- AbbVie is attempting to acquire Irish-based Shire.
- The deal is once again motivated by tax differentials, and AbbVie's intentions to reduce reliance on Humira.
- The market is applauding these deals way too much, I suggest that tax savings should be discounted at higher rates as governments will come under pressure to respond.
A potential move is driven by the ¨inversion¨ move allowing US-based companies to cut their tax bill. AbbVie is looking to reduce reliance on its top-selling drug Humira as well.
With so much of a premium being attributed to modest tax synergies, I am very cautious about the deal.
A Potential Deal
According to news reports, AbbVie which is of course known from top-selling rheumatoid arthritis drug Humira, held talks to acquire its Irish counterpart Shire.
Reportedly AbbVie is willing to pay $46.5 billion for Shire in a cash and stock-based deal, yet Shire's board has rejected the offer. Talks appear to have started in May of this year, but have stopped after the latest rejection.
The first offer made by AbbVie supposedly was 39.50 Pounds a share, while the latest offer has been improved to 46.26 Pounds. Of course shares of Shire are surging on the back of the news while investors in AbbVie are sending its shares higher as well in pre-market trading.
Shire which originally was founded in Britain, has moved to Ireland in 2008 for tax purposes. The company focuses on medicines which treat ADHD through drugs like Vyvanse and Adderall. It furthermore markets drugs to treat rare diseases and neurological disorders.
For the year of 2013, it posted revenues of $4.93 billion which was up by 9% compared to the year before. The company posted net earnings of $665 million after registering losses of nearly $755 million from discontinued operations. Excluding this, earnings came in at $1.42 billion which was up by 76% compared to the year before. The effective tax rate of the company was just 16.4%, higher than official tax rates of 12.5%.
Note that the company's balance sheet is rock solid with Shire holding $2.2 billion in cash while not having any debt outstanding. A potential deal at $46.5 billion would value operating assets at $44 billion. This would value Shire at nearly 9 times annual sales and 30-31 times earnings from continuing operations. Following Shire's acquisition of ViroPharma, the company anticipates healthy growth in its operations in 2014.
AbbVie posted 2013 revenues of $18.8 billion in 2013, up merely 2.2% on the year before. Sales of Humira, the company's top selling drug were up by 15%, now making up 57% of total sales. To illustrate the reliance on Humira, AbbVie's second best-selling drug was AndroGel. This drug posted revenues of $1.03 billion in 2013, making up just 5.5% of total sales.
Reported earnings were down by nearly 22% to $4.13 billion on higher costs, more R&D, but mostly on a higher effective tax rate. AbbVie's effective tax rate for 2013 came in at 22.6%, still far below statutory tax rates in the US.
AbbVie ended the year with $9.6 billion in cash and equivalents while holding $14.7 billion in total debt, resulting in a net debt position of about $5 billion. A potential deal would push up the debt load significantly, potentially offsetting a significant portion of anticipated synergies.
A Potential Deal Driven By Taxes And Diversification
Given the Irish corporate tax rate of 12.5% and the huge gap with US statutory taxes, inversion moves and potential deals are the talk of the day. Yet AbbVie might be looking for deals to reduce the reliance upon top-selling drug Humira as well, as the drug generates over 57% of its revenues in 2013.
Plenty of other deals or attempts to make such an inversion move have occurred earlier this year. Most prominent is Pfizer's (NYSE:PFE) attempt to acquire AstraZeneca (NYSE:AZN) and Medtronic's (NYSE:MDT) deal to purchase Covidien (NYSE:COV).
Both arguments are a viable explanation for the deal, yet they won't solve all the issues. Important to notice is that Shire's effective 16.4% tax rate exceeds Irish statutory tax rates by nearly 4 percent points. If AbbVie could reduce its rate from a reported 22.6% to 16.4% to bring it in line with Shire, earnings could improve to the tune of $325 million per annum. Note that in order to achieve these and operational synergies, AbbVie will incur potentially a lot of debt with interest costs offsetting a lot of these gains.
A deal would reduce reliance on Humira, but note that Shire's annual revenues of $4.9 billion add just about 26% to annual sales. Even after a potential deal, Humira will still make up 45% of total sales with patent expiration in December of 2016 just being two and a half years away.
The Market Is Partying
AbbVie's shares were valued around $86 billion at $54 per share ahead of the news which brings its enterprise value towards $91 billion given the modest debt position. Shire was valued around $38 billion before the news broke out, valuing it at $36 billion excluding net cash holdings. A $46.5 billion deal would imply a $8.5 billion premium. As AbbVie's shares rose by 4% in after-hours as well, they added a cool $3 billion to its market capitalization.
As such the market is pricing in an already $11.5 billion premium which would reflect its take on the value accretion resulting from a potential deal. Note that no deal has been announced given the difficult discussions, yet potential cost synergies are likely limited.
The main rationale is diversification from Humira which is very limited. The $325 million in annual taxes to be potentially saved by AbbVie, if it could lower its tax rates to match those of Shire, look modest compared to the $11.5 billion premium implied by the market by now.
Irrelevant of the actual current value and the pipeline value of both companies, the market reaction says it all. I am very cautious on the back of the news with the market in my opinion overreacting to tax synergies. The real value of these should be discounted severely in my opinion as the high costs to national governments warrants and could very well trigger a response.