Whether you like the deal or not, Shire-Baxalta valuation is compelling – time to buy
Shire and Baxalta have agreed terms of a $31bn merger. To bring Baxalta to the negotiating table, and to counter the effect of Shire’s 26% share price decline since the initial failed all-share offer in August 2015, approx. 40% will now be funded in cash. Whilst Baxalta may not have been Shire’s best M&A option in our view, it is nonetheless a value-enhancing deal. Everything has a price and we conclude Shire-Baxalta’s should be >30% ahead of current market value. Upgrade to Outperform, TP 5700p.
1) Do the pro forma figures ‘stack up’? YES
Assuming Shire can extract $550m of cost and $300m of sales synergies from the combined
business, we see 6% EPS accretion and projected returns ahead of cost of capital by 2019. Not
stellar perhaps, but certainly not disastrous.
2) Is a potential future tax liability a significant concern? NO
Our discussions with US tax experts lead us to conclude that whilst there are elements of tax
liability risk around the deal, Shire appears well positioned to avoid any tax bill. Under a bear case
scenario the buy case remains intact; fair value including a $3.5bn tax liability is 5015p.
3) Is the valuation attractive? YES
Shire-Baxalta trades on 11.6x 2017 PE, a 30% discount to the Large Pharma group (16.7x). On an
EV/NPV basis, the NewCo trades in line with peers (0.85x vs ave 0.86x). Shire-Baxalta offers a
superior 2017-2020 growth profile vs peers; sales +8% (vs +5% ave), EPS +11% (vs +9% ave).
Next catalysts
Dyax shareholder vote on 21 Jan, Shire shareholder vote on Baxalta May/June, SHP607
(retinopathy of prematurity) P2 data and lifitegrast US filing 1Q16/approval 3Q16.