Patents expiring, a pipeline that lacks any real blockbuster potential and AbbVie’s decision to drop its earlier pursuit of the group has led Shire (LSE: SHP) onto the M&A trail itself in recent quarters.
After several mid-sized rare disease acquisitions, management’s M&A adventures have now culminated in a successful offer for Baxalta Inc (NYSE: BXLT), a company much larger than anything Shire has bought before.
The cash and stock offer will see Baxalta investors receive $18 and 0.1482 of Shire’s ADR shares per ordinary share held.
Understandably, some investors will now be wondering what the deal means for them, particularly after considering the media’s mixed reaction to the news. The following assessment is by no means exhaustive, but here are some points for investors to consider.
An important milestone
The deal is an important milestone for Shire as it comes at a time when its future had been looking more precarious.
Its late-stage pipeline has been uninspiring for a while, leaving investors overly reliant on a dying ADHD franchise and on management’s ability to regurgitate past treatments as snake oil for other kinds of condition (Vyvanse for Binge Easting Disorder).
Swallowing Baxalta will eliminate the problem of reliance on ADHD by providing Shire with a leading position in the market for rare disease treatments. This is an area where high development and manufacturing costs provide industry incumbents with competitive advantage, while the low threat from generics is an added bonus for investors.
Short-term considerations
Consolidation could double Shire’s sales and add as much as 50% to net income almost immediately. This is before the mooted cost synergies of $500m are added to the mix, assuming management can actually pull them off.
The deal will involve Shire raising $18bn worth of debt. This is a lot for any company, but assuming that the future pans out in line with management projections, it shouldn’t be too much of an issue.
And the long term?
Longer-term forecasts from management suggest the combined entity could see annual sales of almost £20bn by 2020. This is more than triple the consensus projection for a standalone Shire’s revenues in the current year.
Analysts appear to be notably more upbeat on the future outlook for Baxalta than they have been for Shire as a standalone. Most notably, the lion’s share of future growth for the duo is slated to come from Baxalta and not Shire.
The takeaway
The deal appears to make strategic and financial sense for Shire. But the jury remains out on whether the same can be said for Baxalta.
Much of the future growth will originate from Baxalta, which not only suggests that Shire shareholders are probably the real winners in the tie-up, but also begs the question of whether or not Baxalta shareholders will go for the idea when they vote on it.
In addition for Baxalta investors, a lot will still depend on the deal’s tax implications given its earlier IPO/spin-off from Baxter in mid-2015. US regulators and the IRS are also wild cards.
Regardless, my initial feeling is that the deal will probably represent good value for Shire investors, assuming that management can actually pull it all off.
