Why I'd pile into FTSE 100 takeover candidate Shire along with this promising life science play
I last wrote about defensive pharmaceutical firm Shire (LSE: SHP) in February when the stock had fallen out of favour after its big 2016 acquisition of Baxalta. Shire took on more debt, but Analysts at Societe Generale were shouting that the valuation made "no sense" because the company was selling too cheaply.
It seems that Takeda Pharmaceutical Company Limited was listening. Takeda submitted four escalating conditional proposals to take over Shire, on 29 March, 11 April, 13 April and on 20 April. The fourth proposal comprises £26 per share in new Takeda shares, and £21 per share in cash, which values Shire at a potential £47 per share, some £44bn in terms of market capitalisation. As I write, the share price runs around 3,874p and the market capitalisation sits just over £35m, so there's still value to play for.
If Shire rises to 4,700p, the forward price-to-earnings ratio for 2019 would sit just above 12. The directors are considering Takeda's fourth proposal and will issue "a further announcement in due course." But even at 4,700p, I reckon Shire will be undervalued. My guess is that Takeda will need to dig yet deeper into its pockets or withdraw, but we'll see.
Based on Takeda's current market capitalisation, Shire shareholders would own around 49% of the enlarged firm. But whether or not the deal goes through, I think Takeda has woken the market up to Shire's possible undervaluation. Maybe others will pitch for the company, or perhaps speculation based on the potential for bid approaches will keep the shares perky.
Meanwhile, Arix Bioscience (LSE: ARIX) released its full-year results today. The UK-based healthcare and life science company aims to generate value by acquiring interests in healthcare and life science businesses focused on developing and commercialising technologies and discoveries.
Chief executive Dr Joe Anderson said that 2017 was "transformational," based mainly on raising a lot of money from investors and spending it. But here we have the opportunity to get in early with a firm that could go on to grow, perhaps being another success story along the lines of Shire over time.
The firm's Initial Public Offering (IPO) in February delivered £112m of new capital, allowing the company to "identify and support" eight new "innovative" life science companies, raising the total at the end of the year to 13 investments, which the firm calls "Group Businesses." Arix raised a further £87m in March, to take advantage of a pipeline of opportunities that "continues to grow, supported by our broad international network." The firm has also "secured strategic partnerships with leading global pharmaceutical companies Takeda, UCB, Fosun and Ipsen."
Today's share price close to 203p throws up a market capitalisation of £274m or so, which compares to net funds raised of £199m. However, the firm expects "multiple clinical and financing catalysts in our Group Businesses and we are also planning to build interests in more exciting young companies." I like the diversified approach to the market that the operational set-up offers investors, which should spread the risks. If things go well, Arix could earn its premium valuation and I reckon the company is worth keeping a close eye on with a view to investing.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.