The rise of Shire (LSE: SHP) has largely been unnoticed. I had always assumed it was a small cap, but did you know it has a market capitalisation (£30 billion) equivalent to BT or Standard Chartered?
Likewise, when I heard that AbbVie were bidding for Shire, my first reaction was: who’s AbbVie? The name actually comes from the demerger of Abbott Laboratories into Abbott and AbbVie. AbbVie is a jeu de mots upon the fact that this the life sciences part of Abbott.
Complementary drug portfolios
So why is AbbVie buying Shire? Well, the most obvious reason is the tax implications: by being taxed in Britain rather than the States, the joint company’s tax bill would be slashed.
But dig a little deeper and you will find that these companies have strongly complementary portfolios and research bases. Both companies have expertise in biopharmaceuticals: these are biological treatments, ranging from antibodies to stem cells, which very much represent the future of the pharma industry.
Analysing Shire reveals a business that is really a cluster of smaller companies which it has acquired over the past two decades. Each of these smaller companies has expertise in a particular rare disease.
In the past you would never have thought that treatments for rare diseases would be economically viable. Shire confounds that view by bringing together a portfolio of rare disease treatments with pooled research resources.
But AbbVie faces a looming patent cliff
AbbVie is also a biopharmaceutical company, but its expertise is more mainstream, focusing on immunology, kidney disease, liver disease, neuroscience and cancer. But it has a clear weak point: most of its revenues are generated by the arthritis treatment Humira, which is the world’s bestselling drug. Once Humira’s US patent protection expires in 2016, profitability, and I suspect AbbVie’s share price, will tumble.
Checking the fundamentals tells me that, although I will watch this takeover with interest, I won’t be interested in investing. The share prices of both companies have been rocketing. Shire is now on a 2014 P/E ratio of 27, falling to 23 in 2015. AbbVie is on a P/E ratio of 21. These numbers look pricey, reflecting the rapid growth that both these companies have experienced.
This makes these companies considerably more expensive than GlaxoSmithKline (P/E ratio of 14) and AstraZeneca (P/E ratio of 16), and I would prefer these pharma stalwarts as investments, particularly as both GSK and AZN are past their respective patent cliffs. Plus they have a clear pathway to future growth. We have yet to see what shape the newly merged company’s strategy will take.
Indeed if, as looks likely, this takeover takes place, I just wonder whether this might be the cue for the merged company’s share price to take a downward path. If I were a shareholder, I would consider taking profits once the takeover is completed.