Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



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.DL  ) 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.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3023746, ~/Articles/ArticleHandler.aspx, 8/29/2015 9:01:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:04 PM
ABBV $63.98 Down -0.53 -0.82%
AbbVie Inc. CAPS Rating: ****
AGN.DL $0.00 Down +0.00 +0.00%
Allergan, Inc. CAPS Rating: ****
SHPG $235.96 Up +3.00 +1.29%
Shire plc (ADR) CAPS Rating: ****
VRX $236.12 Up +1.22 +0.52%
Valeant Pharmaceut… CAPS Rating: ***