Cowen: Shire's Weak Market Sentiment Yields Opportunity

Shares of Shire have seen a "mixed reaction" following its proposed acquisition of Baxalta Inc (NYSE: BXLT), which – when combined with the overall market correction, has created a "compelling opportunity" for investors.

Outperform Rated, $325 Price Target

In a report published Thursday, Cowen and Company analyst Ken Cacciatore maintained an Outperform rating and $325 price target on shares of Shire, as the investment community will begin to recognize the company's revenue and earnings diversification (including the Lifitegrast opportunity) with or without Baxalta as part of the company.

As the Lifitegrast October 25 PDUFA approaches, Cacciatore revisited his valuation models and removed his already "overly conservative" Lifitegrast assumptions and what effect this will have on the stock.

Related Link: Cowen Believes Shire Pharam's Lifitgrast NDA Will Be Approved

The Lifitegrast Effect

The analyst further noted that by removing his Lifitegrast estimates, shares are valued at $225 (based on a discounted cash flow valuation), which reinforces the analyst's belief that the stock is "very well protected" at its current price level.

Nevertheless, Cacciatore is assuming that the Lifitegrast regulatory risk will soon be "resolved favorably," either through an outright approval or through the Street's "acknowledgement of eventual approval" given positive OPUS-3 results.

"And what is striking to us is that despite our very strong conviction in the likelihood of a Lifitegrast approval, the valuation – as it stands today – seemingly provides no credit for the opportunity," Cacciatore wrote.

Priority Review Granted

Cacciatore pointed out that the FDA accepted Shire's NDA and granted it Priority Review, despite the fact that a Priority Review was not initially requested. This served as a "positive surprise," as it may have signaled an acceleration in Lifitegrast's approval timeline.

Finally, Cacciatore stated that he is not expecting Shire's management to "remain strategically idle" during its approach of Baxalta. In addition, if his thesis regarding Lifitegrast approval is correct, Shire's stock will "likely strengthen," which will make its all equity Baxalta acquisition "more and more likely."

Bottom line, Shire's pursuit of Baxalta should become "easier/less costly" given the "likely upcoming positive equity momentum" that Shire's shares are set to experience this quarter.

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