Shire Wins Baxalta With Revised $32 Billion Bid, Adding Cash

  • Baxalta holders to get $18 in cash, 0.1482 of Shire's ADRs
  • Shire expects to cut more than $500 million a year in costs

Inside Shire's Deal to Buy Baxalta for $32B

Shire Plc won over Baxalta Inc. by adding cash to sweeten a takeover bid worth about $32 billion and become the world’s biggest maker of drugs for rare diseases.

The price includes 0.1482 of Shire’s American depositary receipts and $18 in cash for each Baxalta share held, the companies said in a joint statement. Baxalta had rebuffed an unsolicited $30 billion all-stock bid that valued the Deerfield, Illinois-based company at $45.23 a share in July. Shire shares fell to the lowest in 15 months in London trading.

The planned acquisition will boost Dublin-based Shire’s position in the market for rare-disease treatments, which is projected to grow by more than 60 percent over the next five years to $176 billion, according to market researcher EvaluatePharma. The combined company would generate more than $20 billion in sales by 2020.

With Baxalta, Shire also gains a dominant position in providing treatments for hemophilia, a bleeding disorder that affects only about 20,000 people in the U.S. Baxalta’s drug Advate, for hemophilia A, can cost $200,000 to $500,000 a year and is well reimbursed by insurers. That would add to Shire’s collection of rare-disease drugs, which includes Cinryze for an inflammatory disease. Cinryze is among Shire’s best-sellers and one of the most expensive medicines in the world, costing as much as $630,000 a year.

Deal Risks

Shire declined 8.2 percent to 3,925 pence, the lowest since October 2014, as investors remained skeptical about the tax hurdles that remain and the benefits of the deal.

While Shire CEO Flemming Ornskov said his company is confident the transaction would preserve the tax-free status of Baxalta’s spin-off from Baxter International Inc. for shareholders, Bank of America Corp. analyst Graham Parry noted that the company doesn’t have a private letter ruling from the U.S. Internal Revenue Service confirming that there wouldn’t be any liability.

Shire consulted with both Baxalta and Baxter in addition to legal counsel to ensure that the tax status wouldn’t be jeopardized, Mark Enyedy, head of corporate development, said in a call with analysts on Monday. Any tax liabilities would fall to the acquirer, according to Shire Chief Financial Officer Jeff Poulton. An unfavorable decision from the IRS would make the deal less attractive to shareholders.

Moreover, while Baxalta is a leader in treating hemophilia, competition from next-generation therapies for the condition remains an area of concern, according to analysts including Andrew Finkelstein at Susquehanna Financial Group in New York. Roche’s haemophilia antibody ACE910 may pose a challenge, and could lead to the Baxalta transaction curtailing Shire’s earnings from 2019 through 2023, Mark Besley, an analyst at UBS AG, said in a note to clients.

Tax Rate

Baxalta will benefit from a lower tax rate by being taken over by Shire, which has a Dublin legal address despite keeping many operations elsewhere. The U.S. drugmaker had projected a tax rate of 23 percent in 2016. A combination would yield an effective tax rate of 16 percent to 17 percent by 2017, Shire said.

Shares of Baxalta fell 2.2 percent to $39.12 as of 1:06 p.m. in New York trading. The stock has climbed about 17 percent since it was spun off from Baxter Inc. last year.

The value of the offer represents a premium of about 38 percent to Baxalta’s share price on Aug. 3, the day before the announcement of Shire’s initial offer. The transaction is expected to close mid-2016, and will leave Baxalta holders owning about 34 percent of the enlarged company.

Shire expects to save more than $500 million in annual costs following the transaction, which is likely to add to non-GAAP earnings starting in 2017, the companies said.

Rare Diseases

The Baxalta deal is Shire’s latest focus on companies with treatments for rare diseases, including the November purchase of Dyax Inc. for $5.9 billion and the $5 billion acquisition of NPS Pharmaceuticals Inc. in February 2015. Shire has been bulking up following AbbVie Inc.’s abandoned $52 billion buyout of the company last year. The deals also lessen the company’s dependence on treatments for attention-deficit and hyperactivity disorder, such as Vyvanse, its best-selling drug.

Shire is registered in Jersey, in the Channel Islands, and based for tax purposes in Ireland. Its primary stock listing is in the U.K., while Chief Executive Officer Flemming Ornskov and most other top executives are based in Lexington, Massachusetts.

Evercore, Morgan Stanley, Barclays and Deutsche Bank were the financial advisers for Shire on this deal, while Goldman Sachs Group Inc. and Citigroup Inc. acted for Baxalta. Ropes & Gray, Cravath, Swaine, & Moore‎ and Slaughter and May were the legal advisers to Shire, while Kirkland & Ellis acted as transaction counsel and Jones Day was regulatory counsel to Baxalta. ‎Morgan Stanley and Barclays are also providing financing for the transaction.

If the deal isn’t completed, the break-up fee would be limited to 1 percent of Shire’s market cap, Ornskov said.

(An earlier version of this story was corrected to properly identify the U.S. tax authority.)

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