AbbVie's $55B deal for Shire is officially dead. Now what?

Shire CEO Flemming Ornskov

Shire ($SHPG) and AbbVie ($ABBV) have formally called it quits on a planned $55 billion merger, leaving each company to get by on the merits of its own pipeline and talk up the benefits of life without the other.

For Shire, the termination allows it to pick up right where it left off over the summer: stacking up assets with the goal of doubling its revenue by 2020. The plan, unveiled while Shire was trying to convince shareholders to rally against AbbVie's ambitions, predicts $7 billion in sales from on-the-market products like the ADHD treatment Vyvanse and rare disease therapy Firazyr, with the remaining $3 billion stemming from Shire's pipeline.

In the long term, 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 picked up in its $260 million deal for Lumena Pharmaceuticals that Shire says can peak at $3 billion in sum.

And, as is already well told, AbbVie is on the line to hand Shire a $1.6 billion breakup fee by 5 p.m. London time today, cash that savvy dealmakers like Chairwoman Susan Kilsby and CEO Flemming Ornskov could put to immediate use.

The future is a little less clear for AbbVie. Two years from now, the company will lose patent protection for Humira, its blockbuster anti-inflammatory treatment, and biosimilars outfits the world over are angling to cut in on a drug that brought in more than $11 billion last year.

AbbVie CEO Richard Gonzalez

AbbVie CEO Richard Gonzalez believes the company has the assets to replace its TNF-blocking golden goose, pointing to its all-oral combination treatment for hepatitis C, a potential blockbuster up for FDA approval this year, and four cancer treatments currently in late-stage testing. Daclizumab, a multiple sclerosis collaboration with Biogen Idec ($BIIB), is nearing regulatory review, and AbbVie has a wide stable of Phase II immunology treatments with broad applications.

But not one of those bets is a sure thing. In hep C, AbbVie and partner Enanta ($ENTA) are challenging the recent dominance of Gilead Sciences ($GILD), which just launched an injection-free combo of its own. And while Gilead's costly drug has led to sticker shock among payers and providers, AbbVie has signaled that it doesn't plan to mount a price war with its rival. Many analysts expect the company to place third on the market for all-oral treatments, finishing behind Merck ($MRK) and its mid-stage treatment.

As for the cash no longer going to Shire shareholders, AbbVie plans to give it back to its own investors, approving a $5 billion buyback program spanning the next several years.

The deal fell apart after the Treasury Department changed the rules for American companies that incorporate overseas through a process called inversion. When AbbVie first signed on to buy Shire, headquartered in Ireland, it saw a path to repatriate some overseas funds without paying stateside taxes on them, something that's no longer possible, Gonzalez said.

"We are disappointed in Treasury's unprecedented approach," the CEO said on a call with analysts. "It does nothing to solve a fundamental problem of the U.S. tax code, which makes American companies less competitive with their foreign competitors and discourages investment in the United States. There continues to be an urgent need for a competitive U.S. tax code that allows foreign earnings to be used for investment in the U.S., without penalty."

- read Shire's statement (PDF)
- here's AbbVie's release (PDF)

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