Will Shire's Journey End in a Ring?

"I should like to save the Shire, if I could," J.R.R. Tolkien, The Fellowship of the Ring.

British rare disease specialist Shire PLC (NASDAQ: SHPG  ) has become a hot property in this latest round of pharmaceutical merger mania. Not only does Shire offer a relatively low tax rate by virtue of its Irish corporate domicile, the company's focus on rare diseases fits in with the desire of many pharmaceutical companies to focus on therapeutic areas where reimbursement is high and the barriers to entry are substantial.

That Shire continues to get marriage offers is no guarantee that it will consent to do so. Not unlike AstraZeneca, Shire sees itself as a buyer, not a seller, and it may well take a prohibitively high number to seal a deal.

AbbVie steps to the plate and takes three swings
Shire has been tied to Allergan (NYSE: AGN  ) , Bristol-Myers Squibb, and now most recently AbbVie (NYSE: ABBV  ) . AbbVie acknolwedged before the the market opened on Monday that it has made three offers to acquire Shire, all of them a mix of cash and stock that Shire rejected.

The latest offer worked out to about $236, or a 24% premium to Thursday's close. AbbVie offered just under 0.80 shares of ABBV for every Shire share and GBP 20.44 per share in cash, but Shire declined the offer. As per UK takeover laws, AbbVie has a month to work out another offer or it has to go away for six months.

Is AbbVie out?
According to AbbVie's press release, this last offer was about 17% higher than the initial offer it made in early May. Given the relatively limited synergies of the potential combination, it is not clear to me that AbbVie can go significantly higher with its offer and still generate value from the deal.

Buying Shire would knock a few points off of AbbVie's tax rate and give the company better access to future cash generated outside the U.S. Shire would also help diversify the company away from its reliance on key drug Humira (more than 50% of sales). Beyond that, though, AbbVie doesn't really have an established presence in the areas where Shire is strong. Moreover, given Shire's own recent cost-cutting efforts, I don't see large expense reduction opportunities outside of duplicate "back office" expenses.

Will Allergan come back?
Allergan is desperate to ward off a hostile takeover from the ever-persistent Valeant and has not managed to find a rival white knight bidder. Finding a target that allows it to launch a tax inversion transaction is one of the best options that Allergan has for attempting to replicate the value that Valeant purports to offer, and Allergan has reported looked to Shire as a target.

Allergan reportedly approached Shire earlier in 2014 and I would be surprised if they haven't made a follow-up approach since then. Shire might rightly be wary of accepting Allergan shares puffed up by Valeant's interest as currency in a deal and the relative market caps would make it very nearly a merger of equals.

Anybody else?
There is a long list of pharma companies that would like to lower their tax rate and gain access to high-margin rare disease drugs. Given how relatively little focus there has been from Big Pharma on rare diseases, almost any large pharma company outside of Sanofi could consider a bid for Shire as worthwhile diversification. Bristol-Myers was reportedly interested last year and while Bristol-Myers has definitely reoriented itself to a focus on oncology (particularly immuno-oncology), adding Shire and its rare disease drug portfolio would add diversification and tax leverage.

Shire as a solo act
Contrary to these actual and rumored bids, Shire seems more focused on staying independent. Shire is hosting an investor call on Monday (June 23rd) where it intends to discuss its long-term vision, but it sounds as though management believes it can attain $10 billion in 2020 revenue all on its own – a figure that is definitely above the large majority of sell-side forecasts and gives some insight into the sort of valuation disconnect that bidders/would-be acquirers may be facing.

It's also worth noting that Shire has been rumored as a buyer itself. About a month ago it was rumored that Shire was preparing a bid for NPS Pharmaceuticals. NPS denied that any talks had taken place, but it may take a more definitive move from Shire management to put all of the M&A rumors to rest.

The bottom line
That AbbVie is interested in diversifying its business through M&A is not at all surprising, and neither is it surprising to learn that Shire has yet another suitor. As I don't see Shire as an irreplaceable asset for AbbVie, there are plenty fish in the sea for the company to consider. For Shire, there may be a little added pressure on management now to prove to its shareholders that it can create enough value that it doesn't need to sell itself to the highest bidder.

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