By Staff Report Monday, January 11th, 2016

Shire PLC sweetened the pot and Baxalta Inc. investors took the bait in a deal announced early Jan. 11.

Dublin-based Shire announced a $30 billion bid for Deefield, Ill.-based Baxalta on Aug. 4. On Jan. 11, the companies announced Shire will acquire Baxalta for $32 billion.

Baxalta employs about 2,000 people in Thousand Oaks and Newbury Park at the former Baxter Bioscience offices and makes drugs for patients with rare types of cancers. Baxalta spun off from Baxter International’s legacy medical products business in July. Baxter shareholders received a $4 billion cash dividend and retained a 19.5 percent stake in Baxalta.

Baxter shareholders also received 1 share of Baxalta share for each share of Baxter. Those shareholders should make out nicely from the deal. According to a statement from the company, Baxalta shareholders will receive $45.57 in cash per share from the deal.

“Together, we will have leadership positions in multiple, high-value franchises and become the clear partner of choice in rare diseases,” said Shire CEO Flemming Ornskov. “Our expanded portfolio and presence in more than 100 countries will drive our growth to over $20 billion in anticipated annual revenues by 2020.”

Baxalta initially rebuffed an unsolicited $30 billion all-stock bid that valued the company at $45.23 a share in July.

The planned acquisition will boost  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.

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.
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. Inland 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.

Shire is registered in Jersey, just off the coast of France, 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.
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 about 2 percent from $40.01 to $39.18 as of 9:52 a.m. Jan. 11. 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.

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.

• Bloomberg News contributed to this story.