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Calculated risks

12 January 2015 By Neil Unmack

Shire is gambling its AbbVie break fee on risky M&A. The Dublin-based pharma group has agreed to buy U.S. peer NPS to expand in lucrative rare drugs. The 51 percent premium is covered almost entirely by compensation from the collapse of Shire’s sale to larger American rival AbbVie last year. That doesn’t much mitigate the risk of doing a deal ahead of a key regulatory ruling.

It’s no surprise to see Shire Chief Executive Flemming Ornskov back on the acquisition trail. NPS had been tipped as a target back before AbbVie launched a successful bid for Shire itself, only to be wrong-footed by a U.S. clampdown on tax-driven mergers.

The strategic logic of buying NPS is hard to fault. The deal cements Shire’s position as a specialist in rare-disease drugs, which target illnesses affecting less than 200,000 patients and so benefit from generous patents or tax incentives. Shire gets access to Gattex, for short-bowel syndrome, and Natpara, for hypothyroidism.

The financial wisdom isn’t so clear. Given the niche focus, cost synergies are scant. Shire says it could cut 25-35 percent of 2017 costs, or $100 million based on Deutsche Bank estimates. Taxed and capitalised, those would cover only half the premium. There are possible revenue synergies too if Shire can crank up sales of Gattex and develop Natpara.

The snag is Shire is playing its chips just days before the U.S. Food and Drug Administration decides whether to approve Natpara. An advisory panel last year voted eight to five to recommend the drug, but worried about its side effects. The risk is that Natpara isn’t approved after all, or safety concerns could limit its potential.

Moving today may have helped Shire avoid a bidding war, or paying even more when uncertainty eases. And by reinforcing its position in the highly valued rare-disease sector, Shire may defend its premium rating, currently 18 times next year’s forecast earnings. Yet with U.S. healthcare providers increasingly focused on costs, and some rare-disease treatments costing over $400,000 per year, the bet assumes that this area of medicine will escape the broader trends in the pharmaceutical industry.

 

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