An overview of the merger attempt between Abbvie of US and Shire of UK

1. Abbvie vs Shire
Merger Review
Financial Restructuring 1

2. Pharmaceutical
Business Overview
•In Pharmaceutical business it took a long time to develop products
before bringing them to market. Incurring high expenses during the
development.
•This particular business can be characterized as high risk – high
gain.
•High uncertainty involved since if the research failed, company may
not be able to recover the cost
•But once a drug receive approval from FDA, it can be marketed and
receive patent protection that effectively create high barrier to
entry. A product without close rival or substitutions
•Hopefully with a couple of blockbuster drugs, over the patent
protection period of those drugs, the company able to obtain
significant enough earnings to become profitable and to finance
further research.
Some companies may depending on one or two drugs for most of
its income
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3. Abbvie
Abbvie intention to do the merger come from
the following concerns
1.Increase profits through tax inversion
By relocating its headquarter to the lower tax
rate UK, Abbvie expect to slash tax rate from
22% to 13%. However, there is a potential
adverse effect from government action to give
penalty to companies who conduct tax
inversion
2. Product Portfolio expansion
Half of Abbvie earnings comes from a single
drug that will be ending its patent soon (end of
2016).
To maintain its profitability , Abbvie is badly in
need of another product to supplement their
earnings
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4. Financials
Shire
Profitability
Profit Margin (ttm):22.47%
Operating Margin (ttm):35.72%
Management Effectiveness
Return on Assets (ttm):12.93%
Return on Equity (ttm):34.44%
Income Statement
Revenue (ttm):5.77B
Revenue Per Share (ttm):9.97
Qtrly Revenue Growth (yoy):31.70%
Gross Profit (ttm):4.26B
EBITDA (ttm)6:2.46B
Net Income Avl to Common (ttm):1.84B
Diluted EPS (ttm):2.19
Qtrly Earnings Growth (yoy):72.40%
Abbvie
Profitability
Profit Margin (ttm):18.92%
Operating Margin (ttm):31.55%
Management Effectiveness
Return on Assets (ttm):13.64%
Return on Equity (ttm):90.29%
Income Statement
Revenue (ttm):19.62B
Revenue Per Share (ttm):12.31
Qtrly Revenue Growth (yoy):7.80%
Gross Profit (ttm):14.21B
EBITDA (ttm):6.98B
Net Income Avl to Common (ttm):3.69B
Diluted EPS (ttm):2.30
Qtrly Earnings Growth (yoy):-47.50%
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5. Financials
Shire
• Balance Sheet
• Total Cash (mrq):467.70M
• Total Cash Per Share (mrq):0.80
• Total Debt (mrq):850.00M
• Total Debt/Equity (mrq):13.00
• Current Ratio (mrq):1.43
• Book Value Per Share (mrq):11.13
• Cash Flow Statement
• Operating Cash Flow (ttm):2.28B
• Levered Free Cash Flow (ttm):1.68B
Abbvie
• Balance Sheet
• Total Cash (mrq):7.73B
• Total Cash Per Share (mrq):4.85
• Total Debt (mrq):15.06B
• Total Debt/Equity (mrq):324.24
• Current Ratio (mrq):2.65
• Book Value Per Share (mrq):2.92
• Cash Flow Statement
• Operating Cash Flow (ttm):5.37B
• Levered Free Cash Flow (ttm):1.05B
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6. Assesment
• Current valution is no longer valid since it is
also based on benefit from tax inversion. Once
the tax saving is gone due to penalty, Abbvie
must reassess its offering price.
• The updated valuation number should bring
into account products development cost
incurred by Shire and potential future income
from those products. This might produce a
different valuation
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7. Recommendations
•Abbvie must abandon the merger plan with Shire
•Abbvie still have the need to expand its drug portofolio to help with
Abbvie future decrease in income. This can be done by acquisition of
30% to 100% share of ownerhip(without merger). Preferably 51%
ownership
•This acquisition can be targeted at Shire or any other
pharmaceutical/biotech companies to strengthen the target company
capital structure to lower their cost of failure or product development
delay. And as Abbvie balance suggest Abbvie have enough cash to buy
significant portions of several companies at the size of Shire
•The main concern is to come up with fair valuation for those drugs
that are still undergo further testing and development
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8. Recommendations
•As for the tax benefit, there is still a chance of tax
saving coming from acquisition but it mainly
depends on the income repatriation rule included in
the tax treaty between UK and US. There will be no
double taxation. The question now is whether the
income from the acquisitions will receive lower rate
•One of the major cost item is the R&D Expense,
Abbvie should look for acquisitions from country
with favorable tax treatment (tax credit or lower tax
rate) for companies with extensive R&D.
Financial Restructuring 8