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Abbvie vs shire

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

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Abbvie vs shire

  1. 1. Abbvie vs Shire Merger Review Financial Restructuring 1
  2. 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 Financial Restructuring 2
  3. 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 Financial Restructuring 3
  4. 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% Financial Restructuring 4
  5. 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 Financial Restructuring 5
  6. 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 Financial Restructuring 6
  7. 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 Financial Restructuring 7
  8. 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

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