AbbVie Inc. (ABBV:US) Chief Executive Officer Richard Gonzalez spent three decades at Abbott Laboratories (ABT:US), a company known for the diversity of its products, from drugs to medical devices and diagnostics.
Now he leads a company in which almost 60 percent of sales come from a single product, the arthritis medicine Humira, and he’s seeking diversity once again.
In his first major move since AbbVie was spun off from Abbott last year, Gonzalez has bid $46.5 billion for Shire Plc (SHP), a company based in Dublin for tax purposes that’s largely been built through its own aggressive acquisition strategy. If successful, it’s an initiative that can fill two goals: It can broaden AbbVie’s sales base with high-margin rare-disease and specialty drugs, and give the company a financial edge in building its pipeline.
“If you don’t have a low tax rate, you can’t bid against the other guy with the same aggressiveness” in seeking to buy future products, said Samuel Isaly, a managing partner at OrbiMed Advisors, which owns shares in both AbbVie and Shire.
While Shire said last week it has rejected three offers, including the latest, two people with knowledge of the matter said on June 20 that North Chicago, Illinois-based AbbVie, a company yet to define its corporate style after splitting from Abbott, is considering raising its takeover bid again.
AbbVie’s share rose (ABBV:US) 1.4 percent to $54.03 at 9:33 a.m. in New York, after climbing 30 percent in the year before today.
In Shire, AbbVie would obtain a company that’s made 16 acquisitions in a decade, spending nearly $10 billion. While Shire’s top drug, Vyvanse for attention deficit hyperactivity disorder, now generates about a quarter of its $4.9 billion in sales, the company said today it plans to double its revenue based on growth from other products by 2020.
It’s a goal that’s “very achievable,” said Navid Malik, a London-based industry analyst at Cenkos Securities. (CNKS) “This is not a tall order.”
It’s also a target at the center of the company’s defense against a takeover. Shire said in a conference call today that its strategy will deliver “significant shareholder value” as it aims to reach annual product sales of $6.5 billion by 2016.
The gain is expected to come from Shire’s rare disease drugs, including medicines like Elaprase for Hunter syndrome, a genetic disorder, and Replagal, to treat Fabry disease. Its experimental products include lifitegrast for dry eye, and Premiplex for a potentially blinding eye disorder in infants.
While Premiplex is only in the second of three stages of study needed for regulatory approval, Jason Gerberry, an analyst at Leerink Partners in Boston, said he thinks it may generate more than $1 billion annually if it reaches the market.
“From AbbVie’s point of view, Shire is an excellent company with good stuff going on in R&D,” said John LaMattina, a senior partner at PureTech Ventures and the former head of research and development at New York-based Pfizer Inc. (PFE:US) “From a shareholder perspective, it makes sense, with the potential use of money that’s laying somewhat idle in Europe.”
Shire fell 0.7 percent to 43.41 pounds at 12:06 p.m. in London, paring an earlier decline of as much as 2.7 percent.
American acquirers are on the hunt for cross-border targets that can help them avoid high U.S. corporate taxes. The potential is particularly important for specialty drug companies that are most likely to grow by identifying and purchasing compounds in development by others, Isaly said in a telephone interview.
With its Dublin address, Shire fits the bill.
“There is candy for the baby available, it’s become fashionable and everyone is worried that it will become illegal,” he said. “With all the political talk, those who haven’t yet participated are becoming terrified the path will soon become blocked. It does feed on itself.”
AbbVie, meanwhile, isn’t depending only on acquisitions to broaden its offerings.
Under Gonzalez, the company has a record number of products in the third and final phase of development, including a hepatitis C therapy designed to compete in what analysts have predicted could be a $10 billion market. It is also working on novel cancer compounds and a potential successor to Humira. Other therapies in development include drugs for Parkinson’s disease and endometriosis, a disease of the uterus.
AbbVie raised its outlook for 2014 today. It expects earnings per share between $3.06 and $3.16 on an adjusted basis, the company said in a statement, citing positive data from its experimental pipeline. The outlook (ABBV:US) excludes potential revenue from its hepatitis C treatment, which has been given accelerated approval by U.S. regulators.
If successful, Shire will be Gonzalez’s first deal. It comes seven years after he initially retired from Abbott, only to be lured back in 2009 by CEO Miles White to head Abbott Ventures, the company’s medical technology investment arm.
Gonzalez was executive vice president of pharmaceuticals before the two companies split. AbbVie took over the company’s brand name drugs, including Humira, while Abbott kept the original company’s medical devices, nutritional products, diagnostic tests and generic medicines.
All things considered, it’s not a bad first move, according to OrbiMed’s Isaly.
“We think the combination would create a strong company,” he said. “This isn’t two weak companies getting together to cut costs.”
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