Shire (SHP) has released details of recent negotiations with Takeda, detailing three proposed, and rejected, bids from the Japanese pharmaceutical firm. Allergan is also now evaluating a potential offer for Shire. We’re maintaining our £48.90 per share valuation for Shire; shares remain undervalued in our view. The firm’s growing plasma business and steady rare-disease portfolio also contribute to its narrow moat rating.
We think the market’s focus on competition to Shire’s established haemophilia portfolio could give Takeda, or Allergan, the opportunity to acquire a diversified rare-disease business and a rapidly growing immunology business at a good price. However, both Takeda and Allergan will be pushing the limits of their debt capacity and testing shareholder patience, if bids move significantly higher than Takeda’s last rejected bid of £46.50 per share.
While teasing Shire apart by business unit and splitting it between Takeda and Allergan could be an intriguing way to make the deal more digestible, we think both firms would be interested in the GI and neuroscience units, making it more likely that the firms will compete to swallow the firm whole, in our opinion.
If offers escalate much further, we’re concerned about the potential impact on Allergan’s wide moat rating. Allergan’s cash reserves from the sale of its generics business to Teva have been drained by a series of smaller acquisitions, share buybacks, and repayment of debt, so a $60 billion-plus acquisition seems like a stretch to us.
In addition, we think both Allergan and Shire face headwinds with in-line products and scepticism on pipeline potential, a combination that could compound the problems of each firm. However, there could be some synergies between the portfolios, as both firms have neurology, GI, and ophthalmology exposure.
Could Takeda Make a Success of this Bid?
Takeda has a mixed record with acquisitions, which is part of the reason for its low returns on invested capital and very low margins, and we do not award it an economic moat. Takeda’s bids for Shire have all been a combination of new Takeda shares and cash, with a total value growing from £44 per share to £46.50 per share.
The most recent bid would give Shire shareholders 51% ownership of Takeda. Takeda also confirmed that discussions are ongoing, which implies Takeda’s continued interest following Shire’s announced sale of its oncology business for $2.4 billion to Servier earlier this week.
Shire’s oncology business fit the stated therapeutic focus areas for Takeda, but the portfolio was quite small, and Takeda is likely more interested in Shire's rare-disease therapeutics, GI and neuroscience portfolios, and a relatively well-defended, and rapidly growing, plasma business.
