No matter how much firefighting the sellside tried to do yesterday to persuade the markets that the AbbVie/Shire deal could still go ahead, investors who sold off Shire in droves basically got it right. Today AbbVie as good as confirmed that the deal was off.
As surprising as the swiftness of the US firm’s about turn is its resignation to paying Shire a $1.6bn break fee. The credibility of both companies’ management is now shot, but at least Shire can look forward to a bright future as a standalone entity, as well as continuing to court takeover interest.
For one, other bidders were probably waiting for AbbVie’s offer to fall apart – something of which Shire, a perennial bid target, must be well aware. Allergan, for example, is fending off a takeover attempt from Valeant right now, and a last-ditch tender for Shire could put it out of Valeant’s price range.
Other interested parties like Lilly, Celgene or Biogen Idec could be players, though with the bloom well off the tax inversion rose Shire would be lucky to attract a near-term valuation close to AbbVie’s proposed $53bn.
Of course, if US companies’ ability to shield offshore cash from the tax authorities is about to get much tougher the possibility of Pfizer returning to bid for AstraZeneca is also much reduced – a point not lost on the markets yesterday. A separate question is whether Astra might eventually seek a long-rumoured merger with Shire.
More likely than not?
There had been a noticeable sense of panic from the sellside yesterday as news broke that AbbVie was having second thoughts about Shire in the wake of looming curbs on tax inversion (AbbVie-Shire pact wobbles as inversion backlash spreads, October 15, 2014).
Many analysts had trumpeted Shire’s success in attracting a premium valuation, and several urged calm yesterday. Bernstein was typical, highlighting the “formalist” language used by AbbVie, and arguing that a deal was still more likely than not.
But with Shire waiving a three-day requirement that had prevented AbbVie from immediately considering its next step, the US firm moved fast, today announcing its recommendation that shareholders vote against the transaction it had earlier proposed.
It noted the $1.635bn break fee, and said this would be Shire’s “sole and exclusive remedy for all losses and damages”. Shire, in turn, said it was considering the situation and would make a further announcement in due course.
Neither company’s C-suite comes out of this with flying colours. AbbVie’s chief executive, Rick Gonzalez, will be seen as having wasted months of management time and $1.6bn on an overpriced deal in which he had failed to secure the proper safeguards against a change of circumstances that many saw as a possibility, not to mention the imminent lawsuits.
Since AbbVie needed a defensive takeover it will be interesting to see what shape it is in to go shopping again. The situation for Shire’s Flemming Ornskov is probably not as bad, though his immediate worry is that he is today chief exec of a company worth almost 30% less than it was two days ago.
But Shire can plausibly remain a standalone company. Sales of its branded drugs are forecast to grow 8% a year to $8bn in 2020, in spite of having lost the blockbuster Adderall to generic competition, suggesting that its rare disease focus has helped protect it from the industry’s usual boom-bust cycle.
Then there is the likelihood of Shire going shopping itself – notwithstanding the time it might have lost while preoccupied with AbbVie. Speciality and rare disease businesses are hot property, and deal bankers will be keen for Shire, fortified with an additional $1.6bn, to re-enter the fray.
Rumoured targets include Cubist and even NPS Pharmaceuticals, whose hypoparathyroidism project Natpara scraped through an advisory panel and on which an FDA approval decision is due by October 24. However unlikely a first-pass Natpara approval might be, NPS rose 8% yesterday, so clearly someone is willing to make the bet.