AbbVie and Shire come to terms on a $55B union

Flemming Ornskov, CEO of Shire

After months of semi-clandestine courtship, AbbVie ($ABBV) and Shire ($SHPG) have settled on a price: For $54.7 billion in cash and stock, the U.S. drugmaker will absorb its Irish target, securing a pipeline of promising rare disease treatments and a new address that should slash its tax rate.

The deal, announced right at the pair's U.K. takeover rule-imposed deadline, will give each Shire shareholder $41.82 and .896 shares of a combined company, amounting to a roughly 53% premium over Shire's market value before AbbVie made its first offer back in May. Pending shareholder approval, the two expect their deal to close in the fourth quarter. In the event that AbbVie's investors shoot down the idea, Shire is in line for a cost reimbursement of at least $500 million but not more than 1% of the deal value.

In Shire, AbbVie sees both future growth and immediate savings. On the former terms, Shire's strong position in rare diseases--including on-the-market therapies like Firazyr and Cinryze, plus a pipeline of enzyme-replacement therapies--will ideally help AbbVie add value to its portfolio and curb its dependence on the top-selling biologic Humira, which brought in $11 billion last year and loses patent protection in 2016.

In an effort to shake loose of AbbVie's gaze--or at least drive up its bid price--Shire CEO Flemming Ornskov has put forth a bullish view of his company's future, expecting to double revenue to $10 billion by 2020. About $7 billion of that total will come from Shire's approved drugs, which include the well-performing ADHD drug Vyvanse, with the rest coming from its pipeline.

The company believes its in-development drugs are worth a combined $7 billion at their peak, led by lifitegrast, a dry-eye treatment expected to bring in $1 billion a year, and LUM001 and LUM002, two liver treatments Shire picked up in its $260 million deal for Lumena Pharmaceuticals that it bets can peak at $3 billion combined.

On the tax angle, an AbbVie-Shire merger would be the largest ever so-called inversion deal, in which a U.S. company buys an overseas competitor to re-domicile its headquarters and lower its annual rate. Once the acquisition closes, AbbVie's effective tax rate will fall from 22% to about 13% by 2016, according to the company, savings CEO Richard Gonzalez said will allow it to bankroll M&A and expand its pipeline.

AbbVie CEO Richard Gonzalez

"By combining AbbVie and Shire, we're creating a unique, diversified biopharmaceutical company," Gonzalez said in a statement. "The combined company would benefit from a best-in-class product development platform, a stronger pipeline and more enhanced R&D capabilities."

As for Ornskov, he has agreed to stay on and oversee the creation of a rare disease unit within the new AbbVie, answering directly to Gonzalez and receiving a $9.9 million payout for his trouble. About 30 senior Shire staff members will also come aboard to manage the transition, receiving a combined cash payment of $22.9 million, good for between 100% and 200% of their salaries.

If the deal goes through, it'll spell a brief but remarkable tenure at the top for Ornskov. Shire's market cap was about $19 billion when he took the reins in 2013, and, with the help of 6 sizable acquisitions and some targeted cutbacks, he got it to roughly $44 billion before brokering this $54.7 billion sale. His post-integration role at AbbVie is yet to be delineated, and if he chooses to walk away from the company, he's likely to have a few offers come his way.

Combined, the two companies will command a market cap of about $137 billion, according to AbbVie, employing more than 30,000 people at 9 R&D centers and 14 manufacturing operations around the world.

- read the announcement (PDF)

Special Report: 2013's 25 most influential people in biopharma - Flemming Ornskov - Shire

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