Coverage: Shire-Baxalta announce $32 billion deal

After six months of negotiating, drugmaker Shire finally clinched its $32 billion takeover of Baxalta International on Monday, and while the deal comes with some rewards, it also carries a few risks.

Ben Hirschler and Paul Sandle of Reuters had the day’s news:

Drugmaker Shire Plc clinched its six-month pursuit of Baxalta International Inc on Monday with an agreed $32 billion cash and stock offer, catapulting it to a leading position in treating rare diseases.

The London-listed group, which first approached the U.S. company with an all-stock offer in July, won over the maker of treatments for rare blood conditions, cancers and immune system disorders after adding a cash sweetener.

Shire’s U.S.-traded shares fell 9 percent, however, as investors worry about a potential competitive threat from Roche to Baxalta’s critically important haemophilia franchise, and on nerves over the price offered and a cost savings forecast that Jefferies analysts called “somewhat disappointing.”

The deal marks a strong start to mergers and acquisitions in healthcare in 2016 after the sector had its biggest deal-making streak in history last year, with global transactions totaling $673 billion, according to Thomson Reuters data.

It also highlights the appeal of medicines for rare diseases targeting small groups of patients for which drugmakers can charge hundreds of thousands of dollars a year.

“Together we will have the number one platform in rare diseases with a strong foundation for future growth,” Shire Chief Executive Officer Flemming Ornskov told reporters, after unveiling his company’s most ambitious acquisition yet.

Shareholders will receive $18 in cash and 0.1482 Shire American depositary share per Baxalta share, implying a total value of $45.57 per share based on Jan. 8 prices. That is 37.5 percent above Baxalta’s price on Aug. 3, before Shire went public with its interest.

Denise Roland and Richard Rubin of The Wall Street Journal explained the benefits and potential risks of the $32 billion deal:

The deal underlines the allure of rare-disease drugs, which don’t face the same pricing pressures as those for more common ailments because each treatment targets such a small group of patients.

Dr. Ornskov said being the top player in rare diseases would give the combined company extra heft in marketing the drugs to specialists, and make it a desirable partner for others operating in the area.

Still, some analysts have said Shire is taking on a risk with Baxalta, whose large hemophilia franchise faces looming competition from a string of new treatments under development at rival drugmakers. Those include a closely watched product in Roche Holding AG’s pipeline that has been designated a “breakthrough” drug by the U.S. Food and Drug Administration. In addition to Baxalta’s hemophilia drugs, Shire would be adding immunology and cancer treatments to its portfolio, which largely comprises drugs for attention-deficit hyperactivity disorder, rare diseases and ophthalmic conditions.

Shire has agreed to pay a breakup fee capped at 1% of its market capitalization, which at Friday’s closing price would be around £253 million ($367 million), should the deal fall apart, according to Dr. Ornskov.

It has secured an $18 billion bank facility to finance the combination. The company intends to refinance the bank facility through capital-market debt issuances.

Baxalta Chairman Wayne T. Hockmeyer will become deputy chairman of the combined company, and two additional directors will be included from Baxalta’s board.

Leslie Picker and Chad Bray of The New York Times explained the tax benefits of the deal:

Part of Shire’s ability to pay such a premium for Baxalta is tax savings.

Because Shire is based in Dublin, while Baxalta is based in Bannockburn, Ill., outside Chicago, the combined company will be able to achieve a lower tax rate than Baxalta can as a stand-alone. The combined company will have an estimated tax rate of 16 to 17 percent by next year, compared with Baxalta’s current rate of 23 to 24 percent, Shire said.

Shire said that it expected to realize more than $500 million in annual cost savings within the first three years after the deal closes.

Baxalta has been a stand-alone company for only six months. The drug maker was spun off from Baxter in July to streamline its operations with a focus on specialty drugs. Baxter, a medical supplies giant, still owns more than 19 percent and remains the largest shareholder, so the deal with Shire is incumbent upon its support.

“Baxter fully supports the proposed combination of Shire and Baxalta, which will create a major biotechnology company and global leader in rare diseases,” said José E. Almeida, Baxter’s chairman and chief executive.

The Baxalta spinoff was structured in a way to avoid creating a tax burden for Baxter shareholders who received shares in the new company.

Preserving the “tax-free status” of the Baxalta spinoff was a key component of the takeover discussions, Shire’s chief executive, Flemming Ornskov, told reporters in a conference call on Monday. He said he was “confident” the current structure of the transaction would accomplish that.

Tax considerations had helped drive a proposed $54 billion sale of Shire to the American drug maker AbbVie last year. After the Treasury Department announced new rules aimed at curbing inversions — when an American company acquires a foreign one to reincorporate overseas to lower its tax bill — AbbVie and Shire terminated their deal.