By Ben Hirschler and Paul Sandle
LONDON (Reuters) - Drugmaker Shire Plc (L:SHP) clinched its six-month pursuit of Baxalta International Inc (N:BXLT) on Monday with an agreed $32 billion (22 billion pound) cash and stock offer, catapulting it to a leading position in treating rare diseases.
The London-listed group, which first approached the U.S. firm with an all-stock offer in July, won over the maker of treatments for rare blood conditions, cancers and immune system disorders after adding a cash sweetener.
The deal marks a strong start to mergers and acquisitions in healthcare in 2016 after the sector had its biggest deal-making streak in history last year, with global transactions totalling $673 billion, according to Thomson Reuters data.
It also highlights the appeal of medicines for rare diseases targeting small groups of patients for which drug companies can charge prices running into hundreds of thousands of dollars a year.
"Together we will have the number one platform in rare diseases with a strong foundation for future growth," Shire Chief Executive Officer Flemming Ornskov told reporters, after unveiling his company's most ambitious acquisition yet.
Shareholders will receive $18 in cash and 0.1482 Shire American depositary shares per Baxalta share, implying a total value of $45.57 per share based on Jan. 8 prices.
That is 37.5 percent above Baxalta's price on Aug. 3, before Shire went public with its interest.
Bannockburn Illinois-based Baxalta, which was spun off last year from Baxter International (N:BAX), rejected Shire's previous $30 billion all-stock offer in August, arguing it significantly undervalued the company.
But Ornskov relentlessly pursued Baxalta, seeking to pressure it into agreeing to a deal by meeting with Baxalta's major shareholders over a period of months.
That enabled it to sidestep a hostile deal in which it would have faced takeover defences including a "poison pill" that stopped unwanted suitors from buying more than 10 percent of the company and a hard-to-replace board.
Reuters had reported last week that Shire and Baxalta could announce a deal as early as Monday, after Ornskov added cash and raised the offer price.
Shares in Baxalta rose just under 2 percent to $40.70 in early New York trade on confirmation of the deal, while Shire fell back 4 percent on nervousness over the price offered.
TAX BENEFITS
Shire had initially offered only stock due to concerns a cash element might jeopardise the tax-free status of Baxalta's spin-off from Baxter. However, Ornskov said he was confident that adding $18 in cash would maintain this tax-free status.
Together, the two companies said they expected to deliver double-digit sales growth with more than $20 billion in annual revenues by 2020.
With annual operating cost synergies of over $500 million, additional revenue synergies and tax benefits from Shire's Irish domicile, Shire said it expected the transaction to boost non-GAAP diluted earnings from 2017.
Baxalta brings Shire a strong position in haemophilia treatments, although this business also faces challenges, since Roche Holding AG (VX:ROG) is developing a promising haemophilia antibody.
UBS analysts said the threat from Roche's product ACE910 meant Baxalta could actually dilute Shire earnings from 2019 to 2023 before being accretive again from 2024.
Thanks to its base in Dublin, the combined company is expected to have an effective tax rate of 16 to 17 percent by 2017, down from around 23 percent for Baxalta, making the deal the latest transaction to result in lower tax rates.
Shire has been a serial acquirer and Ornskov has stepped up his acquisition efforts in the rare diseases space after a planned takeover on the group by AbbVie Inc (N:ABBV) fell through last year. He bought NPS Pharmaceuticals for $5.2 billion in February and Dyax for $5.9 billion in November.
The group has signed an $18 billion facility to help finance its latest purchase.
Shire was advised by Evercore, Morgan Stanley (N:MS), Barclays (L:BARC) and Deutsche Bank (DE:DBKGn). Baxalta was advised by Goldman Sachs (N:GS) and Citi.
According to Freeman/Thomson Reuters estimates, Shire's advisers could be in line for fees of $50-60 million and Baxalta's may earn $70-80 million.