AGN Allergan plc

By Jonathan D. Rockoff and Noemie Bisserbe 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 20, 2018).

Drugmaker Shire PLC has become the subject of topsy-turvy takeover interest, drawing suitors to one of the few remaining biotechs with rapidly rising sales and a stock price that hasn't soared in recent months.

Japan's Takeda Pharmaceutical Co. kicked off the activity Thursday by disclosing it made a GBP42.38 billion ($60 billion) offer for Dublin-based Shire.

Shortly after Takeda revealed its interest, Shire said it had rejected the offer. Then Allergan PLC jumped into the fray, saying it was considering making its own bid for Shire -- only to pull back hours later, after its stock plunged, to assert it wouldn't make an offer after all.

The commotion was a reminder of the vital role that deal-making plays for drug companies seeking a quicker boost to sales than risky research and development can provide.

Shire is a leading seller of drugs for rare diseases, a $137 billion world-wide market that EvaluatePharma estimates is increasing 11% a year, twice the pace of the overall pharmaceuticals market.

Scientific advances uncovering molecular roots of rare conditions have increased the odds of discovering treatments for the diseases and heightened investor interest in the field. Health regulators have approved drugs for rare diseases rapidly, citing the needs of patients.

Takeda's bid could trigger rivals to join the fray, though Wall Street's lukewarm reaction to the interest of Takeda and Allergan could give other potential suitors pause, suggesting investor support for big deals for established firms has its limits.

Allergan's shares fell more than 7% after the company announced its interest in Shire and recovered after its about-face, and ended the day down more than 4%. Takeda's stock swung throughout the day and ended barely changed, down 0.06%. Shire ended up almost 6% in heavy trading.

Shire itself illustrates the benefits and pitfalls of deal-making. In five years at the helm, Chief Executive Flemming Ornskov has used acquisitions to steer the company, once known for its Adderall attention-deficit drug, toward treatments for rare diseases like hereditary angioedema.

The shift has paid off: Shire reported $14.4 billion in product sales last year, up 33% from the year earlier.

Shire's deal-fueled growth has made it a repeated takeover target, despite Dr. Ornskov's efforts to build a large, independent company. In 2014, the CEO fought a proposed acquisition by AbbVie Inc. of North Chicago, Ill., until it relented and agreed to an acquisition. The deal was called off after new U.S. tax rules deterred U.S. companies from moving their tax homes overseas.

At the same time, Shire's acquisitions, especially a $32 billion deal for hemophilia-drug maker Baxalta in 2016, left it saddled with heavy debt and opened it to criticism from some analysts and investors of overpaying for questionable assets.

Shire reported $19.1 billion in net debt at the end of 2017. Some analysts and investors criticized the Baxalta deal because of new competition in the hemophilia market and the looming threat of a new kind of drug known as gene therapy.

The concerns weighed on Shire's share price, making the company more attractive as a takeover target, analysts say.

Takeda has been undergoing its own deal-juiced transformation under Chief Executive Christophe Weber, who has centralized the company's sprawling operations and focused on drugs with the biggest sales potential in areas like cancer, gastrointestinal disorders and neuroscience.

Adding Shire would boost Takeda's sales to $30 billion a year, and jump-start growth, but it would be a big bite to digest. Takeda's market value of $38 billion Thursday in Tokyo, $13 billion less than its London-listed target's.

Takeda would also face the same debt challenges its Irish rival has been confronting. Takeda would likely have to take on significant debt to fund a deal and balloon its net debt, which is now at a manageable 1.8 times earnings before interest, taxes, depreciation and amortization.

Takeda's offer included a mix of cash and stock. Shire shareholders aren't likely to accept the large proportion of stock Takeda is offering, preferring more cash, analysts said.

Such sentiment could leave room for other suitors, despite Allergan backing away.

Through more than $100 billion in deals of its own, Allergan has been made over into the seller of anti-wrinkle treatment Botox, as well as medicines for gastrointestinal and neuroscience disorders.

But Wall Street has pressured its shares, in part because of concerns about generic competition looming for Restasis, one of its best-selling products, and Allergan's controversial attempt to protect the drug by selling its patents to an Indian tribe in New York.

Allergan has been looking at a range of strategic options for boosting its valuation, from divestitures to acquisitions to combinations.

Dublin-based Allergan, required by Irish takeover rules to reveal its M&A activities, said Thursday it was considering making a bid for Shire. Both companies sell eye drugs, including competing treatments for a condition known as dry eye.

Allergan wanted to give Shire a look as part of its strategic review, but hadn't looked in-depth and was probably unlikely to ever make a bid, according to a person familiar with the matter.

The company issued a new statement later in the day, after its shares plunged on the initial disclosure, saying it "does not intend to make an offer for Shire."

Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com and Noemie Bisserbe at noemie.bisserbe@wsj.com

(END) Dow Jones Newswires

April 20, 2018 02:47 ET (06:47 GMT)

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