Shire's Bid For Baxalta A Fool's Errand?

Shire begins a pursuit to acquire Baxalta, but both analysts and the target company fail to see the positives behind the combination.

Shire PLC is making a play for newly-formed company Baxalta Inc. with a $34bn bid, but the all-stock offer is unlikely to persuade shareholders to give up the vision the company has laid out. It may come down to which tale of “20 by 20” shareholders buy into.

The big biotech announced the morning of Aug. 4 that it has proposed an all-stock merger of 0.1687 Shire American depositary receipts for each Baxalta share, implying a value of $45.23 per share, or $33.9bn. Baxalta shareholders would own 37% of the company. [See Deal]

Shire says it has been looking at Baxalta since Baxter began talking about spinning out its biosciences unit, but that it did not approach anyone until after Baxalta officially became a publicly traded company on July 1. According to Shire CEO Flemming Ornskov, he and Shire's lead attorney met with Baxalta CEO Ludwig Hantson on July 10 to make the proposal. After consulting with its board of directors, Baxalta turned down the deal on July 31, noting there was no compelling basis for discussions.

"As a new, publicly-traded entity only since July 1, we are just in the initial stages of implementing our growth strategy as a standalone company and our stock has not yet achieved a price level that appropriately reflects the company’s value and prospects," Hantson wrote in a letter to Ornskov that was made public on Aug. 4. "Perhaps even more importantly, a transaction at this time would be severely disruptive to our young organization and the implementation of a wide variety of critical commercial, R&D, and operational initiatives and thus carries with it significant risks for our shareholders."

Too Big Of An Umbrella

The merger has its positives and negatives – including a very beneficial 17% tax rate. Both companies operate under the large umbrella of rare diseases, but have few drugs in the same therapeutic areas. While the combination would likely present few anti-trust issues and require little in the way of divestitures, the companies aren't exactly complementary.

Shire operates in the areas of complement biology, gastrointestinal and metabolic, renal fibrosis, ophthalmic and CNS and neuromuscular disease. Its best-selling product is the hyperactivity drug Vyvanse (lisdexamfetamine), which had sales of $1.4bn in 2014.

Meanwhile, Baxalta's lead franchises are in hemophilia and immunology, and the specialty pharma is building out a business in immuno-oncology as well, concentrating on niche cancer indications. Its lead drug is the hemophilia treatment Advate [Antihemophilic Factor (Recombinant)], which had $2.3bn in 2014 sales. Baxalta is currently developing several follow-on hemophilia products, including a gene therapy that has the potential to be administered once annually.

Baxalta debuted on the public market on July 1 as a spinout from the hospital care company Baxter, but has been operating as its own unit for a couple of years now. Baxalta management has been building out the company's pipeline to prepare for the spinout. The plan that the company has been preaching to shareholders is its 20 x 20 plan – an initiative to have 20 new products on the market by 2020 that could bring in another $2.5bn in additional revenue. Chief Scientific Officer John Orloff said in an interview that the growth will be in large part driven by the new oncology division.

But rather than emphasizing Baxalta's oncology prospects, Ornskov stressed the legacy hemophilia and immunology businesses during an Aug. 4 investor call. One-upping Baxalta, Shire has proposed its own 20 x 20 plan – a proposal for the combined company to have $20bn in revenues by 2020.

According to analyst projections for product sales, $7.7bn of that total $20bn would come from the top five products. Four of those products currently belong to Baxalta, although Vyvanse would round out the top five and contribute about $2.5bn in sales in 2020. Both companies are on track to have about $10bn in revenues by 2020 as standalone entities.

Though the revenue possibilities seem compelling, Ornskov was able to say little about the potential synergies that shareholders could expect to gain from the combination.

Baxalta doesn’t see the synergies either. "We do not believe that a combination of our two companies would be strategically complementary, or that our respective product portfolios would benefit from such a combination. And we do not think the combination would generate substantial operational or revenue synergies, which would be critical to any potential value creation for our shareholders," Hantson’s letter states.

Leerink Swann analyst Jason Gerberry wrote in an Aug.4 note to investors that an all-stock offer – particularly a hostile one – is unlikely to come to fruition. "The deal combo remains highly uncertain and we'd caution investors that the deal carries low odds of success," he wrote. "If SHPG were to go hostile, we’d envision a 6-8 month process at a minimum."

AbbVie Similarities

It shouldn't come as a total surprise that Shire is interested in Baxalta; the specialty pharma company has more than just a few things in common with another recent spinout, AbbVie Inc. Both Baxalta and AbbVie were once the pharmaceutical divisions of larger medical device companies and both Illinois-based companies can attribute more than half their revenues to a single franchise – Advate and Humira, respectively.

Shire and AbbVie failed to consummate a deal in 2014 when tax policy changes were enacted last September by the US Treasury that closed a loophole that would’ve allowed AbbVie to repatriate and take on Shire's advantageous Irish tax rate.

Even though AbbVie had a more complementary portfolio to Shire, it's important to note that without the tax benefits, AbbVie didn't see the rationale behind the transaction (Also see "Tax Reform Takes Its Toll: AbbVie Having Second Thoughts About Shire" - Pink Sheet, 15 Oct, 2014.).