyst Ronny Gal sees it, though, a bigger split isn’t going to happen. In a Monday note to clients, he acknowledged that separating the company into four parts—general medicine, intravenous immunoglobulin (IVIG), orphan drugs and hemophilia—would “probably create value” with buyers nabbing the IVIG and orphan businesses at a premium. Hemophilia would “have some believers,” too. But it’s “rare for a company to commit suicide like this,” he pointed out.

Either way, he expects the chatter to continue. “With the stock under pressure for so long, a discussion of sharp action (take-out, breakup) is bound to take place,” he wrote.