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As filed with the Securities and Exchange Commission on July 7, 2015

Registration No. 333-205173

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

to

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

Baxalta Incorporated

(Exact name of registrant as specified in its charter)

 

Delaware   2834   47-1869689
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer
Identification No.)

 

 

One Baxter Parkway,

Deerfield, Illinois 60015

224-940-2000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Robert J. Hombach

One Baxter Parkway,

Deerfield, Illinois 60015

224-940-2000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

This Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-205173) (the “Registration Statement”) of Baxalta Incorporated (Baxalta) is being filed to update and supplement the information contained in the Registration Statement filed with the Securities and Exchange Commission on June 23, 2015, including for the information contained in Baxalta’s Current Report on Form 8-K (the “Current Report”) that was filed with the Securities and Exchange Commission on July 2, 2015. As set forth in the Current Report:

 

    On July 1, 2015, the distribution of approximately 80.5% of Baxalta’s outstanding common stock by Baxter International Inc. (Baxter) was completed. As a result of such distribution, Baxalta became an independent public company trading under the symbol “BXLT” on the New York Stock Exchange. In connection with such distribution, Baxalta entered into several agreements consistent with the terms previously described in the Registration Statement and adopted compensation plans as further described in the Current Report. The exhibit listing hereto has been updated to add such agreement and to replace previously filed forms of agreements with the executed versions of those agreements.

 

    On June 29, 2015, Baxalta’s board of directors declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, of Baxalta. The terms of the Rights are set forth in the Rights Agreement dated as of June 30, 2015 (the “Rights Agreement”), by and between Baxalta and Computershare Trust Company, N.A. and Computershare Inc. collectively as rights agent. A summary of the Rights Agreement is included in the Current Report.

The information included in this filing, including the referenced Current Report, updates the Registration Statement and the prospectus contained therein.


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED JULY 7, 2015

PROSPECTUS

Baxalta Incorporated

 

LOGO

The 3,500,000 shares of common stock covered by this prospectus may be acquired by participants in the Baxalta Incorporated 2015 Incentive Plan (the 2015 Plan) upon the exercise of certain options to purchase shares of the common stock of Baxalta Incorporated (Baxalta) and upon vesting of certain awards issued pursuant to the 2015 Plan. All awards are subject to the terms of the 2015 Plan and the applicable award agreement. Any proceeds received by Baxalta from the exercise of stock options covered by the 2015 Plan will be used for general corporate purposes.

Recent Developments

Baxalta’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 2, 2015 is incorporated herein by reference. The information incorporated by reference to this prospectus as described under “Incorporation by Reference of Certain Documents” updates and supplements this prospectus.

In reviewing this prospectus, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 14.

 

 

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this prospectus is July     , 2015.


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Table of Contents

 

     Page  

Prospectus Summary

     1   

Summary Historical and Unaudited Pro Forma Combined Financial Information

     10   

The Offering

     13   

Risk Factors

     14   

Cautionary Statement Concerning Forward-Looking Statements

     32   

Use of Proceeds

     35   

Dividend Policy

     36   

Capitalization

     37   

Unaudited Pro Forma Combined Financial Statements

     38   

Selected Historical Combined Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   

Business

     72   

Management

     92   

Executive Compensation

     100   

Certain Relationships and Related Person Transactions

     121   

Security Ownership by Certain Beneficial Owners and Management

     128   

Plan of Distribution

     129   

Baxalta Incorporated 2015 Incentive Plan

     130   

The Separation and Distribution

     139   

Description of Material Indebtedness

     144   

Description of Baxalta’s Capital Stock

     146   

Where You Can Find More Information

     150   

Incorporation by Reference of Certain Documents

     150   

Legal Matters

     150   

Experts

     150   

Glossary of Scientific Terms

     151   


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Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of all of the transactions referred to in this prospectus in connection with the separation and distribution. Unless the context otherwise requires, references in this prospectus to “Baxalta” and “the company” refer to Baxalta Incorporated, a Delaware corporation, and its combined subsidiaries as they will exist assuming the completion of all of the transactions referred to in this prospectus in connection with the separation and distribution. References to Baxalta’s historical business and operations refer to the business and operations of Baxter’s biopharmaceuticals business that will be transferred to Baxalta in connection with the separation and distribution. References in this prospectus to “Baxter” and “Baxter International” refer to Baxter International Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise requires.

“Distribution” or “distribution” refers to the distribution of more than 80% of the shares of Baxalta common stock owned by Baxter to shareholders of Baxter as of the record date.

“Separation” or “separation” refers to the separation of the biopharmaceuticals business from Baxter and the creation of an independent, publicly traded company holding the biopharmaceuticals business through a distribution of shares of Baxalta common stock to the Baxter shareholders as of the record date.

“Spin-off” or “spin-off” refers to the contribution of property by Baxter in one or more transfers to Baxalta in exchange for Baxalta stock, Baxalta debt instruments, cash, and the assumption of certain liabilities, together with the distribution.

Trademarks, Trade Names and Service Marks

Baxalta owns or has rights to use the trademarks, service marks and trade names that it uses in conjunction with the operation of its business. Some of the trademarks that Baxalta owns or has rights to use that appear in this prospectus include: ADVATE, ARALAST, BUMINATE, CEPROTIN, FEIBA, FLEXBUMIN, GAMMAGARD, GAMMAGARD LIQUID, GLASSIA, HYQVIA, KIOVIG, OBIZUR, RECOMBINATE, RIXUBIS and SUBCUVIA, which may be registered or trademarked in the United States and other jurisdictions. Baxalta’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name or service mark of any other company appearing in this prospectus is, to Baxalta’s knowledge, owned by such other company.


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PROSPECTUS SUMMARY

The following is a summary of material information discussed in this prospectus. This summary may not contain all the details concerning the separation or other information that may be important to you. To better understand the separation and distribution and Baxalta’s business and financial position, you should carefully review this entire prospectus. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of all the transactions referred to in this prospectus in connection with the separation and distribution. Unless the context otherwise requires, references in this prospectus to “Baxalta” and “the company” refer to Baxalta Incorporated, a Delaware corporation, and its combined subsidiaries as they will exist assuming the completion of all of the transactions referred to in this prospectus in connection with the separation and distribution. References in this prospectus to “Baxter,” “Baxter International Inc.” and “Baxter International” refer to Baxter International Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise requires.

This prospectus describes the businesses to be transferred to Baxalta by Baxter in the separation as if the transferred businesses were Baxalta’s businesses for all historical periods described. References in this prospectus to Baxalta’s historical assets, liabilities, products, businesses or activities of Baxalta’s business are generally intended to refer to the historical assets, liabilities, products, businesses or activities of the transferred businesses as the businesses were conducted as part of Baxter and its subsidiaries prior to the separation.

Baxalta

Baxalta is a global, innovative biopharmaceutical leader with a sustainable portfolio of differentiated therapies that seek to address unmet medical needs across many disease areas, including hemophilia, immunology and oncology. More specifically, the company develops, manufactures and markets a diverse portfolio of treatments for hemophilia and other bleeding disorders, immune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute medical conditions. Baxalta is also investing in new disease areas, including oncology, as well as emerging technology platforms, including gene therapy and biosimilars.

Baxalta’s business strategy is aimed at improving diagnosis, treatment and standards of care across a wide range of bleeding disorders and other rare chronic and acute medical conditions, capitalizing on the company’s differentiated portfolio, ensuring the sustainability of supply to meet growing demand for therapies across core disease areas, and accelerating innovation by developing and launching new treatments while leveraging its expertise into new emerging therapeutics through acquisitions and collaborations.

Baxalta’s 2014 worldwide net sales totaled $6.0 billion, an increase of 7% over 2013 at actual foreign currency exchange rates and 8% at constant foreign currency exchange rates. In 2014, the company achieved net income from continuing operations of $1.2 billion while also incurring research and development (R&D) expenses of $820 million.

Strengths

Baxalta possesses a number of competitive advantages that distinguish the company from its competitors, including:

Differentiated portfolio of leading products. Baxalta’s portfolio consists of a number of market-leading therapies across core disease areas, particularly in hematology and immunology. Baxalta’s portfolio includes a variety of additional differentiated therapies for the treatment of bleeding disorders and chronic and acute medical conditions, including hemophilia A, hemophilia B, acquired hemophilia, inhibitor treatments, primary immunodeficiency (PID) and alpha-1 antitrypsin deficiency. The company believes that all of these treatment

 

 

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areas have significant growth potential, as they remain under-diagnosed and under-treated on a global basis. Baxalta intends to capitalize on this growth opportunity by increasing awareness and diagnosis, expanding access to therapies, enhancing market penetration and improving standards of care. Baxalta’s core disease therapies include:

 

    ADVATE [Antihemophilic Factor (Recombinant)], the leading recombinant factor VIII (rFVIII) therapy for the treatment of children and adults with hemophilia A;

 

    FEIBA [Anti-Inhibitor Coagulant Complex], a leading inhibitor management therapy;

 

    GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)], a liquid formulation of the antibody-replacement therapy for the treatment of immune deficiencies and certain neurological disorders; and

 

    HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase], an immune globulin with a recombinant human hyaluronidase for the treatment of PID in adults.

Diverse biopharmaceuticals pipeline. Building and advancing Baxalta’s existing product pipeline is a key driver of future growth. The current pipeline includes programs in hematology, oncology, immunology and biosimilars with a focus on rare diseases and areas of unmet medical need. The company has more than 20 programs under development, including those in development with collaboration partners, as it applies internal scientific expertise in addition to advancing the pipeline through a number of recent acquisitions and collaborations. Since the beginning of 2014, Baxalta received approval for five products in the United States (including further developments or indications of existing products), recently submitted two products for approval in the U.S., and currently has five programs, including collaborations, in late-stage clinical trials.

Worldwide commercial infrastructure and opportunity for continued geographic penetration and expansion. Baxalta’s products are sold in approximately 100 countries. Baxalta has strong and extensive sales, marketing, and distribution networks around the world to support its products. In 2014, Baxalta had sales of $2.9 billion outside of the United States, representing nearly half of Baxalta’s total sales, including sales to emerging markets of $1.2 billion, representing 20% of total sales. Continued penetration of under-diagnosed and under-treated therapies will help drive growth across selected geographies.

High-quality products and world-class manufacturing operations. Baxalta has an established heritage as a leader in quality manufacturing. Baxalta has strong, globally managed and coordinated quality control and quality assurance programs in place at its manufacturing sites, and conducts and supports internal and external inspections and audits at these sites. Baxalta’s regional and global manufacturing teams seek to ensure that all of its contract manufacturers adhere to Baxalta’s standards of manufacturing quality. The company utilizes a diversified network of proprietary manufacturing sites and contract manufacturers to maximize operational efficiencies and to help meet demand for the company’s therapies. Baxalta’s extensive manufacturing and supply chain expertise and capabilities position the company well to provide critical therapies for distribution in all major regions of the world and to meet growing demand over the long-term.

Financial flexibility to fuel future growth. Baxalta retains strong financial flexibility, freeing the company to reinvest in the business and fuel future growth. In 2014, Baxalta generated $1.4 billion in operating cash flow and spent $970 million on capital expenditures. Baxalta anticipates that its business will continue to generate sufficient cash flow to allow the company to continue to invest in its new and expanding product pipeline and other areas to support and expand its business through both capital investments and strategic initiatives, including acquisitions and collaborations.

Experienced management team with track record of successful performance. Baxalta’s management team has a strong track record of performance and execution. Dr. Ludwig N. Hantson, who has served as a Corporate Vice President and President of BioScience at Baxter since 2010, is expected to be Baxalta’s President and Chief

 

 

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Executive Officer. Dr. Hantson brings with him more than 25 years of industry experience, including in executive roles, serving as regional, division and country head at several large biopharmaceutical companies, as well as in leadership positions in the areas of commercial operations, sales and marketing, and clinical research and development. Robert J. Hombach, who has served more than 25 years in various capacities at Baxter, including as Baxter’s Chief Financial Officer since 2010, is expected to be Baxalta’s Executive Vice President, Chief Financial Officer and Chief Operations Officer.

The management team is also expected to include:

 

    John Glasspool as Executive Vice President and Head of Corporate Strategy and Customer Operations, with more than 20 years of industry experience, including most recently as Baxter’s Vice President, New Therapies and Market Developments since 2012;

 

    Brian Goff as Executive Vice President and President, Hematology, with more than 20 years of industry experience, including most recently as Global Franchise Head of Hemophilia for Baxter;

 

    Anne-Marie Law as Executive Vice President and Head of Human Resources, with more than 25 years of human resources experience, including, prior to joining Baxalta, as Senior Vice President, Human Resources McKesson Specialty Health/US Oncology;

 

    Jacopo Leonardi as Executive Vice President and President, Immunology, with 20 years of industry experience, including most recently as Region Head of Baxter’s North America Hematology Division;

 

    David D. Meek as Executive Vice President and President, Oncology, with more than 25 years of industry experience, including, prior to joining Baxalta, as the Chief Commercial Officer of Endocyte and as Novartis Pharmaceuticals’ Region Head of Oncology for Europe;

 

    John J. Orloff, M.D., as Executive Vice President, Head of Research & Development and Chief Scientific Officer, with more than 30 years of industry and clinical experience, including, prior to joining Baxalta, as Global Head of Clinical Development at Merck Serono Pharmaceuticals;

 

    Dagmar Rosa-Björkeson as Executive Vice President and President, Biosimilars, with more than 20 years of industry experience, including, prior to joining Baxalta, serving in multiple capacities at Novartis Pharmaceuticals, most recently as Vice President, Head of Multiple Sclerosis; and

 

    Patrice Zagame, M.D., as Executive Vice President and President, Intercontinental, with more than 25 years of industry experience, including, prior to joining Baxalta, as Sanofi’s Country Head for Brazil.

Strategies

Baxalta is seeking to grow its business by, among other things:

Enhancing access through increasing awareness and diagnosis and improving standards of care. Baxalta is committed to supporting efforts to improve diagnosis and enhancing standards of care. A number of disease areas, such as hemophilia, primary immune deficiency (PID), multifocal motor neuropathy (MMN), alpha-1 antitrypsin deficiency, and von Willebrand disease (VWD), are currently under-diagnosed and under-treated. For example, Baxalta believes based on historical data that diagnosis rates remain well under 50% for alpha-1 antitrypsin deficiency, hemophilia A, hemophilia B and PID, and up to an estimated 60% for MMN. As awareness and diagnosis increases, Baxalta believes it can capitalize on its existing and developing product portfolio to address the rising demand for these areas of unmet medical need. Baxalta also seeks to differentiate itself through its commitment to increasing standards of care for its patients. As an example, in June 2014, Baxalta obtained European CE marking of myPKFiT, a new web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE, which allows physicians to calculate personalized ADVATE treatment regimens based on patient information and individual pharmacokinetic (PK) profiles.

 

 

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Further penetrating targeted emerging markets. In many emerging markets, population growth and economic development are driving increased demand for therapies such as Baxalta’s. In addition, rising standards of living and healthcare in such markets increase the global marketplace for Baxalta’s therapies. Based on the company’s diverse product portfolio and its history of successfully utilizing regional and local sales and distribution capabilities, Baxalta believes that the company is well-positioned for growth in these emerging markets. For example, Baxalta believes that it has further opportunities to expand in targeted emerging markets by reaching new customers, by introducing more of the company’s therapies into these markets and by supporting the adoption of the company’s products. Baxalta believes that the company will be able to efficiently respond to the needs of its emerging market customers and provide strong customer service and support in these markets.

Exploring additional models to partner with governments and other third parties. Baxalta is exploring alternative business models to partner with governments and other large patient care organizations to become the partner of choice, particularly in a number of emerging markets where utilization is very low. For example, in 2012 the company entered into an exclusive 20-year partnership with Hemobrás (Empresa Brasileira de Hemoderivado e Biotechnologia) to provide hemophilia patients in Brazil, the world’s third-largest hemophilia market, greater access to rFVIII therapy for the treatment of hemophilia A. The company has also entered into a 10-year contract manufacturing agreement with Sanquin Blood Supply Foundation of the Netherlands to enhance the supply of plasma-derived treatments for immune deficiencies, hemophilia, trauma and other critical conditions. These and similar measures will help to build and drive innovation and brand excellence on a global basis.

Augmenting Baxalta’s product portfolio through organic growth, acquisitions and collaborations. Baxalta intends to continue to develop and grow its product portfolio through internal research and development (R&D) as well as through external acquisitions and collaborations. These R&D efforts enable the company to deliver innovative products to address areas of unmet medical need, and enhance current therapies so they remain relevant for Baxalta’s customers. Baxalta leverages its brand leadership to position the company to capitalize on enhancing access with the introduction of new therapeutics and indications. While continuing to leverage its expertise and develop therapies in its core disease areas, Baxalta intends to further diversify its product portfolio and pipeline by shifting to therapies for diseases beyond hemophilia, such as blood disorders, liquid and solid tumors and immunologic conditions. Baxalta incurred R&D expenses of $820 million in 2014 and believes that at least seven new products in its R&D portfolio have the potential to reach the market by 2018, along with several other indications or developments with respect to existing products and geographic expansions of such products.

Baxalta also intends to continue to grow its business through acquisitions, asset purchases, in-licensing transactions, development, supply and distribution agreements and other strategic partnerships, as well as through the growth of its existing products resulting from such factors as increased awareness and diagnosis, and further penetration into emerging markets.

Baxalta has entered into several significant collaborations, alliances and other business development transactions to support its growth, including:

 

    AesRx Acquisition. In June 2014, Baxalta acquired AesRx, LLC (AesRx), obtaining AesRx’s program related to the development and commercialization of treatments for sickle cell disease (SCD), including BAX 555 (f/k/a Aes-103), an investigational prophylactic treatment for SCD currently in a Phase II clinical trial as part of an ongoing collaboration with the National Institute of Health (NIH)’s National Center for Advancing Translational Sciences (NCATS) through its Therapeutics for Rare and Neglected Diseases (TRND) program.

 

   

Chatham Acquisition. In April 2014, Baxalta acquired Chatham Therapeutics, LLC (Chatham), gaining broad access and intellectual property rights to its gene therapy platform for the treatment of

 

 

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hemophilia B (BAX 335, currently in Phase I clinic trials) as well as a preclinical hemophilia A program, and the potential future application to additional hemophilia treatments.

 

    Coherus Collaboration. Baxalta has established a collaboration with Coherus BioSciences, Inc. (Coherus) to develop and commercialize CHS-0214/BAX 2200, a biosimilar product candidate for ENBREL® (etanercept), indicated for the treatment of certain autoimmune deficiencies, in Europe, Canada, Brazil and other markets. This is Baxalta’s most advanced biosimilar, currently in Phase III clinical trials for rheumatoid arthritis and psoriasis. In early stage clinic trials, Coherus has demonstrated pharmacokinetic (PK) equivalence versus the innovator molecule.

 

    CTI BioPharma Collaboration. Baxalta acquired rights under a worldwide licensing agreement with CTI BioPharma Corp. (f/k/a Cell Therapeutics, Inc.) (CTI BioPharma) to develop and commercialize pacritinib (BAX 2201), a novel investigational JAK2/FLT3 inhibitor that recently completed Phase III trials for myelofibrosis, a chronic, malignant bone marrow disorder, and is currently in Phase II trials for acute myeloid leukemia. Baxalta has exclusive commercialization rights for all indications outside the United States, and will jointly commercialize pacritinib in the United States with CTI BioPharma. Positive top-line results from the Phase III trials were announced in March 2015.

 

    GLASSIA. In 2010, Baxalta acquired exclusive distribution and licensing rights in the United States, Australia, New Zealand and Canada to GLASSIA, the first ready-to-use liquid alpha1-proteinase inhibitor used to treat alpha-1 antitrypsin deficiency, through an agreement with Kamada Ltd. (Kamada), together with a technology transfer allowing Baxalta to implement Kamada’s related production technology.

 

    HYQVIA. HYQVIA is a product consisting of human normal immunoglobulin (IG) and recombinant human hyaluronidase (licensed from Halozyme Therapeutics, Inc. in 2007). HYQVIA was approved in Europe in 2013 for adults with PID syndromes and myeloma or chronic lymphocytic leukemia (CLL) with severe secondary hypogammaglobulinemia and recurrent infections, and also in the United States in 2014 for adults with PID.

 

    Merrimack Collaboration. In September 2014, Baxalta entered into an exclusive license and collaboration agreement with Merrimack Pharmaceuticals, Inc. (Merrimack) for the development and commercialization of nanoliposomal irinotecan injection, or nal-IRI (MM-398), an investigational drug candidate for the treatment of patients with metastatic pancreatic cancer previously treated with a gemcitabine-based therapy, for all potential indications outside the United States and Taiwan. A Phase III trial has been completed, and Baxalta filed for approval for second-line pancreatic cancer in the European Union (EU) in May 2015. In November 2014, FDA granted nal-IRI Fast Track designation for the treatment of patients with metastatic pancreatic cancer who have been previously treated with gemcitabine-based therapy. Fast Track is designed by the U.S. Food and Drug Administration (FDA) to facilitate and expedite the development and review of drugs that treat serious conditions and fill an unmet medical need.

 

    Momenta Collaboration. Baxalta is collaborating with Momenta Pharmaceuticals, Inc. (Momenta) on the development and commercialization of M923/BAX 2923, a biosimilar product candidate for HUMIRA® (adalimumab), which is currently in early-stage development. In December 2014, a European clinical trial application for M923/BAX 2923 was accepted. In June 2015, Baxalta entered into an agreement with SFJ Pharmaceuticals Group (SFJ) relating to M923/BAX 2923 whereby SFJ will fund up to $200 million of specified development costs related to Baxalta’s M923/BAX 2923 program in exchange for payments in the event the product obtains regulatory approval in the United States and/or Europe. The contingent success payments, which would total approximately 5.5 times the incurred development costs, would be paid in installments over several years following the date(s) of regulatory approval.

 

 

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    OBIZUR. In 2013, Baxalta acquired the investigational hemophilia compound and related assets from Inspiration BioPharmaceuticals, Inc. (Inspiration), as well as certain other assets, including manufacturing operations, from Ipsen Pharma S.A.S. in conjunction with Inspiration’s bankruptcy proceedings. In October 2014, OBIZUR was approved for the treatment of acquired hemophilia A in the United States and is currently under regulatory review in Europe and Canada.

 

    SuppreMol Acquisition. In March 2015, Baxalta acquired SuppreMol GmbH (SuppreMol), a biopharmaceutical company based in Germany with an early-stage development portfolio of novel treatment options for autoimmune and allergic diseases, focusing on the modulation of Fc receptor signaling pathways, an immune target that could have broad applications in autoimmune disorders. SuppreMol’s pipeline includes lead candidate SM101, an investigational immunoregulatory treatment that has completed Phase IIa studies in idiopathic thrombocytopenic purpura (ITP, a disorder causing low platelet levels) and systemic lupus erythematosus (SLE, a disorder in which the immune system attacks healthy tissue).

Accessing new products and technologies through scientific partnerships. Baxalta intends to continue to expand its network of research partnerships around the globe in order to gain access to new technologies, including its relationships with universities and other public and private institutions. The transition of Baxalta’s R&D hub to Cambridge, Massachusetts, will enhance its ability to leverage expertise in the greater Boston area and forge strategic partnerships with leading biotechnology companies and academic and research institutions. In addition, Baxalta will have the ability to explore opportunities to enter into collaboration agreements and external alliances with other parties under its own standalone growth and investment strategies.

Continuing to provide high-quality products and drive manufacturing efficiencies. Baxalta is a leader in quality manufacturing. Baxalta’s global commercial and manufacturing teams collaborate on various operational efficiency initiatives, including yield improvements, procurement, site and area synergies and manufacturing support rationalization, intended to improve Baxalta’s manufacturing margins. Baxalta’s manufacturing and supply chain provide it with a flexible and scalable global platform for continued expansion, including in emerging markets.

Managing the product portfolio to maximize value. Baxalta plans to continue its investment in products with durable sales, while making adjustments as necessary to increase the value of its product portfolio. Baxalta intends to achieve this objective in a variety of ways depending on product and circumstances by, for example, identifying supply chain efficiencies, pursuing additional indications, and employing strong product lifecycle management. Baxalta believes that its approach will allow the company to maintain a strong operating margin on existing products.

Risks Related to Baxalta’s Business and the Separation

An investment in Baxalta common stock is subject to a number of risks, including risks related to the separation and distribution. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

Risks Related to Baxalta’s Business

 

    If Baxalta is unable to successfully introduce new products or fails to keep pace with advances in technology, Baxalta’s business, financial condition and results of operations could be adversely affected.

 

   

Baxalta is currently dependent upon its three principal products: ADVATE, FEIBA and GAMMAGARD LIQUID. If Baxalta is unable to successfully introduce new products, encounters

 

 

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negative developments with respect to its existing products or fails to keep pace with advances in technology, Baxalta’s business, financial condition and results of operations could be adversely effected.

 

    Issues with product quality could have a material adverse effect upon Baxalta’s business, subject Baxalta to regulatory actions and cause a loss of customer confidence in Baxalta or its products.

 

    Baxalta is subject to a number of existing laws and regulations in a changing regulatory environment, non-compliance with which could adversely affect Baxalta’s business, financial condition and results of operations.

 

    ADVATE and Baxalta’s other products face substantial competition in the product markets in which it operates.

 

    If Baxalta is unable to successfully implement its business development strategy or expand its product portfolio through external collaborations, Baxalta’s business could suffer and Baxalta’s business, financial condition and results of operations could suffer.

 

    If reimbursement for Baxalta’s current or future products is reduced or modified in the United States or abroad, its business could suffer.

Risks Related to the Separation and Distribution

 

    Baxalta has no history operating as an independent company, and Baxalta’s historical and pro forma financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results.

 

    Baxalta may not achieve some or all of the expected benefits of the separation and distribution, and the separation and distribution may adversely affect Baxalta’s business.

The Separation and Distribution

On March 27, 2014, Baxter announced that it intended to separate its biopharmaceuticals business from its medical products business. The medical products business offers a broad portfolio of intravenous (IV) solutions and nutritional therapies, infusion pumps and administration sets, premixed and other injectable drugs, inhalation anesthetics, hospital-based biosurgery products, as well as a comprehensive portfolio of products and services to treat end-stage renal disease across the full continuum of care. The biopharmaceuticals business offers a differentiated portfolio of innovative therapies that seek to address unmet medical needs across many disease areas, including hematology, immunology and oncology.

On June 5, 2015, the Baxter Board of Directors approved the distribution of approximately 80.5% of Baxalta’s issued and outstanding shares of common stock on the basis of one share of Baxalta common stock for each share of Baxter common stock held as of the close of business on June 17, 2015, the record date.

Baxter’s plan to transfer less than all of the Baxalta common stock to its shareholders in the distribution is motivated by its desire to establish, in an efficient and nontaxable, cost effective manner, an appropriate capital structure for each of Baxter and Baxalta, including by reducing, directly or indirectly, Baxter indebtedness during the 18-month period following the distribution. These reductions are expected to meaningfully address Baxter’s liquidity management considerations. Baxter intends to transfer any Baxalta common stock not distributed in the distribution to Baxter’s creditors in satisfaction of outstanding obligations of Baxter (including by way of one or more contributions to the Baxter U.S. pension plan) and possibly to Baxter’s shareholders as a dividend or in exchange for Baxter stock, in each case during the 18-month period following the distribution. To the extent

 

 

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Baxter holds any Baxalta common stock at the end of the 18-month period, Baxter will dispose of such stock in one or more transactions (including potentially through secondary transactions) as soon as practicable, taking into account market conditions and sound business judgment, but in no event later than five years after the distribution.

Baxalta’s Post-Distribution Relationship with Baxter

Baxalta will enter into a separation and distribution agreement with Baxter, which is referred to in this prospectus as the “separation agreement” or the “separation and distribution agreement.” In connection with the separation, Baxalta will enter into various other agreements to effect the separation and provide a framework for its relationship with Baxter after the distribution, including a transition services agreement, a long term services agreement, a tax matters agreement, a manufacturing and supply agreement, an employee matters agreement, a trademark license agreement, a Galaxy license agreement, an international commercial operations agreement, a shareholder’s and registration rights agreement with respect to Baxter’s continuing ownership of Baxalta common stock and certain other commercial agreements. These agreements will provide for the allocation between Baxter and Baxalta of Baxter’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after Baxalta’s separation from Baxter. These agreements will also govern certain relationships between Baxter and Baxalta after the separation. For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation and Distribution” and “Certain Relationships and Related Person Transactions.”

Reasons for the Separation

The Baxter Board of Directors believes that separating the biopharmaceuticals business from the remainder of Baxter is in the best interests of Baxter and its shareholders for a number of reasons, including that:

 

    the separation will allow greater management focus on the distinct businesses of biopharmaceuticals and medical products by Baxalta and Baxter, respectively;

 

    the separation will give each of Baxter and Baxalta the ability to commercialize new and existing product offerings more effectively on a global basis;

 

    the separation will give each of Baxter and Baxalta the ability to drive innovation and allocate necessary resources to areas presenting the highest growth potential;

 

    the separation will give each of Baxter and Baxalta the flexibility to pursue aligned growth and investment strategies resulting in revenue acceleration, improved profitability and enhanced returns;

 

    the separation will allow each of Baxter and Baxalta to capitalize on emerging healthcare trends while enhancing operational, commercial and scientific effectiveness;

 

    the separation will allow investors to separately value each of Baxter and Baxalta based on their unique investment identities, including the merits, performance and future prospects of their respective businesses, providing investors with two distinct and targeted investment opportunities;

 

    the separation will allow each of Baxter and Baxalta to generate strong cash flow and be well capitalized with a strong balance sheet, an investment-grade profile and a disciplined approach to capital allocation;

 

    the separation will create an independent equity structure that will afford Baxalta direct access to the capital markets and facilitate the ability to capitalize on its unique growth opportunities and effect future acquisitions using its common stock.

 

 

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The Baxter Board of Directors considered a number of potentially negative factors in evaluating the separation, including risks relating to the creation of a new public company, possible increased overall costs as well as one-time separation costs, but concluded that the potential benefits of the separation outweighed these factors. For more information, see the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this prospectus.

Corporate Information

Baxalta Incorporated was incorporated in Delaware on September 8, 2014 for the purpose of holding Baxter’s biopharmaceuticals business in connection with the separation and distribution described herein. The contribution of this business to Baxalta will begin to occur over a period of several months prior to the distribution, and Baxalta will have no operations prior to any such contribution. The address of Baxalta’s principal executive offices is One Baxter Parkway, Deerfield, Illinois 60015. Baxalta’s telephone number is 224-940-2000.

Baxalta will also maintain an Internet site at www.baxalta.com. Baxalta’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

 

 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

The following table sets forth summary historical financial information for the periods indicated below. The summary balance sheet data as of December 31, 2014 and 2013 and the summary statement of income data for the years ended December 31, 2014, 2013 and 2012 have been derived from Baxalta’s audited combined financial statements which are included elsewhere in this prospectus. The summary balance sheet data as of March 31, 2015 and the summary statement of income data for the three months ended March 31, 2015 and 2014 are derived from Baxalta’s unaudited condensed combined interim financial statements which are included elsewhere in this prospectus. The unaudited condensed combined interim financial data have been prepared on a basis consistent with the basis on which Baxalta’s audited combined financial statements have been prepared except for income taxes which are based on the estimated effective tax rate for the full fiscal year. In the opinion of Baxalta’s management, the unaudited condensed combined interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. These interim results are not necessarily indicative of results to be expected for the full year.

The combined financial statements were prepared on a “carve-out” basis for purposes of presenting Baxalta’s financial position, results of operations and cash flows. Baxalta did not operate as a standalone entity in the past and accordingly the summary financial data presented herein is not necessarily indicative of Baxalta’s future performance and does not reflect what Baxalta’s financial performance would have been had the company operated as an independent publicly traded company during the periods presented.

The unaudited pro forma combined statement of income data for the year ended December 31, 2014 and for the three months ended March 31, 2015 assumes that the separation occurred as of January 1, 2014. The unaudited pro forma combined balance sheet assumes that the separation occurred as of March 31, 2015. The pro forma adjustments are based upon available information and assumptions that Baxalta believes are reasonable. The summary unaudited pro forma condensed financial information is for illustrative and informational purposes only and does not purport to represent what the financial position or results of operations would have been if Baxalta had operated as an independent company during the periods presented or if the transactions described therein had actually occurred as of the date indicated, nor does it project the financial position at any future date or the results of operations for any future period. Please see the notes to the unaudited pro forma combined financial statements included elsewhere in this prospectus for a discussion of adjustments reflected in the unaudited pro forma combined financial statements.

 

 

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The summary financial information should be read in conjunction with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the unaudited pro forma combined financial statements and corresponding notes, the audited combined financial statements and corresponding notes and the unaudited condensed combined interim financial statements and corresponding notes included elsewhere in this prospectus.

 

    For the three months ended
March 31,
    For the years ended December 31,  
(in millions)   Pro Forma
2015
   

2015

    2014     Pro Forma
2014
    2014     2013     2012  

Combined Statement of Income Data:

             

Net sales

  $ 1,403      $ 1,361      $ 1,329      $ 6,109      $ 5,952      $ 5,555      $ 5,310   

Cost of sales

    (609     (571     (559     (2,590     (2,443     (2,329     (2,240)   
                                                         

Gross margin

  794      790      770      3,519      3,509      3,226      3,070   
                                                         

Selling, general and administrative expenses

  (274   (283   (222   (1,020   (1,053   (1,017   (913)   

Research and development expenses

  (155   (156   (163   (818   (820   (595   (581)   

Interest expense

  (47   —       —       (188   —       —       —    

Other (expense) income, net

  (12   (12   23      (104   (104   (1   (15)   
                                                         

Income from continuing operations before income taxes

  306      339      408      1,389      1,532      1,613      1,561   

Income tax expense

  (64   (77   (99   (285   (346   (325   (356)   
                                                         

Net income from continuing operations

$

242

  

$ 262    $ 309    $ 1,104    $ 1,186    $ 1,288    $ 1,205   
                                                         
                                                         

 

     As of March 31,      As of December 31,  
(in millions)    Pro Forma
2015
     2015      2014      2013  

Combined Balance Sheet Data:

           

Total assets

   $ 10,986       $ 9,020       $     8,784       $     7,742   

Long-term debt1

   $ 4,940       $ —        $ —        $ —    
                                     
1  Excludes capital lease obligations.

 

     For the three
months ended
March 31,
     For the years ended
December 31,
 
(in millions)    2015      2014      2014      2013      2012  

Other Financial Data:

              

Adjusted net income from continuing operations2

   $ 295       $ 333       $ 1,585       $ 1,432       $ 1,390   
                                              
2 

Adjusted net income from continuing operations is calculated as net income from continuing operations excluding special items and is not calculated in accordance with generally accepted accounting principles (GAAP). Upfront and milestone payments related to collaborative arrangements that have been expensed as research and development (R&D) are excluded as special items because they are uncertain and often result in a different payment and expense recognition pattern than internal R&D activities. Intangible asset amortization is excluded as a special item to facilitate an evaluation of current and past operating performance, particularly in terms of cash returns, and is similar to how management internally assesses performance. Other special items are excluded because they are highly variable, difficult to predict, and of a size that may substantially impact the company’s reported operations for a period. Non-GAAP financial measures may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one

 

 

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  period to another. Management believes that non-GAAP earnings measures, when used in conjunction with the results presented in accordance with GAAP and the reconciliations to corresponding GAAP financial measures, may enhance an investor’s overall understanding of the company’s past financial performance and prospects for the future. Accordingly, management uses these non-GAAP measures internally in financial planning, to monitor the company’s performance, and in some cases for purposes of determining incentive compensation. The company strongly encourages investors to review its combined financial statements in their entirety and cautions investors that the non-GAAP measures used by the company may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

 

     For the three
months ended
March 31,
    For the years ended
December 31,
 
(in millions)    2015     2014     2014     2013     2012  

Net income from continuing operations

   $ 262      $ 309      $ 1,186      $ 1,288      $ 1,205   

Adjustments for special items

          

Upfront and milestone payments to collaboration partners

     —         25        217        78        113   

Business optimization items

     (7     8        22        45        51   

Change in fair value of contingent payment liabilities

     —         —         124        18        —    

Other-than-temporary impairment charge

     —         —         45        —         —    

Branded Prescription Drug Fee

     —         —         26        —         —    

Separation costs

     43        —         56        —         —    

Intangible asset amortization expense

     8        3        16        16        16   

Plasma-related litigation

     —         (10     (10     84        —    

Turkey VAT charge

     —         —         —         8        —    

Pension settlement charge allocated from Baxter

     —         —         —         —         72   

Impact of special items on income taxes

     (11     (2     (97     (105     (67)   
                                          

Total special items, net of tax

$ 33    $ 24    $ 399    $ 144    $ 185   
                                          

Adjusted net income from continuing operations

$ 295    $ 333    $ 1,585    $ 1,432    $ 1,390   
                                          
                                          

 

 

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THE OFFERING

 

Securities Offered

3,500,000 shares of common stock.

 

Use of proceeds

Baxalta intends to use any proceeds received by it from the exercise of stock options covered by the 2015 Plan for general corporate purposes.

 

Listings

Baxalta common stock began trading on a limited market, commonly known as a “when-issued” trading market, on June 15, 2015, and Baxalta expects that “regular-way” trading of Baxalta common stock will begin on the first trading day following the completion of the distribution. Baxalta’s common stock has been approved for listing on the New York Stock Exchange (NYSE) under the symbol “BXLT.”

 

 

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RISK FACTORS

You should carefully consider the following risks and other information in this prospectus in evaluating Baxalta and Baxalta’s common stock. Any of the following risks could materially and adversely affect Baxalta’s results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to Baxalta’s business, risks related to the separation and distribution, and risks related to Baxalta’s common stock.

Risks Related to Baxalta’s Business

If Baxalta is unable to successfully introduce new products, encounters negative developments with respect to its existing products or fails to keep pace with advances in technology, Baxalta’s business, financial condition and results of operations could be adversely affected.

Baxalta currently relies on the revenues generated from its principal products, including ADVATE, FEIBA and GAMMAGARD LIQUID. Although Baxalta has developed and continues to develop additional products for commercial introduction, the company may be substantially dependent on sales from these products for many years. Any negative developments relating to any of these products, such as safety or efficacy issues, the introduction or greater acceptance of competing products, constraints on product pricing or price increases, changes in reimbursement policies of third parties or adverse regulatory or legislative developments, may reduce Baxalta’s revenues and adversely affect the company’s results of operations.

Baxalta needs to successfully introduce new products to achieve its strategic business objectives. Product development requires substantial investment and there is inherent risk in the research and development process. A successful product development process depends on many factors, including Baxalta’s ability to properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economical and timely manner and differentiate Baxalta’s products from those of its competitors. If Baxalta cannot successfully introduce new products or adapt to changing technologies, the company’s products may become obsolete and its revenue and profitability could suffer.

In 2014, Baxalta filed for regulatory approval for BAX 855 in the United States. BAX 855 is an investigational, extended half-life recombinant factor VIII (rFVIII) treatment for hemophilia A based on ADVATE. While ADVATE is expected to continue to be an important revenue-driver for the company, BAX 855 would be an alternative for patients preferring an extended half-life treatment, which allows for fewer doses and may be preferable in terms of convenience to some patients. If the company does not receive regulatory approvals for the commercialization of BAX 855, or if the company is unable to successfully execute on its plans to commercialize BAX 855, Baxalta’s future revenue growth and results of operations may be adversely affected to the extent that extended half-life and similar products otherwise adversely affect ADVATE results. Along with the risk that regulatory approvals may not be received, factors that may prevent the company from successfully meeting its plans for the launch and commercialization of BAX 855 include the availability of competitive products; any reputational damage that may result from adverse experiences or events that may occur with patients treated with BAX 855; any successful challenge with respect to rights in the company’s exclusive ownership of the PEGylation technology utilized in BAX 855; and other risks described in these “Risk Factors” related to the operation of the company’s business and the sales of products of the business.

Baxalta’s pipeline also includes additional extended half-life therapies for hemophilia A and other potential new treatments for hemophilia A and B (including gene therapy), von Willebrand disease and a recombinant treatment for patients with inhibitors, as well as treatments in other areas of unmet medical need (including oncology), each of which remains subject to additional clinical development risks in addition to the factors listed above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development” and “Business—Building a Diversified Biopharmaceutical Pipeline” for a discussion of Baxalta’s R&D activities and product pipeline.

 

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Issues with product quality could have a material adverse effect upon Baxalta’s business, subject Baxalta to regulatory actions and cause a loss of customer confidence in Baxalta or its products.

Baxalta’s success depends upon the quality of its products. Quality management plays an essential role in meeting customer requirements, preventing defects, improving the company’s products and services and assuring the safety and efficacy of Baxalta’s products. Baxalta’s future success depends on its ability to maintain and continuously improve its quality management program. While Baxalta has one quality system deployed globally that covers the lifecycle of its products, quality and safety issues may occur with respect to any of these products at any stage. A quality or safety issue may result in adverse inspection reports, warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in Baxalta or its current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, Baxalta has made and continues to make significant investments in assets, including inventory and property, plant and equipment, which relate to potential new products or modifications to existing products. Product quality or safety issues may restrict the company from being able to realize the expected returns from these investments, potentially resulting in asset impairments in the future.

Unaffiliated third party suppliers provide a number of goods and services to Baxalta’s R&D, clinical and manufacturing organizations. Third party suppliers are required to comply with Baxalta’s quality standards. Failure of a third party supplier to provide compliant raw materials or supplies could result in delays, service interruptions or other quality related issues that may negatively impact Baxalta’s business results. In addition, some of the raw materials employed in Baxalta’s production processes are derived from human and animal origins, requiring robust controls to eliminate the potential for introduction of pathogenic agents or other contaminants.

Baxalta is subject to a number of existing laws and regulations, non-compliance with which could adversely affect Baxalta’s business, financial condition and results of operations, and Baxalta is susceptible to a changing regulatory environment.

As a biopharmaceutical company, Baxalta’s operations and products, and those of its customers, are regulated by numerous government agencies, both inside and outside the United States. The impact of this on Baxalta is direct to the extent the company is subject to these laws and regulations, and indirect in that in a number of situations, even though the company may not be directly regulated by specific biopharmaceutical laws and regulations, Baxalta’s products must be capable of being used by its customers in a manner that complies with those laws and regulations.

The manufacture, distribution, marketing and use of Baxalta’s products are subject to extensive regulation and scrutiny by the U.S. Food and Drug Administration (FDA) and other regulatory authorities globally. In particular, regulation of the development, manufacture, and sale of biologics (including biosimilars) may be more complex and require greater expenditures than the regulations applicable to other pharmaceutical products. Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by FDA and foreign regulatory authorities. Changes to current products may be subject to vigorous review, including multiple regulatory submissions, and approvals are not certain. Baxalta’s facilities must be licensed prior to production and remain subject to inspection from time to time thereafter. Failure to comply with the requirements of FDA or other regulatory authorities, including a failed inspection or a failure in Baxalta’s adverse event reporting system, could result in adverse inspection reports, warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Any of these actions could cause a loss of customer confidence in Baxalta and its products, which could adversely affect the company’s sales. The requirements of regulatory

 

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authorities, including interpretative guidance, are subject to change and compliance with additional or changing requirements or interpretative guidance may subject the company to further review, result in product launch delays or otherwise increase Baxalta’s costs. For information on current regulatory issues affecting Baxalta, see “Business—Regulation.” In connection with these issues, there can be no assurance that additional costs or civil and criminal penalties will not be incurred, that additional regulatory actions with respect to the company will not occur, that the company will not face civil claims for damages from purchasers or users, that substantial additional charges or significant asset impairments may not be required, that sales of other products may not be adversely affected, or that additional regulation will not be introduced that may adversely affect the company’s operations and combined financial statements.

The sales, marketing and pricing of products and relationships that biopharmaceutical companies have with healthcare providers are under increased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Food, Drug and Cosmetic Act (including the parts that relate to off-label promotion of products) and other healthcare related laws, as well as competition, data and patient privacy and export and import laws, is under increased focus by the agencies charged with overseeing such activities, including FDA, the Office of the Inspector General within the Department of Health and Human Services (OIG), the Department of Justice (DOJ) and the Federal Trade Commission. The DOJ and the U.S. Securities and Exchange Commission (SEC) have also increased their focus on the enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), particularly as it relates to the conduct of biopharmaceutical companies. The FCPA and similar anti-bribery laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Healthcare professionals in many countries are employed by the government and consequently may be considered government officials. Foreign governments have also increased their scrutiny of biopharmaceutical companies’ sales and marketing activities and relationships with healthcare providers and competitive practices generally. The laws and standards governing the promotion, sale and reimbursement of Baxalta’s products and those governing Baxalta’s relationships with healthcare providers and governments, including the Sunshine Act enacted under the Patient Protection and Affordable Care Act, can be complicated, are subject to frequent change and may be violated unknowingly. Baxalta has compliance programs in place, including policies, training and various forms of monitoring, designed to address these risks. Nonetheless, these programs and policies may not always protect the company from conduct by individual employees that violate these laws. Violations, or allegations of violations, of these laws may result in large civil and criminal penalties, debarment from participating in government programs, diversion of management time, attention and resources and may otherwise have a material adverse effect on Baxalta’s business, financial condition and results of operations. For more information related to Baxalta’s ethics and compliance programs, see “Business—Ethics and Compliance.” For more information related to Baxalta’s legal proceedings, see Note 14 to the audited combined financial statements.

The laws and regulations discussed above are broad in scope and subject to evolving interpretations, which could require Baxalta to incur substantial cost associated with compliance or to alter one or more of the company’s sales and marketing practices and may subject the company to enforcement actions which could adversely affect Baxalta’s business, financial condition and results of operations.

Baxalta’s products face substantial competition in the product markets in which it operates.

Baxalta faces substantial competition throughout its business from international and domestic biopharmaceutical companies of all sizes. Competition is primarily focused on cost-effectiveness, price, service, product effectiveness and quality, patient convenience, and technological innovation.

Competition may increase further as existing competitors enhance their offerings or additional companies enter Baxalta’s markets or modify their existing products to compete directly with Baxalta’s products. For example, ADVATE may face additional competition from extended half-life treatments, such as ELOCTATE® from Biogen Idec, which allow for fewer doses compared to ADVATE and may be preferable in terms of

 

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convenience to some patients. If Baxalta’s competitors respond more quickly to new or emerging technologies and changes in customer requirements, the company’s products may be rendered obsolete or non-competitive. If Baxalta’s competitors develop more effective or affordable products, or achieve earlier patent protection or product commercialization than the company does, its operations will likely be negatively affected. If Baxalta is forced to reduce its prices due to increased competition, Baxalta’s business could become less profitable. The company’s sales could be adversely affected if any of its contracts with customers (including with hospitals, treatment centers and other health care providers, distributors, GPOs and IDNs) are terminated due to increased competition or otherwise.

If Baxalta’s business development activities are unsuccessful, Baxalta’s business could suffer and Baxalta’s financial performance could be adversely affected.

As part of Baxalta’s long-term strategy, Baxalta is engaged in business development activities including evaluating acquisitions, joint development opportunities, technology licensing arrangements and other opportunities. These activities may result in substantial investment of the company’s resources. Baxalta’s success developing products or expanding into new markets from such activities will depend on a number of factors, including Baxalta’s ability to find suitable opportunities for acquisition, investment or alliance; whether Baxalta is able to complete an acquisition, investment or alliance on terms that are satisfactory to the company; the strength of the other company’s underlying technology, products and ability to execute its business strategies; any intellectual property and litigation related to these products or technology; and Baxalta’s ability to successfully integrate the acquired company, business, product, technology or research into Baxalta’s existing operations, including the ability to adequately fund acquired in-process research and development projects and to maintain adequate controls over the combined operations. Certain of these activities are subject to antitrust and competition laws, which laws could impact Baxalta’s ability to pursue strategic transactions and could result in mandated divestitures in the context of proposed acquisitions. If Baxalta is unsuccessful in its business development activities, the company may be unable to meet its financial targets and Baxalta’s financial performance could be adversely affected.

For more information on recent business development activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development” and “Business—Strategies.”

Baxalta’s growth strategy depends upon its ability to expand its product portfolio through external collaborations, which, if unsuccessful, may adversely affect the development and sale of its products.

Baxalta intends to continue to explore opportunities to enter into collaboration agreements and external alliances with other parties, focusing on hematology, oncology and immunology. These third party collaborators may include other biopharmaceutical companies, academic and research institutions, governments and government agencies and other public and private research organizations.

These third party collaborators are often directly responsible for clinical development under these types of arrangements, and Baxalta does not have the same level of decision-making capabilities for the prioritization and management of development-related activities as it does for its internal research and development activities. Failures by these partners to meet their contractual, regulatory, or other obligations to Baxalta, or any disruption in the relationships between Baxalta and these partners, could have a material adverse effect on Baxalta’s pipeline and business. In addition, Baxalta’s collaborative relationships for research and development extend for many years and may give rise to disputes regarding the relative rights, obligations and revenues of Baxalta and its partners, including the ownership of intellectual property and associated rights and obligations. These could result in the loss of intellectual property rights or other intellectual property protections, delay the development and sale of potential pharmaceutical products, and lead to lengthy and expensive litigation or arbitration.

Long-term public-private partnerships with governments and government agencies, including in certain emerging markets, may include technology transfers to support local manufacturing capacity and technical

 

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expertise. For example, Baxalta recently became Brazil’s exclusive provider of rFVIII and will facilitate a technology transfer to support local manufacturing capacity and technical expertise. Baxalta cannot predict whether these types of transfers and arrangements will become more common in the future. These types of technology transfers and similar arrangements could have a material adverse effect on the company’s results of operations as a result of lost exclusivity with respect to certain manufacturing and technical capabilities, particularly if this model becomes widely used. Public-private partnerships are also subject to risks of doing business with governments and government agencies, including risks related to sovereign immunity, shifts in the political environment, changing economic and legal conditions and social dynamics.

For more information on Baxalta’s current pipeline, see “Business—Building a Diversified Biopharmaceutical Pipeline.”

If reimbursement or other payment for Baxalta’s current or future products is reduced or modified in the United States or abroad, including through the implementation of government-sponsored healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, taxation or rebates, then Baxalta’s business could suffer.

Sales of Baxalta’s products depend, in part, on the extent to which the costs of its products are paid by both public and private payors. These payors include Medicare, Medicaid, and private health care insurers in the United States and foreign governments and third-party payors outside the United States. Public and private payors are increasingly challenging the prices charged for pharmaceutical products and services. Baxalta may continue to experience continued downward pricing pressures from any or all of these payors which could result in a material adverse effect on its business, financial condition and operational results.

Global efforts toward healthcare cost containment continue to exert pressure on product pricing. Governments around the world use various mechanisms to control healthcare expenditures such as price controls, the formation of public contracting authorities, product formularies (lists of recommended or approved products), and competitive tenders which require the submission of a bid to sell products. Sales of Baxalta’s products are dependent, in part, on the availability of reimbursement by government agencies and healthcare programs, as well as insurance companies and other private payors. In much of Europe, Latin America, Asia and Australia, for example, the government provides healthcare at low cost to patients, and controls its expenditures by purchasing products through public tenders, collective purchasing, regulating prices, setting reference prices in public tenders or limiting reimbursement or patient access to certain products. Additionally, austerity measures or other reforms by foreign governments may limit, reduce or eliminate payments for Baxalta’s products and adversely affect both pricing flexibility and demand for its products.

For example, in the United States the Patient Protection and Affordable Care Act (PPACA), which was signed into law in March 2010, includes several provisions which impact Baxalta’s businesses in the United States, including increased Medicaid rebates and an expansion of the 340B Drug Pricing Program, which provides certain qualified entities, such as hospitals serving disadvantaged populations, with discounts on the purchase of drugs for outpatient use and an excise tax on the sale of certain drugs. Baxalta may also experience downward pricing pressure as the PPACA reduces Medicare and Medicaid payments to hospitals and other providers. While it is intended to expand health insurance coverage and increase access to medical care generally, the long-term impact of the PPACA on Baxalta’s business and the demand for the company’s products is uncertain.

As a result of these and other measures, including future measures or reforms that cannot be predicted, reimbursement may not be available or sufficient to allow Baxalta to sell its products on a competitive basis. Legislation and regulations affecting reimbursement for Baxalta’s products may change at any time and in ways that may be adverse to Baxalta. Baxalta cannot predict the impact of these pressures and initiatives, or any negative effects of any additional regulations that may affect the company’s business.

 

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The nature of producing plasma-based therapies may prevent Baxalta from timely responding to market forces and effectively managing its production capacity.

The production of plasma-based therapies is a lengthy and complex process, and Baxalta sources its plasma both externally and internally through BioLife Plasma Services L.P. (BioLife), its wholly owned subsidiary. Efforts to increase the collection of plasma or the production of plasma-based therapies may include the construction and regulatory approval of additional plasma collection facilities and plasma fractionation facilities. Baxalta is in the process of building a state-of-the-art manufacturing facility near Covington, Georgia to support growth of its plasma-based treatments, with commercial production scheduled to begin in 2018. The development of such facilities involves a lengthy regulatory process and is highly capital intensive. In addition, access to and transport and use of plasma may be subject to restrictions by governmental agencies both inside and outside the United States. As a result, Baxalta’s ability to match its collection and production of plasma-based therapies to market demand is imprecise and may result in a failure to meet market demand for its plasma-based therapies or, alternatively, an oversupply of inventory. Failure to meet market demand for Baxalta’s plasma-based therapies may result in customers transitioning to available competitive products resulting in a loss of market share or customer confidence. In the event of an oversupply, Baxalta may be forced to lower the prices it charges for some of its plasma-based therapies, close collection and processing facilities, record asset impairment charges or take other action which may adversely affect Baxalta’s business, financial condition and results of operations.

If Baxalta is unable to obtain sufficient components or raw materials on a timely basis or if it experiences other manufacturing or supply difficulties, its business may be adversely affected.

The manufacture of Baxalta’s products requires the timely delivery of sufficient amounts of quality materials. Baxalta manufactures its products in more than ten manufacturing facilities around the world. Baxalta acquires its materials from many suppliers in various countries and works closely with its suppliers to ensure the continuity of supply, but cannot guarantee these efforts will always be successful. Further, while efforts are made to diversify its sources of components and materials, in certain instances Baxalta acquires components and materials from a sole supplier. For most of its components and materials for which a sole supplier is used, Baxalta believes that alternative sources of supply exist and has made a strategic determination to use a sole supplier. In very limited instances, however, including with respect to a single material used in ADVATE and HYQVIA, Baxalta relies on sole supplier relationships for which no alternatives have currently been identified. Although Baxalta does carry strategic inventory and maintain insurance to mitigate the potential risk related to any related supply disruption, there can be no assurance that such measures will be effective. Due to the regulatory environment in which it operates, Baxalta may be unable to quickly establish additional or replacement sources for some materials. A reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect Baxalta’s ability to manufacture its products in a timely or cost-effective manner or to make product sales.

Many of Baxalta’s products are difficult to manufacture. This is due to the complex nature of manufacturing pharmaceuticals, particularly biologics, as well as the strict regulatory regimes governing the company’s manufacturing operations. Variations in the manufacturing process may result in production failures which could lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to the company’s reputation. A failure to identify and address manufacturing problems prior to the release of products to the company’s customers may also result in quality or safety issues, which could result in significant recalls, remediations or other costs.

Several of Baxalta’s products are manufactured at a single manufacturing facility or stored at a single storage site. Loss or damage to a manufacturing facility or storage site due to a natural disaster or otherwise could adversely affect the company’s ability to manufacture sufficient quantities of key products or otherwise deliver products to meet customer demand or contractual requirements which may result in a loss of revenue and other adverse business consequences. Because of the time required to obtain regulatory approval and licensing of

 

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a manufacturing facility, a third party manufacturer may not be available on a timely basis to replace production capacity in the event the company loses manufacturing capacity or products are otherwise not available due to natural disaster, regulatory action or otherwise.

If Baxalta is unable to protect its patents or other proprietary rights, or if Baxalta infringes the patents or other proprietary rights of others, its competitiveness and business prospects may be materially damaged.

Patent and other proprietary rights are essential to Baxalta’s business. Baxalta’s success depends to a significant degree on its ability to obtain and enforce patents and licenses to patent rights, both in the United States and in other countries. Baxalta cannot guarantee that pending patent applications will result in issued patents, that patents issued or licensed will not be challenged or circumvented by competitors, that the patents and other intellectual property rights of Baxalta and its business partners will not be found to be invalid or that the intellectual property rights of others will not prevent the company from selling its products or from executing on its strategies.

The patent position of a biopharmaceutical company is often uncertain and involves complex legal and factual questions. Significant litigation concerning patents and products is pervasive in Baxalta’s industry. Patent claims include challenges to the coverage and validity of Baxalta’s patents on products or processes as well as allegations that Baxalta’s products infringe patents held by competitors or other third parties. A loss in any of these types of cases could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations. Baxalta also relies on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen Baxalta’s competitive positions. Third parties may know, discover or independently develop equivalent proprietary information or techniques, or they may gain access to Baxalta’s trade secrets or disclose Baxalta’s trade secrets to the public.

Although Baxalta employees, consultants, parties to collaboration agreements and other business partners are generally subject to confidentiality or similar agreements to protect the company’s confidential and proprietary information, these agreements may be breached, and the company may not have adequate remedies for any breach. In addition, Baxalta’s trade secrets may otherwise become known or be independently discovered by competitors. To the extent that Baxalta’s employees, consultants, parties to collaboration agreements and other business partners use intellectual property owned by others in their work for the company, disputes may arise as to the rights in related or resulting know-how and inventions.

Furthermore, Baxalta’s intellectual property, other proprietary technology and other sensitive company data is potentially vulnerable to loss, damage or misappropriation from system malfunction, computer viruses, unauthorized access to data or misappropriation or misuse thereof by those with permitted access and other events. While the company has invested to protect its intellectual property and other data, and continues to work diligently in this area, there can be no assurance that its precautionary measures will prevent breakdowns, breaches, cyber incidents or other events. Such events could have a material adverse effect on the company’s reputation, business, financial condition or results of operations.

Misappropriation or other loss of Baxalta’s intellectual property from any of the foregoing could have a material adverse effect on the company’s competitive position and may cause it to incur substantial litigation costs.

Baxalta faces competition in the development of relationships with research, academic and governmental institutions.

Baxalta faces competition for marketing, distribution and collaborative development agreements, for establishing relationships with academic and research institutions, and for licenses to intellectual property. In addition, academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar to Baxalta’s products. These companies and institutions

 

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compete with Baxalta in recruiting and retaining qualified scientific and management personnel as well as in acquiring technologies complementary to Baxalta’s programs. If Baxalta is unable to successfully compete with these companies and institutions, its business may suffer.

Baxalta is subject to risks associated with doing business globally.

Baxalta’s operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. These risks include changes in exchange controls and other governmental actions, loss of business in government and public tenders that are held annually in many cases, increasingly complex labor environments, availability of raw materials, changes in taxation, export control restrictions, changes in or violations of U.S. or local laws (including the FCPA and the United Kingdom Bribery Act), dependence on a few government entities as customers, pricing restrictions, economic and political instability (including instability as it relates to the Euro and currencies in certain emerging market countries), disputes between countries, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significant geographic region regardless of cause, including war, terrorism, riot, civil insurrection, shifts in the political environment or social unrest. Failure to comply with, or material changes to, the laws and regulations that affect Baxalta’s global operations could have a material adverse effect on Baxalta’s business, financial condition or results of operations.

Changes in foreign currency exchange rates and interest rates could have a material adverse effect on Baxalta’s operating results and liquidity.

Baxalta generates a substantial portion of its revenue (approximately 50% of its total revenue in 2014) outside the United States. As a result, Baxalta’s financial results may be adversely affected by fluctuations in foreign currency exchange rates. Baxalta cannot predict with any certainty changes in foreign currency exchange rates or the ability of the company to mitigate these risks. Baxalta may experience additional volatility as a result of inflationary pressures and other macroeconomic factors in certain emerging market countries. Baxalta is also exposed to changes in interest rates, and the company’s ability to access the money markets and capital markets could be impeded if adverse liquidity market conditions occur. For discussion of the financial impact of foreign exchange rate and interest rate fluctuations, and the ways and extent to which Baxalta attempts to mitigate such impact, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.”

Changes in tax laws or exposure to additional income tax liabilities may have a negative impact on Baxalta’s operating results.

Tax policy reform continues to be a topic of discussion in the United States. A significant change to the tax system in the United States, including changes to the taxation of international income, could have a material adverse effect upon Baxalta’s results of operations. Because Baxalta operates in multiple income tax jurisdictions both inside and outside the United States, it is subject to tax audits in various jurisdictions. Tax authorities may disagree with certain positions the company has taken and assess additional taxes and related penalties. The company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of its tax provision. However, the company may not accurately predict the outcome of these audits, and as a result the actual outcome of these audits may have a material adverse impact on the company’s financial results. For more information on the company’s income taxes, see Note 13 to the audited combined financial statements.

Baxalta is increasingly dependent on information technology systems, and the company’s systems and infrastructure face certain risks, including from cyber security breaches and data leakage.

Baxalta relies upon its technology systems and infrastructure. Baxalta’s technology systems are potentially vulnerable to breakdown or other interruption by fire, power loss, system malfunction, unauthorized access and other events. Likewise, data privacy breaches by employees and others with both permitted and unauthorized access to Baxalta’s systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the

 

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public, or may be permanently lost. The increasing use and evolution of technology, including cloud-based computing, creates additional opportunities for the unintentional dissemination of information, intentional destruction of confidential information stored in the company’s systems or in non-encrypted portable media or storage devices. The company could also experience a business interruption, information theft of confidential information, or reputational damage from industrial espionage attacks, malware or other cyber incidents, which may compromise the company’s system infrastructure or lead to data leakage, either internally or at the company’s third-party providers or other business partners. While Baxalta has invested heavily in the protection of data and information technology and in related training, there can be no assurance that these efforts will prevent significant breakdowns, data leakages, breaches in the company’s systems or other cyber incidents that could have a material adverse effect upon the reputation, business, operations or financial condition of the company. In addition, significant implementation issues may arise as Baxalta seeks to consolidate and outsource certain computer operations and application support activities.

If Baxalta fails to attract and retain key employees Baxalta’s business may suffer.

Baxalta’s ability to compete effectively depends on its ability to attract and retain key employees, including people in senior management, research and sales and marketing. Competition for top talent in the biopharmaceuticals business can be intense. Baxalta’s ability to recruit and retain such talent will depend on a number of factors, including hiring practices of Baxalta’s competitors, compensation and benefits, work location, work environment and industry economic conditions. If Baxalta cannot effectively hire and retain qualified employees, its business could suffer.

Baxalta is subject to pending lawsuits.

Baxalta is a defendant in certain pending lawsuits and may be named as a defendant in future patent, product liability or other lawsuits, including lawsuits that may relate to its business prior to the separation. These current and future matters may result in a loss of patent protection, reduced revenue, significant liabilities and diversion of Baxalta’s management’s time, attention and resources. Given the uncertain nature of litigation generally, Baxalta is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these current matters. In view of these uncertainties, the outcome of these matters may result in charges in excess of any established reserves. Protracted litigation, including any adverse outcomes, may have a material adverse impact on the business, operations or financial condition of the company. Even claims without merit could subject Baxalta to adverse publicity and require Baxalta to incur significant legal fees. See Note 14 to the audited combined financial statements for more information regarding legal proceedings involving Baxalta.

Current or worsening economic conditions may adversely affect Baxalta’s business and financial condition.

Baxalta’s ability to generate cash flows from operations could be affected if there is a material decline in the demand for the company’s products, in the solvency of its customers or suppliers, or deterioration in the company’s key financial ratios or credit ratings. Current or worsening economic conditions may adversely affect the ability of Baxalta’s customers (including governments) to pay for its products and services, and the amount spent on healthcare generally. This could result in a decrease in the demand for Baxalta’s products and services, declining cash flows, longer sales cycles, slower adoption of new technologies and increased price competition. These conditions may also adversely affect certain of Baxalta’s suppliers, which could cause a disruption in Baxalta’s ability to produce its products. In addition, global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. These conditions may also impact the stability of the Euro or other currencies in which Baxalta does business.

Although biosimilars represent a developing opportunity for Baxalta, the market has an uncertain regulatory framework, and Baxalta and its partners may not be able to successfully develop and introduce biosimilar products.

Baxalta is actively working to develop and commercialize biosimilar products, including with its partners. Significant uncertainty remains concerning both the regulatory pathway in the United States and in other

 

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countries to obtain approval of biosimilar products and the commercial pathway to successfully market and sell such products. The PPACA authorizes FDA to approve biosimilars through a more abbreviated pathway as compared to new biologics. Although in March 2015 FDA approved the first biosimilar drug in the United States, the approval pathway for biosimilar applications remains relatively untested and is subject to ongoing guidance from FDA. Delays and uncertainties in these approval pathways may result in delays or difficulties in the approval of Baxalta’s biosimilar products by regulatory authorities, subject Baxalta to unanticipated development costs or otherwise reduce the value of the investments Baxalta has made in biosimilars. Any such delays, difficulties or unanticipated costs could impact the profitability of the company’s biosimilars products.

Even if Baxalta and its partners are able to obtain approvals from FDA or other relevant regulatory authorities, the company’s biosimilar products and partnerships may not be commercially successful and may not generate profits in amounts that are sufficient to offset the amount invested to develop such biosimilars and obtain such approvals. Biosimilar products could be subject to extensive patent clearances and patent infringement litigation, which could delay or prevent the commercial launch of a product for many years. Market success of biosimilar products will depend on demonstrating to patients, physicians and payors (such as insurance companies) that such products are safe and effective compared to other existing products and offer a more competitive price or other benefit over existing therapies. If Baxalta’s competitors develop biosimilar products more quickly or more efficiently than Baxalta does, Baxalta may not be able to effectively execute on its biosimilar strategy. Depending on the outcome of these risks, Baxalta’s sales of biosimilar products and related profitability may not meet the company’s expectations, and the company’s results of operations or financial condition could be adversely affected.

For more information on biosimilars, see “Business—Intellectual Property” and “—Regulation.”

Risks Related to the Separation and Distribution

Baxalta has no history operating as an independent company, and Baxalta’s historical and pro forma financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results.

The historical information about Baxalta in this prospectus refers to Baxalta’s business as operated by and integrated with Baxter. Baxalta’s historical and pro forma financial information included in this prospectus is derived from the consolidated financial statements and accounting records of Baxter. Accordingly, the historical and pro forma financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows that Baxalta would have achieved as a separate, publicly traded company during the periods presented or those that Baxalta will achieve in the future primarily as a result the following factors:

 

    Prior to the distribution, Baxalta’s business has been operated by Baxter as part of its broader corporate organization, rather than as an independent company. Baxter or one of its affiliates performed various corporate functions for Baxalta, such as tax, treasury, finance, audit, risk management, legal, information technology, human resources, shareholder relations, compliance, shared services, insurance, employee benefits and compensation. Following the distribution, Baxter will continue to provide some of these functions to Baxalta, as described in “Certain Relationships and Related Person Transactions.” Baxalta’s historical and pro forma financial results reflect allocations of corporate expenses from Baxter for such functions. These allocations may not be indicative of the actual expenses Baxalta would have incurred had it operated as an independent, publicly traded company in the periods presented. Baxalta will need to make significant investments to replicate or outsource from other providers certain facilities, systems, infrastructure, and personnel to which Baxalta will no longer have access after its separation from Baxter. These initiatives to develop Baxalta’s independent ability to operate without access to Baxter’s existing operational and administrative infrastructure will be costly to implement. Baxalta may not be able to operate its business efficiently or at comparable costs, and its profitability may decline.

 

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    Currently, Baxalta’s business is integrated with the other businesses of Baxter. Baxalta is able to utilize Baxter’s size and purchasing power in procuring various goods and services and has shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although Baxalta will enter into transition agreements with Baxter, these arrangements may not fully capture the benefits Baxalta has enjoyed as a result of being integrated with Baxter and may result in Baxalta paying higher charges than in the past for these services. As a separate, independent company, Baxalta may be unable to obtain goods and services at the prices and terms obtained prior to the separation, which could decrease Baxalta’s overall profitability. As a separate, independent company, Baxalta may also not be as successful in negotiating favorable tax treatments and credits with governmental entities. This could have a material adverse effect on Baxalta’s results of operations and financial condition following the completion of the distribution.

 

    Generally, Baxalta’s working capital requirements and capital for its general corporate purposes, including acquisitions, research and development and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Baxter. Following the completion of the distribution, Baxalta may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.

 

    After the completion of the distribution, the cost of capital for Baxalta’s business may be higher than Baxter’s cost of capital prior to the distribution.

 

    Baxalta’s historical financial information does not reflect the issuance of any debt it may incur as part of the separation and distribution or its obligations to purchase from Baxter certain operations and assets, and assume the corresponding liabilities, of Baxalta’s business after the distribution date.

Other significant changes may occur in Baxalta’s cost structure, management, financing and business operations as a result of operating as a company separate from Baxter. For additional information about the past financial performance of Baxalta’s business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of Baxalta’s business, see “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this prospectus.

As Baxalta builds its information technology infrastructure and transitions its data to its own systems, Baxalta could incur substantial additional costs and experience temporary business interruptions.

After the distribution, Baxalta will install and implement information technology infrastructure to support its critical business functions, including accounting and reporting, manufacturing process control, quality and compliance systems, customer service, inventory control and distribution. Baxalta may incur temporary interruptions in business operations if it cannot transition effectively from Baxter’s existing transactional and operational systems, data centers and the transition services that support these functions as Baxalta replaces these systems. Baxalta may not be successful in implementing its new systems and transitioning its data, and it may incur substantially higher costs for implementation than currently anticipated. Baxalta’s failure to avoid operational interruptions as it implements the new systems and replaces Baxter’s information technology services, or its failure to implement the new systems and replace Baxter’s services successfully, could disrupt its business and have a material adverse effect on its profitability. In addition, if Baxalta is unable to replicate or transition certain systems, its ability to comply with regulatory requirements could be impaired.

Baxter may not satisfy its obligations under various transaction agreements that have been or will be executed as part of the separation or Baxalta may not have necessary systems and services in place when certain of the transition agreements expire.

In connection with the separation, Baxalta and Baxter will enter into a separation and distribution agreement and will enter into various other agreements, including a transition services agreement, a tax matters agreement, a long term services agreement, a manufacturing and supply agreement, an employee matters agreement, a

 

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trademark license agreement, a Galaxy license agreement, an international commercial operations agreement, a shareholder’s and registration rights agreement with respect to Baxter’s continuing ownership of Baxalta common stock and certain other commercial agreements. These agreements are discussed in greater detail in the section titled “Certain Relationships and Related Person Transactions.” Certain of these agreements will provide for the performance of services by each company for the benefit of the other for a period of time after the distribution. Baxalta will rely on Baxter to satisfy its performance and payment obligations under these agreements. If Baxter is unable to satisfy its obligations under these agreements, including its indemnification obligations, Baxalta could incur operational difficulties or losses.

If Baxalta does not have its own systems and services in place, or if Baxalta does not have agreements with other providers of these services when the transition agreements terminate, Baxalta may not be able to operate its business effectively and its profitability may decline. While Baxalta is in the process of creating its own, or engaging third parties to provide, systems and services to replace many of the systems and services Baxter currently provides to it, that effort will continue until after the separation from Baxter. Baxalta may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from Baxter’s systems to Baxalta’s. These systems and services may also be more expensive or less efficient than the systems and services Baxter is expected to provide during the transition period.

Potential indemnification liabilities to Baxter pursuant to the separation agreement could materially adversely affect Baxalta.

The separation agreement with Baxter provides for, among other things, the principal corporate transactions required to effect the separation, certain conditions to the distribution and provisions governing the relationship between Baxter and Baxalta with respect to and resulting from the separation. For a description of the separation agreement, see “Certain Relationships and Related Person Transactions—Agreements with Baxter—The Separation and Distribution Agreement,” which includes additional details regarding the scope of Baxalta’s indemnification obligations. Among other things, the separation agreement provides for indemnification obligations designed to make Baxalta financially responsible for many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution pursuant to the separation agreement, including any pending or future litigation. These indemnification liabilities are intended to ensure that, as between Baxter and Baxalta, Baxalta is responsible for all liabilities assumed by it in connection with the separation, and that any liability incurred by Baxter (including directors, officers, employees and agents) related to Baxalta’s failure to satisfy such obligations or otherwise in respect of Baxalta’s operation of its business or any breach by Baxalta of the separation agreement or any ancillary agreement is paid by Baxalta; provided that such indemnification obligations shall not extend to individuals who were or become directors, officers, employees or agents of Baxalta if such persons would not be eligible for indemnification under Baxter organizational documents for the underlying matter or if the Baxter directors’ and officers’ insurance policy would not cover such persons in connection with the applicable matter. Baxalta’s indemnification liabilities are subject to certain limitations under certain ancillary agreements that require Baxalta to act as a service provider for the benefit of Baxter (with Baxter having similar limitations with respect to corresponding services provided to Baxalta) following the distribution, but its other indemnification obligations pursuant to the separation agreement and under other ancillary agreements are not generally subject to such limitations. If Baxalta is required to indemnify Baxter under the circumstances set forth in the separation agreement, Baxalta may be subject to substantial liabilities.

There could be significant liability if the distribution is determined to be a taxable transaction.

A condition to the spin-off is Baxter’s receipt of an opinion from KPMG LLP (KPMG) that is in substance and form satisfactory to Baxter and the receipt and continuing validity of a private letter ruling from the U.S. Internal Revenue Service (IRS). The opinion, as described below, is expected to conclude that the spin-off of at least 80.1% of the outstanding Baxalta shares to Baxter shareholders and certain related transactions will qualify as tax-free to Baxter and its shareholders under Sections 355, 361 and 368 of the Internal Revenue Code of 1986,

 

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as amended (the Code), except to the extent of any cash received in lieu of fractional shares of Baxalta’s common stock. Any such opinion is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. The opinion and the private letter ruling will rely on certain facts, assumptions, representations and undertakings from Baxter and Baxalta regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion or ruling.

If the spin-off ultimately is determined to be taxable, the spin-off could be treated as a taxable dividend to Baxter’s shareholders for U.S. federal income tax purposes, and Baxter’s shareholders could incur significant U.S. federal income tax liabilities. In addition, Baxter would recognize a taxable gain to the extent that the fair market value of Baxalta’s common stock exceeds Baxter’s tax basis in such stock on the date of the spin-off. For a description of the sharing of such liabilities between Baxter and Baxalta, see “Certain Relationships and Related Person Transactions—Agreements with Baxter—Tax Matters Agreement.”

Baxalta may not be able to engage in certain corporate transactions after the separation.

To preserve the tax-free treatment to Baxter of the separation and the distribution, under the tax matters agreement that Baxalta will enter into with Baxter, Baxalta is restricted from taking any action that prevents the distribution and related transactions from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution, it is expected that Baxalta will be prohibited, except in certain circumstances, from:

 

    entering into any transaction resulting in the acquisition of above a certain percentage of its stock or substantially all of its assets, whether by merger or otherwise;

 

    merging, consolidating, or liquidating;

 

    issuing equity securities beyond certain thresholds;

 

    repurchasing its capital stock;

 

    ceasing to actively conduct its business; and

 

    taking or failing to take any action that prevents the distribution and related transactions from being tax-free.

These restrictions may limit Baxalta’s ability to pursue certain strategic transactions or other transactions that it may believe to be in the best interests of its shareholders or that might increase the value of its business. In addition, under the tax matters agreement, Baxalta will be required to indemnify Baxter against any such tax liabilities as a result of the acquisition of Baxalta’s stock or assets, even if it did not participate in or otherwise facilitate the acquisition.

After the distribution, certain of Baxalta’s executive officers and directors may have actual or potential conflicts of interest because of their previous or continuing positions at Baxter.

Because of their current or former positions with Baxter, certain of Baxalta’s initial post-distribution executive officers and directors are expected to own shares of Baxter common stock, options to purchase shares of Baxter common stock or other equity awards. Following the distribution, even though Baxalta’s Board of Directors will consist of a majority of directors who are independent, and Baxalta’s expected executive officers who are currently employees of Baxter will cease to be employees of Baxter, some Baxalta executive officers and directors will continue to have a financial interest in shares of Baxter common stock. In addition, three of Baxalta’s directors will continue serving on the Baxter Board of Directors. Continuing ownership of Baxter common stock and equity awards, or service as a director at both companies, could create, or appear to create, potential conflicts of interest if Baxalta and Baxter pursue the same corporate opportunities or face decisions that could have different implications for Baxalta and Baxter.

 

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Baxalta may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect Baxalta’s business.

Baxalta may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution is expected to provide the following benefits, among others:

 

    greater management focus on the distinct businesses of biopharmaceuticals and medical products;

 

    the ability to commercialize new and existing product offerings more effectively on a global basis;

 

    the ability to drive innovation and allocate necessary resources to areas presenting the highest growth potential; and

 

    the flexibility to pursue aligned growth and investment strategies resulting in revenue acceleration, improved profitability and enhanced returns.

Baxalta may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

    the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing Baxalta’s business;

 

    following the separation, Baxalta may be more susceptible to market fluctuations and other adverse events than if it were still a part of Baxter;

 

    following the separation, Baxalta’s business will be less diversified than Baxter’s business prior to the separation; and

 

    the other actions required to separate Baxter’s and Baxalta’s respective businesses could disrupt Baxalta’s operations.

If Baxalta fails to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, the business, financial conditions, and results of operations of Baxalta could be adversely affected.

Baxalta may have received better terms from unaffiliated third parties than the terms it will receive in its agreements with Baxter.

The agreements Baxalta will enter into with Baxter in connection with the separation, including a transition services agreement, a long term services agreement, a tax matters agreement, a manufacturing and supply agreement, an employee matters agreement, a trademark license agreement, a Galaxy license agreement, an international commercial operations agreement, a shareholder’s and registration rights agreement with respect to Baxter’s continuing ownership of Baxalta common stock and certain other commercial agreements, were prepared in the context of the separation while Baxalta was still a wholly owned subsidiary of Baxter. Accordingly, during the period in which the terms of those agreements were prepared, Baxalta did not have an independent board of directors or a management team that was independent of Baxter. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Arm’s- length negotiations between Baxter and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third party. See “Certain Relationships and Related Person Transactions.”

After the distribution, Baxalta will have indebtedness, which could restrict the company’s ability to pay dividends and have a negative impact on the company’s financing options and liquidity position.

Immediately following the distribution, Baxalta expects to bear a total combined indebtedness for borrowed money of approximately $5 billion as a result of the pre-distribution issuance of senior notes with such aggregate principal amount. Approximately $4 billion of such amount was paid to Baxter as a cash

 

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distribution as partial consideration for the contribution of assets to Baxalta by Baxter in connection with the separation, with the remaining net proceeds intended to be used for general corporate purposes, including to fund acquisitions. The company may also incur additional indebtedness in the future. The company’s indebtedness may impose restrictions on Baxalta that could have material adverse consequences by:

 

    limiting the company’s ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;

 

    limiting the company’s ability to refinance its indebtedness on terms acceptable to the company or at all;

 

    imposing restrictive covenants on the company’s operations;

 

    requiring the company to dedicate a significant portion of its cash flows from operations to paying the principal of and interest on its indebtedness, thereby reducing funds available for other corporate purposes; and

 

    making the company more vulnerable to economic downturns and limiting its ability to withstand competitive pressures.

See “Description of Material Indebtedness.”

Challenges in the commercial and credit environment may adversely affect Baxalta’s ability to complete the separation and Baxalta’s future access to capital.

Baxalta’s ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for Baxalta’s products or in the solvency of its customers or suppliers or other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect Baxalta’s ability to access the capital markets. These conditions may adversely affect Baxalta’s ability to obtain and maintain investment grade credit ratings prior to and following the distribution.

Risks Related to Baxalta’s Common Stock

Baxalta cannot be certain that an active trading market for its common stock will develop or be sustained after the distribution, and following the distribution, Baxalta’s stock price may fluctuate significantly.

Baxalta common stock began trading on a limited market on a “when-issued” basis as of June 15, 2015, and Baxalta anticipates that “when-issued” trading will continue until the time of the distribution. However, Baxalta cannot guarantee that an active trading market will develop or be sustained for its common stock after the distribution. Nor can Baxalta predict the prices at which shares of its common stock may trade after the distribution. Similarly, Baxalta cannot predict the effect of the separation and distribution on the trading prices of its common stock or whether the combined market value of the shares of Baxalta’s common stock and the shares of Baxter common stock will be less than, equal to or greater than the market value of Baxter’s common stock prior to the distribution.

The market price of Baxalta’s common stock may fluctuate significantly due to a number of factors, some of which may be beyond Baxalta’s control, including:

 

    actual or anticipated fluctuations in Baxalta’s operating results;

 

    changes in earnings estimated by securities analysts or Baxalta’s ability to meet those estimates;

 

    the operating and stock price performance of comparable companies;

 

    changes to the regulatory and legal environment under which Baxalta operates; and

 

    domestic and worldwide economic conditions.

 

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In addition, when the market price of a company’s common stock drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against Baxalta could cause it to incur substantial costs and could divert the time and attention of its management and other resources.

Shares of Baxalta’s common stock are or will be eligible for future sale, and substantial sales of such shares may cause the price of Baxalta’s common stock to decline.

Any sales of substantial amounts of Baxalta’s common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of Baxalta’s common stock to decline. Upon completion of the distribution, Baxalta expects that it will have an aggregate of approximately 676,424,202 shares of its common stock issued and outstanding on July 1, 2015. These shares will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the Securities Act), unless the shares are owned by one of Baxalta’s “affiliates,” (including Baxter) as that term is defined in Rule 405 under the Securities Act. Baxalta is unable to predict whether large amounts of its common stock will be sold in the open market following the distribution. Baxalta is also unable to predict whether a sufficient number of buyers would be in the market at that time.

After completion of the distribution, Baxter will retain approximately 19.5% of Baxalta’s total shares outstanding for a limited period of time. Baxter plans to dispose of all of the Baxalta common stock that it retains after the distribution. Such disposition could include one or more subsequent exchanges for debt or equity within the 18-month period following the distribution or otherwise be used to satisfy Baxter’s outstanding obligations (including through one or more contributions to Baxter’s U.S. pension plan). Any shares not disposed of by Baxter during such 18-month period will be otherwise disposed of, including potentially through secondary offerings of Baxalta common stock, by Baxter consistent with the business reasons for the retention, but in no event later than five years after the distribution. It is anticipated that Baxter and Baxalta will enter into a shareholder’s and registration rights agreement with Baxter wherein Baxalta will agree, upon the request of Baxter, to use reasonable best efforts to effect a registration under applicable federal and state securities laws of any shares of Baxalta’s common stock retained by Baxter. See “Certain Relationships and Related Person Transactions—Agreements with Baxter—Shareholder’s and Registration Rights Agreement” for additional information.

Dispositions of significant amounts of Baxalta’s common stock or the perception in the market that this will occur may result in the lowering of the market price of Baxalta’s common stock.

Baxalta cannot guarantee the timing, amount, or payment of any dividends on its common stock.

The Board of Directors of Baxalta is expected to adopt a dividend policy with respect to the payment of dividends on Baxalta common stock following the distribution. The timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of Baxalta’s Board of Directors. The Board’s decisions regarding the payment of dividends will depend on many factors, such as Baxalta’s financial condition, earnings, corporate strategy, capital requirements, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that the Board deems relevant. For more information, see “Dividend Policy.” Baxalta’s ability to pay any dividends will depend on its ongoing ability to generate cash from operations and access capital markets. Baxalta cannot guarantee that it will pay any dividends in the future or continue to pay any dividend if Baxalta commences paying dividends.

The current percentage of ownership a shareholder has in Baxalta may be diluted in the future.

In the future, the percentage ownership of a given shareholder in Baxalta may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that Baxalta will be granting to its directors, officers and employees. Baxalta’s and Baxter’s employees will have stock options, stock-settled performance share units and stock-settled restricted stock units for Baxalta’s common stock after

 

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the distribution as a result of an adjustment to their corresponding Baxter awards as described under “Executive Compensation—Effects of the Separation on Outstanding Executive Compensation Awards; Baxalta Compensation.” Baxalta anticipates its compensation committee will grant additional performance share units, restricted stock, stock options or other stock-based awards to its employees after the distribution. Such awards will have a dilutive effect on Baxalta’s earnings per share, which could adversely affect the market price of Baxalta’s common stock.

In addition, Baxalta’s amended and restated certificate of incorporation will authorize Baxalta to issue, without the approval of Baxalta’s shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over Baxalta’s common stock respecting dividends and distributions, as Baxalta’s Board of Directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of Baxalta’s common stock. For example, Baxalta could grant the holders of preferred stock the right to elect some number of Baxalta’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences Baxalta could assign to holders of preferred stock could affect the residual value of the common stock.

See “Description of Baxalta’s Capital Stock.”

The public announcement of data from clinical studies or news of any developments related to Baxalta’s product pipeline may cause significant volatility in its stock price. If the development of any of Baxalta’s key pipeline products is delayed or discontinued, the company’s stock price could decline significantly.

As Baxalta evolves into a standalone company, it will be focusing efforts and resources in building a diversified pipeline of products in existing core disease areas and into new areas of unmet medical need, such as oncology. The company expects that investors may place heightened scrutiny on some of the company’s products in development when making investment decisions in Baxalta compared to historic Baxter. The announcement of data from clinical studies by the company or its collaborators or news of any developments related to the company’s key pipeline products may cause significant volatility in the company’s stock price. Furthermore, the announcement of any negative or unexpected data or the discontinuation of development of any of Baxalta’s key pipeline products, or any delay in anticipated timelines for filing for regulatory approval, could cause the company’s stock price to decline significantly. There can be no assurance that data from clinical studies will support a filing for regulatory approval or even if approved, that any of Baxalta’s key pipeline products will become commercially successful.

Certain provisions in Baxalta’s amended and restated certificate of incorporation and amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of Baxalta, which could decrease the trading price of Baxalta’s common stock.

Baxalta’s amended and restated certificate of incorporation and amended and restated bylaws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirors to negotiate with Baxalta’s Board of Directors rather than to attempt a hostile takeover. See “Description of Baxalta’s Capital Stock—Anti-Takeover Effects of Various Provisions of Delaware Law and Baxalta’s Amended and Restated Certificate of Incorporation and Bylaws” for a further description of certain of these provisions.

In addition, because Baxalta has not chosen to be exempt from Section 203 of the Delaware General Corporation Law, this provision could also delay or prevent a change of control that shareholders may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any

 

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business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15 percent of the corporation’s outstanding voting stock.

Baxalta believes these provisions will protect its shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with Baxalta’s Board of Directors and by providing Baxalta’s Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make the company immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that Baxalta’s Board of Directors determines is not in the best interests of Baxalta and Baxalta’s shareholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

Certain of the agreements that Baxalta will enter into with Baxter will require Baxter’s consent to any assignment by Baxalta of its rights and obligations under the agreements. The consent and termination rights set forth in these agreements might discourage, delay or prevent a change of control that shareholders may consider favorable. See “Certain Relationships and Related Person Transactions” and “Description of Baxalta’s Capital Stock” for a more detailed description of these agreements and provisions.

In addition, an acquisition or further issuance of Baxalta’s stock could trigger the application of Section 355(e) of the Code. Under the tax matters agreement, Baxalta would be required to indemnify Baxter for the resulting taxes, and this indemnity obligation might discourage, delay or prevent a change of control that shareholders may consider favorable.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus and other materials Baxter and Baxalta have filed or will file with the SEC include, or will include, forward-looking statements. Use by Baxter and Baxalta of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent such company’s current judgment about possible future events. All statements in this prospectus, in other materials Baxter and/or Baxalta have filed or will file with the SEC and in related comments by management, other than statements of historical facts, including statements about future events or financial performance, are forward-looking statements that involve certain risks and uncertainties.

These forward-looking statements may include statements with respect to accounting estimates and assumptions, litigation-related matters including outcomes, future regulatory filings and the company’s R&D pipeline, strategic objectives, credit exposure to foreign governments, potential developments with respect to credit ratings, investment of foreign earnings, estimates of liabilities including those related to uncertain tax positions, contingent payments, future pension plan contributions, costs, discount rates and rates of return, the company’s exposure to financial market volatility and foreign currency and interest rate risks, geographic expansion, business development activities, business optimization initiatives, future capital and R&D expenditures, future transactions in the company’s securities and debt issuances, the impact of healthcare reform, the sufficiency of the company’s facilities, financial flexibility, future cash flows, the adequacy of credit facilities and capitalization, tax provisions and reserves, Baxalta’s effective tax rate, the impact on the company of recent tax legislation, the timing and expected impact of the separation and all other statements that do not relate to historical facts.

These forward-looking statements are based on certain assumptions and analyses made in light of experience and perception of historical trends, current conditions, and expected future developments as well as other factors that Baxter and Baxalta believe are appropriate in the circumstances. While these statements represent Baxter and Baxalta’s current judgment on what the future may hold, and Baxter and Baxalta believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform to expectations and predictions is subject to a number of risks and uncertainties, including the following factors, many of which are beyond the control of Baxter and Baxalta:

 

    demand for and market acceptance of risks for and competitive pressures related to new and existing products;

 

    product development risks, including satisfactory clinical performance, the ability to manufacture at appropriate scale, and the general unpredictability associated with the product development cycle;

 

    product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, sanctions, seizures, litigation, loss of confidence or declining sales;

 

    future actions of FDA, EMA or any other regulatory body or government authority that could delay, limit or suspend product development, manufacturing or sale or result in seizures, recalls, injunctions, loss of customer confidence, monetary sanctions or criminal or civil liabilities;

 

    failures with respect to the company’s compliance programs;

 

    global regulatory, trade and tax policies;

 

    the impact of competitive products and pricing, including generic competition, drug re-importation and disruptive technologies;

 

    the company’s ability to identify business development and growth opportunities and to successfully execute on its business development strategy;

 

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    the company’s ability to realize the anticipated benefits from its joint product development and commercialization arrangements, governmental collaborations and other business development activities or to identify and enter into additional such opportunities in the future;

 

    future actions of third parties, including third-party payors, as healthcare reform and other similar measures are implemented in the United States and globally;

 

    the impact of U.S. healthcare reform and other similar actions undertaken by foreign governments with respect to pricing, reimbursement, taxation and rebate policies;

 

    additional legislation, regulation and other governmental pressures in the United States or globally, which may affect pricing, reimbursement, taxation and rebate policies of government agencies and private payors or other elements of the company’s business;

 

    fluctuations in supply and demand and the pricing of plasma-based therapies;

 

    the availability and pricing of acceptable raw materials and component supply;

 

    inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties;

 

    the ability to protect or enforce the company’s owned or in-licensed patent or other proprietary rights (including trademarks, copyrights, trade secrets and know-how) or patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology;

 

    the company’s ability to develop and sustain relationships with institutional partners;

 

    the impact of global economic conditions on the company and its customers and suppliers, including foreign governments in certain countries in which the company operates;

 

    fluctuations in foreign exchange and interest rates;

 

    any changes in law concerning the taxation of income, including income earned outside the United States;

 

    breaches or failures of the company’s information technology systems;

 

    loss of key employees or inability to identify and recruit new employees;

 

    the outcome of pending or future litigation;

 

    the adequacy of the company’s cash flows from operations to meet its ongoing cash obligations and fund its investment program;

 

    the company’s ability to successfully develop and introduce biosimilar products;

 

    Baxalta’s operations as an independent company;

 

    the costs and temporary business interruptions related to the separation;

 

    Baxter’s performance under various transaction agreements that will be executed as part of the separation;

 

    the ability of Baxalta to transition away from the services to be provided by Baxter pursuant to the transition services agreement, manufacturing and supply agreement and other agreements with Baxter in a timely manner;

 

    potential indemnification liabilities owed to Baxter after the separation;

 

    the tax treatment of the distribution and the limitations imposed on Baxalta under the tax matters agreement that Baxalta will enter into with Baxter;

 

    restrictions on post-separation activities in order to preserve the tax-free treatment of the separation;

 

    potential conflicts of interest for certain of Baxalta’s executive officers and directors because of their previous or continuing positions at Baxter;

 

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    the ability of Baxalta to achieve benefits from the separation in a timely manner;

 

    the incurrence of substantial indebtedness following the separation from Baxter;

 

    Baxalta’s ability to access the capital markets following the separation from Baxter;

 

    the timing of the initial distribution, the amount of Baxalta equity distributed in the initial distribution or changes to the timing of the subsequent disposal of the equity retained by Baxter;

 

    failure of the “regular-way,” “ex-distribution” or “when issued” markets to develop or other unexpected reactions to the distribution in the capital markets;

 

    the nature of the dividend policy established by the Board of Directors of Baxalta; and

 

    other factors identified elsewhere in this prospectus including the risk factors described herein under the section entitled “Risk Factors.”

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated will be realized or, even if realized, that they will have the expected consequences to or effects on Baxter, Baxalta or their respective subsidiaries or businesses or operations. Neither Baxter nor Baxalta undertake any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events, or other such factors that affect the subject of these statements, except where we are expressly required to do so by law. Factors that could cause actual results or events to differ materially from those anticipated include the matters described under the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “The Separation and Distribution,” which contain forward-looking statements.

 

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USE OF PROCEEDS

Any proceeds received by Baxalta from the exercise of Baxalta stock options covered by the 2015 Plan will be used for general corporate purposes. These proceeds represent the exercise prices for the Baxalta stock options.

 

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DIVIDEND POLICY

The Board of Directors of Baxalta is expected to adopt a policy with respect to the payment of dividends on Baxalta common stock following the distribution. The company currently expects that Baxalta will pay quarterly cash dividends following the distribution, with the annual amount initially determined based on 15% of the estimate of annual adjusted net income for the applicable period. Notwithstanding the current expectations for Baxalta’s future dividend policy, the timing, declaration, amount of, and payment of any dividends following the separation by Baxalta is within the discretion of its Board of Directors and will depend upon many factors, including Baxalta’s financial condition, earnings, corporate strategy, capital requirements of its operating subsidiaries, covenants associated with certain of Baxalta’s debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by Baxalta’s Board of Directors.

 

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CAPITALIZATION

The following table sets forth Baxalta’s capitalization as of March 31, 2015 on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in Baxalta’s unaudited pro forma financial information. The information below is not necessarily indicative of what Baxalta’s capitalization would have been had the separation, distribution and related financing transactions been completed as of March 31, 2015. In addition, it is not indicative of Baxalta’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Baxalta’s combined financial statements and notes included elsewhere in this prospectus.

 

     As of March 31, 2015  
(in millions)    Actual      Pro Forma  

Cash and cash equivalents

   $ —        $ 1,790   
   
   

Debt:

Long-term debt

$ —     $ 4,940   

Total debt1

$ —     $ 4,940   

Equity:

Common stock, par value $0.01 per share2

$ —     $ 7   

Additional paid-in capital2

  —       3,937   

Net parent company investment

  7,172      —    

Accumulated other comprehensive loss

  (808   (931

Total Capitalization

$     6,364    $     7,953   
   
  1  Total debt excludes capital lease obligations.
  2  Based on anticipated distribution ratio of 1 share of Baxalta common stock for each share of Baxter common stock outstanding, and 132 million additional shares to be retained by Baxter.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements consist of unaudited pro forma combined statements of income for the three months ended March 31, 2015 and for the year ended December 31, 2014 and an unaudited pro forma condensed combined balance sheet as of March 31, 2015.

The unaudited pro forma financial statements illustrate the financial impacts of the separation and the related transactions described below. The unaudited pro forma balance sheet gives effect to the separation and related transactions described below as if they had occurred on March 31, 2015. The unaudited pro forma combined statements of income for the three months ended March 31, 2015 and for the year ended December 31, 2014 assume that the separation and related transactions described below had occurred as of January 1, 2014.

The unaudited pro forma combined balance sheet and statements of income have been derived from Baxalta’s historical audited combined annual and unaudited condensed combined interim financial statements included elsewhere in this prospectus and have been adjusted to give effect to the following items related to the separation and the associated transactions:

 

    the contribution by Baxter to Baxalta, pursuant to the separation agreement, of the assets and liabilities that comprise Baxalta’s business;

 

    the expected transfer, to Baxalta upon separation, of various corporate and other assets and liabilities not included in Baxalta’s historical combined balance sheet;

 

    the incurrence of $5 billion of debt at a weighted-average interest rate of 3.76%, a cash distribution of approximately $4 billion to Baxter, and cash contributed from Baxter in connection with the formation of various Baxalta entities of $850 million;

 

    the anticipated issuance of approximately 676 million shares of Baxalta’s common stock; and

 

    the impact of the manufacturing and supply agreement, the transition services agreement and other commercial agreements between Baxter and Baxalta and the provisions contained therein.

The unaudited pro forma combined financial statements are for informational purposes only and do not purport to represent what Baxalta’s financial position and results of operations actually would have been had the separation and related transactions occurred on the dates indicated, or to project Baxalta’s financial performance for any future period. The unaudited pro forma combined financial statements are based on information and assumptions, which are described in the accompanying notes.

The Baxalta historical financial information, which was the basis for the unaudited pro forma combined financial statements, was prepared on a carve-out basis as Baxalta was not operated as a separate, independent company for the periods presented. Accordingly, such financial information reflects an allocation of certain corporate costs for corporate administrative services, including general corporate expenses related to tax, treasury, finance, audit, risk management, legal, information technology, human resources, shareholder relations, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These historical allocations may not be indicative of Baxalta’s future cost structure; however, the pro forma results have not been adjusted to reflect any potential changes associated with Baxalta being an independent public company as such amounts are estimates that are not factually supportable.

The unaudited pro forma combined financial statements reported below should be read in conjunction with the section herein entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the historical audited combined annual and unaudited condensed combined interim financial statements and the corresponding notes included elsewhere in this prospectus.

 

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THE BIOPHARMACEUTICALS BUSINESS OF BAXTER INTERNATIONAL INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2015

 

(in millions, except share and per share data)    Historical     Pro Forma
Adjustments
          

Pro

Forma

 

Net sales

   $ 1,361      $ 42        (A)      $ 1,403   

Cost of sales

     (571     (38     (A)(G)(I)        (609
                                  

Gross margin

  790      4      794   
                                  

Selling, general and administrative expenses

  (283   9      (B)(G)(I)      (274

Research and development expenses

  (156   1      (G)      (155

Interest expense

  —        (47   (C)      (47

Other expense, net

  (12   —       (12
                                  
                                  

Income from continuing operations before income taxes

  339      (33   306   

Income tax expense

  (77   13      (D)      (64
                                  

Net income from continuing operations

$ 262    $ (20 $ 242   
                                  
                                  

Earnings per share

Basic

  N/A      (E $ 0.36   

Diluted

  N/A      (E $ 0.36   
                                  
                                  

Common shares outstanding

Basic

  N/A      (E   676   

Diluted

  N/A      (E   676   
                                  
                                  

 

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THE BIOPHARMACEUTICALS BUSINESS OF BAXTER INTERNATIONAL INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2014

 

(in millions, except share and per share data)    Historical     Pro Forma
Adjustments
         

Pro

Forma

 

Net sales

   $ 5,952      $ 157      (A)    $ 6,109   

Cost of sales

     (2,443     (147   (A)(G)(I)      (2,590
                               

Gross margin

  3,509      10      3,519   
                               

Selling, general and administrative expenses

  (1,053   33    (B)(G)(I)   (1,020

Research and development expenses

  (820   2    (G)   (818

Interest expense

  —       (188 (C)   (188

Other expense, net

  (104   —       (104
                               
                               

Income from continuing operations before income taxes

  1,532      (143   1,389   

Income tax expense

  (346   61    (D)   (285
                               

Net income from continuing operations

$ 1,186    $ (82 $ 1,104   
                               
                               

Earnings per share

Basic

  N/A    (E) $ 1.64   

Diluted

  N/A    (E) $ 1.64   
                               
                               

Common shares outstanding

Basic

  N/A    (E)   674   

Diluted

  N/A    (E)   674   
                               
                               

 

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THE BIOPHARMACEUTICALS BUSINESS OF BAXTER INTERNATIONAL INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF MARCH 31, 2015

 

(in millions)    Historical     Pro Forma
Adjustments
         

Pro

Forma

 

Current Assets

         

Cash and cash equivalents

   $ —       $ 1,790      (J)    $ 1,790   

Accounts and other current receivables, net

     928        —            928   

Inventories

     1,918        —            1,918   

Other current assets

     387        —            387   
                               

Total current assets

  3,233      1,790      5,023   
                               

Property, Plant and Equipment, Net

  4,261      43    (I)   4,304   
                               

Other

  1,526      133    (G)(I)   1,659   
                               

Total assets

$ 9,020    $ 1,966    $ 10,986   
                               
                               

Current Liabilities

Accounts payable

$ 376    $ —     $ 376   

Accrued liabilities

  858      —       858   
                               

Total current liabilities

  1,234      —       1,234   
                               

Long-term debt

  —       4,940    (F)   4,940   

Other long-term liabilities

  1,422      377    (G)   1,799   
                               
                               

Equity

Common stock

  —       7    (H)   7   

Additional paid-in capital

  —       3,937    (H)   3,937   

Net parent company investment

  7,172      (7,172 (H)   —    

Accumulated other comprehensive loss

  (808   (123 (G)   (931
                               

Total equity

  6,364      (3,351   3,013   
                               

Total liabilities and equity

$ 9,020    $ 1,966    $ 10,986   
                               
                               

 

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THE BIOPHARMACEUTICALS BUSINESS OF BAXTER INTERNATIONAL INC.

NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

(A) Reflects the effect of the manufacturing and supply agreement that Baxalta and Baxter will enter into in connection with the separation. The net sales adjustments of $42 million and $157 million reflect the additional sales that Baxalta would have recorded for product manufactured and sold to Baxter for the three months ended March 31, 2015 and for the year ended December 31, 2014, respectively, under the manufacturing and supply agreement. Pricing under this agreement will reflect Baxalta’s costs plus a profit on certain steps of the manufacturing process. The cost of sales adjustments of $42 million and $156 million reflect the impact of costs incurred to manufacture certain products for Baxter as well as the incremental costs that Baxalta would have recorded for the three months ended March 31, 2015 and for the year ended December 31, 2014, respectively, for purchases of other products from Baxter under the manufacturing and supply agreement. Historically, inventory transfers between Baxter and Baxalta were recorded at cost.

 

(B) Reflects $5 million for the three months ended March 31, 2015 and $20 million for the year ended December 31, 2014 for the difference in costs to be incurred by Baxalta for the services to be provided by Baxter under the transition services agreement.

 

(C) Reflects interest expense related to $5 billion in debt that Baxalta incurred in connection with the separation including amortization of debt discounts related to the original issue discount and fees to be paid by Baxalta. The weighted-average interest rate on the debt including amortization of the debt discount is approximately 3.76%. Interest expense was calculated assuming constant debt levels throughout the periods. Interest expense may be higher or lower if Baxalta’s actual interest rate or credit ratings change. A 1/8% change to the annual interest rate would change interest expense by $6.3 million on an annual basis. The pro forma interest expense has not been reduced by the amount that the company believes would have been capitalized had the debt been outstanding for the entire period. Baxalta estimates that this would have been approximately $17 million and $55 million for the three months ended March 31, 2015 and for the year ended December 31, 2014, respectively.

 

(D) Reflects the tax effects of the pro forma adjustments at the applicable statutory income tax rates.

 

(E) The number of Baxalta shares used to compute basic earnings per share for the year ended December 31, 2014 and for the three months ended March 31, 2015 is based on the number of shares of Baxter common stock outstanding on December 31, 2014 and March 31, 2015, respectively, assuming the anticipated distribution ratio of 1 share of Baxalta common stock for each share of Baxter common stock outstanding, and 132 million additional shares to be retained by Baxter. The number of Baxter shares used to determine the assumed distribution reflects the Baxter shares outstanding as of each balance sheet date, which is the most current information as of the date of those financial statements. While the actual future impact of potential dilution from shares of common stock related to equity awards granted to Baxalta employees under Baxter’s share-based plans will depend on various factors, pro forma diluted shares outstanding were not adjusted as the company does not currently estimate that the future dilutive impact is material.

 

(F) Reflects $5 billion of borrowings incurred in connection with the separation and offset by debt discounts related to the original issue discount and fees to be paid by Baxalta of approximately $60 million. The company distributed approximately $4 billion of the proceeds to Baxter on June 23, 2015 in connection with the separation.

 

(G) Reflects $377 million of additional liabilities related to the net retirement obligations that are expected to be transferred to Baxalta and $124 million of associated deferred tax assets. The statement of income adjustments reflect a reduction in operating expenses of $11 million ($5 million in cost of sales, $5 million in selling, general and administrative expenses and $1 million in research and development expenses) for the three months ended March 31, 2015 and $34 million ($16 million in cost of sales, $16 million in selling, general and administrative expenses and $2 million in research and development expenses) for the year ended December 31, 2014 associated with the transfer.

 

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(H) On the distribution date, Baxter’s net investment in Baxalta will be re-designated as Baxalta Shareholders’ Equity and will be allocated between common stock and additional paid in capital based on the number of shares of Baxalta common stock outstanding at the distribution date. The pro forma adjustment reflects the re-designation of Baxter’s net investment in Baxalta and the impact of the pro forma adjustments described above and below.

 

(I) Reflects certain assets to be transferred to Baxalta pursuant to the separation agreement that were not included in the Company’s March 31, 2015 actual balance sheet. These include $43 million of manufacturing equipment and information technology assets and $9 million of associated deferred tax assets, resulting in $2 million of related depreciation expense ($1 million in cost of sales and $1 million in selling, general and administrative expenses) during the three months ended March 31, 2015 and $10 million of related depreciation expense ($7 million in cost of sales and $3 million in selling, general and administrative expenses) during the year ended December 31, 2014.

 

(J) Reflects the proceeds of the debt issued by Baxalta, net of the approximate $4 billion distribution to Baxter and the debt discounts of $60 million, and $850 million of cash that was contributed from Baxter in connection with the formation of various Baxalta entities. As a result of the cash contributed by Baxter, the funds raised in the debt issuance and related cash distribution to Baxter, Baxalta expects to begin operations as an independent company with approximately $1.8 billion in cash.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

The Baxalta selected combined income statement data for the years ended December 31, 2014, 2013 and 2012 and the selected combined balance sheet data as of December 31, 2014 and 2013 have been derived from Baxalta’s audited combined financial statements, which are included elsewhere in this prospectus. The Baxalta selected combined balance sheet data as of December 31, 2012 has been derived from Baxalta’s audited combined financial statements. The Baxalta unaudited combined income statement data for the year ended December 31, 2011 has been derived from Baxalta’s unaudited combined financial statements. The Baxalta unaudited combined income statement data for the year ended December 31, 2010 and the unaudited combined balance sheet data as of December 31, 2011 and 2010 have been carved out from the underlying financial records of Baxter.

The Baxalta combined income statement data for the three months ended March 31, 2015 and March 31, 2014, and the combined balance sheet data as of March 31, 2015 has been derived from Baxalta’s unaudited condensed combined interim financial statements, which are included elsewhere in this prospectus.

The unaudited combined financial statement data has been prepared on a basis consistent with which Baxalta’s audited combined financial statements have been prepared, except income taxes for the interim period which are based on the estimated effective tax for the full year, and in the opinion of management, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such data. These interim results are not necessarily indicative of results to be expected for the full year.

The historical combined financial statements have been prepared on a “carve-out” basis for the purpose of presenting the company’s historical financial position, results of operations and cash flows. Baxalta did not operate as a standalone entity in the past and accordingly the selected financial data presented herein is not necessarily indicative of the company’s future performance and does not reflect what the company’s performance would have been had Baxalta operated as an independent publicly traded company during the periods presented.

The selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the “Unaudited Pro Forma Combined Financial Statements” and the corresponding notes included elsewhere in this prospectus.

 

     As of or for the
three months ended
March 31
     As of or for the year ended
December 31
 
(in millions)    2015      2014      2014      2013      2012      2011      2010  

Combined Statement of Income Data

                    

Net sales

   $ 1,361       $ 1,329       $ 5,952       $ 5,555       $ 5,310       $ 5,218       $ 4,831   

Net income from continuing operations

   $ 262       $ 309       $ 1,186       $ 1,288       $ 1,205       $ 1,344       $ 1,225   

Combined Balance Sheet Data

                    

Total assets

   $ 9,020         N/A       $ 8,784       $ 7,742       $ 6,194       $ 5,425       $ 5,204   

Long-term capital lease obligations

   $ 317         N/A       $ 275       $ 14       $ 5       $ 6       $ 6   
                                                                

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the audited combined financial statements and the corresponding notes, the unaudited condensed combined interim financial statements and the corresponding notes, and the unaudited pro forma combined financial statements and the corresponding notes included elsewhere in this prospectus. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

On March 27, 2014, Baxter announced its plan to separate into two independent publicly traded companies, one focused on lifesaving medical products and the other focused on developing and marketing innovative biopharmaceuticals. For purposes of the following discussion, Baxalta refers to the biopharmaceuticals business of Baxter prior to the separation. To accomplish the separation, Baxter created a new company, Baxalta Incorporated, to be the parent company for the biopharmaceuticals business. Baxalta Incorporated was incorporated in Delaware on September 8, 2014 and is currently a wholly owned subsidiary of Baxter. To effect the separation, Baxter will make a pro rata distribution of approximately 80.5% of Baxalta Incorporated’s common stock to Baxter’s shareholders. The distribution is subject to a number of conditions, including the receipt of an opinion from a third party tax advisor that is in substance and form satisfactory to Baxter. See “The Separation and Distribution” section of this prospectus for additional details on these conditions. After the distribution, Baxalta Incorporated will operate as an independent, publicly-traded company.

EXECUTIVE OVERVIEW

Company Overview

Baxalta is a global, innovative biopharmaceutical leader with a sustainable portfolio of differentiated therapies that seek to address unmet medical needs across many disease areas, including hemophilia, immunology and oncology. More specifically, the company develops, manufactures and markets a diverse portfolio of treatments for hemophilia and other bleeding disorders, immune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute medical conditions. Baxalta is also investing in new disease areas, including oncology, as well as emerging technology platforms, including gene therapy and biosimilars.

Baxalta’s business strategy is aimed at improving diagnosis, treatment and standards of care across a wide range of bleeding disorders and other rare chronic and acute medical conditions, capitalizing on the company’s differentiated portfolio, ensuring the sustainability of supply to meet growing demand for therapies across core disease areas, and accelerating innovation by developing and launching new treatments while leveraging its expertise into new emerging therapeutics through acquisitions and collaborations.

Financial Results Overview—Three Months Ended March 31, 2015 and 2014

 

     Three months ended
March 31,
        
(in millions)    2015      2014      Percent change  

Net sales

   $ 1,361       $ 1,329         2

Net income from continuing operations

   $ 262       $ 309         (15 %) 
                            

 

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Baxalta’s global net sales totaled $1.4 billion for the first three months of 2015, an increase of 2% over the prior year period. Excluding the impact of changes in foreign currency exchange rates, net sales increased 8% over the prior year period. Sales in the United States totaled $755 million in the first three months of 2015, an increase of 7% over 2014, and international sales totaled $606 million, a decrease of 3% over the prior year period at actual foreign currency exchange rates and an increase of 10% at constant foreign currency exchange rates. Excluding the impact of changes in foreign currency exchange rates, the company drove revenue growth in each of its four product categories. Refer to the “Results of Operations—Three Months Ended March 31, 2015 and 2014” section below for further discussion regarding the company’s sales.

The company’s net income from continuing operations was $262 million and $309 million during the three months ended March 31, 2015 and 2014, respectively. While the company drove sales growth and gross margin improvement as compared to the prior year period, net income from continuing operations decreased due primarily to $43 million of separation costs incurred during the current year period and a change in other expense (income) from $23 million of income during the three months ended March 31, 2014 to $12 million of expense during the three months ended March 31, 2015. Refer to the “Results of Operations—Three Months Ended March 31, 2015 and 2014” section below for further discussion of the company’s results.

The company’s net cash used for operations was $142 million in the first three months of 2015 and $168 million in the first three months of 2014. The company generates significant cash flows from operations on an annual basis; however, the first three months of each year reflect cash outflows for the annual settlement of the company’s current income tax payables, which include the full previous year’s current income tax expense and other current tax amounts. Excluding the impact of this annual settlement of current tax payables, the company generated positive cash flows from operations during both periods. Refer to the “Liquidity and Capital Resources” section below for further discussion regarding the company’s cash flows.

Financial Results Overview—Full-Year 2014, 2013 and 2012

 

                          Percent change  
years ended December 31 (in millions)    2014      2013      2012      2014     2013  

Net sales

   $ 5,952       $ 5,555       $ 5,310         7     5

Net income from continuing operations

   $ 1,186       $ 1,288       $ 1,205         (8 %)      7
                                             

Baxalta’s global net sales totaled approximately $6.0 billion in 2014, an increase of 7% over 2013. Sales in the United States totaled $3.0 billion in 2014, an increase of 5% over 2013 and international sales totaled more than $2.9 billion, an increase of 9% over 2013. Net sales of the company’s largest product category, Hemophilia, increased 7% driven by strong demand for ADVATE. Net sales of Inhibitor Therapies grew 14% due to increased demand for FEIBA. BioTherapeutics and Immunoglobulin Therapies net sales growth in 2014 was 9% and 4%, respectively, reflecting increased sales of albumin products and GAMMAGARD LIQUID, as well as the launch of HYQVIA in the United States in late 2014. In 2013, net sales growth of 5% was driven by Hemophilia, which increased 6% over 2012 driven by increased global demand for ADVATE. Net sales of the Inhibitor Therapies product category also increased 6% in 2013 due to strong global demand for FEIBA. Refer to the “Results of Operations—Years Ended December 31, 2014, 2013 and 2012” section below for further discussion regarding the company’s sales.

The company’s net income from continuing operations was $1.2 billion in 2014 as compared to $1.3 billion in 2013 and $1.2 billion in 2012. The decrease in 2014 was driven by special items, including research and development (R&D) charges in 2014 of $217 million for both upfront and milestone payments related to collaborative arrangements. Special items are further discussed in the “Results of Operations—Years Ended December 31, 2014, 2013 and 2012” section below. Excluding the impact of special items, net income from continuing operations increased 11% in 2014 as compared to 2013 due to increased sales, an improvement in gross margin percentage and increased income from equity method investments. Excluding the impact of special

 

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items, net income from continuing operations increased 3% in 2013 as compared to 2012 driven by an increase in sales partially offset by increased investments in the R&D pipeline.

The company’s net cash provided from operations was $1.4 billion in 2014, $1.5 billion in 2013 and $1.4 billion in 2012. The decrease in 2014 reflected increased R&D investments, including milestone payments to collaboration partners, and an increase in tax-related items. Capital expenditures totaled $970 million, $797 million, and $521 million in 2014, 2013, and 2012, respectively. The increases in capital expenditures in 2014 and 2013 reflected efforts to add capacity to meet long-term expected demand growth for the company’s products, and were driven by continued progress in the construction of the company’s new manufacturing facility in Covington, Georgia. Refer to the “Liquidity and Capital Resources” section below for further discussion regarding the company’s cash flows.

Key Commercial Highlights

The company continues to grow international sales of ADVATE through expansion into new markets and continued penetration into existing markets, and increased global sales of its Hemophilia product category despite competition from an extended half-life recombinant factor VIII therapy launched in the United States during 2014. The company has now received reimbursement approval in China and additional regulatory approvals for ADVATE in Russia and Turkey in 2014, and it is now approved in over 60 countries. In 2014, the company also received multi-year tender awards for ADVATE in the U.K. and in Australia. The company obtained U.S. approval in 2014 for BAXJECT III, a needleless reconstitution system for ADVATE allowing patients to prepare their treatment with fewer steps compared to the previous process, and has filed for approval in Europe. European CE marking of myPKFiT, a web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE, was also obtained in 2014. The device allows physicians to calculate personalized ADVATE treatment regimens based on patient information and individual pharmacokinetic profiles.

During 2014, the company made advances in its 20-year public-private partnership with Hemobrás, which the company entered into in 2012. The partnership provides hemophilia patients in Brazil with increased access to ADVATE. ADVATE sales in Brazil exceeded $100 million during 2014, and approximately 40% of the Brazil hemophilia market has been converted to recombinant factor VIII therapy as of the end of 2014. Baxalta is Brazil’s exclusive provider of recombinant factor VIII and will facilitate a technology transfer to support local manufacturing capacity and technical expertise. Following completion of the technology transfer, Baxalta will receive royalties on recombinant factor VIII product produced by Hemobrás over the duration of the partnership.

FEIBA, the company’s inhibitor bypass therapy, was approved by the Food and Drug Administration (FDA) for routine prophylactic use in the United States in late 2013, and other markets in 2014, driving increased demand. FEIBA is used to prevent or reduce the frequency of bleeding episodes in patients with hemophilia A or B who have developed inhibitors.

The company’s immunoglobulin therapy product offerings, including GAMMAGARD LIQUID, demonstrate strong clinical performance and the company believes there is significant growth potential as the products are used to treat several indications which remain under-diagnosed and under-treated on a global basis. To meet estimated long-term demand growth, the company has made progress in enhancing its overall capacity across its manufacturing network, as well as in the construction of a state-of-the-art manufacturing facility in Covington, Georgia, which is expected to begin commercial production in 2018.

Within the BioTherapeutics product category, FLEXBUMIN 5% was approved by FDA in 2014, expanding the FLEXBUMIN product portfolio. FLEXBUMIN is the first and only preparation of human albumin to be packaged in a flexible container, which now includes both 5% in a 250 mL solution and 25% in 50 and 100 mL solutions. The flexible container weighs less, requires less storage space and has a lower risk of breakage compared to glass containers of equal volume.

 

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The company’s long-term prospects are influenced by the ability to successfully launch new products and therapies. Recent new product launches include:

 

    RIXUBIS: Within the Hemophilia product category, the company received FDA approval for RIXUBIS for the treatment of adults in 2013 and for pediatric use in 2014. The company has also recently received European approval of RIXUBIS for both adult and pediatric use. RIXUBIS is a recombinant based therapy for the treatment of hemophilia B. The product was introduced in the U.S. market in late 2013 and first launched in Europe in April 2015.

 

    HYQVIA: Within the Immunoglobulin Therapies product category, HYQVIA, a differentiated subcutaneous immunoglobulin treatment, received European regulatory approval in 2013 for treatment of adults with primary and secondary immunodeficiency syndromes, and U.S. regulatory approval in 2014 for the treatment of adults with primary immunodeficiency syndrome. HYQVIA was first launched in certain European markets in late 2013 and in the United States in late 2014.

 

    OBIZUR: Within the Inhibitor Therapies product category, OBIZUR received regulatory approval in the United States in 2014 for the treatment of patients with acquired hemophilia A. Baxalta recorded its first commercial sale of OBIZUR in the United States in late 2014.

Research and Development

Baxalta continues to make substantial investments in R&D in support of its ongoing proprietary research programs and through collaborations with third parties for the development of new products and therapies. R&D expenses were $820 million, or 14% of global net sales, during 2014, and $156 million, or 11% of global net sales during the first three months of 2015. The company believes its R&D pipeline will provide a catalyst for future growth. R&D expenses primarily relate to programs in hematology, oncology, immunology and biosimilars with a focus on rare diseases and areas of unmet medical need.

The company’s overall R&D strategy includes the continued pursuit of collaborations and partnerships with third parties that are developing new products and therapies. These collaborations generally involve the company obtaining commercialization rights from third parties in exchange for an upfront payment upon execution of the agreement and potential future payments related to the achievement of development, regulatory approval or commercial milestones, as well as royalties. The collaboration arrangements include joint steering committees with representatives from both parties. The company’s significant collaborative arrangements include an agreement with Merrimack Pharmaceuticals, Inc. (Merrimack) for the development and commercialization of all potential indications of nal-IRI (MM-398), including pancreatic cancer, in most markets outside the United States; an agreement with Coherus Biosciences, Inc. (Coherus) for the development and commercialization of a biosimilar to ENBREL® (etanercept) in Europe, Canada, Brazil and other markets outside the United States along with first refusal rights for other biosimilars under development; an agreement with CTI BioPharma Corp. (f/k/a Cell Therapeutics, Inc.) (CTI BioPharma) for the development and commercialization of pacritinib for all indications including the treatment of myelofibrosis and acute myeloid leukemia; and an agreement with Momenta Pharmaceuticals, Inc. (Momenta) for the development and commercialization of biosimilars. The company recorded R&D expenses associated with upfront and milestone payments to collaboration partners of $217 million, $78 million, and $113 million during 2014, 2013, and 2012, respectively, and $25 million during the three months ended March 31, 2014. There were no R&D expenses associated with upfront and milestone payments during the three months ended March 31, 2015. Refer to Note 4 to the audited combined financial statements for additional details on the company’s significant collaborative arrangements. As part of its strategy to further develop its pipeline, Baxalta also makes equity investments in companies developing high-potential technologies to accelerate innovation and growth for the company.

Baxalta has also acquired several companies in recent years with R&D projects that align with Baxalta’s therapeutic areas of focus. In 2015, the company acquired SuppreMol GmbH for consideration of $228 million, obtaining its early-stage research programs related to treatment options for autoimmune and allergic diseases. In 2014, the company acquired AesRx, LLC (AesRx) for consideration of $80 million, obtaining AesRx’s research

 

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program for sickle cell disease treatments. Also in 2014, Baxalta acquired Chatham Therapeutics, Inc. (Chatham) for consideration of $147 million, obtaining its gene therapy programs related to treatments of hemophilia.

In September 2014, the company announced it was forming a new global innovation and R&D center in Cambridge, Massachusetts, which positions the company to accelerate innovation by building on its pipeline in core areas of expertise, strengthen and build upon R&D collaborations with partners in new and emerging biotechnology areas, and optimize R&D productivity while enhancing patient care globally.

The company’s R&D pipeline includes projects in the preclinical or exploratory phase through late-stage clinical trials or pending regulatory approval. The following are several key projects currently in late-stage clinical trials or pending regulatory approval:

 

    BAX 111: a recombinant therapy providing a pure von Willebrand disease factor with customized dosing. Baxalta filed for approval in the United States in December 2014 based on positive results in a clinical trial involving on-demand therapy for patients with severe von Willebrand disease.

 

    BAX 817: a recombinant factor VIIa for the treatment of acute bleeding episodes in hemophilia A or B patients with inhibitors. In March 2015, the company announced positive results from its Phase III clinical trial evaluating the safety and efficacy of BAX 817.

 

    BAX 855: an investigational, extended half-life, recombinant factor VIII treatment for hemophilia A. The company submitted for regulatory approval in the United States in December 2014 and in Japan in April 2015.

 

    CHS-0214/BAX 2200: a biosimilar to ENBREL® (etanercept) that is indicated for the treatment of autoimmune deficiencies in Europe, Canada, Brazil and other markets. This is Baxalta’s most advanced biosimilar, currently in Phase III clinical trials for rheumatoid arthritis and psoriasis, and in early stage clinical trials has demonstrated pharmacokinetic (PK) equivalence versus the innovator molecule. This program is part of a collaboration agreement with Coherus.

 

    20% GAMMAGARD LIQUID SubQ: a higher-potency immunoglobulin therapy offering patients faster infusions with less volume. The company has completed Phase III enrollment in the European Union and the United States, and filed for approval in Europe in May 2015.

 

    nal-IRI (MM-398): an investigational drug candidate for the treatment of patients with metastatic pancreatic cancer previously treated with a gemcitabine-based therapy. A Phase III trial has been completed, and Baxalta filed for approval in the European Union in May 2015 for second-line pancreatic cancer. This program is part of a collaboration agreement with Merrimack. In November 2014, FDA granted nal-IRI (MM-398) Fast Track designation for the treatment of patients with metastatic pancreatic cancer who have been previously treated with gemcitabine-based therapy.

 

    Pacritinib (BAX 2201): a novel investigational JAK2/FLT3 inhibitor that recently completed Phase III clinical trials for its primary indication, the treatment of myelofibrosis, a chronic, malignant bone marrow disorder. This program is part of a collaboration agreement with CTI BioPharma. Positive top-line results from the Phase III trials were announced in March 2015.

The company also incurs R&D expenses in support of regulatory filings, lifecycle management activities on existing products, and on infrastructure and management of the company’s overall research and development initiatives.

Key Factors Affecting Results of Operations

Separation from Baxter

The company has not previously operated as an independent, standalone company, but rather as a part of a larger group of companies controlled by Baxter. There are limitations inherent in the preparation of all carve-out

 

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financial statements due to the fact that the company’s business was previously part of a larger organization. The basis of preparation included in the combined financial statements provides a detailed description of the treatment of historical transactions. The company’s net income has been most notably impacted by the following consequences of carve-out accounting and the planned separation:

 

    Baxter utilizes a centralized treasury management system and cash or debt was not allocated to Baxalta in the carve-out financial statements. In connection with the separation, the capital structures of both companies will be re-aligned on or before the distribution date, resulting in Baxalta incurring debt and having adequate cash to fund its operations. The indebtedness will cause Baxalta to record interest expense in future periods. Any additional borrowings entered into in the future will increase interest expense.

 

    The combined statements of income include an allocation to the company from Baxter for the services provided by various Baxter functions including, but not limited to, executive oversight, treasury, finance, legal, human resources, tax planning, internal audit, financial reporting, information technology and investor relations. The amounts of these allocations may not necessarily be indicative of the similar costs the company will incur as an independent, standalone company. The total amount allocated to Baxalta from Baxter was $538 million, $596 million, and $594 million, in 2014, 2013 and 2012, respectively, and $132 million and $130 million during the three months ended March 31, 2015 and 2014, respectively.

 

    The company has incurred certain one-time separation costs, which are primarily associated with the design and establishment of Baxalta as a standalone public company. Included in results of operations are pre-tax separation costs of $56 million during the year ended December 31, 2014 and $43 million during the three months ended March 31, 2015. The company expects to incur additional separation costs both before and after the separation, certain of which may be capitalized in relation to operating infrastructure such as information technology.

 

    Income tax expense is computed on a separate company basis, as if operated as a standalone entity or a separate entity or a separate consolidated group in each material jurisdiction in which the company operates. As a result of potential changes to the company’s business model and potential future tax planning, income tax expense included in the combined financial statements may not be indicative of the company’s future expected tax rate.

 

    Concurrent with the separation, Baxalta will enter into a contract manufacturing agreement with Baxter whereby Baxalta and Baxter will produce certain products for one another at agreed upon terms. As products were historically transferred at cost between Baxter and the businesses that comprise Baxalta, these contract manufacturing agreements will result in changes to both sales and cost of goods sold in future periods.

Discontinued Operations

The company completed the divestiture of its commercial vaccines business in 2014 and recorded an after-tax gain of $417 million, which is reported in income from discontinued operations. The company entered into a separate agreement to sell the remainder of the vaccines business, which includes certain R&D programs, in December 2014. The operating results of the vaccines business have been reflected as discontinued operations for all periods presented. Refer to Note 17 to the combined financial statements and Note 13 to the condensed combined interim financial statements for additional information regarding the presentation of the vaccines business. Unless otherwise stated, financial results discussed herein reflect continuing operations.

 

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RESULTS OF OPERATIONS—Three Months Ended March 31, 2015 and 2014

Special Items

The following table provides a summary of the company’s special items and the related impact by line item on the company’s results of operations for the three months ended March 31, 2015 and 2014.

 

     Three months ended March 31,  
(in millions)          2015                  2014        

Gross Margin

     

Intangible asset amortization expense

   $ (8    $ (3

Business optimization items

     —          (2
   

Total Special Items

$ (8 $ (5
   
                   

Impact on Gross Margin Ratio

  (0.6 pts   (0.4 pts
   

Selling, General and Administrative Expenses

Plasma related litigation

$ —     $ (10

Business optimization items1

  (1   —    

Separation costs

  36     —    
   

Total Special Items

$ 35   $ (10
   

Impact on Selling, General and Administrative Expense Ratio

  2.6 pts      (0.8 pts
                   
   

Research and Development Expenses

Business optimization items1

$ (6 $ 6   

Upfront and milestone payments to collaboration partners

  —       25   

Separation costs

  7     —    
   

Total Special Items

$ 1   $ 31   
                   
   

Income Tax Expense

Impact of special items

$ (11 $ (2
   

Total Special Items

$ (11 $ (2
                   
   

Impact on Effective Tax Rate

  (0.8 pts   0.9 pts   
   

Total Special Items, net of tax

$ 33    $ 24   
                   
   
  1  Includes a portion allocated from Baxter related to shared activities or functions.

Intangible asset amortization expense is identified as a special item to facilitate an evaluation of current and past operating performance, particularly in terms of cash returns, and is similar to how management internally assesses performance. Upfront and milestone payments related to collaborations that have been expensed as R&D are uncertain and often result in a different payment and expense recognition pattern than internal R&D activities and therefore are typically treated as special items. Refer to the “Research and Development Expenses” caption below for additional information regarding the company’s upfront and milestone payments to collaboration partners. Additional special items are identified above because they are highly variable, difficult to predict, and of a size that may substantially impact the company’s reported operations for a period. The special items identified in the periods presented above reflect the portions of special items reported by Baxter that were attributable to Baxalta. Management believes that providing the separate impact of the above items on the company’s GAAP (generally accepted accounting principles) results, when used in conjunction with the results presented in accordance with GAAP, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another.

 

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The company’s results in the three months ended March 31, 2015 and 2014 were impacted by costs associated with the company’s execution of certain strategies to optimize its organizational structure, as well as benefits from adjustments to previous estimates. The company recorded a net pre-tax benefit related to business optimization initiatives, including a portion allocated from Baxter related to shared functions or activities, of $7 million during the three months ended March 31, 2015 and a net charge of $8 million during the three months ended March 31, 2014. The business optimization items impacted R&D expenses and selling, general and administrative expenses during the three months ended March 31, 2015 and R&D expenses and cost of sales during the three month period ending March 31, 2014.

During the three months ended March 31, 2015, the company recorded $43 million of separation costs related to expenses incurred to prepare Baxalta to operate as an independent standalone public company within selling, general and administrative expenses and R&D expenses. During the three months ended March 31, 2014, selling, general and administrative expenses included a $10 million benefit for the reversal of a portion of legal related charges, previously recorded in 2013, following the settlement of class-action litigation associated with pricing of plasma-derived therapies. Income tax expense in both periods included the net tax benefit from the special pre-tax items discussed above.

Net Sales

 

            Percent change        
     Three months ended
March 31
     At actual
currency

rates
    At constant
currency

rates
 
(in millions)    2015      2014       

United States

   $ 755       $ 706         7     7

International

     606         623         (3 %)      10
   

Total net sales

$ 1,361    $ 1,329      2   8
   

Foreign currency unfavorably impacted net sales by six percentage points during the first quarter of 2015 as compared to the prior period principally due to the strengthening of the U.S. Dollar relative to the Euro as well as certain other currencies.

The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. The company believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate a fuller analysis of the company’s results of operations, particularly in evaluating performance from one period to another.

 

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The table below presents sales results for Baxalta’s four product categories. The commentary beneath discusses growth drivers at constant currency rates.

 

                   Percent change  
     Three months ended
March 31
     At actual
currency
rates
    At constant
currency
rates
 
(in millions)    2015      2014       

Hemophilia

          

United States

   $ 305       $ 297         3     3

International

     336         378         (11 %)      1
   

Total

$ 641    $ 675      (5 %)    2
   

Immunoglobulin

United States

$ 328    $ 307      7   7

International

  92      91      1   15
   

Total

$ 420    $ 398      6   9
   

Inhibitors

United States

$ 63    $ 44      43   43

International

  103      108      (5 %)    8
   

Total

$ 166    $ 152      9   18
   

BioTherapeutics

United States

$ 59    $ 58      2   2

International

  75      46      63   78
   

Total

$ 134    $ 104      29   36
   

Total net sales

$ 1,361    $ 1,329      2   8
   
   

Hemophilia includes sales of recombinant and plasma-derived hemophilia products (primarily factor VIII and factor IX).

 

    Net sales growth was driven primarily by increased international demand for the company’s recombinant factor VIII therapy, ADVATE, including the impact of new multi-year tender awards in Australia and the U.K. Also contributing was increased prophylactic use of ADVATE in the United States and continued growth of RIXUBIS, which the company launched in 2013. Globally, ADVATE contributed approximately 3 percentage points to the Hemophilia product category’s net sales growth rate. Partially offsetting during the period was the impact of a reimbursement assistance program recently implemented in the United States, which unfavorably impacted pricing, competition from an extended half-life factor VIII therapy in the United States, and lower volumes of plasma-derived therapies. Globally, plasma-derived therapies negatively impacted the Hemophilia net sales growth rate by approximately 2 percentage points and was largely driven by the timing of certain tenders.

The company expects growth in the Hemophilia product category in 2015 to continue to be impacted by competition from new entrants, including the competitive extended half-life recombinant factor VIII therapy launched in the United States during 2014. The company submitted a Biologics License Application for BAX 855, the company’s own investigational extended half-life factor VIII treatment for hemophilia A, to FDA in the fourth quarter of 2014 following positive topline results from the phase III clinical trial. In addition, the company expects long-term growth in the Hemophilia product category, driven by strong underlying global demand, further penetration in markets outside the United States, the new multi-year tenders, and the launch of new therapies in the coming months and years across a variety of geographies, including BAX 855.

 

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Immunoglobulin Therapies includes sales of the company’s antibody-replacement immunoglobulin therapies.

 

    Net sales growth was driven by increased global demand for GAMMAGARD LIQUID, as well as the launch of HYQVIA, the company’s differentiated immunoglobulin therapy, in the United States in late 2014. International sales growth of GAMMAGARD LIQUID was driven by increased supply and continued penetration into certain markets while growth in the United States included both volume and pricing improvements. Globally, GAMMAGARD LIQUID and HYQVIA contributed approximately 7 and 2 percentage points, respectively, to the Immunoglobulin Therapies net sales growth rate.

To support expected long-term demand for the company’s immunoglobulin therapies, including HYQVIA, Baxalta is expanding its capacity across its network, including a manufacturing services agreement with Sanquin Blood Supply Foundation of the Netherlands and construction of a new manufacturing facility in Covington, Georgia.

Inhibitor Therapies include sales of the company’s products to treat patients with congenital hemophilia A or B who have developed inhibitors as well as patients that have developed acquired hemophilia A due to an inhibitor.

 

    Growth in net sales was driven by strong global demand for the company’s plasma-based inhibitor bypass therapy, FEIBA. Continued advancement in prophylactic use and pricing improvements contributed to the strong growth in the United States, while penetration into emerging markets drove international growth. Globally, FEIBA contributed approximately 13 percentage points to the Inhibitor Therapies net sales growth rate. The late 2014 U.S. launch of OBIZUR, a recombinant porcine factor VIII therapy for the treatment of acquired Hemophilia A, also contributed to the product category’s net sales growth during the period.

BioTherapeutics includes sales of the company’s plasma-based therapies to treat alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions.

 

    Net sales increased primarily due to strong demand for the company’s albumin therapies, including increased volumes in China as the company previously resolved licensure delays that impacted shipments in the first quarter of 2014. Globally, the company’s albumin products contributed 26 percentage points to the BioTherapeutics product category’s net sales growth rate. Also contributing were revenues recorded from a contract manufacturing agreement related to the divested commercial vaccines business, which contributed approximately 8 percentage points to the product category’s net sales growth rate.

Expenses and Expense Ratios

 

     Three months ended
March 31
       
(as a percent of net sales)    2015     2014     Change  

Gross margin

     58.0     57.9     0.1 pts  

Selling, general and administrative expense ratio

     20.8     16.7     4.1 pts   
   

Gross Margin

The special items identified above had an unfavorable impact of 0.6 and 0.4 percentage points on the gross margin percentage during the three months ended March 31, 2015 and 2014, respectively. Refer to the “Special Items” caption above for additional details.

Excluding the impact of special items, gross margin percentage increased modestly during the three months ended March 31, 2015 as compared to the prior year period. The increase was driven by sales growth and pricing

 

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improvements for FEIBA and a favorable impact from foreign currency exchange rate fluctuations. Partially offsetting were higher manufacturing costs for plasma-derived products, including increased production in the Company’s Los Angeles fractionation facility and timing of a planned temporary facility shutdown.

Selling, General and Administrative Expenses

The special items identified above had an unfavorable impact of 2.6 percentage points and a favorable impact of 0.8 percentage points on the selling, general and administrative expense ratio during the three months ended March 31, 2015 and 2014, respectively. Refer to the “Special Items” caption above for additional detail.

Excluding the impact of the special items from both periods, the selling, general and administrative expense ratio increased during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. Leverage from higher sales was more than offset by investments to support international operations and marketing initiatives related to new product launches.

Following the separation, the composition of Baxalta’s selling, general and administrative expenses will change. The company will no longer receive an allocation of costs from Baxter associated with certain corporate or other functions and will incur costs associated with operating as a standalone public company. As a result, selling, general and administrative expenses and the selling, general and administrative expense ratio included in or calculated from the company’s results of operations prior to the separation may not be indicative of the company’s expenses or ratio following the separation. Refer to Note 12 to the unaudited condensed combined interim financial statements for additional information regarding allocated costs from Baxter.

Business Optimization Items

The company has implemented certain business optimization initiatives in an effort to streamline its international operations, rationalize its manufacturing facilities, enhance its general and administrative infrastructure and re-align or cancel certain R&D activities and programs.

During the three months ended March 31, 2015, the company recorded charges of $3 million allocated from Baxter and benefits of $10 million resulting from adjustments to previous estimates. The company does not expect a material amount of savings associated with charges recorded during the three months ended March 31, 2015.

The company estimates that business optimization activities from 2012 through 2014 have resulted in total annualized savings of approximately $60 million as of March 31, 2015. The company expects additional annualized savings of $19 million when the programs are fully implemented in 2016. The savings from these actions impact cost of sales, selling, general and administrative expenses and R&D expenses. Refer to Note 6 to the combined financial statements and Note 5 to the unaudited condensed combined interim financial statements for further information regarding business optimization items.

Research and Development Expenses

 

     Three months ended
March 31
        
(in millions)    2015      2014      Percent change  

Discovery, clinical and lifecycle management

   $ 99       $ 81         22

Upfront and milestone payments to collaboration partners

     —           25         N/M   

Other research and development expenses

     57         57        
   

Total research and development expenses

$ 156    $ 163      (4 %) 
   
   

Discovery, clinical and lifecycle management R&D expenses consist of costs supporting specific R&D projects, including those in the exploratory or preclinical phase, those in early-or late-stage clinical trials, as well

 

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as those pending regulatory approval or supporting development of products that have already obtained regulatory approval. The increase in discovery, clinical and lifecycle management R&D expenses during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was driven by an increase in costs supporting the development of biosimilars and oncology products, as well as an increase in costs supporting the regulatory approval process for BAX855. Partially offsetting was the impact of foreign currency exchange rate fluctuations.

Upfront and milestone payments to collaboration partners in the three months ended March 31, 2014 of $25 million consisted of payments to Coherus related to the development of a biosimilar to ENBREL® (etanercept).

Other research and development expenses include costs not directly attributable to individual projects and include depreciation and other facility-based expenses, medical and regulatory affairs functions, pharmacovigilance, other infrastructure and management costs supporting multiple projects, business optimization items, and separation costs. Other research and development expenses during the three months ended March 31, 2015 included a benefit of $6 million for adjustments to estimates of prior period business optimization charges and separation costs of $7 million. Other research and development expenses during the three months ended March 31, 2014 included business optimization charges of $6 million. Excluding the impact of business optimization items and separation costs, other research and development expenses increased during the three months ended March 31, 2015 as compared to the prior year due primarily to investments the company made in its medical affairs function.

Other (Expense) Income, Net

Other (expense) income, net was $12 million of expense during the three months ended March 31, 2015 and $23 million of income during the three months ended March 31, 2014. Included in other (expense) income, net during the three months ended March 31, 2015 was other-than-temporary impairment charges of $9 million based on the duration of declines in the fair value of two of the company’s investments. Other (expense) income, net during the three months ended March 31, 2014 included equity method investment income of $25 million.

Income Taxes

Effective Income Tax Rate

The company’s effective income tax rate from continuing operations was 22.7% and 24.3% during the three months ended March 31, 2015 and 2014, respectively. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective income tax rate decreased during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 primarily due to R&D charges associated with milestone payments made to collaboration partners during the three months ended March 31, 2014 that were deductible at tax rates lower than the effective tax rate and separation costs incurred during the three months ended March 31, 2015 that were deductible at tax rates higher than the effective rate. Additionally, during the three months ended March 31, 2015, the company favorably resolved certain miscellaneous tax contingent liabilities.

 

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RESULTS OF OPERATIONS—Years Ended December 31, 2014, 2013 and 2012

Special Items

The following table provides a summary of the company’s special items and the related impact by line item on the company’s results of operations for 2014, 2013, and 2012.

 

years ended December 31 (in millions)    2014     2013     2012  

Gross Margin

      

Intangible asset amortization expense

   $ (16   $ (16   $ (16)   

Business optimization items1

     (1     (5     (19)   
   

Total Special Items

$ (17 $ (21 $ (35)   
   
   

Impact on Gross Margin Ratio

  (0.3 pts   (0.4 pts   (0.7 pts)   
   

Selling, General and Administrative Expenses

Plasma related litigation

$ (10 $ 84    $ —     

Business optimization items1

  —        16      16    

Separation costs

  43      —       —    

Branded Prescription Drug Fee

  26      —       —    

Turkey VAT charge

  —       8      —    

Pension settlement charge allocated from Baxter

  —       —       72    
   

Total Special Items

$ 59    $ 108    $ 88    
   
   

Impact on Selling, General and Administrative Expense Ratio

  1.0 pts      1.9 pts      1.7 pts    
   

Research and Development Expenses

Business optimization items1

$ 21    $ 24    $ 16    

Upfront and milestone payments to collaboration partners

  217      78      113    

Separation costs

  13      —       —    
   

Total Special Items

$ 251    $ 102    $ 129    
   
   

Other Expense, Net

Change in fair value of contingent payment liabilities

$ 124    $ 18    $ —    

Other-than-temporary impairment charge

  45      —       —    
   

Total Special Items

$ 169    $ 18    $ —    
   
   

Income Tax Expense

Impact of special items

$ (97 $ (105 $ (67)   
   

Total Special Items

$ (97 $ (105 $ (67)   
   
   

Impact on Effective Tax Rate

  0.7 pts      (2.9 pts   (0.5 pts)   
   

Total Special Items, net of tax

$ 399    $ 144    $ 185    
   
   
  1  Includes a portion allocated from Baxter related to shared activities or functions.

Refer to the “Special Items” caption in the “Results of Operations—Three Months Ended March 31, 2015 and 2014” section for further discussion regarding the reasons for providing separate impact of intangible amortization expense, upfront and milestone payments to collaboration partners and other items above.

The company’s results in 2014, 2013 and 2012 were impacted by costs associated with the company’s execution of certain strategies to optimize its organizational structure. These actions included streamlining the company’s international operations, rationalizing its manufacturing facilities, improving its general and administrative infrastructure, and re-aligning or cancelling certain R&D activities and programs. The company recorded net pre-tax charges related to business optimization initiatives, including a portion allocated from

 

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Baxter, of $22 million, $45 million, and $51 million in 2014, 2013, and 2012, respectively, which impacted cost of sales, selling, general and administrative expenses and R&D expenses. The 2014 net business optimization charge included adjustments of $12 million, including a portion allocated from Baxter, for reserves that are no longer probable of being utilized.

The company recorded legal related charges in selling, general and administrative expenses during 2013 totaling $84 million for class-action litigation associated with pricing of plasma-derived therapies, $10 million of which was reversed in 2014 following the settlement of the plasma-related litigation.

The company recorded losses in other expense, net of $124 million in 2014 and $18 million in 2013 resulting from increases in the fair value of a contingent payment liability associated with the acquisition of OBIZUR and related assets from Inspiration BioPharmaceuticals, Inc. and Ipsen Pharma S.A.S. (Inspiration / Ipsen).

In 2014, cost of sales, selling, general and administrative expenses and R&D expenses included separation costs totaling $56 million related to expenses incurred to prepare Baxalta to operate as an independent, standalone public company. Selling, general and administrative expenses in 2014 also included a charge of $26 million to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued by the Internal Revenue Service. Other expense, net in 2014 included a $45 million other-than-temporary impairment charge to write-down the company’s investment in the common stock of Onconova Therapeutics, Inc. (Onconova) to its fair value.

In 2013, selling, general and administrative expenses included an $8 million charge related to VAT matters in Turkey. In 2012, the company recorded charges within selling, general and administrative expenses of $72 million related to pension settlements in the United States that were allocated from Baxter.

Income tax expense in 2014, 2013 and 2012 included the net tax benefit from the special pre-tax items discussed above. In addition, income tax expense in 2013 included a benefit of $34 million related to the reversal of accruals for uncertain tax positions in Switzerland.

Net Sales

 

                          Percent change  
                          At actual
currency rates
    At constant
currency rates
 
years ended December 31 (in millions)    2014      2013      2012      2014     2013     2014     2013  

United States

   $ 3,016       $ 2,861       $ 2,687         5     6     5     6

International

     2,936         2,694         2,623         9     3     11     3
                                                             

Total net sales

$ 5,952    $ 5,555    $ 5,310      7   5   8   5
                                                             
                                                             

Foreign currency fluctuations unfavorably impacted the net sales growth rate by one percentage point in 2014 as compared to 2013 primarily due to the strengthening of the U.S. Dollar relative to several currencies, including the Japanese Yen. Foreign currency fluctuations did not have a significant impact on the 2013 net sales growth rate as compared to 2012 as the favorable impact of a weaker U.S. Dollar relative to the Euro was offset by the unfavorable impact of a stronger U.S. Dollar relative to the Japanese Yen.

Refer to the “Net Sales” caption in the “Results of Operations—Three Months Ended March 31, 2015 and 2014” section for a description of net sales growth at constant currency rates and reasons for use of this non-GAAP measure.

 

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The table below presents sales results for Baxalta’s four product categories. The commentary beneath discusses growth drivers at constant currency rates.

 

                          Percent change  
                          At actual
currency rates
    At constant
currency rates
 
years ended December 31 (in millions)    2014      2013      2012      2014     2013     2014     2013  

Hemophilia

                 

United States

   $ 1,281       $ 1,216       $ 1,141         5     7     5     7%    

International

     1,703         1,570         1,486         8     6     11     7%    
                                                             

Total

$ 2,984    $ 2,786    $ 2,627      7   6   8   7%    
                                                             

Immunoglobulin Therapies

United States

$ 1,272    $ 1,228    $ 1,161      4   6   4   6%    

International

  405      388      422      4   (8 %)    7   (8%)   
                                                             

Total

$ 1,677    $ 1,616    $ 1,583      4   2   5   2%    
                                                             

Inhibitor Therapies

United States

$ 219    $ 194    $ 179      13   8   13   8%    

International

  525      457      435      15   5   16   7%    
                                                             

Total

$ 744    $ 651    $ 614      14   6   15   7%    
                                                             

BioTherapeutics

United States

$ 244    $ 223    $ 206      9   8   9   8%    

International

  303      279      280      9   0   10   (1%)   
                                                             

Total

$ 547    $ 502    $ 486      9   3   10   3%    
                                                             

Total net sales

$ 5,952    $ 5,555    $ 5,310      7   5   8   5%    
                                                             
                                                             

Hemophilia includes sales of recombinant and plasma-derived hemophilia products (primarily factor VIII and factor IX).

 

    Sales growth in both 2014 and 2013 was driven by strong global demand for the recombinant factor VIII therapy, ADVATE, including increased shipments to Brazil as part of the company’s exclusive partnership with Hemobrás. Globally, growth in ADVATE contributed approximately 8 percentage points and 6 percentage points to the Hemophilia net sales growth rate in 2014 and 2013, respectively. Additionally, the launch of RIXUBIS in late 2013 contributed approximately 1 percentage point to the 2014 Hemophilia growth rate.

Immunoglobulin Therapies includes sales of the company’s antibody-replacement immunoglobulin therapies.

 

    Sales increased in 2014 primarily due to increased demand in the United States for GAMMAGARD LIQUID and continued penetration into certain emerging markets, partially offset by lower net pricing in the United States due to shifts in channel mix and increased customer incentives. Globally, GAMMAGARD LIQUID contributed approximately 2 percentage points to the Immunoglobulin Therapies growth rate in 2014. HYQVIA, a differentiated subcutaneous immunoglobulin therapy for the treatment of primary immunodeficiency syndrome, was launched in the United States in the second half of 2014 and contributed approximately 2 percentage points to the 2014 growth rate. In 2013, sales increased primarily due to improved product availability and accelerated demand for GAMMAGARD LIQUID, particularly in the United States. Sales growth in 2013 was partially offset by lower international sales as a result of the impact from exiting certain markets due to previous supply constraints. Globally, GAMMAGARD LIQUID contributed 3 percentage points to the Immunoglobulin Therapies growth rate in 2013.

 

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Inhibitor Therapies include sales of the company’s products to treat patients with congenital hemophilia A or B who have developed inhibitors as well as patients that have developed acquired hemophilia A due to an inhibitor.

 

    Sales growth in 2014 was driven by strong global demand for the company’s plasma-based inhibitor bypass therapy, FEIBA. Strong demand in the United States was due in part to increased prophylactic use, which was approved by FDA in late 2013. International sales growth was driven by continued prophylactic use and continued penetration into emerging markets. Sales growth in 2013 was primarily due to higher volumes in Europe driven in part from increased prophylactic use, as well as increased volumes in the United States. FEIBA contributed nearly all of the 15 percentage points and 7 percentage points of Inhibitor Therapies net sales growth rate in 2014 and 2013, respectively.

BioTherapeutics includes sales of the company’s plasma-based therapies to treat alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute blood-related conditions.

 

    Sales increased during 2014 primarily due to increased demand for the company’s albumin products within the United States and several emerging markets. Partially offsetting was lower albumin sales in China due to licensure delays that impacted shipments in the first half of 2014. Globally, albumin products contributed 10 percentage points to the BioTherapeutics net sales growth rate in 2014. In 2013, sales growth was primarily due to improved product availability and accelerated demand of albumin and Alpha-1 treatments in the United States.

Expenses and Expense Ratios

 

                          Change  
years ended December 31 (as a percent of net sales)    2014      2013      2012      2014      2013  

Gross margin

     59.0%         58.1%         57.8%         0.9 pts          0.3 pts   

Selling, general and administrative expense ratio

     17.7%         18.3%         17.2%         (0.6 pts)         1.1 pts   
                                              

Gross Margin

The special items identified above had an unfavorable impact of 0.3, 0.4 and 0.7 percentage points on the gross margin percentage in 2014, 2013, and 2012, respectively. Refer to the “Special Items” caption above for additional details.

Excluding the impact of the special items, gross margin percentage improved in 2014 as compared to 2013 driven by growth in higher margin products, including ADVATE and FEIBA, and lower pension expense allocated from Baxter partially offset by an unfavorable impact from foreign currency fluctuations.

Excluding the impact of the special items, the gross margin percentage in 2013 was unchanged compared to 2012. Growth in higher margin products, including ADVATE and FEIBA, was offset by government austerity measures that negatively impacted selling prices of certain products in select markets, the realization of additional costs associated with the modification and ramp-up of production at the company’s Los Angeles fractionation facilities and the impact of increased pension expense allocated from Baxter.

Selling, General and Administrative Expenses

The special items identified above had an unfavorable impact of 1.0, 1.9 and 1.7 percentage points on the selling, general and administrative expense ratio in 2014, 2013, and 2012, respectively. Refer to the “Special Items” caption above for additional detail.

Excluding the impact of the special items, the selling, general and administrative expense ratio increased in 2014 compared to 2013 and in 2013 compared to 2012. Select investments and spending on marketing and promotional programs for new launches and initiatives were the primary drivers in both periods. Partially

 

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offsetting in both periods was leverage from higher sales, savings from the company’s business optimization initiatives and continued focus on controlling discretionary spending. Pension expense allocated from Baxter had a favorable impact in 2014 as compared to 2013 and an unfavorable impact in 2013 as compared to 2012.

Following the separation, the composition of Baxalta’s selling, general and administrative expenses will change. The company will no longer receive an allocation of costs from Baxter associated with certain corporate or other functions and will incur costs associated with operating as a standalone public company. As a result, selling, general and administrative expenses and the selling, general and administrative expense ratio included in or calculated from the company’s results of operations prior to the separation may not be indicative of the company’s expenses or ratio following the separation. Refer to Note 16 to the combined financial statements for additional information regarding allocated costs from Baxter.

Pension Plan Costs

For pension plans in Austria, Baxalta has been deemed to be the sole sponsor. Within the United States and other countries, Baxalta employees participate in pension plans sponsored by Baxter. Baxalta records pension expense related to its employees that participate in any of these plans. Baxalta’s results of operations also include an allocation from Baxter, which includes pension costs associated with corporate, shared, or inactive employees. In aggregate, excluding the impact of U.S. pension obligation settlement charges in 2012 allocated from Baxter, costs associated with pension plans decreased $33 million in 2014 and increased $23 million in 2013. The decrease in 2014 as compared to 2013 was driven by a decrease in amortization of actuarial losses. The increase in 2013 compared to 2012 was primarily driven by lower interest rates used to discount the plans’ projected benefit obligations and an increase in amortization of actuarial losses.

Business Optimization Items

The company has implemented certain business optimization initiatives in an effort to streamline its international operations, rationalize its manufacturing facilities, enhance its general and administrative infrastructure and re-align or cancel certain R&D activities and programs.

In 2014, the company recorded net business optimization charges from continuing operations of $22 million. The net business optimization charges in 2014 included $12 million of adjustments for reserves that are no longer probable of being utilized, including a portion allocated from Baxter. The savings from these actions will impact primarily cost of sales. The company expects annualized savings of approximately $7 million when these programs are fully implemented in 2016.

The company has previously recognized business optimization charges of $45 million and $51 million in 2013 and 2012, respectively, associated with initiatives that the company estimates have resulted in annualized savings of approximately $51 million as of December 31, 2014. The company expects additional annualized savings of approximately $21 million when these programs are fully implemented in 2016. The savings from these actions impact cost of sales, selling, general and administrative expenses and R&D expenses. Refer to Note 6 to the combined financial statements for further information regarding business optimization items.

Research and Development Expenses

 

                          Percent change  
years ended December 31 (in millions)    2014      2013      2012      2014     2013  

Discovery, clinical and lifecycle management

   $ 340       $ 289       $ 261         18     11%    

Upfront and milestone payments to collaboration partners

     217         78         113         178     (31%)   

Other research and development expenses

     263         228         207         15     10%    
                                             

Total research and development expenses

$ 820    $ 595    $ 581      38   2%    
                                             
                                             

 

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Discovery, clinical and lifecycle management R&D expenses consist of costs supporting specific R&D projects, including those in the exploratory or preclinical phase, those in early-or late-stage clinical trials, as well as those pending regulatory approval or supporting development of products that have already obtained regulatory approval. The increase in discovery, clinical and lifecycle management R&D expenses in 2014 as compared to 2013 was primarily due to an increase in expenses supporting the development of BAX855, the company’s extended half-life recombinant factor VIII therapy for Hemophilia A which was submitted for regulatory approval in the United States in December 2014, and biosimilars. Partially offsetting were lower expenses associated with the company’s Alzheimer’s program, which was suspended in 2013 following a Phase III trial which did not meet its primary endpoint. The increase in discovery, clinical and lifecycle management R&D expenses in 2013 as compared to 2012 was driven by an increase in expenses supporting the development of BAX 855, biosimilars and OBIZUR, as well as an increase in expenses supporting continued development of marketed products. OBIZUR was approved and launched in the United States in 2014. Partially offsetting was lower expenses associated with the company’s Alzheimer’s program.

Upfront and milestone payments to collaboration partners in 2014 of $217 million consisted of payments to Merrimack related to the development of MM-398, a pancreatic cancer drug candidate, to Coherus related to the development of a biosimilar to ENBREL® (etanercept), to CTI BioPharma related to the development of pacritinib, and to Momenta related to the development of biosimilars. Upfront and milestone payments to collaboration partners in 2013 of $78 million consisted primarily of payments to Coherus and CTI BioPharma. Upfront and milestone payments to collaboration partners in 2012 of $113 million consisted of payments to Chatham related to the development of potential treatments for hemophilia utilizing proprietary gene therapy technology, to Onconova related to the development of rigosertib, and to Momenta.

Other research and development expenses include costs not directly attributable to individual projects and include depreciation and other facility-based expenses, medical and regulatory affairs functions, pharmacovigilance, other infrastructure and management costs supporting multiple projects, business optimization charges, and separation costs. Business optimization charges reported in R&D expenses were $21 million in 2014, $24 million in 2013, and $16 million in 2012 as further discussed above under the “Business Optimization Items” caption. Separation costs reported in R&D expenses were $13 million in 2014. Excluding the impact of business optimization charges and separation costs, other research and development expenses increased in 2014 as compared to 2013 primarily due to investments the company made in its medical affairs function. In 2013 as compared to 2012, other research and development expenses increased in support of a number of key projects in the company’s R&D pipeline and geographic expansion.

Other Expense, Net

Other expense, net was $104 million in 2014, $1 million in 2013, and $15 million in 2012. During 2014 and 2013, other expense, net included losses of $124 million and $18 million, respectively, resulting from increases in the fair value of a contingent payment liability associated with the acquisition of OBIZUR and related assets from Inspiration / Ipsen. Other expense, net also included income from equity method investments of $64 million and $23 million in 2014 and 2013, respectively, which primarily represented distributions from funds that sold portfolio companies as well as gains from the sale of certain investments. Also included in other expense, net during 2014 was a $45 million other-than-temporary impairment charge to write-down the company’s investment in the common stock of Onconova to its fair value.

Income Taxes

Effective Income Tax Rate

The effective income tax rate was 22.6% in 2014, 20.1% in 2013, and 22.8% in 2012. The company’s effective tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes and foreign taxes that are different than the U.S. federal statutory rate. The average foreign effective tax rate on international pre-tax income was 5.4%, 5.3%, and 7.8% for the years ended

 

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December 31, 2014, 2013 and 2012, respectively. The company’s average foreign effective tax rate was lower than the U.S. federal statutory rate as a result of the impact of tax incentives in Switzerland and certain other tax jurisdictions outside of the United States, as well as foreign earnings in tax jurisdictions with lower statutory rates than the United States. In addition, as discussed further below, the company’s effective income tax rate can be impacted in each year by discrete factors or events. Refer to Note 13 to the combined financial statements for further information regarding the company’s income taxes.

The company’s effective income tax rate in 2014 increased as compared to 2013 due primarily to an increase in the company’s annual fee on Branded Prescription Pharmaceuticals Manufacturers and Importers, which is not deductible for federal income tax purposes, a change to the earnings mix from lower tax to higher tax rate jurisdictions, and a reduction in uncertain tax position benefits.

The company’s effective income tax rate in 2013 decreased as compared to 2012 due primarily to the reduction of uncertain tax positions for matters that have been settled by the taxing authorities as well as a law change allowing for a credit for research and experimental activities which previously expired in 2012. Partially offsetting was a change to the earnings mix from lower tax to higher tax rate jurisdictions compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Baxalta has historically participated in Baxter’s centralized treasury management including centralized cash pooling and overall financing arrangements. Baxalta has generated and expects to continue to generate positive cash flow from operations on an annual basis. Net cash provided from (used for) financing activities in the historical periods primarily reflects changes in Baxter’s investment in Baxalta. Baxalta has not reported cash or cash equivalents on its balance sheet for the periods presented due to its participation in Baxter’s centralized treasury management.

Subsequent to the separation, Baxalta will no longer participate in cash management and funding arrangements with Baxter. Baxalta’s ability to fund its operations and capital needs will depend on its ongoing ability to generate cash from operations and access to capital markets, as further described under the “Debt and Capital” caption below. Baxalta’s principal uses of cash in the future will be primarily to fund its operations, working capital needs, capital expenditures, repayment of borrowings and strategic investments.

A significant portion of the company’s net cash from operations is generated within the United States, allowing the company to indefinitely reinvest a portion of its foreign earnings in jurisdictions outside of the United States. The company believes its U.S. cash flows from operations together with repatriations of foreign earnings that are not deemed permanently invested are adequate to meet its ongoing cash flow obligations in the United States.

Debt and Capital

Baxalta issued $5 billion of debt in advance of the separation, of which approximately $4 billion was paid to Baxter as a cash distribution as partial consideration for the contribution of assets to Baxalta by Baxter in connection with the separation. Following the debt issuance, cash distribution to Baxter and cash contributed from Baxter in connection with the formation of various Baxalta entities, Baxalta expects to begin operations as an independent company with approximately $1.8 billion of cash and cash equivalents. The company believes that its financing arrangements described above, future cash from operations, and access to capital markets will provide adequate resources to fund its future cash flow needs. Refer to the “Description of Material Indebtedness” section of this prospectus for further details on the company’s expected financing arrangements.

 

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Historical Cash Flow Trends

 

     Three months ended
March 31,
    Year ended December 31,  
(in millions)    2015     2014      2014     2013     2012  

Net cash (used for) provided from operations

   $ (142   $ (168   $ 1,373      $ 1,548      $ 1,408   

Net cash used for investing activities

     (547     (206     (501     (977     (697

Net cash provided from (used for) financing activities

     689        374        (872     (571     (711
   

Change in cash and cash equivalents

$ —     $ —     $ —     $ —     $ —    
   
   

Net Cash (Used For) Provided From Operations

The decrease in net cash used for operations during the first three months of 2015 as compared to 2014 was driven by lower cash outflows for tax related items partially offset by significant accounts receivable collections in the United States and certain international markets during the first three months of 2014 and lower net income during the first three months of 2015. The company maintains an income taxes payable to/from account with Baxter, and is deemed to have settled its current income tax payables with Baxter annually on the first day of each year. This results in significant tax related cash outflows during the first three months of each year that are not repeated during the last nine months of each year. This annual settlement resulted in cash outflows of $352 million and $537 million during the three months ended March 31, 2015 and 2014, respectively, which reflected the full prior year’s current income tax expense and other current tax balances.

Net cash provided from operations decreased in 2014 as compared to 2013 as the impact of sales growth was more than offset primarily by an increase in tax-related items, increased payments to collaboration partners upon the achievement of R&D related milestones, and the settlement of the company’s plasma-related litigation in 2014.

Net cash provided from operations increased by $140 million in the year ended December 31, 2013 as compared to 2012. The growth in net cash provided from operations was driven primarily by growth in the company’s sales and operating results.

Net Cash Used For Investing Activities

Net cash used for investing activities increased during the three months ended March 31, 2015 as compared to the prior year period due primarily to the acquisition of SuppreMol during the current year period and an increase in capital expenditures. The company’s net cash used for investing activities decreased in 2014 as compared to 2013 due primarily to a cash inflow of $639 million from the sale of the commercial vaccines business partially offset by a $173 million increase in capital expenditures. Capital expenditures drove the increase in cash used for investing activities in 2013 as compared to 2012.

Capital expenditures during the first three months of 2015 and 2014 were $301 million and $219 million, respectively, and $970 million, $797 million and $521 million, in the years ended December 31, 2014, 2013, and 2012, respectively. The increase in capital expenditures in the first three months of 2015 as compared to the first three months of 2014 was driven by increased costs for the construction of the company’s Covington, Georgia manufacturing facility as the company continues to progress towards completion. A significant portion of the construction is expected to be completed by the end of 2015 and commercial production is expected to begin in 2018. Capital expenditures associated with the Covington, Georgia facility also drove the increase in 2014 as compared to 2013 and in 2013 as compared to 2012. Also contributing to the increase in 2013 as compared to 2012 was construction of a manufacturing facility in Singapore, which began commercial production of ADVATE in 2014. The company expects to continue investing in the Singapore facility to add capacity for other products, including BAX855 upon regulatory approval.

 

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Cash outflows for acquisitions, net of cash acquired during the first three months of 2015 was $228 million and reflected the consideration paid for the acquisition of SuppreMol. The company did not have any cash outflows for acquisitions during the three months ended March 31, 2014. For the years ended December 31, 2014, 2013 and 2012, cash outflows for acquisitions, net of cash acquired were $197 million, $163 million and $163 million, respectively. For the year ended December 31, 2014, the cash outflows from acquisitions, net of cash acquired included $100 million for an upfront collaboration payment to Merrimack, $70 million for the acquisition of Chatham and $15 million for the acquisition of AesRx. For the year ended December 31, 2013, the cash outflows for acquisitions, net of cash acquired included a payment of $60 million related to a collaboration agreement with and investment in CTI BioPharma, $51 million for the acquisition of OBIZUR and related assets from Inspiration / Ipsen and $30 million related to an upfront payment to Coherus. For the year ended December 31, 2012, cash outflows for acquisitions, net of cash acquired primarily included a $50 million investment in and a $50 million upfront collaboration payment to Onconova and upfront collaboration payments of $33 million and $30 million related to agreements with Momenta and Chatham, respectively. Refer to Note 4 to the combined financial statements for additional information regarding the company’s acquisitions and collaboration agreements.

Net Cash Provided From (Used For) Financing Activities

Baxter has historically used a centralized approach to cash management and financing of its operations. As a result, the company has not reported cash and cash equivalents on its combined balance sheets. Net cash provided from (used for) financing activities in all periods presented primarily reflected net transactions with Baxter.

Concentrations of Credit Risk

Baxalta engages in business with foreign governments in certain countries that have experienced deterioration in credit and economic conditions, including Greece, Spain, Portugal and Italy. As of March 31, 2015, December 31, 2014 and December 31, 2013, the company’s net accounts receivable from the public sector in these countries totaled $79 million, $88 million and $146 million, respectively.

Contractual Obligations

As of December 31, 2014, the company had contractual obligations, excluding accounts payable and accrued liabilities, payable or maturing in the following periods:

 

(in millions)    Total      Less than
one year
    

One to

three years

    

Three to

five years

    

More than

five years

 

Capital lease obligations, including current maturities and interest(a)

   $ 370       $ 1       $ 40       $ 31       $ 298   

Operating leases

     218         43         72         45         58   

Other long-term liabilities(b)

     1,019                 89         42         888   

Purchase obligations(c)

     1,058         426         431         146         55   
                                              

Contractual obligations

$ 2,665    $ 470    $ 632    $ 264    $ 1,299   
                                              
                                              

 

(a) Interest payments on capital lease obligations are calculated for future periods using interest rates in effect at the end of 2014. The projected payments only pertain to obligations outstanding at December 31, 2014.

 

(b) Other long-term liabilities include long-term obligations recorded on the company’s combined balance sheet as of December 31, 2014 that are not presented separately within the table above. They include the fair value of contingent payment liabilities associated with acquisitions, deferred tax liabilities and the company’s recorded pension obligations.

The company projected the timing of the future cash payments of its other long-term liabilities based on contractual maturity dates (where applicable) and estimates of the timing of payments (for liabilities with no contractual maturity dates). The actual timing of payments could differ from the estimates.

 

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(c) Includes the company’s significant contractual unconditional purchase obligations. For cancelable agreements, any penalty due upon cancellation is included. These commitments do not exceed the company’s projected requirements and are in the normal course of business. Examples include firm commitments for raw material purchases, utility agreements and service contracts.

In addition to amounts in the table above, the company is contractually obligated to pay third parties upon the achievement of development, regulatory and commercial milestones, as well as potential royalty payments, associated with its collaboration agreements. The company’s obligations associated with these arrangements have not been incurred and as such have not been recorded on the company’s combined balance sheet. Potential future milestone payments associated with the company’s collaborations was approximately $2.3 billion as of December 31, 2014, which excludes potential royalty payments. Of the potential $2.3 billion, the company anticipates less than $400 million of potential milestone payments will become payable in 2015. Also excluded from the table above is the company’s unfunded commitment at December 31, 2014 of $32 million as a limited partner in multiple investment companies, in which the timing of future payments is uncertain. As of March 31, 2015, the company increased this unfunded commitment to $80 million. The long-term liability relating to gross unrecognized tax benefits of $99 million at December 31, 2014 has been excluded from the table above due to the uncertainty related to the timing of the reversal.

In 2015, the company entered into a long-term lease agreement for a facility in Bannockburn, Illinois that will serve as Baxalta’s global headquarters following a transition period. The arrangement calls for approximately $65 million in lease payments over an initial term of approximately 13 years.

The table above excludes obligations from financing arrangements that the company expects to enter into prior to the separation.

Off-Balance Sheet Arrangements

Baxalta periodically enters into off-balance sheet arrangements. Certain contingencies arise in the normal course of business, and are not recorded in the combined balance sheet in accordance with GAAP (such as contingent joint development and commercialization arrangement payments). Also, upon resolution of uncertainties, the company may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications). For a discussion of the company’s significant off-balance sheet arrangements, refer to Note 4 to the combined financial statements for information regarding collaboration agreements, Note 9 to the combined financial statements regarding indemnifications and Note 14 to the combined financial statements regarding legal contingencies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Risk

Baxalta operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange rates. Baxalta is primarily exposed to foreign exchange risk with respect to forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Turkish Lira, Russian Ruble, Chinese Renminbi, and Colombian Peso. Baxter maintains a foreign currency risk management program through a central shared entity, which enters into derivative contracts to hedge foreign currency risk associated with forecasted transactions for the entire company, including for Baxalta’s operations. Gains and losses on derivative contracts entered into by Baxter have been allocated to Baxalta and offset gains and losses on underlying foreign currency exposures. The fair value of outstanding derivative instruments have not been allocated to Baxalta’s combined balance sheets. Following the separation, Baxalta intends to implement a foreign currency risk management program on its own behalf.

The company estimates that a hypothetical 10% adverse movement in foreign currency exchange rates would not be material to its financial position, results of operations or cash flows.

 

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Interest Rate and Other Risks

Baxalta’s combined balance sheets and statements of income do not include an allocation of third-party debt or interest expense from Baxter because Baxalta was not the legal obligor of the debt and because Baxter’s borrowings were not directly attributable to Baxalta’s business. Baxalta issued $5 billion of senior notes prior to the separation, at which time its exposure to interest rate risk increased. To mitigate the risk to earnings associated with fluctuations in interest rates related to the anticipated incurrence of debt, the company has entered into forward-starting interest rate swaps with a notional amount of $1.8 billion as of March 31, 2015 and $550 million as of December 31, 2014. The company has designated these forward-starting swaps as cash flow hedges, and the resulting gain or loss from changes in fair value is accumulated in accumulated other comprehensive income and will be recognized in earnings consistent with the underlying hedged debt. The company performed a sensitivity analysis to assess potential impacts of hypothetical movements in interest rates on the fair value of its forward-starting swaps as of March 31, 2015. The sensitivity analysis, while not predictive in nature, indicated that if interest rates increased by 25 basis points, the net liability, net of tax, with respect to the forward-starting swaps would decrease by $39 million, and result in the contracts being in a net asset position. A similar sensitivity analysis performed as of December 31, 2014, indicated that if interest rates increased by 25 basis points, the net liability, net of tax, with respect to the forward-starting swaps would decrease by $11 million, and result in the contracts being in a net asset position.

With respect to the company’s investments, the company believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material to the company’s combined financial position.

CHANGES IN ACCOUNTING STANDARDS

In April 2014, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) which amends the definition of a discontinued operation in Accounting Standard Codifications (ASC) 205-20 and provides additional requirements for the entities with its disposal transaction to qualify as a discontinued operation. ASU 2014-08 is effective prospectively for all disposals beginning on or after December 15, 2014 (with early adoption permitted). The company did not early adopt the new guidance and it is effective for the company for periods beginning with its first interim period ending March 31, 2015. ASU 2014-08 did not have a material impact on the company’s interim combined financial statements upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the company beginning on January 1, 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. In April 2015, the FASB issued an exposure draft that would delay the effective date of the standard by one year and allow early adoption as of the original effective date. The company is currently evaluating the impact of adopting the new revenue standard on its combined financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 2 to the combined financial statements. Certain of the company’s accounting policies are considered critical because these policies are the most important to the depiction of the company’s financial statements and require significant, difficult or complex judgments by the company, often requiring the use of estimates about the effects of matters that are inherently uncertain. Actual results that differ from the company’s estimates could have an unfavorable effect on the company’s results of

 

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operations and financial position. The company applies estimation methodologies consistently from year to year. The following is a summary of accounting policies that the company considers critical to the combined financial statements.

Revenue Recognition and Related Provisions and Allowances

The company’s policy is to recognize revenues from product sales and services when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for the majority of the company’s revenue arrangements are FOB destination.

The company periodically and systematically evaluates the collectability of accounts receivable and determines the appropriate reserve for doubtful accounts. In determining the amount of the reserve, the company considers historical credit losses, the past-due status of receivables, payment history and other customer-specific information, and any other relevant factors or considerations.

Provisions for rebates, chargebacks to wholesalers and distributors, returns, and discounts (collectively, “sales deductions”) are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. The sales deductions are based primarily on estimates of the amounts earned or will be claimed on such sales. The company’s most significant and judgmental sales deductions are rebates and wholesaler and distributor chargebacks.

Rebates include amounts estimated to be paid to third parties based either on contractual obligations that vary by product or customer or statutory requirements. Contractual rebate obligations are based on units sold, customer inventory levels, forecasted customer buying patterns and historical experience. Contractual rebate obligations are settled up to 15 months after date of sale, and accruals are adjusted throughout the contract period as actual contract performance measures become known. Statutory rebate estimates, which include payments under Medicaid, TRICARE and Medicare Part D reimbursement programs, are generally based on historical payment data and estimates of future utilization based on established formulas or requirements, including the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. All liabilities associated with rebates are reviewed regularly taking into consideration known market events and trends as well as internal and external historical data. The company believes the methodology used to accrue rebates is reasonable and appropriate given the current circumstances and facts.

Chargeback provisions are based on the differential of product acquisition prices paid by wholesalers and distributors and prices paid by eligible customers under product pricing or customer contractual agreements, and may fluctuate based on channel strategy shifts, inventory levels, and end customer pricing strategies and mix. Such amounts are generally settled within one year of initial shipment.

Legal Contingencies

The company is involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. The company records a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. The company has established reserves for certain of its legal matters. At December 31, 2014, total legal liabilities were $24 million.

The company’s loss estimates are generally developed in consultation with outside counsel and are based on analyses of potential outcomes. With respect to the recording of any insurance recoveries, after completing the assessment and accounting for the company’s legal contingencies, the company separately and independently

 

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analyzes its insurance coverage and records any insurance recoveries that are probable of occurring at the gross amount that is expected to be collected. In performing the assessment, the company reviews available information, including historical company-specific and market collection experience for similar claims, current facts and circumstances pertaining to the particular insurance claim, the financial viability of the applicable insurance company or companies, and other relevant information.

While the liability of the company in connection with certain claims cannot be estimated with certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s combined financial position. While the company believes it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments or enter into material settlements of claims.

Deferred Tax Asset Valuation Allowances and Reserves for Uncertain Tax Positions

The company maintains valuation allowances unless it is more likely than not that all or a portion of the deferred tax asset will be realized. Changes in valuation allowances are included in the company’s tax provision in the period of change. In determining whether a valuation allowance is warranted, the company evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The realizability assessments made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if the company takes operational or tax planning actions that could impact the future taxable earnings of a subsidiary. The company does not currently have any valuation allowances. In the normal course of business, the company is audited by federal, state and foreign tax authorities, and is periodically challenged regarding the amount of taxes due. These challenges relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. The company believes its tax positions comply with applicable tax law and the company intends to defend its positions. In evaluating the exposure associated with various tax filing positions, the company records reserves for uncertain tax positions in accordance with GAAP, based on the technical support for the positions, the company’s past audit experience with similar situations, and potential interest and penalties related to the matters. The company’s results of operations and effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, the company prevailed in positions for which reserves have been established, or was required to pay amounts in excess of established reserves.

Valuation of Intangible Assets, Including IPR&D

The company acquires intangible assets and records them at fair value. Valuations are generally completed for business acquisitions using a discounted cash flow analysis, incorporating the stage of completion and consideration of market participant assumptions. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.

Acquired in-process R&D (IPR&D) is the value assigned to acquired technology or products under development which have not received regulatory approval and have no alternative future use.

Acquired IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned, the indefinite-lived asset is charged to expense.

 

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R&D acquired in transactions that are not business combinations is expensed immediately. For such transactions, payments made to third parties on or after regulatory approval are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.

Due to the inherent uncertainty associated with R&D projects, there is no assurance that actual results will not differ materially from the underlying assumptions used to prepare discounted cash flow analyses, nor that the R&D project will result in a successful commercial product.

Valuation of Contingent Consideration Resulting from Business Combinations

The company recognizes contingent consideration liabilities resulting from business combinations at estimated fair value on the acquisition date. The contingent consideration liabilities are revalued subsequent to the acquisition date with changes in fair value recognized in earnings. Contingent payments related to acquisitions consist of development, regulatory and commercial milestone payments, in addition to sales-based payments, and are valued using discounted cash flow techniques. Significant estimates and assumptions required for these valuations include the probability of achieving milestones, product sales projections under various scenarios and discount rates used to calculate the present value of the estimated payments. Changes in the fair value of contingent consideration liabilities result from changes in these estimates and assumptions. Significant judgment is employed in determining the appropriateness of the estimates and assumptions as of the acquisition date and in post-acquisition periods. Accordingly, the use of alternative estimates or assumptions would increase or decrease the estimated fair value of contingent consideration liabilities, and could materially impact the company’s results of operations in any given period. At December 31, 2014 the company’s combined balance sheet included $518 million of contingent consideration liabilities resulting from business combinations.

Impairment of Assets

Goodwill and other indefinite-lived intangible assets are subject to impairment reviews annually, and whenever indicators of impairment exist. The company tests the goodwill of its single reporting unit in the fourth quarter of each year. No goodwill impairment was recorded in 2014, 2013 or 2012. The results of the 2014 impairment test indicated the fair value of the company’s reporting unit was substantially in excess of its carrying value. The company performs a qualitative assessment of other indefinite-lived intangible assets, including IPR&D, at least annually. If the intangible asset is determined to be more likely than not impaired as a result of the assessment, the company completes a quantitative impairment test. Intangible assets with definite lives and other long-lived assets (such as fixed assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company’s impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset groupings, and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plans and a market participant’s views of the company and similar companies. The use of alternative estimates and assumptions could increase or decrease the estimated fair values of the assets, and potentially result in different impacts to the company’s results of operations. Actual results may differ from the company’s estimates.

Pension and Other Postemployment Benefit (OPEB) Plans

Baxalta’s employees participate in various pension and other postretirement benefit plans. Baxalta accounts for the majority of these plans as multiemployer plans, in which case no liabilities or plan assets are included in the company’s combined balance sheets. Within its combined statements of income, Baxalta includes pension expense associated with its employees that participate in the multiemployer plans. Total pre-tax defined benefit plan net expenses included in net income from continuing operations associated with multiemployer plans was $37 million in 2014, $45 million in 2013 and $36 million in 2012. These costs are reflected in cost of sales, R&D expenses, and selling, general and administrative expenses. The pension costs were deemed to be funded through intercompany transactions with Baxter and are reflected within the net parent company investment equity balance.

 

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For pension plans in Austria, nearly all participants have been determined to be Baxalta employees. Baxalta has concluded these pension plans are multiple-employer plans and has accounted for them as if Baxalta was the sponsor of a single employer plan. The company has included the related liabilities and expenses in its combined financial statements based on actuarial analyses. The plans are unfunded and there are no plan assets. Expenses from continuing operations included in Baxalta’s combined statements of income associated with multiple-employer plans were $14 million, $14 million and $9 million, in 2014, 2013 and 2012, respectively. Projected and accumulated benefit obligations and net periodic benefit cost are calculated using actuarial assumptions including interest rates used to discount the liabilities, rates of increase in employee compensation and other assumptions involving demographic factors such as retirement, mortality and turnover.

In addition to pension expense associated with Baxalta’s employees, the company’s results of operations included allocated expenses from Baxter, which considered costs related to pension plans for corporate or shared employees.

For several of the pension plans that have been accounted for as a multiemployer plan, Baxalta is expected to receive a net benefit obligation in connection with the separation and record pension plan liabilities and assets when transferred. See “Unaudited Pro Forma Combined Financial Statements” for additional information.

 

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BUSINESS

Overview

Baxalta is a global, innovative biopharmaceutical leader with a sustainable portfolio of differentiated therapies that seek to address unmet medical needs across many disease areas, including hemophilia, immunology and oncology. More specifically, the company develops, manufactures and markets a diverse portfolio of treatments for hemophilia and other bleeding disorders, immune deficiencies, alpha-1 antitrypsin deficiency, burns and shock, and other chronic and acute medical conditions. Baxalta is also investing in new disease areas, including oncology, as well as emerging technology platforms, including gene therapy and biosimilars.

Baxalta’s business strategy is aimed at improving diagnosis, treatment and standards of care across a wide range of bleeding disorders and other rare chronic and acute medical conditions, capitalizing on the company’s differentiated portfolio, ensuring the sustainability of supply to meet growing demand for therapies across core disease areas, and accelerating innovation by developing and launching new treatments while leveraging its expertise into new emerging therapeutics through acquisitions and collaborations.

Baxalta was incorporated in Delaware on September 8, 2014 in connection with the separation of Baxter International Inc.’s biopharmaceuticals business from its diversified medical products businesses. For a brief transition period after the spin-off, the company’s corporate offices will continue to be located at One Baxter Parkway, Deerfield, Illinois. After this transition period, the company’s corporate offices will be relocated to 1200 Lakeside Drive, Bannockburn, Illinois.

Strengths

Baxalta possesses a number of competitive advantages that distinguish the company from its competitors, including:

Differentiated portfolio of leading products. Baxalta’s portfolio consists of a number of market-leading therapies across core disease areas, particularly in hematology and immunology. Baxalta’s portfolio includes a variety of additional differentiated therapies for the treatment of bleeding disorders and chronic and acute medical conditions, including hemophilia A, hemophilia B, acquired hemophilia, inhibitor treatments, primary immunodeficiency (PID) and alpha-1 antitrypsin deficiency. The company believes that all of these treatment areas have significant growth potential, as they remain under-diagnosed and under-treated on a global basis. Baxalta intends to capitalize on this growth opportunity by increasing awareness and diagnosis, expanding access to therapies, enhancing market penetration and improving standards of care. Baxalta’s core disease therapies include:

 

    ADVATE [Antihemophilic Factor (Recombinant)], the leading recombinant factor VIII (rFVIII) therapy for the treatment of children and adults with hemophilia A;

 

    FEIBA [Anti-Inhibitor Coagulant Complex], a leading inhibitor management therapy;

 

    GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)], a liquid formulation of the antibody-replacement therapy for the treatment of immune deficiencies and certain neurological disorders; and

 

    HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase], an immune globulin with a recombinant human hyaluronidase for the treatment of PID in adults.

Diverse biopharmaceuticals pipeline. Building and advancing Baxalta’s existing product pipeline is a key driver of future growth. The current pipeline includes programs in hematology, oncology, immunology and biosimilars with a focus on rare diseases and areas of unmet medical need. The company has more than 20

 

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programs under development, including those in development with collaboration partners, as it applies internal scientific expertise in addition to advancing the pipeline through a number of recent acquisitions and collaborations. Since the beginning of 2014, Baxalta received approval for five products in the United States (including further developments or indications of existing products), recently submitted two products for approval in the U.S., and currently has five programs, including collaborations, in late-stage clinical trials.

Worldwide commercial infrastructure and opportunity for continued geographic penetration and expansion. Baxalta’s products are sold in approximately 100 countries. Baxalta has strong and extensive sales, marketing, and distribution networks around the world to support its products. In 2014, Baxalta had sales of $2.9 billion outside of the United States, representing nearly half of Baxalta’s total sales, including sales to emerging markets of $1.2 billion, representing 20% of total sales. Continued penetration of under-diagnosed and under-treated therapies will help drive growth across selected geographies.

High-quality products and world-class manufacturing operations. Baxalta has an established heritage as a leader in quality manufacturing. Baxalta has strong, globally managed and coordinated quality control and quality assurance programs in place at its manufacturing sites, and conducts and supports internal and external inspections and audits at these sites. Baxalta’s regional and global manufacturing teams seek to ensure that all of its contract manufacturers adhere to Baxalta’s standards of manufacturing quality. The company utilizes a diversified network of proprietary manufacturing sites and contract manufacturers to maximize operational efficiencies and to help meet demand for the company’s therapies. Baxalta’s extensive manufacturing and supply chain expertise and capabilities position the company well to provide critical therapies for distribution in all major regions of the world and to meet growing demand over the long-term.

Financial flexibility to fuel future growth. Baxalta retains strong financial flexibility, freeing the company to reinvest in the business and fuel future growth. In 2014, Baxalta generated $1.4 billion in operating cash flow and spent $970 million on capital expenditures. Baxalta anticipates that its business will continue to generate sufficient cash flow to allow the company to continue to invest in its new and expanding product pipeline and other areas to support and expand its business through both capital investments and strategic initiatives, including acquisitions and collaborations.

Experienced management team with track record of successful performance. Baxalta’s management team has a strong track record of performance and execution. Dr. Ludwig N. Hantson, who has served as a Corporate Vice President and President of BioScience at Baxter since 2010, is expected to be Baxalta’s President and Chief Executive Officer. Dr. Hantson brings with him more than 25 years of industry experience, including in executive roles, serving as regional, division and country head at several large biopharmaceutical companies, as well as in leadership positions in the areas of commercial operations, sales and marketing, and clinical research and development. Robert J. Hombach, who has served more than 25 years in various capacities at Baxter, including as Baxter’s Chief Financial Officer since 2010, is expected to be Baxalta’s Executive Vice President, Chief Financial Officer and Chief Operations Officer.

The management team is also expected to include:

 

    John Glasspool as Executive Vice President and Head of Corporate Strategy and Customer Operations, with more than 20 years of industry experience, including most recently as Baxter’s Vice President, New Therapies and Market Developments since 2012;

 

    Brian Goff as Executive Vice President and President, Hematology, with more than 20 years of industry experience, including most recently as Global Franchise Head of Hemophilia for Baxter;

 

    Anne-Marie Law as Executive Vice President and Head of Human Resources, with more than 25 years of human resources experience, including, prior to joining Baxalta, as Senior Vice President, Human Resources McKesson Specialty Health/US Oncology;

 

    Jacopo Leonardi as Executive Vice President and President, Immunology, with 20 years of industry experience, including most recently as Region Head of Baxter’s North America Hematology Division;

 

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    David D. Meek as Executive Vice President and President, Oncology, with more than 25 years of industry experience, including, prior to joining Baxalta, as the Chief Commercial Officer of Endocyte and as Novartis Pharmaceuticals’ Region Head of Oncology for Europe;

 

    John J. Orloff, M.D., as Executive Vice President, Head of Research & Development and Chief Scientific Officer, with more than 30 years of industry and clinical experience, including, prior to joining Baxalta, as Global Head of Clinical Development at Merck Serono Pharmaceuticals;

 

    Dagmar Rosa-Björkeson as Executive Vice President and President, Biosimilars, with more than 20 years of industry experience, including, prior to joining Baxalta, serving in multiple capacities at Novartis Pharmaceuticals, most recently as Vice President, Head of Multiple Sclerosis; and

 

    Patrice Zagame, M.D., as Executive Vice President and President, Intercontinental, with more than 25 years of industry experience, including, prior to joining Baxalta, as Sanofi’s Country Head for Brazil.

Strategies

Baxalta is seeking to grow its business by, among other things:

Enhancing access through increasing awareness and diagnosis and improving standards of care. Baxalta is committed to supporting efforts to improve diagnosis and enhancing standards of care. A number of disease areas, such as hemophilia, primary immune deficiency (PID), multifocal motor neuropathy (MMN), alpha-1 antitrypsin deficiency, and von Willebrand disease (VWD), are currently under-diagnosed and under-treated. For example, Baxalta believes based on historical data that diagnosis rates remain well under 50% for alpha-1 antitrypsin deficiency, hemophilia A, hemophilia B and PID, and up to an estimated 60% for MMN. As awareness and diagnosis increases, Baxalta believes it can capitalize on its existing and developing product portfolio to address the rising demand for these areas of unmet medical need. Baxalta also seeks to differentiate itself through its commitment to increasing standards of care for its patients. As an example, in June 2014, Baxalta obtained European CE marking of myPKFiT, a new web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE, which allows physicians to calculate personalized ADVATE treatment regimens based on patient information and individual pharmacokinetic (PK) profiles.

Further penetrating targeted emerging markets. In many emerging markets, population growth and economic development are driving increased demand for therapies such as Baxalta’s. In addition, rising standards of living and healthcare in such markets increase the global marketplace for Baxalta’s therapies. Based on the company’s diverse product portfolio and its history of successfully utilizing regional and local sales and distribution capabilities, Baxalta believes that the company is well-positioned for growth in these emerging markets. For example, Baxalta believes that it has further opportunities to expand in targeted emerging markets by reaching new customers, by introducing more of the company’s therapies into these markets and by supporting the adoption of the company’s products. Baxalta believes that the company will be able to efficiently respond to the needs of its emerging market customers and provide strong customer service and support in these markets.

Exploring additional models to partner with governments and other third parties. Baxalta is exploring alternative business models to partner with governments and other large patient care organizations to become the partner of choice, particularly in a number of emerging markets where utilization is very low. For example, in 2012 the company entered into an exclusive 20-year partnership with Hemobrás (Empresa Brasileira de Hemoderivado e Biotechnologia) to provide hemophilia patients in Brazil, the world’s third-largest hemophilia market, greater access to rFVIII therapy for the treatment of hemophilia A. The company has also entered into a 10-year contract manufacturing agreement with Sanquin Blood Supply Foundation of the Netherlands to enhance the supply of plasma-derived treatments for immune deficiencies, hemophilia, trauma and other critical conditions. These and similar measures will help to build and drive innovation and brand excellence on a global basis.

 

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Augmenting Baxalta’s product portfolio through organic growth, acquisitions and collaborations. Baxalta intends to continue to develop and grow its product portfolio through internal research and development (R&D) as well as through external acquisitions and collaborations. These R&D efforts enable the company to deliver innovative products to address areas of unmet medical need, and enhance current therapies so they remain relevant for Baxalta’s customers. Baxalta leverages its brand leadership to position the company to capitalize on enhancing access with the introduction of new therapeutics and indications. While continuing to leverage its expertise and develop therapies in its core disease areas, Baxalta intends to further diversify its product portfolio and pipeline by shifting to therapies for diseases beyond hemophilia, such as blood disorders, liquid and solid tumors and immunologic conditions. Baxalta incurred R&D expenses of $820 million in 2014 and believes that at least seven new products in its R&D portfolio have the potential to reach the market by 2018, along with several other indications or developments with respect to existing products and geographic expansions of such products.

Baxalta also intends to continue to grow its business through acquisitions, asset purchases, in-licensing transactions, development, supply and distribution agreements and other strategic partnerships, as well as through the growth of its existing products resulting from such factors as increased awareness and diagnosis, and further penetration into emerging markets.

Baxalta has entered into several significant collaborations, alliances and other business development transactions to support its growth, including:

 

    AesRx Acquisition. In June 2014, Baxalta acquired AesRx, LLC (AesRx), obtaining AesRx’s program related to the development and commercialization of treatments for sickle cell disease (SCD), including BAX 555 (f/k/a Aes-103), an investigational prophylactic treatment for SCD currently in a Phase II clinical trial as part of an ongoing collaboration with the National Institute of Health (NIH)’s National Center for Advancing Translational Sciences (NCATS) through its Therapeutics for Rare and Neglected Diseases (TRND) program.

 

    Chatham Acquisition. In April 2014, Baxalta acquired Chatham Therapeutics, LLC (Chatham), gaining broad access and intellectual property rights to its gene therapy platform for the treatment of hemophilia B (BAX 335, currently in Phase I clinic trials) as well as a preclinical hemophilia A (FVIII) program, and the potential future application to additional hemophilia treatments.

 

    Coherus Collaboration. Baxalta has established a collaboration with Coherus BioSciences, Inc. (Coherus) to develop and commercialize CHS-0214/BAX 2200, a biosimilar product candidate for ENBREL® (etanercept), indicated for the treatment of certain autoimmune deficiencies, in Europe, Canada, Brazil and other markets. This is Baxalta’s most advanced biosimilar, currently in Phase III clinical trials for rheumatoid arthritis and psoriasis. In early stage clinic trials, Coherus has demonstrated pharmacokinetic (PK) equivalence versus the innovator molecule.

 

    CTI BioPharma Collaboration. Baxalta acquired rights under a worldwide licensing agreement with CTI BioPharma Corp. (f/k/a Cell Therapeutics, Inc.) (CTI BioPharma) to develop and commercialize pacritinib (BAX 2201), a novel investigational JAK2/FLT3 inhibitor that recently completed Phase III trials for myelofibrosis, a chronic, malignant bone marrow disorder, and is currently in Phase II trials for acute myeloid leukemia (AML). Baxalta has exclusive commercialization rights for all indications outside the United States, and will jointly commercialize pacritinib in the United States with CTI BioPharma. Positive top-line results from the Phase III trials were announced in March 2015.

 

    GLASSIA. In 2010, Baxalta acquired exclusive distribution and licensing rights in the United States, Australia, New Zealand and Canada to GLASSIA, the first ready-to-use liquid alpha1-proteinase inhibitor used to treat alpha-1 antitrypsin deficiency, through an agreement with Kamada Ltd. (Kamada), together with a technology transfer allowing Baxalta to implement Kamada’s related production technology.

 

   

HYQVIA. HYQVIA is a product consisting of human normal immunoglobulin (IG) and recombinant human hyaluronidase (licensed from Halozyme Therapeutics, Inc. in 2007). HYQVIA was approved in

 

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Europe in 2013 for adults with PID syndromes and myeloma or chronic lymphocytic leukemia (CLL) with severe secondary hypogammaglobulinemia and recurrent infections, and also in the United States in 2014 for adults with PID.

 

    Merrimack Collaboration. In September 2014, Baxalta entered into an exclusive license and collaboration agreement with Merrimack Pharmaceuticals, Inc. (Merrimack) for the development and commercialization of nanoliposomal irinotecan injection, or nal-IRI (MM-398), an investigational drug candidate for the treatment of patients with metastatic pancreatic cancer previously treated with a gemcitabine-based therapy, for all potential indications outside the United States and Taiwan. A Phase III trial has been completed, and Baxalta filed for approval for second-line pancreatic cancer in the EU in May 2015. In November 2014, FDA granted nal-IRI Fast Track designation for the treatment of patients with metastatic pancreatic cancer who have been previously treated with gemcitabine-based therapy. Fast Track is designed by FDA to facilitate and expedite the development and review of drugs that treat serious conditions and fill an unmet medical need.

 

    Momenta Collaboration. Baxalta is collaborating with Momenta Pharmaceuticals, Inc. (Momenta) on the development and commercialization of M923/BAX 2923, a biosimilar product candidate for HUMIRA® (adalimumab), which is currently in early-stage development. In December 2014, a European clinical trial application for M923/BAX 2923 was accepted. In June 2015, Baxalta entered into an agreement with SFJ Pharmaceuticals Group (SFJ) relating to M923/BAX 2923 whereby SFJ will fund up to $200 million of specified development costs related to Baxalta’s M923/BAX 2923 program in exchange for payments in the event the product obtains regulatory approval in the United States and/or Europe. The contingent success payments, which would total approximately 5.5 times the incurred development costs, would be paid in installments over several years following the date(s) of regulatory approval.

 

    OBIZUR. In 2013, Baxalta acquired the investigational hemophilia compound and related assets from Inspiration BioPharmaceuticals, Inc. (Inspiration), as well as certain other assets, including manufacturing operations, from Ipsen Pharma S.A.S. in conjunction with Inspiration’s bankruptcy proceedings. In October 2014, OBIZUR was approved for the treatment of acquired hemophilia A in the United States and is currently under regulatory review in Europe and Canada.

 

    SuppreMol Acquisition. In March 2015, Baxalta acquired SuppreMol GmbH (SuppreMol), a biopharmaceutical company based in Germany with an early-stage development portfolio of novel treatment options for autoimmune and allergic diseases, focusing on the modulation of Fc receptor signaling pathways, an immune target that could have broad applications in autoimmune disorders. SuppreMol’s pipeline includes lead candidate SM101, an investigational immunoregulatory treatment that has completed Phase IIa studies in idiopathic thrombocytopenic purpura (ITP, a disorder causing low platelet levels) and systemic lupus erythematosus (SLE, a disorder in which the immune system attacks healthy tissue).

For more information about Baxalta’s collaborations, alliances and other significant business development transactions, see Note 4 to the audited combined financial statements.

Accessing new products and technologies through scientific partnerships. Baxalta intends to continue to expand its network of research partnerships around the globe in order to gain access to new technologies, including its relationships with universities and other public and private institutions. The transition of Baxalta’s R&D hub to Cambridge, Massachusetts, will enhance its ability to leverage expertise in the greater Boston area and forge strategic partnerships with leading biotechnology companies and academic and research institutions. In addition, Baxalta will have the ability to explore opportunities to enter into collaboration agreements and external alliances with other parties under its own standalone growth and investment strategies.

Continuing to provide high-quality products and drive manufacturing efficiencies. Baxalta is a leader in quality manufacturing. Baxalta’s global commercial and manufacturing teams collaborate on various operational efficiency initiatives, including yield improvements, procurement, site and area synergies and manufacturing support rationalization, intended to improve Baxalta’s manufacturing margins. Baxalta’s manufacturing and supply chain provide it with a flexible and scalable global platform for continued expansion, including in emerging markets.

 

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Managing the product portfolio to maximize value. Baxalta plans to continue its investment in products with durable sales, while making adjustments as necessary to increase the value of its product portfolio. Baxalta intends to achieve this objective in a variety of ways depending on product and circumstances by, for example, identifying supply chain efficiencies, pursuing additional indications, and employing strong product lifecycle management. Baxalta believes that its approach will allow the company to maintain a strong operating margin on existing products.

Products

Baxalta’s business consists of a portfolio of products serving patient needs in a variety of ways. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to the financial statements below present certain financial information related to Baxalta’s products by reference to four categories of products. Those four groups, Hemophilia, Inhibitor Therapies, Immunoglobulin Therapies and BioTherapeutics, are further described below, together with selected details for products within each group.

Hemophilia. Baxalta is a market leader in hemophilia therapies, and expects to continue to build on that leadership position with new therapies for bleeding disorders. The Hemophilia category accounted for $3.0 billion, $2.8 billion and $2.6 billion, or 50%, 50% and 49%, of Baxalta’s sales in 2014, 2013 and 2012, respectively. Hemophilia products currently offered by Baxalta include:

 

    ADVATE. ADVATE [Antihemophilic Factor (Recombinant)] is the world’s leading rFVIII therapy. ADVATE is a recombinant antihemophilic factor indicated for use in adults and children with hemophilia A (congenital factor VIII deficiency or classic hemophilia) for control and prevention of bleeding episodes, perioperative management and routine prophylaxis to prevent or reduce the frequency of bleeding episodes. Baxalta believes based on historical data that well over 50% of those with hemophilia A, which is the most prevalent form of hemophilia and occupies approximately $6 billion of the global market for hemophilia treatments, remain undiagnosed. ADVATE is approved in over 60 countries, and Baxalta intends to continue to improve diagnosis and prophylaxis treatment rates and overall access to ADVATE-based therapies over the next several years.

 

    RECOMBINATE. RECOMBINATE [Antihemophilic Factor (Recombinant)], as with ADVATE, is a recombinant antihemophilic factor indicated for use in adults and children with hemophilia A for control and prevention of bleeding episodes, perioperative management and routine prophylaxis to prevent or reduce the frequency of bleeding episodes. RECOMBINATE was Baxalta’s first generation recombinant therapy and was introduced in 1992, more than ten years prior to ADVATE’s 2003 introduction.

 

    HEMOFIL M. HEMOFIL M [Antihemophilic Factor (Human) Method M, Monoclonal Purified], is indicated in hemophilia A for the prevention and control of hemorrhagic episodes. Antihemophilic factor (AHF) is a protein found in normal plasma which is necessary for clot formation. The administration of HEMOFIL M provides an increase in plasma levels of AHF and can temporarily correct the coagulation defect of patients with hemophilia A.

 

    IMMUNATE. Immunate is a highly purified, double virus inactivated, plasma derived Factor VIII/von Willebrand Factor complex concentrate, suitable for the treatment of hemophilia A and von Willebrand disease with FVIII deficiency.

 

    IMMUNINE. Immunine Purified Factor IX Concentrate Virus–Inactivated, is indicated for treatment and prophylaxis of bleeding episodes caused by congenital or acquired factor IX deficiency (hemophilia B, or Christmas disease, hemophilia B with factor IX inhibitors, and acquired factor IX deficiency due to spontaneous development of factor IX inhibitors).

 

   

PROTHROMPLEX TOTAL. PROTHROMPLEX TOTAL is a powder and solvent for solution for injection containing human prothrombin complex and is indicated in adults for the treatment and perioperative prophylaxis of bleeding in acquired deficiency of prothrombin complex coagulation

 

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factors, as well as for the treatment and perioperative prophylaxis of hemorrhages in congenital deficiency of vitamin K-dependent coagulation factors when purified specific coagulation factor concentrate is not available.

 

    RIXUBIS. RIXUBIS [Coagulation Factor IX (Recombinant)] was launched in the United States in 2013 for the treatment of hemophilia B. RIXUBIS is an injectable medicine used to replace clotting factor IX that is missing in people with hemophilia B.

 

    FACTOR VII NF. FACTOR VII NF is a powder and solvent for solution for injection containing human coagulation factor VII. FACTOR VII NF is indicated in the treatment of bleeding disorders caused by isolated congenital factor VII deficiency and prophylaxis of bleeding disorders caused by isolated congenital factor VII deficiency associated with a history of bleeding and a residual level of factor VII:C lower than 25% of normal.

 

    BEBULIN. BEBULIN [Factor IX Complex] is indicated for the prevention and control of hemorrhagic episodes in hemophilia B patients. BEBULIN is a combination of vitamin K-dependent clotting factors (Factor IX, II, X) and found in normal plasma. The administration of BEBULIN provides an increase in plasma levels of factor IX and can temporarily correct the coagulation defect of patients with factor IX deficiency.

Inhibitor Therapies. The Inhibitor Therapies category accounted for $744 million, $651 million and $614 million, or 13%, 12% and 12% of Baxalta’s sales in 2014, 2013 and 2012, respectively. Baxalta’s current Inhibitor Therapies products are:

 

    FEIBA. FEIBA [Anti-Inhibitor Coagulant Complex] is the company’s plasma-based inhibitor bypass therapy, and is a leading plasma-derived inhibitor management therapy. FEIBA is indicated for the control of spontaneous bleeding episodes or to cover surgical interventions in hemophilia A and hemophilia B patients with inhibitors.

 

    OBIZUR. OBIZUR [Antihemophilic Factor (Recombinant), Porcine Sequence] is an acquired hemophilia A therapy that consists of a recombinant porcine factor VIII. In October 2014, OBIZUR was approved for the treatment of acquired hemophilia A in the United States and is currently under regulatory review in Europe and Canada.

Immunoglobulin Therapies. Baxalta’s sales related to Immunoglobulin Therapies products were $1.7 billion, $1.6 billion and $1.6 billion, or 28%, 29% and 30% of Baxalta’s sales in 2014, 2013 and 2012, respectively. Immunoglobulin Therapies products currently offered by Baxalta include:

 

    GAMMAGARD LIQUID / KIOVIG. GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)] is the company’s liquid formulation of the antibody-replacement therapy immunoglobulin product. GAMMAGARD LIQUID is used to treat patients with PID. The most common types of PID result in an inability to make a very important type of protein called antibodies, which help the body fight off infections from bacteria or viruses. GAMMAGARD LIQUID is made from human plasma that is donated by healthy people and contains antibodies collected from these healthy people that replace the missing antibodies in PID patients. KIOVIG is the brand name used for GAMMAGARD LIQUID outside of the United States.

 

    GAMMAGARD S/D. GAMMAGARD S/D [Immune Globulin Intravenous (Human)] is indicated for the treatment of PID in patients two years old and older. GAMMAGARD S/D is also indicated for prevention of bacterial infections in hypogammaglobulinemia and/or recurrent bacterial infections associated with B-cell CLL, treatment of adult patients with chronic idiopathic thrombocytopenic purpura (ITP) to increase platelet count and to prevent and/or control bleeding, and prevention of coronary artery aneurysms associated with Kawasaki Syndrome in pediatric patients.

 

    SUBCUVIA. Subcuvia [Human Normal Immunoglobulin] is a replacement therapy in adults and children with PID syndromes, as well as replacement therapy in myeloma and CLL with severe secondary hypogammaglobulinemia and recurrent infections.

 

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    HYQVIA. HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase] was approved in Europe in 2013 for adults with PID syndromes and myeloma or CLL with severe secondary hypogammaglobulinemia and recurrent infections, and also in the United States in 2014 for adults with PID. HYQVIA is a product consisting of human normal immunoglobulin (IG) and recombinant human hyaluronidase (licensed from Halozyme). The IG provides the therapeutic effect and the recombinant human hyaluronidase facilitates the dispersion and absorption of the IG administered subcutaneously, increasing its bioavailability. The IG is a 10% solution that is prepared from human plasma consisting of at least 98% immunoglobulin G, which contains a broad spectrum of antibodies.

BioTherapeutics. Baxalta’s sales related to BioTherapeutics products were $547 million, $502 million and $486 million in 2014, 2013 and 2012, respectively, or 9% of Baxalta’s sales in each year. BioTherapeutics products currently offered by Baxalta include:

 

    FLEXBUMIN. Baxalta’s FLEXBUMIN [Albumin (Human)] products are indicated for hypovolemia, hypoalbuminemia due to general causes and burns, and for use during cardiopulmonary bypass surgery as a component of the pump prime, while FLEXBUMIN 25% is also indicated for hypoalbuminemia associated with adult respiratory distress syndrome (ARDS) and nephrosis, and hemolytic disease of the newborn (HDN). FLEXBUMIN is the first and only preparation of human albumin to be packaged in a flexible plastic container. The FLEXBUMIN flexible, shatterproof container offers important safety features for hospitals by eliminating risk of glass breakage and affords the ability to infuse without a vented administration set. The lighter weight and reduced space requirements for FLEXBUMIN compared to glass containers of equal volume make Baxalta’s FLEXBUMIN products more compatible with hospital inventory storage systems. FLEXBUMIN’s product portfolio includes multiple formulations with both 5% in a 250 mL solution and 25% in 50 and 100 mL solutions.

 

    BUMINATE. Baxalta’s BUMINATE [Albumin (Human)] products are indicated for hypovolemia, hypoalbuminemia associated with general causes and burns, and use during or prior to cardiopulmonary bypass surgery as a component of the pump prime, while BUMINATE 25% is also indicated for hypoalbuminemia associated with ARDS and nephrosis, and HDN. Baxalta’s BUMINATE products offer the same high-quality human albumin as FLEXBUMIN, but packaged in glass bottles as BUMINATE in various concentrations and bottle sizes.

 

    ARALAST NP. ARALAST NP is an alpha1-proteinase inhibitor (Alpha1-PI) indicated for chronic augmentation therapy in adults with clinically evident emphysema due to severe congenital deficiency of Alpha1-PI (alpha1-antitrypsin deficiency). ARALAST NP increases antigenic and functional (anti-neutrophil elastase capacity, ANEC) serum levels and antigenic lung epithelial lining fluid (ELF) levels of Alpha1-PI.

 

    GLASSIA NP. GLASSIA NP is also an Alpha1-PI used for adults who have clinically evident emphysema due to severe congenital alpha-1 antitrypsin deficiency. GLASSIA is used to increase antigenic and functional (anti-neutrophil elastase capacity, or ANEC) serum levels and antigenic lung ELF levels of Alpha1-PI.

 

    CEPROTIN. CEPROTIN is a protein C concentrate [(Human)] replacement therapy to increase protein C to levels that reduce symptoms by allowing the blood to clot normally. Protein C plays an important part in blood clotting by stopping the blood from clotting when enough clots have been produced. If not corrected, damage from too much clotting can cause death.

 

    ANTITHROMBIN III IMMUNO. ANTITHROMBIN III IMMUNO, Antithrombin III (human) contains antithrombin III in a sterile, purified, concentrated and stabilized form. ANTITHROMBIN III IMMUNO is indicated for prophylaxis and treatment of thrombotic and thromboembolic disorders in patients with hereditary antithrombin III deficiency (antithrombin III activity below 70% of normal). Infusions of antithrombin III may be particularly valuable in surgical procedures or pregnancy and delivery in patients with congenital antithrombin III deficiency.

 

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Enhancements and Increased Access to Approved Products. Baxalta works to expand treatment options for patients by seeking additional indications for and developing innovative enhancements to its existing product portfolio. In addition, Baxalta expands access to its products for patients geographically by seeking regulatory approvals for its products throughout the globe and developing innovative partnerships with foreign governments. Recent examples of such enhancements and expansions include:

 

    In July 2014, FLEXBUMIN 5% was approved in the United States, expanding Baxalta’s FLEXBUMIN product portfolio, which is the first and only preparation of human albumin to be packaged in a flexible plastic container, to include both 5% in a 250 mL solution and 25% in 50 and 100 mL solutions.

 

    In April 2014, the new BAXJECT III needleless reconstitution system for ADVATE was approved in the United States, which allows patients to prepare their treatment with fewer steps compared to the previous process. The company has filed for approval of ADVATE with BAXJECT III system in Europe, with a planned launch there in 2015.

 

    In July 2014, Baxalta obtained European CE marking of myPKFiT, a web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE. The device allows physicians to calculate personalized ADVATE treatment regimens based on patient information and individual pharmacokinetic (PK) profiles.

 

    In 2014, ADVATE was approved by regulators in Turkey and Russia and the company received European approval for its production at a new facility in Singapore.

Building a Diversified Biopharmaceutical Pipeline

Baxalta is committed to developing a robust new product pipeline focused on new and innovative treatments that address unmet medical needs and investing resources to develop and grow a broad-based and innovative biopharmaceutical pipeline, including by exploring new indications and emerging uses based on Baxalta’s current portfolio, as well as executing product enhancements designed to meet patient and provider needs. Baxalta’s internal development programs are being augmented with a number of collaborations that leverage Baxalta’s proven expertise and extend the pipeline into new therapeutic areas. At least seven new product launches are planned prior to the end of 2018, along with several other indications or developments with respect to existing products and geographic expansions of such products.

The following table illustrates some of the key programs in Baxalta’s pipeline and current portfolio, including developments with respect to existing products. For ease of presentation in the following table and related descriptions, the Hemophilia and Inhibitor Therapies product categories are grouped together in a single hematology section, the Immunoglobulin Therapies and BioTherapeutics product categories are grouped together in a single immunology section, and separate oncology and biosimilars sections are included to reflect the company’s focus on those areas in the development of its product pipeline.

 

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Pre-Clinical and Early Stage

Development

(Pre-clinical, Phase I &

Phase II)

Late-State Development

(Phase III or Regulatory

Submission)

Recent Approval Highlights

Hematology

BAX 826

Extended half-life recombinant

factor VIII; Hemophilia A

BAX 855

PEGylated recombinant factor

VIII based on full-length

ADVATE molecule;

Hemophilia A

RIXUBIS

U.S. Pediatric Indication

Recombinant factor IX;

Hemophilia B

BAX 335

Gene therapy; Hemophilia B

BAX 111

Recombinant von Willebrand

factor; von Willebrand disease

OBIZUR

U.S. Approval

Acquired hemophilia A

BAX 888

Gene Therapy; Hemophilia A

BAX 817

Recombinant Factor VIIa;

Hemophilia A and B with

inhibitors

FEIBA

Prophylaxis Indication in U.S., Canada, ANZ and Japan

Plasma-based

inhibitor bypass therapy;

Hemophilia A and B with

inhibitors

BAX 930

rADAMTS13; Thrombotic

thrombocytopenic purpura

 

BAXJECT III

U.S. Approval

Next-generation needleless

transfer device for ADVATE

BAX 555

First-in-class compound;

Sickle cell disease

 

myPKFiT

EU Approval

Personalized dosing for

ADVATE

OBIZUR

Recombinant porcine factor VIII; Surgical indication for acquired Hemophilia A

 

Oncology

BAX 069

Anti-MIF; Solid tumors

nal-IRI (MM-398)*

Novel encapsulation of

irinotecan; Metastatic pancreatic

cancer

 

Pacritinib (BAX 2201)*

JAK2/FLT3 inhibitor; Acute

myeloid leukemia (AML)

Pacritinib (BAX 2201)*

Myelofibrosis

 

Rigosertib (BAX 2001)*

High-risk MDS

 

 

Immunology

 

GAMMAGARD LIQUID and

HYQVIA

Chronic inflammatory

demyelinating

polyradiculoneuropathy

(CIDP)

 

GAMMAGARD LIQUID

20% Subcutaneous therapy;

immune diseases

HYQVIA

U.S. & EU Approval

SM 101

Idiopathic thrombocytopenic purpura (ITP) and Systemic lupus erythematosus (SLE)

 

 

FLEXBUMIN 5%

U.S. Approval

 

Biosimilars

M923/BAX 2923*

Biosimilar to HUMIRA®;

Autoimmune and inflammatory

diseases

CHS-0214/BAX 2200*

Biosimilar to ENBREL®;

Psoriasis and rheumatoid

arthritis

 
       

 

* Denotes partnered programs. For further details, see related descriptions below.

 

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Among the promising products, therapies and acquisitions in Baxalta’s pipeline are the following:

Hematology

Innovative Recombinant Therapies.

BAX 855. In December 2014, Baxalta filed for regulatory approval for BAX 855 in the United States. BAX 855 is an investigational, extended half-life rFVIII treatment for hemophilia A based on ADVATE, which in a Phase III pivotal clinical trial met its primary endpoint in reducing annualized bleed rates in the prophylaxis arm compared to the on-demand arm. BAX 855 uses the same manufacturing process as ADVATE and adds a proven technology, PEGylation (a chemical process that prolongs the amount of time a compound remains in circulation, potentially allowing for fewer injections), which Baxalta has exclusively licensed from Nektar Therapeutics. The United States patent covering the composition of matter for this technology has a protected expiry date of 2024, subject to potential patent-term extension as applicable. In April 2015, Baxalta also filed for regulatory approval of BAX 855 in Japan.

RIXUBIS. As described above, RIXUBIS was launched in the United States in 2013 for the treatment of hemophilia B. In October 2014, Baxalta received approval for a pediatric indication in the United States. In addition to the therapies currently approved in the United States, Baxalta has also submitted applications in the EU, Japan and Australia. The global hemophilia B market is in excess of $1 billion, and Baxalta believes that well over 50% of the population remains undiagnosed.

BAX 111. BAX 111 would be the first recombinant therapy providing a pure von Willebrand disease factor (rVWF) with customized dosing. Von Willebrand disease (VWD) is the most common inherited blood disorder. The most rare is type 3 VWD, which is often characterized by complete factor deficiency and with resulting severe bleeding. Baxalta filed for approval in the United States in December 2014 based on positive results in a clinical trial involving on-demand therapy for patients with severe VWD.

Inhibitor Bypass Therapies.

BAX 817. BAX 817 is a recombinant factor VIIa (rFVIIa) for the treatment of acute bleeding episodes in hemophilia A or B patients with inhibitors. In March 2015, the company announced positive results from its Phase III clinical trial evaluating the safety and efficacy of BAX 817. The market opportunity for the bypass therapy category is more than $1.7 billion per year globally.

Gene Therapies.

BAX 335 (Gene Therapy). BAX 335 is an investigational factor IX gene therapy treatment for hemophilia B. The AAV8 vector-based technology has the potential to re-define the concept of longer-acting therapy. A Phase I/II open-label clinical trial to assess the safety and optimal dosing schedule of BAX 335 is underway.

Chatham Acquisition. In April 2014, Baxalta acquired Chatham, gaining broad access and intellectual property rights to its gene therapy platform, including a preclinical hemophilia A program and the potential future application to additional hemophilia treatments. This technology supports BAX 335.

Sickle Cell Disease Therapies

BAX 555. In June 2014, Baxalta acquired AesRx, obtaining AesRx’s program related to the development and commercialization of treatments for sickle cell disease (SCD), including BAX 555 (f/k/a Aes-103), an investigational prophylactic treatment for SCD currently in a Phase II clinical trial as part of an ongoing collaboration with the NIH’s National Center for Advancing Translational Sciences (NCATS) through its Therapeutics for Rare and Neglected Diseases (TRND) program.

 

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Oncology

Pacritinib. Baxalta acquired rights under a worldwide licensing agreement with CTI BioPharma to develop and commercialize pacritinib (BAX 2201), a novel investigational JAK2/FLT3 inhibitor that recently completed Phase III trials for myelofibrosis, a chronic, malignant bone marrow disorder, and is currently in Phase II trials for AML. Baxalta has exclusive commercialization rights for all indications outside the United States, and will jointly commercialize pacritinib (BAX 2201) in the United States with CTI BioPharma. Positive top-line results from the Phase III trials were announced in March 2015.

nal-IRI (MM-398). In September 2014, Baxalta entered into an exclusive license and collaboration agreement with Merrimack for the development and commercialization of nal-IRI (MM-398), an investigational drug candidate for the treatment of patients with metastatic pancreatic cancer previously treated with a gemcitabine-based therapy, for all potential indications outside the United States and Taiwan. nal-IRI has completed a Phase III program in second-line pancreatic cancer, and Baxalta filed for approval for this indication in the EU in May 2015. In November 2014, FDA granted nal-IRI Fast Track designation for the treatment of patients with metastatic pancreatic cancer who have been previously treated with gemcitabine-based therapy.

BAX 069. BAX 069 is a monoclonal antibody with a novel mode of action for the treatment of solid tumors, targeting the oxidized form of cytokine macrophage migration inhibitor factor (oxMIF). BAX 069 is currently in Phase I clinical trials, which have completed enrollment.

Rigosertib. Baxalta has obtained from Onconova Therapeutics, Inc. (Onconova) the exclusive EU marketing rights to rigosertib (BAX 2201), a novel, targeted anti-cancer compound. Onconova has announced that the Phase III study for the treatment of high-risk MDS, a rare hematological malignancy, did not meet its primary endpoint. The trial did achieve a statistically significant benefit in median survival in a post-hoc analysis of a subset of patients who failed or progressed on previous treatments with hypomethylating agents. Baxalta continues to work with Onconova to evaluate the appropriate next steps and support the continued engagement with regulatory authorities.

Immunology

20% GAMMAGARD LIQUID SubQ. 20% GAMMAGARD LIQUID SubQ is a higher-potency immunoglobulin therapy offering patients faster infusions with less volume. Baxalta has completed Phase III enrollment in the EU and the United States, and filed for approval in Europe in May 2015.

GAMMAGARD LIQUID and HYQVIA for CIDP. Baxalta is undertaking efforts to expand indications for its GAMMAGARD LIQUID / KIOVIG and HYQVIA products to include the treatment of chronic inflammatory demyelinating polyradiculoneuropathy (CIDP), a neurological disorder characterized by progressive weakness and impaired sensory function in the legs and arms.

SM101. In March 2015, Baxalta acquired SuppreMol and its lead product candidate SM101, an investigational immunoregulatory treatment that has completed Phase 2a studies in idiopathic thrombocytopenic purpura (ITP, a disorder causing low platelet levels) and systemic lupus erythematosus (SLE, a disorder in which the immune system attacks healthy tissue).

Biosimilars

With approximately $70 billion in branded biologics going off patent by 2021, biosimilars present an attractive growth opportunity for Baxalta. Baxalta’s biosimilars collaborations include the following:

CHS-0214/BAX 2200. Baxalta has established a collaboration with Coherus to develop and commercialize CHS-0214/BAX 2200, a biosimilar product candidate for ENBREL® (etanercept), indicated for the treatment of autoimmune deficiencies, in Europe, Canada, Brazil and other markets. This is Baxalta’s most advanced biosimilar, currently in Phase III clinical trials for rheumatoid arthritis and psoriasis, and in early stage clinical trials has demonstrated pharmacokinetic (PK) equivalence versus the innovator molecule.

 

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Momenta Collaboration. Baxalta is collaborating with Momenta on the development and commercialization of M923/BAX 2923, a biosimilar product candidate for HUMIRA® (adalimumab) indicated for certain autoimmune and inflammatory diseases, which is currently in early-stage development. In December 2014, a European clinical trial application for M923/BAX 2923 was accepted by the UK Medicines and Healthcare Products Regulatory Agency. In June 2015, Baxalta entered into an agreement with SFJ Pharmaceuticals Group (SFJ) relating to M923/BAX 2923 whereby SFJ will fund up to $200 million of specified development costs related to Baxalta’s M923/BAX 2923 program in exchange for payments in the event the product obtains regulatory approval in the United States and/or Europe. The contingent success payments, which would total approximately 5.5 times the incurred development costs, would be paid in installments over several years following the date(s) of regulatory approval.

For more information on biosimilars, see “—Intellectual Property” and “—Regulation.”

Research and Development Activities

Baxalta’s investment in R&D is essential to its future growth and its ability to remain competitive in the markets in which it participates. Accordingly, Baxalta continues to focus its investment in R&D programs to enhance future growth through clinical differentiation. Expenditures for Baxalta’s R&D activities were $820 million in 2014, $595 million in 2013 and $581 million in 2012. These expenditures include costs associated with R&D activities performed at Baxter’s R&D centers as well as in-licensing, milestone and reimbursement payments made to partners for R&D work performed at non-Baxter locations. Included in Baxalta’s R&D activities in 2014 were upfront and milestone payments to collaboration partners of $217 million.

Baxalta’s research efforts emphasize self-manufactured product development, and portions of that research relate to multiple product categories. Baxalta supplements its own R&D efforts by acquiring various technologies and entering into development and other collaboration agreements with third parties. In addition, Baxalta has been actively engaged in investigating new potential biosimilar and oncology treatments, primarily through business collaborations. Baxalta expects to continue to explore external partnerships as part of its product development and R&D efforts.

Collaboration agreements with third parties often result in Baxalta making an upfront payment to its partners upon the initial execution of a collaboration or similar agreement and future contingent payments to Baxalta’s partners upon the achievement of development, regulatory, commercial or other milestones. These upfront payments and pre-regulatory approval milestone payments are expensed to R&D and may result in significant R&D charges in one period with no comparable charge or charges in another period. The timing and impact of these payments on the company’s results of operations and financial condition may be difficult to predict.

In 2014, Baxalta announced that the company entered into a long-term lease in Cambridge, Massachusetts, for a facility that will serve as the company’s global innovation and R&D center. Also in 2014, Baxalta entered into a strategic partnership with Quintiles, a leading global provider of biopharmaceutical development and commercial outsourcing services, pursuant to which Quintiles will assume responsibility for routine clinical development activities for Baxalta and provide strategic input to certain R&D programs. Baxalta will maintain the leadership, management and accountability roles for its R&D programs, as well as operational responsibility for its early stage and non-clinical research.

For more information on the company’s R&D activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development.”

Quality Management

Baxalta’s success depends upon the quality of its products. Quality management plays an essential role in meeting customer requirements, preventing defects, facilitating continuous improvement of the company’s

 

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products, processes and services, and assuring the safety and efficacy of the company’s products. Baxalta has one quality system deployed globally that enables the design, development, manufacturing, packaging, sterilization, handling, distribution and labeling of the company’s products to ensure they conform to customer requirements. In order to continually improve the effectiveness and efficiency of the quality system, various measurements, monitoring and analysis methods such as management reviews and internal, external and vendor audits are employed at local and central levels.

Each product that Baxalta markets is required to meet specific quality standards, both in packaging and in product integrity and quality. If any product is determined to be compromised at any time, Baxalta takes all corrective and preventive actions necessary to ensure compliance with regulatory requirements and to meet customer expectations.

Intellectual Property

Patents and other proprietary rights are essential to Baxalta’s business. Baxalta relies on patents, trademarks, copyrights, trade secrets, know-how and confidentiality agreements to develop, maintain and strengthen its competitive position. Baxalta owns a number of patents and trademarks throughout the world and has entered into license arrangements relating to various third-party patents and technologies. Products manufactured by Baxalta are sold primarily under its own trademarks and trade names. Some products distributed by the company are sold under the company’s trade names, while others are sold under trade names owned by its suppliers or partners. Trade secret protection of unpatented confidential and proprietary information is also important to Baxalta. The company maintains certain details about its products, processes and technology as trade secrets and generally requires employees, consultants, parties to collaboration agreements and other business partners to enter into confidentiality agreements. These agreements may be breached and Baxalta may not have adequate remedies for any breach. In addition, Baxalta’s trade secrets may otherwise become known or be independently discovered by competitors. To the extent that Baxalta’s employees, consultants, parties to collaboration agreements and other business partners use intellectual property owned by others in their work for the company, disputes may arise as to the rights in related or resulting know-how and inventions.

Biologics are entitled to exclusivity under the Biologics Price Competition and Innovation Act, which was passed on March 23, 2010 as Title VII to the PPACA. The PPACA provides a pathway for approval of biosimilars following the expiration of 12 years of exclusivity for the innovator biologic and a potential additional 180 day-extension term for conducting pediatric studies. The PPACA also includes an extensive process for the innovator biologic and biosimilar manufacturer to litigate patent infringement, validity, and enforceability prior to the approval of the biosimilar. The PPACA does not, however, change the duration of patents granted on biologic products. For more information regarding governmental regulation of biosimilars, see “—Regulation.”

Baxalta’s policy is to protect its products and technology through patents, the maintenance of trade secrets and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the company. Baxalta also recognizes the need to promote the enforcement of its intellectual property and takes commercially reasonable steps to enforce its intellectual property around the world against potential infringers, including judicial or administrative action where appropriate.

Baxalta operates in an industry susceptible to significant patent litigation. At any given time, the company is involved as either a plaintiff or defendant in a number of patent infringement and other intellectual property-related actions. Such litigation can result in significant royalty or other payments or result in injunctions that can prevent the sale of products. For more information on litigation, see “—Legal Proceedings.”

 

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Regulation

The operations of Baxalta and many of the products it manufactures or sells are subject to extensive regulation by numerous government agencies, both within and outside the United States. The U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA), the China Food and Drug Administration (CFDA) and other government agencies both inside and outside of the United States, regulate the testing, safety, effectiveness, manufacturing, labeling, promotion and advertising, distribution and post-market surveillance of Baxalta’s products. The company must obtain specific approval from FDA and non-U.S. regulatory authorities before it can market and sell most of its products in a particular country.

In the United States, Baxalta’s products often undergo a three phase clinical testing program, with the results of preclinical and clinical trials submitted to FDA in the form of a Biologics License Application (BLA) for biologic products. Most non-United States jurisdictions where Baxalta markets its products have product approval and post-approval regulatory processes that are similar in principle to those in the United States. In Europe, for example, there are several tracks for marketing approval, depending on the type of product for which approval is sought. Under the centralized procedure in Europe, a company submits a single application to the EMA that is similar to the BLA in the United States. A marketing application approved by the European Commission (EC) is valid in all member states. In addition to the centralized procedure, Europe also has various other methods for submitting applications and receiving approvals. Regardless of the approval process employed, various parties share responsibilities for the monitoring, detection, and evaluation of adverse events post-approval, including national authorities, the EMA, the EC, and the marketing authorization holder. In some regions, it is possible to receive an “accelerated” review whereby the national regulatory authority will commit to truncated review timelines for products that meet specific medical needs.

The complex nature of biologics, including biosimilar formulations of reference biologic products, has warranted the creation of biosimilar regulatory approval pathways with strict, science-based approval standards that take into account patient safety considerations. These biosimilar approval pathways are considered to be more abbreviated than for new biologics, although they are significantly different from the abbreviated approval pathways available for “generic drugs” (small-molecule drugs that are the same as, and bioequivalent to, an already-approved small molecule drug). The European Union has created a pathway for the approval of biosimilars, and has published guidance for approval of certain biosimilar products. More recently, in 2010, the PPACA authorized FDA to approve biosimilars, but the U.S. approval pathway for biosimilar applications remains relatively untested and is subject to ongoing guidance from FDA. While mature pathways for regulatory approval of generic drugs and healthcare systems exist around the globe that support and promote the substitutability of generic drugs, the approval pathways for biosimilar products remain in various stages of development, as do private and public initiatives or actions supporting the substitutability of biosimilar products. Thus, the extent to which biosimilars will be viewed as readily substitutable, and in practice readily substituted, for the reference biologic product is largely yet to be determined.

The PPACA establishes a period of 12 years of data exclusivity for reference biologic products in order to preserve incentives for future innovation. Under this framework, FDA cannot make a product approval effective for any biosimilar application until at least 12 years after the reference product’s date of first licensure.

Changes to current products may be subject to vigorous review, including multiple regulatory submissions, and approvals are not certain. Even after the company obtains regulatory approval to market a product, the product and the company’s manufacturing processes and quality systems are subject to continued review by FDA and other regulatory authorities globally. State agencies in the United States also regulate the facilities, operations, employees, products and services of the company within their respective states. The company and its facilities are subject to periodic inspections and possible administrative and legal actions by FDA and other regulatory agencies inside and outside the United States. Such actions may include warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or

 

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withdrawal of existing approvals and licenses. As situations require, the company takes steps to ensure safety and efficacy of its products, such as removing products found not to meet applicable requirements from the market and improving the effectiveness of quality systems.

Baxalta and its products are also subject to various other regulatory regimes both inside and outside the United States. In the United States alone, the company is subject to the oversight of FDA, the Office of the Inspector General within the Department of Health and Human Services (OIG), the Center for Medicare/Medicaid Services (CMS), the Department of Justice (DOJ), the Environmental Protection Agency, the Department of Defense and Customs and Border Protection, in addition to others. The company supplies products and services to healthcare providers that are reimbursed by federally funded programs such as Medicare. As a result, the company’s activities are subject to regulation by CMS and enforcement by OIG and DOJ. In jurisdictions outside the United States, the company’s activities are subject to regulation by government agencies including the EMA in Europe, CFDA in China and other agencies in other jurisdictions. Many of the agencies enforcing these laws have increased their enforcement activities with respect to healthcare companies in recent years. These actions appear to be part of a general trend toward increased enforcement activity globally.

The sales, marketing and pricing of products and relationships that pharmaceutical companies have with healthcare providers are under increased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Food, Drug and Cosmetic Act (including as these laws relate to off-label promotion and production of products) and other healthcare related laws, as well as competition, data and patient privacy and export and import laws, is under increased focus by the agencies charged with overseeing such activities, including FDA, OIG, DOJ and the Federal Trade Commission. Anti-kickback laws make it illegal to solicit, offer, receive or pay any remuneration in exchange for or to induce the referral of business, including the purchase or prescription of a particular drug that is reimbursed by a state or federal program. False claims laws prohibit knowingly and willingly presenting, or causing to be presented for payment to third-party payors (including Medicare and Medicaid) any claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid).

The DOJ and the Securities and Exchange Commission have also increased their focus on the enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), particularly as it relates to the conduct of pharmaceutical companies. The FCPA and similar anti-bribery laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Healthcare professionals in many countries are employed by the government and consequently may be considered government officials. Foreign governments have also increased their scrutiny of pharmaceutical companies’ sales and marketing activities and relationships with healthcare providers and competitive practices generally.

FDA regulates all advertising and promotion activities and communications for products under its jurisdiction both before and after approval. A company can make only those claims relating to safety and efficacy that are approved by FDA. Healthcare providers are permitted to prescribe drugs for “off-label” uses—that is, uses not approved by FDA and therefore not described in the drug’s labeling—because FDA does not regulate the practice of medicine. However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses. Broadly speaking, a manufacturer may not promote a drug for off-label use, but may engage in non-promotional, balanced communication regarding off-label use under certain conditions. Failure to comply with applicable FDA requirements and restrictions in this area may subject a company to adverse publicity and enforcement action by FDA, DOJ, or OIG and the Department of Health and Human Services, as well as state authorities. Noncompliance could subject a company to a range of penalties that could have a significant commercial and financial impact, including civil and criminal fines and the imposition of agreements that materially restrict the manner in which a company promotes or distributes its products.

 

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Ethics and Compliance

In order to maintain compliance with applicable laws and regulations, Baxalta has established a comprehensive global ethics and compliance program. The program is intended to prevent, detect and mitigate risk across the organization and throughout the lifecycle of Baxalta’s products. Baxalta’s program starts with a culture and expectation of compliance at all levels of the organization. It also includes, among other things, resources to address compliance globally; formal compliance governance; mechanisms to intake questions and concerns; policies, processes, and procedures; communications; training; various forms of risk-based auditing and monitoring; review of alleged misconduct; and, when necessary, disciplinary action for failure to comply. All of these actions are intended to protect Baxalta from conduct by individual employees and agents that may be in violation of legal and regulatory requirements and the company’s compliance expectations.

Compliance with applicable laws and regulations is costly and materially affects Baxalta’s business. Baxalta expects that compliance with laws and regulations around the globe will increasingly require significant technical expertise and capital investment. Healthcare regulations substantially increase the time, difficulty and costs incurred in obtaining approval to market and promote products, and Baxalta’s failure to meet its compliance obligations may result in regulatory and enforcement actions, the seizure or recall of products, the suspension or revocation of the authority necessary for product production and sale, and other civil or criminal sanctions, including fines and penalties. The company expects to continuously devote substantial resources to proactively maintain, administer and expand its compliance program globally.

Sales, Marketing and Distribution Capabilities

Baxalta has its own direct sales force and also makes sales to and through independent distributors, drug wholesalers acting as sales agents and specialty pharmacy or other alternate site providers. The company reviews its sales channels from time to time, and will make changes in its sales and distribution model as the company believes necessary to best implement the company’s business plan and strategies. Managed care providers (for example, health maintenance organizations), hospitals, and state and federal government agencies are also important customers.

In the United States, third parties warehouse and ship a significant portion of the company’s products through their distribution centers. These centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales and customer service representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publication presence and advertising.

International sales are made and products are distributed on a direct basis or through independent distributors or sales agents in approximately 100 countries. In many international locations, including much of Europe, Latin America, Asia and Australia, for example, the government purchases products through public tenders or collective purchasing.

Facilities, Manufacturing Capabilities and Operations

For a brief transition period after the spin-off, the company’s corporate offices will continue to be located at One Baxter Parkway, Deerfield, Illinois. In 2015, Baxalta announced that it had entered into a long-term lease agreement for a 260,000 square foot facility in Bannockburn, Illinois that will serve as Baxalta’s global headquarters after the transition period.

 

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Baxalta manufactures its products in more than ten manufacturing facilities around the world. Baxalta owns or has long-term leases on all of its manufacturing facilities. The company’s principal manufacturing facilities are listed below.

 

Location

  

Owned/Leased

Orth, Austria    Owned
Vienna, Austria    Owned
Lessines, Belgium    Owned
Hayward, California    Leased
Los Angeles, California    Owned
Thousand Oaks, California    Owned
Pisa, Italy    Owned
Rieti, Italy    Owned
Milford, Massachusetts    Owned
Brooklyn Park, Minnesota    Owned
Woodlands, Singapore    Owned/Leased(1)
Neuchatel, Switzerland    Owned

 

(1) Baxalta owns the facility at Woodlands, Singapore, and leases the property upon which it rests.

In addition to the manufacturing facilities listed above, Baxalta is currently building a state-of-the-art manufacturing facility near Covington, Georgia, to support the growth of its plasma-based products. The timeline on the project spans several years with commercial production scheduled to begin in 2018.

The company is also expanding its manufacturing facility in Krems, Austria, with production expected to commence at the expanded facility in 2018.

In 2014, Baxalta announced that the company entered into a long-term lease in Cambridge, Massachusetts, for a facility that will serve as the company’s global innovation and R&D center.

The company’s facility in Hoover, Alabama is a critical facility for the testing of human plasma, including plasma collected by its BioLife subsidiary (as more fully described below under “—Sources and Availability of Raw Materials”) for use in the company’s products.

Baxalta’s properties include facilities which, in the company’s opinion, are suitable and adequate for development, manufacture, and distribution of its products.

Third Party Agreements

Baxalta has agreements with third parties for process development, analytical services, and manufacturing of certain products. Baxalta procures certain products and services from a limited number of suppliers and, in some cases, a single supply source. Baxalta also will have certain agreements with Baxter following the separation, including as described in “Certain Relationships and Related Person Transactions—Agreements with Baxter—Manufacturing and Supply Agreement.”

Sources and Availability of Raw Materials

Baxalta purchases, in the ordinary course of business, raw materials and supplies essential to its operations from numerous suppliers around the world, including in the United States. While efforts are made to diversify Baxalta’s source of components and materials, in certain instances Baxalta acquires components and materials from a sole supplier.

Human plasma is a critical raw material in Baxalta’s business. The company believes that its ability to internally and externally source plasma represents a distinctive and flexible infrastructure, which provides the

 

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company a unique capability with respect to the consistent delivery of high quality plasma-based products. Baxalta owns and operates plasma collection facilities in the United States and Austria through its wholly owned subsidiary BioLife Plasma Services L.P. (BioLife). BioLife operates and maintains more than 65 state-of-the-art plasma collection facilities in 23 states throughout the United States and at seven locations in Austria. Baxalta also maintains relationships with other plasma suppliers to ensure that it retains the flexibility to meet market demand for its plasma-based therapies, including through its 10-year contract manufacturing agreement with Sanquin Blood Supply Foundation of the Netherlands.

There have been no recent significant availability problems or supply shortages with respect to raw materials.

For additional information regarding sources and availability of raw materials, see the discussion of such matters under “Risk Factors—Risks Related to Baxalta’s Business—If Baxalta is unable to obtain sufficient components or raw materials on a timely basis or if it experiences other manufacturing or supply difficulties, its business may be adversely affected.”

Competition and Healthcare Cost Containment

Baxalta enjoys leading positions based on a number of competitive advantages. The Baxalta business benefits from continued innovation in its products and therapies, consistency of its supply of products, strong customer relationships and the technological advantages of its products.

Baxalta faces substantial competition from pharmaceutical, biotechnology and other companies of all sizes, in the United States and internationally, and such competitors continue to expand their manufacturing capacity and sales and marketing channels. Competition is primarily focused on cost-effectiveness, price, service, product effectiveness and quality, patient convenience and technological innovation. There has been increasing consolidation in the company’s customer base, which continues to result in pricing and market pressures.

The principal sources of competition for Baxalta’s principal products globally are as follows:

 

    ADVATE: Xyntha®/ReFacto AF® (Pfizer and Swedish Orphan Biovitrum); Kogenate® (Bayer); Helixate® (CSL Behring); Eloctate® (Biogen Idec); NovoEight® (Novo Nordisk); and Nuwiq® (Octapharma).

 

    FEIBA: NovoSeven®/NovoSeven RT® (Novo Nordisk); Coagil VII® (Pharmstandard); and Facteur VII-LFB® (LFB Group).

 

    GAMMAGARD LIQUID: Privigen®/Hizentra®/Carimune NF® (CSL Behring); Flebogamma DIF®/Gamunex-C® (Grifols); Octagam®/Octagam 10®/Gammanorm® (Octapharma); Ig Vena®/Gammaked® (Kedrion); and Intratect 10%®/Intratect, Intraglobin F®/Bivigam® (Biotest).

Additionally, for each of the principal products listed above, there are additional competitive products or alternative therapy regimens available on a more limited geographic basis throughout the world.

In March 2010, the PPACA was enacted in the United States. While this legislation provides for a number of changes in how companies are compensated for providing healthcare products and services, many of these changes are still being implemented by regulations. The PPACA includes several provisions which impact the company’s businesses in the United States, including a tax on the sales of its pharmaceutical products to the government, increased Medicaid rebates and an expansion of the 340B Drug Pricing Program which provides certain qualified entities, such as hospitals serving disadvantaged populations, with discounts on the purchase of drugs for outpatient use and an excise tax on the sale of certain drugs and medical devices.

For additional information regarding competition and healthcare cost containment, see the discussion of such matters in the “Risk Factors” section of this prospectus, including the following:

 

    “Risk Factors—Risks Related to Baxalta’s Business—Baxalta’s products face substantial competition in the product markets in which it operates.”

 

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    “Risk Factors—Risks Related to Baxalta’s Business—If reimbursement or other payment for Baxalta’s current or future products is reduced or modified in the United States or abroad, including through the implementation of government-sponsored healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, taxation or rebates, then Baxalta’s business could suffer.”

 

    “Risk Factors—Risks Related to Baxalta’s Business—Baxalta faces competition in the development of relationships with research, academic and governmental institutions.”

Employees

Baxalta expects to employ approximately 16,000 persons as of the distribution date. Outside the United States, some of Baxalta’s employees are represented by unions or works councils. Baxalta believes that it has good relations with its employees and their unions and works councils.

Environmental Matters

Environmental policies of the company require compliance with all applicable environmental regulations and contemplate, among other things, appropriate capital expenditures for environmental protection.

Legal Proceedings

Baxalta is from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of United States and foreign competition law, labor laws, consumer protection laws, and environmental laws and regulations, as well as claims or litigation relating to product liability, intellectual property, securities, breach of contract and tort. Baxalta operates in multiple jurisdictions and, as a result, a claim in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. Baxalta intends to defend vigorously against any pending or future claims and litigation.

On February 25, 2015, Baxalta received a notice of a violation from the Ventura County Air Pollution Control District as a result of it self-reporting certain violations of environmental regulations at its manufacturing facility located in Thousand Oaks, California, to that agency promptly after discovery on October 16, 2014, as required by local regulations. Pursuant to that notice, Baxalta paid penalties in the amount of $103,000 to the agency, which releases Baxalta of any further claims or liabilities for such violations.

For a description of further legal proceedings, see Note 14 to the audited combined financial statements.

While the liability of the company in connection with certain claims cannot be estimated with any certainty, and although the resolution in any reporting period of one or more of these matters could have a significant impact on the company’s results of operations and cash flows for that period, the outcome of these legal proceedings is not expected to have a material adverse effect on the company’s combined financial position. While Baxalta believes it has valid defenses in these matters, litigation is inherently uncertain, excessive verdicts do occur, and the company may in the future incur material judgments against it or enter into settlements of claims resulting in material financial payments or otherwise having a material operational or financial impact on the company.

Divestitures and Discontinued Operations

In July 2014, the company entered into an agreement to sell its commercial vaccines business and committed to a plan to divest the remainder of its vaccines business, which includes certain R&D programs. In December 2014, the company completed the sale of the commercial vaccines business and entered into an agreement to sell the remainder of the vaccines business. As a result of the divestitures, the operations and cash flows of the vaccines business will be eliminated from the ongoing operations of the company. In addition, the company will not have significant continuing involvement or cash flows from the operations associated with the vaccines business.

 

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MANAGEMENT

Executive Officers Following the Distribution

While some of Baxalta’s expected executive officers are currently officers and employees of Baxter, upon the distribution, none of these individuals will continue to be employees or executive officers of Baxter. The following table sets forth information regarding individuals who are expected to serve as Baxalta’s executive officers, including their positions after the distribution.

 

Name

   Age   

Title

Ludwig N. Hantson, Ph.D.    52    President and Chief Executive Officer
Robert J. Hombach    49   

Executive Vice President, Chief Financial Officer

and Chief Operations Officer

John Glasspool    53    Executive Vice President and Head of Corporate Strategy
and Customer Operations
Brian Goff    46    Executive Vice President and President, Hematology
Anne-Marie Law    48    Executive Vice President and Head of Human Resources
Jacopo Leonardi    43    Executive Vice President and President, Immunology
David D. Meek    51    Executive Vice President and President, Oncology
John J. Orloff, M.D.    58    Executive Vice President, Head of Research & Development and Chief Scientific Officer
Dagmar Rosa-Björkeson    51    Executive Vice President and President, Biosimilars
Patrice Zagame, M.D.    54    Executive Vice President and President, Intercontinental

Ludwig N. Hantson, Ph.D., age 52, is expected to serve as the President and Chief Executive Officer of Baxalta. He has served Baxter as Corporate Vice President and President, BioScience, having served in that capacity since October 2010, and is expected to continue in that role until the separation is completed. Dr. Hantson joined Baxter in May 2010 as Corporate Vice President and President, International. From 2001 to May 2010, Dr. Hantson held various positions at Novartis Pharmaceuticals Corporation, the most recent of which was Chief Executive Officer, Pharma North America. Prior to Novartis, Dr. Hantson spent 13 years with Johnson & Johnson in roles of increasing responsibility in marketing and clinical research and development.

Robert J. Hombach, age 49, is expected to serve as the Executive Vice President, Chief Financial Officer and Chief Operations Officer of Baxalta. He has served as Corporate Vice President and Chief Financial Officer of Baxter since July 2010 and is expected to continue in that role until the separation is completed. From February 2007 to March 2011, Mr. Hombach also served as Treasurer of Baxter and from December 2004 to February 2007, he was Vice President of Finance, Europe for Baxter. Prior to that, Mr. Hombach served in a number of finance positions of increasing responsibility in the planning, manufacturing, operations and treasury areas at Baxter.

John Glasspool, age 53, is expected to serve as Executive Vice President and Head of Corporate Strategy and Customer Operations for Baxalta after completion of the separation. Mr. Glasspool has more than 20 years of industry experience. He has served as Baxter’s Vice President, New Therapies and Market Developments since 2012 and is expected to continue in that role until the separation is completed. Mr. Glasspool had previously spent approximately 10 years with Novartis Pharmaceuticals, where he served in several Senior Vice President and Vice President positions, including Head of Region/Europe, Vaccines and Diagnosis and Head of Pricing, Market Access and Commercial Operations. Mr. Glasspool previously held key positions in market and sales for Johnson & Johnson and Scotia Pharmaceuticals.

Brian Goff, age 46, is expected to serve as Executive Vice President and President, Hematology for Baxalta upon completion of the separation. Mr. Goff has more than 20 years of industry experience. He has served as Baxter’s Global Franchise Head for Hemophilia since June 2012 and is expected to continue in that role until the separation is completed. Prior to joining Baxter, Mr. Goff was the Vice President and Head of the Primary Care

 

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Business Unit for Novartis Pharmaceuticals and had served in other key leadership positions at Novartis since 2005, including global brand leadership in Basel, Switzerland. Before joining Novartis in 2005, he worked for 14 years in key positions in sales and product management in the pharmaceutical division of Johnson & Johnson.

Anne-Marie Law, age 48, is expected to serve as Executive Vice President and Head of Human Resources for Baxalta upon completion of the separation. Ms. Law has more than 25 years of human resources experience. From 2009 until joining Baxalta in 2015, Ms. Law served in various senior positions at McKesson Corporation, including most recently as Senior Vice President, Human Resources McKesson Specialty Health/US Oncology since 2011. Ms. Law also served as Senior Vice President, Global Human Resources of VeriSign, Inc. from 2007 to 2009. Prior to joining VeriSign, Ms. Law spent approximately eight years in human resources leadership positions with Xilinx, Inc.

Jacopo Leonardi, age 43, serves as Executive Vice President and President, Immunology for Baxalta. Mr. Leonardi has 20 years of industry experience. He served as Region Head of Baxter’s North America Hematology Division in 2015 prior to joining Baxalta. From 2014 until 2015, he was General Manager, U.S. Hemophilia for Baxter, and prior to that he served in senior sales and marketing roles since 2009 for Baxter’s Hemophilia and U.S. BioTherapeutics businesses. Mr. Leonardi served in various roles at Eli Lilly and Johnson & Johnson from 1996-2009, including 10 years in senior marketing and other leadership roles.

David D. Meek, age 51, is expected to serve as Executive Vice President and President, Oncology for Baxalta upon completion of the separation. Mr. Meek has more than 25 years of industry experience. He has served as Baxter’s Vice President, Global Head of Oncology since early 2014 and is expected to continue in that role until the separation is completed. Mr. Meek served as Chief Commercial Officer of Endocyte, Inc., a public biopharmaceuticals company, from 2012 to 2014. Mr. Meek previously spent approximately seven years with Novartis Pharmaceuticals, where he served in several leadership positions, including Region Head, Novartis Oncology, Europe and President and CEO of Novartis, Canada. Prior to joining Novartis, Mr. Meek spent approximately 16 years with Johnson & Johnson, where he served in various market and sales executive leadership roles.

John J. Orloff, M.D., age 58, is expected to serve as Executive Vice President, Head of Research & Development and Chief Scientific Officer for Baxalta upon completion of the separation. Dr. Orloff has more than 30 years of industry and clinical experience, and, prior to joining Baxter in 2014 as Vice President, R&D in Bioscience, Dr. Orloff served as the Global Head of Clinical Development at Merck Serono Pharmaceuticals since 2014. He previously spent approximately 10 years with Novartis Pharmaceuticals, where he served in several Senior Vice President and Vice President positions, including Chief Medical Officer, Head of U.S. Medical and Regulatory Affairs and Global Head of Regulatory Strategy for Drug Regulatory Affairs. Prior to Novartis, Dr. Orloff spent 6 years in leadership roles at Merck Research Laboratories and 7 years on the faculty of the Yale University School of Medicine.

Dagmar Rosa-Björkeson, age 51, is expected to serve as Executive Vice President and President, Biosimilars upon completion of the separation. Ms. Rosa-Björkeson has more than 20 years of industry experience, and, prior to joining Baxter as its biosimilars program leader in 2014, she served in multiple capacities at Novartis Pharmaceuticals over 17 years where she was most recently Vice President, Head of Multiple Sclerosis. Previously she held other Vice President positions at Novartis, including having served as Country Head for Sweden and in leadership roles focused on sales and branding. Before her time at Novartis, she held sales oriented roles with Forest Pharmaceutical, Ferguson Advertising and Hoechst-Roussell Pharmaceuticals.

Patrice Zagame, M.D., age 54, is expected to serve as Executive Vice President and President, Intercontinental for Baxalta upon completion of the separation. Dr. Zagame has more than 25 years of industry experience, and, prior to joining Baxter in 2014, Dr. Zagame was Country Head for Brazil at Sanofi, a position

 

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he held since 2013. He was employed by Novartis Pharmaceuticals since 1996, where he served as a country head in several other emerging and developed markets, including France, Venezuela and Argentina, as well as serving terms as Head of Pharma Division, Regional Marketing Director and Integration Officer. Prior to his time at Novartis, Dr. Zagame held management and sales positions at Glaxo-Wellcome and Rhone-Poulenc.

Board of Directors Following the Distribution

The following table sets forth information with respect to those persons who are expected to serve on Baxalta’s Board of Directors following the completion of the distribution, including Dr. Hantson, whose biographical information is included above in the section entitled “Management—Executive Officers Following the Distribution.” The nominees will be presented to Baxalta’s sole shareholder, Baxter, for election prior to the distribution.

 

Name

   Age     

Title

Wayne T. Hockmeyer, Ph.D.

   70      Chairman

Blake E. Devitt

   68      Director

John D. Forsyth

   67      Director

Gail D. Fosler

   67      Director

James R. Gavin III, M.D., Ph.D.

   69      Director

Ludwig N. Hantson, Ph.D.

   52      Director, President and Chief Executive Officer

Albert P.L. Stroucken

   67      Director

Wayne T. Hockmeyer, Ph.D., age 70, will serve as non-executive Chairman of the Baxalta Board of Directors. Dr. Hockmeyer has served as a Director of Baxter since September 2007. Dr. Hockmeyer founded MedImmune, Inc., a healthcare company focused on infectious diseases, cancer and inflammatory diseases, and served as Chairman and/or Chief Executive Officer of MedImmune from 1988 to 2007. Prior to that, he was vice president of laboratory research and product development at Praxis Biologics Inc. and chief of the Department of Immunology at Walter Reed Army Institute of Research. Dr. Hockmeyer serves as a director of GenVec Inc. and previously served as a director of MedImmune, Inc., Middlebrook Pharmaceuticals, Inc. and Idenix Pharmaceuticals Inc.

Blake E. Devitt, age 68, has served as a Director of Baxter since 2005. Mr. Devitt retired in 2004 from the public accounting firm of Ernst & Young LLP. During his 33-year career at Ernst & Young, Mr. Devitt held several positions, including Senior Audit Partner and Director, Pharmaceutical and Medical Device Industry Practice, from 1994 to 2004.

John D. Forsyth, age 67, has served as a Director of Baxter since 2003. Mr. Forsyth has been Chairman of Wellmark Blue Cross Blue Shield, a healthcare insurance provider for residents of Iowa and South Dakota, since 2000 and Chief Executive Officer since 1996. Prior to that, he spent 26 years at the University of Michigan, holding various positions, including President and Chief Executive Officer of the University of Michigan Health System.

Gail D. Fosler, age 67, has served as a Director of Baxter since 2001. Ms. Fosler is President of The GailFosler Group LLC, a strategic advisory service for global business leaders and public policy makers that she has led since 2010. Prior to that, she spent more than 20 years at The Conference Board, a global research and business membership organization, where she held several positions including President, Executive Vice President and Chief Economist. Ms. Fosler previously served as a director of Caterpillar Inc.

James R. Gavin III, M.D., Ph.D., age 69, has served as a Director of Baxter since 2003. Dr. Gavin is Chief Executive Officer and Chief Medical Officer of Healing Our Village, Inc., a corporation that specializes in targeted advocacy, training, education, disease management and outreach for health care professionals and minority communities, having previously served as Executive Vice President for Clinical Affairs at Healing Our

 

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Village from 2005 to 2007. Dr. Gavin is also Clinical Professor of Medicine and Senior Advisor of Health Affairs at Emory University, a position he has held since 2005. From 2002 to 2005, Dr. Gavin was President of the Morehouse School of Medicine and from 1991 to 2002, he was Senior Science Officer at Howard Hughes Medical Institute, a nonprofit medical research organization. Dr. Gavin previously served as a director of Amylin Pharmaceuticals, Inc. and Nuvelo Inc.

Albert P.L. Stroucken, age 67, has served as a Director of Baxter since 2004. Mr. Stroucken has served as Chairman, President and Chief Executive Officer of Owens-Illinois, Inc., a glass packaging company, since 2006 and as director since 2005. From 1998 to 2006, Mr. Stroucken served as President and Chief Executive Officer of H.B. Fuller Company, a manufacturer of adhesives, sealants, coatings, paints and other specialty chemicals. Mr. Stroucken served as Chairman of the Board of H.B. Fuller Company from 1999 to 2006. From 1997 to 1998, he was General Manager of the Inorganics Division of Bayer AG. From 1992 to 1997, Mr. Stroucken was Executive Vice President and President of the Industrial Chemicals Division of Bayer Corporation.

Upon completion of the distribution, Baxalta’s Board of Directors will be divided into three approximately equal classes. The term of the first class of directors will expire on the date of the 2016 annual meeting of shareholders, the term of the second class of directors will expire on the date of the 2017 annual meeting of shareholders, and the term of the third class of directors will expire on the date of the 2018 annual meeting of shareholders. Baxalta expects that the first class will be comprised of Mr. Devitt and Ms. Fosler; the second class will be comprised of Mr. Forsyth, Dr. Gavin and Mr. Stroucken; and the third class will be comprised of Dr. Hockmeyer and Dr. Hantson. Commencing with the 2016 annual meeting of shareholders, directors for each class will be elected at the annual meeting of shareholders held in the year in which the term for that class expires and thereafter will serve for a term of three years. At any meeting of shareholders for the election of directors at which a quorum is present, the election will be determined by a majority of the votes cast by the shareholders entitled to vote in the election, with directors not receiving a majority of the votes cast required to tender their resignations for consideration by the Board, except that in the case of a contested election, the election will be determined by a plurality of the votes cast by the shareholders entitled to vote in the election.

Committees of the Board of Directors

Effective upon the completion of the distribution, Baxalta’s Board of Directors will have the following standing committees: Audit Committee, Compensation Committee, Corporate Governance Committee, and Quality and Compliance Committee. Each committee is expected to consist solely of independent directors and be governed by a written charter. All such committee charters will be available on Baxalta’s website at www.baxalta.com prior to the distribution.

Audit Committee. The Audit Committee is currently expected to be comprised of Mr. Devitt (Chair), Ms. Fosler and Mr. Stroucken, each of whom is independent under the rules of the New York Stock Exchange and Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Baxalta Board of Directors is expected to determine that at least one member of the Audit Committee is an “audit committee financial expert” for purposes of the rules of the SEC. The Audit Committee will be primarily concerned with the integrity of Baxalta’s financial statements, system of internal accounting controls, the internal and external audit process, and the process for monitoring compliance with laws and regulations. The Audit Committee’s duties will include: (1) reviewing the adequacy and effectiveness of Baxalta’s internal control over financial reporting with management and the external and internal auditors, and reviewing with management Baxalta’s disclosure controls and procedures; (2) retaining and evaluating the qualifications, independence and performance of the independent auditor; (3) approving audit and permissible non-audit engagements to be undertaken by the independent registered public accounting firm; (4) reviewing the scope of the annual external and internal audits; (5) reviewing and discussing Baxalta’s financial statements (audited and non-audited), as well as earnings press releases and related information, prior to their filing or release; (6) overseeing legal and regulatory compliance as it relates to financial matters; (7) holding separate executive sessions with the independent registered public accounting firm, the internal auditor and management; and (8) discussing guidelines and policies governing the process by which Baxalta assesses and manages risk.

 

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Compensation Committee. The Compensation Committee is currently expected to be comprised of Mr. Forsyth (Chair), Dr. Gavin, Dr. Hockmeyer and Mr. Stroucken, each of whom is independent under the rules of the New York Stock Exchange. The Compensation Committee will have the ability to exercise the authority of the Baxalta Board of Directors relating to employee benefit and equity-based plans and the compensation of the company’s officers. The Compensation Committee’s duties will include: (1) making recommendations for consideration by the Board of Directors, in executive session and in coordination with the Corporate Governance Committee, concerning the compensation of Baxalta’s Chief Executive Officer; (2) determining the compensation of the company’s officers (other than Baxalta’s Chief Executive Officer) and advising the Board of Directors of such determination; (3) making recommendations to the Board of Directors with respect to incentive compensation plans and equity-based plans and exercising the authority of the Board of Directors concerning benefit plans; (4) serving as the administration committee of the company’s equity-based plans; (5) making recommendations to the Board of Directors concerning director compensation; (6) reviewing the adequacy of the company’s stock ownership guidelines and periodically assessing compliance with these guidelines; and (7) overseeing the company’s compensation philosophy and strategy and periodically assessing the risk related to its compensation policies and practices. The Corporate Governance and Compensation Committees will work together to establish a link between Dr. Hantson’s performance and decisions regarding his compensation. All compensation actions relating to Dr. Hantson will be subject to the approval of the independent directors of the Board of Directors.

Corporate Governance Committee. The Corporate Governance Committee is currently expected to be comprised of Dr. Hockmeyer (Chair), Mr. Devitt, Mr. Forsyth and Ms. Fosler, each of whom is independent under the rules of the New York Stock Exchange. The Corporate Governance Committee will assist and advise the Baxalta Board of Directors on director nominations, corporate governance and general Board of Directors organization and planning matters. The Corporate Governance Committee’s duties include: (1) developing criteria for use in evaluating and selecting candidates for election or re-election to the Board of Directors and assisting the Board of Directors in identifying and attracting qualified director candidates, as well as in assessing director independence; (2) identifying and recommending to the Board of Directors the director nominees for the annual meeting of shareholders and recommending persons to fill any vacancy on the Board of Directors; (3) determining Board of Directors committee structure and membership; (4) overseeing the succession planning process for management, including Baxalta’s Chief Executive Officer; (5) developing, implementing and overseeing an annual process for evaluating the performance of Baxalta’s Chief Executive Officer; (6) developing, implementing and overseeing an annual process for evaluating Board of Directors and committee performance; and (7) reviewing at least annually the adequacy of Baxalta’s Corporate Governance Guidelines.

Quality and Compliance Committee. The Quality and Compliance Committee is currently expected to be comprised of Dr. Gavin (Chair), Mr. Devitt, Ms. Fosler and Dr. Hockmeyer. The Quality and Compliance Committee will assist the Baxalta Board of Directors in fulfilling its oversight responsibilities with respect to legal, regulatory, quality and other compliance matters. The Quality and Compliance Committee’s duties will include: (1) reviewing the adequacy and effectiveness of the company’s policies, practices and procedures with respect to FDA and similar compliance and product quality and safety; (2) receiving regular reports regarding significant compliance matters from the senior management; (3) reviewing with management strategic issues and corporate actions relating to current and emerging political, corporate citizenship and public policy issues that may affect the business operations, performance or public image of the company, including those related to public affairs, political advocacy, environmental health and safety and sustainability, corporate social responsibility and philanthropic activities. In addition, the Quality and Compliance Committee will coordinate with the Audit Committee regarding oversight of non-financial compliance.

Compensation Committee Interlocks and Insider Participation

During the company’s fiscal year ended December 31, 2014, Baxalta was not an independent company, and did not have a compensation committee or any other committee serving a similar function. Decisions as to the compensation of Baxalta’s executive officers who currently serve as Baxter’s executive officers were made by Baxter, as described in the section of this prospectus captioned “Executive Compensation—Compensation Discussion and Analysis.”

 

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Corporate Governance

Baxalta expects that its Board of Directors will periodically review its corporate governance practices and take other actions to address changes in regulatory requirements, developments in governance best practices and matters raised by shareholders.

Director Independence

It is expected that Baxalta’s Board of Directors will adopt Corporate Governance Guidelines that will require that the Baxalta Board of Directors be composed of a majority of directors who meet the criteria for “independence” established by the rules of the New York Stock Exchange. To be considered independent, the Board of Directors must affirmatively determine that a director does not have any direct or indirect material relationship with Baxalta (either directly or as a partner, shareholder or officer of an organization that has a relationship with Baxalta), and solely with regard to Compensation Committee Members, consider all relevant factors that could impair the ability of such Compensation Committee members to make independent judgments about executive compensation.

In making its independence determinations, the Board of Directors considers transactions, relationships and arrangements between Baxalta and entities with which directors are associated as executive officers, directors and trustees. When these transactions, relationships and arrangements exist, they are in the ordinary course of business and are of a type customary for a global company such as Baxalta.

Director Qualifications

The experience, expertise and knowledge represented by the Board of Directors as a collective body allows the Board to lead Baxalta in a manner that serves its shareholders’ interests appropriately. Set forth below is a discussion of the key qualifications for each of the directors in which are expected to align with the criteria to be included in Baxalta’s Corporate Governance Guidelines.

Mr. Devitt—Significant accounting expertise and knowledge of the healthcare industry through his 33-year career at Ernst & Young, including his service as Director of the Pharmaceutical and Medical Device Industry Practice

Mr. Forsyth—Extensive experience in the healthcare industry as well as an understanding of the challenges associated with leading and operating within large, complex organizations as current Chairman and Chief Executive Officer of Wellmark Blue Cross Blue Shield and his 25 years of management experience at the University of Michigan Health System

Ms. Fosler—Substantial experience with respect to corporate best practices as well as significant global economic expertise, with an emphasis on emerging markets, especially China, as a result of her more than 20-year leadership career at The Conference Board and her other public-company board service

Dr. Gavin—Extensive medical and scientific expertise and knowledge of the healthcare industry as a result of the positions he has held at Emory University, the Morehouse School of Medicine and Howard Hughes Medical Institute as well as leadership experience given his service as Chief Executive Officer and Chief Medical Officer of Healing Our Village, Inc.

Dr. Hantson—Extensive experience leading and operating within global, multi-faceted corporations and deep knowledge of the biopharmaceuticals industry as a result of more than 25 years spent in roles of increasing responsibility at Baxter, Novartis and Johnson & Johnson

Dr. Hockmeyer—Substantial experience developing and running a significant biopharmaceutical company as founder and Chairman and Chief Executive Officer of MedImmune and significant scientific and clinical expertise as a result of his roles at Praxis Biologics Inc. and Walter Reed Army Institute of Research

 

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Mr. Stroucken—Substantial experience leading and operating large, multi-faceted corporations and financial expertise as a result of serving as Chairman, President and Chief Executive Officer of Owens-Illinois, Inc. and H.B. Fuller Company as well as experience in the pharmaceutical and chemical industries through his roles at Bayer

Nomination of Directors

Baxalta’s amended and restated bylaws will contain provisions that address the process by which a shareholder may nominate an individual to stand for election to the Board of Directors. Baxalta expects that its Board of Directors will adopt a policy concerning the evaluation of shareholder recommendations of Board candidates by the Corporate Governance Committee.

Corporate Governance Guidelines

The Baxalta Board of Directors is expected to adopt a set of Corporate Governance Guidelines in connection with the separation to assist it in guiding Baxalta’s governance practices. These practices will be regularly re-evaluated by the Corporate Governance Committee in light of changing circumstances in order to continue serving the company’s best interests and the best interests of its shareholders. Baxalta’s Corporate Governance Guidelines are expected to cover topics including, but not limited to, director qualification standards, director responsibilities (including those of the Chairman), director access to management and independent advisors, director compensation, director orientation and continuing education, succession planning and the annual evaluations of the Board of Directors and its committees.

Communicating with the Board of Directors

Baxalta’s Corporate Governance Guidelines are expected to include procedures by which shareholders and other interested parties may contact any of Baxalta’s directors, including the Chairman of the Board of Directors or the non-management directors as a group, by writing a letter to Baxalta Director c/o Corporate Secretary, Baxalta Incorporated, One Baxter Parkway, Deerfield, Illinois 60015 or by sending an e-mail to boardofdirectors@baxalta.com. Baxalta’s Corporate Secretary will forward communications to the Board directly to the Chairman, unless a different director is specified.

Director Qualification Standards

Baxalta’s Corporate Governance Guidelines are expected to provide that the Corporate Governance Committee is responsible for reviewing with the Board of Directors the appropriate skills and characteristics required of Board members in the context of the makeup of the Board of Directors and developing criteria for identifying and evaluating Board candidates.

The process that this committee will use to identify a nominee to serve as a member of the Board of Directors will depend on the qualities being sought. From time to time, Baxalta may engage an independent search firm to assist the committee in identifying individuals qualified to be Board members. Board members should have backgrounds that when combined provide a portfolio of experience and knowledge that will serve Baxalta’s governance and strategic needs.

In the process of identifying nominees to serve as a member of the Board of Directors, the Corporate Governance Committee will consider diversity of background, including diversity of gender, race, ethnic or geographic origin, age, and experience (including in business, government and education as well as healthcare, science and technology) as a relevant factor in the selection process. This factor is relevant as a diverse Board of Directors is likely to be a well-balanced Board of Directors with varying perspectives and a breadth of experience that will positively contribute to robust discussion at Board of Directors meetings.

 

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A nominee’s ability to meet the independence criteria established by the New York Stock Exchange will also be a factor in the nominee selection process.

Once a candidate has been identified, the Corporate Governance Committee and the independent search firm, if any, will engage in a process that includes a thorough investigation of the candidate, an examination of his or her business background and education, research on the individual’s accomplishments and qualifications, an in-person interview and reference checking. If this process generates a positive indication, the members of the Corporate Governance Committee and the Chairman of the Board of Directors will meet separately with the candidate and then confer with each other regarding their respective impressions of the candidate. If the individual was positively received, the Corporate Governance Committee will then recommend the individual to the full Board of Directors for further meetings and evaluation and ultimately election. If the full Board of Directors agrees, the Chairman of the Board of Directors will then be authorized to extend an offer to the individual candidate.

Board Leadership Structure

Baxalta’s Corporate Governance Guidelines provide the Board of Directors flexibility in determining its leadership structure. Upon the distribution, Ludwig N. Hantson, Ph.D. is expected to serve as Baxalta’s Chief Executive Officer and Wayne T. Hockmeyer, Ph.D. is expected to serve as the Chairman of the Board of Directors. Baxalta believes that this leadership structure, which separates the Chairman and Chief Executive Officer roles, is optimal at this time because it allows Dr. Hantson to focus on operating and managing Baxalta following Baxalta’s transition to being a public company while Dr. Hockmeyer can focus on the leadership of the Board of Directors. The Chairman of the Board of Directors, pursuant to Baxalta’s amended and restated bylaws, would preside at all meetings of the Board of Directors and shareholders, and act as liaison between the Board of Directors and the shareholders. The Board of Directors will periodically evaluate leadership structure and determine whether continuing the separate roles of Board of Directors Chairman and Chief Executive Officer is in Baxalta’s best interests based on circumstances existing at the time, including the skills and experience that the selected Chairman and Chief Executive Officer bring to these roles.

Code of Conduct

In connection with the separation, Baxalta will adopt a Code of Conduct that requires all its business activities to be conducted in compliance with laws, regulations, and ethical principles and values. The Code of Conduct will apply to all members of Baxalta’s Board of Directors and all of Baxalta’s employees, including Baxalta’s Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers. Any amendment to, or waiver from, a provision of the Code of Conduct that applies to Baxalta’s Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions will be disclosed on Baxalta’s website. The Code of Conduct will be available on Baxalta’s website.

Non-Employee Director Compensation

Baxalta’s non-employee directors have not received, and will not receive, any compensation for their service on Baxalta’s Board of Directors prior to the completion of the distribution.

Baxalta is currently reviewing the compensation that it will pay to its non-employee directors following the distribution, but anticipates that its non-employee directors will be compensated for their service under a non-employee director compensation plan. Baxalta’s non-employee director compensation plan is expected to include cash compensation and annual equity awards.

 

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EXECUTIVE COMPENSATION

Introduction

Baxalta is currently a wholly owned subsidiary of Baxter, and the Compensation Committee of Baxter’s Board of Directors determined the past compensation of Baxalta’s executive officers who were also executive officers of Baxter. The Compensation Discussion and Analysis, as well as the Summary Compensation Tables and accompanying information below, discusses these historical compensation practices of Baxter. The only information in this Executive Compensation section that addresses compensation effects of the distribution or anticipated compensation with Baxalta after the distribution is set forth below under “Effects of the Separation on Outstanding Executive Compensation Awards; Baxalta Compensation.” While certain expectations regarding post-distribution compensation are included herein, Baxalta’s own Compensation Committee and Board of Directors will determine Baxalta’s executive compensation policies following the distribution.

The Compensation Discussion and Analysis presents historical compensation information for Dr. Hantson and Mr. Hombach, since they are both current named executive officers at Baxter, but generally does not address the specific compensation decisions for the other individuals who are expected to be Baxalta’s executive officers as none of them are executive officers at Baxter and therefore Baxter’s Compensation Committee did not make such decisions directly. Among the individuals who are expected to serve as Baxalta’s executive officers, the three most highly compensated in 2014 were Brian Goff, who is expected to serve as Baxalta’s Executive Vice President and President, Hematology, Dagmar Rosa-Björkeson, who is expected to serve as Baxalta’s Executive Vice President and President, Biosimilars, and Patrice Zagame, who is expected to serve as Baxalta’s Executive Vice President and President, Intercontinental, and as such have been included in the Executive Compensation Tables below. Decisions related to the compensation of Mr. Goff in 2014 were made by Baxter management, and Ms. Rosa-Björkeson’s and Dr. Zagame’s compensation in 2014 was negotiated in conjunction with their hiring.

Additional information about Baxalta’s expected senior executive team following the distribution is set forth in the section of this prospectus captioned “Management—Executive Officers Following the Distribution.”

Compensation Discussion and Analysis

The following Compensation Discussion and Analysis describes Baxter’s compensation philosophy, policies and practices as they applied to Dr. Hantson and Mr. Hombach in 2014.

Compensation Philosophy

Baxter’s compensation program is designed to:

 

    Recognize both Baxter and individual performance;

 

    Drive the long-term financial performance of Baxter (and in doing so, encourage innovation and appropriate levels of risk-taking); and

 

    Reflect the value of each officer’s position in the market and within Baxter.

The objective of the program is to compensate Baxter’s executive officers in a manner that is consistent with these principles, aligns the interests of management and shareholders and drives sustained and superior performance relative to Baxter’s peers. The program is also designed to be comparable with companies with which Baxter competes for executive talent in order to attract, retain and motivate high-performing executives.

 

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Structure of Compensation Program

Pay-for-Performance

Pay-for-performance is the most significant structural element of Baxter’s compensation program. Annual performance against financial targets (adjusted EPS, adjusted sales and adjusted operating cash flow) drives the payout of cash bonuses. Baxter’s three-year growth in shareholder value relative to Baxter’s peer group and three-year performance against annual return on invested capital (ROIC) targets together determine the payout under 50% of Baxter’s annual equity awards to executive officers, which are granted in the form of performance share units. The overall performance of Baxter’s common stock determines the value of the remainder, which is granted in the form of stock options. The Baxter Compensation Committee’s assessment of how each officer performs his or her job impacts earned cash bonuses and equity awards.

Baxter’s focus on pay-for-performance is best demonstrated through the structure of its executive compensation programs, where the majority of executive pay is at risk and subject to specific annual and long-term performance requirements.

Financial Targets

The Baxter Compensation Committee selected adjusted EPS, adjusted sales and adjusted operating cash flow as the financial measures on which to assess Baxter’s performance for purposes of funding the cash bonus pool. The relative weight assigned to each of these measures was 50%, 25%, and 25% respectively. If each financial measure is met in a given year, then the cash bonus pool is funded at two times the base salary for each executive officer covered by the bonus pool and negative discretion is applied as described below.

These three financial metrics (adjusted EPS, adjusted sales and adjusted operating cash flow) were deemed appropriate by the Baxter Compensation Committee as they are of immediate interest to shareholders and are the primary measures as to which Baxter regularly provides guidance to the market. Adjusted EPS is the most heavily weighted measure, as the Baxter Compensation Committee believes it is a straightforward measure of Baxter’s current ability to generate value that is well understood by shareholders.

Performance over the Long-Term

As a healthcare company, Baxter operates in a rapidly changing, increasingly competitive and heavily regulated environment. Accordingly, encouraging its executive officers to focus on the long-term performance of Baxter is particularly important to Baxter. Historically, the payout of performance share units was based solely on Baxter’s growth in shareholder value relative to its peers. The performance share units that were awarded to the named executive officers in 2014 were designed to reward strong and sustained long-term performance by Baxter on two important measures: growth in shareholder value and ROIC. The ROIC measure was added to the performance share units in 2013 to provide a better balance compared to tying the award to a single performance metric. It also provides the opportunity to focus on a strategic financial component over a multi-year period. Finally, the use of multiple measures for performance share units is aligned with external market best practice.

Performance Against Peers

One-half of the performance share units awarded in 2014 were designed to reward strong long-term performance by Baxter relative to the companies in Baxter’s peer group. These healthcare companies are the primary companies with which Baxter competes for talent, investor capital and market position. The payout of shares of Baxter common stock resulting from the vesting of these performance share units will be based on Baxter’s change in total shareholder value versus the change in total shareholder value of the companies included in Baxter’s healthcare peer group during the three-year performance period commencing with the year in which the performance share units are awarded (January 1, 2014—December 31, 2016).

 

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Growth in shareholder value will be measured based on the following formula:

Average Closing Stock Price Over the Last Twenty Days of the Performance Period

minus Average Closing Stock Price Over the Last Twenty Days Immediately

Preceding the Commencement of the Performance Period

plus Reinvested Dividends

Divided (÷) by

Average Closing Stock Price Over the Last Twenty Days Immediately Preceding the

Commencement of the Performance Period

The performance share units will pay out in shares of Baxter common stock in a range of 0% to 200% of the number of performance share units awarded. The table below shows how Baxter’s growth in shareholder value against its peers correlates with the 0% to 200% range of payouts.

 

Performance

   Payout  

Below 25(th) Percentile Rank

     0

25(th) Percentile Rank

     25

60(th) Percentile Rank

     100

75(th) Percentile Rank

     150

85(th) Percentile Rank or Above

     200

The performance share units will pay out linearly between each set of data points above the 25th percentile and below the 85th percentile. For example, if Baxter performs at a 40th percentile rank, each named executive officer will receive the number of shares equal to 57% of his award of performance share units. In order to pay out at the 100% target level, Baxter must outperform its peers at the 60th percentile.

Performance Against ROIC

ROIC is the strategic internal cash earnings measure that will determine the payout of shares of Baxter common stock for the other half of the performance share units awarded in 2014. ROIC measures how effectively Baxter is allocating and utilizing capital in its operations. The Baxter Compensation Committee selected ROIC as the second performance share unit measure in order to balance the Growth in Shareholder Value measure, helping to ensure a focus on efficient and value-maximizing investment and appropriate long-term management of capital. Improving ROIC requires disciplined management of working capital and is inherently challenging because of the measure’s focus on increasing cash flows relative to improved retained earnings. As Baxter becomes more profitable it becomes more difficult to show significant ROIC improvement due to the impact of increases in retained earnings on the denominator of the measure—that is, as the denominator grows Baxter is required to generate more cash flows from operations than in the prior year to improve its ROIC.

ROIC is calculated by dividing cash flows from operations (excluding the impact of interest expense) by average invested capital. During the three-year performance period the Baxter Compensation Committee will set annual ROIC goals. The 2014 goal is intended to measure performance for both the first tranche of the 2014 ROIC performance share units and the second tranche of the 2013 ROIC performance share units. The performance share units that are tied to the ROIC goals will pay out in shares of Baxter common stock in a range of 0% to 200% of the number of performance share units awarded. The table below shows how Baxter’s ROIC performance correlates with the 0% to 200% range of payouts.

 

Performance as a Percentage of Target

   Payout  

Below 93%

     0

93%

     25

100%

     100

107%

     200

 

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Baxter does not provide guidance on ROIC nor does it disclose ROIC in its public filings. However, for years 2014, 2013 and 2012, Baxter achieved 102.5%, 100.6% and 108.8% of its respective ROIC targets.

Performance Payout is “At Risk”

As it is possible that there will be no payout under the performance share units, these awards are completely “at-risk” compensation. For example, Baxter did not issue any shares of common stock with respect to the performance share units granted in 2009 and payable in 2012 or granted in 2012 and payable in 2015 because Baxter did not achieve the threshold level of performance over the applicable three-year periods. This result is consistent with Baxter’s pay-for-performance philosophy and the Baxter Compensation Committee’s belief that a portion of equity granted to Baxter’s officers be completely “at-risk.” Additionally, the payouts of performance share awards in 2011 (2008 grant), 2013 (2010 grant) and 2014 (2011 grant) were 37%, 65% and 30%, respectively, of the original targets for those awards, demonstrating alignment with Baxter’s overall pay-for-performance philosophy.

Performance of Baxter Common Stock

The performance of Baxter common stock determines the value of the stock options and restricted stock units that have been granted to the named executive officers in 2014.

Individual Performance

The Baxter Compensation Committee (or the Baxter Board in the case of Baxter’s Chief Executive Officer) assesses the individual performance of each executive officer in making compensation decisions related to cash bonuses and equity awards. The Baxter Compensation Committee’s assessment of individual performance is inherently subjective and requires significant input from Baxter’s Chief Executive Officer. Essentially, the Baxter Compensation Committee assesses how well an officer fulfilled his or her obligations in the past year. This assessment focuses on how well the operations or function for which an officer is responsible performed during the year. One factor that the Baxter Compensation Committee considers in making assessments of individual performance is how well an officer performed against the performance goals set for such officer for the relevant year. The Baxter Chief Executive Officer reviews the performance goals and self-evaluations of each of the other executive officers and shares his insights and recommendations with the Baxter Compensation Committee.

The goals set for each named executive officer for 2014 reflected the diversity of Baxter’s business and the wide range of responsibilities that are attributed to each of these officers. In evaluating each officer’s performance against his or her goals, consideration is given not only to whether an objective was met but most significantly how the objective was met including how appropriately the officer prioritized meeting an objective relative to the officer’s other responsibilities. Accordingly, the adjustments that are made to such officer’s compensation based on his or her performance are not directly correlated to the number of goals that an officer achieved. The Baxter Compensation Committee believes that this type of rigid correlation could motivate an officer to focus on achieving his or her performance goals rather than on fulfilling his or her job responsibilities in a manner that is in the best interests of Baxter and its shareholders. The Baxter Compensation Committee adjusts cash bonuses and equity grants for individual performance on a discretionary basis in light of the Baxter Compensation Committee’s overall assessment of how well an officer fulfilled his or her obligations to Baxter in the past year.

Baxter’s Peer Group and Use of Peer Group Data

Use of peer group data plays a significant role in the structure of the compensation program as it is a primary input in setting target levels for base salaries, cash bonuses and equity awards and helps to ensure that

 

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compensation is market competitive in order to retain and attract talent. Baxter uses data from companies that the Baxter Compensation Committee has selected as comparable companies (collectively, the peer group) to help identify a reasonable starting point for base salaries, cash bonuses and equity awards and then analyzes both Baxter and individual performance to determine whether it is appropriate to move away from this baseline. Peer group data also plays a role in what non-cash compensation is paid to the named executive officers as the market data Baxter obtains regarding companies in its peer group helps determine what types and amounts of non-cash compensation are appropriate for competitive purposes. If data is not available for a particular officer’s position at Baxter, the Baxter Compensation Committee utilizes the information that is available to Aon Hewitt as well as internal equity principles to set an officer’s compensation targets at levels that are competitive with other officers at Baxter.

Baxter’s use of peer group data is consistent among the named executive officers in that the baseline (i.e., percentile target) that is set for an element of compensation applies to all officers regardless of position. However, differences in the compensation paid to comparable officers at companies in the peer group do result in different target amounts for officers depending on their position.

Baxter’s peer group includes all of the companies in the Standard & Poor’s 500 Health Care Index, except for distribution companies, insurance providers, hospitals, nursing homes, consultants and companies whose primary focus is not human health.

As discussed above, information may not be available from each of the companies in Baxter’s peer group for every officer position. As a result, the number of companies in Baxter’s peer group may fluctuate as applied to each officer. As of December 31, 2014, the companies included in this peer group and that will therefore be used to determine the payout under one half of the performance share units granted in 2014, are set forth below.

 

Abbott Laboratories Covidien Plc PerkinElmer, Inc.
AbbVie Inc. C.R. Bard, Inc. Perrigo Company Plc
Actavis plc DaVita Healthcare Partners Inc. Pfizer Inc.
Agilent Technologies, Inc. DENTSPLY International Inc. Quest Diagnostics Incorporated
Alexion Pharmaceuticals, Inc. Edwards Lifesciences Corporation Regeneron Pharmaceuticals, Inc.
Allergan, Inc. Eli Lilly and Company St. Jude Medical, Inc.
Amgen Inc. Gilead Sciences, Inc. Stryker Corporation
Becton, Dickinson and Company Hospira, Inc. Thermo Fisher Scientific Inc.
Biogen Idec Inc. Intuitive Surgical, Inc. Varian Medical Systems, Inc.
Boston Scientific Corporation Johnson & Johnson Vertex Pharmaceuticals Incorporated
Bristol-Myers Squibb Company Laboratory Corp. of America Holdings Waters Corporation
CareFusion Corporation Medtronic, Inc. Zimmer Holdings, Inc.
Celgene Corporation Merck & Co., Inc.
Cerner Corporation Mylan Inc.

The median revenue and market capitalization for these companies is approximately $7.3 billion and $27.7 billion, respectively. As of December 31, 2014, Baxter’s revenue of $16.7 billion was above the 75th percentile and market capitalization of $39.7 billion was just below the 60th percentile of the peer group.

Elements of Executive Compensation

Base Salaries

Base salaries are paid in order to provide a fixed component of compensation for the named executive officers. For each of the last three years, base salary target levels for all named executive officers were set within a range that is competitive with the 50th percentile of salaries paid to comparable officers at companies in the peer group. The Baxter Compensation Committee selected the 50th percentile as the positioning for base salaries because, as they are the only fixed component of compensation, they are less appropriately used to motivate performance and thus the Baxter Compensation Committee determined to set them at a reasonably competitive mid-point.

 

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The Baxter Compensation Committee sets actual individual base salaries higher or lower than targeted base salaries for any reason that the Baxter Compensation Committee deems relevant. Factors that the Baxter Compensation Committee considered for 2014 base salaries included how long an officer has been at Baxter and in his or her current role, the impact of his or her position on Baxter’s results, the quality of the overall experience an officer brings to his or her role and how the officer’s role fits within the structure of the organization. Base salaries for all of the named executive officers were generally competitive with the 50th percentile of salaries paid to comparable officers in the peer group. In August of 2014, Dr. Hantson’s base salary was further increased from $765,000 to $950,000 in recognition of his designation as the future CEO of Baxalta.

Cash Bonuses

Cash bonuses are intended to reward both Baxter and individual performance by providing officers with an opportunity to receive additional cash compensation based on both Baxter’s performance relative to the financial targets described above and the Baxter Compensation Committee’s assessment of how well an officer performed his or her role during the applicable year. In assessing an individual officer’s performance, the Baxter Compensation Committee considers the individual’s present and potential contribution to Baxter, in addition to various performance criteria which include, but are not limited to, implementation of critical projects (e.g., acquisitions or divestitures), product development, regulatory or quality performance and innovation or research goals. Baxter believes it is important to consider an individual’s performance in assessing compensation and not just Baxter’s overall performance relative to the financial targets discussed above. In addition, cash bonuses may be periodically used by Baxter for recruitment purposes in order to competitively compensate and attract high performing executives.

Target Setting

For each of the last three years, cash bonus targets for all named executive officers were set within a range that is competitive with cash bonuses paid to comparable officers at companies in Baxter’s peer group. The Baxter Compensation Committee has the discretion to adjust each officer’s target as it deems appropriate. Typical reasons for adjusting cash bonus targets are how long an officer has been in his or her current role and how the officer’s role fits within the structure of the organization.

Determination of 2014 Annual Bonus Payouts

Based on Baxter’s performance against its 2014 financial targets, the bonus pool was funded at 1.92 times the base salary for each executive officer covered by the bonus pool. The Baxter Compensation Committee then has the ability to use “negative discretion” to determine the actual cash bonus amount paid to each named executive officer. Any “negative discretion” takes into account the Baxter Compensation Committee’s view of how well each officer performed his or her responsibilities during 2014. As a result, the actual cash bonus paid to each named executive officer was calculated using the following formula: (x) the product of such officer’s cash bonus target multiplied by (y) Baxter performance adjustment percentage (see description immediately below under “Company Performance”) multiplied by (z) such officer’s individual performance adjustment percentage as determined by the Baxter Compensation Committee.

Company Performance. As discussed above, Baxter performed relative to its adjusted EPS, adjusted sales and adjusted operating cash flow financial targets for 2014 at 101.2%, 102.2% and 97.8%, respectively. Given the relative weighting of these targets (50%, 25% and 25%, respectively) and the associated funding schedule for each metric, this performance translated into an adjustment to each officer’s cash bonus of 111% of target. The funding schedule associated with each metric ranges from 0% to 150% with the baseline for each metric being 100% (i.e., Baxter must achieve a given financial target for the funding for such metric to be 100% and funding

 

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can range from 0% to 150%). The band of funding around the baseline varies by metric. This variation reflects the probability of achievement of a given target based on historical performance data as well as the scope of the given metric. Accordingly, the adjustment for 2014 performance of 111% was higher than the adjustment of 103% for 2013 performance, which was in turn lower than the adjustment of 116% for 2012 performance, based on how Baxter performed against its financial targets in each respective year and the relative weighting of, and funding schedule associated with, each metric. The fluctuation from year to year in these adjustments based on actual company performance against specific financial targets is consistent with Baxter’s pay-for-performance philosophy.

Individual Performance. Based on the Baxter Compensation Committee’s assessment of the performance of each officer of Baxter, each officer’s cash bonus target was adjusted further in a range of 100% to 130% of target. Dr. Hantson was paid a cash bonus of $1,370,850, which included an upward individual adjustment of 130% of target. This adjustment reflects the leadership provided to and the performance of the BioScience business in 2014. Mr. Hombach was paid a cash bonus of $1,049,061, which included an upward individual adjustment of 130% of target. This adjustment primarily reflects the financial performance of Baxter in 2014 as well as Mr. Hombach’s leadership with respect to the company’s finance function and within the organization. The Baxter Compensation Committee believes that the methodology it uses in paying cash bonuses is consistent with providing compensation that reflects how an officer is valued within Baxter and the marketplace.

Spin-Off Retention Bonus. As Baxter works toward a successful transition plan to create two new independent companies, retaining senior leadership talent through and after the transition date is critical to both the execution of the plan and business continuity. Mr. Hombach is eligible for a cash bonus with a target of $750,000 in connection with the planned separation of Baxter and Baxalta. Payment is conditioned on the successful close of the spin-off of Baxalta and can range between 75% to 150% of the target amount based on milestone achievements.

Equity Awards

Equity awards are the most significant components of each named executive officer’s compensation package. Baxter’s compensation program emphasizes equity awards to motivate executive officers to drive the long-term performance of Baxter and to align their interests with those of Baxter’s shareholders. This emphasis is appropriate as these officers have the greatest role in establishing Baxter’s direction and should have the greatest proportion of their compensation aligned with the long-term interests of shareholders. This alignment is furthered by requiring officers to satisfy the stock ownership guidelines discussed below under “Baxter’s Stock Ownership Guidelines for Executive Officers; Prohibitions on Trading.”

Structure of Equity Compensation Program

Baxter’s equity compensation program for named executive officers provides for annual grants in equal proportion of performance share units and stock options. Performance share units are provided to reflect the Baxter Compensation Committee’s belief that as the recipients of these awards have the most responsibility for Baxter’s performance, the payout of a portion of their equity awards should be completely “at-risk.” Stock options compose the balance of the annual equity grant to recognize that it is in the best interests of Baxter to provide a certain amount of equity that will vest as long as the officer continues to serve at Baxter. There are factors beyond the control of the officers that affect Baxter’s performance as measured against its peers or otherwise, and equity awards that are not subject to performance metrics but only vest over time provide greater stability in compensation and will only have value so long as Baxter’s stock price continues to increase from the date of grant. Baxter also periodically grants equity to named executive officers for recognition, recruitment and retention purposes, and as discussed above, utilizes equity as a primary vehicle to attract high performing executives.

Individual Equity Grants

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much equity similarly situated officers were receiving at companies in Baxter’s peer group. This review focused on how much equity should be granted to each officer in order to be competitive with similarly situated officers at companies in Baxter’s peer group. The Baxter Compensation Committee set targets that were competitive with the peer group for each of the named executive officers. In determining the actual amount of each officer’s equity grant, the Baxter Compensation Committee then used its discretion to adjust 2014 target equity grants for Baxter’s officers across a range of 100% to 150%. With respect to the Baxalta named executive officers, the 2014 target equity grants were adjusted as follows: Dr. Hantson, 100% and Mr. Hombach, 100%. These adjustments were made primarily to reflect the Baxter Compensation Committee’s assessment of such officer’s individual performance during 2013 and future potential.

Spin-Off Retention Restricted Stock Units

As Baxter works toward a successful transition plan to create two new independent companies, retaining senior leadership talent through and after the transition date is critical to both the execution of the plan and business continuity. Certain Baxalta executive officers received a grant of restricted stock units in connection with the planned separation of Baxter and Baxalta, including Mr. Hombach in the amount of 40,000 units. The grants will vest on the earlier of the third anniversary of the grant date or involuntary termination of employment, other than for cause.

Perquisites

Baxter provides a very limited range of perquisites to its named executive officers. Baxter permits limited personal travel on company aircraft due to the potential efficiencies associated with such use. All personal aircraft usage must be pre-approved by the Chief Executive Officer and any such aircraft usage, including by the Chief Executive Officer, is reviewed annually by the Board. Baxter reimburses business-related travel and other related entertainment and incidental costs for executive officers and their significant others when such executive officers are invited to attend Board meetings or other business-related activities where the attendance of a significant other is expected. Baxter pays these expenses and costs as the business purpose served is closely related to the benefits received. Baxter also pays for an annual physical exam for executive officers and believes this practice to be in the best interests of Baxter and its shareholders as the health of an executive officer is critical to an officer’s performance. In 2014, the aggregate incremental cost associated with providing these perquisites was less than $10,000 for each named executive officer.

Retirement and Other Benefits

Baxter’s named executive officers hired prior to December 31, 2006, including Mr. Hombach, participate in Baxter’s pension and supplemental pension plans to the same extent and on the same terms as any other eligible employee. Dr. Hantson is not eligible to participate in Baxter’s pension and supplemental pension plans as such plans were closed to new participants as of December 31, 2006. Employees hired or rehired after that date, including Dr. Hantson, receive an additional employer contribution equal to 3% of his or her compensation in Baxter’s tax-qualified Section 401(k) plan and nonqualified deferred compensation plan if his or her compensation exceeds the compensation that can be taken into account under Baxter’s 401(k) plan.

Each of the named executive officers is eligible to participate in Baxter’s deferred compensation plan, which permits the officer to defer the receipt of covered compensation and receive a 3.5% company match. Baxter allows named executive officers to participate in a deferred compensation plan in order to provide a market competitive plan as well as to facilitate retirement savings as part of the total compensation program in a cost- and tax-effective way for Baxter.

Risk Assessment of Compensation Policies and Practices

With the assistance of the Baxter Compensation Committee’s independent compensation consultant, Frederic W. Cook & Co. Inc., the Baxter Compensation Committee reviewed Baxter’s material compensation

 

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policies and practices applicable to its employees, including its executive officers, and concluded that these policies and practices do not create risks that are reasonably likely to have a material adverse effect on Baxter. The key features of the executive compensation program that support this conclusion include:

 

    appropriate pay philosophy, peer group and market positioning;

 

    effective balance in cash and equity mix, short- and long-term focus, corporate, business unit and individual performance focus and financial and non-financial performance measurement and discretion; and

 

    meaningful risk mitigants, such as the stock ownership guidelines and executive compensation recoupment policy discussed below.

Baxter’s Stock Ownership Guidelines for Executive Officers; Prohibitions on Trading

In order to drive the long-term performance of Baxter, Baxter’s executive officers are required to own a certain amount of Baxter stock. Each of Baxter’s executive officers (other than Baxter’s Chief Executive Officer) is required to achieve ownership of Baxter common stock valued at a minimum of four times annual base salary, in each case within five years of becoming an executive officer. This requirement, like the executive compensation recoupment policy discussed below, helps ensure long-term focus and appropriate levels of risk-taking by Baxter’s executive officers.

Pursuant to Baxter’s securities trading policy, officers and certain other employees, including all named executive officers, are prohibited from engaging in short-term trading activities and option transactions in Baxter stock. As a result, such persons cannot enter into any “put” or “call” options or otherwise buy or sell derivatives on any Baxter stock. Additionally, it is Baxter’s policy to not permit officers to pledge Baxter stock as collateral for loans or otherwise as a security interest.

Executive Compensation Recoupment Policy

Baxter has an executive compensation recoupment policy that applies to all cash bonuses paid by Baxter under its incentive plans and all grants of equity awarded by Baxter to any person designated as an officer by the Board. Following any restatement of Baxter’s financial results that requires an amendment to any previously filed results or if an officer violates a restrictive covenant contained in any agreement between Baxter and such officer, the Board will review the facts and circumstances that led to the requirement for the restatement or the violation and take any actions it deems appropriate with respect to executive incentive compensation. With respect to a restatement, the Board will consider whether an officer received compensation based on performance reported, but not actually achieved, or was accountable for the events that led to the restatement, including any misconduct. Actions the Board may take include: recovery, reduction or forfeiture of all or part of any bonus, equity or other compensation previously provided or to be provided in the future; disciplinary actions; and the pursuit of any other remedies.

Post-Termination Compensation

Baxter’s named executive officers may receive certain payments if Baxter undergoes a change in control and the officer ceases to be employed by Baxter under their employment agreements or severance agreements, as applicable. Providing for payments in a change in control situation is consistent with market practice and helps ensure that if a change in control is in the best interest of the shareholders, officers have appropriate incentives to remain focused on their responsibilities before, during and after the transaction without undue concern for their personal circumstances. In consideration for these benefits, Baxter’s named executive officers have agreed to be bound for two years from the date of their respective termination to non-competition, non-solicitation and non-disparagement covenants. The Baxter named executive officers’ severance benefits were not a significant factor in determining their other compensation elements because the Baxter Compensation Committee did not believe that such benefits, as provided, exceeded market practices of peer companies in a way that justified a reduction in any other elements or vice versa None of the named executive officers is entitled to any excise tax gross-up covering such officer’s change in control benefits.

 

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Following Baxter’s announcement of its plan to separate into two new independent companies, the Board approved a severance agreement with Mr. Hombach, the terms of which are described below.

Effects of the Separation on Outstanding Executive Compensation Awards; Baxalta Compensation

The separation is not a change in control and therefore will not entitle Baxalta officers to any change in control benefits; however, in connection with the separation, certain Baxalta executive officers, including Mr. Hombach, have entered into or will enter into severance agreements with Baxter that will become obligations of Baxalta upon completion of the separation and distribution. See “—Baxalta Executive Severance Agreements.”

Equity-Based Compensation

Concurrently with the distribution, and notwithstanding anything in the foregoing to the contrary (including the more general discussion of Baxter’s equity-based compensation awards presented in the “Executive Compensation Tables” discussion herein), holders of Baxter stock options, restricted stock units and performance share units, in each case to the extent granted prior to January 1, 2015 and whether vested or unvested, will generally receive both adjusted Baxter awards and Baxalta awards, subject only to limited exceptions. Baxter stock options and restricted stock units granted on or after January 1, 2015, whether vested or unvested, will generally be adjusted into corresponding awards of either Baxter or Baxalta equity based on which company will employ the employee holding such awards following the separation, and be subject to the original vesting schedule, subject only to limited exceptions.

Similarly, employees who hold unrestricted common stock of Baxter acquired through past equity awards or otherwise will be treated like all other Baxter shareholders in the distribution. See also “Certain Relationships and Related Person Transactions—Agreements with Baxter—Employee Matters Agreement.”

Baxalta Compensation Programs

Baxalta believes that the Baxter executive compensation programs are effective both at retaining and motivating officers and competitive with compensation programs at peer companies. Baxalta expects the executive compensation programs that will initially be adopted by Baxalta will be very similar to those in place at Baxter immediately prior to the distribution. However, after the distribution, the Baxalta Compensation Committee will continue to evaluate Baxalta’s compensation and benefit programs and may make adjustments as necessary to meet prevailing business needs.

Baxalta Executive Severance Agreements

In connection with the separation, certain Baxalta executive officers, including Mr. Hombach, have entered into or will enter into severance agreements with Baxter that will become obligations of Baxalta upon completion of the distribution. The executive severance agreements provide for payments to the executive officer if such executive officer’s employment is terminated by Baxalta without cause (as defined in the executive severance agreement) prior to the first anniversary of the distribution date. In such event, the payments include a lump sum payment equal to 1.5 times the executive officer’s salary and target bonus, a lump sum payment covering six months of cost-sharing for health insurance coverage and outplacement expense reimbursement in an amount not exceeding $50,000. Such agreements are consistent with market practice and help ensure that senior leadership talent is retained through and after the transition date, which is critical for both the execution of the plan and business continuity.

For the avoidance of doubt, the “Potential Payments Upon Termination Following A Change in Control” table and related discussion below is applicable only to the executive severance agreements entered into with Baxter and in existence as of the end of 2014.

 

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Table of Contents

Executive Compensation Tables

The following executive compensation tables show compensation provided by Baxter to Ludwig N. Hantson, Ph.D., who is expected to serve as Baxalta’s President and Chief Executive Officer, and Robert J. Hombach, who is expected to serve as Baxalta’s Executive Vice President, Chief Financial Officer and Chief Operations Officer. Both Dr. Hantson and Mr. Hombach were named executive officers of Baxter in 2014. They also include the 2014 compensation provided by Baxter for Brian Goff, who is expected to serve as Baxalta’s Executive Vice President and President, Hematology, Dagmar Rosa-Björkeson, who is expected to serve as Baxalta’s Executive Vice President and President, Biosimilars, and Patrice Zagame, who is expected to serve as Baxalta’s Executive Vice President and President, Intercontinental. The following tables reflect compensation arrangements in 2012, 2013 and 2014 with Baxter only, and they do not reflect the compensation arrangements with Baxalta or the effects of the separation and distribution on outstanding executive compensation awards, including the impact of the separation and distribution on outstanding performance-based awards. See “Executive Compensation—Effects of the Separation on Outstanding Executive Compensation Awards; Baxalta Compensation.”

Summary Compensation Table

The following table shows for the years indicated below the compensation provided to Baxalta’s named executive officers by Baxter. Position titles refer to each named executive officer’s title at Baxter prior to the spin-off.

 

Name and

Principal Position

  Year     Salary
($)
    Bonus
($)(1)
    Stock
Awards
($)(2)
    Option
Awards
($)(3)
    Non-Equity
Incentive
Plan
Compensation
($)(4)
    Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)(5)
    All Other
Compensation
($)(6)
    Total
($)
 

Ludwig N. Hantson,

    2014        833,846        —          972,610        1,191,276        1,370,850        —          118,315        4,486,897   

Corporate Vice President

    2013        742,308        —          1,096,573        1,428,483        1,004,250        —          135,267        4,406,881   

and President, BioScience

    2012        692,308        —          3,974,999        906,193        1,367,800        —          102,079        7,043,379   

Robert J. Hombach,

    2014        755,000        —          3,886,172        1,191,276        1,049,061        2,601,713        57,478        9,540,700   

Corporate Vice President and

    2013        687,692        —          877,271        1,142,793        890,435        744,791        54,510        4,397,492   

Chief Financial Officer

    2012        609,231        —          1,466,499        906,193        873,828        1,470,588        43,654        5,369,993