Shire-Baxalta Would Be a Blueprint
After taking a run at Baxalta over the summer and getting rebuffed, Shire is making another, better-received approach, according to Bloomberg News. The deal checks off a laundry list of pharma's current obsessions: It's not an inversion, but brings more revenue into the warm embrace of Shire's low Irish tax rate. It is the direct result of a spinoff, and it's focused on rare-disease drugs, a highly profitable fixation of the industry. The deal would be a capstone to a ridiculous year in healthcare M&A and a blueprint for the kind of deal we might see going forward as things cool down a bit.
On the tax front, the deal could shift Deerfield, Illinois-based Baxalta's $6 billion in revenue from an effective 23 percent tax rate expected next year to Ireland's 16 percent to 17 percent rate. This sort of tax-oriented deal will be more likely than inversions going forward, given the widespread criticism provoked by the Pfizer-Allergan deal. Hillary Clinton's platform includes substantial tactics to make inversion unappealing. Shire-Baxalta is the kind of deal regulators and politicians might gripe about, but can't really touch.
Spinoffs are another deal type favored in M&A these days -- Dow and DuPont are combining with the express intention of dividing -- and pharma's no exception. Baxalta was spun off from Baxter earlier this year, and AbbVie split from Abbott in 2014. Allergan and Pfizer are dragging their heels on announcing such a deal, but are widely expected to do a blockbuster spinoff after their blockbuster merger. Sanofi plans to split off its animal health division, and GlaxoSmithKline is being prodded by investors to consider a breakup.
In this case, Shire's desire to get bigger was perfectly timed to the Baxalta spinoff, which focused on one of Shire's specialties, rare diseases. That's likely why Shire lunged for Baxalta in July, 10 days after its exit from Baxter was completed, when it was the business equivalent of a squalling infant.
Both Shire and Baxalta are heavily invested in developing drugs for rare genetic diseases, which have serious growth potential. Shire estimates the combined firm could do $20 billion in sales by 2020.
Rare diseases are a new and appealing kind of blockbuster. Their small market size discourages competitors and allows for serious pricing power, which is more important than ever, given the ability of increasingly large pharmacy benefit managers and insurers to force discounts in competitive markets.
These sort of drugs can command prices in the high six figures per year, and in many cases are taken for years or over a lifetime. Vertex's Kalydeco for cystic fibrosis costs $311,000 a year. Alexion's newly approved Kanuma for Wolman disease is expected to cost an average of $310,000 a year in the U.S. There are significant added incentives to develop these kind of drugs, including accelerated FDA review and approval, and extra years of market exclusivity that let companies profit for longer.
Rare-disease drugs aren't an entirely safe bet. Firms are less afraid to develop competitors, and governments are starting to scrutinize prices, particularly in the UK. But it's been an enormously profitable strategy for those that have pursued it, and firms will likely keep looking for such opportunities.
Pfizer-Allergan and a series of behemoth managed-care mergers get all the attention, forming a big chunk of the $631 billion in health care services and pharma deals announced so far this year, according to data compiled by Bloomberg. But it's unlikely we'll see many more such deals. Shire and Baxalta's proposed tie-up, in contrast, is an all-in-one example of the kinds of deals that are still on the table.
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