Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
The price is just right for a Shire and Baxalta combination. But is it the right combination?
The drugmakers are closing in on a deal that would value Baxalta at $46.50 to $48 a share in cash and stock, people familiar with the matter told Bloomberg News. The price is attractive enough to convince Baxalta to sell, but not so lofty as to wipe out the possibility of earnings accretion for Shire in 2017, according to Bloomberg Intelligence's Sam Fazeli. Baxalta had previously rebuffed an all-stock $45.23-a-share bid from Shire in August.
So it looks like the two will finally be able to strike a deal and claim the honor of being 2016's first mega-merger, with a total transaction value of more than $35 billion including debt. Whether this is a smart move for Shire is still up for debate. Shareholders didn't exactly celebrate the deal, sending the stock down about 5 percent in London.
At the high end of the reported price range, or $48 a share, Shire would be paying about 6 times Baxalta's projected revenue for 2015. That's essentially in line with what big pharmaceutical and biotechnology companies have commanded over the last decade . Many of those targets were growing faster than Baxalta is, though. The company's sales growth over the next few years will trail that of Shire itself. That makes the purchase look expensive -- and strategically somewhat questionable -- even if the math works on paper. Sure, a Baxalta takeover will make Shire bigger and more diversified, but as anyone who's followed M&A for any length of time knows, bigger isn't always better.
With Baxalta getting the bulk of its sales from a hemophilia franchise that's facing growing competition, there's some doubt as to whether the revenue growth it has now is sustainable in the long run. Biogen has new hemophilia products that threaten to take market share. Roche is developing an experimental antibody treatment and others including BioMarin are exploring gene therapies that could provide a longer-lasting fix for the blood disorder. The threat of encroaching rivals makes Baxalta a bit of an odd fit for Shire, which has traditionally gravitated toward rare diseases where competition is slim.
Baxalta is still the leader in hemophilia treatments, and patients aren't prone to abandoning remedies that work. That should help protect it for at least a few years. The drugmaker is also developing new products for the disorder (including the recently approved Adynovate) and building up its non-hemophilia portfolio. The company on Monday announced it was investing in experimental cancer treatments through a deal with Danish drugmaker Symphogen that's worth as much as $1.6 billion.
But $35 billion-plus is a big price to pay for a deal that potentially may only look OK in the long run -- especially for a company that's already learned the high cost of playing defense. Shire agreed to pay $4.2 billion for ViroPharma in 2013 primarily to gain access to a drug for hereditary angioedema. About two years later, it's planning to shell out as much as $6.5 billion to buy Dyax and defend that HAE drug.
Fixing a Baxalta misfire will be a lot more expensive. Just look at two of its competitors: Biogen is valued at more than $65 billion, while BioMarin is worth about $17 billion.
This just-right price may be anything but, if it ends up only being a down payment.
Data for peer group is based on trailing 12-month revenue. Because Baxalta was spun off from Baxter International in July, this data is not available for the company. It will report fourth-quarter earnings on Jan. 29.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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