Analysts view Shire defense as independent pharma

There has been quite a lot of reaction to  yesterday’s presentation by Ireland-headquartered Shire's presentation, defending its independence and argument that the unsolicited bid from the USA’s AbbVie (NYSE: ABBV) significantly undervalues the company. Below we publish a summary of notes from two investment analysts: William Blair and Jefferies.

William Blair

AbbVie's attempt to purchase Shire is the latest attempt by US companies to purchase foreign companies through a mixture of cash and equity, with the combined company domiciled in a lower tax rate country, say analysts at William Blair. Shire's tax rate guidance for 2014 is between 18% and 20% and there is relatively little overlap between the two companies' existing franchises.

Both companies aspire to enter the ophthalmology segments; Shire is developing Lifitegrast for dry eye and Premiplex for retinopathy of prematurity (ROP) and AbbVie may expand Humira into non-infectious uveitis with a Phase III program in progress.

Shire's board confirmed that it had met with AbbVie before unanimously rejecting the proposal on the basis that the proposal fundamentally undervalued the company.

Unlike the ongoing Allergan Valeant hostile bid and defense, it will be difficult to argue that new management at Shire has not executed well, increasing EBITDA margin from 37% a year ago to 45%, an industry-best mark for cash generation. Management has also deployed capital aggressively by purchasing ViroPharma, for $4.2 billion in January 2014 and Lumena Pharmaceuticals Inc. for $260 million in May 2014 on top of acquiring Lifitegrast and Premiplex over the past year.

However, Shire remains an attractive target for acquisition by one of the large pharmaceutical companies facing increased generic erosion of core franchises. Many potential acquirers hold significant cash offshore, and an acquisition of Shire could be attractive for a company interested in entering the rare genetic disease space.

Furthermore, Shire's attention-deficit hyperactivity disorder (ADHD) franchise would also be highly accretive to a company with a large psychiatric presence. We note that several stocks have traded well since the Shire news, likely in speculation that the company may perform a defensive acquisition, including Cubist and BioMarin, both companies that hold clear overlap with Shire and have been rumored to be possible targets in the past.

Jeffries

Earnings per share# accretion and cash flow benefits from acquiring Shire could be higher than investors appreciate as we consider the underlying tax rate of AbbVie, note analysts at Jeffries. Inversion risk looks to be the key driver of the ceiling, which we estimate at £55 per share.

The Shire bid is driven by financial engineering, but there may be other benefits. We have considered that an acquisition by AbbVie may be required to dilute the contribution of Humira over time as well as to prevent AbbVie itself eventually becoming prey to industry consolidation.

Shire deploys bid defense out of the AZN playbook:
- The bid fundamentally undervalues Shire,
- The company has seen accelerating growth and shareholder returns over the last 12 months following a change in management,
- Shire will more than double sales to $10 billion by 2020, and
- The proposal would deny shareholders the full benefits of Shire's growth strategy.
. AbbVie can raise materially in our view, but will have to risk-adjust inversion
. Blue Sky scenario implies bid could go much higher
. Inversion risk may cap bid at c£55 in reality:
. Expecting a raised bid up to £55 per share: