Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Irish biopharma Shire plc (NASDAQ:SHPG) lost more than a quarter of their value in premarket trading this morning after AbbVie (NYSE:ABBV) announced that they are reconsidering their $55 billion tender offer due to the Treasury Department instituting new rules to lower the incentive for tax inversions. AbbVie's decision is somewhat surprising, given that they had recently informed employees of both companies that the merger was going ahead as planned, and even formed a transition committee to begin the rigorous process of combining two major pharmas into a single entity.
Shire's board released a statement on the matter this morning, saying they believe the merger should proceed per their previous arrangement, and even warned AbbVie that they would have to pay up to $1.64 billion in "break-up" fees, if the deal is nixed at this late stage.
So what: Shire's share price has risen over 30% year-to-date largely because of this buyout offer. So, the stock could give up most, if not all, of those gains if this deal is indeed tabled. AbbVie's shares will also probably take a big hit because investors were optimistic about the company diversifying its pipeline, which is presently overly dependent on a single drug, Humira.
Now what: My take is that AbbVie is having second thoughts about performing a substantial capital raise in order to complete this merger. As a refresher, the revised rules bar companies involved in tax inversions from using ex-U.S. funds to buy a foreign entity, forcing AbbVie to take on debt to complete this merger.
Will this merger ultimately take place? While I don't have a crystal ball, I think the positives still far outweigh the negatives for AbbVie in this deal. With an uncertain commercial outlook for its experimental hepatitis C drug and Humira's patent protection set to expire in 2016, AbbVie would be remiss to pass on Shire's highly coveted product portfolio.