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Having started life selling calcium supplements from above a shop in provincial England, Shire has emerged three decades later as one of the most prized assets in the European healthcare sector

June 23, 2014 9:39 pm

Shire a jewel in crown among drugmakers

By Andrew Ward, Pharmaceuticals Correspondent

Having started life selling calcium supplements from above a shop in provincial England, Shire has emerged three decades later as one of the most prized assets in the European healthcare sector.

On Friday, months of speculation over which big pharmaceuticals group would make the first move for Shire came to an end when AbbVie confirmed it had made a £27bn takeover proposal.

Flemming Ornskov, Shire chief executive, made clear on Monday that AbbVie – or any other suitor – would have to bid much higher than the latest £46.11 per share cash and stock offer made by the Chicago-based company.

The Dane highlighted Shire’s acceleration in growth since he took charge just over a year ago as the company builds one of the industry’s most promising portfolios of rare disease treatments.

“The full benefits of this transformation are yet to be delivered, and we do not think they are fully reflected in the current share price or AbbVie’s proposal,” he told investors on a conference call.

Shire is attractive because it possesses two rare qualities for a drugmaker: strong growth among its existing products and a rich pipeline of new products nearing market.

While other drugmakers fret over diminishing returns from ageing drugs, Shire still has almost a decade of US patent protection remaining on its top-selling product: Vyvanse, a medicine for children with attention deficit hyperactivity disorder.

Revenues from Vyvanse rose 19 per cent last year to $1.23bn – a quarter of total sales – and Mr Ornskov on Monday said it would continue growing as the company seeks to expand the drug into a new use as a treatment for binge-eating.

Controversy over alleged over-use of amphetamine-based drugs such as Vyvanse for behavioural disorders had in the past been seen as a deterrent to takeover interest from reputation-conscious big pharma groups.

However, while Mr Ornskov vigorously defends the therapeutic value of Vyvanse, he has sought to change perceptions of Shire since taking charge by sharpening its focus on rare diseases through a series of acquisitions.

The biggest came last November in a $4.2bn takeover of US-based ViroPharma, which makes a treatment for hereditary angioedema, which causes sudden attacks of swelling and affects 18,000 people in the US and EU.

The condition is typical of a range of serious rare diseases being targeted by Shire where the small number of patients is offset by strong pricing power because of the absence of alternative treatments.

“These are [treatments for] kids who are going straight into organ failure with no known treatment,” Mr Ornskov told the Financial Times. “So the value is very clear.”

In addition to high prices, the other appeal of rare disease drugs is the small sales force they require compared with the expensive marketing machines involved in selling medicines for more common ailments.

Mr Ornskov said this limited the potential cost savings available to AbbVie in the event of a deal.

“There are very few synergies,” he said. “Normally a deal would produce savings through scale or merged sales forces but there is none of that here. I do not think you will find that Shire is a fat organisation.”

Jeffrey Holford, analyst at Jefferies, agreed that AbbVie was mainly motivated by “financial engineering” and the potential to lower its tax bill by using Shire as a vehicle to shift its headquarters to the UK – a so-called tax inversion.

However, he said there would be an additional benefit for the US company by reducing dependence on its Humira rheumatoid arthritis drug, which accounts for about 60 per cent of revenues and loses patent protection at the end of 2016.

“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,” said Mr Holford, predicting that a price of £55 per share may be needed to clinch a deal with Shire.

That could be a stretch for AbbVie considering the lack of available cost synergies. Another obstacle could be its need to make a sizeable proportion of the offer in shares because the rules governing tax inversions require Shire shareholders to end up owning at least 20 per cent of the merged company.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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