Shire and Baxalta have reached an agreement to combine. Baxalta shareholders will receive $18 in cash and 0.1482 Shire ADS per Baxalta share. Based on Shire's closing ADS price on January 8, 2016, this implies a total current value of $45.57 per Baxalta share, representing an aggregate consideration of approximately $32 billion. The exchange ratio is based on Shire's 30-day trading day volume weighted average ADS price of $199.03 as of Jan. 8, which implies a total value of $47.50 per Baxalta share.
The value of the offer represents a premium of approximately 37.5% to Baxalta's unaffected share price on Aug. 3, the day prior to the public announcement of Shire's initial offer for Baxalta. This will provide Baxalta shareholders with approximately 34% ownership in the combined company. The parties expect the transaction to close mid-2016.
Shire Chief Executive Officer Flemming Ornskov, M.D., M.P.H., 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."
Baxter International Chairman and Chief Executive Officer José E. Almeida said, "Baxter fully supports the proposed combination of Shire and Baxalta, which will create a major biotechnology company and global leader in rare diseases. Baxter is pleased to support this value enhancing transaction."
The combination of Baxalta and Shire will create the number one rare diseases platform in revenue and pipeline depth, with best-in-class products in each of the following growing, multi-billion-dollar franchises: hematology, immunology, neuroscience, lysosomal storage diseases, gastrointestinal/endocrine and hereditary angioedema (HAE). The combined company also will possess a growing franchise in oncology, with approved products and innovative compounds in development, as well as a robust late-stage Ophthalmics pipeline.
The combined portfolio will have an expanded range of therapeutic areas with more than 60 programs in development, including over 50 that will address rare diseases and the newly-approved Baxalta products Adynovate, Vonvendi and Obizur. Shire anticipates more than 30 recent and planned product launches from the combined pipeline, contributing approximately $5 billion in annual revenues by 2020.
Further, the combined company will benefit from expanded geographic reach across more than 100 countries, with a high-quality commercial organization and world-class manufacturing operations. Through a balanced portfolio and expanded therapeutic expertise and capabilities, the combination will enhance revenue diversification and optionality for the business, while strong cash flows will increase financial and operational scale. In total, the proposed combination will create a sustainable platform for future innovation and growth, yielding projected near- and long-term value for shareholders.
Shire anticipates that it will realize more than $500 million in annual cost synergies (expected to be achieved within the first three years post-closing). These annual cost synergies will be achieved by increasing efficiencies, leveraging the scale of the combined business, aligning to Shire's lean operating model and optimizing the combined R&D portfolio. Further, Shire expects to generate additional revenue synergies and a combined non-GAAP effective tax rate of 16-17% by 2017. Growth is expected to be accelerated by combining capabilities and establishing a global infrastructure that will include a "best of both" commercial model and a presence in over 100 global markets.
The transaction is expected to be accretive to non-GAAP diluted EPS in 2017, the first calendar year of ownership, and beyond. The combined company is expected to generate annual operating cash flow of $6 billion beginning in 2018, underpinning an attractive ROIC that will exceed Shire's cost of capital in 2020.
Shire has conducted additional tax due diligence, and based on this diligence, Shire and its tax advisor have concluded that a merger with the proposed cash consideration of $18 per Baxalta share will maintain the tax-free status of the Baxalta spinoff from Baxter.
Shire has secured an $18 billion fully underwritten bank facility to finance the combination. The new bank facility has a one year life, with a one-year extension available at Shire's option. Shire intends to refinance the bank facility through capital market debt issuances in due course. The financing of the transaction has been structured with the intention of maintaining an investment grade credit rating for the combined entity. Shire is committed to de-levering rapidly post-close by deploying free cash flow to repay debt. Shire is targeting a net debt to EBITDA range of between 2.0x and 3.0x 12-18 months post-closing.
The transaction has been approved by the boards of directors of both Shire and Baxalta. Closing of the transaction is subject to approval by Baxalta and Shire shareholders, certain regulatory approvals, redelivery of tax opinions delivered at signing and other customary closing conditions. The transaction is a class 1 transaction for Shire for the purposes of the U.K. Listing Rules requiring the approval of Shire shareholders. The parties expect the transaction to close mid-2016.