Markets live chat transcript for the chat ending at 12:13 on 14 Mar 2008. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Hi there. Welcome to Markets Live
PM: This is FT Alphaville’s daily discussion on stocks and other stuff.
PM: Managed to get rid of Neil Hume for the day.
PM: Rob Orr is here with me instead
RO: Good morning!
PM: Right, let’s kick off with some raw market information.
PM: But everyone is talking abotu it
PM: Concerning Shire.
RO: All over the market and the news wires
RO: The biggest riser on the FTSE 100 – soared 59p to £10.02
RO: Touched £10.35 earlier
RO: On talk on bid interest.
PM: Any names in the frame.?
RO: Pfizer
RO: Talk in that bankers have been appointed and Pfizer is waiting for markets to stabilise.
RO: I should add – this is just raw market gossip at the moment.
PM: Rumours — but certainly got the stock moving
PM: What’s the attraction of Shire anyway?
RO: Some would say it has a stronger pipeline than many. Main product going forward is Vyvanse, its treatment for attention deficit disorder.
RO: Shire is seeking to promote Vyvanse as a replacement for Adderall XR as a leading ADHD treatment – Adderall comes off patent next year.
RO: According to Nomura Code, 30 per cent of Shire sales in the last quarter were from new products.
RO: The last piece of research on the company I could find was from Charles Stanley.
RO: Entitled Vyvanse to the rescue?
RO: Shire confounded the legion of industry pessimists with full year results which
comfortably exceeded expectations and were driven by a very strong Q4
performance. Key to the Q4 performance (outwith a low tax charge which may not
be maintained beyond 2008) was a strong revenue performance driven by reduced
couponing for Vyvanse (ADHD replacement product) and a stronger than expected
performance from Adderall XR. Total revenues increased by 36% over 2007 to
$2,436m and in Q4 by 46% to $724.5m. New product launches chipped in usefully,
representing 23% of total sales over 2007 (V’s 6% in 2006) and 32% of total over Q4
(V’s 12% in the equivalent period in 06). In an upbeat presentation Shire forecasts
that new products should account for more than 45% of total sales in 2008. Full
year pre-tax emerged at $552m against our estimate for $535m with the Group’s
own “cash” EPS emerging at $0.98c. The dividend was raised by 20%, in line with
expectations and a reflection of confidence in the near-term outlook. Following
these results we have reworked our estimates (see table below). Although 2008
has been upgraded we have lowered estimates therafter reflecting lower Adderall
XR sales, coupled with increased marketing costs associated with support for
product launches, especially Vyvanse. The latter is expected to be approved in the
adult market in the US in April, with launch anticipated for the latter part of Q2 ’08.
RO: Shire’s share price has been under pressure of late, reflecting concerns regarding
Vyvanse prescription trends. The Group provided a robust defence both of the value of
couponing (patient and physician survey data feedback) and prescription trends thus far
(small sales force specifically targeting high prescriber physicians). This, coupled with
arrangements now in place with all the top six managed care organisations in the US and
clear product differentiation, underpins the Group’s forecast for Vyvanse sales of $350m-
400m in the current year (V’s $76.5m in ’07). Total Group revenue is targeted for growth
of mid-to high teens, in line with expectations.
We remain impressed by the strength and diversity of the product pipeline where, it
should be noted, long (c10yrs+) patent protection is in place. The purchase of New River
has helped augment the Group’s pipeline and facilitate the ability to drop non-key
developmental products to focus on core future drivers. The timetable for potential
blockbuster Juvista (reduced scarring) phase 3 appears to have lengthened, however
Shire makes much of this year’s cash generation to support the current business model
and possibly to target 4-5 new therapeutic areas requiring a niche sales force. This will
require significant R&D support, hence lowered ‘09/’10 estimates, however, we believe
prospects to be brighter than the doubters believe and for that reason we reiterate our
Buy recommendation.
PM: So are Pfizer likely to do this?
RO: Well, good question.
RO: As we wrote in FT last week, Jeff Kindler, chief executive, is under pressure from Wall Street to retool Pfizer to boost sales and profit.
RO: Pfizer itself is preparing for the impending expiry of the patent for its blockbuster cholesterol drug Lipitor, worth some $12bn in annual sales.
RO: Reporting figures last week, Mr Kindler ruled out an acquisition of a big rival drugmaker.
RO: “I don’t see anything that would meet the definition of a mega deal with a large-cap biopharma company whose strategic value would outweigh the potential concentration of risk, the inevitable disruption it would bring and the price,” Mr Kindler told a meeting of Wall Street analysts.
RO: But – is Shire a megamerger?
RO: Pfizer’s market capitalisation at $143bn.
RO: Shire’s capitalisation is just over £5bn (roughly $10bn).
PM: So no, this would not constitute a mega takeover — for Pfizer
RO: Would seem not.
RO: Here is something that we got sent by a sector specialist
RO: Central to takeover theories is that a purchaser with an existing CNS [central nervous system] sales force could get rid of most of Shire’s footmen, realising synergies that should run to hundreds of millions of dollars. Also, many commentators believe a backer with deeper pockets could wring more out of the product.
Vyvanse is forecast to be generating sales of more than $1bn by 2012, with limited competition on the horizon. On top of that, it is patent protected until 2023, a decent stretch.
For the large pharma companies that are struggling to find new products in the face of looming patent expiries, Vyvanse alone should look a tempting prospect. With its other products, top line sales growth at Shire is forecast to grow 13% over the next five years, to $3.78bn.
Global majors which could take a look include Pfizer, which has a fairly large CNS franchise, is facing significant revenue loss when Lipitor goes off patent, and is not shy about making acquisitions. AstraZeneca has been named in the past, but is likely to be busy with MedImmune integration right now. A merger with Cephalon, which is striving to build its own CNS franchise on the back of insomnia drug Nuvigil, is another possibility.
RO: Helps explain the logic of a tie-up
PM: hmmm
PM: This is all over the newswires now – what are Shire actually saying?
RO: No comment from Shire this morning – as one would expect. But sources close to Shire said the company was “not jumping around” about this one this morning.
PM: “Not jumping around” !
RO: quite literally
PM: I think that is useful guidance!
PM: So it’s a Friday rumour! afterall
RO: On Astra: has been named before as possible bidder for Shire. but as note above says, bit busy integrating medimiune right now.
RO: or even medimmune
PM: ok ay — thanks for all that
PM: 
PM: Wider market?
RO: Don’t say wider markets! Neil Collins has banned the phrase remember.
PM: Oh yes of course.
PM: As has been mentioned below, there is a piece by Neil in this week’s Spectator on us 
RO: http://www.spectator.co.uk/the-magazine/business/552631/my-daily-fix-of-markets-live.thtml
RO: All very complementary – even the insults were complementary!
RO: Like the one about you lookign like a boomaker.
PM: Some of you might remember that Neil Collins came in here a few weeks ago to see see how we did ML.
RO: Which you do
RO:
PM: 
PM: We were not sure what he was gong to write
PM: Not least cos he’s a curmudgeonly bugger.
PM: Anyway, in the event that it as a hatchet job we were going to return fire.
PM: Line up an air strike.
PM: What were the co-ordinates Rob?
RO: Errrr — STAN13092007
PM: A FEW TILES MAY GO, BUT NORTHERN CAN WEATHER THIS STORM
BY NEIL COLLINS
1232 words
13 September 2007
RO: Oh that’s cruel Murphy!
RO: That’s Neil saying buy Northern Rock
PM: just before it blew
RO: How would you like it if other people reprinted your dud stories!
PM: Hmm. They’d need a lot of pixels!
PM: Oh I know – but he’s got a sense of humour.
PM: Wider market?
RO: FTSE 100 is up 9.7 points to 5,702.2
RO: Has come back in the last hour
RO: Dollar still under pressure. Euro hit an all-time high of $1.5650 this morning.
RO: We’ve just had Euro zone inflation figures – which hit a new record of 3.3 peer cent in February.
RO: All eyes are now on US consumer price inflation data - due out at 12.30 our time. Also the University of Michigan confidence survey later in the day.
RO: CPI is expected to reveal a 0.3 per cent increase in consumer prices for February, representing a 4.3% rise over a year.
RO: While we’re here – think it’s worth posting the S&P note that was partly responsible for turning round the markets last night.
RO: They saying end is in sight for mortgage-backed securities-related writedowns.
RO: Standard & Poor’s Ratings Services believes that the bulk of the write-downs of subprime securities may be behind
the banks and brokers that have already announced their results for full-year 2007. There may be some additional
marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the
percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some
write-downs is greater than any reasonable estimate of ultimate losses.
The write-downs of collateralized debt obligations (CDOs) of subprime asset-backed securities (ABS) by large banks
and investment banks (referred to as banks) in North America and Europe to-date total approximately $110 billion.
To this amount we add approximately $40 billion in write-downs of insurers (financial guarantors and other
insurers) and banks in the Gulf States and Asia to arrive at a rough estimate of $150 billion in global disclosed
write-downs to-date.
RO: Most of the write-downs have been on the so-called supersenior tranches of CDOs of subprime ABS. To date, banks
have written down their unhedged supersenior CDOs of ABS by more than $65 billion. On an original exposure of
about $160 billion, this represents about a 40% discount. However, that discount percentage varies tremendously
from institution to institution.
In our view, some of the variation may be based on differences in the specific securities the institution owns, as the
securities vary widely in their ultimate loss characteristics. Some of the variables that affect the valuation are
whether the exposure was to so-called CDO-squared securities (CDOs that purchased tranches of CDOs) or to the
supersenior tranches of high-grade CDOs or mezzanine CDOs; the proportion of the underlying loans that were of
2005 or earlier vintages; how many of the CDOs’ investments were in other CDOs and in subprime residential
mortgage-backed securities (RMBS); and the levels of subordination in each structure.
RO: Based on available information, we believe that the largest players can be seen as having undertaken a rigorous
valuation methodology to come up with conservative valuations. Citigroup Inc. and Merrill Lynch & Co. Inc., for
example, value their high-grade supersenior tranches at 52% and 68% discounts to original exposure, respectively.
The broader range of banks values them at only a 30% discount. Similarly, Citi and Merrill value the supersenior
tranches of the mezzanine CDOs at 63% and 73% discounts, respectively, whereas the broader range of banks
values them at a 48% discount.
PM: Hmm — went thru that yesterday afternoon
PM: Jusging by the comments, readers were not too impressed by S&P
PM: Pint being that they are just referring to subprime
PM: Now that its infected everyting else….
PM:
PM: v funny below
PM: Sad news about Tony Dye
PM: I did know he quite well
PM: New the internet bubble was over when he was forced out of P&D — final bear to capitulate
PM: Well, UBS
PM: ON we go tho — Maximus wants to talk about the Pru…
PM:
PM: How’s the Prudential doing this morning?
RO: Was up earlier
RO: Now down 5p to 649p
PM: Had figures out earlier – which hit expectations.
RO: But seems to have come off as the market has appreciated comments from Mark Tucker effectively ruling out a break up of the company
RO: Says no plans to spin-off the fast-growing Asian arm
RO: A blow to some
RO: Speaking as the company reported better than consensus figures for 2007, Mr Tucker said: “I think the undervaluation of the business is apparent. Looking at analysts’ average sum of parts valuation our share price should be around 850p. However there are no plans to separately list.”
RO: That’s from our story on FT.com
PM: Price was up about 2 per cent earlier – but then there’s also been some hot money in expecting Ping An of China to come and buy a great big stake.
PM: No news on that either , so the prices has dropped back.
PM: Ive got to confess to being a tad sceptical on that.
PM: I think the Pru management are quite happy for the story to circulate. Anything that props yer stock up in the current climate is to be welcome.
PM: But Ping An first has to raise a load of money in Shanghai – and in case any one failed to notice, the Shanghai market hasn’t been too healthy of late.
PM: Secondly, Ping An is rather busy at the moment discussing buying a stake in the fund management arm of Fortis.
PM: JP Morgan’s working for them on that, I believe.
PM: I might be wrong, but I suspect the story that it is simultaneously doing something with the Pru is a bit over cooked.
RO: Should come true over the weekend, in that case.
PM:
RO: I just think it is a natural fit for the Chinese.
PM: Just to repeat — think Ping is talking to Fortis about a stake in its fund management biz — not the bank overall
PM: Rob - -you might be right on the Pru
PM: Im just sceptical
PM: Got any analysts’ research on the Pru??
RO: Here’s a bit from Cazenove:
RO: Pru have reported EEV pretax operating profit of £2,542m compared to our estimate of £2,518m and a consensus of £2,467m (2006 - £2,029m).
New business profit £1,215m v Caz £1,136m, 2006 - £1,039m. Beat driven by Asia.
DPS of 18.0p compared to a consensus of 18.00p and a prior year payout of 17.14p.
EV per share (excluding goodwill, final DPS) of 532p compared to a consensus of 506p and a prior year figure of 420p. The EV was helped by a £748m P&L credit relating (somewhat counter intuitively) to wider credit spreads.
The outlook comment is cautious on the global economy, but the target to double new business profit in Asia will be achieved one year earlier than originally planned. Overall prospects are said to be positive. No comment on the widely expected Asian IPO or on Ping An so far as we can see.
Asset quality has not changed much since interims. Our main concern remains the £19bn US bond portfolio rather than sub-prime
RO: And here’s some stuff that the Pru itself would like everyone to read…
RO:
From MF Global Top billing for 2008 Our 2008 forecasts are for an underlying 15% growth in
earnings and new business and an ROEV of 16%. We
believe this will be sector-leading performance.
