The third AbbVie Shire Plc bid has been rejected, both companies confirmed on Friday. Shire said AbbVie’s $46 billion “unsolicited and highly conditional proposal” undervalues Shire’s worth, which has a promising future independently.
The offer consisted of £20.44 in cash and 0.7988 AbbVie shares per Shire share, and involved a new US listed holding company with a tax domicile in the United Kingdom.
As AbbVie had requested, Shire met with the bidders so that AbbVie could present the key aspects of the offer. Following that meeting, Shire said that its Board rejected the proposal unanimously “on the basis that it fundamentally undervalued the company and its prospects.
Inversion structure “risky”
According to Shire, its Board was not happy with the execution risks linked with the proposed inversion structure, with AbbVie moving its headquarters to the UK for tax purposes.
The Shire Board listed the following points:
- As a leader in rare diseases and specialty markets, AbbVie’s bid fundamentally undervalued Shire and its prospects,
- Shire’s new management has achieved a fundamental change in the company’s performance, resulting in considerably faster growth and greater shareholder returns over the past year,
- By the end of this decade, Shire expects its 2013 annual product sales to reach $10 billion,
- Shire shareholders would lose out on the full benefits of the company’s growth strategy if the Board went ahead with the proposal.
Chairman of Shire Pharmaceuticals, Susan Kilsby, said:
“Shire has a long track record of delivering for shareholders and addressing unmet patient needs. Our high-performing management team and focused strategy are producing even stronger results, reflected in our recent top-line growth and increased profitability.”
“With an expanded portfolio focused on high-growth opportunities, an efficient cost base and an enhanced innovative pipeline, we have put in place a platform for long-term value creation. We believe that Shire has a strong independent future.”
“The Board believes the Proposal fundamentally undervalued Shire and its prospects and that as an independent company Shire’s focused growth strategy will continue to deliver significant shareholder value and patient benefits.”
Shares up for Shire, down for AbbVie
After announcing its rejection, Shire’s shares rose more than 12% in London, while AbbVie’s fell 1.64%, but recovered in after-hours trading.
AbbVie wrote in a statement filed with the Securities and Exchange Commission that as discussions are no longer ongoing, it cannot be certain whether any firm offer will be made. It has until July 18 to announce whether it has a firm intention to place a bid or confirm a withdrawal.
Moody’s Investor Service, which left AbbVie’s rating unchanged at Baa1 with a positive outlook, said that as the company would be raising its financial leverage if it made another offer, it would be credit negative overall. However, if the deal went through, the rating agency said it would be good for AbbVie’s business profile.
About Shire and AbbVie
In 2013, Shire Plc, headquartered in Dublin, Ireland, reported revenue of $4.934 billion, operating income of $1.733 billion, and net income of $665.1 million. Its main products, including preliminary results for 2013, were:
- Vyvanse, for ADHD (attention deficit hyperactivity disorder), $1,029.8 million
- Adderall XR, for ADHD, $429 million,
- Replagal, for Fabry disease, $497.5 million,
- Elaprase, for Hunter syndrome, $497.6 million,
- Lialda/Mezavant, for ulcerative colitis, $399.9 million,
- VPRIV, for Type 1 Gaucher disease, $306.6 million,
- Pentasa, for ulcerative colitis, $265.8 million,
- Intuniv, for ADHD, $287.8 million,
- Fosrenol, for renal (kidney) disease, $172 million,
- Dermagraft, for diabetic foot ulcers, $153.8 million,
- Firazyr, for hereditary angioedema, $116.3 million.
Abbott Laboratories announced in October, 2011, that it would separate into two companies, a medical products one which maintained the Abbott name, and a research-based pharmaceutical company, which it named AbbVie.
In 2013, AbbVie’s net sales were $18.790 billion and its net income was $4.128 billion.
AbbVie, headquartered in Chicago, Illinois, was listed in the New York Stock exchange at the beginning of 2013.
Several US companies have tried to do deals in which they acquire a company based abroad in a country with lower corporate tax. By decamping to the lower-taxed country the US firm can save a lot of money.
As the US corporate tax rate, at 35%, is the highest among the advanced economies, moving their headquarters to, for example, Ireland (corporate tax 12.5%) or the United Kingdom (corporate tax 21%), has become an popular quest for a growing number of US firms.
Pfizer, the world’s largest pharmaceutical company, based in New York, spent several months trying to acquire the UK’s second largest drugmaker, AstraZeneca (AZ), but eventually withdrew. There was fierce opposition in both the UK because of Pfizer’s history of stripping down research and development, and in the US from lawmakers alarmed at the exodus of domestic companies and job losses at home.
The governors of Maryland and Delaware wrote to Pfizer, expressing serious concern about the potential deal and the job losses in their states that might follow.
In many cases, the acquisition offers coming from the US to European companies have been rejected, because when the tax-inversion benefits for the US firm are taken out of the equation, the prey concludes it is better off in the long-term without merging with the predator.
Pfizer is struggling with falling sales and profits and a bleak future – it has a lack of new products in the pipeline and a large list of blockbuster drugs that are approaching their expiry dates. AstraZeneca, on the other hand, has invested heavily in research and development and forecasts a healthy future with several new drugs in the pipeline.
American corporate tax system keeps money overseas
Lawmakers and economists in high-taxed countries, such as the US and France, are expressing concern at the amount of tax money that is legally being kept abroad.
In May, the Council on Foreign Relations stated that the “US Corporate tax system keeps money abroad.”
The United States’ tax system has not undergone a major overhaul in nearly thirty years. Both Democrat and Republican lawmakers say that if corporate tax were reduced and overseas profits were taxed differently, tax income would start moving in the right direction.
Other advanced economies with much lower corporate tax rates, such as the UK, collect proportionally more money from businesses in the form of taxes than the US government does.
Had the AbbVie Shire Plc bid and the Pfizer AstraZeneca acquisition attempt gone through, the US government would have seen yet two more cases of major companies moving overseas because of its high corporate tax rates.
Video – Good for Shire investors?
In this Financial Times video, Lex’s Lucy Colback talks to Robert Armstrong about whether AbbVie’s offer undervalued Shire.
Mr. Armstrong wonders whether Shire’s projection of sales doubling during the next five years is realistic, given that Shire had simply said its last five years had doubled, so the next five should do so too. He adds that forecasting future drug sales in the pharmaceutical industry is never that accurate.
Mr. Armstrong also mentions Shire’s share price, which he believes was artificially bloated during the Pfizer-AstraZeneca acquisition attempt. All eyes were on other companies, such as Shire, expecting them to be recipients of takeover bids.