Shire to buy Baxalta for $32 billion

CHICAGO - Six months after being spun off from Baxter, Baxalta reached an agreement Monday to join with Shire, an Irish drugmaker, for about $32 billion in cash and stock.

With the combination, Shire said, it will become a global leader in treating rare diseases, with $12 billion in revenue.

The company foresees saving $500 million in annual costs after the deal, which is expected to be done by mid-2016. About half of the cost cuts will come from administrative functions, Shire executives said, which is not good for Baxalta's 800 employees in suburban Chicago.

The merger reflects how frenzied dealmaking has become in the pharmaceutical industry. Baxalta separated from Baxter in July and a few days later received an unsolicited offer from Shire, which went public with the proposal in August. Baxalta initially spurned the offer, saying the price was too low and a potential deal too disruptive so soon after it became independent.

But Shire kept up its pursuit and didn't have to go the hostile route, persuading Baxalta's board of directors to negotiate. Baxalta investors will get $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. Baxalta closed at $40.01 Friday.

The price is about 4.5 percent higher than what Shire offered in July.

The 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 valued at $30.6 billion, Shire said then, 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 CEO Flemming Ornskov tried to reassure investors Monday that, even with cash, the spinoff will be tax-free. But analysts asked about the tax risk during a conference call, an indication that there are still concerns.

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.

Baxter, a big shareholder in Baxalta, "fully supports" the sale, Shire said.

The deal will be closely watched by the hemophilia community in the U.S. Baxalta is a leading player in treating the rare blood disorder. About 20,000 Americans have the genetic disease, making it a big market for drugmakers, with $6 billion to $8 billion in annual revenue, according to the National Hemophilia Foundation.

Hemophilia 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. The drugs are covered by insurers. "We're hoping that the merger has no impact or a positive impact on our community," Indence said. "But it's just too early to tell."

Hemophilia drugs are expensive, in part, because the products are hard to make and primarily biotech in nature. Those barriers to entry gave Baxalta pricing power, and are among the reasons that attracted Shire. But there are competitive threats to the hemophilia business coming, analysts said.