Shire ADHD Spinoff Idea Is Shaky

(Bloomberg Gadfly) -- Shire PLC's ADHD business has been at its core for years and helped it afford last year's transformative, $35 billion dollar purchase of Baxalta Inc.

As thanks, Shire on Thursday announced, along with its second-quarter results, that it will decide whether to spin off or sell its ADHD business by the end of this year. The firm thinks it has two very different businesses, which "could be better off managed separately," according to CEO Flemming Ornskov on the firm's earnings call.

Bankers might be excited for what would be the biggest health-care spinoff since, ironically, Baxalta. But there isn't an airtight case for such a deal. 

Shire's neuroscience business -- the vast majority of which consists of ADHD medicines -- may be in for a plateau. Generic Adderall is widely available, posing low-priced competition for branded ADHD drugs. Shire's lead drug Vyvanse missed sales expectations in the second quarter, and revenue for its ADHD unit fell 3 percent overall from a year earlier.

Shire has room to expand the franchise internationally. It also has a newly FDA-approved, long-lasting ADHD drug that will launch broadly next month. And the U.S. patent on still-growing Vyvanse extends to 2023. But the competitive environment means the $11 billion dollar value analysts put on Shire's ADHD unit is unlikely to last. 

The ADHD business is less of a strategic fit for Shire these days. A spinoff would finally complete the company's rebranding as a rare-disease-focused biotech. Right now, Shire trades at a major discount to other pharma firms, particularly those making medicines for rare diseases. One hope for a spinoff would be that increased focus and efficiency -- along with greater emphasis on the firm's pipeline over maturing drugs -- would translate to a higher valuation.  

But it's not as if neuroscience is the sole weight hanging over Shire's shares. Its large hemophilia business, acquired via Baxalta, is also a matter of concern. Pro forma growth in the full hematology business was just about 1 percent in the second quarter from a year earlier.

Shire faces competition in hemophilia from several other firms, including Novo Nordisk A/S and Biogen Inc. spinoff Bioverativ Inc. A new Roche Holding AG drug that's been filed with U.S. and European regulators may eat at Shire's sales of medicines for hemophilia A patients. Gene therapies like the one BioMarin Pharmaceuticals Inc. is working on, which could offer one-shot cures for a type of hemophilia, are still distant but are a potentially existential threat.

So even after a spinoff, one of Shire's biggest businesses will still have downside and competitive threats that may continue to distract from the pipeline and newer, growing drugs. 

A disposal may still make sense to raise cash to help pay off Shire's $21.5 billion in debt and enable more M&A. However, Shire's executives pushed back somewhat against the notion that cash was the motivating force behind a possible spinoff on the earnings call.  

Absent a plan to put any proceeds to good use -- or a much more detailed justification for why these businesses would run better apart -- Shire may be better off just holding on to the still-substantial cash flow from its ADHD business. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.