April 7, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Yesterday’s official abandonment of a merger between Pfizer and Allergan has made analysts and investors look toward Dublin-based Shire and Bannockburn, Ill.-based Baxalta , wondering if that deal is in jeopardy as well.
Shire, however, moved to assure investors that the deal was still on in a statement yesterday. “The combination of Shire and Baxalta is based on a strong strategic rationale to create the leading global biotechnology company focused on rare diseases,” the company said. “The company currently expects to complete its proposed combination by mid-2016 as previously announced.”
On April 4, the U.S. Treasury Department released a new set of rules to make it more difficult for U.S. companies to conduct tax inversions. A tax inversion is when a U.S. company buys a company that is based in a country with a lower tax rate than the U.S., then shifts its headquarters to that country in order to get the lower tax rate.
The rules ran over 300 pages and had two major components. The first affected “serial inverters,” which are large companies that have undergone numerous inversions or takeovers. The rules allow the U.S. government to ignore U.S. assets acquired by these companies over the last three years.
For example, in the Pfizer-Allergan deal, Allergan as a company today exists as the byproduct of a number of cross-over deals since 2013. It started with the acquisition of New Jersey-based Actavis by Ireland-based Warner Childott PLC in 2013. Several more deals occurred, culminating in 2015 in Actavis acquiring Allergan for $66 billion and changing the merged company’s name to Allergan. Under the new rules, none of that market value is taken into consideration in determining if the company qualifies for a tax inversion. In the case of Allergan and Pfizer, it did not.
The second part of the rules involved earnings stripping, which is a little more complicated. When a non-U.S.-based company acquires a subsidiary in the U.S., the non-U.S. company can lend money to its U.S. subsidiary, which creates deductible interest in the U.S., cutting the income subject to the 35 percent U.S. corporate tax rate.
Shire’s statement seems to say that, whether Baxalta inverts is beside the point, the merger is intended to bolster Shire’s business strategy.
In a statement made by Shire’s chief executive officer in January after announcing the deal, Flemming Ornskov said, “This proposed combination allows us to realize our vision of building the leading biotechnology company focused on rare diseases. Together, we will have leadership positions in multiple, high-value franchises and become the clear partner of choice in rare diseases. Our expanded portfolio and presence in more than 100 countries will drive our growth to over $20 billion in anticipated annual revenues by 2020. Our due diligence has reinforced our belief in the combination, and we look forward to welcoming Baxalta colleagues to a shared entrepreneurial, patient-driven culture.”
The merged companies will be a leader in orphan drugs and rare diseases. Portfolio products will include Baxalta’s hematology drug, Adynovate, Antihemophilic Factor (Recombinant), PEGylated, to treat hemophilia A, and Hyqvia, a next-generation subcutaneous immunoglobulin (IG) product to treat patients with primary immunodeficiency.
Shire’s top drug is Vyvanse, to treat attention deficit hyperactivity disorder (ADHD) and for moderate-to-severe Binge Eating Disorder. The two companies also have a strong presence in lysosomal storage diseases, gastrointestinal and endocrine, HAE, opthalmics and oncology.
Baxalta’s projected tax rate for this year is 23 percent. Once the deal goes through, barring any as-yet announced side effects from the new regulations, it will have an effective tax rate of about 16 to 17 percent by 2017. The deal is also projected to save more than $500 million in annual costs.
The deal has a price tag of about $32.5 billion. Baxalta shares dropped by more than 7 percent on Tuesday after the Treasury rules were announced. The deal was set up on a Baxalta share price of $48, which includes $20 in cash and the rest in stock. Investors apparently have concerns that with the share price dropping, the deal may not go through for the agreed price.
Baxalta recovered, however, and is currently trading for $41.13.
