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Shire Release: Vyvanse: This Time I'll be Bulletproof

6/25/2014 9:51:37 AM

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Expect an appeal…but case still rings strong for Shire, even more so now. District Court has granted Shire a summary judgement motion for the Vyvanse patent infringement lawsuit - deciding that certain claims of the patents protecting Vyvanse were both infringed and valid. This is positive news and we expect it to ease Vyvanse concerns at least in the mid term - Vyvanse drives c30% of Shire’s earnings and hence patent uncertainty is a significant driver of sentiment. This ruling prevents ALL five generic filers (all companies who have filed ANDAs to launch generic Vyvanse) from launching until the earlier of EITHER a successful appeal to the US Court of Appeals or the expiration of these patents in 2023 (although a new indication in preschool age could expand this expiration to 2024).

What would it take for a successful appeal to the US court of Appeals? The generic filers would have to now request the court’s permission to appeal today’s ruling to the Federal Circuit (they can do this at any time) and usually it takes c6-12 months for a court date to be scheduled and a further 6-12 months for a ruling. This means earliest we could get a ruling (if the generic companies appeal, which we think they probably will) would be c2016 and generic filers would have to win on all 18 composition of matter patents protecting Vyvanse. If this case did play out, Shire could still appeal and would only need to win on one patent to end the case. In our view 1) timelines for a final ruling are far in the future and 2) the likelihood of winning on all 18 patents is stretched. Even though we and the market already assume a 2023 patent expiry, this is clearly positive for sentiment especially after yesterday’s tentative approval of Roxane’s Vyvanse generic.

Does this enhance value for a potential acquirer? As previously published, taking ABBV’s current offer proposal of £46.26 per Shire share, 55|45 split between equity and cash, financing costs of 3%, cost synergies of 10%, and a tax mix effect, could result in EPS accretion of ~4-5% by 2017E for ABBV. We calculate that ABBV could pay up to £55/sh before transaction costs neutralise any anticipated earnings accretion and we note there is a limit to how much cash ABBV can deploy given its 2013 EBITDA of $7.2bn and net debt of $4.8bn. Assuming ABBV could lever up to 3.5x the combined entity’s EBITDA (i.e. ~$9.2bn), this would imply ABBV could fund as much as $27-28bn of the transaction in cash. At a bid of £55 per share and a 50|50 equity/cash split we calculate earnings accretion of 2%-3% with a cash contribution of $27.9bn.

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