Baxalta, a suburban Chicago drugmaker that focuses on rare diseases, is on its way to being acquired just six months into its life as an independent company, a sign of how lucrative treating niche disorders has become.
Shire, an Irish drugmaker, said Monday that it agreed to acquire Baxalta, of Bannockburn, for about $32 billion in cash and stock. With the combination, Shire said it will become a global leader in treating hemophilia and other rare diseases, with about $12 billion in revenue.
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Drugmakers in this space are like luxury manufacturers. They make fewer sales than a company selling drugs to treat high blood pressure but they can be highly profitable.
Thanks to regulatory changes, tax breaks and scientific advances, investments in treatments for rare diseases, also called “orphan drugs,” are coming fast and furious. Big pharmaceutical companies are spending millions on research and development and acquiring smaller companies in an effort to maintain growth.
The prospects for people with rare diseases who were neglected 30 years ago has never been better. For those who suffer from hemophilia and other blood disorders, for instance, there are probably 100 medications in the research pipeline, said Bob Robinson, executive director of the Bleeding Disorders Alliance Illinois.
“It’s amazing what’s going on,” Robinson said. “I can see why a company would want Baxalta for the technologies they are currently selling but also for what’s in the pipeline.”
The transaction will be closely watched by the hemophilia community in the U.S. because Baxalta is one of the leading players in treating the rare blood disorder. Roughly 20,000 people in the U.S. have the genetic disease. A rare disease is defined as having a population of less than 200,000 in the U.S., but definitions vary across countries.
Hemophilia is a big market for drugmakers, with $6 billion to $8 billion in revenue, according to the National Hemophilia Foundation. It is one of the most expensive chronic conditions to treat, with drugs costing up to $350,000 a year, said John Indence, the foundation’s vice president of marketing and communications. The drugs are covered by insurance plans.
“We’re hoping that the merger has no impact or a positive impact on our community in the long run,” Indence said. “But it’s just too early to tell.”
Hemophilia drugs are expensive, in part, because the products are difficult to manufacture and primarily biotech in nature. Those barriers to entry have given Baxter and now Baxalta a lot of pricing power and are among the reasons Shire was so attracted to the company.
“Companies making orphan drugs can charge high prices and no one is going to push back because these are often life-saving therapies,” said Karen Andersen, a drug industry analyst at Chicago-based Morningstar.
One such drug in Shire’s portfolio is Cinryze, which treats 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, according to Bloomberg News.
Orphan drugs have regulatory protections in the U.S. that shield companies from competition. Manufacturers also are eligible for a tax credit of 50 percent of clinical development expenses and other federal grants, Andersen said. The benefits were part of federal legislation enacted in 1983 to provide financial incentives to spur development of treatments for rare diseases.
Andersen said the consensus is that the legislation has been widely successful. Her research found that 10 times the number of orphan drugs were approved in the decade following the law than in the decade preceding it.
Baxalta was once the biosciences division of Deerfield-based Baxter. Baxter decided to separate the division in July to focus on its medical products business, such as dialysis equipment and infusion pumps.
A few days later, Baxalta received an unsolicited offer to buy the company from Shire. Baxalta initially spurned the bid, saying the price was too low and a potential deal too disruptive so soon after it became an independent company.
But Shire kept up its pursuit and didn’t have to go the hostile route, persuading Baxalta’s board of directors to come to the bargaining table. Baxalta investors will receive $18 in cash and 0.1482 shares of Shire for each share. Based on Shire’s closing price Friday, this implies a total value of $45.57 per Baxalta share.
The value of Shire’s offer represents a premium of about 37.5 percent to Baxalta’s price Aug. 3, the day before Shire went public with its unsolicited offer. Following the close of the transaction, Baxalta shareholders will own 34 percent of the combined company.
Shires foresees saving $500 million in annual costs following the transaction, which is expected to be completed by mid-2016. About half of the cost cuts will come from corporate administrative functions, Shire executives said, which may not be good news for Baxalta’s approximately 800 employees at its corporate headquarters in Bannockburn.
A Baxalta spokesman declined to comment on any potential layoffs or the fate of the Bannockburn facility, saying such issues are still to be determined. Also unclear is the fate of Baxalta CEO Ludwig Hantson. Shire’s news release didn’t mention a role for him in the combined company.
Baxalta Chairman Wayne Hockmeyer will become deputy chairman of Shire following the transaction, and two additional directors from Baxalta are to be added to the combined company’s board.
The merger negotiations were complicated by Baxalta’s recent separation from Baxter. Generally there are rules preventing spinoffs from being taken over immediately. By initially making an all-stock bid, Shire said at the time, the tax-free nature of the spinoff would not be jeopardized.
To make its offer more attractive, Shire offered some cash. But that presented additional tax risk.
Shire’s CEO, Flemming Ornskov, tried to reassure Wall Street and investors Monday that, even by adding cash, the spinoff will continue to be tax-free. But investors have questions about the tax implications as well as other potential benefits of the deal.
Baxalta’s stock rose more than $1 when the markets opened Monday but closed at $39.10, down 91 cents or 2.3 percent. Shire’s American depositary shares fell 9 percent to close at $169.37.
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Baxter, a major shareholder in Baxalta, “fully supports” the transaction, Shire said.
Ornskov spent much of the conference call touting Baxalta’s hemophilia franchise, saying the company continues to launch new drugs to treat the disease and is in a good position to expand in emerging markets like Brazil, China and Russia.
“The more I’ve seen of Baxalta, the more I’m impressed with its capabilities,” Ornskov said.
Baxalta has 16,000 employees worldwide.
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