Shire PLC; market cap: $28.38bn (as of 06/11/2015)
Dyax Corporation; market cap: $5.1bn (as of 06/11/2015)
Introduction
On November 2, Dublin-headquartered pharmaceutical company Shire Plc agreed to acquire the Massachusetts-based biopharma company Dyax Corporation for an upfront cash consideration of $5.9bn and an additional $646m payment contingent on the approval by U.S. regulators (FDA) of a new drug developed by Dyax for the treatment of Hereditary Angioedema (HAE). The deal expands Shire’s rare diseases drug portfolio, eliminates a potential competitor, and allows the buyer to secure a potential patent that, with good chances, will carry regulatory exclusivity beyond 2030. The consolidation trend in the pharmaceuticals sector continues.
About Shire
Shire Plc is a Jersey-registered, Dublin-headquartered pharmaceutical company operating on a global scale with about $6bn in yearly revenues, 70% of which are generated in the U.S. market, as of the end of 2014. The company has managed to grow substantially in recent years thanks to the marketing, in the U.S., of its two main drugs for the treatment of ADHD (Attention Deficit Hyperactivity Disorder), ADDERALL XR and VYVANSE. However, with ADDERALL XR’s patent already expired and the growing threat of generic alternatives, CEO Flemming Ornskov is looking to “recharge” the company’s portfolio of products (and patents) in pace with emerging areas of unmet medical needs. Shire plans to put a strong focus on rare diseases, and to achieve growth through both internal innovation and an aggressive M&A strategy, in combination with sound and efficient commercial execution. The deal represents the last of a long a list for Shire, which has recently acquired ViroPharma ($4.2bn) and NPS Pharmaceuticals ($5.2bn) under the same strategic purpose. The company is also attempting to take control of Baxalta (recently spun-off from Baxter International and focusing on rare blood-related diseases) to further strengthen its position in the rare disease treatment sector.
About Dyax
Dyax Corporation is a Burlington, Massachusetts-based small biopharmaceutical company focusing on rare diseases, in particular on Hereditary Angioedema (HAE). HAE is a dangerous genetic disease that affects one person out of 10-50 thousands and causes swelling to various parts of the body, both externally and internally (e.g. airways, intestine wall). The company has grown incredibly fast in recent years, with revenues increasing from approximately $9m in 2010 to about $68m in 2014, though not yet generating a profit. Dyax’s main product currently on the market is KALBITOR, for the immediate treatment of HAE attacks. The company has also developed an innovative HAE treatment, DX-2930, which is currently going through phase 3 (the last one) of FDA testing, and that should be on the market by 2018-19.
The Pharmaceutical Industry
The pharmaceutical industry has periodically seen M&A waves driven primarily by the need to secure growth and margins in unexplored markets, as patents expire and the threat of generic medications becomes real. Obtaining regulatory approval for new medications has become an incredibly long and risky process, which has understandably led many CEOs, just as in this specific case, to privilege acquisition-based growth over larger R&D investments. In fact, provided a company has sector expertise and easy access to cash, it is faster and less risky for it to acquire products at an advanced stage of approval (just like DS-2930) rather than developing its own at the risk that they will never exit the testing lab.
Shire is certainly not the only firm looking to expand and seek regulatory exclusivity in the yet less crowded field of rare diseases.Various other larger institutions such as Novartis, Valeant, and AstraZeneca have made important steps in this direction as well. Novartis has recently made moves to acquire Spinifex Pharmaceuticals ($200m) and Admune Therapeutics (N/A), specialists respectively in neuropathic pain and cancer immunotherapy. Following Salix, Valeant has gone after Sprout Pharmaceuticals Inc. ($1bn), with the deal being announced a day after the regulatory approval of Sprout’s ADDYI (pre-menopausal treatment). AstraZeneca has moved in the opposite direction, taking advantage of its newly approved thyroid cancer drug, sold to Genzyme for $300m.
Before Dyax, Shire had offered to acquire haemophilia-specialist Baxalta for $30.6bn in an all-stock deal. The offer is still standing, and Shire is considering sweetening the terms by getting cash to shareholders soon after the deal’s execution by means of a stock repurchase. However, doing this would cause Baxalta’s shareholders to lose the tax benefits of the spin-off. An option on the table would be for Baxalta to take on a loan and use it to pay a special pre-deal dividend to its shareholders. The situation is currently developing.
Deal Structure and Financing
Shire will pay Dyax’s shareholders $37.30 per share, a 35.5% premium over Dyax’s closing price last Friday (October 30th), plus an additional non-tradeable contingent value right (CVR) of $4 per share, conditional upon approval of DX-2930 by the FDA within December 31, 2019. The all-cash payment could reach an aggregate amount of $6.5bn. The premium paid seems fairly high in comparison to the 27% and 9% paid respectively for ViroPharma and NPS. Yet, it can be justified by the appealing phase-3 innovative drug and the possibility to gain a virtual monopoly over HAE treatment.
Financing will come from a $5.6bn fully underwritten term loan bank facility to add to the undrawn amount of Shire’s already available $2.1bn revolving credit facility. The transaction is not subject to any financing contingency.
From a U.K. regulatory standpoint, the acquisition represents a Class 2 transaction and as such does not require Shire’s shareholder approval. The two boards have already unanimously approved the deal, which is now awaiting Dyax’s shareholder vote and regulatory approval, and is expected to close in the first half of 2016.
Deal Rationale
Shire expects the deal to be slightly dilutive to earnings for 2016 and 2017, but accretive from 2018 onwards, under the assumption that DX-2930 will be marketed by 2018. Considering Dyax’s operating cost base as a stand-alone company, Shire predicts to be able to generate at least $50m of cost savings starting from 2017, a figure that should grow to $100m by 2019. Shire relies on its post-M&A integration experience and strong development and commercial expertise in the rare diseases area to drive rapid integration and boost operating synergies.
Looking at past deals of the like, Shire’s investors seem to have always rewarded CEO Ornskov’s acquisition-oriented growth strategy, and, from a business perspective, this last transaction indeed appears to be strategically reasonable. On the one hand, DX-2930 represented a potential competitor, which will now enrich Shire’s HAE portfolio already including CINRYZE (currently Shire’s fastest growing product in terms of sales) and FIRAZYR. Moreover, thanks to Shire’s global distribution network, DX-2930 is forecasted to produce up to $2bn in yearly revenues once it is commercialized. On the other hand, Shire is currently generating the greatest portion of its profits from ADHD medication VYVANSE, whose patent will expire in 2023. The company has already won a number of lawsuits to secure its exclusivity until 2023, but from then on profits from VYVANSE are destined to reduce as a result generic competition. Therefore, the acquisition of a phase-3 asset in the fast developing sector of rare diseases allows Shire to secure high margins and avoid competition, potentially beyond 2030 (depending on regulatory approval and expiration date of the patent). As a plus, overall company earnings should benefit from the lower tax rate in Ireland compared to the U.S., assuming repatriation of Dyax’s pre-tax profits to Ireland.
Market Reaction
On Monday, November 2, after the announcement of the deal, Dyax’s shares jumped more than 30%, as investors sought to take advantage of the 35.5% cash premium, while Shire’s stock fell by slightly less than 1%. Yet, given the above-mentioned positive elements of the transaction, the slight drop in Shire’s share price seems to reflect for the most part the forecast of an EPS dilution until 2017, rather than investors’ scepticism.
Financial Advisors
Deutsche Bank, Evercore, and Morgan Stanley are advising Shire. Centerview Partners will be the exclusive financial advisor for Dyax. Morgan Stanley and Deutsche Bank are also providing financing for the transaction.
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