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Standoff over Shire’s pursuit of Baxalta nears an end

December 18, 2015
Life sciences

After a nearly six-month stalemate, Shire PLC appears to be entering the endgame in its pursuit of Baxalta Inc.

The Dublin-based drugmaker expects to either strike a deal with U.S. biotechnology firm Baxalta or walk away “reasonably soon,” according to a person close to the deal, since “most things have [now] been examined.”

A Shire spokesman said the company doesn’t comment on speculation, but added that it is a “highly experienced, patient and disciplined acquirer with a consistent track record of delivering shareholder value.” Baxalta, which makes treatments for rare diseases, declined to comment.

Either outcome would cap a process that started in August, when Shire went public with an all-stock deal then valued at $30.6 billion after Baxalta’s board rejected the offer, saying it undervalued the firm.

The resulting standoff left Shire Chief Executive Flemming Ornskov with few options. Deerfield, Ill.-based Baxalta is protected by an array of takeover defenses, including a shareholder rights plan, meaning any deal would need cooperation from its board.

A complication for Shire is that introducing cash into the deal would risk jeopardizing the tax-free status of Baxalta’s recent spinoff from parent Baxter International Inc. That was the reason Shire gave for making the offer in stock. Nonetheless, Shire has weighed options for bringing cash into the deal since then, people close to the deal have told The Wall Street Journal.

U.S. law requires that tax-free spinoffs not be used as a “device” to funnel cash to shareholders. Tax experts say a quick sale that involves cash being paid to Baxalta shareholders could run afoul of this rule.

Another hurdle is that Shire’s share price has fallen some 24% since the approach to Baxalta became public, due to a mix of investor skepticism over the deal and a broader rout in the biotech sector spurred by worries about the sustainability of high drug prices. That has limited Shire’s ability to sweeten the deal with more stock.

Ronny Gal, an analyst at Sanford C. Bernstein, said he thinks any new offer would need to be valued at more than $50 a share to get Baxalta’s management on board. On Wednesday, Baxalta’s shares were up 1.6% at $37.66 in afternoon trading on the New York Stock Exchange. Mr. Gal added that at least 25% of the offer would need to be made in cash to satisfy Shire shareholders that the deal wouldn’t be too dilutive.

Even if Dr. Ornskov can strike a deal at the right price, some call it a risky bet. Baxalta faces looming competition from a string of hemophilia treatments under development at rival drugmakers, including a closely watched product known as ACE-910 that recently entered late-stage trials at Roche Holding AG.

Bernstein’s Mr. Gal said for Dr. Ornskov to be right that Baxalta would prove resilient against new competitors, “a bunch of smart people have to be wrong. That makes investors uncomfortable.”

He questioned the logic of Shire exposing itself unnecessarily to the risky hemophilia market.

Still, others are more comfortable with Dr. Ornskov’s bet. Jason Gerberry, an analyst at Leerink Partners LLC, said the Baxalta business was “durable” despite the competitive threats and that a deal would “position [Shire] into rare and orphan disease,” where it would have more pricing power.

By Denise Roland

Source: Wall Street Journal

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