Shire Acquires ViroPharma: Two Winners In This Deal

Nov.12.13 | About: Shire PLC (SHPG)

Shares of ViroPharma (VPHM) jumped up on Wednesday following the news that Shire (NASDAQ:SHPG) is acquiring the company, to get a hold of CINRYZE to further grow its business and the growth profile of the firm.

The deal seems very appealing to investors in both firms on the back of very sizable synergy estimates.

The Deal

ViroPharma announced that it has entered into an agreement with Shire PLC. Under the terms of the deal ViroPharma will sell itself for $50 per share in cash, for a total value of $4.2 billion.

The deal price represents a 27% premium compared to Friday's closing price and a 64% premium to the share price on September the 12th, the day before rumors about a possible deal hit the market.

Shire notes that the deal represents an excellent strategic fit, while it expands into the rare disease portfolio which Shire is looking to strengthen.

Shire's CEO Flemming Ornskov commented on the rationale behind the deal, "The acquisition of ViroPharma will immediately benefit Shire and is entirely consistent with our clear strategic objective of strengthening our rare disease portfolio. It brings us a new growth driving product which augments our already strong growth prospects. Shire is uniquely positioned to drive the continued success of CINRYZE for the benefit of patients through our knowledge of the rare disease space, our international infrastructure and our biologics manufacturing expertise."

The deal will be immediately accretive to Shire's non-GAAP earnings per share following completion, while boosting the growth profile of the business. On top of the current reorganization plans, Shire expects $150 million in annual cost synergies by 2015.

ViroPharma generated revenues of $428 million for 2012, expected to increase to $445 million-$465 million for this year.


Shire has secured a $2.6 billion fully underwritten bank facility for the deal. Shire will finance the remainder of the deal with cash and equivalents as well as the existing $1.2 billion revolving credit facility. Shire's share repurchase program will be temporarily terminated.

Before the deal was announced, Shire operated with $1.3 billion in cash and equivalents, and roughly $1.1 billion in debt, for a modest net cash position of $200 million.

Shire generated annual revenues of $4.68 billion for 2012, up 9.8% on the year before. Net earnings fell by 13.8% to $745 million in the meantime.

Trading around $135 per share, the market values Shire at $25 billion. This values operating assets of the firm at 5.3 times annual revenues and 33-34 times annual earnings.

Some Historical Perspective

Long-term holders of Shire have seen great returns. Shares steadily rose from $25 in 2004 to highs around $75 in 2007. Shares fell back to levels in their mid-thirties by 2009 to rise to fresh all-time highs around $140 per share on the back of the announced deal. So far this year, shares have already risen some 45%.

Between 2009 and 2012, revenues have risen by a cumulative 56% to $4.68 billion. Earnings rose by nearly a similar percentage to $745 million.

Investment Thesis

Investors in Shire initially applauded the deal, sending shares up by some 4% at the start of the trading session, after which shares have given up all of their gains.

Shares of ViroPharma jumped up to $49.50 per share, which means that given the $4.2 billion deal tag according to Shire, the market value of the firm has risen by nearly $850 million.

While the standalone value of ViroPharma can be disputed given dismal current earnings, the future looks bright based on Cinryze's expected revenue and profit growth. However, the $150 million in expected synergies per annum justify a great portion of the acquisition premium.

Back in September I last took a look at ViroPharma's prospects after serious rumors hit the market that the firm has received unsolicited interest by European drug companies.

I concluded that opportunistic investors could still jump on the bandwagon. The expected sales growth of Cinryze, the relative large potential synergies, the full pipeline and relative modest capitalization could easily invite to merger & acquisition activity. I concluded that a deal might take place north of $50 per share, and for now Shire has made a $50 offer.

I noted that the thesis was high-risky for opportunistic investors, and for now the deal seems to have materialized. While investors in ViroPharma receive a nice premium and should probably tender, investors in Shire should applaud the deal as well. The deal adds significantly to the pipeline and growth profile of the company. The $150 million in expected synergies alone, can justify the price-earnings ratio of 28 times. This compares to Shire's 33-34 earnings multiple.

For now there appear to be 2 winners in the deal, based on the quite sizable synergy estimates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.