In today’s $4.2bn swoop on ViroPharma, Shire has pulled off a transaction that somehow captures all that is trendy in pharma: cheap debt has been deployed to buy a business focused on rare diseases, and there is even the promise of a big tax saving.
No doubt bankers hungry for their next deal will take note. But although the takeover ticks all the boxes it is actually about something far simpler: an overvalued company grappling with poor margins and struggling to innovate has seen the wisdom of calling the top and selling itself.
Shire is certainly not getting a bargain: consensus estimates for ViroPharma’s four marketed products and R&D pipeline, plus its net cash balance, amount to just $3.3bn. At Friday’s close the group’s stock had already risen 73% this year – partly on takeover rumours – to a level not seen since the 1999/2000 bubble. Shire is paying a 28% premium on top of even this.
But this does not necessarily make the $4.2bn price tag unjustifiable. For a start the UK company is targeting operating cost synergies worth $150m a year – equal to a staggering 62% of the target company’s 2012 operating cost base.
The potential for such savings alone points to how bloated ViroPharma had become and how desperately it needed to be restructured. Secondly, by becoming part of the Ireland-domiciled Shire, the business will be taxed at just 20% rather than its current 30%-plus.
Beyond purely financial considerations the move makes sense for Shire in that it will boost its position in the rare swelling disorder hereditary angioedema (HAE).
The UK company already markets Firazyr, the second-best selling HAE treatment, though this can only be used to treat an acute episode. Through ViroPharma it gets its hands on Cinryze, the number-one HAE drug, and importantly the only one approved for prophylactic use (BioCryst eyes HAE market as Viropharma struggles to innovate, August 2, 2013).
ViroPharma’s problem was that Cinryze’s orphan designation is due to expire in 2015, after which analysts forecast a sales plateau; perhaps a larger player like Shire might be able to put additional muscle behind the drug’s marketing and maintain growth. On a call today, Shire’s chief executive, Flemming Ornskov, denied that Cinryze’s sales needed to be “reinvigorated”.
Shire also plans to grow Cinryze sales outside the US. With North America revenue projected to hit $395-405m out of a consensus figure of $409m this year, ex-US is virtually an untapped opportunity.
|Justifying ViroPharma's $4.2bn price tag|
|NPV of ViroPharma today ($m)||...and what it could be worth to Shire ($m)|
|Plenadren||283||NPV of operating cost cuts||648|
|Buccolam||114||NPV of tax saving||547|
|Vancocin||17||NPV of Cinryze sales boost||?|
|Product NPVs based on EvaluatePharma consensus data.|
Shire will finance the deal through a $2.6bn short-term bank loan and $1.2bn revolving credit line, which together with current cash will, it says, also allow it to pay off its $1.1bn convertible bond due next May. Healthy cash generation will enable this additional indebtedness to be paid down within just three years, it says.
Importantly, as far as investment bankers are concerned, the group said that even after the takeover it would have enough firepower for further M&A.
True, Cinryze faces additional problems: a subcutaneous form had to be scrapped after patients developed antibodies in phase II, and ViroPharma’s contract manufacturer, Sanquin Blood Supply, was hit with a US FDA warning letter in August.
Shire intends to maintain the manufacturing relationship with Sanquin and work through any deficiencies that might remain once the takeover is completed in late 2013/early 2014.
Like the Cinryze push outside the US and any plan to reverse flatlining sales after 2015, this is an initiative where scale might provide a distinct advantage.