How Much Lower Can Shire PLC Go?

Shire’s (LSE: SHP) shares are falling once again today, after AbbVie announced that its board of directors was recommending company’s shareholders vote against the takeover of Shire. shire

This news comes after AbbVie’s announcement yesterday that the company was reconsidering its offer to acquire Shire, after taking into account the US Treasury’s new rules on tax inversion deals. So, now that AbbVie’s management has withdrawn its recommendation to vote for the merger, it looks as if the deal is off the table.

Shire’s management has issued a press release this morning stating that it is assessing the current situation and a further announcement will be made in due course.

Further to fall

Following these developments, it’s likely that the valuations of both Shire and its larger peer, AstraZeneca  (LSE: AZN), could fall as the two groups are no longer attractive takeover targets. 

Indeed, Astra’s shares have been held above the key 4,000p level for much of this year as investors speculate that global pharmaceutical giant Pfizer will come back and make a new, higher offer for the company.

But now, with the possibility of a new offer fading, Astra’s shares look overpriced. For example, Astra currently trades at a forward P/E of 15.9, compared to the pharmaceutical & biotech average sector P/E of 13.1. As the prospects of a bid disappear, Astra’s shares could fall by around 17% to 3,524p, which would bring them into line with the sector’s average valuation.  

In addition, now AbbVie is no longer courting Shire, Shire’s shares could also fall to a valuation that’s more in line with the rest of the sector. Unfortunately, Shire is currently trading at one of the highest valuations in the pharmaceutical & biotech sector — the company trades at a forward P/E of 20.3 — so the group could see its share price fall as low as 2,500p now a deal is off the table. 

Bright prospects

Still, while Shire and Astra might see their share prices fall in the short-term, over the longer term the two companies have a bright future.

For example, Shire should receive a break-up fee of around $1.6bn from AbbVie if the takeover collapses, which will give the company a large acquisition war chest. Shire has built itself up to where it is today by acquiring smaller competitors with outstanding products, further deals could now be on the cards.

Meanwhile, Astra is priming itself for growth and is currently developing several cancer treatments. These treatments have been touted as game-chaining products for the pharmaceutical industry and management believes that these products will help the company double sales by 2023. 

Long-term plays

Overall, even though Shire and Astra are no longer acquisition targets, they remain great long-term investments due to their defensive nature and plans for growth.

A selection of defensive shares with attractive dividend yields gives your portfolio a solid backbone, allowing you to sleep soundly at night. With that in mind, I'm considering investing in several of the five FTSE shares highlighted within this exclusive wealth report.

Indeed, all five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by the Fool as "5 Shares You Can Retire On"!

Just click here for the report -- it's free!

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.