TRENTON, N.J.—Irish drugmaker Shire PLC’s second attempt to buy Baxalta looks more likely to succeed, with Baxalta’s board backing the sweetened offer of $32 billion in cash and stock. If the deal goes through, the combined company would be one of the world’s top 20 drugmakers by revenue and a leader in the sizzling niche of rare disease medicines.
Treatments for rare diseases—those affecting fewer than 200,000 Americans—are a hot, very lucrative research area, with drugmakers testing hundreds in clinical trials. The surge is driven by a combination of tax breaks, the lure of ultra-high drug prices, scientific advances such as the mapping of the human genome and advocacy groups for patients raising money to entice small drug developers to research treatments for their condition.
Meanwhile, there’s an ongoing wave of drugmakers combining to increase revenue, quickly boost profit by trimming overlapping jobs and other expenses, and narrow their focus to diseases where they have the most expertise.
Shire and Baxalta Inc. said during a Monday conference call that their combined company will draw 65 percent of total revenue from rare disease treatments. They expect about $13 billion in sales from that category, and a total exceeding $20 billion annually, by 2020.
Shire said it will give Baxalta shareholders $18 in cash and a portion of a Shire share for each Baxalta share, for a per-share price of $45.57 based on Friday’s closing price of Shire’s U.S.-traded stock. Shares in both companies dropped on the news.
The companies said their combined hemophilia franchise will provide a foundation for a broader hematology and oncology business. The new company also would have strengths in diseases of the eye and gastrointestinal and endocrine systems.
Shire’s lead product is attention deficit hyperactivity disorder drug Vyvanse. Baxalta’s portfolio includes hemophilia treatment Advate, and it’s developing treatments for sickle cell anemia, cancer and psoriasis.
Just a week ago, Baxalta agreed to pay Danish biotech company Symphogen A/S up to $1.6 billion for rights to jointly develop six experimental cancer medicines.
“The bigger picture for Shire is the need to diversify away from an uneven pipeline of products towards a new emphasis on rare diseases and biotech,” wrote Joe Stelzer, managing partner at UK deal adviser Cavendish Corporate Finance.
Rare disease medicines these days come with sky-high list prices: $100,000 up to nearly a half-million dollars for a year or a course of treatment. While insurance companies have won deep discounts, it’s been difficult for them to refuse to cover treatments because for nearly all rare disorders, there are no cheaper alternatives—if any treatment is available.
The Shire and Baxalta boards have agreed to the deal, which they expect to close year around mid-year and save more than $500 million annually. However, shareholders and some regulators must approve it.
Baxalta spun off last July from Deerfield, Illinois-based drugmaker Baxter International Inc.
Shire promptly made an initial run at Bannockburn, Illinois-based Baxalta, which then rejected that $30 billion all-stock bid as too low.
Shire said its latest offer—which includes an infusion of cash—represents a premium of nearly 38 percent to Baxalta’s share price before Shire announced its previous bid. Baxalta shareholders would end up with about 34 percent of the combined company.
The companies said they will maintain the tax-free status of Baxalta’s spinoff from Baxter. They expect an adjusted tax rate for the combined company of 16 percent to 17 percent by 2017.
“Baxalta’s effective tax rate will be significantly slashed thanks to the deal,” Cavendish’s Stelzer wrote, noting that cutting tax rates has driven other industry deals, particularly New York-based Pfizer Inc.’s planned $160 billion deal to buy Allergan and move its tax headquarters to lower-rate Ireland.
U.S.-traded shares of Shire dropped 9.7 percent, or $18.02, to $167.98 in afternoon trading Monday while broader trading indexes climbed slightly. Baxalta fell 2.7 percent, or $1.05, to $38.96.