Is AbbVie's Revised Offer for Shire Finally Enough?

The biopharma industry has already seen a frenzy of merger and acquisition activity in the first half of 2014. Oddly enough, however, the three largest takeover attempts have all fallen short thus far.

Specifically, Pfizer's various offers for AstraZeneca all went the way of the dinosaurs, Valeant Pharmaceuticals (NYSE: VRX  ) can't seem to appease Allergan's (NYSE: AGN  ) management, and AbbVie  (NYSE: ABBV  ) has already struck out three times in its attempts to lure Shire  (NASDAQ: SHPG  ) into a merger. 

Yesterday, we heard rumors that AbbVie has submitted a revised offer of $51.5 billion to Shire's shareholders. As a refresher, the last offer was reportedly worth $46.5 billion; so this revised offer represents a 10.7% increase.

Is this offer finally enough to entire Shire's management and shareholders? Here are three reasons why AbbVie's improved offer still might not be good enough. 

Reason No. 1
A quick look at Shire's financial metrics and you would probably think the latest offer is an absurd price to pay quite frankly. The company's shares are now trading at a price to earnings ratio of 54, after exploding higher by 30.3% following news of AbbVie's interest in a possible buyout. Moreover, shares are trading at over 10 times book value. 

SHPG Chart

SHPG data by YCharts

If you took these financial metrics at face value, however, you'd be wrong in your assessment of Shire's true value. While it's true that the company doesn't have stellar internal metrics presently, you should bear in mind that most of these issues are the direct result of recent acquisitions that put a dent in Shire's wallet. The ViroPharma deal, for example, set Shire back by approximately $4.2 billion. 

Shire's acquisitions in the orphan drug space have nevertheless made the company a top player in one of the most coveted markets in the industry. According to Shire's own internal metrics, they expect their orphan drug portfolio to generate around $10 billion in sales by 2020. Such a growth rate would more than help to lower its comparatively high price to earnings ratio, and create value for long-term shareholders. 

Reason No. 2
Analysts estimate AbbVie should see revenue exceed $20 billion next year, especially if its new hepatitis C therapy gains approval in the U.S. and EU. With a reported effective tax rate of 21%, the company would benefit substantially from the tax haven that is Ireland.

Some quick back of the envelope calculations suggest that AbbVie could save close to $2 billion in tax liabilities next year by acquiring Shire (last year's income tax expense was $1.2 billion, I'm assuming the revenue growth already discussed, etc). Assuming modest revenue growth, the current offer of $51.5 billion might not even account for 20 years of tax savings. In short, AbbVie's deal looks a bit stingy and doesn't consider much in the way of long-term tax savings.

Reason No. 3
AbbVie is not Shire's only suitor. In an attempt to stave off Valeant's takeover bid, Allergan is reportedly interested in approaching Shire about a possible deal. Personally, I don't see how Allergan has the firepower to outbid AbbVie, but Shire's management might prefer such a deal, given the synergies that would be created by merging with Allergan. All told, AbbVie's deal for Shire is all about tax savings, which may end up hurting the commercial prospects of Shire's product portfolio and its clinical program. A deal with Allergan, by contrast, would be more of a meeting of like minds, in my opinion.

Foolish wrap-up
I've thought Shire would get bought out for the past year. And now that there is an offer on the table, I think it's far below market value. Although the latest offer comes at a near 40% premium compared to where shares were a month ago, Shire's long-term growth prospects make it much more compelling as a stand alone entity -- than a takeover target, for shareholders. If left to its own devices, Shire would more than likely increase shareholder value even further by executing additional acquisitions to firm up its standing in the orphan drug space. In sum, I think this deal would work out well for AbbVie shareholders from a tax perspective, but Shire shareholders with a long-term outlook would be getting the short end of the stick if this deal goes through.

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