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Business Deals

Takeda seeks to counter trend of megadeal flops

Hungry for innovation, drugmaker leans on Shire for growth

Will scale spur innovation? Takeda President Christophe Weber steers the company into uncharted waters. (Photo by Wataru Ito)

TOKYO -- Takeda Pharmaceutical looks to use its acquisition of Ireland's Shire, which will lift it to No. 8 in the world, to bolster its own capabilities and avoid the pitfalls that have doomed other big buyouts to failure.

The Japanese drugmaker's shareholders gave the green light to the roughly $60 billion deal on Wednesday by approving the issuance of new stock to finance more than half of the purchase. Around 90% of votes cast were in favor of the proposal, despite a campaign against the deal by a group of investors that included former employees and members of Takeda's founding family.

The pharmaceutical industry has moved away from large mergers and acquisitions in recent years. Companies are instead snapping up smaller startups that already have promising drug candidates, which is seen as a relatively safe bet given that, by some estimates, just one drug is brought to market for every 30,000 compounds discovered.

In this sense, Takeda's acquisition of the much bigger Shire is a sort of throwback to the 1990s and 2000s, when it was more common for drugmakers to swallow up even large rivals. U.S. giant Pfizer in particular had a penchant for such deals -- whether friendly or hostile -- to the point that pursuing growth through M&A has sometimes been called the "Pfizer model."

But rarely have pharmaceutical companies realized acquisitions that added up to more than the sum of their parts. Pfizer has poured hundreds of billions of dollars into acquisitions, starting with its record-setting $90 billion hostile takeover of Warner-Lambert in 2000. Its revenue roughly doubled from 2000 to $52.5 billion in 2017, yet its market capitalization has declined roughly 10% since the end of 2000.

Similarly, GlaxoSmithKline's market cap has fallen by nearly half since it was formed in 2000 through a merger between Glaxo Wellcome and SmithKline Beecham.

Acquirers would rake in profits from their targets' blockbuster drugs but neglect to build up their own research and development capabilities over the longer term, such that once the cash cow patents expired, nothing was left to take their place.

Despite the shortcomings of the Pfizer model, Takeda has forged ahead with the Shire acquisition in hopes of regaining its earning power, which has declined since the late 2000s with the expiration of patents on treatments such as blockbuster diabetes drug Actos. The company has had little luck with new drugs since then, eking out a profit by selling off businesses and real estate.

Shire, meanwhile, reported a net profit of $4.27 billion last year -- well over double Takeda's profit for the fiscal year through March 2018. Its treatments derived from blood components are expected to generate a steady stream of revenue with no need to worry about so-called patent cliffs.

The acquisition will vault Takeda into eighth place among drugmakers worldwide by revenue, a first for a Japanese drugmaker, though the combined company's earnings before interest, taxes, depreciation and amortization will still come to just half that of Pfizer or Roche.

Though much attention has been paid to the deal's hefty price tag, some analysts see it as a bargain based on some metrics. The ratio of enterprise value to EBITDA -- in essence, how many years it would take for the buyer to recoup its investment -- is about 11, compared with 13 or 14 for past pharmaceutical deals.

Takeda aims to use Shire's earnings to buy time to bolster its R&D capabilities, which will be crucial to avoiding the Pfizer trap.

The other main motive behind the Shire deal is globalization. Takeda cannot survive if it does not grow its global presence, President Christophe Weber says. Japan's share of the world pharmaceutical market has shrunk to 7% from 20% two decades ago, owing to such factors as falling drug prices.

Takeda President Christophe Weber leaves the building where the company's shareholders meeting was held on Wednesday. (Photo by Tomoki Mera) Takeda President Christophe Weber leaves the building where the company's shareholders meeting was held on Wednesday. (Photo by Tomoki Mera)

Though Shire is headquartered in Ireland, it earns 60% of its revenue from the U.S., whose high drug prices have made it the world's most profitable pharmaceutical market. For Takeda, which derives 30% of its sales from the U.S., the Shire deal represents an opportunity for a pivot.

But getting Takeda's finances back in order after the deal is a more pressing concern.

The company plans to cover just over half of the cost of the acquisition by issuing new stock, with loans and bonds making up the rest. Worries about dilution -- and an accompanying decline in earnings per share -- have weighed on Takeda's share price, which has slumped 20% since speculation about the deal first surfaced in late March. The stock is now trading near a year-to-date low.

The deal will lift the drugmaker's net interest-bearing debt to an estimated 5.4 trillion yen ($47.7 billion), eight times its level at the end of March, and inflate its net-debt-to-EBITDA ratio to 5 from 1.8. The company aims to return this figure to around 2 by March 2023, and is considering selling up to $10 billion in noncore assets to speed the process along.

Takeda also faces the risk of its acquisition declining in value. The combined company will have goodwill and intangible assets, such as patents, in excess of 10 trillion yen. Though Takeda does not need to amortize goodwill annually under International Financial Reporting Standards, it will need to test for impairment each year.

Nikkei staff writer Chihiro Matsutomi in Tokyo contributed to this article.

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