Shire Seen Luring Pfizer to Teva With Lowest Valuation: Real M&A

Shire Seen Luring Pfizer to Teva With Lowest Valuation
With Shire now throwing off three times more cash relative to its stock price than rivals and sales of its best seller Vyvanse forecast to double by 2015, the drugmaker may attract Pfizer Inc. or Teva Pharmaceutical Industries Ltd., according to Lutetia Capital. Photographer: JB Reed/Bloomberg

Drugmakers looking for lucrative treatments for ailments from attention-deficit disorder to diabetic foot ulcers can now snap up Shire Plc at its cheapest valuation relative to earnings in almost six years.

Shire, which has slumped after a generic version of its Adderall XR drug was approved sooner than analysts projected, was valued at 16.8 times profit this week, the lowest since October 2006, according to data compiled by Bloomberg. The $15.9 billion company now trades for about 30 percent less than the median for comparable specialty drugmakers, the data show.

While the generic’s approval added to setbacks that have led analysts to cut earnings estimates for Shire, the Dublin-based company’s net income and revenue are still projected to climb to records every year through at least 2015, which Chase Investment Counsel Corp. said could entice buyers. With Shire now throwing off three times more cash relative to its stock price than rivals and sales of its best seller Vyvanse forecast to double by 2015, the drugmaker may attract Pfizer Inc. or Teva Pharmaceutical Industries Ltd., according to Lutetia Capital. Novartis AG could also be interested, Barclays Plc said.

“There aren’t many targets like Shire out there,” Jean-Francois Comte, co-founder of Lutetia, a Paris-based hedge fund that bets on mergers and acquisitions, said in a telephone interview. For a large drug company, “Shire would clearly be of the size to make an impact. You’re clearly buying this company’s potential to transform research and development into revenues and margins, and its exceptional cash flow.”

Specialty Drugs

Jessica Mann, a spokeswoman for Shire, declined to say whether the company has been approached by potential acquirers or would welcome an offer.

Shire develops medicines prescribed by specialists, treatments for rare genetic diseases and therapies for repairing tissue and skin. Its sales have grown at least 15 percent a year in four of the past five years, with more than 30 percent of its 2011 revenue of $4.2 billion coming from the attention-deficit hyperactivity disorder drug Adderall XR and its successor Vyvanse, according to data compiled by Bloomberg.

The company was named as a potential takeover target this year by Nomura Holdings Inc., Sanford C. Bernstein & Co., Goldman Sachs Group Inc. and Exane BNP Paribas, even as the stock rose to an all-time high of 2,300 pence ($35.85) in February. Chief Executive Officer Angus Russell said in April that Shire has “no special defenses” against an unsolicited bid except its share price.

Stock Decline

Shire’s shares have fallen 21 percent from their February highs amid setbacks to three of the company’s top five-selling drugs. The drugmaker in March withdrew its application for U.S. approval of Replagal, while its Lialda treatment for ulcerative colitis failed a trial that would have expanded its use. This week, Shire sank the most in more than nine years after the U.S. Food and Drug Administration approved a copycat version of Adderall XR two years before analysts expected it.

The 11 percent drop on June 25 left its shares trading at 16.8 times earnings, the lowest level since October 2006, according to data compiled by Bloomberg. At yesterday’s close of 1,812 pence, Shire was valued at almost 17.5 times profit, a 29 percent discount to the median for specialty pharmaceutical companies with a market capitalization exceeding $1 billion.

Today, Shire fell 1.3 percent to 1,789 pence.

Shire’s lower valuation now “may make it seem attractive to one of the larger pharmaceutical companies” even after the FDA’s approval of the Adderall XR generic, Peter Tuz, who helps manage $700 million as president of Chase Investment Counsel in Charlottesville, Virginia, said in a phone interview. “It’s still a good franchise. It’s a good company and these things happen to everybody.”

Cash Flow

The drugmaker also has a free-cash-flow yield of 6.4 percent, compared with a median of 1.9 percent for global specialty drugmakers, data compiled by Bloomberg show.

Analysts, after cutting their growth estimates for Shire, still project Shire’s net income will rise 14 percent or more each year through 2014 to a record $1.4 billion, according to data compiled by Bloomberg. They estimate sales will climb to highs as well, rising 31 percent to $5.5 billion by 2014 from $4.2 billion last year, the data show.

Henrietta Theorell, who manages about 4 billion Swedish kroner ($570 million) at SEB Asset Management in Stockholm, said the FDA’s approval of an Adderall XR generic may actually increase the company’s allure to a potential acquirer by removing an unknown.

Adderall ‘Clarity’

“Shire has been cited as a takeover target for many years, but the Adderall patent situation was always cited as a problem,” Theorell said in a phone interview. “With improved clarity and the ensuing price decline, it is a more likely takeover candidate. It has a growing portfolio, ADHD is growing very nicely and it also has its orphan drug portfolio. That’s an area people want to get into.”

Shire is seeking to expand the use of its best seller Vyvanse, which has patent protection through 2023, for major depressive disorder, schizophrenia and binge eating.

In addition to its ADHD drugs, it generated 30 percent of revenue from treatments for rare genetic diseases, such as Elaprase for Hunter syndrome. The company paid $750 million last year for Advanced Biohealing Inc., gaining the skin substitute Dermagraft, used to treat diabetic foot ulcers, and has an implantable spinal pump in development that would deliver its rare-disease drugs to the brain.

Teva, Pfizer

Teva, the generic drugmaker that already markets a Shire-authorized copy of Adderall XR and last year bought Cephalon Inc. for more than $6 billion, may be a potential acquirer, Lutetia’s Comte said. Pfizer, which lost patent protection on its cholesterol pill Lipitor in November, could also be interested in Shire as it seeks new drugs for growth, he said.

“Pfizer would clearly benefit from a growth engine that would be a significant size,” Comte said. “They have the ability to do the deal, they probably need the growth and they haven’t done anything in M&A for a while.”

Yossi Koren, a spokesman for Petach Tikva, Israel-based Teva, said the company doesn’t comment on rumors and speculation, as did Joan Campion, a spokeswoman for New York-based Pfizer, the world’s biggest drugmaker.

Novartis may seek a takeover of Shire to obtain new sources of revenue as the Swiss drugmaker faces the loss of patent protection on its two best-selling drugs, Diovan and Gleevec, said Michael Leuchten, an analyst at Barclays in London.

Patent Cliff

Diovan, a blood-pressure medication, will go off-patent in the U.S. this year, while the cancer treatment Gleevec’s patent is set to expire in 2015, according to data compiled by Bloomberg.

“If you’re Novartis and you’re looking to make it through the first patent cliff with Diovan, and as you come out of that you’re going into another one, which is Gleevec, you need to find a way to soften that blow,” Leuchten said. “One way to do it is to buy something that’s not necessarily related to your existing business, but it’s big enough to soften that second blow. It’s a financial plug.”

Eric Althoff, a spokesman for Novartis, said the company doesn’t comment and on rumors and speculation when asked whether the Basel, Switzerland-based company was interested in Shire.

Any potential deal for Shire would be among the largest in the industry’s history. With Shire valued at $16 billion including net debt, a purchase of the company would rank among the top 15 drug company takeovers, according to data compiled by Bloomberg.

Killing Vyvanse

While Shire is marketing Vyvanse as a replacement for Adderall XR, it may not live up to expectations as users switch to the cheaper generic version of the older drug, according to Peter McDougall, CEO of London-based investment research firm Druganalyst Ltd., who has followed the drug industry for 27 years. Half of the company’s revenue growth over the next five years is forecast to be generated by Vyvanse, McDougall wrote in a June 26 note.

“Cheap Adderall will kill Vyvanse growth,” he said in the note. The news “sent Shire stock into a spiral dive. It has been a long time coming.”

Even as Shire begins to face generic competition, the slumping stock price, long patent life of Vyvanse and its “solid” rare-genetic disease business still make it an attractive acquisition candidate, said Adrian Howd, an analyst at Berenberg Bank in London.

“Does the attractiveness of Shire as an M&A target change considerably on the basis of the news? No,” he said in a phone interview. “Does the share price of Shire change significantly on the basis of the news? Yes. So if you look at it that way, there’s your answer.”

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