When Takeda (TSE:4502, Financial) put Shire (SHPG, Financial) into play a couple weeks ago, it looked to be the beginning of a serious hunt for the major biotech company. Takeda offered $62.5 billion for Shire, which had a pre-offer market cap of about $40 billion.
But Takeda's offer was not enough for Shire’s management, who rejected it on April 19. Clearly, Shire saw itself as a beneficiary of a seller’s market and hoped to play Takeda against other well-heeled suitors. That plan seemed to be working when Allergan (AGN, Financial) floated the possibility of a rival bid the same day Shire rejected Takeda’s initial play.
Alas, for Shire’s hopes of a bidding war, Allergan withdrew its offer hours later, issuing a statement declaring that it “does not intend to make an offer for Shire.”
Why did Allergan dive into the competition for Shire only to exit abruptly? We will endeavor to answer that question in this article.
Market reacts badly
Allergan’s announcement that it was considering a bid for Shire was met with sudden and severe negative market sentiment. The company’s shares have been in trouble for some time and it has been working to stanch the bleeding for several months.
The acquisition of valuable assets is part of Allergan’s stated revitalization strategy, but the market was not impressed with this particular prospect. Shares fell 7% on the news, which probably got management concerned. When the potential offer was swiftly withdrawn, shares recovered quickly.
Just too pricey
The cause of negative market sentiment could probably be attributed, in part, to the asking price. Takeda was already offering a more than 50% premium, and any acquisition by Allergan would have only been plausible with a better offer. Shire has been cited by analysts as a major potential buyout target, but even with all the cash floating around the sector right now, sometimes a price is still too dear.
In Shire’s particular case, there are concerns its assets will not retain their massive earnings power down the line. As a research note from Leerink’s points out, Shire’s blockbuster drug Vyvance is already staring down the barrel at fierce new competition:
“In our view, a combination with SHPG introduces some growth challenges in out-years, which are reflected in the negative stock reaction as well also as consensus sales estimates for SHPG with 2019-22E revenue CAGR of +4% but 2019-24E CAGR of -1%, which assumes erosion of Vyvanse starting in 2023E and significant erosion of SHPG’s hemophilia business with entry of novel approaches including Roche’s (NR) Hemlibra (hemophilia A).”
The erosion of profits from Vyvance may start faster than many are currently modeling. That will have a significant impact on the value of Shire as an acquisition target.
Too big a pill to swallow
Not only is Shire perhaps not worth the asking price, but we must also remember that Allergan, while flush with some repatriated cash from overseas, is not so well-heeled as to be able to buy another big company outright. Indeed, Allergan’s own market cap is only around $55 billion. Trying to swallow Shire would demand significant leverage, leverage the embattled pharmaceutical giant probably cannot afford.
The market reaction was understandable, given the obvious costs and operational difficulties that would emerge from such a large-scale tie-up. It would also limit Allergan’s chances of acquiring many other assets to rebuild its struggling pipeline.
Where now, Allergan?
Shire was undoubtedly disappointed by Allergan’s abrupt departure from the running, and its scramble to restart talks with Takeda was proof of its worries it might end up with no deal. Instead, it looks like a slight bump in the offer price, to $65 billion, has been enough to get Shire to say yes.
As for Allergan, the decision to back out was probably for the best. The company can now focus on building its pipeline with smaller, more reasonable acquisitions and mergers. That is still part of the company’s master plan, as it acknowledged in its withdrawal statement:
“Allergan continues its ongoing process of evaluating a full range of potential strategic actions that will create value for shareholders, such as divestitures, combinations and acquisitions.”
Allergan has a lot of work to do to rebuild its pipeline and earnings assets. Acquisitions will play a vital part in that process, but betting big on a huge merger with the likes of Shire is not the best path forward.
Disclosure: I/We own no stocks discussed in this article.
