Why AbbVie Inc Is Buying Shire PLC

AbbVie Inc (NYSE:ABBV) and Shire PLC (LON:SHP) have strongly complementary research portfolios.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool recommends GlaxoSmithKline and owns shares in Standard Chartered.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »