M&A by necessity: Takeda and Shire

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The stakes are high, and the outcome is uncertain in one of the largest Pharma M&A deals ever.

Takeda’s proposed acquisition of Shire seems to have it all: The combined entity becoming one of the largest global Pharma groups, enabling Takeda to become a truly global operation and allowing Shire’s shareholders to get a very attractive pay-out. But, the proposed transaction is also a showcase on how acquisitions are driven by the desire of the buyer to transform its own organization.

Consider where Takeda stood five years ago. The largest Japanese Pharma company was facing a shrinking domestic market (generating almost 50% of revenues). Its best-selling diabetes drug, Actos, was facing patent expiry and safety concerns, and despite previous substantial overseas acquisitions —  Millenium in the USA in 2008 for US$ 8.8bn and Nycomed with operations in Europe and Latin America in 2011 for US$ 13.7bn — Takeda’s corporate culture and focus was still very Japanese.

In 2014, it was clear that Takeda had to make bold moves to further internationalize – pressure which is felt by many Japanese companies across all industries. Christophe Weber, Takeda’s CEO since 2015 and the first foreigner to lead the company, systematically initiated processes to convert the venerable Japanese corporation, founded in 1781, to a globally minded Pharma company.

However, there is only so much you can do to change a company’s culture from the inside. The acquisition of Ariad in 2017 for US$ 5.2bn (oncology) and Tigenix (cell-based therapies) helped to bolster Takeda’s pipeline. Weber has stated that only a large acquisition to scale up Takeda would be the “path to survival” amid price pressure and escalating drug development costs. His personal ambition and sense of urgency is also cited by many as a key driver for the proposed deal.

Thus, perhaps more important than doubling its size, the proposed acquisition of Shire will fundamentally change Takeda by accelerating and irreversibly cementing its transformation into a truly global Pharma group. The share of foreign employees will increase from less than 70% to more than 82%. Its revenue base will broaden geographically, pushing down the share of revenues from Japan from 1/3 to less than 1/6. And finally, it will also internationalize the company’s ownership: Takeda proposes to pay half of the acquisition price with its own shares, which means that the share of the company owned by foreigners – former Shire shareholders – will increase substantially.

The question remains whether the benefits justify the price. Takeda’s winning offer – the fifth in a month-long battle was, 60% higher than Shire’s share price before Takeda first made public its interest. For a mature company with a multi-billion market cap, this premium looks very high.

Shire was considered underappreciated by some observers who claimed that its share price did not fully reflect its own transformation. Originally, Shire was built around speciality pharmaceuticals, but then bought a string of orphan and biotech firms, culminating in the US$ 32bn acquisition of Baxalta. As one analyst put it, Shire today generates about three-quarters of its revenues from Biotech drugs but is still valued as a speciality pharma company. Even so, with a purchase price equal to 5.3x revenues and 32x EBIT, Takeda seems to be paying a high price.

The sheer size of the deal (the largest acquisition by a Japanese company overseas)  poses significant risks. Integration will be long and arduous. At 4x earnings before interest, tax, depreciation and amortization, (EBITDA) Takeda’s debt was already relatively high before the proposed acquisition. It will have to sell some of the combined groups’ assets to pay down its liabilities.

In our analysis, streamlining the portfolio to get rid of purely local brands and products in non-core areas will necessitate substantial disposals which may cut hundreds of millions in revenues, but will likely yield much lower revenue-multiples as Takeda pays for Shire.

Lastly, shareholders of both companies must approve the deal. Takeda’s shareholders continue to be unhappy with the transaction, pushing down Takeda’s share price by 20% since the deal was announced. Shire’s owners, on the other hand, may not want to own shares in a Japanese company and may still block the sale.

Thus, we may have to hold our breath until Q2 2019, when the deal should finally close.

 

Christoph Bieri, PhD is Managing Partner of Kurmann Partners www.kurmannpartners.com, an M&A firm advising Pharma and MedTech companies on strategic mid-market deals in Europe and the Americas.

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