Analysts skeptical about Shire's Baxalta 'growth play' strategy
- On Monday, Shire announced that it would be acquiring Baxalta for $32 billion. Under the terms of the agreement, Shire will pay $18.00 plus 0.1482 of its American Depository shares for each Baxalta share. Based on Shire's closing price on January 8th, the deal values each Baxalta share at $45.57. This represents a 37.5% premium over Shire's closing price on August 3.
- Analysts are concerned that the $500 million in cost-savings announced by Shire as a result of the transaction is too low. Some had anticipated savings of at least $600 million.
- However, Shire's CEO, Flemming Ornskov, says that this is a 'growth play' and that analysts should not be so concerned about the cost-savings factor.
In terms of the upside surrounding the deal, the combined company will generate more than $20 billion in annual revenues by 2020, according to Ornskov. The idea behind this growth strategy goes something like this: now that Shire and Baxalta are combined, they could together become a rare-diseases powerhouse, combining Shire's rare disease portfolio and hyperactivity drugs with Baxalta's hemophilia and immune deficiency drugs.
But some analysts are worried that different approaches to management could compromise sales of Baxalta's hemophilia drugs. Ornskov is choosing to focus on the upside—notably, the rare diseases business, which is expected to generate 65% of the new combined company's revenues in the future, as well as a promising oncology drug in Balxalta's pipeline.