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Shire Pharmaceuticals (SHPG) Release: We Believe The Bids Could Go Higher, Or A Different Currency Is Required

6/25/2014 9:24:02 AM

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In Addition To A Likely Higher Offer, Shire Might Also Be Looking For A Different Currency

Our previous Shire thesis remains intact: management continues to deliver exceptional results, taking no pause on its cost restructuring and balance sheet utilization. This is the new paradigm, and this management team is executing. As for the specifics of today's disclosure of a roughly $235 offer from ABBV (44% cash, 56% ABBV shares) we had a couple of initial thoughts before discussing valuation: (1) it does appear that Shire and AbbVie did meet – as disclosed in the press release – indicating that at the minimum there is no significant level of hostility amongst the two parties and therefore the possibility for a re-bid on friendly terms is very possible/likely ("At AbbVie's request, Shire met with AbbVie to enable AbbVie to explain key aspects of the Proposal. Following this meeting, the Board of Shire decided unanimously to reject the Proposal on the basis that it fundamentally undervalued the Company and its prospects"); (2) Shire will host a call on Monday in which they will provide their view of their Long Range Plan, in which they indicate that they believe that they will "more than double its 2013 annual product sales to US$10 billion by 2020." We would note that our DCF valuation that includes pipeline additions and is the basis of our standalone valuation of $230 previously printed assumes total revenue of roughly $9B by 2020 (see attached). If we move that revenue number higher to the $10B number and keep the same growth rate that we previously had in our DCF, this would yield a value well in excess of $260. And this would exclude any cost and tax synergies able to be generated from an acquirer which would move the valuation higher; (3) we do remain a bit concerned that management would place in their press release that the board has "concerns regarding the execution risks associated with the proposed inversion structure, as AbbVie would redomicile in the UK for tax purposes." It is a bit confusing to us that Shire would downplay the very obvious attractiveness of the ability for an acquirer to invert into potential lower tax jurisdictions. It seems like an unnecessary statement and not value creating; (4) Shire could feel that there are potentially other better acquirers with both higher cash component and a potential currency preferable to AbbVie. Given the disclosure of the offer, we do believe that this could accelerate other potential acquirers, including Allergan, which we previously published on April 24 and can be found here. It is not entirely clear to us with the rejection at these levels whether Allergan could secure the Shire asset given what appears to be Shire's aspirational valuation target.

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