$32 billion for Baxalta

DUBLIN & BANNOCKBURN, Ill.—In a deal that sets a high bar for 2016 M&A numbers, Shire plc and Baxalta Inc. have announced that Shire will combine with Baxalta, a deal agreed upon by both companies’ boards of directors. The terms stipulate that Baxalta shareholders will receive $18 in cash and 0.1482 Shire ADS per Baxalta share, which, based on Shire’s closing price as of Jan. 8, comes to a total current value of $45.57 per Baxalta share, for an aggregate deal consideration of roughly $32 billion. Following the close of the transaction, which is slated for mid-2016, Baxalta shareholders will hold approximately 34 percent ownership in the combined entity.

“This proposed combination allows us to realize our vision of building the leading biotechnology company focused on rare diseases,” Dr. Flemming Ornskov, CEO of Shire, commented in a statement. “Together, we will have leadership positions in multiple, high-value franchises and become the clear partner of choice in rare diseases. Our expanded portfolio and presence in more than 100 countries will drive our growth to over $20 billion in anticipated annual revenues by 2020. Our due diligence has reinforced our belief in the combination, and we look forward to welcoming Baxalta colleagues to a shared entrepreneurial, patient-driven culture.”

Shire expects to see annual cost synergies from this combination of more than $500 million, which are expected to be realized within the first three years after the deal closes. Additional revenue synergies and a combined non-GAAP effective tax rate of 16 to 17 percent by 2017 are also expected. The deal is forecast to be accretive to non-GAAP diluted earnings per share in 2017 and beyond, with the expectation that the combined company will generate annual operating cash flow of $6 billion starting in 2018, as well.

This transaction is expected to create the leading rare disease company globally, with best-in-class products in therapeutic fields such as hematology, immunology, neuroscience, lysosomal storage diseases, gastrointestinal/endocrine and hereditary angioedema, as well as growing pipelines in oncology and ophthalmics. The combined Shire/Baxalta portfolio will consist of more than 60 programs in development, more than 50 of which address rare diseases, and Shire forecasts more than 30 recent and planned product launches from the combined pipeline will contribute nearly $5 billion in annual revenues by 2020.

“We launched Baxalta to focus on purpose-driven performance, sustainable growth and continuing our leadership in developing treatments for orphan and underserved diseases,” said Dr. Wayne T. Hockmeyer, chairman of Baxalta. “While we have made great progress to date and have had a measurable impact across all our businesses, I look forward to joining the board of the combined company to help ensure that we infuse the best of both organizations and foster a new shared culture that has the resources, the passion and the commitment to continue to make a meaningful difference in the lives of our patients and their families.”

Reaction to the deal has been mixed, as Shire’s stock dropped 10 percent on news of the deal while Baxalta’s fell 2 percent. Prof. John Lyon of Warwick Business School, a professor of practice in the Entrepreneurship & Innovation Group, however, remarked favorably on the deal, saying “It is always good to see deals that make good strategic sense, and this is one of them. Shire has set out its future as a global leader in rare diseases, and this deal augments that strategy with Baxalta—another specialist in rare diseases—having expertise in bleeding disorders, immunology and oncology.”

Credit Suisse is also optimistic about the deal, upgrading Shire to “Outperform” and remarking that the transaction “provides a solid strategic fit and mitigates the significant generic risk at Shire (Vyvanse, Lialda, Firazyr) at the end of the decade.” While Credit Suisse called investor concerns “justified,” it added that the risks were “overdone.” The three main risks for the deal, according to Credit Suisse, are competition within the hemophilia market, an $8-billion IRS tax-overhang (from Baxalta’s spin out from Baxter in July 2015) and integrating the two companies.

While there are a number of competing hemophilia therapeutics in clinical development and on the market—including Roche’s contender ACE910, which received Breakthrough Therapy Designation from the U.S. Food and Drug Administration in September—Credit Suisse noted the “very conservative nature of this market to date, with strong patient loyalties, and we expect only a slow switch away from traditional treatment patients over time.” As for the tax-overhang, the firm noted that Shire stated in its conference call that the extended discussions with Baxalta “largely revolved around due diligence on eliminating this future tax liability … While the absolute value of the risk is substantial, we believe that the probability of it crystalizing is negligible.”

The issue of integration, however, is what Credit Suisse said “generates the greatest long-term risk.” Shire has 6,000 employees, while Baxalta brings with it 16,000 employees, as well as “a vast network of plasma collection and fractionation manufacturing infrastructure.”

Shire has been extremely active in the M&A field lately, having acquired NPS Pharmaceuticals in February 2015 for approximately $5.2 billion and Dyax Corp. in November 2015 for $5.9 billion.