Niche drug-maker Shire (SHP) recovers 5.1% to £41.27 after Monday’s 8.2% drop on confirmation it is splashing out £22.2 billion in cash and shares to buy US outfit Baxalta (BXLT:NYSE).

The $45.57 a share agreement is a 37.5% premium to Baxalta’s share price on the day before the initial offer was made on 4 August.

Although the deal strengthens the FTSE 100 member’s position in the rare disease sector Monday’s fall points to the market believing that it’s paying too much for the rare blood, cancer and immune system disorder specialist.

Dublin-based Shire hopes the deal will double revenue to $10 million in the next five years and see more than 30 new product launches that will add $5 billion to the group’s sales by 2020.

Web - Shire - 12 Jan 2016

Rare diseases affect less than 2,000 people and inducements to get drug companies to tackle such conditions include charging higher prices, enjoy longer periods of exclusivity, tax breaks and faster approval decisions by regulators.

Ketan Patel, an associate fund manager at EdenTree Investment Management, believes that investors are right to question the deal.

‘With healthcare systems under greater pressure, the deal could bring greater focus on drug prices, more so for Shire which has some of the most expensive treatments on the market, ranging from $200,000 to $630,000 a year,’ Patel says. ‘From an industry perspective, investors should take heed - healthcare mergers have a track record of over-promising and under delivering, especially on R&D.’

Issue Date: 12 Jan 2016