S-4/A 1 d98425ds4a.htm S-4/A S-4/A
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As filed with the Securities and Exchange Commission on April 21, 2016

Registration No. 333-210320

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

to

FORM S-4

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 Number)

1200 Lakeside Drive

Bannockburn, Illinois 60015

224-940-2000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Peter G. Edwards

1200 Lakeside Drive

Bannockburn, Illinois 60015

224-940-2000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

David A. Schuette
Mayer Brown LLP
71 South Wacker Drive
Chicago, Illinois 60606
312-701-7363
 

David J. Goldschmidt
Skadden, Arps,

Slate, Meagher & Flom LLP

4 Times Square
New York, New York 10036
212-735-3000

 

 

Approximate date of commencement of proposed sale of the securities to the public: As promptly as practicable after the filing of this registration statement and other conditions to the commencement of the exchange offer described herein have been satisfied or, where permissible, waived.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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   ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
  Amount to be
registered(1)
 

Proposed maximum
offering price

per unit

  Proposed maximum
aggregate
offering price(2)
  Amount of
registration fee(3)
Common Stock, par value $0.01 per share(4)   12,800,000   n/a   $481,626,750   $48,500

 

 

(1) Represents the maximum number of shares of common stock, par value $0.01 per share, of Baxalta Incorporated, a Delaware corporation, to be exchanged for shares of common stock, par value $1.00 per share, of Baxter International Inc., a Delaware corporation, as described in the prospectus filed as part of this registration statement.
(2) This maximum aggregate offering price assumes the acquisition of up to 11,316,418 shares of common stock, par value $1.00 per share, of Baxter International Inc. in exchange for shares of common stock, par value $0.01 per share, of Baxalta Incorporated held by Baxter International Inc. This maximum aggregate offering price, estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) and Rule 457(c) under the Securities Act of 1933 (the Securities Act), is based on the product of (i) $42.56, the average of the high and low sale prices of Baxter International Inc. common stock on the New York Stock Exchange on April 15, 2016 and (ii) 11,316,418, the maximum number of shares of Baxter International Inc. common stock to be acquired in the exchange offer (based on the indicative exchange ratio of 1.1311 in effect following the close of trading on the New York Stock Exchange on April 20, 2016, the last trading day prior to commencement of the exchange offer).
(3) Computed in accordance with Rule 457(f) under the Securities Act to be $48,500, which is equal to 0.0001007 multiplied by the maximum aggregate offering price of shares of Baxter International Inc. common stock to be acquired of $481,626,750. The Registrant previously paid $10,070 of the registration fee in connection with the initial filing of this Registration Statement.
(4) Includes the related preferred stock purchase rights.

 

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 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may change. Baxter International Inc. may not complete the exchange offer and the securities being registered may not be exchanged or distributed until the registration statement filed with the Securities and Exchange Commission of which this prospectus forms a part is effective. This prospectus is not an offer to sell or exchange these securities and Baxter International Inc. is not soliciting offers to buy or exchange these securities in any jurisdiction where the exchange offer or sale is not permitted.

 

BAXTER INTERNATIONAL INC.

Offer to Exchange up to 12,800,000 Shares of Common Stock of

BAXALTA INCORPORATED

Which Are Owned by Baxter International Inc. for Outstanding Shares of Common Stock of

BAXTER INTERNATIONAL INC.

 

 

THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 11:59 P.M., NEW YORK CITY TIME, ON MAY 18, 2016 UNLESS THE EXCHANGE OFFER IS EXTENDED OR TERMINATED.

Baxter International Inc. (Baxter) is offering to exchange (the exchange offer) up to 12,800,000 shares of common stock (Baxalta common stock) of Baxalta Incorporated (Baxalta) in the aggregate for outstanding shares of common stock of Baxter (Baxter common stock) that are validly tendered and not validly withdrawn.

For each $100 of Baxter common stock tendered by you and accepted in the exchange offer, you will receive approximately $107.52 of Baxalta common stock, subject to an upper limit of 1.4026 shares of Baxalta common stock per share of Baxter common stock. The exchange offer does not provide for a lower limit or minimum exchange ratio. IF THE UPPER LIMIT IS IN EFFECT, YOU MAY RECEIVE LESS THAN $107.52 OF BAXALTA COMMON STOCK FOR EACH $100 OF BAXTER COMMON STOCK THAT YOU TENDER, AND YOU COULD RECEIVE MUCH LESS.

The average value of the two stocks will be determined by reference to the simple arithmetic average of the daily volume-weighted average prices (VWAPs), as determined by Baxter, of Baxter common stock (the Average Baxter Price) and Baxalta common stock (the Average Baxalta Price) on the New York Stock Exchange (NYSE) during the three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer (the Averaging Dates and this three-day period, the Averaging Period), which are currently expected to be May 12, 13 and 16, 2016. See “The Exchanage Offer—Terms of the Exchange Offer.”

Baxter common stock and Baxalta common stock are listed on the NYSE under the symbols “BAX” and “BXLT,” respectively. The reported last sales prices of Baxter common stock and Baxalta common stock on the NYSE on April 20, 2016 were $43.26 and $40.66 per share, respectively. The indicative exchange ratio that would have been in effect following the official close of trading on the NYSE on April 20, 2016, based on the VWAPs of Baxter common stock and Baxalta common stock on April 18, 19 and 20, 2016, would have provided for 1.1311 shares of Baxalta common stock to be exchanged for each share of Baxter common stock accepted.

Subject to any voluntary extension by Baxter of the exchange offer period or any extension mandated by applicable law, the final exchange ratio will be announced by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). At such time, the final exchange ratio will also be available at www.dfking.com/bax and from the information agent, D.F. King & Co., Inc., at 48 Wall Street, New York, NY 10005 or by calling 1-800-622-1649 (toll-free in the United States) or 1-212-269-5550 (for banks and brokers). Baxter will announce whether the upper limit on the number of shares of Baxalta common stock that can be received for each share of Baxter common stock tendered is in effect at the expiration of the exchange offer, through www.dfking.com/bax and by press release, no later than 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer. Commencing on the third day of the exchange offer, indicative exchange ratios (calculated in the manner described in this prospectus) will also be available on that website and from the information agent.

You should read carefully the terms and conditions of the exchange offer described in this prospectus. None of Baxter, Baxalta or any of their respective directors or officers, the dealer manager, the information agent or the exchange agent makes any recommendation as to whether you should tender all, some or none of your shares of Baxter common stock. You must make your own decision after reading this document and consulting with your advisors.

Baxter’s obligation to exchange shares of Baxalta common stock for shares of Baxter common stock is subject to the conditions listed under “The Exchange Offer—Conditions to Completion of the Exchange Offer.”

 

 

See “Risk Factors” beginning on page 28 for a discussion of factors that you should consider in connection with the exchange offer.

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

 

 

The dealer manager for the exchange offer is:

 

  J.P. Morgan  

 

 

The date of this prospectus is April 21, 2016.


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INCORPORATION BY REFERENCE

     1   

QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER

     3   

SUMMARY

     14   

RISK FACTORS

     28   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     58   

DIVIDEND POLICY

     61   

THE TRANSACTIONS

     62   

THE EXCHANGE OFFER

     68   

POTENTIAL ADDITIONAL DISTRIBUTION OF BAXALTA COMMON STOCK

     86   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF BAXALTA

     87   

SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA OF BAXALTA

     90   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BAXALTA

     91   

BUSINESS

     118   

MANAGEMENT

     132   

EXECUTIVE COMPENSATION

     143   

AGREEMENTS BETWEEN BAXTER AND BAXALTA AND OTHER RELATED PARTY TRANSACTIONS

     167   

SECURITY OWNERSHIP BY DIRECTORS, EXECUTIVE OFFICERS AND 5% BENEFICIAL OWNERS OF BAXTER AND BAXALTA

     176   

U.S. FEDERAL INCOME TAX CONSEQUENCES

     180   

DESCRIPTION OF CAPITAL STOCK OF BAXALTA

     183   

COMPARISON OF STOCKHOLDER RIGHTS

     190   

LEGAL MATTERS

     194   

EXPERTS

     194   

GLOSSARY OF SCIENTIFIC TERMS

     195   

INDEX TO FINANCIAL STATEMENTS OF BAXALTA

     F-1   


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This prospectus incorporates by reference important business and financial information about Baxter from documents filed with the Securities and Exchange Commission (the SEC) that have not been included herein or delivered herewith. This information is available without charge at the website that the SEC maintains at www.sec.gov, as well as from other sources. See “Incorporation by Reference.” In addition, you may ask any questions about the exchange offer or request copies of the exchange offer documents and the other information incorporated by reference into this prospectus by Baxter, without charge, upon written or oral request to the information agent, D.F. King & Co., Inc., at 48 Wall Street, New York, NY 10005 or by calling 1-800-622-1649 (toll-free in the United States) or 1-212-269-5550 (for banks and brokers). In order to receive timely delivery of those materials, you must make your requests no later than five business days before expiration of the exchange offer.

This prospectus is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Baxter common stock or Baxalta common stock in any jurisdiction in which the offer, sale or exchange is not permitted. Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in Baxter common stock or Baxalta common stock that may apply in their home countries. Baxter, Baxalta and the dealer manager cannot provide any assurance about whether such limitations exist.

Presentation of Information

As used in this prospectus, unless the context requires otherwise, (i) references to “Baxter,” “Baxter International,” and “Baxter International Inc.” refer to Baxter International Inc. and its consolidated subsidiaries (after giving effect to the separation and distribution of Baxalta Incorporated) and (ii) references to “Baxalta,” “company,” “we,” “us” or “our” refer to Baxalta Incorporated and its consolidated subsidiaries.

“Combined company” or “combined company” refers collectively to Baxalta and Shire plc following the completion of our proposed merger with Shire plc.

“Distribution” or “distribution” refers to the distribution by Baxter on July 1, 2015 of approximately 80.5% of the shares of Baxalta common stock to stockholders of Baxter.

“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 stockholders of Baxter.

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

See “Glossary of Scientific Terms” for definitions of certain scientific terms used in the prospectus.

 

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INCORPORATION BY REFERENCE

The SEC allows certain information to be “incorporated by reference” into this prospectus by Baxter, which means that Baxter can disclose important information to you by referring you to another document it has separately filed with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained directly in this prospectus. This prospectus incorporates by reference the documents set forth below that Baxter has previously filed with the SEC. These documents contain important information about Baxter, its business, financial condition and results of operations:

Baxter SEC Filings

 

    Baxter’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on February 26, 2016; and

 

    Baxter’s Current Reports on Form 8-K filed with the SEC on January 11, 2016, February 2, 2016 (solely with respect to the Current Report on Form 8-K relating to the termination of Baxter’s 364-Day Credit Agreement), March 24, 2016 and March 28, 2016.

All documents filed by Baxter pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), from the date of this prospectus to the date that this offering is terminated or expires shall also be deemed to be incorporated into this prospectus by reference (except for any information therein which has been furnished rather than filed). Subsequent filings with the SEC will automatically modify and supersede the information in this prospectus.

Documents incorporated by reference are available without charge, upon written or oral request to the information agent, D.F. King & Co., Inc., at 48 Wall Street, New York, NY 10005 or by calling 1-800-622-1649 (toll-free in the United States) or 1-212-269-5550 (for banks and brokers). In order to receive timely delivery of those materials, you must make your requests no later than five business days before expiration of the exchange offer.

Where You Can Find More Information About Baxter and Baxalta

Baxter and Baxalta file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy this information at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of this information by mail from the SEC at the above address, at prescribed rates. The SEC also maintains a website that contains reports, proxy statements and other information that Baxter and Baxalta file electronically with the SEC. The address of that website is www.sec.gov.

Baxalta has filed a registration statement on Form S-4 under the Securities Act, of which this prospectus forms a part, to register with the SEC the shares of Baxalta common stock to be exchanged in the exchange offer to be offered to Baxter stockholders whose shares of Baxter common stock are accepted for exchange. Baxter will file a Tender Offer Statement on Schedule TO with the SEC with respect to the exchange offer. This prospectus constitutes Baxter’s offer to exchange, in addition to being a prospectus of Baxalta. This prospectus does not contain all of the information set forth in the registration statement, the exhibits to the registration statement or the Schedule TO, selected portions of which are omitted from this prospectus in accordance with the rules and regulations of the SEC. For further information pertaining to Baxter, Baxter common stock, Baxalta and Baxalta common stock, reference is made to the registration statement and its exhibits. Statements contained in this prospectus or in any document incorporated herein by reference as to the contents of any contract or other document referred to within this prospectus or other documents that are incorporated herein by reference are not

 

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necessarily complete and, in each instance, reference is made to the copy of the applicable contract or other document filed as an exhibit to the registration statement or otherwise filed with the SEC. Each statement contained in this prospectus is qualified in its entirety by reference to the underlying documents.

Where You Can Find More Information About Shire

On January 11, 2016, Baxalta announced that it had reached an agreement (merger agreement) with Shire plc (Shire), pursuant to which Shire would acquire Baxalta (the merger), subject to the satisfaction or waiver of certain conditions described elsewhere in this prospectus. See “Summary—The Merger Agreement with Shire.” Shire is also subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, files annual, quarterly and current reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s Public Reference Room and by accessing the website of the SEC referred to above. On April 18, 2016, Shire filed a proxy statement/prospectus with the SEC with respect to the merger. The proxy statement/prospectus has been declared effective by the SEC. See “Summary—The Merger Agreement with Shire—Information About Shire.”

 

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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER

Baxter has decided to pursue the exchange offer for all or a portion of its remaining interest in Baxalta, consisting of 12,800,000 shares of Baxalta common stock, which represents approximately 1.9% of the outstanding common stock of Baxalta. Following the exchange offer, if Baxter disposes of all of the remaining shares of Baxalta common stock held by it in the exchange offer, Baxalta will be wholly independent from Baxter, except that certain agreements between Baxter and Baxalta will remain in place. See “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter.” The following are answers to common questions about the exchange offer.

 

1. Why did Baxter choose an exchange offer as the way to dispose of all or a portion of its remaining interest in Baxalta?

Baxter believes that the exchange offer, also referred to as the “split-off,” is a tax-efficient way to divest all or a portion of its remaining interest in Baxalta. The split-off is expected to qualify as a tax-free transaction to Baxter and its stockholders under Sections 355 and 361 of the Internal Revenue Code of 1986, as amended (the Code). You are urged to read carefully the discussion in “U.S. Federal Income Tax Consequences” and to consult your own tax advisor regarding the consequences to you of the exchange offer and the merger.

Baxter and Baxalta also have significantly different competitive strengths and operating strategies. The exchange offer is an efficient means of placing Baxalta common stock with holders of Baxter common stock who wish to directly own an interest in Baxalta.

 

2. What are the main ways that the relationship between Baxalta and Baxter will change after the exchange offer is completed?

Following the completion of the exchange offer, if Baxter disposes of all of the remaining shares of Baxalta common stock held by it in the exchange offer, Baxter will no longer have any ownership interest in Baxalta and will not be able to seek to influence Baxalta’s policies or strategies as a stockholder. Baxalta will remain subject to its agreements with Baxter, as described in “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter.”

 

3. Who will receive dividends on Baxalta common stock declared prior to the completion of the exchange offer?

The declaration and payment of dividends to holders of Baxalta common stock is at the discretion of Baxalta’s Board of Directors in accordance with applicable law after taking into account various factors.

If the record date for a dividend precedes the expiration date of the exchange offer, holders of shares distributed in the exchange offer will not participate in such dividend, but will have the right to participate in any dividends distributed after completion of the exchange offer to the extent they hold the Baxalta shares on the relevant record date.

 

4. Who may participate in the exchange offer and will it be extended outside the United States?

Any U.S. holder of Baxter common stock during the exchange offer period, which will be at least 20 business days, may participate in the exchange offer, including directors and officers of Baxalta and its subsidiaries, and, subject to compliance with Baxter’s Securities Trading Policy, the directors and officers of Baxter and its subsidiaries. This includes for the account of current or former Baxter employees: (i) shares held within the Baxter common stock fund investment alternative in the Baxter International Inc. and Subsidiaries Incentive Investment Plan (the Incentive Investment Plan) or the Baxter Healthcare of Puerto Rico Savings and Investment Plan (collectively, the Savings Plans) and (ii) shares held within the self-managed account investment alternative within the Incentive Investment Plan.

 

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Although Baxter will deliver this prospectus to its stockholders to the extent required by U.S. law, including stockholders located outside the United States, this prospectus is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Baxter common stock or Baxalta common stock in any jurisdiction in which such offer, sale or exchange is not permitted.

Countries outside the United States generally have their own legal requirements that govern securities offerings made to persons resident in those countries and often impose stringent requirements about the form and content of offers made to the general public. Baxter has not taken any action under those non-U.S. regulations to facilitate a public offer to exchange Baxter common stock for Baxalta common stock outside the United States but may take steps to facilitate such tenders. Therefore, the ability of any non-U.S. person to tender Baxter common stock in the exchange offer will depend on whether there is an exemption available under the laws of such person’s home country that would permit the person to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. For example, some countries exempt transactions from the rules governing public offerings if they involve persons who meet certain eligibility requirements relating to their status as sophisticated or professional investors.

All tendering stockholders are deemed to make certain representations by executing the letter of transmittal, including, in the case of non-U.S. stockholders, as to the availability of an exemption under their home country laws that would allow them to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. Baxter will rely on those representations and, unless the exchange offer is terminated, plans to accept shares tendered by persons who properly complete the letter of transmittal and provide any other required documentation on a timely basis and as otherwise described herein.

All holders who are tendering shares allocable to their respective Savings Plans accounts should follow the special instructions provided to them by their applicable plan administrator. Such participants may direct the applicable plan administrator through the designated website to tender all, some or none of the shares of Baxter common stock allocable to their Savings Plan accounts, subject to certain limitations. To allow sufficient time for the tender of shares, tendering holders must provide the plan administrator through the designated website with the requisite directions by 4:00 p.m., New York City time, on May 17, 2016, unless the exchange offer is extended. If the exchange offer is extended, and if administratively feasible, the deadline for receipt of your direction may also be extended.

Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in Baxter common stock or Baxalta common stock that may apply in their home countries. Baxter, Baxalta and the dealer manager cannot provide any assurance about whether such limitations exist.

 

5. How many shares of Baxalta common stock will I receive for my shares of Baxter common stock accepted in the exchange offer?

Unless the upper limit discussed below is in effect, the exchange offer is designed to permit you to exchange your shares of Baxter common stock for shares of Baxalta common stock so that for each $100 of your Baxter common stock accepted in the exchange offer, you will receive approximately $107.52 of Baxalta common stock based on the calculated per-share values determined by reference to the simple arithmetic average of the daily volume-weighted average prices (VWAPs) for Baxter common stock (the Average Baxter Price) and Baxalta common stock (the Average Baxalta Price) on the NYSE during the three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer (the Averaging Dates, and this three-day period, the Averaging Period), which are currently expected to be May 12, 13 and 16, 2016.

 

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Please note, however, that the number of shares you can receive is subject to an upper limit of 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. If the upper limit is in effect, you may receive less than $107.52 of Baxalta common stock for each $100 of Baxter common stock that you tender, based on the Average Baxter Price and Average Baxalta Price, and you could receive much less. The exchange offer does not provide for a lower limit or minimum exchange ratio. In addition, because the exchange offer is subject to proration, the number of shares of Baxter common stock Baxter accepts in the exchange offer may be less than the number of shares you tender.

Baxter will announce whether the upper limit on the number of shares of Baxalta common stock that can be received for each share of Baxter common stock tendered is in effect, through www.dfking.com/bax and by press release, no later than 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). If the upper limit is in effect at that time, then the final exchange ratio will be fixed at the upper limit and you will receive 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer.

 

6. If the merger is consummated, what will happen to the Baxalta common stock I receive in the exchange offer?

If the merger is consummated, each share of Baxalta common stock will be canceled and converted into the right to receive both (i) $18.00 in cash and (ii) 0.1482 of an American Depositary Share of Shire (the Shire ADS, and together with Shire ordinary shares, the Shire Securities). For additional information regarding the merger agreement and other agreements relating to the merger, see “The Transactions—The Proposed Merger—Merger Agreement” and “Business—The Proposed Merger.”

Because the record date for the special meeting of the stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

 

7. What is the upper limit on the number of shares of Baxalta common stock I can receive for each share of Baxter common stock that I tender and why is there an upper limit?

The number of shares you can receive is subject to an upper limit of 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. If the upper limit is in effect, you may receive less than $107.52 of Baxalta common stock for each $100 of Baxter common stock that you tender, based on the Average Baxter Price and Average Baxalta Price, and you could receive much less.

This upper limit represents a 25% discount for shares of Baxalta common stock based on the simple arithmetic average of the daily VWAPs of shares of Baxter common stock and Baxalta common stock on the NYSE on April 18, 19 and 20, 2016 (the three trading days immediately preceding the date of the commencement of the exchange offer). Baxter set this upper limit to ensure that any unusual or unexpected decrease in the trading price of Baxalta common stock (relative to the trading price of Baxter common stock) during the exchange offer period, would not result in an unduly high number of shares of Baxalta common stock being exchanged for each share of Baxter common stock accepted in the exchange offer.

 

8. What will happen if the upper limit is in effect?

Baxter will announce whether the upper limit on the number of shares of Baxalta common stock that can be received for each share of Baxter common stock tendered is in effect, through www.dfking.com/bax and by press release, no later than 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). If the upper limit is in effect, then the final exchange ratio will be fixed at the upper limit and you will receive 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. If the upper limit

 

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is in effect, you may receive less than $107.52 of Baxalta common stock for each $100 of Baxter common stock that you tender, based on the Average Baxter Price and Average Baxalta Price, and you could receive much less.

 

9. How are the Average Baxter Price and the Average Baxalta Price determined for purposes of calculating the number of shares of Baxalta common stock to be received for each share of Baxter common stock accepted in the exchange offer?

The Average Baxter Price and the Average Baxalta Price for purposes of the exchange offer will equal the simple arithmetic average of the daily VWAPs of shares of Baxter common stock and Baxalta common stock, respectively, on the NYSE during the Averaging Period (the three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer). Baxter will determine the simple arithmetic average of the daily VWAPs of each stock, and such determination will be final. The Averaging Period of the exchange offer period is currently expected to be May 12, 13 and 16, 2016. If the upper limit is in effect, you will receive 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer, and the Average Baxter Price and Average Baxalta Price will no longer affect the exchange ratio.

 

10. What is the daily volume-weighted average price or VWAP?

The daily VWAPs for shares of Baxter common stock or Baxalta common stock, as the case may be, will be the volume-weighted average price per share of that stock on the NYSE during the period beginning at 9:30 a.m., New York City time (or such other time as is the official open of trading on the NYSE), and ending at 4:00 p.m., New York City time (or such other time as is the official close of trading on the NYSE), except that such data will only take into account adjustments made to reported trades included by 4:10 p.m., New York City time. The daily VWAP will be as reported by Bloomberg L.P. as displayed under the heading Bloomberg VWAP on the Bloomberg pages “BAX UN<Equity>AQR” with respect to Baxter common stock and “BXLT UN<Equity>AQR” with respect to Baxalta common stock (or any other recognized quotation source selected by Baxter in its sole discretion if such pages are not available or are manifestly erroneous). The daily VWAPs obtained from Bloomberg L.P. may be different from other sources or investors’ or other security holders’ own calculations. Baxter will determine the simple arithmetic average of the daily VWAPs of each stock, and such determination will be final.

 

11. How and when will I know the final exchange ratio?

The final exchange ratio showing the number of shares of Baxalta common stock that you will receive for each share of Baxter common stock accepted in the exchange offer will be announced by press release by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). At such time, the final exchange ratio will also be available at www.dfking.com/bax. In addition, as described below, you may also contact the information agent to obtain indicative exchange ratios (prior to the time the final exchange ratio becomes available) and the final exchange ratio (after the time the final exchange ratio becomes available) at its toll-free number provided on the back cover of this prospectus.

 

12. Will indicative exchange ratios be provided during the exchange offer period?

Yes. A website will be maintained at www.dfking.com/bax that will provide the daily VWAPs of both Baxter common stock and Baxalta common stock during the exchange offer. You may also contact the information agent at its toll-free number provided on the back cover of this prospectus to obtain this information.

Prior to the Averaging Period, commencing on the third trading day of the exchange offer, the website will also provide indicative exchange ratios for each day that will be calculated based on the indicative calculated per-

 

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share values of Baxter common stock and Baxalta common stock on each day, calculated as though that day were the last day of the Averaging Period, by 4:30 p.m., New York City time. In other words, assuming that a given day is a trading day, the indicative exchange ratio will be calculated based on the simple arithmetic average of the daily VWAPs of Baxter common stock and Baxalta common stock for that day and the immediately preceding two trading days. The indicative exchange ratio will also reflect whether the upper limit would have been in effect had such day been the last day of the Averaging Period.

During the first two days of the Averaging Period, the website will provide indicative exchange ratios that will be calculated based on the Average Baxter Price and Average Baxalta Price, as calculated by Baxter based on data as reported by Bloomberg L.P. (or any other recognized quotation source selected by Baxter in its sole discretion if such pages are not available or are manifestly erroneous). The website will not provide an indicative exchange ratio on the third day of the Averaging Period. The indicative exchange ratios will be calculated as follows: (i) on the first day of the Averaging Period, the indicative exchange ratio will be calculated based on the daily VWAPs of Baxter common stock and Baxalta common stock for that first day of the Averaging Period and (ii) on the second day of the Averaging Period, the indicative exchange ratio will be calculated based on the simple arithmetic average of the daily VWAPs of Baxter common stock and Baxalta common stock for the first and second day of the Averaging Period. During the first two days of the Averaging Period, the indicative exchange ratios will be updated on the website each day by 4:30 p.m., New York City time. The final exchange ratio will be announced by press release and be available on the website by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016).

In addition, a table indicating the number of shares of Baxalta common stock that you would receive per share of Baxter common stock, calculated on the basis described above and taking into account the upper limit, assuming a range of averages of the daily VWAPs of Baxter common stock and Baxalta common stock during the Averaging Period is provided herein for purposes of illustration. See “The Exchange Offer—Terms of the Exchange Offer—Final Exchange Ratio.”

 

13. What if the trading market in shares of either Baxter common stock or Baxalta common stock is disrupted on one or more days during the Averaging Period?

If a market disruption event (as defined below under “The Exchange Offer—Terms of the Exchange Offer—Final Exchange Ratio”) occurs with respect to shares of Baxter common stock or Baxalta common stock on any day during the Averaging Period, the simple arithmetic average stock price of Baxter common stock and Baxalta common stock will be determined using the daily VWAPs of shares of Baxter common stock and Baxalta common stock on the preceding trading day or days, as the case may be, on which no market disruption event occurred. If, however, Baxter decides to extend the exchange offer period following a market disruption event, the Averaging Period will be reset. If a market disruption event occurs, Baxter may terminate the exchange offer if, in its reasonable judgment, the market disruption event has impaired the benefits of the exchange offer. See “The Exchange Offer—Conditions to Completion of the Exchange Offer.”

 

14. Are there circumstances under which I would receive fewer shares of Baxalta common stock than I would have received if the exchange ratio were determined using the closing prices of the shares of Baxter common stock and Baxalta common stock on the expiration date of the exchange offer?

Yes. For example, if the trading price of shares of Baxter common stock were to increase during the last two trading days of the exchange offer period (currently expected to be May 17, 2016 and May 18, 2016), the Average Baxter Price would likely be lower than the closing price of shares of Baxter common stock on the expiration date of the exchange offer. As a result, you may receive fewer shares of Baxalta common stock for each $100 of Baxter common stock than you would have if the Average Baxter Price were calculated on the basis of the closing price of shares of Baxter common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer. Similarly, if the trading price of Baxalta

 

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common stock were to decrease during the last two trading days of the exchange offer, the Average Baxalta Price would likely be higher than the closing price of shares of Baxalta common stock on the expiration date of the exchange offer. This could also result in your receiving fewer shares of Baxalta common stock for each $100 of Baxter common stock than you would otherwise receive if the Average Baxalta Price were calculated on the basis of the closing price of shares of Baxalta common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer.

 

15. Will I receive any fractional shares of Baxalta common stock in the exchange offer?

No. Fractional shares of Baxalta common stock will not be distributed in the exchange offer. Instead, you will receive cash in lieu of a fractional share. The exchange agent, acting as agent for the Baxter stockholders otherwise entitled to receive a fractional share of Baxalta common stock, will aggregate all fractional shares that would otherwise have been required to be distributed and cause them to be sold in the open market for the accounts of those stockholders. The distribution of fractional share proceeds will take longer than the distribution of shares of Baxalta common stock. As a result, stockholders will not receive fractional share proceeds at the same time they receive shares of Baxalta common stock.

Holders who are tendering shares allocable to their applicable Savings Plans accounts should note that their accounts do not hold shares (including any fractional shares), given the unitized nature of the Savings Plans’ stock funds, and such holders should refer to the special instructions provided to them by their applicable plan administrator for more information.

 

16. Will all the shares of Baxter common stock that I tender be accepted in the exchange offer?

Not necessarily. The maximum number of Baxalta shares that will be exchanged in the exchange offer will be 12,800,000. Therefore the maximum number of shares of Baxter common stock that will be accepted if the exchange offer is completed will be equal to 12,800,000 shares of Baxalta common stock held by Baxter divided by the final exchange ratio (which will be subject to the upper limit). Depending on the number of shares of Baxter common stock validly tendered in the exchange offer and not validly withdrawn, and the Average Baxter Price and Average Baxalta Price, Baxter may have to limit the number of shares of Baxter common stock that it accepts in the exchange offer through a proration process. Any proration of the number of shares accepted in the exchange offer will be determined on the basis of the proration mechanics described under “The Exchange Offer—Terms of the Exchange Offer—Proration; Odd-Lots.”

 

17. Are there any conditions to Baxter’s obligation to complete the exchange offer?

Yes. Baxter is not required to complete the exchange offer unless the conditions described under “The Exchange Offer—Conditions to Completion of the Exchange Offer” are satisfied or, where permissible, waived before the expiration of the exchange offer. For example, Baxter is not required to complete the exchange offer unless, among other things, the private letter ruling from the Internal Revenue Service (IRS), regarding certain U.S. federal income tax consequences of the distribution by Baxter on July 1, 2015 of approximately 80.5% of the shares of Baxalta common stock to stockholders of Baxter and certain related transactions, remains in full force and effect and has not been revoked in whole or in part. Baxter may waive any or all of the conditions to the exchange offer, subject to limited exceptions. Baxalta has no right to waive any of the conditions to the exchange offer.

 

18. How many shares of Baxter common stock will Baxter acquire if the exchange offer is completed?

The number of shares of Baxter common stock that will be accepted if the exchange offer is completed will depend on the final exchange ratio and the number of shares of Baxter common stock validly tendered and not validly withdrawn. The maximum number of shares of Baxter common stock that will be accepted if the exchange offer is completed will be equal to the shares of Baxalta common stock that Baxter offers to exchange

 

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hereby divided by the final exchange ratio (which will be subject to the upper limit). Accordingly, the largest possible number of shares of Baxter common stock that will be accepted equals 12,800,000 divided by the final exchange ratio. For example, assuming that the final exchange ratio is 1.4026 (the upper limit for shares of Baxalta common stock that could be exchanged for one share of Baxter common stock), then Baxter would accept up to 9,125,909 shares of Baxter common stock.

 

19. What happens if the number of shares of Baxter common stock that are tendered does not result in Baxter exchanging all of the shares of Baxalta common stock held by it?

In that case, following the completion of the exchange offer, Baxter will continue to hold shares of Baxalta common stock not distributed in the exchange offer. Baxter has informed Baxalta that Baxter intends to, prior to or following the completion of the exchange offer, make a contribution to Baxter’s U.S. pension fund or distribute as a special dividend to all Baxter stockholders, on a pro rata basis, some or all of its remaining shares of Baxalta common stock prior to any Shire or Baxalta shareholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and, in any event, during the 18-month period following the distribution on July 1, 2015. To the extent Baxter holds any Baxalta common stock or Shire Securities received in exchange for such common stock pursuant to the merger at the end of the 18-month period, as the case may be, Baxter has advised us that it will dispose of such stock in one or more transactions (including potentially through underwritten equity offerings) as soon as practicable thereafter, taking into account market conditions and its business judgment, but in no event later than five years after the distribution. Each of the contribution or special dividend described above is referred to as an “additional distribution.”

 

20. What happens if the exchange offer is oversubscribed and Baxter is unable to fulfill all tenders of Baxter common stock at the exchange ratio?

In that case, all shares of Baxter common stock that are validly tendered and not validly withdrawn will generally be accepted for exchange on a pro rata basis in proportion to the number of shares tendered, which is referred to as “proration.” Stockholders who beneficially own “odd-lots” (less than 100 shares) of Baxter common stock and who validly tender all of their shares will not be subject to proration (other than if the odd-lot shares are held on behalf of a participant in the Savings Plans, each of which plans holds more than 100 shares of Baxter common stock), assuming such stockholders request such preferential treatment in the letter of transmittal. For instance, if you beneficially own 50 shares of Baxter common stock and tender all 50 shares, your odd-lot will not be subject to proration. If, however, you hold less than 100 shares of Baxter common stock but do not tender all of your shares, you will be subject to proration to the same extent as holders of 100 or more shares if the exchange offer is oversubscribed. Beneficial holders of 100 or more shares of Baxter common stock are not eligible for this preference.

Proration for each tendering stockholder will be based on the number of shares of Baxter common stock tendered by that stockholder in the exchange offer, and not on that stockholder’s aggregate ownership of Baxter common stock. Any shares of Baxter common stock not accepted for exchange as a result of proration will be returned to tendering stockholders. Baxter will announce its preliminary determination, if any, of the extent to which tenders will be prorated by press release by 9:00 a.m., New York City time, on the business day immediately following the expiration of the exchange offer. This preliminary determination is referred to as the “preliminary proration factor.” Baxter will announce its final determination of the extent to which tenders will be prorated by press release promptly after this determination is made. This final determination is referred to as the “final proration factor.”

 

21. How long will the exchange offer be open?

The period during which you are permitted to tender your shares of Baxter common stock in the exchange offer will expire at 11:59 p.m., New York City time, on the expiration date of the exchange offer (currently expected to be May 18, 2016), unless the exchange offer is extended or terminated. Baxter may extend the exchange offer in the circumstances described in “The Exchange Offer—Extension; Amendment.”

 

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22. Under what circumstances can the exchange offer be extended or amended by Baxter?

Baxter may extend the exchange offer at any time, in its sole discretion, and regardless of whether any condition to the exchange offer has been satisfied or, where permissible, waived. If Baxter extends the exchange offer, it must publicly announce the extension by press release at any time prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date of the exchange offer (currently expected to be May 18, 2016).

Baxter expressly reserves the right, in its sole discretion, to amend the terms of the exchange offer in any respect prior to the expiration date of the exchange offer.

 

23. How do I decide whether to participate in the exchange offer?

Whether you should participate in the exchange offer depends on many factors. You should examine carefully your specific financial position, plans and needs before you decide whether to participate, as well as the relative risks associated with an investment in Baxalta and Baxter.

In addition, you should consider all of the factors described in “Risk Factors.” None of Baxter, Baxalta or any of their respective directors or officers, the dealer manager, the information agent, the exchange agent or any other person makes any recommendation as to whether you should tender all, some or none of your shares of Baxter common stock. You must make your own decision after carefully reading this prospectus, and the documents incorporated by reference into this prospectus, and consulting with your advisors in light of your own particular circumstances. You are strongly encouraged to read this prospectus in its entirety, including any documents referred to or incorporated by reference herein, very carefully.

 

24. How do I participate in the exchange offer?

The procedures you must follow to participate in the exchange offer will depend on whether you hold your shares of Baxter common stock in certificated form, in uncertificated form registered directly in your name in Baxter’s share register (Direct Registration Shares) or through a broker, dealer, commercial bank, trust company, custodian or similar institution. For specific instructions about how to participate, see “The Exchange Offer—Procedures for Tendering.”

 

25. Can I tender only a part of my Baxter common stock in the exchange offer?

Yes. You may tender all, some or none of your Baxter common stock.

 

26. Will holders of Baxter stock options, restricted stock units (RSUs) or performance share units (PSUs) have the opportunity to exchange their Baxter stock options, RSUs or PSUs in the exchange offer?

Neither holders of unvested stock options nor holders of unvested RSUs or PSUs can tender the shares underlying such awards in the exchange offer. However, holders of vested and unexercised Baxter stock options can exercise their vested stock options in accordance with the terms of the plans and agreements under which the options were issued and tender the shares of Baxter common stock received upon exercise in the exchange offer. An exercise of a Baxter stock option cannot be revoked for any reason, including if the exchange offer is terminated for any reason or if shares of Baxter common stock received upon exercise are tendered and not accepted for exchange in the exchange offer. Additionally, if you hold shares of Baxter common stock as a result of the vesting and settlement of RSUs or PSUs, these shares can be tendered in the exchange offer.

If you are a holder of vested and unexercised Baxter stock options and wish to exercise such stock options and tender shares of Baxter common stock received upon exercise in the exchange offer, you should be certain to initiate such exercise such that the shares of Baxter common stock are received in your account in enough time to

 

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tender the shares in accordance with the instructions for tendering available from your broker. You should contact your stock broker for additional information.

There are tax consequences associated with the exercise of a stock option and individual tax circumstances may vary. You are urged to consult the prospectus provided to you in connection with your participation in the Baxter International Inc. 2007, 2011 and 2015 Incentive Plans and to consult your own tax advisor regarding the consequences to you of exercising your stock options. You are also urged to read carefully the discussion in “U.S. Federal Income Tax Consequences” and to consult your own tax advisor regarding the consequences to you of the exchange offer and the merger.

 

27. What do I do if I want to retain all of my Baxter common stock?

If you want to retain your Baxter common stock, you do not need to take any action in connection with the exchange offer.

 

28. Will I be able to withdraw the shares of Baxter common stock that I tender in the exchange offer?

Yes. You may withdraw shares tendered at any time before the exchange offer expires. See “The Exchange Offer—Withdrawal Rights.” If you change your mind again before the expiration of the exchange offer, you can re-tender your Baxter common stock by following the tender procedures again.

 

29. Will I be able to withdraw the shares of Baxter common stock that I tender in the exchange offer before and after the final exchange ratio has been determined?

Yes. The final exchange ratio used to determine the number of shares of Baxalta common stock that you will receive for each share of Baxter common stock accepted in the exchange offer will be announced by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer. The expiration date of the exchange offer (currently expected to be May 18, 2016) may be extended or the exchange offer may be terminated. You have a right to withdraw shares of Baxter common stock you have tendered for two trading days after the final exchange ratio has been established. If you change your mind again before the expiration of the exchange offer, you can re-tender shares of Baxter common stock by following the tender procedures again prior to the expiration of the exchange offer. See “The Exchange Offer—Withdrawal Rights.”

If you are a registered holder of Baxter common stock (which includes persons holding certificated shares and Direct Registration Shares), you must provide a written notice of withdrawal or facsimile transmission notice of withdrawal to the exchange agent before 11:59 p.m., New York City time, on the expiration date of the exchange offer. The information that must be included in that notice is specified under “The Exchange Offer—Withdrawal Rights.”

If you hold your shares through a broker, dealer, commercial bank, trust company, custodian or similar institution, you should consult with that institution on the procedures with which you must comply and the time by which such procedures must be completed in order for that institution to provide a written notice of withdrawal or facsimile notice of withdrawal to the exchange agent on your behalf before 11:59 p.m., New York City time, on the expiration date of the exchange offer. If you hold your shares through such an institution, that institution must deliver the notice of withdrawal with respect to any shares you wish to withdraw. In such a case, as a beneficial owner and not a registered stockholder, you will not be able to provide a notice of withdrawal for such shares directly to the exchange agent. DTC is expected to remain open until 5:00 p.m., New York City time, and institutions may be able to process withdrawals through DTC during that time (although there is no assurance that will be the case). Once DTC has closed, if you beneficially own shares that were previously delivered through DTC, then in order to withdraw your shares the institution through which your shares are held must deliver a written notice of withdrawal or facsimile transmission notice of withdrawal to the exchange agent prior

 

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to 11:59 p.m., New York City time, on the expiration date of the exchange offer. Such notice of withdrawal must be in the form of DTC’s notice of withdrawal. Shares can be withdrawn only if the exchange agent receives a withdrawal notice directly from the relevant institution that tendered the shares through DTC. On the last day of the exchange offer, beneficial owners who cannot contact the institution through which they hold their shares will not be able to withdraw their shares.

If you hold your shares (or if shares are allocable to you) through the Savings Plans, your plan administrator will provide you with instructions on how to withdraw your direction to tender through the designated website. You must record your withdrawal on the designated website at any time before 4:00 p.m., New York City time, on May 17, 2016 (or, if the exchange offer is extended, on any new plan participant withdrawal deadline established by the plan administrator).

 

30. How soon will I receive my Baxalta common stock once I have tendered my Baxter common stock?

Assuming the shares of Baxter common stock tendered in the exchange offer have been accepted for exchange, the exchange agent will cause shares of Baxalta common stock to be credited to you in book-entry form promptly after the expiration of the exchange offer (currently expected to be May 18, 2016). See “The Exchange Offer—Delivery of Baxalta Common Stock; Book-Entry Accounts.”

 

31. Will I be taxed on the shares of Baxalta common stock that I receive in the exchange offer?

If the merger is consummated, U.S. holders of Baxter common stock who participate in the exchange offer and continue to hold Baxalta common stock at the closing of the merger will recognize gain or loss for U.S. federal income tax purposes upon the receipt of cash and Shire Securities pursuant to the merger. Baxter intends to take the position that the merger does not alter the tax treatment of the exchange offer, as described in the immediately following paragraph, to Baxter or U.S. holders of Baxter common stock who participate in the exchange offer; however, there can be no assurances in this regard. For a description of the potential effect of the merger on the tax treatment of the Baxter Transactions, including this exchange offer, refer to the section of this prospectus entitled “Risk Factors—Risks Related to the Proposed Merger with Shire—The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable.”

Baxter received a ruling from the IRS and a tax opinion from KPMG LLP (KPMG), neither of which contemplated the merger, that collectively provided that the distribution on July 1, 2015 qualified as a tax-free transaction under Sections 355, 361 and 368(a)(1)(D) of the Code. Such ruling and tax opinion also collectively provided for a tax-free exchange of shares of Baxter common stock for shares of Baxalta common stock within 18 months of the distribution. As a result, Baxter believes that it will not recognize gain or loss for U.S. federal income tax purposes in the exchange offer and holders of Baxter common stock who participate in the exchange offer will not recognize gain or loss for U.S. federal income tax purposes upon the receipt of shares of Baxalta common stock in the exchange offer. A U.S. holder of Baxter stock generally will recognize capital gain or loss with respect to cash received in lieu of fractional shares of Baxalta common stock.

Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the completeness of facts and accuracy of factual representations and assumptions made in the ruling. The opinion of KPMG is based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or incomplete in any material respect, an undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the exchange offer, the IRS private letter ruling or tax opinion may not be valid and Baxter and its stockholders could be subject to significant tax liabilities. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to you of the exchange offer could be materially less favorable.

 

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Please see “Risk Factors—Risks Related to the Exchange Offer—The exchange offer could result in significant tax liability” and “U.S. Federal Income Tax Consequences” for more information regarding the IRS private letter ruling, the tax opinion and the potential tax consequences of the exchange offer. Holders of Baxter common stock should consult their tax advisor as to the particular tax consequences of the exchange offer and the merger.

 

32. Are there any appraisal rights for holders of Baxter or Baxalta common stock?

There are no appraisal rights available to Baxter stockholders or Baxalta stockholders in connection with the exchange offer.

 

33. What is the accounting treatment of the exchange offer?

The shares of Baxter common stock acquired by Baxter in the exchange offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of the Baxalta shares exchanged in the offer. Any difference between the carrying value of Baxter’s investment in Baxalta common stock and the market value of the shares of Baxalta common stock will be recognized by Baxter as a gain on disposal of investment net of any direct and incremental expenses of the exchange offer on the disposal of its Baxalta common stock.

 

34. What will Baxter do with the shares of Baxter common stock it acquires in the exchange offer?

Baxter common stock acquired by Baxter in the exchange offer will be held as treasury stock unless and until retired or used for other purposes.

 

35. What is the impact of the exchange offer on the number of Baxter shares outstanding?

Any Baxter common stock acquired by Baxter in the exchange offer will reduce the total number of Baxter shares outstanding, although Baxter’s actual number of shares outstanding on a given date reflects a variety of factors such as option exercises.

 

36. Do the statements on the cover page regarding this prospectus being subject to change and the registration statement filed with the SEC not yet being effective mean that the exchange offer has not commenced?

As permitted under SEC rules, Baxter has commenced the exchange offer without the registration statement, of which this prospectus forms a part, having been declared effective by the SEC. Baxter cannot, however, complete the exchange offer and accept for exchange any shares of Baxter common stock tendered in the exchange offer until the registration statement is declared effective by the SEC and the other conditions to the exchange offer have been satisfied or, where permissible, waived.

 

37. Where can I find out more information about Baxter and Baxalta?

You can find out more information about Baxter and Baxalta by reading this prospectus and, with respect to Baxter, from other documents filed with the SEC and incorporated by reference into this prospectus as described in “Incorporation by Reference.”

 

38. Whom should I call if I have questions about the exchange offer or want copies of additional documents?

You may ask any questions about the exchange offer or request copies of the exchange offer documents and the other information incorporated by reference into this prospectus, without charge, from the information agent, D.F. King & Co., Inc., at 48 Wall Street, New York, NY 10005 or by calling 1-800-622-1649 (toll-free in the United States) or 1-212-269-5550 (for banks and brokers).

 

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SUMMARY

This summary does not contain all of the information that may be important to you. You should carefully read this entire prospectus and the other documents to which it refers to understand the exchange offer. See “Incorporation by Reference.”

The Companies

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

224-948-2000

Baxter provides a broad portfolio of essential renal and hospital products through its subsidiaries, including home, acute and in-center dialysis; sterile IV solutions; infusion systems and devices; parenteral nutrition; biosurgery products and anesthetics; and pharmacy automation, software and services. Baxter’s global footprint and critical nature of its products and services play a key role in expanding access to healthcare in emerging and developed countries. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and by patients at home under physician supervision. As of December 31, 2015, Baxter manufactured products in approximately 25 countries and sold them in approximately 120 countries.

As of December 31, 2015, Baxter had approximately 50,000 employees and conducted business in over 100 countries. Baxter generates approximately 60% of its revenues outside the United States, and maintains approximately 50 manufacturing facilities and over 100 distribution facilities in the United States, Europe, Asia-Pacific, Latin America and Canada.

Baxalta Incorporated

1200 Lakeside Drive

Bannockburn, Illinois 60015

224-940-2000

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, as well as oncology treatments for acute lymphoblastic leukemia. Baxalta is also investing in 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 of and collaborations with others.

On January 11, 2016, Baxalta announced that it had an entered into a merger agreement with Shire, pursuant to which Shire will acquire Baxalta. Under the terms of the merger agreement, Baxalta stockholders will receive $18.00 in cash and 0.1482 Shire American Depository Shares (Shire ADSs), per each Baxalta share. The transaction has been approved by the boards of directors of both Shire and Baxalta. Closing of the transaction is subject to approval by Baxalta and Shire shareholders, certain regulatory approvals, receipt of certain tax opinions and other customary closing conditions. The transaction is expected to close in early June 2016. See “Summary—The Merger Agreement with Shire.”

 



 

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Because the record date for the special meeting of the stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

The Exchange Offer

Terms of the Exchange Offer

Baxter is offering to exchange up to 12,800,000 shares of Baxalta common stock in the aggregate for outstanding shares of Baxter common stock that are validly tendered and not validly withdrawn. You may tender all, some or none of your shares of Baxter common stock.

Shares of Baxter common stock validly tendered and not validly withdrawn will be accepted for exchange at the final exchange ratio, on the terms and conditions of the exchange offer and subject to the limits described below, including the proration provisions. Shares not accepted for exchange will be returned to the tendering stockholder promptly following the expiration or termination of the exchange offer, as applicable.

Extension; Amendment; Termination

The exchange offer, and your withdrawal rights, will expire at 11:59 p.m., New York City time, on May 18, 2016, unless the exchange offer is extended or terminated. You must tender your shares of Baxter common stock before the expiration time if you want to participate in the exchange offer. Baxter may extend, amend or terminate the exchange offer as described in this prospectus.

Conditions to Completion of the Exchange Offer

The exchange offer is subject to various conditions, including, among others, that the private letter ruling from the IRS, regarding certain U.S. federal income tax consequences of the distribution by Baxter on July 1, 2015 of approximately 80.5% of the shares of Baxalta common stock to stockholders of Baxter and certain related transactions, remains in full force and effect and has not been revoked in whole or in part. All conditions to the completion of the exchange offer must be satisfied or, where permissible, waived by Baxter before the expiration of the exchange offer. Baxter may waive any or all of the conditions to the exchange offer, subject to limited exceptions. See “The Exchange Offer—Conditions to Completion of the Exchange Offer.”

Proration; Odd-Lots

If, on the expiration date of the exchange offer (currently expected to be May 18, 2016), the exchange offer is oversubscribed, Baxter will accept on a pro rata basis, in proportion to the number of shares tendered, all shares of Baxter common stock validly tendered and not validly withdrawn, except for tenders of odd-lots as described below. Baxter will announce the preliminary proration factor, if any, by press release by 9:00 a.m., New York City time, on the business day (currently expected to be May 19, 2016) immediately following the expiration of the exchange offer (currently expected to be May 18, 2016). Upon determining the number of shares of Baxter common stock validly tendered for exchange, Baxter will announce the final results, including the final proration factor, if any, promptly after the determination is made.

If you directly or beneficially own less than 100 shares of Baxter common stock and wish to tender all of your shares of Baxter common stock, you may request that your shares not be subject to proration. In order to request this preferential treatment, you should check the box under “Proration/Odd Lot” on the letter of transmittal. If your odd-lot shares are held by a broker, dealer, commercial bank, trust company, custodian or similar institution for your account, you should contact that institution so that it can request such preferential treatment. All of your odd-lot shares validly tendered and not validly withdrawn will be accepted for exchange without proration if

 



 

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Baxter completes the exchange offer. If the odd-lot shares are held on your behalf, as a participant in the Savings Plans, each of which plans holds more than 100 shares of Baxter common stock, you will not have the ability to request that your shares not be subject to proration.

Fractional Shares

Fractional shares of Baxalta common stock will not be distributed in the exchange offer. The exchange agent, acting as agent for the tendering Baxter stockholders, will aggregate any fractional shares that would otherwise have been required to be distributed and cause them to be sold in the open market. You will receive the proceeds, if any, less any brokerage commissions or other fees, from the sale of these shares in accordance with your fractional interest in the aggregate number of shares sold. The distribution of fractional share proceeds will take longer than the distribution of shares of Baxalta common stock. As a result, stockholders will not receive fractional share proceeds at the same time they receive shares of Baxalta common stock. Holders who are tendering shares allocable to their Savings Plans accounts should note that their accounts do not hold shares (including any fractional shares), given the unitized nature of the Savings Plans’ stock funds, and such holders should refer to the special instructions provided to them by their applicable plan administrator for more information.

Procedures for Tendering

The procedures you must follow to participate in the exchange offer will depend on how you hold your shares of Baxter common stock. For you to validly tender your shares of Baxter common stock pursuant to the exchange offer, before the expiration of the exchange offer, you will need to take the following steps:

 

    If you hold certificates for shares of Baxter common stock, you must deliver to the exchange agent at the appropriate address listed on the letter of transmittal a properly completed and duly executed letter of transmittal, together with any required signature guarantees and any other required documents, and the certificates representing the shares of Baxter common stock tendered;

 

    If you hold Direct Registration Shares, you must deliver to the exchange agent at the appropriate address listed in the letter of transmittal a properly completed and duly executed letter of transmittal, together with any required signature guarantees and any other required documents. Because certificates are not issued for Direct Registration Shares, you do not need to deliver any certificates representing those shares to the exchange agent;

 

    If you hold shares of Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, you should receive instructions from that institution on how to participate in the exchange offer. In this situation, do not complete the letter of transmittal. Please contact the institution through which you hold your shares directly if you have not yet received instructions. Some financial institutions may effect tenders by book-entry transfer through The Depository Trust Company (DTC);

 

    Participants in the Savings Plans should follow the special instructions that are being sent to them by their applicable plan administrator. Such participants should not use the letter of transmittal to direct the tender of shares of Baxter common stock held in these plans. Such participants may direct the applicable plan administrator through the designated website to tender all, some or none of the shares of Baxter common stock allocable to their Savings Plan accounts, subject to the limitations set forth in any instructions provided by their applicable plan administrator. Baxter and Baxalta have been informed that instructions to tender or withdraw by participants in the Savings Plans must be made by 4:00 p.m., New York City time, on May 17, 2016, unless the exchange offer is extended. If the exchange offer is extended, and if administratively feasible, the deadline for receipt of your direction may also be extended; and

 

   

If you wish to tender your shares of Baxter common stock that are in certificated form but the share certificates are not immediately available, and time will not permit shares or other required

 



 

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documentation to reach the exchange agent before the expiration date of the exchange offer (currently expected to be May 18, 2016) or the procedure for book-entry transfer cannot be completed on a timely basis, you must follow the procedures for guaranteed delivery described under “The Exchange Offer—Procedures for Tendering—Guaranteed Delivery Procedures.”

Delivery of Shares of Baxalta Common Stock

Assuming the shares of Baxter common stock tendered in the exchange offer have been accepted for exchange, the exchange agent will cause shares of Baxalta common stock to be credited in book-entry form to direct registered accounts maintained by Baxalta’s transfer agent for the benefit of the respective holders (or, in the case of shares tendered through DTC, to the account of DTC so that DTC can credit the relevant DTC participant and such participant can credit its respective account holders) promptly after the expiration of the exchange offer. Certificates representing shares of Baxalta common stock will not be issued pursuant to the exchange offer.

Withdrawal Rights

You may withdraw your tendered shares of Baxter common stock at any time before the expiration of the exchange offer (currently expected to be May 18, 2016). Before the expiration of the exchange offer, you may re-tender your shares of Baxter common stock by again following the exchange offer procedures.

In order to withdraw your shares, you must provide a written notice or facsimile transmission notice of withdrawal to the exchange agent. The information that must be included in that notice is specified under “The Exchange Offer—Withdrawal Rights.”

If you hold shares of Baxter common stock (or if shares are allocable to you) through the Savings Plans, your plan administrator will provide you with instructions on how to withdraw your direction to tender through the designated website. You must record your withdrawal on the designated website at any time before 4:00 p.m., New York City time, on May 17, 2016 (or, if the exchange offer is extended, any new plan participant withdrawal deadline established by the plan administrator).

If you hold your shares through a broker, dealer, commercial bank, trust company, custodian or similar institution, you should consult with that institution on the procedures with which you must comply and the time by which such procedures must be completed in order for that institution to provide a written notice of withdrawal or facsimile notice of withdrawal to the exchange agent on your behalf before 11:59 p.m., New York City time, on the expiration date of the exchange offer. If you hold your shares through such an institution, that institution must deliver the notice of withdrawal with respect to any shares you wish to withdraw. In such a case, as a beneficial owner and not a registered stockholder, you will not be able to provide a notice of withdrawal for such shares directly to the exchange agent.

No Appraisal Rights

No appraisal rights are available to Baxter stockholders or Baxalta stockholders in connection with the exchange offer.

Legal and Other Limitations; Certain Matters Relating to Non-U.S. Jurisdictions

Baxter is not aware of any jurisdiction where the making of the exchange offer or its acceptance would not be legal. If Baxter learns of any jurisdiction where making the exchange offer or its acceptance would not be permitted, Baxter intends to make a good faith effort to comply with the relevant law in order to enable such offer and acceptance to be permitted. If, after such good faith effort, Baxter cannot comply with such law, Baxter will determine whether the exchange offer will be made to and whether tenders will be accepted from or on behalf of persons who are holders of shares of Baxter common stock residing in the jurisdiction.

 



 

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Although Baxter will deliver this prospectus to its stockholders to the extent required by U.S. law, including to stockholders located outside the United States, this prospectus is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Baxter common stock or Baxalta common stock in any jurisdiction in which such offer, sale, purchase or exchange is not permitted. Countries outside the United States generally have their own legal requirements that govern securities offerings made to persons resident in those countries and often impose stringent requirements about the form and content of offers made to the general public. Baxter has not taken any action under those non-U.S. regulations to facilitate a public offer to exchange Baxter common stock for Baxalta common stock outside the United States but may take steps to facilitate such tenders. Therefore, the ability of any non-U.S. person to tender Baxter common stock in the exchange offer will depend on whether there is an exemption available under the laws of such person’s home country that would permit the person to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. For example, some countries exempt transactions from the rules governing public offerings if they involve persons who meet certain eligibility requirements relating to their status as sophisticated or professional investors.

All tendering stockholders are deemed to make certain representations by executing the letter of transmittal, including, in the case of non-U.S. stockholders, as to the availability of an exemption under their home country laws that would allow them to participate without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. Baxter will rely on those representations and, unless the exchange offer is terminated, plans to accept shares tendered by persons who properly complete the letter of transmittal and provide any other required documentation on a timely basis and as otherwise described herein.

Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in Baxter common stock or Baxalta common stock that may apply in their home countries. Baxter, Baxalta and the dealer manager cannot provide any assurance about whether such limitations may exist. See “The Exchange Offer—Legal and Other Limitations; Certain Matters Relating to Non-U.S. Jurisdictions” for additional information about limitations on the exchange offer outside the United States.

Potential Additional Distribution of Baxalta Common Stock

Baxter has informed Baxalta that Baxter intends to, prior to or following the completion of the exchange offer, make a contribution to Baxter’s U.S. pension fund or distribute as a special dividend to all Baxter stockholders, on a pro rata basis, some or all of its remaining shares of Baxalta common stock prior to any Shire or Baxalta shareholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and, in any event, during the 18-month period following the distribution on July 1, 2015. To the extent Baxter holds any Baxalta common stock or Shire Securities received in exchange for such common stock pursuant to the merger at the end of the 18-month period, as the case may be, Baxter has advised Baxalta that it will dispose of such stock in one or more transactions (including potentially through underwritten equity offerings) as soon as practicable thereafter, taking into account market conditions and its business judgment, but in no event later than five years after the distribution.

Risk Factors

In deciding whether to tender your shares of Baxter common stock, you should carefully consider in their entirety the matters described in “Risk Factors,” as well as other information included in this prospectus and the other documents incorporated by reference herein.

Regulatory Approval

Certain acquisitions of Baxalta common stock under the exchange offer may require a premerger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). If you decide to participate in the

 



 

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exchange offer and acquire enough shares of Baxalta common stock to exceed the $78.2 million threshold stated in the HSR Act and associated regulations, and if no exemption under the HSR Act or regulations applies, Baxter and you will be required to make filings under the HSR Act and you will be required to pay the applicable filing fee. A filing requirement could delay the exchange of shares with any stockholder or stockholders required to make such a filing until the waiting periods in the HSR Act have expired or been terminated.

U.S. Federal Income Tax Consequences

If the merger is consummated, U.S. holders of Baxter common stock who participate in the exchange offer and continue to hold Baxalta common stock at the closing of the merger will recognize gain or loss for U.S. federal income tax purposes upon the receipt of cash and Shire Securities pursuant to the merger. Baxter intends to take the position that the merger does not alter the tax treatment of the exchange offer, as described in the immediately following paragraph, to Baxter or U.S. holders of Baxter common stock who participate in the exchange offer; however, there can be no assurances in this regard. For a description of the potential effect of the merger on the tax treatment of the Baxter Transactions, including this exchange offer, refer to the section of this prospectus entitled “Risk Factors—Risks Related to the Proposed Merger with Shire—The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable.”

Baxter received a ruling from the IRS and a tax opinion from KPMG, neither of which contemplated the merger, that collectively provided that the distribution on July 1, 2015 qualified as a tax-free transaction under Sections 355, 361 and 368(a)(1)(D) of the Code. Such ruling and tax opinion also collectively provided for a tax-free exchange of shares of Baxter common stock for shares of Baxalta common stock within 18 months of the distribution. As a result, Baxter believes that it will not recognize gain or loss for U.S. federal income tax purposes in the exchange offer and holders of Baxter common stock who participate in the exchange offer will not recognize gain or loss for U.S. federal income tax purposes upon the receipt of shares of Baxalta common stock in the exchange offer. A U.S. holder of Baxter stock generally will recognize capital gain or loss with respect to cash received in lieu of fractional shares of Baxalta common stock.

Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the completeness of facts and accuracy of factual representations and assumptions made in the ruling. The opinion of KPMG is based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or incomplete in any material respect, an undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the exchange offer, the IRS private letter ruling or tax opinion may not be valid and Baxter and its stockholders could be subject to significant tax liabilities. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to you of the exchange offer could be materially less favorable.

If the exchange offer were determined not to qualify as a tax-free transaction under Sections 355 and 361 of the Code, each Baxter stockholder who receives shares of Baxalta common stock in the exchange offer would generally be treated as recognizing gain or loss for U.S. federal income tax purposes equal to the difference between the fair market value of the shares of Baxalta common stock received by the stockholder and such stockholder’s tax basis in the shares of Baxter common stock exchanged therefor, or, in certain circumstances, as receiving a taxable distribution equal to the fair market value of the shares of Baxalta common stock received by the stockholder, and Baxter would recognize gain for U.S. federal income tax purposes equal to the difference between the fair market value and tax basis of Baxter’s investment in Baxalta common stock disposed of in the exchange offer and possibly with respect to certain related transactions.

 



 

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If the exchange offer and/or certain related transactions are determined to be taxable, Baxter and its stockholders could incur significant tax liabilities, and under the tax matters agreement, dated as of June 30, 2015, between Baxter and Baxalta, and the letter agreement (as defined below under “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Letter Agreement”), Baxalta may be required to indemnify Baxter for any liabilities incurred by Baxter if the liabilities are caused by any action or inaction undertaken by Baxalta following the spin-off (including as a result of the merger).

Please see “Risk Factors—Risks Related to the Exchange Offer—The exchange offer could result in significant tax liability” and “U.S. Federal Income Tax Consequences” for more information regarding the IRS private letter ruling, the tax opinion and the potential tax consequences of the exchange offer. Holders of Baxter common stock should consult their tax advisor as to the particular tax consequences of the exchange offer and the merger.

Accounting Treatment of the Exchange Offer

The shares of Baxter common stock acquired by Baxter in the exchange offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of the Baxalta shares exchanged in the offer. Any difference between the carrying value of Baxter’s investment in Baxalta common stock and the market value of the shares of Baxalta common stock will be recognized by Baxter as a gain on disposal of investment net of any direct and incremental expenses of the exchange offer on the disposal of its Baxalta common stock.

Comparison of Stockholder Rights

Baxter and Baxalta are both organized under the laws of the State of Delaware. Differences in the rights of a stockholder of Baxter from those of a stockholder of Baxalta arise principally from provisions of the constitutive documents of each of Baxter and Baxalta. See “Comparison of Stockholder Rights.”

The Exchange Agent

The exchange agent for the exchange offer is Computershare Trust Company, N.A.

The Information Agent

The information agent for the exchange offer is D.F. King & Co., Inc.

The Dealer Manager

The dealer manager for the exchange offer is J.P. Morgan Securities LLC. This firm is referred to as the “dealer manager.”

Selected Historical Financial Data for Baxter and Baxalta

Baxter Selected Historical Financial Data

The following table sets forth Baxter’s selected historical consolidated financial data for the periods indicated. The selected financial data of Baxter presented below for each of the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 are derived from Baxter’s audited consolidated financial statements and related notes contained in its Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated by reference into this prospectus. The selected financial data of Baxter for each of the years ended December 31, 2012 and 2011 and as of December 31, 2013, 2012 and 2011 have been derived from Baxter’s audited consolidated financial statements for such years, which have not been incorporated into this prospectus by reference.

 



 

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The data shown below are not necessarily indicative of results to be expected for any future period. You should read the following information together with Baxter’s audited consolidated financial statements and the notes related thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Baxter’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

         As of and for the years ended December 31,  

(in millions, except per share data)

  20152,1     20143,1     20134,1     20125,1     20116,1  
Operating Results   

Net sales

  $ 9,968      $ 10,719      $ 9,413      $ 8,626      $ 8,421   
  

Income from continuing operations

    393        457        315        663        434   
  

Income from discontinued operations, net of tax

    575        2,040        1,697        1,663        1,790   
  

Net income7

    968        2,497        2,012        2,326        2,224   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Information

  

Total assets

    20,975        26,138        25,224        20,390        19,073   
  

Long-term debt and lease obligations

    3,935        7,331        8,126        5,580        4,749   
Other   

Capital expenditures, continuing operations

    911        925        706        622        629   
            
Common Stock Information   

Weighted-average number of common shares outstanding

         
  

Basic

    545        542        543        551        569   
  

Diluted

    549        547        549        556        573   
  

Income from continuing operations per common share

         
  

Basic

    0.72        0.84        0.58        1.20        0.76   
  

Diluted

    0.72        0.83        0.57        1.19        0.76   
  

Income from discontinued operations per common share

         
  

Basic

    1.06        3.77        3.12        3.02        3.15   
  

Diluted

    1.04        3.73        3.09        2.99        3.12   
  

Net income per common share

         
  

Basic

    1.78        4.61        3.70        4.22        3.91   
  

Diluted

    1.76        4.56        3.66        4.18        3.88   
  

Cash dividends declared per common share

    1.270        2.050        1.920        1.570        1.265   

 

(1) Refer to the notes to the consolidated financial statements of Baxter incorporated by reference herein for information regarding other charges and income items.
(2) Income from continuing operations included charges totaling $127 million for business optimization, $73 million related to the integration of Gambro AB (Gambro), $111 million related to the Baxalta separation and $130 million related to Baxter’s July 2015 tender offer for certain outstanding indebtedness. Also included were benefits of $28 million primarily related to adjustments to the COLLEAGUE and SIGMA Spectrum infusion pump reserves, $52 million related to a litigation settlement in which Baxter was the beneficiary and $20 million relating to the reversal of contingent consideration milestone liabilities.
(3) Income from continuing operations included charges totaling $68 million for SIGMA Spectrum Infusion Pump product remediation efforts, $144 million related to the integration of Gambro, $11 million related to the Baxalta separation and $3 million to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued by the IRS. Also included were benefits of $13 million for business optimization and $1 million related to third-party recoveries and reversals of prior reserves.
(4)

Income from continuing operations included charges totaling $148 million for business optimization, $17 million primarily related to remediation efforts associated with modifications to the SIGMA Spectrum

 



 

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  Infusion Pump in conjunction with re-filing for 510(k) clearance, $255 million related to the acquisition and integration of Gambro and losses from the derivative instruments used to hedge the anticipated foreign currency cash outflows and $25 million related to an upfront payment associated with one of Baxter’s collaboration arrangements. Also included were benefits of $3 million related to tax and legal reserves associated with VAT matters in Turkey.
(5) Income from continuing operations included charges totaling $106 million for business optimization, $15 million primarily related to business development, and $170 million primarily related to pension settlement charges and other pension-related items. Also included were benefits of $23 million primarily related to an adjustment to the COLLEAGUE infusion pump reserve when the company substantially completed its recall activities in the United States and $91 million for gains related to a decrease in the estimated fair value of acquisition-related contingent payment liabilities.
(6) Income from continuing operations included charges totaling $156 million for business optimization, $36 million related to litigation and certain historical rebate and discount adjustments and $103 million primarily related to the write-down of Greek government bonds and a contribution to the Baxter International Foundation.
(7) Excludes net income attributable to noncontrolling interests of $32 million in 2011.

Baxalta Selected Historical and Pro Forma Financial Data

The following table sets forth summary historical financial information for the periods indicated below. The Baxalta selected combined income statement data for the years ended December 31, 2015, 2014 and 2013 and the selected combined balance sheet data as of December 31, 2015 and 2014 have been derived from Baxalta’s audited consolidated and combined financial statements, which are included elsewhere in this prospectus.

The consolidated and combined financial statements for periods prior to the separation 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 prior to the spin-off, 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 Baxalta consolidated and combined statement of income data disclosed below has been updated to retrospectively present earnings per share (EPS) for periods prior to the completion of the separation and related transactions. The computation of basic EPS for all periods prior to the separation disclosed herein was calculated using the shares distributed and retained by Baxter on July 1, 2015 totaling 676 million. The weighted average number of shares outstanding for diluted EPS for the periods prior to separation also include 5 million of diluted common share equivalents for stock options, RSUs and PSUs as these share-based awards were previously issued by Baxter and outstanding at the time of separation and were assumed by Baxalta following the separation.

The unaudited pro forma combined statement of income data for the year ended December 31, 2015 assumes that the separation occurred as of January 1, 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 of Baxalta,” “Unaudited Pro Forma Combined Financial Statements of Baxalta,” including the corresponding notes thereto, and the audited consolidated and combined financial statements and corresponding notes thereto included elsewhere in this prospectus.

 

     For the years ended December 31,  

(in millions, except per share data)

   Pro Forma
2015
    2015     2014      2013  

Consolidated and Combined Statement of Income Data:

         

Net sales

   $ 6,230      $ 6,148      $ 5,952       $ 5,555   

Cost of sales

     2,462        2,386        2,443         2,329   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross margin

     3,768        3,762        3,509         3,226   
  

 

 

   

 

 

   

 

 

    

 

 

 

Selling, general and administrative expenses

     1,422        1,442        1,053         1,017   

Research and development expenses

     1,174        1,176        820         595   

Net interest expense

     139        48        —           —     

Other (income) expense, net

     (102     (102     104         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

     1,135        1,198        1,532         1,613   

Income tax expense

     246        270        346         325   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income from continuing operations

   $ 889      $ 928      $ 1,186       $ 1,288   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income from continuing operations per common share

         

Basic

   $ 1.31      $ 1.37      $ 1.75       $ 1.90   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 1.30      $ 1.36      $ 1.74       $ 1.89   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     As of December 31,  

(in millions)

   2015      2014  

Consolidated and Combined Balance Sheet Data:

     

Total assets

   $ 12,329       $ 8,583   

Long-term debt and capital lease obligations

   $ 5,265       $ 275   

 

     For the years ended
December 31,
 

(in millions)

   2015      2014      2013  

Other Financial Data:

        

Adjusted net income from continuing operations1

   $ 1,460       $ 1,585       $ 1,432   

 

1 

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). This non-GAAP financial measure excludes the impact of certain special items, which are excluded because they are highly variable, difficult to predict, and of a size that may substantially impact the company’s operations and can facilitate an additional analysis of the company’s results of operations, particularly in evaluating performance from one period to another. Upfront and milestone payments related to collaborative arrangements that have been expensed as research and development (R&D) are uncertain and often result in a different payment and expense recognition pattern than internal R&D activities and therefore are typically excluded as special items. Intangible asset amortization is excluded 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. The company’s management uses non-GAAP financial measures to evaluate the company’s performance and provides them to investors as a supplement to the company’s reported results, as management believes this information provides additional insight into the

 



 

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  company’s operating performance. This non-GAAP financial measure used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. In addition, this non-GAAP financial measure should not be considered in isolation, as a substitute for, or as superior to, financial measures calculated in accordance with GAAP, and the company’s financial results calculated in accordance with GAAP and the following reconciliation to those financial statements should be carefully evaluated.

 

     For the years ended
December 31,
 

(in millions)

   2015     2014     2013  

Net income from continuing operations

   $ 928      $ 1,186      $ 1,288   

Adjustments for special items:

      

Upfront and milestone payments to collaboration partners

     390        217        78   

Business optimization items

     (8     22        45   

Change in fair value of contingent payment liabilities

     (97     124        18   

Other-than-temporary impairment charge

     —          45        —     

Branded Prescription Drug Fee

     —          26        —     

Separation costs

     221        56        —     

Intangible asset amortization expense

     64        16        16   

Plasma-related litigation

     —          (10     84   

Turkey VAT charge

     —          —          8   

Business development items

     12        —          —     

In-process R&D and other impairment charges

     81        —          —     

Currency-related items

     25        —          —     

Impact of special items on income taxes

     (156     (97     (105
  

 

 

   

 

 

   

 

 

 

Total special items, net of tax

   $ 532      $ 399      $ 144   
  

 

 

   

 

 

   

 

 

 

Adjusted net income from continuing operations

   $ 1,460      $ 1,585      $ 1,432   
  

 

 

   

 

 

   

 

 

 

Market Price and Dividend Information

The market prices of Baxter and Baxalta common stock are subject to fluctuation. The exchange ratio will be set based on the respective market prices of Baxter and Baxalta common stock during the Averaging Period. As a result, you should, among other things, obtain current market quotations before deciding to tender your shares of Baxter common stock. There can be no assurance what the market price of shares will be before, on, or after the date on which the exchange offer is completed. Baxter common stock is listed on the NYSE under the symbol “BAX.” Baxalta common stock is listed on the NYSE under the symbol “BXLT.”

 



 

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Baxter

The following table describes the per share range of high and low sales prices, as reported by the NYSE, for shares of Baxter common stock and dividends declared per share of Baxter common stock for the quarterly periods indicated.

 

     Market Price for Baxter
Common Stock
     Dividends
Declared
 
         High1      Low1          Per Share  

2014

        

First Quarter

   $ 38.29       $ 34.39       $ 0.49   

Second Quarter

   $ 39.27       $ 37.46       $ 0.52   

Third Quarter

   $ 40.36       $ 37.62       $ 0.52   

Fourth Quarter

   $ 39.71       $ 35.49       $ 0.52   

2015

        

First Quarter

   $ 38.97       $ 35.84       $ 0.52   

Second Quarter

   $ 39.05       $ 34.59       $ 0.52   

Third Quarter

   $ 43.44       $ 33.25       $ 0.115   

Fourth Quarter

   $ 38.79       $ 32.18       $ 0.115   

2016

        

First Quarter

   $ 41.50       $ 34.06       $ 0.115   

Second Quarter (from April 1, 2016 through April 20, 2016)

   $ 43.52       $ 40.52       $   

 

(1) All stock prices for periods preceding the July 1, 2015 separation of Baxalta are adjusted to reflect the high or low adjusted closing price for the period.

The declaration and payment of dividends to holders of Baxter common stock is at the discretion of Baxter’s board of directors in accordance with applicable law after taking into account various factors.

As of April 11, 2016, there were 551,530,470 shares of Baxter common stock outstanding, and 30,802 stockholders of record of shares of Baxter common stock.

On April 20, 2016, the NYSE trading day immediately preceding the commencement of the exchange offer, the closing sales price per share of Baxter common stock as reported by the NYSE was $43.26.

Baxalta

The following table describes the per share range of high and low sales prices, as reported by the NYSE, for shares of Baxalta common stock and dividends declared per share of Baxalta common stock for the quarterly periods indicated.

 

     Market Price for
Baxalta
Common Stock
     Dividends
Declared
 
     High      Low      Per Share  

2015

        

Third Quarter

   $ 40.90       $ 29.83       $ 0.07   

Fourth Quarter

   $ 40.24       $ 30.50       $ 0.07   

2016

        

First Quarter

   $ 42.38       $ 36.10       $ 0.07   

Second Quarter (from April 1, 2016 through April 20, 2016)

   $ 41.93       $ 38.01       $   

 



 

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The declaration and payment of dividends to holders of common stock of Baxalta is at the discretion of Baxalta’s Board of Directors in accordance with applicable law after taking into account various factors. The merger agreement provides that Baxalta may not pay dividends on Baxalta common stock other than the regular quarterly cash dividends not to exceed $0.07 per quarter.

On February 23, 2016, Baxalta’s Board of Directors declared a quarterly cash dividend of $0.07 per share, which was paid on April 1, 2016, to stockholders of record as of the close of business on March 10, 2016. Holders of shares distributed in the exchange offer will have the right to participate in dividends, if any, distributed after completion of the exchange offer to the extent they hold the shares on the relevant record date. If Baxalta determines to pay any dividend in the future, there can be no assurance that it will continue to pay such dividends or the amount of such dividends.

As of April 11, 2016, there were 683,082,565 shares of Baxalta common stock outstanding. As of April 11, 2016, there were 31,035 registered holders of record of shares of Baxalta common stock. Immediately before the commencement of the exchange offer, Baxter beneficially owned 30,506,097 shares of Baxalta common stock representing approximately 4.5% of Baxalta’s outstanding common stock.

On April 20, 2016, the last NYSE trading day immediately preceding the commencement of the exchange offer, the closing sales price per share of Baxalta common stock as reported by the NYSE was $40.66.

The Merger Agreement with Shire

The Merger Agreement

On January 11, 2016, Shire, BearTracks, Inc. (Merger Sub), a wholly owned subsidiary of Shire, and Baxalta entered into an Agreement and Plan of Merger (the merger agreement), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into Baxalta, with Baxalta being the surviving corporation, and Baxalta will become a wholly owned subsidiary of Shire (the merger).

On the terms and subject to the conditions set forth in the merger agreement, at the effective time of the merger, each share of Baxalta common stock issued and outstanding immediately prior to the effective time of the merger (other than treasury shares of Baxalta and any shares of Baxalta common stock owned by Shire or any subsidiary of Shire (including Merger Sub) or Baxalta, and other than shares of Baxalta common stock as to which dissenters’ rights have been properly exercised) will be canceled and converted into the right to receive both (i) $18.00 in cash, without interest and (ii) 0.1482 of an American Depositary Share of Shire (the Shire ADS) duly and validly issued against Shire’s ordinary shares (the Shire ordinary shares), par value £0.05 per share (the per share stock consideration), except that cash will be paid in lieu of fractional Shire ADSs. Although Shire has agreed to permit holders of Baxalta common stock to elect to receive 0.4446 of a Shire ordinary share for each outstanding share of Baxalta common stock in lieu of the per share stock consideration, the deadline for making such election is expected to have passed before the exchange offer is complete.

Under the merger agreement, Shire agreed to use its reasonable best efforts to appoint Wayne T. Hockmeyer, Ph.D., chairman of the Baxalta Board of Directors, and two additional members of the Baxalta Board, jointly selected by the chairman of the Baxalta Board and chairman of the Shire board of directors following consultation with the Nomination Committee of the Shire board, to the Shire board of directors, effective upon the closing of the merger. Following the appointment of such directors, Shire agreed to nominate the same individuals as directors, to the extent such individuals are willing to serve and have complied in a satisfactory manner, in the good faith reasonable judgment of the Shire board, with the attendance and performance expectations of the Shire board, at the 2017 Shire stockholder meeting. Since the date of the merger agreement, Dr. Hockmeyer has decided to withdraw himself from consideration for such an appointment due to personal reasons and therefore only two members of the Baxalta Board will be considered for nomination.

 



 

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Because the record date for the special meeting of the stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

The merger is expected to close in early June 2016, subject to the satisfaction or waiver of certain conditions described in this prospectus. See “The Transactions—The Proposed Merger—Merger Agreement” and “Business—The Proposed Merger.”

Information About Shire

According to publicly available information, Shire (LSE: SHP, NASDAQ: SHPG), a company incorporated in Jersey, Channel Islands and based in Dublin, Ireland, is a biopharmaceutical company that focuses on developing and marketing innovative medicines for patients with rare diseases and other specialty conditions.

Shire is required to file reports and other information with the SEC. On April 18, 2016, Shire filed a proxy statement/prospectus with the SEC with respect to the merger. The proxy statement/prospectus has been declared effective by the SEC. Copies of these reports and other information regarding Shire, including information regarding Shire’s dividend policy and history and the market price performance of Shire ADSs (listed on the Nasdaq Global Select Market) and Shire ordinary shares (listed on the London Stock Exchange), may be inspected and copied at the SEC’s public reference room or website as specified under “Incorporation by Reference—Where You Can Find More Information About Baxter and Baxalta.” However, such reports and other information are not incorporated by reference in this prospectus. This prospectus relates only to the common stock of Baxalta being offered by Baxter in this offering and does not relate to the Shire ADSs, Shire ordinary shares or other securities of Shire. All disclosures contained in this prospectus regarding Shire are derived from the publicly available reports and other information on file with the SEC, referred to above. We have not participated in the preparation of Shire’s reports and other information on file with the SEC, and none of Baxalta, Baxter or the dealer manager represent that any such Shire reports or other information, or any other publicly available information regarding Shire, is accurate or complete.

None of Baxalta, Baxter, the dealer manager, the information agent or the exchange agent can provide you with any assurance that all events occurring prior to the date of this prospectus, including events that would affect the accuracy or completeness of the publicly available documents described in the preceding paragraph that would affect the trading price of the Shire ADSs or Shire ordinary shares, and therefore the trading price of Baxalta common stock, have been publicly disclosed. Subsequent disclosure of any such event or the disclosure of or failure to disclose material future events concerning Shire could affect the trading price of Baxalta common stock. We, our affiliates, Baxter, the dealer manager, the information agent and the exchange agent do not make any representation to you as to the performance of Shire, the Shire ADSs, the Shire ordinary shares or any other securities of Shire.

 



 

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RISK FACTORS

In determining whether or not to tender your shares of Baxter common stock in the exchange offer, you should consider carefully all of the information about Baxalta and Baxter included or incorporated by reference into this prospectus, as well as the information about the terms and conditions of the exchange offer. None of Baxter, Baxalta or any of their respective directors or officers, the dealer manager, the information agent, the exchange agent or any other person makes any recommendation as to whether you should tender all, some or none of your shares of Baxter common stock. You must make your own decision after reading this prospectus and consulting with your advisors.

The risk factors described below are separated into five groups:

 

  1. Risks Related to the Exchange Offer;

 

  2. Risks Related to Baxalta’s Business;

 

  3. Risks Related to the Separation and Distribution;

 

  4. Risks Related to Baxalta’s Common Stock; and

 

  5. Risks Related to the Proposed Merger with Shire.

“Risks Related to Baxalta’s Business,” “Risks Related to the Separation and Distribution” and “Risks Related to Baxalta’s Common Stock” describe the material risks relating to Baxalta’s business and ownership of Baxalta common stock. For a description of the material risks relating to Baxter, please read “Risk Factors” in Baxter’s Annual Report on Form 10-K for the year ended December 31, 2015, which report is incorporated by reference into this prospectus.

The occurrence of the events described below under “Risks Related to Baxalta’s Business” and “Risks Related to Baxalta’s Common Stock” could have a material adverse effect on Baxalta’s businesses, prospects, financial condition, results of operations and/or cash flows. If the merger is consummated, the occurrence of certain of the events described below under “Risks Related to the Proposed Merger with Shire” could have a material adverse effect on the combined company’s businesses, prospects, financial condition, results of operations and/or cash flows. In such a case, the price of shares of Baxalta common stock, or the combined company’s common stock if the merger is consummated, may decline and you could lose all or part of your investment. In addition, other unknown or unpredictable economic, business, competitive, regulatory, geopolitical or other factors could have material adverse effects on Baxalta’s, Baxter’s or the combined company’s businesses, prospects, financial condition, results of operations and/or cash flows. Please read “Cautionary Statement Concerning Forward-Looking Statements.”

Risks Related to the Exchange Offer

Your investment will be subject to different risks after the completion of the exchange offer regardless of whether you elect to participate in the exchange offer.

Your investment will be subject to different risks as a result of the completion of the exchange offer, regardless of whether you tender all, some or none of your shares of Baxter common stock.

 

    If you exchange all of your shares of Baxter common stock and the exchange offer is not oversubscribed, then you will no longer have an ownership interest in Baxter, but instead will directly own only an interest in Baxalta. As a result, your investment will be subject exclusively to risks associated with Baxalta and not risks associated solely with Baxter.

 

    If you exchange all of your shares of Baxter common stock and the exchange offer is oversubscribed, then the offer will be subject to the proration procedures described in this prospectus and, unless your odd-lot tender is not subject to proration, you will own a direct interest in both Baxter and Baxalta. As a result, your investment will continue to be subject to risks associated with both Baxter and Baxalta.

 

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    If you exchange some, but not all, of your shares of Baxter common stock, then regardless of whether the exchange offer is fully subscribed, the number of shares of Baxter common stock you own will decrease (unless you otherwise acquire shares of Baxter common stock), while the number of shares of Baxalta common stock you own will increase. As a result, your investment will continue to be subject to risks associated with both Baxter and Baxalta.

 

    If you do not exchange any of your shares of Baxter common stock and if Baxter disposes of all of the remaining shares of Baxalta common stock held by it in the exchange offer, then your ownership interest in Baxter will increase on a percentage basis, while your indirect ownership in Baxalta will be eliminated (unless you otherwise own shares of Baxalta common stock). As a result, your investment would be subject exclusively to risks associated with Baxter and not risks associated with Baxalta because Baxter would no longer have an ownership interest in Baxalta.

Regardless of whether you tender your shares of Baxter common stock, the shares you hold after the completion of the exchange offer will reflect a different investment from the investment you previously held.

The exchange offer and related transactions will result in Baxalta common stock entering the market, which may adversely affect the market price of Baxalta common stock.

Before the exchange offer, Baxter owned 30,506,097 shares of Baxalta common stock (or approximately 4.5% of the total number of outstanding Baxalta shares as of April 11, 2016). Assuming the exchange offer is fully subscribed and completed, Baxter will distribute 12,800,000 shares of Baxalta common stock. If Baxter does not dispose of all of the remaining shares of Baxalta common stock held by it in the exchange offer, Baxalta has been advised by Baxter that Baxter will continue to hold shares of Baxalta common stock. Baxter intends to, prior to or following the completion of the exchange offer, complete a distribution via a dividend or make a contribution to Baxter’s U.S. pension fund prior to any Shire or Baxalta shareholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and, in any event, during the 18-month period following the distribution on July 1, 2015. To the extent Baxter holds any Baxalta common stock or Shire Securities received in exchange for such common stock pursuant to the merger at the end of the 18-month period, as the case may be, Baxter has advised us that it will dispose of such stock in one or more transactions (including potentially through underwritten equity offerings) as soon as practicable thereafter, taking into account market conditions and its business judgment, but in no event later than five years after the distribution. The distribution of such number of shares of Baxalta common stock in the exchange offer and/or via a dividend could adversely affect the market price of Baxalta common stock as could sales of Baxalta common stock by the U.S. pension fund.

Following the completion of the exchange offer, shares of Baxter common stock and Baxalta common stock will fluctuate and the final per-share values used in determining the exchange ratio may not be indicative of future trading prices.

The common stock price history for shares of Baxter and Baxalta may not provide investors with a meaningful basis for evaluating an investment in either company’s common stock. Baxalta has been a publicly traded company only since July 1, 2015. As a result, the prior performance of Baxter and Baxalta common stock may not be indicative of the performance of their common stock after the exchange offer. In addition, the indicative and final per-share values used in determining the exchange ratio may not be indicative of the prices at which Baxter common stock and Baxalta common stock (or, if the merger is consummated, Shire Securities issued in exchange for Baxalta common stock) will trade after the exchange offer is completed. See “The Transactions—The Proposed Merger—Merger Agreement.”

Tendering Baxter stockholders may receive a reduced discount or may not receive any discount in the exchange offer.

The exchange offer is designed to permit you to exchange your shares of Baxter common stock for shares of Baxalta common stock at a 7% discount. Stated another way, subject to the limitations described below, for

 

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each $100 of your shares of Baxter common stock accepted in the exchange offer, you will receive approximately $107.52 of Baxalta common stock based on the Average Baxter Price and the Average Baxalta Price.

The number of shares you can receive is, however, subject to an upper limit of 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. The upper limit ensures that any unusual or unexpected decrease in the trading price of Baxalta common stock, relative to the trading price of Baxter common stock, would not result in an unduly high number of shares of Baxalta common stock being exchanged for each share of Baxter common stock accepted in the exchange offer. As a result, you may receive less than $107.52 of Baxalta common stock for each $100 of Baxter common stock accepted in the exchange offer, depending on the Average Baxter Price and the Average Baxalta Price. Because of the upper limit, if there is a decrease of sufficient magnitude in the trading price for shares of Baxalta common stock relative to the trading price of shares of Baxter common stock, or if there is an increase of sufficient magnitude in the trading price for shares of Baxter common stock relative to the trading price for shares of Baxalta common stock, you may not receive $107.52 of Baxalta common stock for each $100 of Baxter common stock accepted, and could receive much less.

In addition, there is no assurance that shares of Baxalta common stock received in the exchange offer will be able to be sold at prices comparable to the Average Baxalta Price.

There may also be circumstances under which you would receive fewer shares of Baxalta common stock than you would have received if the exchange ratio were determined using the closing prices for shares of Baxter common stock and Baxalta common stock on the expiration date of the exchange offer. For example, if the trading price of shares of Baxter common stock were to increase during the last two trading days of the exchange offer period, the Average Baxter Price would likely be lower than the closing price of shares of Baxter common stock on the expiration date of the exchange offer. As a result, you may receive fewer shares of Baxalta common stock for each $100 of Baxter common stock than you would have if the Average Baxter Price were calculated on the basis of the closing price of shares of Baxter common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer. Similarly, if the trading price of Baxalta common stock were to decrease during the last two trading days of the exchange offer, the Average Baxalta Price would likely be higher than the closing price of shares of Baxalta common stock on the expiration date of the exchange offer. This could also result in your receiving fewer shares of Baxalta common stock for each $100 of Baxter common stock than you would otherwise receive if the Average Baxalta Price were calculated on the basis of the closing price of shares of Baxalta common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer.

Participating Baxter stockholders will experience some delay in receiving shares of Baxalta common stock (and cash in lieu of fractional shares of Baxalta common stock, if any) for shares of Baxter common stock that are accepted in the exchange offer.

Tendering Baxter stockholders whose shares of Baxter common stock have been accepted for exchange may not be able to sell the shares of Baxalta common stock to be received until the distribution of shares of Baxalta common stock to individual stockholders has been completed. Consequently, if the market price for shares of Baxalta common stock should decrease or increase during that period, the relevant stockholder may not be able to stop any losses or recognize any gain by selling the shares of Baxalta common stock. Similarly, you will not be able to invest cash in lieu of fractional shares of Baxalta common stock, if any, until the distribution of such cash has been completed, and you will not receive interest payments for this time period.

Market prices for shares of Baxter common stock may be impacted by the exchange offer.

Investors may purchase shares of Baxter common stock in order to participate in the exchange offer, which may have the effect of raising market prices for shares of Baxter common stock during the pendency of the exchange offer. Following the completion of the exchange offer, the market prices for shares of Baxter common stock may decline because any exchange offer-related demand for shares of Baxter common stock will cease.

 

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In addition, following the completion of the exchange offer, the market prices for shares of Baxter common stock may decline because Baxter may no longer have any ownership interest in Baxalta.

The exchange offer could result in significant tax liability.

Baxter received a ruling from the IRS and a tax opinion from KPMG, neither of which contemplated the merger, that collectively provided that the distribution on July 1, 2015 qualified as a tax-free transaction under Sections 355, 361 and 368(a)(1)(D) of the Code. Such ruling and tax opinion also collectively provided for a tax-free exchange of shares of Baxter common stock for shares of Baxalta common stock within 18 months of the distribution. As a result, Baxter believes that it will not recognize gain or loss for U.S. federal income tax purposes in the exchange offer and holders of Baxter common stock who participate in the exchange offer will not recognize gain or loss for U.S. federal income tax purposes upon the receipt of shares of Baxalta common stock in the exchange offer. A U.S. holder of Baxter stock generally will recognize capital gain or loss with respect to cash received in lieu of fractional shares of Baxalta common stock. Completion by Baxter of the exchange offer will be conditioned on, among other things, the continuing application of Baxter’s private letter ruling from the IRS.

Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the completeness of facts and accuracy of factual representations and assumptions made in the ruling. The opinion of KPMG is based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or incomplete in any material respect, an undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the exchange offer, the IRS private letter ruling or tax opinion may not be valid and Baxter and its stockholders could be subject to significant tax liabilities. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to you of the exchange offer could be materially less favorable.

If the exchange offer were determined not to qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 355 and 361 of the Code, each Baxter stockholder who receives shares of Baxalta common stock in the exchange offer would generally be treated as recognizing gain or loss for U.S. federal income tax purposes equal to the difference between the fair market value of the shares of Baxalta common stock received by the stockholder and its tax basis in the shares of Baxter common stock exchanged therefor, or, in certain circumstances, as receiving a taxable distribution equal to the fair market value of the shares of Baxalta common stock received by the stockholder.

In addition, Baxter would recognize gain for U.S. federal income tax purposes equal to the difference between the fair market value and the tax basis of Baxter’s investment in Baxalta common stock disposed of in the exchange offer and possibly with respect to certain related transactions.

If the exchange offer and/or certain related transactions are determined to be taxable, Baxter and its stockholders could incur significant tax liabilities, and under the tax matters agreement, dated as of June 30, 2015, between Baxter and Baxalta, and the letter agreement, dated as of January 11, 2016, among Baxter, Baxalta and Shire. Baxalta may be required to indemnify Baxter for any liabilities incurred by Baxter if the liabilities are caused by any action or inaction undertaken by Baxalta following the distribution on July 1, 2015 (including as a result of the merger).

For a description of the potential effect of the merger on the tax treatment of the Baxter Transactions, including this exchange offer, refer to the section of this prospectus entitled “Risk Factors—Risks Related to the Proposed Merger with Shire—The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable.”

 

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Because the record date for the special meeting of stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

Baxalta set April 11, 2016 as the record date for stockholders of Baxalta entitled to notice of and to vote at the special meeting of stockholders at which the merger will be submitted for approval. Because the record date for the special meeting of stockholders has already occurred, you will not become the owner of Baxalta common stock as of the record date as a result of participating in the exchange offer and, unless you otherwise own shares of Baxalta common stock, you will not be entitled to vote on the merger, nor to receive notice of any appraisal rights in connection with the merger. In addition, you will not be entitled to receive the proxy statement/prospectus distributed to Baxalta stockholders in connection with the special meeting.

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 November 2015, Baxalta received regulatory approval for ADYNOVATE in the United States. ADYNOVATE is an 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, ADYNOVATE is 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 ADYNOVATE outside of the United States, or if the company is unable to successfully execute on its plans to commercialize ADYNOVATE, 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 additional regulatory approvals may not be received, factors that may prevent the company from successfully meeting its plans for the launch and commercialization of ADYNOVATE include the availability of competitive products; any reputational damage that may result from adverse experiences or events that may occur with patients treated with ADYNOVATE; any successful challenge with respect to rights in the company’s exclusive ownership of the PEGylation technology utilized in ADYNOVATE; 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) and a recombinant treatment for patients with

 

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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. For a discussion of Baxalta’s R&D activities and product pipeline, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta—Executive Summary—Research and Development and External Innovation” and “Business—Building a Diversified Biopharmaceutical Pipeline,” respectively.

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

 

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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 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 consolidated 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, Federal 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 (PPACA), 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, refer to Note 16 to the audited consolidated and combined financial statements contained in this prospectus.

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.

 

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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. 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, group purchasing organizations and integrated delivery networks) 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 and consummating acquisitions, joint research and 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 of Baxalta—Executive Summary—Research and Development and External Innovation,” “Business—Research and Development Activities” and “Business—Collaborations.”

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.

 

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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 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 PPACA, which was signed into law in March 2010, includes several provisions that 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, ADYNOVATE and HYQVIA, Baxalta relies on sole supplier relationships for which no alternatives have currently been identified. Although Baxalta does carry strategic inventory and maintains 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 shortages, 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 a

 

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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 compete

 

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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 45% of its total revenue in 2015) 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 of Baxalta—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, refer to Note 14 to the audited consolidated and combined financial statements contained in this prospectus.

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

 

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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 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 or 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. The announcement of the merger may also adversely affect Baxalta’s ability to attract and retain employees. 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. For more information regarding legal proceedings involving Baxalta, refer to Note 16 to the audited consolidated and combined financial statements contained in this prospectus.

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. In particular, Baxalta has significant accounts receivable related to its Hemobrás partnership in Brazil ($207 million at December 31, 2015). These conditions may also impact the stability of the Euro or other currencies in which Baxalta does business.

 

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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. Uncertainty remains concerning both the regulatory pathway in the United States and in other countries to obtain approval of biosimilar products and the commercial pathway to successfully market and sell such products. The Biologics Price Competition and Innovation Act (BPCIA) 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, and recently approved a second biosimilar drug, 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 “Business—Regulation.”

Risks Related to the Separation and Distribution

Baxalta has only operated as an independent company since July 1, 2015, 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 prior to July 1, 2015 included in this prospectus refers to Baxalta’s business as operated by and integrated with Baxter. Baxalta’s historical and pro forma financial information for such periods was derived from the consolidated financial statements and accounting records of Baxter. Accordingly, such historical and pro forma financial information 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 of the following factors:

 

   

Prior to the separation, Baxalta’s business was 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, stockholder relations, compliance, shared services, insurance, employee benefits and compensation. Following the separation, Baxter has continued to provide some of these functions to Baxalta, as described in the section of this prospectus entitled “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter.” 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

 

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presented. Baxalta will make significant investments to replicate or outsource from other providers certain facilities, systems, infrastructure and personnel to which Baxalta no longer has access as a result of the separation. 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.

 

    Prior to the separation, Baxalta’s business was integrated with the other businesses of Baxter. Baxalta was able to utilize Baxter’s size and purchasing power in procuring various goods and services and shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although Baxalta has entered into transition agreements with Baxter, these arrangements may not fully capture the benefits Baxalta 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 for periods following the separation.

 

    Generally, prior to the separation, Baxalta’s working capital requirements and capital for its general corporate purposes, including acquisitions, R&D and capital expenditures, were satisfied as part of the corporate-wide cash management policies of Baxter. Following the separation, 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 separation, 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 its obligations to purchase from Baxter certain operations and assets, and assume the corresponding liabilities, of Baxalta’s business after the separation 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 and pro forma combined financial statements of Baxalta’s business, see “Unaudited Pro Forma Combined Financial Statements of Baxalta,” “Selected Historical Consolidated and Combined Financial Data of Baxalta,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta” and the audited consolidated and combined 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.

Since the separation, Baxalta has begun installing and implementing 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.

 

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Baxter may not satisfy its obligations under various transaction agreements that have been 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 entered into a separation and distribution agreement and entered 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 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 in this prospectus entitled “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter.” Certain of these agreements provide for the performance of services by each company for the benefit of the other for a period of time after the separation. 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. 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. 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, which could disrupt Baxalta’s business and have a material adverse effect on its profitability. These systems and services may also be more expensive or less efficient than the systems and services Baxter is providing and is expected to provide during the transition period.

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

The separation and distribution agreement with Baxter provides for, among other things, provisions governing the relationship between Baxter and Baxalta with respect to and resulting from the separation. For a description of the separation and distribution agreement, see “Agreements Between Baxter and Baxalta and Other Related Party 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 and distribution 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 separation pursuant to the separation and distribution 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 and distribution 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 separation, but its other indemnification obligations pursuant to the separation and distribution 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 and distribution agreement, Baxalta may be subject to substantial liabilities.

 

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The spin-off and the Later Distributions (as defined below) could result in significant liability to Baxalta.

The spin-off and the Later Distributions (collectively, the Baxter Transactions) are intended to qualify for tax-free treatment to Baxter and its stockholders under Sections 355, 361 and 368(a)(1)(D) of the Code. Completion of the spin-off was conditioned upon, among other things, the receipt of a private letter ruling from the IRS regarding certain issues relating to the tax-free treatment of the Baxter Transactions. Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the completeness of facts and accuracy of factual representations and assumptions made in the ruling. Completion of the distribution on July 1, 2015 was also conditioned upon Baxter’s receipt of a tax opinion from KPMG regarding certain aspects of the spin-off not covered by the IRS private letter ruling. The opinion was based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or incomplete in any material respect, an undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the Baxter Transactions, the opinion or IRS private letter ruling may not be valid. Neither the IRS private letter ruling nor the tax opinion took into account the merger, which was not contemplated at the time of their issuances. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS.

If the Baxter Transactions are determined to be taxable, Baxter and its stockholders could incur significant tax liabilities, and under the tax matters agreement and the letter agreement, Baxalta may be required to indemnify Baxter for any liabilities incurred by Baxter if the liabilities are caused by any action or inaction undertaken by Baxalta following the spin-off (including as a result of the merger). For additional detail, see “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Tax Matters Agreement,” and “Risk Factors—Risks Related to the Proposed Merger with Shire—The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable,” and the immediately following risk factor.

In this prospectus, references to the “Later Distributions” refer to the following transactions that have been or may be undertaken by Baxter: (i) any debt-for-equity exchange (and related underwritten offering) with respect to Baxalta shares, (ii) any offer to exchange Baxter shares for Baxalta shares, including this exchange offer, (iii) a contribution of Baxalta shares to Baxter’s U.S. pension fund, and/or (iv) a dividend of Baxalta shares to Baxter’s stockholders, in each case, that are undertaken prior to any Shire or Baxalta stockholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and that are intended to be part of a plan that includes the spin-off.

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

In order to preserve the tax-free treatment of the Baxter Transactions to Baxter and its stockholders, the tax matters agreement generally restricts Baxalta from taking or failing to take any action that would cause the Baxter Transactions to become taxable. Under the tax matters agreement, for the two-year period following the separation, Baxalta is prohibited, except in certain circumstances, from:

 

    entering into any transaction resulting in the acquisition of more than 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 Baxter Transactions or certain related transactions from being tax-free.

 

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The tax matters agreement permits Baxalta to take any of the actions described above if Baxalta provides Baxter with a tax opinion or Baxter receives an IRS private letter ruling that, in each case, is reasonably satisfactory to Baxter to the effect that such action will not affect the tax-free status of the Baxter Transactions (or Baxter waives the requirement to obtain such an opinion or ruling). If Baxalta intends to take any such restricted action, Baxter will generally be required to cooperate and use reasonable best efforts with a reasonable request to obtain the tax opinion or IRS ruling as expeditiously as possible. The receipt of any such ruling or opinion in respect of an action Baxalta proposes to take will not relieve Baxalta of its obligation to indemnify Baxter if that action causes the Baxter Transactions to be taxable. 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 stockholders or that might increase the value of its business. In addition, under the tax matters agreement, Baxalta is required to indemnify Baxter against any tax liabilities as a result of the acquisition of Baxalta’s stock or assets, even if Baxalta did not participate in or otherwise facilitate the acquisition.

In connection with the signing of the merger agreement, Baxter agreed in the letter agreement to waive the provisions under the tax matters agreement as they relate to the signing of the merger agreement and will waive such prohibitions in connection with the consummation of the merger, provided that each of Shire’s and Baxter’s tax advisors furnish the tax opinions referenced in the letter agreement. Such waiver and opinions will not relieve Baxalta or Shire, following the merger, of its obligation to indemnify Baxter if the merger causes the Baxter Transactions or certain related transactions to be taxable. For additional detail, see “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Tax Matters Agreement” and “Risk Factors—Risks Related to the Proposed Merger with Shire—The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable.”

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 executive officers and directors own shares of Baxter common stock, options to purchase shares of Baxter common stock or other equity awards. Even though Baxalta’s Board of Directors consists of a majority of directors who are independent, and Baxalta’s executive officers who were employees of Baxter ceased to be employees of Baxter, some Baxalta executive officers and directors continue to have a financial interest in shares of Baxter common stock. In addition, three of Baxalta’s directors continue to serve 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.

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 is expected to provide the following benefits, among others:

 

    greater management focus on the distinct business of biopharmaceuticals;

 

    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.

 

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

 

    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 is 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 condition and results of operations of Baxalta could be adversely affected.

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

The agreements Baxalta entered 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. For additional detail, see “Agreements Between Baxter and Baxalta and Other Related Party Transactions.”

Baxalta has significant 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.

Shortly before the separation, Baxalta incurred approximately $5 billion of indebtedness through the issuance of senior notes. Baxalta used the net proceeds to make a cash distribution of $4 billion to Baxter as partial consideration for the contribution of assets to Baxalta in connection with the separation, with the remaining net proceeds intended to be used for general corporate purposes, including to fund acquisitions. In addition, Baxalta also has a senior revolving credit facility with availability of up to $1.2 billion and a Euro-denominated senior revolving credit facility with availability of up to €200 million. The company may also incur additional indebtedness in the future, subject to restrictions set forth in the merger agreement. 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.

 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta—Liquidity and Capital Resources—Financial Condition—Debt and Capital Lease Obligations—Senior Notes.”

Challenges in the commercial and credit environment may adversely affect 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 maintain investment grade credit ratings following the separation.

Risks Related to Baxalta’s Common Stock

Baxalta’s stock price may fluctuate significantly.

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 Shire;

 

    the operating and stock price performance of comparable companies;

 

    announcements or speculation regarding proposed business combinations involving Baxalta or comparable companies in our industry;

 

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

 

    domestic and worldwide economic conditions.

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

Future sales or distributions of Baxalta common stock may cause the market price for shares of Baxalta common stock to decline.

As a result of the separation, Baxter distributed approximately 544 million shares of Baxalta’s common stock to its stockholders, all of which are 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.

After completion of the distribution, Baxter retained approximately 19.5% of Baxalta’s total shares outstanding. In January 2016 and March 2016, Baxter exchanged a portion of its retained stake in Baxalta common stock for indebtedness of Baxter held by third parties. The shares of Baxalta common stock exchanged were then sold by such third parties in secondary public offerings pursuant to registration statements filed by Baxalta under the Securities Act. Immediately following the exchanges, Baxter held approximately 4.5% of Baxalta’s total shares outstanding. Baxter has advised Baxalta that it intends to dispose of its remaining ownership interest in Baxalta common stock (i) 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), (ii) in exchange for Baxter stock in this exchange offer and (iii) possibly to Baxter’s stockholders as a special dividend, on a pro rata basis, in each case, prior to any Shire or Baxalta shareholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and, in any event, during the 18-month period following the distribution. If any shares of

 

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Baxalta common stock, or Shire Securities received in exchange for such common stock pursuant to the merger, are not disposed of by Baxter either prior to the merger or during such 18-month period, as the case may be, Baxter has advised Baxalta that it intends to otherwise dispose of such shares as soon as practicable thereafter, taking into account market conditions and its business judgment, including potentially through secondary offerings of Baxalta common stock, but in no event later than five years after the distribution. Baxter and Baxalta entered into a shareholder’s and registration rights agreement wherein Baxalta agreed, 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. Baxter exercised a portion of its demand registration rights pursuant to such agreement to cause Baxalta to register the offer and sale of the shares of Baxalta common stock in this exchange offer.

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 has adopted a dividend policy with respect to the payment of dividends on Baxalta common stock. However, the timing, declaration, amount and payment of any future dividends to stockholders will be 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 of its operating subsidiaries, debt service obligations, industry practice, legal requirements, regulatory constraints, ability to access capital markets 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 continue to pay dividends in the future. The merger agreement provides that Baxalta may not pay dividends on Baxalta common stock other than regular quarterly cash dividends not to exceed $0.07 per quarter.

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

In the future, the percentage ownership of a given stockholder in Baxalta may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that Baxalta has granted and will grant to its directors, officers and employees. Baxalta’s and Baxter’s employees have stock options, stock-settled performance share units and stock-settled restricted stock units for Baxalta’s common stock as a result of an adjustment to their corresponding Baxter awards as described in the section of this prospectus entitled “Executive Compensation—Executive Compensation Discussion and Analysis—Elements of Compensation—Equity-Based Incentive Awards.” Baxalta’s compensation committee granted approximately 2.9 million RSUs to participating employees through its 2016 annual equity grant process, and it may grant additional PSUs, RSUs, stock options or other stock-based awards to its employees in the future. 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 authorizes Baxalta to issue, without the approval of Baxalta’s stockholders, 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 Capital Stock of Baxalta.”

 

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The merger agreement provides that Baxalta may not issue any capital stock (including any preferred stock, as described above) except pursuant to its existing equity incentive plans. However, Shire may waive this restriction on issuances without prior notice and such restriction shall continue only so long as the merger agreement is in effect.

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 as 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.

The rights agreement and 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 by a party other than Shire, which could decrease the trading price of Baxalta’s common stock.

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. The terms of the Rights are set forth in the rights agreement dated as of June 30, 2015. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person or group that attempts to acquire Baxalta on terms not approved by Baxalta’s Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. In connection with the execution of the merger agreement, Baxalta amended certain provisions of the rights agreement as they relate to Shire and the proposed merger. See “Description of Capital Stock of Baxalta—Rights Agreement” for a further description of the Rights and the amendment to the rights agreement.

Baxalta’s amended and restated certificate of incorporation and amended and restated bylaws 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 Capital Stock of Baxalta—Anti-Takeover Effects of Various Provisions of Delaware Law and Baxalta’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws” for a further description 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 stockholders 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 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. Section 203 of the Delaware General Corporation Law does not apply to the merger because the merger agreement has been approved by the Baxalta Board of Directors.

Baxalta believes these provisions will protect its stockholders 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

 

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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 stockholders 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 stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

Certain of the agreements that Baxalta entered into with Baxter 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 stockholders may consider favorable. For more information on these agreements, refer to the section of this prospectus entitled “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter.”

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 is required to indemnify Baxter for the resulting taxes, and this indemnity obligation might discourage, delay or prevent a change of control that stockholders may consider favorable. For a description of such indemnification by Baxalta, refer to the section contained in this prospectus entitled “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Tax Matters Agreement.”

Risks Related to the Proposed Merger with Shire

Failure to consummate the merger could negatively impact the price of Baxalta common stock and our future business and financial results.

The consummation of the merger may be delayed, the merger may be consummated on terms different than those contemplated by the merger agreement, or the merger may not be consummated at all. Failure to consummate the merger would prevent Baxalta stockholders from realizing the anticipated benefits of the merger. In addition, the consideration offered by Shire reflects a valuation of Baxalta significantly in excess of the price at which Baxalta’s common stock was trading prior to the public announcement of Shire’s interest in the potential combination. The current market price of Baxalta common stock may reflect a market assumption that the merger will occur, and a failure to consummate the merger could result in a significant decline in the market price of Baxalta common stock and a negative perception of Baxalta generally. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger could also negatively impact the share price and future business and financial results of Baxalta.

The market price of the Shire Securities will fluctuate prior to the merger, so Baxalta stockholders cannot be sure of the value of the Shire Securities they will receive if the merger is consummated.

If the merger is consummated, each outstanding share of Baxalta common stock will be exchanged for both (i) $18.00 in cash and (ii) 0.1482 of a Shire ADS (or, if a Baxalta stockholder timely elects accordingly and Shire so permits, 0.4446 of a Shire ordinary share in lieu of such fraction of a Shire ADS, although the deadline for making such election is expected to have passed before the exchange offer is complete) as further described in the sections of this prospectus entitled “The Transactions—The Proposed Merger—The Merger Agreement” and “Business—The Proposed Merger.” Because the number of Shire Securities being offered as consideration is fixed, the market value of the per share stock consideration will be based on the value of Shire Securities at the time the consideration in the merger is paid. If the market price of Shire Securities declines, Baxalta stockholders could receive less value for their shares of Baxalta common stock upon the consummation of the merger than the implied value of such shares as of the date the merger was announced, the date of the Baxalta stockholders’ meeting or as of the date of this prospectus. The market price of the Shire Securities may fluctuate due to a variety of factors that are beyond Baxalta’s control, including general market and economic conditions, changes in business prospects, catastrophic events, both natural and man-made, and regulatory considerations. In addition, the market price of the Shire Securities may significantly fluctuate during the period of time between the date of the merger agreement and the

 

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consummation of the merger, as a result of uncertainty regarding the transactions contemplated by the merger agreement, market perception of the synergies and cost savings expected to be achieved related to the merger, changes to the ongoing business of Baxalta or Shire, including any actions taken by Baxalta’s or Shire’s customers, suppliers, distributors, partners, employees, investors and governmental authorities as a result of the merger announcement, or actions taken by Baxalta or Shire in connection with the merger.

Shire and Baxalta must obtain governmental and regulatory approvals to consummate the merger, which, if delayed or not granted, may delay or jeopardize the merger.

The merger is conditioned on the expiration or termination of the applicable waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), merger control approval under relevant merger control laws of the European Union and the consent of certain other merger control authorities and other governmental entities. The governmental and regulatory agencies from which Shire and Baxalta are seeking these approvals have broad discretion in administering the applicable governing regulations. As a condition to their approval of the transactions contemplated by the merger agreement, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business. The required approvals may not be obtained or the required conditions to the merger may not be satisfied, or, even if the required approvals are obtained and the conditions to the consummation of the merger are satisfied, the terms, conditions and timing of such approvals are uncertain.

The closing condition related to anti-trust approval in the United States was satisfied on February 29, 2016, when the waiting period under the HSR Act expired without a request for additional information being issued.

Any delay in consummating the merger could cause the combined company not to realize some or all of the synergies that Shire expects to achieve if the merger is successfully consummated within the expected time frame.

The merger remains subject to additional conditions, some of which Shire and Baxalta cannot control, which could result in the merger not being consummated or being delayed, either of which could negatively impact the share price and future business and operating results of Baxalta.

The merger is subject to the satisfaction or waiver of other conditions in addition to the approval of governmental authorities described above, including, but not limited to, the approval of the issuance of the Shire Securities by the stockholders of Shire; the adoption of the merger agreement by the stockholders of Baxalta; the continued effectiveness of a registration statement on Form S-4 registering the Shire Securities to be issued to Baxalta stockholders in the merger; the absence of any orders, injunctions or rulings that would have the effect of enjoining or preventing the consummation of the merger; the approval of the UK Listing Authority (UKLA) of a prospectus relating to the Shire Securities and a circular convening the Shire stockholder meeting; approval from The Nasdaq Stock Market LLC to list the Shire ADS; approval of the UKLA and London Stock Exchange (LSE) to list the Shire ordinary shares; and receipt by each of Baxter and Shire of a tax opinion from its respective tax advisor, in each case, substantially in the same form and substance as the tax opinion delivered by such advisor in connection with the signing of the merger agreement such that a restriction under the tax matters agreement is waived. Certain conditions to the merger may not be satisfied or, if they are, the timing of such satisfaction is uncertain. If any conditions to the merger are not satisfied or, where waiver is permitted by applicable law, not waived, the merger will not be consummated.

The merger is not subject to a financing condition. While Shire has secured an $18 billion fully underwritten bank facility, of which $13 billion is available to finance the cash component of the merger consideration and the payment of related acquisition costs and transaction costs, certain customary conditions precedent to funding must be satisfied in order for Shire to utilize its bank facility, and if such conditions are not satisfied or if Shire’s lenders do not satisfy their funding commitment, Shire may be unable to obtain the funds necessary to consummate the merger.

 

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If for any reason the merger is not completed, or the closing of the merger is significantly delayed, the Baxalta share price and business and results of operations of Baxalta may be adversely affected. In addition, failure to consummate the merger would prevent Baxalta stockholders from realizing the anticipated benefits of the merger. Baxalta has incurred, and expects to continue to incur, significant transaction fees, professional service fees, taxes and other costs related to the merger. Further, if the merger agreement is terminated, under certain circumstances, Baxalta may be required to disburse to Shire a termination fee of $369 million and/or reimburse Shire’s expenses in an amount not to exceed $110 million, which expense reimbursement would be offset against any termination fee subsequently disbursed.

The directors and executive officers of Baxalta have interests in the merger that may be different from, or in addition to, those of other Baxalta stockholders, which could have influenced their decisions to support or approve the merger.

Baxalta stockholders should recognize that the directors and executive officers of Baxalta have interests in the merger that may be different from, or in addition to, their interests as stockholders of Baxalta generally. For Baxalta directors, these interests may include the accelerated vesting and payment for certain Baxalta stock-based incentive awards as a result of the merger. For Baxalta executive officers, these interests may include the potential acceleration of stock-based incentive awards as a result of the merger, as well as cash severance payments and benefits that may become payable in connection with the merger. Additionally, Baxalta has agreed to provide “gross-up” payments to individuals for excise taxes imposed by Section 4999 of the Code (by amending the severance agreements with its executive officers to provide for such payments). Baxalta’s directors and executive officers are also covered by certain indemnification and insurance arrangements. Two members of the Baxalta Board, who will be jointly selected by the chairman of the Baxalta Board and chairman of the Shire board following consultation with the Nomination Committee of the Shire board, are expected to be appointed to the Shire board, effective upon the closing of the merger. Such interests and benefits could have influenced the decisions of Baxalta’s directors and executive officers to support or approve the merger.

The merger agreement contains provisions that restrict Baxalta’s ability to pursue alternatives to the merger and, in specified circumstances, could require Baxalta to pay Shire a termination fee and/or expense reimbursement.

Under the merger agreement, Baxalta has agreed not to (1) take certain actions to solicit proposals relating to alternative business combination transactions or (2) subject to certain exceptions, including the receipt of a “company superior proposal” (as such term is defined in the merger agreement), enter into discussions or an agreement concerning, or provide confidential information in connection with, any proposals for alternative business combination transactions. In certain circumstances, upon termination of the merger agreement, Baxalta would be required to disburse to Shire a termination fee of $369 million and/or reimburse Shire for its merger-related expenses in an amount not to exceed $110 million, which reimbursement would be offset against any termination fee subsequently disbursed. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of Baxalta from considering or proposing that acquisition, even if such third party were prepared to enter into a transaction that is more favorable to Baxalta or its stockholders than the merger.

If the proposed merger is not completed, Baxalta will have incurred substantial costs that may adversely affect Baxalta’s financial results.

Baxalta has incurred and will continue to incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of consultants, attorneys, accountants and financial advisors. In addition, Baxalta diverted significant management resources in an effort to complete the merger and Baxalta is subject to restrictions contained in the merger agreement on the conduct of Baxalta’s business during the pendency of the merger. If the merger is not completed, such costs may adversely affect Baxalta’s financial results.

 

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In specified circumstances, Shire could terminate the merger agreement to accept an alternative proposal.

Under the merger agreement, Shire may terminate the merger agreement to enter into a definitive agreement with respect to a “parent superior proposal” (as such term is defined in the merger agreement) prior to obtaining approval of the merger from its stockholders. In such event, Shire would be obligated to pay Baxalta a termination fee equal to $369 million, but would have no further obligation or liabilities to Baxalta. Such termination would deny Baxalta and Baxalta’s stockholders any benefits from the merger and could negatively impact Baxalta’s share price.

Uncertainties associated with the merger may cause a loss of employees and may otherwise affect the future business and operations of Baxalta, Shire and the combined company.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Shire or Baxalta and, if the proposed combination with Shire is consummated, on the combined company following the merger. These consequent uncertainties may impair Baxalta’s, and following the closing of the merger, the combined company’s, ability to retain and motivate key personnel and could also cause customers, suppliers, licensees, partners and others that deal with Shire or Baxalta to defer entering into contracts with, making other decisions concerning, or seeking to change existing business relationships with Baxalta, and following the closing of the merger, the combined company. Because Baxalta and Shire depend on the experience and industry knowledge of their executives and other key personnel to execute their business plans, the combined company may be unable to meet its strategic objectives.

While the merger is pending, Baxalta and Shire may not be able to hire qualified personnel to replace any key employees that may depart to the same extent that they have been able to in the past. In addition, if the merger is not completed, Baxalta may also encounter challenges in hiring qualified personnel to replace key employees that may depart Baxalta subsequent to the merger announcement.

Shire and Baxalta may not successfully integrate.

If the merger is consummated, which will represent Shire’s largest transaction to date, achieving the anticipated benefits of the proposed combination of Shire and Baxalta will depend in part upon whether the two companies integrate their businesses in an effective and efficient manner. The companies may not be able to accomplish this integration process successfully. The integration of businesses is complex and time-consuming. The difficulties that could be encountered include the following:

 

    integrating personnel, operations and systems, while maintaining focus on selling and promoting existing and newly acquired or produced products;

 

    coordinating geographically dispersed organizations;

 

    distraction of management and employees from operations;

 

    changes or conflicts in corporate culture;

 

    management’s inability to manage a substantial increase in the number of employees;

 

    management’s inability to train and integrate personnel, who may have limited experience with the respective companies’ business lines and products, and to deliver a consistent message regarding diseases treated by the combined company;

 

    retaining existing customers and attracting new customers;

 

    retaining existing employees and attracting new employees;

 

    maintaining business relationships; and

 

    inefficiencies associated with the integration and management of the operations of the combined company.

 

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In addition, there will be integration costs and non-recurring transaction costs (such as fees paid to legal, financial, accounting and other advisors and other fees paid in connection with the merger) associated with the proposed merger, including costs associated with combining operations and achieving the synergies Shire expects to obtain, and such costs may be significant.

An inability to realize the full extent of the anticipated benefits of the proposed combination of Shire and Baxalta, including estimated cost synergies, as well as any delays encountered in the integration process and realizing such benefits, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may materially adversely affect the value of Shire Securities after the consummation of the merger.

Shire will incur significant additional indebtedness in connection with the merger, which will decrease Shire’s business flexibility and increase its interest expense. All of Shire’s debt obligations, and any future indebtedness Shire may incur, will have priority over the Shire Securities with respect to payment in the event of a liquidation, dissolution or winding up.

Shire has secured an $18 billion fully underwritten bank facility, of which $13 billion is available to finance the cash component of the merger consideration. Shire has announced that it intends to maintain an investment grade credit rating for the combined company, but one or more credit rating agencies may determine that the combined company’s credit rating is below investment grade, which could increase the combined company’s borrowing costs. The combined company’s indebtedness following consummation of the merger could have the effect, among other things, of reducing the combined company’s flexibility to respond to changing business and economic conditions as well as reducing funds available for capital expenditures and acquisitions and creating competitive disadvantages for the combined company relative to other companies with lower indebtedness levels. Shire has incurred various costs and expenses associated with the debt financing.

Shire has indicated that it intends to refinance the bank facility through capital market debt issuances in due course. Its ability to refinance the indebtedness will depend on the condition of the capital markets and the combined company’s financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require the combined company to comply with more onerous covenants, which could further restrict business operations and such refinancing may not be available at all. Shire may also incur additional costs and expenses associated with any such refinancing.

Moreover, the combined company may be required to raise substantial additional financing to fund capital expenditures and acquisitions. The combined company’s ability to arrange additional financing and the costs of that financing will depend on, among other factors, the combined company’s financial position and performance, as well as prevailing market conditions and other factors beyond its control.

In any liquidation, dissolution or winding up of Shire, Shire Securities would rank below all debt claims against Shire or any of its subsidiaries. In addition, any convertible or exchangeable securities or other equity securities that Shire may issue in the future may have rights, preferences and privileges more favorable than those of Shire Securities. As a result, holders of Shire Securities will not be entitled to receive any payment or other distribution of assets upon any liquidation or dissolution until after Shire’s obligations to its debt holders and holders of equity securities which rank senior to the Shire Securities have been satisfied.

The merger could result in significant liability to Baxalta and Shire if it causes the Baxter Transactions to be taxable.

Under the letter agreement, from and after the closing of the merger, Baxalta agreed to indemnify, and Shire agreed to guarantee such indemnity to, Baxter and each of its affiliates and each of their respective officers, directors and employees against certain tax-related losses attributable to, or resulting from (in whole or in part) the merger (as described in more detail in the letter agreement). If the Baxter Transactions, including this

 

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exchange offer, are determined to be taxable as a result (in whole or in part) of the merger (for example, if the merger is deemed to be part of a plan (or series of related transactions) that includes the Baxter Transactions), Baxter and its stockholders could incur significant tax liabilities, and under the tax matters agreement and the letter agreement, Baxalta and Shire may be required to indemnify Baxter for any such tax liabilities incurred by Baxter. Baxter’s waiver of the provisions under the tax matters agreement restricting Baxalta’s ability to enter into and consummate the merger will not relieve Baxalta (or Shire) of its obligation to indemnify Baxter if the merger causes any of the Baxter Transactions to be taxable.

In connection with the signing of the merger agreement, Shire received an opinion from Cravath, Swaine & Moore LLP (Cravath), tax counsel to Shire, to the effect that the merger will not cause Baxter’s contribution of assets to Baxalta, Baxter’s distribution of Baxalta shares on July 1, 2015, Baxter’s distribution of cash received from Baxalta to its creditors or the Later Distributions to fail to qualify as tax-free to Baxter and its stockholders under Sections 355, 361 and 368(a)(1)(D) of the Code. The merger is conditioned on the receipt by Shire at the time of the consummation of the merger of a tax opinion to the same effect.

The opinion referred to in the immediately preceding paragraph is based upon various factual representations and assumptions, as well as certain undertakings made by Baxter and Baxalta. If any of the factual representations or the assumptions in the tax opinion are untrue or incomplete in any material respect, an undertaking is not complied with or the facts upon which the tax opinion is based are materially different from the facts at the time of the merger, the opinion may not be valid. Moreover, opinions of counsel are not binding on the IRS. As a result, the conclusions expressed in the Cravath opinion could be challenged by the IRS. None of Baxalta, Baxter or Shire has requested a ruling from the IRS regarding the impact of the merger on the tax treatment of the Baxter Transactions. Further, the Cravath opinion does not address all tax aspects of the spin-off, Later Distributions and other related transactions and it is possible that Baxalta and Shire may be obligated to indemnify Baxter despite the continuing validity of the Cravath tax opinion.

Baxalta’s (and Shire’s) indemnification obligations to Baxter and its subsidiaries, officers, directors and employees under the tax matters agreement and letter agreement are not limited in amount or subject to any cap. If Baxalta or Shire is required to indemnify Baxter and its subsidiaries and their respective officers, directors and employees under the circumstances set forth in the tax matters agreement (as supplemented by the letter agreement), it could have a material adverse effect on Baxalta and Shire.

For a description of the sharing of certain tax liabilities between Baxter and Baxalta, see “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Tax Matters Agreement” and “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Letter Agreement.”

New regulations issued by the U.S. Department of Treasury may impact the combined company following the merger.

On April 4, 2016, the U.S. Department of Treasury issued new regulations applicable to acquisitions of U.S. companies by non-U.S. companies. These regulations, among other things, change the manner in which thresholds contained within the so-called “anti-inversion” rules that govern how the combined company will be taxed are calculated. These calculations are affected both by the merger and by any future acquisitions funded in whole or in part by Shire Securities. These calculations are complicated and depend on several factors. Moreover, the U.S. Department of Treasury also introduced proposed “earning stripping” regulations that may, among other things, cause certain related-party debt instruments issued by a U.S. corporation to be treated as equity, resulting in the loss of deductible interest payments for U.S. federal income tax purposes.

These regulations are newly issued and complex, and as such their application to any particular set of facts is uncertain. Shire believes that the regulations are not likely to affect the expected tax position of the combined company, which belief is based on, among other things, facts that may change or judgments that may prove to be incorrect and, if incorrect, could have an adverse impact on the expected tax position of the combined company.

Furthermore, the U.S. tax authorities could issue additional guidance as to the application of these regulations or issue new regulations that could have an adverse effect on the expected tax position of the combined company.

 

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Sales of Baxalta common stock in anticipation of the merger, and resales of Shire Securities following the completion of the merger, may adversely affect the market price of Baxalta common stock prior to the merger, and, after the merger, the market price of Shire Securities.

Certain Baxalta stockholders, such as index funds or funds with concentration, geographic or other limitations on their permitted investments, may be required to sell the Shire Securities that they receive in the transaction. Other Baxalta stockholders may already hold Shire Securities and those stockholders may decide not to hold the additional Shire Securities they receive in the merger, or to sell their Baxalta shares prior to the merger. Such sales of Baxalta common stock or Shire Securities could have the effect of depressing the market price of Shire Securities and Baxalta common stock.

If the merger is consummated, Shire will issue new Shire Securities to Baxalta stockholders. The issuance of these new shares and the sale of additional shares that may become eligible for sale in the public market from time to time upon exercise of options or the vesting of restricted securities could have the effect of depressing the market price for Shire Securities. Moreover, the increase in the number of Shire Securities, or an increase in the number of Shire Securities outstanding following a future issuance, sale or transfer of Shire Securities by Shire or the possibility of such an issue, sale or transfer may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, Shire Securities.

The market price of Shire Securities may be adversely affected by reports of third-party analysts published in connection with the consummation of the merger.

The trading market for Shire Securities depends in part on the research and reports that third-party securities analysts publish about Shire and its industry. In connection with the consummation of the merger, one or more of these analysts could downgrade Shire Securities or issue other negative commentary about Shire or its industry, which could cause the market price of Shire Securities to decline.

The market price of Shire Securities may be affected by factors different from those affecting the market price of Baxalta common stock.

If the merger is consummated, Baxalta stockholders will become holders of Shire Securities. Shire’s business differs from that of Baxalta, and Shire’s results of operations, as well as the market price of Shire Securities, may be affected by factors different from those affecting Baxalta’s results of operations and the market price of Baxalta common stock.

Exchange rate fluctuations may adversely affect the foreign currency value of Shire Securities and any dividends.

If the merger is consummated, Baxalta common stock will be exchanged for Shire Securities. Unlike Baxalta, as a consequence of Shire’s dual listing on both the NASDAQ and LSE, Shire ordinary shares are quoted in pounds sterling on the LSE and Shire ADS are quoted in U.S. dollars on the NASDAQ. Dividends in respect of Shire ordinary shares, if any, will be declared in U.S. dollars. Shire’s financial statements are prepared in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and pounds sterling will affect, among other matters, the pounds sterling value of Shire ordinary shares and of any dividends in respect of such shares.

The Shire Securities have different rights from the shares of Baxalta common stock.

Certain of the rights associated with Baxalta common stock are different from the rights associated with Shire Securities. In particular, the law of Jersey, in which Shire is organized, significantly limits the circumstances under which stockholders of companies may bring derivative actions and, in most cases, only the corporation may be the claimant or plaintiff for the purposes of maintaining proceedings in respect of any wrongful act committed against it. Neither an individual nor any group of stockholders has any right of action in such circumstances. In addition, Jersey law does not afford appraisal rights to dissenting stockholders in the form typically available to stockholders of a U.S. corporation.

 

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Only registered holders of Shire Securities are afforded the rights of stockholders under Jersey law, the Shire Memorandum of Association and the Shire Articles of Association. Because the depositary’s nominee will be the registered owner of the shares, holders of Shire ADS must rely on the nominee to exercise the rights of a stockholder on their behalf.

If the merger is consummated, Baxalta stockholders will have a reduced ownership and voting interest and will exercise less influence over the management and policies of Shire than they do over Baxalta.

Baxalta stockholders currently have the right to vote in the election of the Baxalta Board of Directors and on other matters affecting Baxalta. If the merger is consummated, each Baxalta stockholder will become a holder of Shire Securities with a percentage ownership of the combined company that is smaller than the stockholder’s percentage ownership of Baxalta. Shire estimates that, upon the consummation of the merger, former Baxalta stockholders would own, in the aggregate, approximately 34% of all outstanding Shire ordinary shares on a diluted basis. Accordingly, Baxalta stockholders would have less influence over the management and policies of Shire than they now have over the management and policies of Baxalta.

Holders of Shire Securities in the United States may not be able to enforce civil liabilities against Shire.

A number of Shire’s directors and executive officers are not residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to affect service of process within the United States upon such persons or to enforce against them judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States.

There is also a doubt as to the enforceability in England, Wales and Jersey, whether by original actions or by seeking to enforce judgments of U.S. courts, of claims based on the federal securities laws of the United States. In addition, punitive damages in actions brought in the United States or elsewhere may be unenforceable in England, Wales and Jersey.

Lawsuits have been filed and additional lawsuits may be filed against Baxalta, Shire and the Baxalta Board of Directors challenging the merger. An adverse ruling in any such lawsuit may delay or prevent the completion of the merger or result in an award of damages against Baxalta.

Following announcement of the merger, putative class action complaints were filed by purported Baxalta stockholders on behalf of all Baxalta stockholders in the Court of Chancery of the State of Delaware and the Nineteenth Judicial Circuit Court of Illinois. The complaints generally allege that the members of the Baxalta board breached their fiduciary duties to Baxalta stockholders by entering into the merger agreement and approving the merger, and that Baxalta, Shire and Merger Sub aided and abetted such breaches of fiduciary duties. The complaints further allege that, among other things, the per share stock consideration undervalues Baxalta and certain provisions of the merger agreement inappropriately inhibit competing bids. In addition, a complaint for violation of Sections 14(a) and 20(a) of the Exchange Act was filed by a purported Baxalta stockholder in the United States District Court for the Northern District of Illinois. The complaints seek, among other things, to enjoin the merger. The complaints filed in the State of Delaware have since been dismissed and Baxalta has filed a motion to dismiss the complaint filed in the Nineteenth Judicial Circuit Court of Illinois, but additional lawsuits arising out of or relating to the merger agreement or the merger may be filed in the future. The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the merger. The existence of litigation relating to the merger could adversely impact the likelihood of obtaining the stockholder approvals from either Baxalta or Shire. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert Baxalta’s and Shire’s respective management’s attention away from their regular business.

One of the conditions to completion of the merger is the absence of any law or judgment issued by any court or tribunal of competent jurisdiction that prevents, makes illegal or prohibits the closing of the merger. Accordingly, if a plaintiff is successful in obtaining a judgment prohibiting completion of the merger, then such judgment may prevent the merger from being completed, or from being completed within the expected time frame.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus and certain documents incorporated by reference into this prospectus include forward-looking statements. Use 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 our current judgment about possible future events. All statements in this prospectus and documents incorporated by reference into this prospectus, 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 the exchange offer and/or one or more subsequent additional distributions, the tax-free status of the exchange offer, accounting estimates and assumptions, the company’s expectations regarding the separation, including separation costs, 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, the impact of competition, future sales growth, 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, manufacturing expansion, the sufficiency of the company’s facilities, financial flexibility, future cash flows, the adequacy of credit facilities, derivative instruments and capitalization, tax provisions and reserves, Baxalta’s effective tax rate, the impact on the company of recent tax legislation, the 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 our experience and perception of historical trends, current conditions, and expected future developments as well as other factors that Baxalta believes are appropriate in the circumstances. While these statements represent Baxalta’s current judgment on what the future may hold, and Baxalta believes 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 Baxalta’s control:

 

    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 of 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;

 

    the company’s operations as an independent company;

 

    the costs and temporary business interruptions related to the separation;

 

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

 

    the company’s ability 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 (including with regard to the Baxter Transactions);

 

    the tax treatment of the distribution and the limitations imposed on the company under the tax matters agreement (and as further addressed in the letter agreement) that the company entered into with Baxter;

 

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

 

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

 

    the company’s ability to achieve benefits from the separation in a timely manner;

 

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

 

    changes to the timing of the subsequent disposal of the equity retained by Baxter;

 

    the inability to complete the merger due to the failure to obtain the approval of Baxalta’s or Shire’s stockholders, or the failure to satisfy other conditions to completion of the merger;

 

    the failure to obtain regulatory approvals required for the merger, or required regulatory approvals delaying the merger or causing the parties to abandon the merger;

 

    the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement;

 

    the outcome of any legal proceeding instituted against Baxalta and others following the announcement of the merger;

 

    the amount of the costs, fees, expenses and charges related to the merger;

 

    the effect of the announcement of the merger on Baxalta’s client relationships, operating results and business generally, including without limitation the ability to retain key employees;

 

    the failure of Shire to obtain the necessary financing for the merger;

 

    the risk that the benefits of the merger, including synergies, may not be fully realized or may take longer to realize than expected;

 

    the failure of relevant tax opinions that are a condition to the merger to be obtained on acceptable conditions or at all;

 

    the risk that the merger may not advance the combined company’s business strategy;

 

    the risk that the combined company may experience difficulty integrating Baxalta’s employees or operations;

 

    the potential diversion of Baxalta’s management’s attention resulting from the proposed merger and of the combined company’s management’s attention resulting from integration issues after the merger;

 

    the factors identified in the documents filed by Baxter and incorporated by reference herein; and

 

    other factors identified elsewhere in this prospectus.

Factors that could cause actual results or events to differ materially from those anticipated include the matters described in this prospectus under the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta,” and “Business,” and the matters described in the sections entitled “Risk Factors” and “Forward-Looking Information” in Baxter’s Annual Report on Form 10-K for the year ended December 31, 2015, which report is incorporated by reference into this prospectus. All of the forward-looking statements made in this prospectus and in the documents incorporated by reference into 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 or Baxalta or their respective subsidiaries or businesses or operations. Baxter and Baxalta undertake no 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.

 

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DIVIDEND POLICY

The Board of Directors of Baxalta has adopted a policy with respect to the payment of dividends on Baxalta common stock. Baxalta currently expects that it will continue to pay quarterly cash dividends until the completion of the merger, 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 dividend policy, the timing, declaration, amount and payment of any dividends 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.

The merger agreement provides that Baxalta may not pay dividends on Baxalta common stock other than the regular quarterly cash dividends not to exceed $0.07 per quarter. If the merger is consummated, Baxalta stockholders will no longer receive any dividends on Baxalta common stock. The merger is expected to close in early June 2016, subject to the satisfaction or waiver of certain conditions described in this prospectus. For more information, see “The Transactions—The Proposed Merger—Merger Agreement” and “Business—The Proposed Merger.”

 

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THE TRANSACTIONS

Separation and Distribution

On July 1, 2015, Baxter completed the distribution of approximately 80.5% of the issued and outstanding shares of common stock of Baxalta to Baxter stockholders. The distribution was made to Baxter’s stockholders of record as of the close of business on June 17, 2015, who received one share of Baxalta common stock for each Baxter common share held as of such date.

Baxter’s transfer of less than all of the Baxalta common stock to its stockholders in the distribution was 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. The debt-for-equity exchanges discussed below and this exchange offer form part of Baxter’s liquidity management plans.

The Proposed Merger

Merger Agreement

On January 11, 2016, Shire, Merger Sub, a wholly owned subsidiary of Shire, and Baxalta entered into the merger agreement, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into Baxalta, with Baxalta being the surviving corporation, and Baxalta will become a wholly owned subsidiary of Shire.

On the terms and subject to the conditions set forth in the merger agreement, at the effective time of the merger, each share of Baxalta common stock issued and outstanding immediately prior to the effective time of the merger (other than treasury shares of Baxalta and any shares of Baxalta common stock owned by Shire or any subsidiary of Shire (including Merger Sub) or Baxalta, and other than shares of Baxalta common stock as to which dissenters’ rights have been properly exercised) will be canceled and converted into the right to receive both (i) $18.00 in cash, without interest, and (ii) 0.1482 of an American Depositary Share of Shire (the Shire ADS) duly and validly issued against Shire’s ordinary shares, par value £0.05 per share (the per share stock consideration), except that cash will be paid in lieu of fractional Shire ADSs. Although Shire will permit holders of Baxalta common stock to elect to receive 0.4446 of a Shire ordinary share for each outstanding share of Baxalta common stock in lieu of the per share stock consideration, the deadline for making such election is expected to have passed before the exchange offer is complete.

Under the merger agreement, Shire agreed to use its reasonable best efforts to appoint Wayne T. Hockmeyer, Ph.D., chairman of the Baxalta Board of Directors, and two additional members of the Baxalta Board, jointly selected by the chairman of the Baxalta Board and chairman of the Shire board of directors following consultation with the Nomination Committee of the Shire board, to the Shire board of directors, effective upon the closing of the merger. Following the appointment of such directors, Shire agreed to nominate the same individuals as directors, to the extent such individuals are willing to serve and have complied in a satisfactory manner, in the good faith reasonable judgment of the Shire board, with the attendance and performance expectations of the Shire board, at the 2017 Shire stockholder meeting. Since the date of the merger agreement, Dr. Hockmeyer has decided to withdraw himself from consideration for such an appointment due to personal reasons and therefore only two members of the Baxalta Board will be considered for nomination.

The consummation of the merger is subject to certain closing conditions, including the approval of holders of a majority of the issued and outstanding Baxalta common stock and the approval of holders of a majority of Shire ordinary shares present and voting in person or by proxy, the receipt of certain regulatory approvals, the absence of a “material adverse effect” with respect to Shire and Baxalta, the receipt by Shire and Baxter of certain tax opinions set forth in the letter agreement described below, and other conditions specified in the merger agreement.

 

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Because the record date for the special meeting of the stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

The merger agreement provides that, during the period from the date of the merger agreement until the effective time of the merger, Baxalta will be subject to certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide non-public information to third parties and engage in discussions with third parties regarding alternative acquisition proposals except that Baxalta may, in response to an unsolicited acquisition proposal, engage in discussions with, and provide non-public information to, a third party if Baxalta’s Board of Directors determines in good faith that the acquisition proposal constitutes or is reasonably likely to constitute or lead to a “superior proposal.” Baxalta’s Board of Directors may make an adverse recommendation and terminate the merger agreement after receiving a “superior proposal,” subject to Shire’s right to match the superior proposal during a negotiation period of 5 days (with subsequent negotiation periods of 4 days if the superior proposal is amended). A “superior proposal” is a written acquisition proposal providing for a transfer of control of at least 50% of the stock or assets of Baxalta, which Baxalta’s Board of Directors determines in good faith (i) to be reasonably likely to be consummated if accepted and (ii) to be more favorable to Baxalta’s stockholders from a financial point of view than the merger and the other transactions contemplated by the merger agreement. Shire is subject to generally reciprocal “non-solicitation” obligations except that Baxalta does not have similar rights to match a superior proposal received by Shire.

The merger agreement provides for certain termination rights for both Shire and Baxalta. Upon termination of the merger agreement under certain specified circumstances, Baxalta may be required to disburse to Shire a termination fee of $369 million and Shire may be required to pay the company a termination fee of $369 million.

In addition, if the merger agreement is terminated under certain specified circumstances following the receipt of an acquisition proposal by Baxalta, Baxalta may be required to reimburse Shire for transaction expenses up to $110 million (which expenses would be credited against any termination fee subsequently payable by Baxalta), and if the merger agreement is terminated under certain specified circumstances following the receipt of an acquisition proposal by Shire, Shire may be required to reimburse Baxalta for transaction expenses up to $65 million (which expenses would be credited against any termination fee subsequently payable by Shire).

Shire and Baxalta each made certain representations, warranties and covenants in the merger agreement, including, among other things, covenants by Shire and Baxalta to conduct their businesses in the ordinary course during the period between the execution of the merger agreement and consummation of the merger.

Letter Agreement

On January 11, 2016, Baxter, Shire and Baxalta entered into a letter agreement (the letter agreement) in connection with the entry by Shire and Baxalta into the merger agreement, which, among other things, addresses certain aspects of a tax matters agreement, dated as of June 30, 2015, between Baxter and Baxalta, and modifies certain aspects of a shareholder’s and registration rights agreement, dated as of June 30, 2015, between Baxter and Baxalta.

Under the letter agreement, Baxter agreed under certain circumstances to express its support for the merger and waived its appraisal rights under Delaware law in connection with the merger. Under the letter agreement, Baxter represented to Shire and Baxalta that it had received an opinion from its tax advisor and, in connection with the execution of the merger agreement, Shire received an opinion from its tax advisor, Cravath, Swaine & Moore LLP (Cravath). In addition, under the letter agreement, immediately prior to the closing of the merger, Baxter, Shire and Baxalta agreed to deliver certain representation letters to each of Cravath and Baxter’s tax advisor. The letter agreement provides that Baxter will use its reasonable best efforts to cause its tax advisor to deliver a tax opinion immediately prior to the closing of the merger as required by the letter agreement, and Shire will use its reasonable best efforts to cause Cravath to deliver immediately prior to the closing of the merger a tax opinion required by the letter agreement.

 

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Under the letter agreement, from and after the closing of the merger, Baxalta agreed to indemnify, and Shire agreed to guarantee such indemnity to, Baxter and each of its affiliates and each of their respective officers, directors and employees against certain tax-related losses resulting from the merger (other than losses resulting from any disposition of Baxalta common stock by Baxter (i) that are not attributable to the merger and (ii) other than in the distribution on July 1, 2015 and certain debt-for-equity exchanges (including the debt-for-equity exchanges described below), exchange offers (including this exchange offer), contribution of Baxalta shares to Baxter’s U.S. pension fund or a dividend distribution to Baxter’s stockholders (in each case as contemplated by the letter agreement)).

Under the letter agreement, Shire agreed to cooperate with Baxalta and Baxter to enable Baxalta to comply with its obligations under the shareholder’s and registration rights agreement and to use its reasonable best efforts to facilitate Baxter’s disposition of Baxalta common stock in certain SEC registered offerings, including this exchange offer. Each of Shire and Baxalta agreed in the letter agreement not to hold their respective stockholder meetings to approve, and not to consummate, the merger before the earliest of (a) the date that Baxter has completed marketing periods for two debt-for-equity exchanges and one equity exchange offer with respect to its Baxalta common stock, (b) the date on which Baxter has disposed of all its Baxalta common stock, and (c) May 26, 2016 (subject to tolling or extension (generally to no later than June 25, 2016) under certain circumstances).

The letter agreement may be terminated (a) by mutual written consent of Shire, Baxalta and Baxter, (b) by Shire or Baxalta upon termination of the merger agreement or (c) upon the closing of the merger, in each case, subject to the terms of the letter agreement.

Initial Debt-for-Equity Exchange

Effective January 27, 2016, Baxter completed a debt-for-equity exchange with Chase Lincoln First Commercial Corporation (Chase Lincoln), an affiliate of J.P. Morgan Securities LLC, the underwriter in the subsequent underwritten public offering described below, and terminated Baxter’s existing 364-Day Credit Agreement, dated as of December 10, 2014, among Baxter, as borrower, JPMorgan Chase Bank, National Association, as administrative agent, and the lender(s) party thereto from time to time (as amended, the Credit Agreement). The Credit Agreement provided for a revolving credit commitment of up to $1.8 billion, of which an aggregate principal amount of $1.45 billion was drawn and outstanding immediately prior to the termination of the Credit Agreement. The Credit Agreement was terminated in connection with the transfer of 37,573,040 shares of Baxalta common stock (the Exchanged Shares) held by Baxter to Chase Lincoln, the sole lender under the Credit Agreement prior to its termination, in exchange for the extinguishment of all the outstanding indebtedness thereunder. Chase Lincoln sold the Exchanged Shares in an underwritten public offering managed by J.P. Morgan Securities LLC that was completed on February 2, 2016.

Immediately after giving effect to this initial debt-for-equity exchange, Baxter continued to own 94,329,679 shares of Baxalta common stock, representing approximately 13.9% of Baxalta’s total issued and outstanding shares as of December 31, 2015.

Subsequent Debt-for-Equity Exchange and Third Party Tender Offer

On February 16, 2016, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and UBS Securities LLC (collectively, the Third Party Purchasers) commenced an offer to purchase for cash, upon the terms and subject to the conditions set forth in the offer to purchase, dated February 16, 2016 and the related letter of transmittal as amended by means of a press release dated March 1, 2016, up to $2.2 billion aggregate principal amount of certain notes issued by Baxter. The Third Party Purchasers purchased $2.2 billion aggregate principal amount of such notes on March 2, 2016, on the early settlement date of the tender offer.

On March 16, 2016, the Third Party Purchasers entered into an agreement with Baxter whereby the Third Party Purchasers exchanged the notes purchased by them pursuant to the tender offer for certain of the shares of

 

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Baxalta common stock held by Baxter in a debt-for-equity exchange. The Third Party Purchasers sold the 63,823,582 shares of Baxalta common stock received by them pursuant to the debt-for-equity exchange in a registered public offering, which was completed on March 21, 2016. Immediately after giving effect to this debt-for-equity exchange, Baxter continued to own 30,506,097 shares of Baxalta common stock, representing approximately 4.5% of Baxalta’s total issued and outstanding shares as of April 11, 2016.

The Exchange Offer

Baxter is offering to exchange up to 12,800,000 shares of Baxalta common stock in the aggregate for outstanding shares of Baxter common stock that are validly tendered and not validly withdrawn. You may tender all, some or none of your shares of Baxter common stock. Shares of Baxter common stock validly tendered and not validly withdrawn will be accepted for exchange at the final exchange ratio, on the terms and conditions of the exchange offer and subject to the limits described below, including the proration provisions. Shares not accepted for exchange will be returned to the tendering stockholder promptly following the expiration or termination of the exchange offer, as applicable. See “The Exchange Offer” for more information.

Reasons for the Exchange Offer

As part of Baxter’s liquidity management plans, Baxter has decided to pursue the exchange offer to dispose of all or a portion of its remaining interest in Baxalta in a tax-efficient manner, thereby enhancing stockholder value.

The following factors, among others, were considered by Baxter in making the determination to dispose of all or a portion of its remaining interest in Baxalta by means of the exchange offer:

 

    The exchange offer is a tax-efficient way for Baxter to divest its interest in Baxalta.

 

    The exchange offer presents an opportunity for Baxter to quickly repurchase a significant number of outstanding shares of Baxter common stock without reducing overall cash and financial flexibility.

 

    The prevailing market price of Baxalta common stock reflects a substantial increase in value since the distribution on July 1, 2015.

 

    The exchange offer is an efficient means of placing Baxalta common stock with only those Baxter stockholders who wish to directly own an interest in Baxalta.

 

    The exchange offer will likely present stockholders tendering shares of Baxter common stock an opportunity to acquire shares of Baxalta common stock at a discount to the then prevailing market price.

 

    The exchange offer presents more execution risk than a pro rata distribution of all or a portion of Baxter’s remaining interest in Baxalta, and may require an extension of the exchange offer period and/or one or more subsequent additional distributions if Baxter does not dispose of all of the remaining shares of Baxalta common stock held by it in the exchange offer.

 

    The exchange offer cannot be completed prior to the effectiveness of a registration statement under the Securities Act, while a pro rata distribution of all or a portion of Baxter’s remaining interest in Baxalta could be completed without such a registration statement under the Securities Act.

 

    The exchange offer will cause Baxter to incur certain incremental expenses relating to the exchange offer that it would not otherwise incur in connection with a pro rata distribution of all or a portion of Baxter’s remaining interest in Baxalta.

 

    If Baxter holds Baxalta common stock as of the date of the consummation of the merger, such common stock will be converted into the right to receive certain cash consideration and Shire Securities as further described above under “—The Proposed Merger—Merger Agreement.”

 

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Effects of the Exchange Offer

Holders of Baxter common stock will be affected by the exchange offer as follows:

 

    Holders who exchange all of their shares of Baxter common stock will, if the exchange offer is not oversubscribed, no longer have any ownership interest in Baxter but will instead directly own only an interest in Baxalta. As a result, their investment will be subject exclusively to risks associated with Baxalta and not risks associated solely with Baxter.

 

    Holders who exchange all of their shares of Baxter common stock will, if the exchange offer is oversubscribed, be subject to proration and, unless their odd-lot tender is not subject to proration, will own an interest in both Baxter and Baxalta. As a result, their investment will continue to be subject to risks associated with both Baxter and Baxalta, though such holders may be subject to these risks to a different degree than prior to the exchange offer.

 

    Holders who exchange some, but not all, of their shares of Baxter common stock, regardless of whether the exchange offer is fully subscribed, will own fewer shares of Baxter common stock and more shares of Baxalta common stock than prior to the exchange offer, unless they otherwise acquire Baxter common stock. As a result, their investment will continue to be subject to risks associated with both Baxter and Baxalta, though such holders may be subject to these risks to a different degree than prior to the exchange offer.

 

    Holders who do not exchange any of their shares of Baxter common stock in the exchange offer will have an increased ownership interest in Baxter, on a percentage basis, and if Baxter disposes of all of the remaining shares of Baxalta common stock held by it in the exchange offer, have no indirect ownership interest in Baxalta (unless they otherwise own shares of Baxalta common stock). As a result, their investment will be subject exclusively to risks associated with Baxter and not risks associated with Baxalta because Baxter would no longer have an investment in Baxalta.

Baxalta’s Equity Capitalization

Baxalta had 683,082,565 shares of common stock outstanding as of April 11, 2016. Baxter currently owns approximately 4.5% of the outstanding shares of Baxalta’s common stock.

No Appraisal Rights

Appraisal is a statutory remedy under state law available to corporate stockholders who object to extraordinary actions taken by their corporation. This remedy allows dissenting stockholders to require the corporation to repurchase their stock at a price equivalent to its value immediately prior to the extraordinary corporate action. No appraisal rights are available to Baxter stockholders or Baxalta stockholders in connection with the exchange offer.

Regulatory Approval

Certain acquisitions of Baxalta common stock under the exchange offer may require a premerger notification filing under the HSR Act. If a holder of Baxter common stock decides to participate in the exchange offer and consequently acquires enough shares of Baxalta common stock to exceed the $78.2 million threshold provided for in the HSR Act and associated regulations, and if an exemption under the HSR Act or regulations does not apply, Baxter and the holder will be required to make filings under the HSR Act and the holder will be required to pay the applicable filing fee. A filing requirement could delay the exchange of shares with any stockholder or stockholders required to make such a filing until the waiting periods in the HSR Act have expired or been terminated.

Apart from the registration of shares of Baxalta common stock offered in the exchange offer under applicable securities laws and Baxter filing a Schedule TO with the SEC, Baxter does not believe that any other material U.S. federal or state regulatory filings or approvals will be necessary to consummate the exchange offer.

 

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Accounting Treatment

The shares of Baxter common stock acquired by Baxter in the exchange offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of the Baxalta shares exchanged in the offer. Any difference between the carrying value of Baxter’s investment in Baxalta common stock and the market value of the shares of Baxalta common stock will be recognized by Baxter as a gain on disposal of investment net of any direct and incremental expenses of the exchange offer on the disposal of its Baxalta common stock.

The aggregate market value of Baxter’s investment in 12,800,000 shares of Baxalta common stock, based on the closing price of shares of Baxalta common stock on April 20, 2016 of $40.66 per share, was approximately $520.4 million. Baxter expects to recognize a gain upon consummation of the exchange offer. The amount of the gain will be dependent upon the final exchange ratio and the value of Baxalta common stock at the time the exchange offer is consummated. For example, if at the time Baxter completes the exchange offer, (i) the exchange offer is fully subscribed, (ii) the upper limit of 1.4026 shares of Baxalta stock exchanged for each share of Baxter common stock is in effect, and (iii) the market value of Baxalta common stock is $40.66 per share (the last reported sales price on the NYSE on April 20, 2016), Baxter would recognize a gain of approximately $451 million in connection with the transaction, prior to estimated fees and expenses. A $1 increase in the per share market value of Baxalta common stock in this example would increase the gain recognized by Baxter by approximately $12.8 million.

The exchange of shares of Baxalta common stock for shares of Baxter common stock in the exchange offer, in and of itself, will not affect the financial condition or results of operations of Baxalta.

Tax Treatment

See “U.S. Federal Income Tax Consequences” for a discussion of the tax treatment of the exchange offer.

 

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THE EXCHANGE OFFER

Terms of the Exchange Offer

General

Baxter is offering to exchange up to 12,800,000 shares of Baxalta common stock which are owned by Baxter for shares of Baxter common stock, at an exchange ratio to be calculated in the manner described below, on the terms and conditions and subject to the limitations described below and in the related letter of transmittal (including the instructions thereto), which are validly tendered and not validly withdrawn by 11:59 p.m., New York City time, on the expiration date, which is currently expected to be May 18, 2016, unless the exchange offer is extended or terminated. The last day on which tenders will be accepted, whether on May 18, 2016 or any later date to which the exchange offer is extended, is referred to in this prospectus as the “expiration date.” You may tender all, some or none of your shares of Baxter common stock.

The number of shares of Baxter common stock that will be accepted if the exchange offer is completed will depend on the final exchange ratio and the number of shares of Baxter common stock validly tendered and not validly withdrawn. The maximum number of shares of Baxter common stock that will be accepted if the exchange offer is completed will be equal to 12,800,000 shares of Baxalta common stock held by Baxter divided by the final exchange ratio (which will be subject to the upper limit described below under “—Upper Limit”). Baxter’s obligation to complete the exchange offer is subject to important conditions that are described in the section entitled “—Conditions to Completion of the Exchange Offer.”

For each share of Baxter common stock that you validly tender in the exchange offer and do not validly withdraw, and that is accepted by Baxter, you will receive a number of shares of Baxalta common stock at a discount of approximately 7%, subject to an upper limit of 1.4026 shares of Baxalta common stock per share of Baxter common stock. Stated another way, subject to the upper limit described below, for each $100 of Baxter common stock tendered by you and accepted in the exchange offer, you will receive approximately $107.52 of shares of Baxalta common stock based on the Average Baxter Price and the Average Baxalta Price, as determined by Baxter.

The Average Baxter Price will be equal to the simple arithmetic average of the daily volume-weighted average prices (VWAPs) of shares of Baxter common stock on the NYSE during the Averaging Period, as determined by Baxter, and the Average Baxalta Price will be equal to the simple arithmetic average of the daily VWAPs of shares of Baxalta common stock on the NYSE during the Averaging Period, as determined by Baxter, as more fully described below under “—Pricing Mechanism.”

The daily VWAP for shares of Baxter common stock or Baxalta common stock, as the case may be, will be the VWAP per share of that stock on the NYSE during the period beginning at 9:30 a.m., New York City time (or such other time as is the official open of trading on the NYSE), and ending at 4:00 p.m., New York City time (or such other time as is the official close of trading on the NYSE), except that such data will only take into account adjustments made to reported trades included by 4:10 p.m., New York City time. The daily VWAP will be as reported by Bloomberg L.P. as displayed under the heading Bloomberg VWAP on the Bloomberg pages “BAX UN<Equity>AQR” with respect to Baxter common stock and “BXLT UN<Equity>AQR” with respect to Baxalta common stock (or any other recognized quotation source selected by Baxter in its sole discretion if such pages are not available or are manifestly erroneous). The daily VWAPs obtained from Bloomberg L.P. may be different from other sources or investors’ or other security holders’ own calculations. Baxter will determine the simple arithmetic average of the VWAPs of each stock, and such determination will be final.

For purposes of the exchange offer, a “business day” means any day other than a Saturday, Sunday or U.S. federal holiday and consists of the time period from 12:01 a.m., New York City time, through 11:59 p.m., New York City time.

 

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Upper Limit

The number of shares of Baxalta common stock that you can receive is subject to an upper limit of 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. If the upper limit is in effect, you may receive less than $107.52 of Baxalta common stock for each $100 of Baxter common stock that you tender, based on the Average Baxter Price and Average Baxalta Price, and you could receive much less. This upper limit represents a 25% discount for shares of Baxalta common stock based on the simple arithmetic average of the daily VWAPs of shares of Baxter common stock and Baxalta common stock on April 18, 19 and 20, 2016 (the three trading days immediately preceding the date of the commencement of the exchange offer). Baxter set this upper limit to ensure that there would not be an unduly high number of shares of Baxalta common stock being exchanged for each share of Baxter common stock accepted in the exchange offer.

Pricing Mechanism

The terms of the exchange offer are designed to result in you receiving approximately $107.52 of shares of Baxalta common stock for each $100 of Baxter common stock tendered and accepted in the exchange offer based on the Average Baxter Price and the Average Baxalta Price determined as described above and subject to the upper limit. Regardless of the final exchange ratio, the terms of the exchange offer would always result in you receiving approximately $107.52 of Baxalta common stock for each $100 of Baxter common stock, based on the Average Baxter Price and the Average Baxalta Price, so long as the upper limit described above is not in effect.

To illustrate, the number of shares of Baxalta common stock you will receive for shares of Baxter common stock validly tendered and accepted in the exchange offer, and assuming no proration occurs, will be calculated as:

 

Number of shares of Baxalta common stock   =   (a) number of shares of Baxter common stock validly tendered by you and accepted by Baxter   multiplied by   (b) the final exchange ratio

The following formula will be used to calculate the final exchange ratio:

 

Final exchange ratio   =   the lesser
of:
  (a) the Average Baxter Price divided by 93% of the Average Baxalta Price   and   (b) 1.4026 (the upper limit)

The Average Baxter Price for purposes of the exchange offer will equal the simple arithmetic average of the daily VWAPs of shares of Baxter common stock on the NYSE during the Averaging Period of the three consecutive trading days (currently expected to be May 12, 13, and 16, 2016) ending on and including the second trading day preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). The Average Baxalta Price for purposes of the exchange offer will equal the simple arithmetic average of the daily VWAPs of shares of Baxalta common stock on the NYSE during the Averaging Period of the three consecutive trading days (currently expected to be May 12, 13, and 16, 2016) including the second trading day preceding the expiration date of the exchange offer (currently expected to be May 18, 2016),

The final exchange ratio, the daily VWAPs used to calculate the final exchange ratio, the Average Baxter Price and the Average Baxalta Price will each be rounded to four decimals.

 

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To help illustrate the way these calculations work, below are two examples:

 

    Example 1: Assuming that the simple arithmetic average of the daily VWAPs during the Averaging Period is $43.2256 per share of Baxter common stock and $41.0903 per share of Baxalta common stock, you would receive 1.1311 shares ($43.2256 divided by 93% of $41.0903) of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer. In this example, the upper limit of 1.4026 shares of Baxalta common stock for each share of Baxter common stock would not apply.

 

    Example 2: Assuming that the simple arithmetic average of the daily VWAPs during the Averaging Period is $49.7094 per share of Baxter common stock and $34.9268 per share of Baxalta common stock, the upper limit of 1.4026 would be in effect and you would only receive 1.4026 shares of Baxalta common stock for each share of Baxter common stock accepted in the exchange offer because the upper limit is less than 1.5304 shares ($49.7094 divided by 93% of $34.9268) of Baxalta common stock for each share of Baxter common stock.

A website will be maintained at www.dfking.com/bax that provides the indicative exchange ratio on each day commencing on the third trading day of the exchange offer period prior to the announcement of the final exchange ratio. You may also contact the information agent at its toll-free number provided on the back cover of this prospectus to obtain this information.

Prior to the Averaging Period, commencing on the third trading day of the exchange offer, the website will also provide indicative exchange ratios for each day that will be calculated based on the indicative calculated per-share values of Baxter common stock and Baxalta common stock on each day, calculated as though that day were the last day of the Averaging Period, by 4:30 p.m., New York City time. In other words, assuming that a given day is a trading day, the indicative exchange ratio will be calculated based on the simple arithmetic average of the daily VWAPs of Baxter common stock and Baxalta common stock for that day and the immediately preceding two trading days. The indicative exchange ratio will also reflect whether the upper limit would have been in effect had such day been the last day of the Averaging Period.

During the first two days of the Averaging Period, the website will provide indicative exchange ratios that will be calculated based on the Average Baxter Price and Average Baxalta Price, as calculated by Baxter based on data as reported by Bloomberg L.P. (or any other recognized quotation source selected by Baxter in its sole discretion if such pages are not available or are manifestly erroneous). The website will not provide an indicative exchange ratio on the third day of the Averaging Period. The indicative exchange ratios will be calculated as follows: (i) on the first day of the Averaging Period, the indicative exchange ratio will be calculated based on the daily VWAPs of Baxter common stock and Baxalta common stock for that first day of the Averaging Period and (ii) on the second day of the Averaging Period, the indicative exchange ratio will be calculated based on the simple arithmetic average of the daily VWAPs of Baxter common stock and Baxalta common stock for the first and second day of the Averaging Period. During the first two days of the Averaging Period, the indicative exchange ratios will be updated on the website each day by 4:30 p.m., New York City time. The final exchange ratio will be announced by press release and be available on the website by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016).

Prior to and during the Averaging Period, the data based on which the VWAP is determined will only take into account adjustments made to reported trades included by 4:10 p.m., New York City time. In addition, the data used to derive the actual daily volume-weighted average prices during the elapsed portion of the day will reflect a 30-minute reporting and upload delay. The daily VWAPs, and the actual daily volume-weighted average prices during the elapsed portion of the day on each of the Averaging Dates as reported by Bloomberg L.P., may be different from other sources or investors’ or other security holders’ own calculations. Baxter will determine the simple arithmetic average of the daily VWAPs of each stock, and such determination will be final.

Final Exchange Ratio

The final exchange ratio that shows the number of shares of Baxalta common stock that you will receive for each share of Baxter common stock that you tendered and which is accepted in the exchange offer will be announced

 

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by press release and available at www.dfking.com/bax by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). After that time, you may also contact the information agent to obtain the final exchange ratio at its toll-free number provided on the back cover of this prospectus.

If a market disruption event occurs with respect to shares of Baxter common stock or Baxalta common stock on any day during the Averaging Period, the simple arithmetic average stock price of Baxter common stock and Baxalta common stock will be determined using the daily VWAPs of shares of Baxter common stock and Baxalta common stock on the preceding trading day or days, as the case may be, on which no market disruption event occurred. If, however, Baxter decides to extend the exchange offer period following a market disruption event, the Averaging Period will be reset. If a market disruption event occurs as specified above, Baxter may terminate the exchange offer if, in its reasonable judgment, the market disruption event has impaired the benefits of the exchange offer. See “—Conditions to Completion of the Exchange Offer.”

A “market disruption event” with respect to either Baxter common stock or Baxalta common stock means a suspension, absence or material limitation of trading of such stock on the NYSE for more than two hours of trading or a breakdown or failure in the price and trade reporting systems of the NYSE as a result of which the reported trading prices for Baxter common stock or Baxalta common stock, as the case may be, during any half-hour trading period during the principal trading session in the NYSE are materially inaccurate, as determined by Baxter in its sole discretion, on the day with respect to which such determination is being made. For purposes of such determination: (i) a limitation on the hours or number of days of trading will not constitute a market disruption event if it results from an announced change in the regular business hours of the NYSE; and (ii) limitations pursuant to NYSE Rule 80A (or any applicable rule or regulation enacted or promulgated by the NYSE, any other self-regulatory organization or the SEC of similar scope as determined by Baxter or the exchange agent) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading.

Since the exchange offer is scheduled to expire at 11:59 p.m., New York City time, on the expiration date (currently expected to be May 18, 2016) and the final exchange ratio will be announced by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer, you will be able to tender or withdraw your shares of Baxter common stock after the final exchange ratio is determined until the exchange offer has expired. For more information on tendering and withdrawing your shares, see “—Procedures for Tendering” and “—Withdrawal Rights.”

 

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For the purposes of illustration, the table below indicates the number of shares of Baxalta common stock that you would receive per one share of Baxter common stock accepted in the exchange offer, calculated on the basis described under “—Pricing Mechanism” and taking into account the upper limit, assuming a range of simple arithmetic averages of the daily VWAPs of shares of Baxter common stock and Baxalta common stock during the assumed Averaging Period. The first line of the table below shows the indicative Average Baxter Price and the indicative Average Baxalta Price and indicative exchange ratio that would have been in effect following the official close of trading on the NYSE on April 20, 2016, based on the daily VWAPs of shares of Baxter common stock and Baxalta common stock on April 18, 19 and 20, 2016. The table also shows the effects of a 15% increase or decrease in either or both of the indicative Average Baxter Price and indicative Average Baxalta Price based on changes relative to the values as of April 20, 2016.

 

Baxter
common stock

   Baxalta
common stock
   Average
Baxter Price
     Average
Baxalta Price
     Shares of Baxalta
common stock per
Baxter common
stock tendered
     Value
Ratio(1)
 

As of April 20, 2016

   As of April 20, 2016    $ 43.2256       $ 41.0903         1.1311         1.0752   

Down 15%

   Up 15%    $ 36.7418       $ 47.2538         0.8361         1.0752   

Down 15%

   Unchanged    $ 36.7418       $ 41.0903         0.9615         1.0752   

Down 15%

   Down 15%    $ 36.7418       $ 34.9268         1.1311         1.0752   

Unchanged

   Up 15%    $ 43.2256       $ 47.2538         0.9836         1.0753   

Unchanged

   Down 15%    $ 43.2256       $ 34.9268         1.3308         1.0752   

Up 15%

   Up 15%    $ 49.7094       $ 47.2538         1.1311         1.0752   

Up 15%

   Unchanged    $ 49.7094       $ 41.0903         1.3008         1.0752   

Up 15%

   Down 15%    $ 49.7094       $ 34.9268         1.4026         0.9855 (2) 

 

(1) The Value Ratio equals (i) the Average Baxalta Price multiplied by the exchange ratio, divided by (ii) the Average Baxter Price.
(2) In this scenario, the upper limit of 1.4026 is in effect. Absent the upper limit, the exchange ratio would have been 1.5304 shares of Baxalta common stock per share of Baxter common stock tendered. In this scenario, Baxter would announce that the upper limit on the number of shares of Baxalta common stock that can be received for each share of Baxter common stock tendered is in effect no later than 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016).

If the trading price of shares of Baxter common stock were to increase during the last two trading days of the exchange offer (currently expected to be May 17 and May 18, 2016), the Average Baxter Price would likely be lower than the closing price of shares of Baxter common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer. As a result, you may receive fewer shares of Baxalta common stock for each $100 of Baxter common stock that are validly tendered and accepted for exchange than you would have received if the Average Baxter Price were calculated on the basis of the closing price of shares of Baxter common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer. Similarly, if the trading price of shares of Baxalta common stock were to decrease during the last two trading days of the exchange offer, the Average Baxalta Price would likely be higher than the closing price of shares of Baxalta common stock on the expiration date of the exchange offer. This could also result in your receiving fewer shares of Baxalta common stock for each $100 of Baxter common stock than you would otherwise receive if the Average Baxalta Price were calculated on the basis of the closing price of shares of Baxalta common stock on the expiration date or on the basis of an Averaging Period that includes the last two trading days of the exchange offer.

The number of shares of Baxter common stock accepted by Baxter in the exchange offer may be subject to proration. Depending on the number of shares of Baxter common stock validly tendered, and not validly withdrawn, and the final exchange ratio, determined as described above, Baxter may have to limit the number of shares of Baxter common stock that it accepts in the exchange offer through a proration process. Any proration of

 

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the number of shares accepted in the exchange offer will be determined on the basis of the proration mechanics described below under “—Proration; Odd-Lots.”

This prospectus and related documents are being sent to:

 

    persons who directly held shares of Baxter common stock on April 19, 2016;

 

    participants in the Savings Plans; and

 

    brokers, banks and similar persons whose names or the names of whose nominees appear on Baxter’s stockholder list or, if applicable, who are listed as participants in a clearing agency’s security position listing for subsequent transmittal to beneficial owners of shares of Baxter common stock.

Proration; Odd-Lots

If, upon the expiration of the exchange offer, Baxter stockholders have validly tendered and not validly withdrawn more shares of Baxter common stock than Baxter is able to accept for exchange, Baxter will accept for exchange the shares of Baxter common stock validly tendered and not validly withdrawn by each tendering stockholder on a pro rata basis, based on the proportion that the total number of shares of Baxter common stock to be accepted for exchange bears to the total number of shares of Baxter common stock validly tendered and not validly withdrawn (rounded to the nearest whole number of shares of Baxter common stock, and subject to any adjustment necessary to ensure the exchange of all shares of Baxalta common stock owned by Baxter), except for tenders of odd-lots, as described below.

Except as otherwise provided in this section, beneficial holders of less than 100 shares of Baxter common stock who validly tender all of their shares may elect not to be subject to proration if the exchange offer is oversubscribed. Beneficial holders of at least 100 shares of Baxter common stock, even those holders with separate stock certificates representing less than 100 shares, and those who own less than 100 shares but do not tender all of their shares, are not eligible for this preference. In addition, shares held on behalf of participants in the Savings Plans (each of which plans holds more than 100 shares of Baxter common stock) are not eligible for this preference.

Any beneficial holder of less than 100 shares of Baxter common stock who wishes to tender all of the shares and not be subject to proration must check the box under “Proration/Odd Lot” on the letter of transmittal. If your odd-lot shares are held by a broker for your account, you can contact your broker and request the preferential treatment.

Baxter will announce the preliminary proration factor, if any, by press release by 9:00 a.m., New York City time, on the business day (currently expected to be May 19, 2016) following the expiration date of the exchange offer (currently expected to be May 18, 2016). Upon determining the number of shares of Baxter common stock validly tendered for exchange, Baxter will announce the final results, including the final proration factor, if any.

Any shares of Baxter common stock not accepted for exchange in the exchange offer as a result of proration will be returned to the tendering stockholder promptly after the expiration of the exchange offer in book-entry form to a direct registration account in the name of the registered holder maintained by Baxter’s transfer agent even if tendered in certificated form.

Fractional Shares

Fractional shares of Baxalta common stock will not be distributed in the exchange offer. The exchange agent, acting as agent for the Baxter stockholders otherwise entitled to receive fractional shares of Baxalta common stock, will aggregate all fractional shares that would otherwise have been required to be distributed and cause them to be sold in the open market for the accounts of the stockholders. Any proceeds that the exchange agent realizes from that sale will be distributed, less any brokerage commissions or other fees, to each stockholder entitled thereto in accordance with the stockholder’s fractional interest in the aggregate number of shares sold.

 

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The distribution of fractional share proceeds will take longer than the distribution of shares of Baxalta common stock. As a result, stockholders will not receive fractional share proceeds at the same time they receive shares of Baxalta common stock.

None of Baxter, Baxalta, the exchange agent, the information agent or the dealer manager or any other person will guarantee any minimum proceeds from the sale of fractional shares of Baxalta common stock. You will not receive any interest on any cash paid to you, even if there is a delay in making the payment. In addition, a U.S. holder who receives cash in lieu of a fractional share of Baxalta common stock will generally recognize capital gain or loss for U.S. federal income tax purposes on the receipt of the cash to the extent that the cash received exceeds the tax basis allocated to the fractional share. You are urged to read carefully the discussion in “U.S. Federal Income Tax Consequences” and to consult your own tax advisor regarding the consequences to you of the exchange offer and the merger.

Holders who are tendering shares allocable to their applicable Savings Plans accounts should note that their accounts do not hold shares (including any fractional shares), given the unitized nature of the Savings Plans’ stock funds, and such holders should refer to the special instructions provided to them by their applicable plan administrator for more information.

Exchange of Shares of Baxter Common Stock

Upon the terms and subject to the conditions of the exchange offer (including, if the exchange offer is extended or amended, the terms and conditions of the extension or amendment), Baxter will accept for exchange, and will exchange, for shares of Baxalta common stock owned by Baxter, the shares of Baxter common stock validly tendered, and not validly withdrawn, prior to the expiration of the exchange offer, promptly after the expiration date of the exchange offer (currently expected to be May 18, 2016).

The exchange of shares of Baxter common stock tendered and accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of:

 

  (a) (i) share certificates representing all tendered shares of Baxter common stock (other than Direct Registration Shares), in proper form for transfer or (ii) with respect to shares delivered by book-entry transfer through DTC, confirmation of a book-entry transfer of those shares of Baxter common stock in the exchange agent’s account at DTC, in each case pursuant to the procedures set forth in the section below entitled “—Procedures for Tendering;”

 

  (b) the letter of transmittal for shares of Baxter common stock, properly completed and duly executed (including any signature guarantees that may be required), or, in the case of shares delivered by book-entry transfer through DTC, an agent’s message; and

 

  (c) any other required documents.

For purposes of the exchange offer, Baxter will be deemed to have accepted for exchange, and thereby exchanged, shares of Baxter common stock validly tendered and not validly withdrawn if and when Baxter notifies the exchange agent of its acceptance of the tenders of those shares of Baxter common stock pursuant to the exchange offer.

On or prior to the time of consummation of the exchange offer, Baxter will deliver to the exchange agent irrevocable instructions to hold the shares of Baxalta common stock in trust for Baxter stockholders whose shares of Baxter common stock are being accepted for exchange in the exchange offer. Baxalta common stock and/or cash in lieu of fractional shares will be transferred to Baxter stockholders whose shares of Baxter common stock are accepted in the exchange offer promptly after the expiration of the exchange offer. You will not receive any interest on any cash paid to you, even if there is a delay in making the payment.

 

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Return of Shares of Baxter Common Stock

If shares of Baxter common stock are delivered and not accepted due to proration or a partial tender, (i) certificated shares of Baxter common stock that were delivered will be returned in uncertificated book-entry form to be credited in book-entry form in a direct registration account in the name of the applicable holder maintained by Baxter’s transfer agent, (ii) direct registration account shares of Baxter common stock that were delivered will be credited back to the applicable account in book-entry form and (iii) shares of Baxter common stock held through DTC will be credited back through DTC in book-entry form.

If you validly withdraw your shares of Baxter common stock or the exchange offer is not completed, (i) certificated shares of Baxter common stock that were delivered will be returned, (ii) direct registration account shares of Baxter common stock that were delivered will be credited back to the applicable account in book-entry form and (iii) shares of Baxter common stock held through DTC will be credited back through DTC in book-entry form.

Procedures for Tendering

Shares Held in Certificated Form. If you hold certificates representing shares of Baxter common stock you must deliver to the exchange agent at an address listed on the letter of transmittal a properly completed and duly executed letter of transmittal, along with any required signature guarantees and any other required documents, and the certificates representing the shares of Baxter common stock tendered.

Shares Held in Book-Entry Direct Registration System. If you hold Direct Registration Shares of Baxter common stock, you must deliver to the exchange agent at an address listed on the letter of transmittal a properly completed and duly executed letter of transmittal, along with any required signature guarantees and any other required documents. Because certificates are not issued for Direct Registration Shares, you do not need to deliver any certificates representing those shares to the exchange agent.

Shares Held Through a Broker, Dealer, Commercial Bank, Trust Company, Custodian or Similar Institution. If you hold shares of Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, you should follow the instructions sent to you separately by that institution. In this case, you should not use a letter of transmittal to direct the tender of your shares of Baxter common stock. If that institution holds shares of Baxter common stock through DTC, it must notify DTC and cause it to transfer the shares into the exchange agent’s account in accordance with DTC’s procedures. The institution must also ensure that the exchange agent receives an agent’s message from DTC confirming the book-entry transfer of your shares of Baxter common stock. A tender by book-entry transfer will be completed upon receipt by the exchange agent of an agent’s message, confirmation of a book-entry transfer into the exchange agent’s account at DTC and any other required documents.

The term “agent’s message” means a message, transmitted by DTC to, and received by, the exchange agent and forming a part of a book-entry confirmation, which states that DTC has received an express acknowledgment from the participant in DTC tendering the shares of Baxter common stock which are the subject of the book-entry confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal (including the instructions thereto) and that Baxter may enforce that agreement against the participant.

The exchange agent will establish an account at DTC with respect to the shares of Baxter common stock for purposes of the exchange offer, and any eligible institution that is a participant in DTC may make book-entry delivery of shares of Baxter common stock by causing DTC to transfer such shares into the exchange agent’s account at DTC in accordance with DTC’s procedure for the transfer. Delivery of documents to DTC does not constitute delivery to the exchange agent.

Participants in the Savings Plans should follow the special instructions that are being sent to them by their applicable plan administrator. Such participants should not use the letter of transmittal to direct the tender of shares of Baxter common stock held in these plans. Such participants may direct the applicable plan administrator through the

 

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designated website to tender all, some or none of the shares of Baxter common stock allocable to their Savings Plans accounts, subject to the limitations set forth in any instructions provided by their applicable plan administrator. Baxter and Baxalta have been informed that instructions to tender or withdraw by participants in the Savings Plans must be made by 4:00 p.m., New York City time, on May 17, 2016, unless the exchange offer is extended. If the exchange offer is extended, and if administratively feasible, the deadline for receipt of your direction may also be extended.

General Instructions. Do not send letters of transmittal or certificates representing shares of Baxter common stock to Baxter, Baxalta, the dealer manager or the information agent. Letters of transmittal for shares of Baxter common stock and certificates representing shares of Baxter common stock should be sent to the exchange agent at an address listed on the letter of transmittal. Trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity who sign a letter of transmittal or any certificates or stock powers must indicate the capacity in which they are signing and must submit evidence of their power to act in that capacity unless waived by Baxter.

Whether you tender certificated shares of Baxter common stock by delivery of certificates or uncertificated Direct Registration Shares, the exchange agent must receive the letter of transmittal and any certificates representing your shares of Baxter common stock at the appropriate address set forth in the letter of transmittal prior to the expiration of the exchange offer. Note that for Direct Registration Shares, you do not need to deliver any certificates representing those shares because certificates are not issued for such shares. In the case of a book-entry transfer of shares of Baxter common stock through DTC, the exchange agent must receive the agent’s message and confirmation of a book-entry transfer into the exchange agent’s account at DTC prior to the expiration date of the exchange offer (currently expected to be May 18, 2016).

Letters of transmittal for shares of Baxter common stock and certificates representing shares of Baxter common stock, if any, must be received by the exchange agent. Please read carefully the instructions to the letter of transmittal you have been sent. You should contact the information agent if you have any questions regarding tendering your shares of Baxter common stock.

Signature Guarantees. Signatures on all letters of transmittal for shares of Baxter common stock must be guaranteed by a firm that is a member of the Securities Transfer Agents Medallion Program, or by any other “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being a U.S. eligible institution), except in cases in which shares of Baxter common stock are tendered either (1) by a registered stockholder (which term, for purposes of this document, shall include any participant in DTC whose name appears on a security position listing as the owner of shares of Baxter common stock) who has not completed the “Special Transfer Instructions” enclosed with the letter of transmittal or (2) for the account of a U.S. eligible institution.

If the certificates representing shares of Baxter common stock or Direct Registration Shares are registered in the name of a person other than the person who signs the letter of transmittal, the certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificates or as reflected on the letter of transmittal accompanying the tender of Direct Registration Shares without any change whatsoever, with the signature(s) on the certificates or stock powers guaranteed by an eligible institution.

Guaranteed Delivery Procedures. If you wish to tender shares of Baxter common stock pursuant to the exchange offer but (1) your certificates are not immediately available, (2) the procedure for book-entry transfer cannot be completed on a timely basis or (3) time will not permit all required documents to reach the exchange agent on or before the expiration date of the exchange offer, you may still tender your shares of Baxter common stock, so long as all of the following conditions are satisfied:

 

    you must make your tender by or through a U.S. eligible institution;

 

    on or before the expiration date of the exchange offer (currently expected to be May 18, 2016), the exchange agent must receive a properly completed and duly executed notice of guaranteed delivery, substantially in the form made available by Baxter, in the manner provided below; and

 

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    within three NYSE trading days after the date of execution of such notice of guaranteed delivery, the exchange agent must receive (1)(A) share certificates representing all tendered shares of Baxter common stock (other than Direct Registration Shares), in proper form for transfer or (B) with respect to shares delivered by book-entry transfer through DTC, confirmation of a book-entry transfer of those shares of Baxter common stock in the exchange agent’s account at DTC, (2) a letter of transmittal for shares of Baxter common stock, properly completed and duly executed (including any signature guarantees that may be required) or, in the case of shares delivered by book-entry transfer through DTC, an agent’s message and (3) any other required documents.

Registered stockholders (including any participant in DTC whose name appears on a security position listing of DTC as the owner of shares of Baxter common stock) may transmit the notice of guaranteed delivery by facsimile transmission or mail to the exchange agent. If you hold shares of Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, that institution must submit any notice of guaranteed delivery on your behalf. You must, in all cases, obtain a Medallion guarantee, in the form set forth in the notice of guaranteed delivery.

Tendering Your Shares After the Final Exchange Ratio Has Been Determined. Subject to any voluntary extension by Baxter of the exchange offer period or any extension mandated by applicable law, the final exchange ratio will be available by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). If you hold Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, that institution must tender your shares on your behalf. DTC is expected to remain open until 5:00 p.m., and institutions may be able to process tenders through DTC during that time (although there is no assurance that will be the case). Once DTC has closed, participants in DTC whose name appears on a DTC security position listing as the owner of shares of Baxter common stock will still be able to tender shares by delivering a notice of guaranteed delivery to the exchange agent via facsimile. If you hold Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, that institution must submit any notice of guaranteed delivery on your behalf. It will generally not be possible to direct such an institution to submit a notice of guaranteed delivery once that institution has closed for the day. In addition, any such institution, if it is not an eligible institution, will need to obtain a Medallion guarantee from an eligible institution in the form set forth in the notice of guaranteed delivery in connection with the delivery of those shares.

Effect of Tenders. A tender of shares of Baxter common stock pursuant to any of the procedures described above will constitute your acceptance of the terms and conditions of the exchange offer as well as your representation and warranty to Baxter that (1) you have the full power and authority to tender, sell, assign and transfer the tendered shares (and any and all other shares of Baxter common stock or other securities issued or issuable in respect of such shares); (2) when the same are accepted for exchange, Baxter will acquire good, marketable and unencumbered title to such shares, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims; (3) you have a net long position in the shares being tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act as further explained below; (4) your participation in the exchange offer and tender of such shares complied with Rule 14e-4 and the applicable laws of both the jurisdiction where you received the materials relating to the exchange offer and the jurisdiction from which the tender is being made; and (5) for non-U.S. persons: you acknowledge that Baxter has advised you that it has not taken any action under the laws of any country outside the United States to facilitate a public offer to exchange Baxter common stock or Baxalta common stock in that country; that there may be restrictions that apply in other countries, including with respect to transactions in Baxter common stock or Baxalta common stock in your home country; that, if you are located outside the United States, your ability to tender Baxter common stock in the exchange offer will depend on whether there is an exemption available under the laws of your home country that would permit you to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise; that Baxter will rely on your representation that your participation in the exchange offer is made pursuant to and in compliance with the applicable laws in the

 

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jurisdiction in which you are resident or from which you are tendering your shares and in a manner that will not require Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise; and that Baxter will rely on your representations concerning the legality of your participation in the exchange offer in determining to accept any shares that you are tendering for exchange.

It is a violation of Rule 14e-4 under the Exchange Act for a person, directly or indirectly, to tender shares of Baxter common stock for such person’s own account unless, at the time of tender, the person so tendering (1) has a net long position equal to or greater than the amount of (a) shares of Baxter common stock tendered or (b) other securities immediately convertible into or exchangeable or exercisable for the shares of Baxter common stock tendered and such person will acquire such shares for tender by conversion, exchange or exercise; and (2) will cause such shares to be delivered in accordance with the terms of this prospectus. Rule 14e-4 provides a similar restriction applicable to the tender or guarantee of a tender on behalf of another person.

The exchange of shares of Baxter common stock tendered and accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of (a)(i) share certificates representing all tendered shares of Baxter common stock (other than Direct Registration Shares), in proper form for transfer or (ii) with respect to shares delivered by book-entry transfer through DTC, confirmation of a book-entry transfer of those shares of Baxter common stock in the exchange agent’s account at DTC; (b) a letter of transmittal for shares of Baxter common stock, properly completed and duly executed (including any signature guarantees that may be required), or, in the case of shares delivered by book-entry transfer through DTC, an agent’s message; and (c) any other required documents.

Appointment of Attorneys-in-Fact and Proxies. By executing a letter of transmittal as set forth above, you irrevocably appoint Baxter’s designees as your attorneys-in-fact and proxies, each with full power of substitution, to the full extent of your rights with respect to your shares of Baxter common stock tendered and accepted for exchange by Baxter and with respect to any and all other shares of Baxter common stock and other securities issued or issuable in respect of the shares of Baxter common stock on or after the expiration of the exchange offer. That appointment is effective when and only to the extent that Baxter deposits the shares of Baxalta common stock for the shares of Baxter common stock that you have tendered with the exchange agent. All such proxies shall be considered coupled with an interest in the tendered shares of Baxter common stock and therefore shall not be revocable. Upon the effectiveness of such appointment, all prior proxies that you have given will be revoked and you may not give any subsequent proxies (and, if given, they will not be deemed effective). Baxter’s designees will, with respect to the shares of Baxter common stock for which the appointment is effective, be empowered, among other things, to exercise all of your voting and other rights as they, in their sole discretion, deem proper. Baxter reserves the right to require that, in order for shares of Baxter common stock to be deemed validly tendered, immediately upon Baxter’s acceptance for exchange of those shares of Baxter common stock, Baxter must be able to exercise full voting rights with respect to such shares.

Determination of Validity. Baxter will determine questions as to the form of documents (including notices of withdrawal) and the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of shares of Baxter common stock, in Baxter’s sole discretion, provided that Baxter may delegate such power in whole or in part to the exchange agent. Baxter reserves the absolute right to reject any and all tenders of shares of Baxter common stock that it determines are not in proper form or the acceptance of or exchange for which may, in the opinion of its counsel, be unlawful. Baxter also reserves the absolute right to waive any of the conditions of the exchange offer (other than the conditions relating to the absence of an injunction and the effectiveness of the registration statement for Baxalta common stock to be distributed in the exchange offer), or any defect or irregularity in the tender of any shares of Baxter common stock. No tender of shares of Baxter common stock is valid until all defects and irregularities in tenders of shares of Baxter common stock have been cured or waived. None of Baxter, Baxalta, the dealer manager, the exchange agent, the information agent or any other person, nor any of their directors or officers, is under any duty to give notification of any defects or irregularities in the tender of any shares of Baxter common stock or will incur any liability for failure to give any such notification. Baxter’s determinations and interpretations of the terms and conditions of the exchange offer

 

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(including the letter of transmittal and instructions thereto) may be challenged in a court of competent jurisdiction.

Binding Agreement. The tender of shares of Baxter common stock pursuant to any of the procedures described above, together with Baxter’s acceptance for exchange of such shares pursuant to the procedures described above, will constitute a binding agreement between Baxter and you upon the terms of and subject to the conditions to the exchange offer.

The method of delivery of share certificates of shares of Baxter common stock and all other required documents, including delivery through DTC, is at your option and risk, and the delivery will be deemed made only when actually received by the exchange agent. If delivery is by mail, it is recommended that you use registered mail with return receipt requested, properly insured. In all cases, you should allow sufficient time to ensure timely delivery.

Partial Tenders. If you tender fewer than all the shares of Baxter common stock evidenced by any share certificate you deliver to the exchange agent, then you must check the box labeled “Partial Tender” and fill in the number of shares that you are tendering in the space provided on the first page of the letter of transmittal filed as an exhibit to the registration statement of which this prospectus forms a part. In those cases, promptly after the expiration of the exchange offer (currently expected to be May 18, 2016), the exchange agent will credit the remainder of the shares of Baxter common stock that were evidenced by the certificate(s) but not tendered to a Direct Registration Share account in the name of the registered holder maintained by Baxter’s transfer agent, unless otherwise provided in “Special Transfer Instructions” or “Special Delivery Instructions” enclosed with the letter of transmittal filed as an exhibit to the registration statement of which this prospectus forms a part. Unless you indicate otherwise in your letter of transmittal, all Baxter common stock represented by share certificates you deliver to the exchange agent will be deemed to have been tendered. No share certificates are expected to be delivered to you, including in respect of any shares delivered to the exchange agent that were previously in certificated form.

Lost or Destroyed Certificates

If your certificate(s) representing shares of Baxter common stock have been mutilated, destroyed, lost or stolen and you wish to tender your shares, you will need to take the steps described under the section entitled “Lost or Destroyed Certificate(s)” included in the letter of transmittal and in the instruction booklet to the letter of transmittal. You will also need to pay a premium and service fee as calculated in the letter of transmittal to support the purchase of the blanket bond for your lost shares of Baxter common stock. Upon receipt of the completed applicable letter of transmittal (appropriately notarized) with the required information, the surety bond payment and the service fee, your shares of Baxter common stock will be included in the exchange offer, subject to acceptance by Baxter.

Withdrawal Rights

Shares of Baxter common stock tendered pursuant to the exchange offer may be withdrawn at any time before 11:59 p.m., New York City time, on the expiration date of the exchange offer (currently expected to be May 18, 2016) and, unless Baxter has previously accepted them pursuant to the exchange offer, may also be withdrawn at any time after the expiration of 40 business days from the commencement of the exchange offer. Once Baxter accepts shares of Baxter common stock pursuant to the exchange offer, your tender is irrevocable.

For a withdrawal of shares of Baxter common stock to be effective, the exchange agent must receive from you a written notice of withdrawal or facsimile transmission of notice of withdrawal, in the form of the notice of withdrawal provided by Baxter, at one of its addresses or fax numbers, respectively, set forth in the instructions booklet to the letter of transmittal, and your notice must include your name and the number of shares of Baxter common stock to be withdrawn, as well as the name of the registered holder, if it is different from that of the person who tendered those shares.

 

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If shares of Baxter common stock have been tendered pursuant to the procedures for book-entry tender through DTC discussed in the section entitled “—Procedures for Tendering,” any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn shares and must otherwise comply with the procedures of DTC.

If you hold your shares through a broker, dealer, commercial bank, trust company, custodian or similar institution, you should consult that institution on the procedures you must comply with and the time by which such procedures must be completed in order for that institution to provide a written notice of withdrawal or facsimile notice of withdrawal to the exchange agent on your behalf before 11:59 p.m., New York City time, on the expiration date of the exchange offer. If you hold your shares through such an institution, that institution must deliver the notice of withdrawal with respect to any shares you wish to withdraw. In such a case, as a beneficial owner and not a registered stockholder, you will not be able to provide a notice of withdrawal for such shares directly to the exchange agent.

Baxter will decide all questions as to the form and validity (including time of receipt) of any notice of withdrawal, in its sole discretion. Baxter may delegate such power in whole or in part to the exchange agent. None of Baxter, Baxalta, the dealer manager, the exchange agent, the information agent nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or will incur any liability for failure to give any notification. Any such determinations may be challenged in a court of competent jurisdiction.

Any shares of Baxter common stock validly withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer.

However, you may re-tender withdrawn shares of Baxter common stock by following one of the procedures discussed in the section entitled “—Procedures for Tendering” at any time prior to the expiration of the exchange offer (or pursuant to the instructions sent to you separately).

If you hold shares of Baxter common stock (or if shares are allocable to you) through the Savings Plans, your plan administrator will provide you with instructions on how to withdraw your direction to tender through the designated website. You must record your withdrawal on the designated website at any time before 4:00 p.m., New York City time, on May 17, 2016, or, if the exchange offer is extended, any new plan participant withdrawal deadline established by the plan administrator.

Withdrawing Your Shares After the Final Exchange Ratio Has Been Determined. Subject to any extension of the exchange offer period, the final exchange ratio will be available by 9:00 a.m., New York City time, on the trading day (currently expected to be May 17, 2016) preceding the expiration date of the exchange offer (currently expected to be May 18, 2016). If you are a registered stockholder of Baxter common stock and you wish to withdraw your shares after the final exchange ratio has been determined, then you must deliver a written notice of withdrawal or facsimile transmission notice of withdrawal to the exchange agent prior to 11:59 p.m., New York City time, on the expiration date of the exchange offer, in the form of the notice of withdrawal provided by Baxter. Medallion guarantees will not be required for such withdrawal notices. If you hold Baxter common stock through a broker, dealer, commercial bank, trust company, custodian or similar institution, any notice of withdrawal must be delivered by that institution on your behalf. DTC is expected to remain open until 5:00 p.m., New York City time, and institutions may be able to process withdrawals through DTC during that time (although there is no assurance that will be the case). Once DTC has closed, if you beneficially own shares that were previously delivered through DTC, then in order to withdraw your shares the institution through which your shares are held must deliver a written notice of withdrawal or facsimile transmission notice of withdrawal to the exchange agent prior to 11:59 p.m., New York City time, on the expiration date of the exchange offer. Such notice of withdrawal must be in the form of DTC’s notice of withdrawal and must specify the name and number of the account at DTC to be credited with the withdrawn shares and must otherwise comply with DTC’s procedures. Shares can be withdrawn only if the exchange agent receives a withdrawal notice directly from the

 

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relevant institution that tendered the shares through DTC. On the last day of the exchange offer, beneficial owners who cannot contact the institution through which they hold their shares will not be able to withdraw their shares.

Except for the withdrawal rights described above, any tender made under the exchange offer is irrevocable.

Delivery of Baxalta Common Stock; Book-Entry Accounts

Physical certificates representing shares of Baxalta common stock will not be issued pursuant to the exchange offer, including in respect of any shares delivered to the exchange agent in certificated form. Rather than issuing physical certificates for such shares to tendering stockholders, the exchange agent will cause shares of Baxalta common stock to be credited in book-entry form to direct registered accounts maintained by Baxalta’s transfer agent for the benefit of the respective holders (or, in the case of shares tendered through DTC, to the account of DTC so that DTC can credit the relevant DTC participant and such participant can credit its respective account holders). Promptly following the crediting of shares to your respective direct registered account, you will receive a statement from Baxalta’s transfer agent evidencing your holdings, as well as general information on the book-entry form of ownership.

If shares of Baxalta common stock are to be issued to a person other than the signer of the letter of transmittal, a check is to be issued in the name of, and/or shares of Baxter common stock not tendered or not accepted for exchange in the exchange offer are to be issued or returned to, a person other than the signer of the letter of transmittal, or a check is to be mailed to a person other than the signer of the letter of transmittal or to an address other than that shown on the first page of the letter of transmittal, then the information in “Special Transfer Instructions” and/or “Special Delivery Instructions” enclosed with the letter of transmittal filed as an exhibit to the registration statement of which this prospectus forms a part will need to be completed. Baxter has no obligation pursuant to such instructions to transfer any such shares from the name of the registered holder(s) thereof if Baxter does not accept any such shares for exchange. If no such instructions are given, all such shares not accepted for exchange in the exchange offer will be credited in book-entry form to the registered holders in a direct registered account maintained by Baxter’s transfer agent even if tendered in certificated form.

With respect to any shares tendered through DTC, a stockholder may request that shares not exchanged be credited to a different account maintained at DTC by providing the appropriate instructions pursuant to DTC’s applicable procedures. If no such instructions are given, all such shares of Baxter common stock not accepted will be returned by crediting the same account at DTC as the account from which such shares of Baxter common stock were delivered.

Extension; Amendment

Extension or Amendment by Baxter

Baxter expressly reserves the right, in its sole discretion, for any reason, to extend the period of time during which the exchange offer is open and thereby delay acceptance for exchange of, and the exchange for, any shares of Baxter common stock validly tendered and not validly withdrawn in the exchange offer. For example, the exchange offer can be extended if any of the conditions to completion of the exchange offer described in the next section entitled “—Conditions to Completion of the Exchange Offer” are not satisfied or, where permissible, waived prior to the expiration of the exchange offer.

Baxter expressly reserves the right, in its sole discretion, to amend the terms of the exchange offer in any respect prior to the expiration date of the exchange offer (currently expected to be May 18, 2016).

If Baxter materially changes the terms of or information concerning the exchange offer, it will extend the exchange offer if required by applicable law. Generally speaking, an offer must remain open under SEC rules for

 

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a minimum of five business days from the date that notice of the material change is first given. The length of time will depend on the particular facts and circumstances giving rise to the extension.

As required by applicable law, the exchange offer will be extended so that it remains open for a minimum of ten business days following the applicable announcement if:

 

    Baxter changes the method for calculating the number of shares of Baxalta common stock offered in exchange for each share of Baxter common stock; and

 

    the exchange offer is scheduled to expire within ten business days of announcing any such change.

If Baxter extends the exchange offer, is delayed in accepting for exchange any shares of Baxter common stock or is unable to accept for exchange any shares of Baxter common stock under the exchange offer for any reason, then, without affecting Baxter’s rights under the exchange offer, the exchange agent may retain on Baxter’s behalf all shares of Baxter common stock tendered. These shares of Baxter common stock may not be withdrawn except as provided in the section entitled “—Withdrawal Rights.”

Baxter’s reservation of the right to delay acceptance of any shares of Baxter common stock is subject to applicable law, which requires that Baxter pay the consideration offered or return the shares of Baxter common stock deposited promptly after the termination or withdrawal of the exchange offer.

Baxter will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day following any extension, amendment, non-acceptance or termination of the previously scheduled expiration date of the exchange offer.

Method of Public Announcement. Subject to applicable law (including Rules 13e-4(d), 13e-4(e)(3) and 14e-1 under the Exchange Act, which require that any material change in the information published, sent or given to stockholders in connection with the exchange offer be promptly disclosed to stockholders in a manner reasonably designed to inform them of the change) and without limiting the manner in which Baxter may choose to make any public announcement, Baxter assumes no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a release via BusinessWire that is posted to Baxter’s website.

Conditions to Completion of the Exchange Offer

Baxter will not be required to accept shares for exchange and may terminate the exchange offer if:

 

    the private letter ruling from the IRS, regarding certain U.S. federal income tax consequences of the distribution by Baxter on July 1, 2015 of approximately 80.5% of the shares of Baxalta common stock to stockholders of Baxter and certain related transactions, is invalidated or otherwise ceases to be effective in whole or in part;

 

    Baxter notifies Baxalta that Baxter has received a written proposal for an alternative transaction involving Baxalta common stock that Baxter’s board of directors reasonably determines, in its good faith judgment, to be in the best interests of its stockholders;

 

    any of the following events occurs, or Baxter reasonably expects any of the following events to occur:

 

    any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States;

 

    a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States;

 

    a commencement of a war (whether declared or undeclared), armed hostilities or other national or international calamity, including an act of terrorism, directly or indirectly involving the United States, which would reasonably be expected to affect materially and adversely, or to delay materially, the completion of the exchange offer;

 

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    if any of the situations described in the immediately preceding three bullet points exists, as of the date of the commencement of the exchange offer, the situation deteriorates materially;

 

    a decline of at least 10% in the closing level of either the Dow Jones Industrial Average or the Standard & Poor’s 500 Index from the closing level established on April 20, 2016;

 

    a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of Baxalta;

 

    a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of Baxter;

 

    any action, litigation, suit, claim or proceeding is instituted that would be reasonably likely to enjoin, prohibit, restrain, make illegal, make materially more costly or materially delay completion of the exchange offer;

 

    any order, injunction, stay, judgment or decree is issued by any U.S. federal or state court, government, governmental authority or other regulatory or administrative authority having jurisdiction over Baxter and Baxalta and is in effect, or any law, statute, rule, regulation, legislation, interpretation, governmental order or injunction shall have been enacted or enforced, any of which would reasonably be likely to restrain, prohibit or delay completion of the exchange offer or materially impair the contemplated benefits of the exchange offer to Baxter or Baxalta;

 

    the registration statement on Form S-4 of which this prospectus is a part shall not have become effective under the Securities Act prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer (currently expected to be May 18, 2016);

 

    any stop order suspending the effectiveness of the registration statement of which this prospectus forms a part has been issued, or any proceeding for that purpose has been initiated by the SEC and not concluded or withdrawn; or

 

    a market disruption event occurs with respect to Baxter common stock or Baxalta common stock and such market disruption event has, in Baxter’s reasonable judgment, impaired the benefits of the exchange offer.

If any of the above events occurs and exists at the scheduled expiration date, Baxter may:

 

    terminate the exchange offer and promptly return all tendered shares of Baxter common stock to tendering stockholders;

 

    extend the exchange offer and, subject to the withdrawal rights described in “—Withdrawal Rights” above, retain all tendered shares of Baxter common stock until the extended exchange offer expires;

 

    amend the terms of the exchange offer; and/or

 

    waive the unsatisfied condition (except the conditions relating to the absence of an injunction and the effectiveness of the registration statement for shares of Baxalta common stock to be distributed in the exchange offer) and, subject to any requirement to extend the period of time during which the exchange offer is open, complete the exchange offer.

These conditions are for the sole benefit of Baxter. Except as described in the immediately preceding bullet point, Baxter may waive any condition in whole or in part at any time in its sole discretion, subject to applicable law. Baxter’s failure to exercise its rights under any of the above conditions does not represent a waiver of these rights. Each right is an ongoing right which may be asserted by Baxter at any time. However, all conditions to completion of the exchange offer must be satisfied or, where permissible, waived by Baxter before the expiration of the exchange offer. Any determination or interpretation by Baxter concerning the conditions described above may be challenged in a court of competent jurisdiction.

 

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If a stop order issued by the SEC is in effect with respect to the registration statement of which this prospectus forms a part, Baxter will not accept any shares of Baxter common stock tendered and will not exchange shares of Baxalta common stock for any shares of Baxter common stock.

Fees and Expenses

Baxter has retained J.P. Morgan Securities LLC to act as dealer manager and as financial advisor, D.F. King & Co., Inc. to act as the information agent and Computershare Trust Company, N.A. to act as the exchange agent in connection with the exchange offer.

The dealer manager, the information agent and the exchange agent each will receive reasonable compensation for their respective services, will be reimbursed for reasonable out-of-pocket expenses and will be indemnified against specified liabilities in connection with their services, including liabilities under the federal securities laws.

The dealer manager and its affiliates have in the past provided investment banking services to Baxter and Baxalta and their respective affiliates, for which it has received customary compensation. J.P. Morgan Securities LLC also acted as an initial purchaser in connection with Baxalta’s June 2015 offering of senior notes. In the ordinary course of business, the dealer manager is engaged in securities trading and brokerage activities as well as investment banking and financial advisory services. In the ordinary course of its trading and brokerage activities, the dealer manager and certain of its affiliates may from time to time hold positions of Baxter common stock and Baxalta common stock in its proprietary accounts or those of its customers, and to the extent it holds shares of Baxter common stock in these accounts at the time of the exchange offer, the dealer manager and/or certain of its affiliates may tender these shares.

For the purposes of U.S. securities laws, Baxter may be deemed to be an underwriter of the shares of Baxalta common stock issued in the exchange offer.

Legal and Other Limitations; Certain Matters Relating to Non-U.S. Jurisdictions

Although Baxter will deliver this prospectus to its stockholders to the extent required by U.S. law, including stockholders located outside the United States, this prospectus is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Baxter common stock or Baxalta common stock in any jurisdiction in which such offer, sale or exchange is not permitted.

Countries outside the United States generally have their own legal requirements that govern securities offerings made to persons resident in those countries and often impose stringent requirements about the form and content of offers made to the general public. Baxter has not taken any action under those non-U.S. regulations to facilitate a public offer to exchange Baxter common stock for Baxalta common stock outside the United States but may take steps to facilitate such tenders. Therefore, the ability of any non-U.S. person to tender Baxter common stock in the exchange offer will depend on whether there is an exemption available under the laws of such person’s home country that would permit the person to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. For example, some countries exempt transactions from the rules governing public offerings if they involve persons who meet certain eligibility requirements relating to their status as sophisticated or professional investors.

All tendering holders are deemed to make certain representations by executing the letter of transmittal, including (in the case of non-U.S. holders) as to the availability of an exemption under their home country laws that would allow them to participate in the exchange offer without the need for Baxter or Baxalta to take any action to facilitate a public offering in that country or otherwise. Baxter will rely on those representations and, unless the exchange offer is terminated, plans to accept shares tendered by persons who properly complete the letter of transmittal and provide any other required documentation on a timely basis and as otherwise described herein.

 

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Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in Baxter common stock or Baxalta common stock that may apply in their home countries. Baxter, Baxalta and the dealer manager cannot provide any assurance about whether such limitations exist.

 

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POTENTIAL ADDITIONAL DISTRIBUTION OF BAXALTA COMMON STOCK

Baxter has informed Baxalta that, prior to or following the completion of the exchange offer, Baxter intends to make a contribution to Baxter’s U.S. pension fund or distribute as a special dividend to all Baxter stockholders, on a pro rata basis, some or all of its remaining shares of Baxalta common stock prior to any Shire or Baxalta shareholder vote with respect to the merger, which are expected to be taken at meetings held on May 27, 2016, and, in any event, during the 18-month period following the distribution on July 1, 2015. To the extent Baxter holds any Baxalta common stock or Shire Securities received in exchange for such common stock pursuant to the merger at the end of the 18-month period, as the case may be, Baxter has advised Baxalta that it will dispose of such stock in one or more transactions (including potentially through underwritten equity offerings) as soon as practicable thereafter, taking into account market conditions and its business judgment, but in no event later than five years after the distribution.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF BAXALTA

The following unaudited pro forma combined financial statements consist of an unaudited pro forma combined statement of income for the year ended December 31, 2015. An unaudited pro forma combined balance sheet as of December 31, 2015 has not been presented with the unaudited pro forma combined financial statements because the separation and the associated transactions are reflected in the company’s historical audited consolidated balance sheet as of December 31, 2015 and presented elsewhere in this prospectus.

The unaudited pro forma combined financial statements illustrate the financial impacts of the separation and the related transactions described below. The unaudited pro forma combined statement of income for the year ended December 31, 2015 assumes that the separation and related transactions described below had occurred as of January 1, 2015.

The unaudited pro forma combined statement of income has been derived from Baxalta’s historical audited consolidated and combined financial statements included elsewhere in this prospectus and has 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 and distribution agreement, of the assets and liabilities that comprise Baxalta’s business;

 

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

 

    interest expense related to the incurrence of $5 billion of debt at a weighted-average interest rate of 3.76%; 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 presented on a consolidated basis for periods after the July 1, 2015 separation and on a carve-out basis for periods prior to the separation as Baxalta was not operated as a separate, independent company for the periods presented prior to the separation. Accordingly, such financial information prior to the separation 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 computation of basic EPS for all periods disclosed prior to the separation was calculated using the shares distributed and retained by Baxter on July 1, 2015 totaling 676 million. The weighted average number of shares outstanding for diluted EPS for the periods prior to separation also include 5 million of diluted common share equivalents for stock options, RSUs and PSUs, as these share-based awards were previously issued by Baxter and outstanding at the time of separation and were assumed by Baxalta following the separation.

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 of Baxalta,” as well as the audited consolidated and combined financial statements and the corresponding notes included elsewhere in this prospectus.

 

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BAXALTA INCORPORATED

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2015

 

(in millions, except share and per share data)

   Historical     Pro Forma
Adjustments
         Pro
Forma
 

Net sales

   $ 6,148      $ 82      (A)    $ 6,230   

Cost of sales

     2,386        76      (A)(E)(F)      2,462   
  

 

 

   

 

 

      

 

 

 

Gross margin

     3,762        6           3,768   
  

 

 

   

 

 

      

 

 

 

Selling, general and administrative expenses

     1,442        (20   (B)(E)(F)      1,422   

Research and development expenses

     1,176        (2   (E)      1,174   

Interest expense

     48        91      (C)      139   

Other income, net

   $ (102   $ —           $ (102
  

 

 

   

 

 

      

 

 

 

Income from continuing operations before income taxes

     1,198        (63        1,135   

Income tax expense

     270        (24   (D)      246   
  

 

 

   

 

 

      

 

 

 

Net income from continuing operations

   $ 928      $ (39      $ 889   
  

 

 

   

 

 

      

 

 

 

Net income from continuing operations per common share

         

Basic

   $ 1.37      $ (0.06      $ 1.31   

Diluted

   $ 1.36      $ (0.06      $ 1.30   
  

 

 

   

 

 

      

 

 

 

Common shares outstanding

         

Basic

     677        —             677   

Diluted

     683        —             683   
  

 

 

   

 

 

      

 

 

 

 

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BAXALTA INCORPORATED

NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

(A) Reflects the effect of the manufacturing and supply agreement that Baxalta and Baxter entered into in connection with the separation. The net sales adjustment of $82 million reflects the additional sales that Baxalta would have recorded for product manufactured and sold to Baxter for the year ended December 31, 2015, under the manufacturing and supply agreement. Pricing under this agreement reflects Baxalta’s costs plus a profit on certain steps of the manufacturing process. The cost of sales adjustment of $83 million reflects the impact of costs incurred to manufacture certain products for Baxter as well as the incremental costs that Baxalta would have recorded for the year ended December 31, 2015, for purchases of other products from Baxter under the manufacturing and supply agreement. Historically, inventory transfers between Baxter and Baxalta were recorded at cost. The pro forma adjustments for the year ended December 31, 2015 exclude net sales of $71 million and related cost of sales recognized for the company’s manufacturing and supply agreement with Baxter following the July 1, 2015 separation as those costs are reflected in Baxalta’s historical statement of income.

 

(B) Reflects $10 million for the year ended December 31, 2015 for the difference in costs to be incurred by Baxalta for certain services to be provided by Baxter under the transition services agreement. The pro forma adjustment for the year ended December 31, 2015 excludes costs incurred under the transition services agreement following the July 1, 2015 separation as those costs are reflected in Baxalta’s historical statement of income.

 

(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 paid by Baxalta. The pro forma adjustment for the year ended December 31, 2015 excludes net interest expense of $48 million incurred during the period following the debt issuance and reflected in the company’s historical statement of income. 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. 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 $34 million for the year ended December 31, 2015 (relating to the period prior to the separation).

 

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

 

(E) Reflects a reduction in operating expenses of $22 million ($8 million in cost of sales, $12 million in selling, general and administrative expenses and $2 million in research and development expenses) for the year ended December 31, 2015 associated with the actual transfer of net retirement obligations from Baxter to Baxalta.

 

(F) Reflects incremental depreciation expense of $3 million ($1 million in cost of sales and $2 million in selling, general and administrative expenses) during the year ended December 31, 2015 for assets transferred to Baxalta pursuant to the separation and distribution agreement that were not included in Baxalta’s historical financial statements prior to the July 1, 2015 separation.

 

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SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA OF BAXALTA

The following table sets forth selected financial data as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011. This selected financial data reflects the consolidated position of Baxalta and its consolidated subsidiaries as an independent, publicly-traded company for periods on or after its separation from Baxter on July 1, 2015. Selected financial data for periods prior to July 1, 2015 reflect the combined historical business and operations of the company as it was historically managed as part of Baxter, and have been prepared on a “carve-out” basis for the purpose of presenting Baxalta’s historical financial condition and results of operations. Baxalta did not operate as a standalone entity prior to the separation, and accordingly the selected financial data presented herein for periods prior to the separation is not necessarily indicative of Baxalta’s performance following the separation and does not reflect what Baxalta’s performance would have been had Baxalta operated as an independent publicly traded company.

The consolidated or combined statement of income data for 2015, 2014 and 2013 and the consolidated or combined balance sheet data as of December 31, 2015 and 2014 were derived from Baxalta’s audited consolidated and combined financial statements and accompanying notes included elsewhere in this prospectus. The combined statement of income data for 2012 and the combined balance sheet data as of December 31, 2013 and 2012 were derived from Baxalta’s audited combined financial statements that are not included in this prospectus. The combined statement of income data for 2011 and the combined balance sheet data as of December 31, 2011 were derived from the company’s unaudited combined financial statements that are not included in this prospectus.

The selected financial information should be read in conjunction with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta” and the company’s audited consolidated and combined financial statements (and the corresponding notes thereto) included in this prospectus.

 

     As of or for the year ended December 31,  

(in millions, except per share data)

   2015      2014      2013      2012      2011  

Consolidated and Combined Statement of Income and Other Data

              

Net sales

   $ 6,148       $ 5,952       $ 5,555       $ 5,310       $ 5,218   

Net income from continuing operations

   $ 928       $ 1,186       $ 1,288       $ 1,205       $ 1,344   

Net income from continuing operations per common share

              

Basic1

   $ 1.37       $ 1.75       $ 1.90       $ 1.78       $ 1.99   

Diluted1

   $ 1.36       $ 1.74       $ 1.89       $ 1.77       $ 1.97   

Cash dividends declared per common share

   $ 0.14       $ —         $ —         $ —         $ —     

Consolidated and Combined Balance Sheet Data

              

Total assets2

   $ 12,329       $ 8,583       $ 7,559       $ 6,088       $ 5,300   

Long-term debt and capital lease obligations

   $ 5,265       $ 275       $ 14       $ 5       $ 6   

 

1  On July 1, 2015, Baxter distributed approximately 544 million shares of Baxalta common stock to its shareholders and retained an additional 132 million shares. The computation of basic EPS for periods prior to the separation was calculated using the shares distributed and the shares retained by Baxter on July 1, 2015 totaling 676 million. The weighted average number of shares outstanding for diluted EPS for periods prior to the separation included 5 million of diluted common share equivalents related to employee equity awards outstanding as of July 1, 2015.
2  The company has elected to adopt new income tax accounting guidance on a retrospective basis, as further discussed in Note 2 and Note 13 in the company’s audited consolidated and combined financial statements. As a result, the company has made certain reclassifications to its consolidated or combined balance sheets starting with the period ending December 31, 2015 and retroactively applying to prior year balances disclosed in the table above. The reclassifications had the effect of decreasing total assets by $201 million, $183 million, $106 million and $125 million for the years ended December 31, 2014, 2013, 2012 and 2011, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF BAXALTA

The following is management’s discussion and analysis of the financial condition of Baxalta Incorporated (Baxalta or the company) for each of the three years in the period ended December 31, 2015. This section should be read in conjunction with the consolidated and combined financial statements and accompanying notes appearing elsewhere in this prospectus.

EXECUTIVE SUMMARY

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, as well as oncology treatments for acute lymphoblastic leukemia. Baxalta is also investing in 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 of and collaborations with others.

Separation from Baxter on July 1, 2015

On July 1, 2015, Baxalta separated from Baxter International Inc. (Baxter) and became an independent public company (the separation). To effect the separation, the two companies undertook a series of transactions to separate entities and net assets. As a result of these transactions, Baxalta holds the biopharmaceuticals business that was a part of the combined company prior to the separation. On July 1, 2015, Baxter distributed to its shareholders 80.5% of the common stock of Baxalta. Baxter retained an approximate 19.5% ownership stake in Baxalta immediately following this distribution. Baxalta common stock began trading “regular way” under the ticker symbol “BXLT” on the New York Stock Exchange on July 1, 2015.

In January 2016 and March 2016, Baxter exchanged a portion of its retained stake in Baxalta common stock for indebtedness of Baxter held by third parties. The shares of Baxalta common stock exchanged were then sold by such third parties in secondary public offerings pursuant to registration statements filed by Baxalta. Following these transactions, Baxter held approximately 4.5% of Baxalta’s total shares outstanding.

Merger Agreement with Shire plc

In January 2016, the company announced that it had reached an agreement (merger agreement) with Shire plc (Shire) under which Shire will acquire Baxalta, forming a global leader in rare diseases. Under the terms of the merger agreement, Baxalta shareholders will receive $18.00 in cash and 0.1482 Shire American Depository Shares (ADS), per each Baxalta share. The transaction has been approved by the boards of directors of both Shire and Baxalta. Closing of the transaction is subject to approval by Baxalta and Shire shareholders, certain regulatory approvals, receipt of certain tax opinions and other customary closing conditions. The transaction is expected to close in early June 2016.

The merger agreement provides for certain termination rights for both Shire and Baxalta. Upon termination of the merger agreement under certain specified circumstances, Baxalta may be required to disburse to Shire a termination fee of $369 million and Shire may be required to pay the company a termination fee of $369 million. In addition, if the merger agreement is terminated under certain specified circumstances following the receipt of

 

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an acquisition proposal by Baxalta, Baxalta may be required to reimburse Shire for transaction expenses up to $110 million (which expenses would be credited against any termination fee subsequently disbursed by Baxalta), and if the merger agreement is terminated under certain specified circumstances following the receipt of an acquisition proposal by Shire, Shire may be required to reimburse Baxalta for transaction expenses up to $65 million (which expenses would be credited against any termination fee subsequently payable by Shire).

For further discussion on the proposed merger with Shire, refer to the sections of this prospectus entitled “The Transactions—The Proposed Merger” and “Business—The Proposed Merger.”

Financial Results Overview

 

                          Percent Change  

years ended December 31 (in millions)

   2015      2014      2013      2015     2014  

Net sales

   $ 6,148       $ 5,952       $ 5,555         3     7

Net income from continuing operations

   $ 928       $ 1,186       $ 1,288         (22 %)      (8 %) 

Baxalta’s global net sales totaled approximately $6.1 billion in 2015, an increase of 3% over 2014. Excluding the impact of foreign currency exchange rate fluctuations, net sales increased 11%. Sales in the United States totaled $3.3 billion in 2015, an increase of 10% over 2014, and international sales totaled $2.8 billion, a decrease of 4% over 2014. Excluding the impact of foreign currency exchange rate fluctuations, 2015 international net sales increased 13% over 2014. The company experienced constant currency revenue growth of 7% and 15% in its hematology and immunology businesses, respectively, driven by strong global sales of ADVATE, FEIBA and immunoglobulin therapies. In addition, the company launched its Oncology business in 2015 through the acquisition of ONCASPAR as further described below, recording Oncology net sales of $87 million during the year.

In 2014, Baxalta’s global net sales totaled approximately $6.0 billion and increased 7% compared to 2013 at actual foreign currency exchange rates (8% excluding foreign currency exchange rate fluctuations). Hemophilia sales increased 7% due to strong demand for ADVATE and the success of new products like RIXUBIS. Inhibitor Therapies grew 14% due to increased demand and the promotion of the prophylaxis indication for FEIBA. BioTherapeutics and Immunologbulin Therapies net sales increased 9% and 4%, respectively, reflecting increased sales of immunoglobulin therapies, including HYQVIA, and albumin products. Refer to the “Results of Operations” section below for further discussion regarding the company’s sales.

The company’s net income from continuing operations was $928 million in 2015 as compared to $1.2 billion in 2014, a decrease of 22%. While the company drove sales growth across its businesses, net income from continuing operations was impacted by expenses related to special items such as charges related to the separation from Baxter and an increase in upfront and milestone payments to collaboration partners. Excluding the impact of special items, net income from continuing operations decreased 8% in 2015 compared to 2014 due to investments in the research and development (R&D) pipeline, incremental costs associated with operating as a standalone company and interest expense associated with the June 2015 debt issuance.

Net income from continuing operations in 2014 of $1.2 billion decreased 8% compared to $1.3 billion during 2013. The decrease was driven primarily by special items, including R&D charges of $217 million in 2014 for both upfront and milestone payments. Special items are further discussed in the “Results of Operations” section below. Excluding the impact of special items, net income from continuing operations increased 11% in 2014 as compared to 2013 due to sales growth, an improvement in gross margin percentage and increased income from equity method investments.

 

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New Product Launches

The company’s long-term prospects are influenced by the ability to successfully launch new products and therapies. During 2015, the company’s new product revenues totaled nearly $300 million. The company believes it has the capability to launch approximately 20 new products by 2020. Recent new products include:

 

    ADYNOVATE: Within the Hemophilia product category, the company launched ADYNOVATE in the United States in November 2015 following U.S. regulatory approval. ADYNOVATE is an extended half-life recombinant factor VIII treatment for hemophilia A, which offers a twice-weekly dosing schedule compared to the conventional 3-4 doses weekly.

 

    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 and Canada in 2014 and 2015, respectively, for the treatment of patients with acquired hemophilia A. Baxalta recorded its first commercial sale of OBIZUR in the United States in late 2014. Regulatory approval in Europe for the treatment of adults with acquired hemophilia A was received in November 2015.

 

    ONCASPAR: The company began selling its first oncology product through the acquisition of ONCASPAR (pegaspargase) from Sigma-Tau Finanziaria S.p.A (Sigma-Tau) in July 2015. Refer to the discussion below for further information regarding the acquisition of the ONCASPAR business.

 

    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 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.

The company has also launched or received regulatory approval in recent years for VONVENDI (as further discussed below), the prophylaxis indication for FEIBA, FLEXBUMIN 5% (part of the albumin product portfolio), BAXJECT III (a needleless reconstitution system for ADVATE allowing patients to prepare their treatment with fewer steps compared to the previous process) and myPKFit (a web-based individualized dosing device for prophylactic treatment of hemophilia A with ADVATE).

Research and Development and External Innovation

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 $1.2 billion, or 19% of global net sales, during 2015. The company believes its R&D pipeline will provide a catalyst for future growth. R&D expenses primarily relate to programs focused 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 potential royalty payments on future sales.

The company’s various collaborative arrangements include agreements with the following partners:

 

    Symphogen for the development and commercialization of up to six immuno-oncology therapies currently in early-stage development.

 

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    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.

 

    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.

 

    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 $390 million, $217 million and $78 million during 2015, 2014 and 2013, respectively.

In July 2015, the company entered into an agreement with SFJ Pharmaceuticals Group (SFJ) relating to adalimumab, a biosimilar being developed pursuant to the collaboration agreement with Momenta, whereby SFJ will fund up to $200 million of development costs related to adalimumab in exchange for payments in the event the product obtains regulatory approval in the United States or Europe.

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 (SuppreMol) for consideration of $228 million, obtaining its early-stage research programs related to treatment options for autoimmune and allergic diseases. In 2014, Baxalta acquired Chatham Therapeutics, Inc. (Chatham) for consideration of $147 million, obtaining its gene therapy programs related to treatments of hemophilia. 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.

In 2015, the company announced the opening of its global innovation center in Cambridge, Massachusetts, which serves as the company’s headquarters for R&D and certain other functions. The global innovation center 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 projects that have recently received regulatory approval or are pending regulatory approval and have either recently completed or are currently in late-stage clinical trials:

 

    VONVENDI: a recombinant therapy providing a pure von Willebrand disease (VWD) factor with customized dosing. VWD is a genetic disorder that results in impaired clotting with limited other treatment options. The company received U.S. regulatory approval in December 2015 and anticipates the product will be broadly available in the United States in late 2016.

 

    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.

 

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

 

    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, and, in January 2016, Baxalta announced that it had met its primary end point in its Phase III clinical trials for rheumatoid arthritis. There is also a Phase III clinical trial on-going for psoriasis, and, in early stage clinical trials, Coherus has demonstrated pharmacokinetic (PK) equivalence versus the innovator molecule. This program is part of a collaboration agreement with Coherus.

 

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    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 EU in May 2015 for second-line pancreatic cancer. This program is part of a collaboration agreement with Merrimack. In October 2015, Merrimack received regulatory approval for nal-IRI in the United States and Taiwan.

Refer to the section of this prospectus entitled “Business” for additional projects in the R&D pipeline, including earlier-stage R&D programs. 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.

Other Recent Events and Initiatives

ONCASPAR Business Acquisition

In July 2015, the company acquired the ONCASPAR (pegaspargase) product portfolio from Sigma-Tau, a privately held biopharmaceutical company based in Italy, through the acquisition of 100% of the shares of a subsidiary of Sigma-Tau for $890 million. Through the acquisition, the company gained the marketed biologic treatment ONCASPAR, the investigational biologic calaspargase pegol, and an established oncology infrastructure with clinical and sales resources. ONCASPAR is a first-line biologic used as part of a chemotherapy regimen to treat patients with acute lymphoblastic leukemia. It is currently marketed in the United States, Germany, Poland and certain other countries, and recently received EU approval. The company’s results of operations discussed below include the results of the acquired business beginning with the closing of the transaction in July 2015.

Capacity Expansion Efforts

To support expected long-term demand for currently marketed products and anticipated new product launches, the company has and continues to invest in several projects aimed at expanding capacity, including the following:

 

    In 2015, the company made progress in its construction of a state-of-the-art manufacturing facility in Covington, Georgia to support demand for plasma-derived therapies. Commercial production in the Covington, Georgia facility is expected begin in 2018.

 

    The company’s new recombinant biologic manufacturing facility in Singapore received FDA approval for the production of ADVATE bulk drug substance in November 2015, having previously received European regulatory approval in 2014.

 

    The company also has a manufacturing and supply agreement with Sanquin Blood Supply Foundation of the Netherlands (Sanquin), and in 2015 Sanquin received European regulatory approval for processing plasma into bulk drug substance for HYQVIA and GAMMAGARD LIQUID.

Divestiture of Vaccines Business

In December 2014, the company completed the divestiture of its commercial vaccines business and recorded an after-tax gain of $417 million. During 2015, the company recorded additional net after-tax gains of $31 million resulting primarily from working capital adjustments and the sale of certain vaccines-related R&D programs. The operating results and gains from the divestitures of the vaccines business have been reflected as discontinued operations for all periods presented. Refer to Note 18 to the audited consolidated and combined financial statements contained in this prospectus for additional information regarding the presentation of the vaccines business. Unless otherwise stated, financial results discussed herein reflect continuing operations.

 

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Basis of Preparation in the Historical Financial Statements

The historical financial statements reflect the consolidated results of operations of the company as an independent, publicly traded company beginning with the July 1, 2015 separation from Baxter. Prior to the separation, the company did not operate as an independent, standalone company, but rather as a part of a larger group of companies controlled by Baxter. The historical financial statements for periods prior to July 1, 2015 reflect the combined results of operations of the company as carved-out from the combined reporting entity of Baxter (carve-out financial statements). There are limitations inherent in the preparation of all carve-out 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 audited consolidated and combined financial statements provides a detailed description of the treatment of historical transactions in periods prior to the separation. During these periods, the company’s net income was most notably impacted by the following consequences of carve-out accounting and the separation:

 

    Baxter utilized a centralized treasury management system and neither cash nor debt was allocated to Baxalta in the carve-out financial statements. In connection with the separation, the capital structures of both companies were re-aligned, resulting in Baxalta incurring its own debt and having adequate cash to fund its operations. The indebtedness has caused Baxalta to record interest expense beginning in June 2015. The results of operations of the company did not include a significant amount of interest expense prior to June 2015. Any additional borrowings entered into in the future will further increase interest expense.

 

    Additionally, as foreign currency risk was also hedged through the centralized treasury management system prior to separation, the company was not allocated gains or losses related to foreign currency exposures on balance sheet positions in the carve-out financial statements. Following the separation, the company manages its foreign currency risk through various hedging activities and recognizes gains or losses related to foreign currency exposures on balance sheet positions through other (income) expense, net.

 

    Prior to the separation, the combined statements of income included 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 $284 million during the six months ended June 30, 2015 and $538 million, $596 million and $594 million during the years ended December 31, 2014, 2013 and 2012, respectively.

 

    The company has incurred certain separation costs, which are primarily associated with the design and establishment of Baxalta as a standalone public company. Included in results of operations are separation costs of $221 million and $56 million during the years ended December 31, 2015 and 2014, respectively. The company expects to incur additional separation costs in future periods, certain of which may be capitalized in relation to operating infrastructure, such as information technology.

 

    Income tax expense was computed on a separate company basis, as if operated as a standalone entity, a separate entity, or a separate consolidated group in each material jurisdiction in which the company operates. Income tax expense included in the combined financial statements prior to the separation may not be indicative of the company’s future expected tax rate.

 

    Concurrent with the separation, Baxalta entered into a manufacturing and supply agreement (MSA) with Baxter whereby Baxalta and Baxter produce certain products for one another at agreed upon terms. The MSA results in changes to both sales and cost of goods sold in periods after the separation because products were transferred at cost between Baxter and the businesses that comprised Baxalta prior to the separation.

 

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RESULTS OF OPERATIONS

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 years ended December 31, 2015, 2014 and 2013.

 

years ended December 31 (in millions)

   2015     2014     2013  

Gross Margin1

  

Intangible asset amortization expense

   $ (64   $ (16   $ (16

Separation costs

     (20     —          —     

Business optimization items2

     —          (1     (5
  

 

 

   

 

 

   

 

 

 

Total Special Items

   $ (84   $ (17   $ (21
  

 

 

   

 

 

   

 

 

 

Impact on Gross Margin Ratio

     (1.4 pts     (0.3 pts     (0.4 pts
  

 

 

   

 

 

   

 

 

 

Selling, General and Administrative Expenses1

  

Separation costs

   $ 186      $ 43      $ —     

Business development items

     16        —          —     

Plasma related litigation

     —          (10     84   

Business optimization items2

     1        —          16   

Branded Prescription Drug Fee

     —          26        —     

Turkey VAT charge

     —          —          8   
  

 

 

   

 

 

   

 

 

 

Total Special Items

   $ 203      $ 59      $ 108   
  

 

 

   

 

 

   

 

 

 

Impact on Selling, General and Administrative Expense Ratio

     3.3 pts        1.0 pts        1.9 pts   
  

 

 

   

 

 

   

 

 

 

Research and Development Expenses1

  

Upfront and milestone payments to collaboration partners

   $ 390      $ 217      $ 78   

Impairment charges and adjustments

     81        —          —     

Separation costs

     15        13        —     

Business optimization items2

     (9     21        24   
  

 

 

   

 

 

   

 

 

 

Total Special Items

   $ 477      $ 251      $ 102   
  

 

 

   

 

 

   

 

 

 

Other (Income) Expense, Net1

  

Other-than-temporary impairment charge

   $ —        $ 45      $ —     

Currency-related item

     25        —          —     

Business development items

     (4     —          —     

Change in fair value of contingent payment liabilities

     (97     124        18   
  

 

 

   

 

 

   

 

 

 

Total Special Items

   $ (76   $ 169      $ 18   
  

 

 

   

 

 

   

 

 

 

Income Tax Expense1

  

Impact of special items

   $ (156   $ (97   $ (105
  

 

 

   

 

 

   

 

 

 

Impact on Effective Tax Rate

     (0.1 pts     0.7 pts        (2.9 pts
  

 

 

   

 

 

   

 

 

 

Total Special Items, net of tax

   $ 532      $ 399      $ 144   
  

 

 

   

 

 

   

 

 

 

 

1  For Gross Margin, a number in parentheses represents an expense to the company, whereas in all other categories a number in parentheses represents a benefit.
2  Includes a portion allocated from Baxter related to shared activities or functions.

Management believes that providing the separate impact of the above items on the company’s results presented in accordance with generally accepted accounting principles in the United States (GAAP), when used in conjunction with the results presented in accordance with GAAP, can facilitate an additional analysis of the company’s results of operations, particularly in evaluating performance from one period to another. In periods prior to the separation, the special items identified above reflected the portions of special items reported by Baxter that were attributable to Baxalta.

 

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Intangible Amortization Expense

Intangible asset amortization expense, which includes amortization of an inventory fair value step-up during the year ended December 31, 2015 related to the acquisition of ONCASPAR, 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.

Additional items as described below are identified as special items because they are highly variable, difficult to predict, and of a size that may substantially impact the company’s reported operations for a period.

Upfront and Milestone Payments to Collaboration Partners

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” section below for additional information regarding the company’s upfront and milestone payments to collaboration partners.

Business Optimization Items

The company has participated in business optimization plans initiated by Baxter prior to the separation, which were in an effort to streamline international operations, rationalize manufacturing facilities, enhance general and administrative infrastructure and re-align certain R&D activities and programs. The company’s results for the periods presented above were impacted by charges associated with these plans, as well as benefits from adjustments to business optimization charge estimates. The amount of business optimization charges or benefits incurred during the current and prior year periods and the impacted statement of income line items are presented in the table above.

The net benefit or charge in periods prior to the separation included a portion allocated from Baxter related to shared functions or activities.

Separation Costs

During 2015 and 2014, the company incurred costs to separate from Baxter and establish Baxalta as an independent, standalone public company. The amount of separation costs incurred during the current and prior year periods and the impacted statement of income line items are presented in the table above.

Plasma Related Litigation

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

Change in Fair Value of Contingent Payment Liabilities

The company recorded gains and losses in other (income) expense, net from changes in the fair value of contingent payment liabilities associated with previously completed business combinations. Significant changes in fair value are generally driven by changes in the estimated probability of achieving milestones or estimated product sales projections. Gains and losses during the periods presented above primarily include the following:

 

    Gain of $66 million during 2015 associated with the 2014 acquisition of AesRx, LLC (AesRx).

 

    Gain of $33 million during 2015 and losses of $124 million and $18 million during 2014 and 2013, respectively, associated with the 2013 acquisition of OBIZUR and related assets from Inspiration BioPharmaceuticals, Inc. and Ipsen Pharma S.A.S. (Inspiration / Ipsen).

 

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Other Special Items Impacting 2015

 

    The company recorded $81 million of impairment charges within R&D expenses primarily resulting from a decrease in the fair value of in-process R&D (IPR&D) acquired as part of the 2014 acquisition of AesRx. The fair value decreased as a result of the company’s decision in 2015 not to pursue further development activities related to the acquired project.

 

    The company incurred $12 million of non-recurring net business development expenses primarily associated with the acquisition of the ONCASPAR business from Sigma-Tau within selling, general and administrative expenses and other (income) expense, net.

 

    The company incurred $25 million of unrealized foreign currency losses in other (income) expense, net during the fourth quarter of 2015 following an announcement in December by the Argentine government lifting currency controls, resulting in the Argentine Peso devaluing nearly 30% in one day.

Other Special Items Impacting 2014

 

    During 2014, selling, general and administrative expenses 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 Special Items Impacting 2013

 

    During 2013, selling, general and administrative expenses included an $8 million charge related to VAT matters in Turkey.

Special Items Impacting Income Tax Expense

Income tax expense in all periods 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)

   2015      2014      2013      2015     2014     2015     2014  

United States

   $ 3,315       $ 3,016       $ 2,861         10     5     10     5

International

     2,833         2,936         2,694         (4 %)      9     13     11
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 6,148       $ 5,952       $ 5,555         3     7     11     8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency unfavorably impacted the net sales growth rate by 8 and 1 percentage points in 2015 and 2014, respectively, principally due to the strengthening of the U.S. dollar relative to the Euro, Russian Ruble and Japanese Yen.

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, can facilitate an additional analysis of the company’s results of operations, particularly in evaluating performance from one period to another.

 

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

Hematology

 

                   Percent change  
                          At actual
currency rates
    At constant
currency rates
 

years ended December 31 (in millions)

   2015      2014      2013      2015     2014     2015     2014  

Hemophilia

                 

United States

   $ 1,339       $ 1,281       $ 1,216         5     5     5     5

International

     1,501         1,703         1,570         (12 %)      8     4     11
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,840       $ 2,984       $ 2,786         (5 %)      7     4     8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Inhibitor Therapies

                 

United States

   $ 295       $ 219       $ 194         35     13     35     13

International

     492         525         457         (6 %)      15     9     16
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 787       $ 744       $ 651         6     14     16     15
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Hematology

   $ 3,627       $ 3,728       $ 3,437         (3 %)      8     7     10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

Net sales growth in 2015 and 2014 was the result of strong global demand for recombinant factor VIII therapies, including ADVATE.

 

    In the United States, recombinant factor VIII sales growth in 2015 was driven by increased volumes and modest pricing improvements. Volume growth was driven by increased prophylactic use and the launch of ADYNOVATE, the company’s extended half-life factor VIII treatment for hemophilia that was approved in the United States in November 2015. The company experienced modest market share loss due to entrance of new competition which partially offset the above factors. U.S. sales growth in 2014 was driven primarily by increased volumes.

 

    Internationally, growth in both periods was driven by penetration into certain markets, including increased ADVATE shipments to Brazil as part of the company’s partnership with Hemobrás, particularly in 2014 compared to 2013.

 

    Globally, recombinant factor VIII therapies contributed approximately 4 and 7 percentage points to the Hemophilia product category’s net sales growth rate for 2015 and 2014, respectively.

The launch and growth of RIXUBIS, which was first introduced in the U.S. market in 2013 and certain other markets beginning in 2015, contributed approximately 1 percentage point to the Hemophilia net sales growth rate in both 2015 and 2014.

The company expects continued competition from new entrants; however, long-term growth in the Hemophilia product category is expected to be driven by strong underlying global demand, further penetration in markets outside the United States, and launches of new therapies, including ADYNOVATE, across a variety of geographies.

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.

 

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Growth in net sales during 2015 and 2014 was driven by strong global sales of the company’s plasma-based inhibitor bypass therapy, FEIBA. Globally, FEIBA contributed approximately 12 and 15 percentage points to the Inhibitor Therapies net sales growth rate in 2015 and 2014, respectively.

 

    In the United States, strong FEIBA growth in both periods was driven by increased volume associated with advancement in prophylactic use, with modest pricing improvements also benefitting 2015 net sales growth.

 

    Internationally, FEIBA growth in both periods resulted from expanded use and enhanced penetration into new and existing markets.

Net sales growth for Inhibitor Therapies in 2015 also reflected a modest impact from the U.S. launch of OBIZUR in late 2014, a recombinant porcine factor VIII therapy for the treatment of acquired hemophilia A.

Immunology

 

                   Percent change  
                          At actual
currency rates
    At constant
currency rates
 

years ended December 31 (in millions)

   2015      2014      2013      2015     2014     2015     2014  

Immunoglobulin Therapies

                 

United States

   $ 1,350       $ 1,272       $ 1,228         6     4     6     4

International

     400         405         388         (1 %)      4     17     7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,750       $ 1,677       $ 1,616         4     4     9     5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BioTherapeutics

                 

United States

   $ 258       $ 244       $ 223         6     9     6     9

International

     426         303         279         41     9     56     10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 684       $ 547       $ 502         25     9     34     10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Immunology

   $ 2,434       $ 2,224       $ 2,118         9     5     15     6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

Net sales growth during 2015 and 2014 was driven by increased global demand for immunoglobulin therapies, including GAMMAGARD LIQUID and HYQVIA.

 

    The company launched HYQVIA, a differentiated immunoglobulin therapy for patients with primary immunodeficiency, in the United States during the second half of 2014 and in certain European markets beginning in the second half of 2013, which contributed to the product category’s net sales growth rate in both periods.

To support expected long-term demand for the company’s immunoglobulin therapies and other plasma-based therapies, Baxalta is expanding its capacity through ongoing yield improvements, a contract manufacturing services agreement with Sanquin and construction of a new manufacturing site in Covington, Georgia.

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, as well as revenue from manufacturing and supply arrangements.

Net sales growth in 2015 was primarily impacted by:

 

   

Revenues related to the MSA with Baxter of $71 million in 2015, which contributed approximately 13 percentage points to the BioTherapeutics net sales growth rate. In connection with the separation,

 

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Baxalta and Baxter entered into the MSA whereby Baxalta manufactures and sells certain products and materials to Baxter. Baxalta began recording revenues associated with the MSA with Baxter during 2015, which are reported in international sales.

 

    Increased sales of albumin products, which contributed approximately 11 points to the product category’s net sales growth rate, driven by increased volumes in the United States and China.

 

    Benefit from revenues recorded from a contract manufacturing agreement related to the divested commercial vaccines business, which are reported in international sales.

Net sales growth in 2014 was primarily driven by increased demand for albumin products within the United States and several emerging markets, partially offset by 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.

Oncology

 

                Percent change  
                      At actual
currency rates
    At constant
currency rates
 

years ended December 31 (in millions)

  2015     2014     2013     2015     2014     2015      2014  

Oncology

              

United States

  $ 73      $ —        $ —          N/M        N/M        N/M         N/M   

International

    14        —          —          N/M        N/M        N/M         N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Oncology

  $ 87      $ —        $ —          N/M        N/M        N/M         N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

N/M—not meaningful

Oncology includes sales of the company’s therapies to treat patients with cancer. The company began reporting Oncology revenues during 2015 following the acquisition of the ONCASPAR business, which the company completed in July 2015. ONCASPAR is a first-line biologic used as part of a chemotherapy regimen to treat patients with acute lymphoblastic leukemia. The company’s R&D pipeline has the potential to deliver a wide range of new oncology therapies, including certain therapies in late-stage clinical trials or pending regulatory approvals.

Gross Margin and Selling, General and Administrative Expenses

 

                       Percent Change  

years ended December 31 (as a percent of net sales)

   2015     2014     2013     2015      2014  

Gross margin

     61.2     59.0     58.1     2.2pts         0.9 pts   

Selling, general and administrative expenses

     23.5     17.7     18.3     5.8pts         (0.6 pts

Gross Margin

The special items identified above had an unfavorable impact of 1.4, 0.3 and 0.4 percentage points on the gross margin percentage during 2015, 2014 and 2013, respectively. Refer to the “Special Items” section above for additional details.

Excluding the impact of special items, gross margin in 2015 reflects a favorable impact from foreign currency exchange rate fluctuations and hedging activities, benefits from increased sales of higher-margin products such as ADVATE and FEIBA, and a favorable contribution from ONCASPAR sales. Partially offsetting the above factors was the impact of lower-margin revenues recorded in 2015 associated with the MSA with Baxter.

 

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In 2014 as compared to 2013, gross margin percentage improved primarily due to growth in higher margin products such as ADVATE and FEIBA and lower pension expense allocated from Baxter, partially offset by an unfavorable impact from foreign currency exchange rate fluctuations.

Selling, General and Administrative Expenses

Following the July 1, 2015 separation from Baxter, the composition of Baxalta’s selling, general and administrative expenses has changed. The company no longer receives a significant allocation of costs from Baxter associated with certain corporate or other functions, and instead incurs costs associated with operating as a standalone public company, including expenses associated with certain separation-related agreements entered into with Baxter. Refer to Note 17 to the audited consolidated and combined financial statements contained in this prospectus for further information regarding the separation-related agreements.

The special items identified above had an unfavorable impact of 3.3, 1.0 and 1.9 percentage points on the selling, general and administrative expense ratio during 2015, 2014 and 2013, respectively.

In addition to the impact of special items, 2015 was impacted by additional costs associated with operating as a standalone public company, including expenses related to the transition services agreement with Baxter, which in aggregate exceeded allocated costs from Baxter during the prior year period. In addition, the company’s selling, general and administrative expense ratio in 2015 was unfavorably impacted by costs supporting the company’s emerging oncology business, an increase in investments related to new product launches, including for the ADYNOVATE launch, launch excellence initiatives and other investments supporting expansion of the company’s commercial and international operations.

In 2014 as compared to 2013, excluding the impact of special items, the selling, general and administrative expense ratio increased primarily due to select investments and spending on marketing and promotional programs for new launches and initiatives partially offset by leverage from higher sales, savings from business optimization initiatives and lower pension expense allocated from Baxter.

Business Optimization Items

The company has participated in business optimization plans initiated by Baxter prior to the separation, which were in an effort to streamline international operations, rationalize manufacturing facilities, enhance general and administrative infrastructure and re-align or cancel certain R&D activities and programs. The related net charges or benefits in 2015, 2014 and 2013 are presented above under the heading “Special Items.” The company estimates that it has fully realized savings associated with past initiatives and it has not implemented significant new business optimization plans following its separation from Baxter. Refer to Note 7 to the audited consolidated and combined financial statements contained in this prospectus for further information regarding business optimization items.

Research and Development Expenses

 

                       Percent change  

years ended December 31 (in millions)

   2015     2014     2013     2015     2014  

Discovery, clinical and lifecycle management

   $ 425      $ 340      $ 289        25     18

Upfront and milestone payments to collaboration partners

     390        217        78        80     178

Other research and development expenses

     361        263        228        37     15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expenses

   $ 1,176      $ 820      $ 595        43     38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

R&D expense as a % of sales

     19.1     13.8     10.7     5.3pts        3.1pts   

 

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Discovery, clinical and lifecycle management 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 growth in discovery, clinical and lifecycle management R&D expenses in 2015 as compared to 2014 was impacted by the following:

 

    Increased development costs supporting oncology programs, including nal-IRI for the treatment of metastatic pancreatic cancer, and pacritinib for the treatment of myelofibrosis;

 

    Increased investments in research projects related to the development and manufacture of hemophilia treatments, including gene therapy development.

 

    Increased costs supporting development of treatments using immunoglobulin therapies.

 

    An agreement with SFJ Pharmaceuticals Group (SFJ) that the company entered into in 2015 for the reimbursement of certain biosimilar development costs, which resulted in less R&D expenses for the company in 2015 compared to 2014. Biosimilar development costs in 2015 funded by SFJ were $58 million. The SFJ agreement is further discussed in Note 5 to the audited consolidated and combined financial statements contained in this prospectus.

 

    Partial offset from the impact of foreign currency fluctuations, including strengthening of the U.S. dollar relative to the Euro in 2015 as compared to 2014.

The growth in discovery, clinical and lifecycle management R&D expenses in 2014 as compared to 2013 included the following:

 

    Increased expenses supporting the development of ADYNOVATE, which was submitted for U.S. regulatory approval in December 2014 and launched in November 2015.

 

    Increased investments related to biosimilar development.

 

    Partial offset for lower expenses associated with the company’s Alzheimer’s program, which was suspended in 2013 following a Phase III trial that did not meet its primary endpoint.

Upfront and milestone payments to collaboration partners during 2015 included an accrued expense of $175 million for an upfront payment to Symphogen related to the development of early-stage immuno-oncology therapies, as well as milestone payments totaling $215 million. Milestone payments included payments to Merrimack related to the development of nal-IRI, a pancreatic cancer drug, Coherus related to the development of a biosimilar to ENBREL® (etanercept), and CTI BioPharma Corp. (CTI BioPharma) related to the development of pacritinib.

Upfront and milestone payments to collaboration partners during 2014 included an upfront payment of $100 million to Merrimack and milestone payments totaling $117 million primarily to Coherus, CTI BioPharma and Momenta for the development of biosimilars.

Upfront and milestone payments to collaboration partners in 2013 included payments totaling $78 million to Coherus and CTI BioPharma.

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, as well as special items such as impairment charges, business optimization items and separation costs. The following special items were reported in other research and development expenses during the periods presented above:

 

    IPR&D impairment charge of $81 million during 2015, primarily related to IPR&D acquired in the 2014 acquisition of AesRx.

 

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    Business optimization items consisting of a $9 million benefit during 2015 and net charges of $21 million and $24 million during 2014 and 2013, respectively.

 

    Separation costs of $15 million and $13 million during 2015 and 2014, respectively.

Excluding the impact of the special items described above, other R&D expenses increased 20% during 2015 and 12% during 2014, primarily due to investments in infrastructure to support a standalone R&D function and several key projects in the company’s R&D pipeline, as well as increased expenses related to medical affairs.

Net Interest Expense

On June 23, 2015, Baxalta issued debt directly attributable to its business and began recording interest expense. Net interest expense during 2015 of $48 million primarily reflects interest expense associated with the June 2015 debt issuance and is net of portions capitalized, amortization of deferred hedging gains and losses, and interest income. The June 2015 debt issuance is further discussed in the “Liquidity and Capital Resources” section below.

Prior to the June 2015 debt issuance, Baxter’s third-party debt and the related interest expense were not allocated to the company as the company was not the legal obligor of the debt and Baxter borrowings were not directly attributable to the company’s business.

Other (Income) Expense, Net

During 2015, other (income) expense, net was $102 million of income and consisted primarily of the following items:

 

    Gains of $97 million, a special item, due to adjustments in the fair value of contingent payment liabilities associated primarily with the 2014 acquisition of AesRx and the 2013 acquisition of Chatham.

 

    Gains from the sale of investments and equity method income totaling $31 million.

 

    Unrealized foreign currency losses of $25 million following an announcement from the Argentine government lifting currency controls, resulting in the Argentine Peso devaluing nearly 30% in one day, a special item.

 

    Other-than-temporary impairment charges of $14 million due to the duration of declines in fair value of three of the company’s investments.

During 2014, other (income) expense, net was $104 million of expense and consisted primarily of the following items:

 

    Loss of $124 million, a special item, resulting from an increase in the fair value of a contingent payment liability associated with the acquisition of OBIZUR and related assets from Inspiration / Ipsen.

 

    Other-than-temporary impairment charge of $45 million, a special item, to write-down the company’s investment in the common stock of Onconova to its fair value.

 

    Income from equity method investments of $64 million which primarily represented distributions from funds that sold portfolio companies as well as gains from the sale of certain investments.

During 2013, other (income) expense, net was $1 million of expense and consisted primarily of the following items:

 

    Income from equity method investments of $23 million.

 

    Loss of $18 million, a special item, resulting from an increase in the fair value of a contingent payment liability associated with the acquisition of OBIZUR and related assets from Inspiration / Ipsen.

 

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Income Taxes

Effective Income Tax Rate

The effective income tax rate for continuing operations was 22.5% in 2015, 22.6% in 2014 and 20.1% in 2013. The company’s effective income tax rate differs from the U.S. federal statutory rate each year due to state and local taxes, certain operations that are subject to tax incentives and foreign taxes that are different from the U.S. federal statutory rate.

The average foreign effective tax rate on international pre-tax income was 9.0%, 5.4% and 5.3% for 2015, 2014 and 2013, respectively. The company’s average foreign effective tax rate was lower than the U.S. federal statutory rate as a result of tax incentives in jurisdictions outside of the United States, as well as foreign earnings in tax jurisdictions with lower statutory rates than the United States. In addition, the effective tax rate can be affected each period by discrete factors and events. Refer to Note 14 to the audited consolidated and combined financial statements contained in this prospectus for further information regarding the company’s income taxes.

The effective income tax rate in 2015 was comparable to the effective tax rate in 2014. The impact of an increase in charges related to the separation that were deductible at tax rates higher than the effective rate and a decrease in the non-deductible charge for the Branded Prescription Drug Fee were largely offset by an increase in charges associated with upfront and milestone payments made to collaboration partners that were deductible at tax rates lower than the effective tax rate.

The effective income tax rate in 2014 increased as compared to 2013 primarily due to an increase in the company’s Branded Prescription Drug Fee, 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 reversals of reserves for uncertain tax position benefits.

LIQUIDITY AND CAPITAL RESOURCES

The company believes that its existing capital resources, as supplemented by its cash flows generated from operating activities, will be adequate to satisfy its operations and capital needs for the foreseeable future. However, its ability to fund its operations and capital needs could be adversely affected if there is a material decline in the demand for the company’s products or in the solvency of its customers or suppliers, deterioration in the company’s key financial ratios or credit ratings or other significant unfavorable changes in conditions.

Financial Condition

The following table summarizes components of the company’s financial condition as of December 31, 2015 and 2014:

 

as of December 31 (in millions)

   2015      2014  

Cash and equivalents

   $ 1,001       $ —     
  

 

 

    

 

 

 

Current assets (including cash and equivalents)

   $ 4,708       $ 3,093   

Current liabilities

     1,911         1,640   
  

 

 

    

 

 

 

Working capital

   $ 2,797       $ 1,453   
  

 

 

    

 

 

 

Current maturities of long-term debt and capital lease obligations

   $ 3       $ —     

Long-term debt and capital lease obligations

     5,265         275   
  

 

 

    

 

 

 

Total debt and capital lease obligations

   $ 5,268       $ 275   
  

 

 

    

 

 

 

 

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Cash and Equivalents

The company’s investment policy allows it to invest its cash in highly liquid investment vehicles, including institutional money market funds, certificates of deposits or time deposit accounts.

Prior to the separation, Baxalta participated in Baxter’s centralized treasury management system, which included centralized cash pooling and overall financing arrangements. At December 31, 2014, Baxalta did not report cash and equivalents on its balance sheet due to its participation in Baxter’s centralized treasury management system.

Working Capital

The company’s working capital is calculated as current assets, including cash and equivalents, less current liabilities. The increase in working capital is driven by $1.0 billion of cash and equivalents as of December 31, 2015, compared to zero cash and equivalents in working capital as of December 31, 2014 due to the company’s participation in Baxter’s centralized treasury management system prior to the separation. Refer to the discussion below under the heading “Historical Cash Flow Trends” for information regarding changes in the company’s cash and equivalents.

Excluding cash and equivalents, the company’s working capital as of December 31, 2015 of $1.8 billion increased compared to $1.5 billion as of December 31, 2014, driven by the following factors:

 

    Increases in inventory and receivables (including due from Baxter) due to growth in the company’s commercial operations.

 

    Decrease in income tax payables due largely to the basis of preparation included in the carve-out financial statements, as further discussed in the “Historical Cash Flow Trends” section below.

Partially offsetting the factors above was an increase in accounts payable and other accrued liabilities, including a $175 million accrual for an upfront collaboration payment made to Symphogen in January 2016.

Debt and Capital Lease Obligations

Senior Notes

On June 23, 2015, the company issued senior notes with a total aggregate principal amount of $5 billion. The company used the net proceeds to make a cash distribution of $4 billion to Baxter as partial consideration for the contribution of net assets to the company in connection with the separation, and the remainder has been or is intended to be used for general corporate purposes, including funding of acquisitions. The $4 billion cash distribution to Baxter was made on June 23, 2015. The $5 billion in senior notes consist of the following tranches:

 

    $375 million aggregate principal of senior notes bearing a floating coupon rate of three-month LIBOR plus 0.780% and maturing in June 2018.

 

    $375 million aggregate principal of senior notes bearing a fixed coupon rate of 2.000% and maturing in June 2018.

 

    $1.0 billion aggregate principal of senior notes bearing a fixed coupon rate of 2.875% and maturing in June 2020.

 

    $500 million aggregate principal of senior notes bearing a fixed coupon rate of 3.600% and maturing in June 2022.

 

    $1.75 billion aggregate principal of senior notes bearing a fixed coupon rate of 4.000% and maturing in June of 2025.

 

    $1.0 billion aggregate principal of senior notes bearing a fixed coupon rate of 5.250% and maturing June 2045.

 

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Refer to Note 9 to the audited consolidated and combined financial statements contained in this prospectus for information regarding interest rate derivative contracts the company has entered into related to the senior notes.

Prior to the June 2015 debt issuance, no debt was allocated to Baxalta because Baxalta was not the legal obligor of the debt and the borrowings were not directly attributable to Baxalta’s business.

Capital Lease Obligations

The company leases certain facilities under capital leases. During 2014, the company entered into a leasing arrangement for a new global innovation center in Cambridge, Massachusetts and recorded a capital lease obligation of $263 million. During 2015, the company entered into a leasing arrangement for its corporate headquarters in Bannockburn, Illinois and recorded a capital lease obligation of $41 million. As of December 31, 2015 and 2014, the company’s total capital lease obligations, including current portion, were $319 million and $275 million, respectively.

Sources and Uses of Cash

Baxalta expects its principal uses of cash in the future would be primarily to fund its operations, working capital needs, capital expenditures, repayment of borrowings, strategic investments and dividends paid to shareholders. Refer to the “Historical Cash Flow Trends” section below for further discussion of the company’s cash flows during the years ended December 31, 2015, 2014 and 2013.

The company’s principal sources of cash include its operating cash flows and current or future financing arrangements, including the June 2015 senior note issuance described above and liquidity provided by credit facilities, including those described below. Pursuant to the merger agreement with Shire, there are limitations on the amount of future indebtedness the company can incur.

In July 2015, the company entered into a credit agreement providing for a senior revolving credit facility that provides the company with access to an aggregate principal amount of up to $1.2 billion maturing in 2020, of which no amounts are currently outstanding. Effective November 12, 2015 the company entered into Amendment No. 1 to the credit agreement. The amendment narrowed the definition of “Change of Control.” The other material terms of the credit agreement, including covenants, remained unchanged. The facility enables the company to borrow funds on an unsecured basis at variable interest rates, and contains various financial and other covenants, including a net leverage ratio covenant and an interest coverage ratio covenant, as well as events of default with respect to the company. The credit facility also provides for the issuance of letters of credit, which reduces the maximum capacity of this facility. At December 31, 2015, the amount of letters of credit issued was insignificant.

The company also entered into a Euro-denominated senior revolving credit facility in an aggregate principal amount of up to €200 million maturing in 2020, with similar terms as the above credit facility, of which no amounts are currently outstanding. Effective November 12, 2015, the company entered into an amendment to this credit facility. Similar to the amendment discussed above, this amendment narrows the definition of “Change of Control.” The non-performance of any financial institution supporting either of the credit facilities would reduce the maximum capacity of these facilities by each institution’s respective commitment.

A significant portion of the company’s net cash provided 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.

 

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Dividends and Share Repurchase Authorization

On July 28, 2015, Baxalta’s Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, which was paid on October 1, 2015 to shareholders of record as of the close of business on September 4, 2015. On November 28, 2015, Baxalta’s Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, which was paid on January 4, 2016 to shareholders of record as of the close of business on December 17, 2015. On February 23, 2016, Baxalta’s Board of Directors declared a quarterly cash dividend of $0.07 per share of common stock, which was paid on April 1, 2016 to shareholders of record as of the close of business on March 10, 2016. Pursuant to the merger agreement with Shire, the company is prohibited from declaring a quarterly dividend in excess of $0.07 per share.

On July 28, 2015, Baxalta’s Board of Directors approved a share repurchase authorization which allowed the company to repurchase up to $1 billion of its common stock. The company did not repurchase any of its common stock during 2015 and, pursuant to the merger agreement with Shire, the company may not repurchase or otherwise acquire its own common stock.

Historical Cash Flow Trends

The company’s historical cash flows reflect both continuing and discontinued operations.

 

years ended December 31 (in millions)

   2015      2014      2013  

Net cash provided from operations

   $ 799       $ 1,373       $ 1,548   

Net cash used for investing activities

     (2,293      (501      (977

Net cash provided from (used for) financing activities

     2,492         (872      (571

Effect of foreign exchange rate changes on cash and  equivalents

     3                   
  

 

 

    

 

 

    

 

 

 

Change in cash and equivalents

   $ 1,001       $       $   
  

 

 

    

 

 

    

 

 

 

Net Cash Provided From Operations

The decrease in net cash provided by operations during 2015 as compared to the prior year was driven by lower net income excluding certain non-cash charges and gains. Sales growth and the resulting growth in gross profit was more than offset by increased expenses, including from separation costs and increased investments in the R&D pipeline. Also contributing to the decrease in net cash provided from operations was an increase in certain working capital items, including accounts receivables and inventories, as the company supports growth in its commercial operations. The basis of preparation of the carve-out financial statements also unfavorably impacted the change in operating cash flows:

 

    The company’s 2015 net cash provided from operations reflects an annual settlement of the company’s current income tax payable account on January 1, 2015 of $356 million and an additional $119 million paid to taxing authorities as a stand-alone company in the second half of the year.

 

    The company also incurred operating cash outflows associated with interest expense in 2015 which compares to no interest payments in 2014.

The company’s net cash provided from operations for the second half of 2015 (period following the separation) was $608 million, which reflected growth as compared to net cash provided by operations of $191 million during the first six months of 2015 (period before the separation). The growth was driven in part by:

 

    The basis of preparation of the carve-out financial statements in periods prior to the separation regarding the current income tax payable, as described above, resulting in higher outflows in the first half of 2015 as compared to the second half.

 

    Lower cash outflows associated with working capital, including the impact of the annual settlement of certain incentive compensation programs during the first half of the year.

 

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Net cash provided by operations decreased in 2014 as compared to 2013 as the impact of sales growth was more than offset 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.

Net Cash Used For Investing Activities

The company’s net cash used for investing activities increased in 2015 as compared to 2014 due primarily to increased cash outflows for acquisitions and a 2014 cash inflow of $640 million from the sale of the commercial vaccines business. The divestiture of the commercial vaccines business drove the decrease in 2014 as compared to 2013.

Cash outflows for acquisitions, net of cash acquired during 2015, 2014 and 2013 were $1.2 billion, $185 million and $111 million, respectively. During 2015, cash outflows for acquisitions, net of cash acquired included $890 million for the acquisition of the ONCASPAR business from Sigma-Tau and $228 million for the acquisition of SuppreMol, a privately held biopharmaceuticals company based in Germany. During 2014, cash outflows for acquisitions, net of cash acquired included $100 million for an upfront collaboration payment to Merrimack and $70 million and $15 million for the acquisitions of Chatham and AesRx, respectively. During 2013, cash outflows for acquisitions, net of cash acquired, included $51 million for the acquisition of OBIZUR and related assets from Inspiration / Ipsen, $30 million for an upfront collaboration payment to Coherus and $30 million for an upfront collaboration payment to CTI BioPharma.

Capital expenditures during 2015, 2014 and 2013 were $1.2 billion, $970 million and $797 million, respectively. The increase in capital expenditures in 2015 compared to 2014 was driven by several projects aimed at improving manufacturing capacity for the company’s products, including increased expenditures associated with the construction of the Covington, Georgia manufacturing facility. A significant portion of the construction has been completed as of December 31, 2015 and commercial production is expected to begin in 2018. The increase in 2015 was also driven by expenditures related to the company’s corporate headquarters in Bannockburn, Illinois and its global innovation center located in Cambridge, Massachusetts. In 2014 as compared to 2013, capital expenditures associated with the Covington, Georgia facility primarily drove the increase.

Net Cash Provided From (Used For) Financing Activities

Proceeds from the issuance of long-term debt totaled $4.9 billion during 2015 and reflected cash inflows from the debt issuance described above, and were net of a debt discount and deferred issuance costs totaling $59 million. The company also reported proceeds and excess tax benefits from share-based payments under employee benefit plans of $64 million and dividend payments of $47 million during 2015.

Other cash provided from or used for financing activities during the periods presented above primarily reflected net cash outflows from transactions with Baxter, which were $2.5 billion, $856 million and $571 million during 2015, 2014 and 2013, respectively. The net transactions with Baxter during 2015 included a $4 billion cash distribution to Baxter as partial consideration for the contribution of assets to Baxalta from Baxter in connection with the separation and cash contributions received from Baxter in connection with the formation of Baxalta legal entities. As of July 1, 2015, outstanding pre-separation receivables and payables with Baxter were reclassified from net parent company investment to due to or from Baxter in the consolidated balance sheet. The settlement of these outstanding pre-separation receivables and payables with Baxter are reported in financing activities in periods following the separation because an operating cash flow associated with these transactions would have already been reported prior to the separation.

Concentration 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, Italy and Brazil. As of December 31, 2015,

 

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the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $80 million, of which Greece receivables represented an immaterial balance. The company also has significant accounts receivable related to its Hemobrás partnership in Brazil totaling $207 million at December 31, 2015.

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. While the company believes that its allowance for doubtful accounts as of December 31, 2015 is adequate, future governmental actions and customer-specific factors may require the company to re-evaluate the collectability of its receivables and the company could potentially incur additional credit losses that materially impact its results of operations.

Off-Balance Sheet Arrangements

Baxalta periodically enters into off-balance sheet arrangements. Certain contingencies arise in the normal course of business and, in accordance with GAAP, are not recorded in the consolidated or combined balance sheet (such as contingent milestone payments associated with the company’s collaboration agreements). Also, upon resolution of uncertainties, the company may incur charges in excess of presently established liabilities for certain matters (such as contractual indemnifications).

The company’s significant off-balance sheet arrangements and contingencies are discussed in the consolidated and combined financial statements. Refer to Note 5, Note 11 and Note 16 to the audited consolidated and combined financial statements contained in this prospectus for information regarding collaboration agreements, indemnifications and legal contingencies.

Contractual Obligations

As of December 31, 2015, 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
 

Debt and capital lease obligations

   $ 5,450       $ 3       $ 799       $ 1,036       $ 3,612   

Interest on debt and capital lease obligations(a)

     2,455         170         338         307         1,640   

Operating leases

     382         58         98         65         161   

Other long-term liabilities(b)

     712         5         82         80         545   

Purchase obligations(c)

     1,771         602         624         427         118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contractual obligations

   $ 10,770       $ 838       $ 1,941       $ 1,915       $ 6,076   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)  Interest payments on capital lease obligations are calculated for future periods using interest rates in effect at the end of 2015. The projected payments only pertain to obligations outstanding at December 31, 2015.
(b)  Other long-term liabilities include long-term obligations recorded on the company’s consolidated balance sheet as of December 31, 2015 that are not presented separately within the table above. They include, among other items, the fair value of contingent payment liabilities associated with acquisitions and deferred tax liabilities. 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.
(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.

 

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The following items have been excluded from 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. Obligations associated with these arrangements have not been incurred and as such have not been recorded on the company’s consolidated balance sheet. Potential future milestone payments associated with the company’s collaborations were approximately $2.1 billion as of December 31, 2015 which excludes potential royalty payments. Of the potential $2.1 billion, the company anticipates less than $235 million of potential payments will become payable in 2016.

 

    An unfunded commitment at December 31, 2015 of $79 million as a limited partner in multiple investment companies, in which the timing of future payments is uncertain.

 

    Long-term liability relating to gross unrecognized tax benefits of $17 million at December 31, 2015, in which the timing of reversal is uncertain.

 

    Long-term liabilities relating to pension and other post-employment benefits of $499 million and related cash outflows, in which timing of funding is uncertain and dependent on future movements in interest rates and investment returns, changes in laws and regulations and other variables.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Risk

The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Turkish Lira, Russian Ruble, Chinese Renminbi, Colombian Peso and Argentine Peso. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative financial instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and shareholders’ equity volatility relating to foreign exchange. Financial market and currency volatility may limit the company’s ability to hedge these exposures in a cost-effective manner.

The company may use options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions denominated in foreign currencies and recognized assets and liabilities. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of December 31, 2015 is 12 months. The company also enters into derivative instruments to hedge certain intercompany and third-party receivables and payables and debt denominated in foreign currencies.

As part of its risk-management program, the company performs a sensitivity analysis to assess potential changes in the fair value of its foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at December 31, 2015, while not predictive in nature, indicated that if the U.S. dollar uniformly weakened by 10% against all currencies, on a net-of-tax basis, the net asset balance of $13 million would decrease by $43 million resulting in a net liability.

The sensitivity analysis model recalculates the fair value of the foreign exchange option and forward contracts outstanding at December 31, 2015 by replacing the actual exchange rates at December 31, 2015 with exchange rates that are 10% weaker to the actual exchange rates for each applicable currency. All other factors are held constant. The sensitivity analysis disregards the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analysis also disregards the offsetting change in value of the underlying hedged transactions and balances.

 

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The consolidated statement of income is exposed to currency risk from various transactions, including intercompany receivables and payables, where the denominated currency of the transaction differs from the functional currency of one or more of the company’s subsidiaries. A sensitivity analysis that measures the unfavorable impact to income from continuing operations before income taxes from a hypothetical 10% strengthening of the U.S. dollar relative to multiple currencies indicates an unfavorable impact of $25 million as of December 31, 2015. This sensitivity analysis holds all other variables equal and does not reflect any hypothetical benefits that would be derived from hedging activities, including cash holdings in similar foreign currencies, that the company has historically utilized to mitigate its exposure to movements in foreign exchange rates.

The company is also exposed to translation risk on non-U.S. dollar-denominated net assets. A sensitivity analysis indicated that a hypothetical 10% strengthening of the U.S. dollar relative to the Euro, Japanese Yen, British Pound, Swiss Franc and Australian Dollar, the company’s most significant foreign currency exposures, would decrease net assets by $368 million. The change in net assets associated with the translation of these currencies is generally recorded as currency translation adjustment within accumulated comprehensive income in shareholder’s equity of the company’s consolidated balance sheets.

Interest Rate and Other Risks

In June 2015, the company issued senior notes with a total aggregate principal amount of $5 billion. The $5 billion of senior notes includes both fixed and floating interest rates. As a result of the June 2015 debt offering, the company is exposed to the risk that its earnings or cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage this risk to an acceptable level, which includes using interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt.

As part of its risk management program, the company performs sensitivity analyses to assess potential gains and losses in earnings related to hypothetical movements in interest rates. A 23 basis-point increase in interest rates (approximately 10% of the company’s weighted-average interest rate from the June 2015 debt issuance through December 31, 2015) affecting the company’s financial instruments, including debt obligations and related derivatives, would have an immaterial effect on the company’s 2015 earnings and on the fair value of the company’s fixed-rate debt as of December 31, 2015.

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

NEW ACCOUNTING STANDARDS

Refer to Note 2 to the audited consolidated and combined financial statements contained in this prospectus for information regarding new accounting standards, which is incorporated herein by reference.

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 audited consolidated and combined financial statements contained in this prospectus. 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 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 consolidated and combined financial statements.

 

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Revenue Recognition, Related Provisions and Allowances

The company’s policy is to recognize revenues from product sales when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, 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 indicate that title and risk of loss pass at delivery.

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, 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 12 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, 2015, total legal liabilities were $23 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 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.

 

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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 consolidated 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.

Income Taxes

The company accounts for income taxes under the asset and liability method. Provisions for federal, state and foreign income taxes are calculated on reported pre-tax earnings based on current tax laws. Deferred taxes are provided using enacted tax rates on the future tax consequences of temporary differences, which are the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and the tax benefits of carryforwards. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. 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.

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 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 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, 2015 the company’s consolidated balance sheet included $433 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 performs an annual impairment review of goodwill in the fourth quarter of each year. No goodwill impairment was recorded in 2015, 2014 or 2013. For the annual impairment review, the company may elect to complete a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and, if the company determines it is not, then it would not be required to calculate the fair value of the reporting unit. For its 2015 annual impairment review, the company elected to complete the qualitative assessment and concluded further quantitative testing was not required. 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

Background and impact of separation from Baxter

Prior to the second quarter of 2015 and with the exception of certain Austrian defined benefit pension plans, of which Baxalta was the sole sponsor, the company’s employees participated in certain U.S. and international

 

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defined benefit pension and other post-employment benefit (OPEB) plans sponsored by Baxter. Baxalta accounted for these plans as multiemployer plans prior to the second quarter of 2015, at which time no liabilities or plan assets were included in the company’s combined balance sheets.

During the second quarter of 2015, Baxalta assumed certain pension and OPEB obligations and plan assets related to newly-created single employer plans for Baxalta employees, as well as pension obligations and plan assets associated with its employees who participated in certain plans that split following the separation. The company accounted for certain plans with delayed split dates as multiple-employer plans beginning in the second quarter of 2015 because the company was responsible for its employees retiring during the interim period.

Measurement of funded status and net periodic benefit cost

The valuation of the funded status and net periodic benefit cost for the company’s pension and OPEB plans is calculated using actuarial assumptions. These assumptions are reviewed at least annually, and revised if appropriate. The significant assumptions include the following:

 

    interest rates used to discount pension and OPEB plan liabilities;

 

    the long-term rate of return on pension plan assets;

 

    rates of increases in employee compensation (used in estimating liabilities);

 

    anticipated future healthcare costs (used in estimating the OPEB plan liability); and

 

    other assumptions involving demographic factors such as retirement, mortality and turnover (used in estimating liabilities).

Selecting assumptions involves an analysis of both short-term and long-term historical trends and known economic and market conditions at the time of the valuation (also called the measurement date). The use of different assumptions would result in different measures of the funded status and net cost. Actual results in the future could differ from expected results. The company is not able to estimate the probability of actual results differing from expected results, but believes its assumptions are appropriate.

The company’s key assumptions are listed in Note 12 in to the audited consolidated and combined financial statements contained in this prospectus.

 

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BUSINESS

Overview

Baxalta Incorporated (Baxalta or the company) 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, as well as oncology treatments for acute lymphoblastic leukemia. Baxalta is also investing in 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 of and collaborations with others.

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. The company’s corporate headquarters are located at 1200 Lakeside Drive, Bannockburn, Illinois.

Separation from Baxter

Baxalta separated from Baxter International Inc. (Baxter) on July 1, 2015, becoming an independent company as a result of a pro rata distribution by Baxter of 80.5% of Baxalta’s common stock to Baxter’s shareholders. Baxter retained an approximate 19.5% ownership stake in Baxalta immediately following the distribution. On July 1, 2015, Baxter’s shareholders of record as of the close of business on June 17, 2015 received one share of Baxalta common stock for every one share of Baxter’s common stock held as of the record date. Baxalta common stock began trading “regular way” under the ticker symbol “BXLT” on the New York Stock Exchange on July 1, 2015.

In January 2016 and March 2016, Baxter exchanged a portion of its retained stake in Baxalta common stock for indebtedness of Baxter held by a third parties. The shares of Baxalta common stock exchanged were then sold by such third parties in secondary public offerings pursuant to registration statements filed by Baxalta. Following these transactions, Baxter held approximately 4.5% of Baxalta’s total shares outstanding.

The Proposed Merger

On January 11, 2016, Shire, Merger Sub, a wholly owned subsidiary of Shire, and Baxalta entered into the merger agreement, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into Baxalta, with Baxalta being the surviving corporation, and Baxalta will become a wholly owned subsidiary of Shire.

On the terms and subject to the conditions set forth in the merger agreement, at the effective time of the merger, each share of Baxalta common stock issued and outstanding immediately prior to the effective time of the merger (other than treasury shares of Baxalta and any shares of Baxalta common stock owned by Shire or any subsidiary of Shire (including Merger Sub) or Baxalta, and other than shares of Baxalta common stock as to which dissenters’ rights have been properly exercised) will be canceled and converted into the right to receive both (i) $18.00 in cash, without interest and (ii) 0.1482 of Shire ADS duly and validly issued against Shire ordinary shares, par value £0.05 per share (the per share stock consideration), except that cash will be paid in lieu of fractional Shire ADSs. Although Shire will permit holders of Baxalta common stock to elect to receive 0.4446 of a Shire ordinary share for each outstanding share of Baxalta common stock in lieu of the per share stock consideration, the deadline for making such election is expected to have passed before the exchange offer is complete.

 

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Under the merger agreement, Shire agreed to use its reasonable best efforts to appoint Wayne T. Hockmeyer, Ph.D., chairman of the Baxalta Board of Directors, and two additional members of the Baxalta Board, jointly selected by the chairman of the Baxalta Board and chairman of the Shire board of directors following consultation with the Nomination Committee of the Shire board, to the Shire board of directors, effective upon the closing of the merger. Following the appointment of such directors, Shire agreed to nominate the same individuals as directors, to the extent such individuals are willing to serve and have complied in a satisfactory manner, in the good faith reasonable judgment of the Shire board, with the attendance and performance expectations of the Shire board, at the 2017 Shire stockholder meeting. Since the date of the merger agreement, Dr. Hockmeyer has decided to withdraw himself from consideration for such an appointment due to personal reasons and therefore only two members of the Baxalta Board will be considered for nomination.

The consummation of the merger is subject to certain closing conditions, including the approval of holders of a majority of the issued and outstanding Baxalta common stock and the approval of holders of a majority of Shire ordinary shares present and voting in person or by proxy, the receipt of certain regulatory approvals, the absence of a “material adverse effect” with respect to Shire and Baxalta, the receipt by Shire and Baxter of certain tax opinions set forth in the letter agreement described in the section of this prospectus entitled “Agreements Between Baxter and Baxalta and Other Related Party Transactions—Agreements with Baxter—Letter Agreement,” and other conditions specified in the merger agreement.

Because the record date for the special meeting of the stockholders of Baxalta to approve the merger has already occurred, you will not be entitled to vote on the merger with Shire with respect to shares of Baxalta common stock you receive in the exchange offer.

The merger agreement provides that, during the period from the date of the merger agreement until the effective time of the merger, Baxalta will be subject to certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide non-public information to third parties and engage in discussions with third parties regarding alternative acquisition proposals, except that Baxalta may, in response to an unsolicited acquisition proposal, engage in discussions with, and provide non-public information to, a third party if Baxalta’s Board of Directors determines in good faith that the acquisition proposal constitutes or is reasonably likely to constitute or lead to a “superior proposal.” Baxalta’s Board of Directors may make an adverse recommendation and terminate the merger agreement after receiving a “superior proposal,” subject to Shire’s right to match the superior proposal during a negotiation period of 5 days (with subsequent negotiation periods of 4 days if the superior proposal is amended). A “superior proposal” is a written acquisition proposal providing for a transfer of control of at least 50% of the stock or assets of Baxalta, which Baxalta’s Board of Directors determines in good faith (i) to be reasonably likely to be consummated if accepted and (ii) to be more favorable to Baxalta’s stockholders from a financial point of view than the merger and the other transactions contemplated by the merger agreement. Shire is subject to generally reciprocal “non-solicitation” obligations, except that Baxalta does not have similar rights to match a superior proposal received by Shire.

The merger agreement provides for certain termination rights for both Shire and Baxalta. Upon termination of the merger agreement under certain specified circumstances, Baxalta may be required to disburse to Shire a termination fee of $369 million and Shire may be required to pay the company a termination fee of $369 million. In addition, if the merger agreement is terminated under certain specified circumstances following the receipt of an acquisition proposal by Baxalta, Baxalta may be required to reimburse Shire for transaction expenses up to $110 million (which expenses would be credited against any termination fee subsequently disbursed by Baxalta), and if the merger agreement is terminated under certain specified circumstances following the receipt of an acquisition proposal by Shire, Shire may be required to reimburse Baxalta for transaction expenses up to $65 million (which expenses would be credited against any termination fee subsequently payable by Shire).

Shire and Baxalta each made certain representations, warranties and covenants in the merger agreement, including, among other things, covenants by Shire and Baxalta to conduct their businesses in the ordinary course during the period between the execution of the merger agreement and consummation of the merger.

 

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Products

Baxalta’s business consists of a portfolio of products serving patient needs in a variety of ways. The section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Baxalta” and the notes to the financial statements contained herein present certain financial information related to Baxalta’s products by reference to five categories of products—Hemophilia, Inhibitor Therapies, Immunoglobulin Therapies, BioTherapeutics and Oncology—that are further described below, together with selected details for products within each category.

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 $2.8 billion, $3.0 billion and $2.8 billion, or 46%, 50% and 50%, of Baxalta’s sales in 2015, 2014 and 2013, respectively. Hemophilia products currently offered by Baxalta include:

 

    ADVATE. ADVATE [Antihemophilic Factor (Recombinant)] is the world’s leading recombinant factor VIII (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.

 

    ADYNOVATE. In November 2015, Baxalta received regulatory approval for ADYNOVATE in the United States. ADYNOVATE is an extended half-life rFVIII treatment for hemophilia A based on ADVATE. ADYNOVATE 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.

 

    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 recombinant therapy and was introduced in 1992.

 

    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).