Pharma’s Big Deal of the Year: Shire acquires ViroPharma

Shire PLC Market Cap (as of 15/11/13): £15.7bn

ViroPharma Inc. Market Cap (as of 15/11/13): $3.3bn

Monday, November 11^th brought about the much rumored king-size deal of the year in the pharmaceutical sector: Shire PLC of Ireland acquired ViroPharma Inc., a US-based niche company focused on rare diseases, for a $4.2bn cash consideration.

The $50 price per share paid by Shire represents a premium of 27% on the last closing price before the announcement on November 8^th and a hefty 64% premium on the targets’ undisturbed price, before rumors about the negotiations started spreading at the end of the summer. The market, however, seems to trust the strategic vision of Shire’s CEO Flemming Ornskov and has responded positively with a 3.6% uptick on the news.

The transaction comes at a transformational moment for global pharmaceutical firms. Pressure from cheap genericals and expiring patents is forcing Shire and competitors like Novartis and AstraZeneca to concentrate on cost cutting and refocusing on high-growth, high-margin fields such as rare disease treatment. These worldwide dynamics, together with regulatory headaches and squabbles with health care authorities in the UK have led all the above mentioned companies to cut back on precious research staff and budgets at their UK operations in the recent months.

Shire is a leading UK based (but Irish-domiciled) specialty pharmaceuticals company with $4.4bn in sales in 2012 (30% of which coming from rare disease treatments), and owner of blockbuster ADHD medication Adderall. It has recently expanded mainly via external growth, and it has acquired two smaller companies in the rare disease sector in the past year. The firm has recently benefited from a refocusing of its strategy mostly due to Mr. Ornskov’s “One Shire” integration plan, away from explorative research and towards expansion of its rare disease drugs portfolio, which has resulted in an impressive 54% increase in share price in the year-to-date. The most recent steps in this direction have been a reduction of research personnel at its historic Basingstoke labs and the shift of its Swiss office to Zug, in search of better qualified staff.

ViroPharma, based in Pennsylvania, is a rare disease specialised company, with the majority of its $455mln expected sales for 2013 coming from Cinryze, a preventive treatment for hereditary angioedema (HAE), a rare condition which causes potentially life-threatening swelling symptoms to its roughly 18,000 victims in the US and EU combined.

The company is experiencing high growth in sales (6.3% y-o-y) and the rare disease field as a whole looks poised for high expansion in the coming years.

Shire is paying a high price for this growth expectations, valuing its target at 9x 2012 sales and 58x EBITDA (against a sector average of 23x), but the acquisition is expected to create value in multiple ways. From a strategic point of view, ViroPharma’s HAE medication Cinryze will complement Shire’s Firazyr, an emergency treatment for the same illness, bringing its rare disease division sales up to $2bn, or 40% of the total. This combination is also forecasted to generate $150mln in annual cost synergies from 2015. The taxation differential between the two companies (16% for Shire, 35% for ViroPharma) also gives scope to tax synergies. Shire easily obtained relatively cheap funding for the acquisition through a mixture of available cash, a new $2.6 short term bank loan and an existing $1.2bn facility. This favorable arrangement is expected to make the transaction EPS accretive from the outset.

The deal is going to be finalized in Q4 2013 or early 2014. Lazard and Morgan Stanley advised Shire, while Goldman Sachs was ViroPharma’s advisor of choice.