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Business deals

Ominous earnings outlook boosts Takeda's case for Shire bid

Irish peer is potential lifeline as profitability lags behind competition

Takeda Pharmaceutical President and CEO Christophe Weber aims to improve the company's competitiveness and shave costs with the $62 billion Shire deal. (Photo by Shinya Abe)

TOKYO -- Takeda Pharmaceutical projects net profit will fall 26% for the year ending next March, exposing the limits of independent growth as the drugmaker pursues a titanic deal for Ireland's Shire.

The Osaka-based company on Monday forecast a consolidated net profit of 139 billion yen ($1.26 billion) for fiscal 2018, representing its first annual earnings decline in four years.

"The outlook was worse than I expected," said one analyst. "The purchase price aside, it made the need to acquire Shire clear."

The expected profit drop can mainly be attributed to the absence of one-time gains booked in fiscal 2017, a year in which Takeda reaped a profit of 100 billion yen from the sale of research reagent subsidiary Wako Pure Chemical Industries sold to Fujifilm Holdings.

Takeda's struggles are made clear when compared to foreign rivals. Despite brisk sales of ulcerative colitis and Crohn's disease medications, the Japanese company predicts a 17% slide in operating profit to 201 billion yen, with an operating profit margin of just 12%. By contrast, Switzerland's Roche recorded a 24% margin for the year ended December, while America's Pfizer logged 23%.

Concern over this gap has prompted Takeda to embark on the $62 billion bid. Including Shire's results for the 12 months ended in December would lift the company's operating profit to about 470 billion yen a year, with an operating profit margin of about 14%. The deal would also save about $1.4 billion annually in costs over the next three years while improving the research and development front

The Shire deal is expected to be completed sometime next year, and its earnings will likely be included in Takeda's financial results for fiscal 2019. President and CEO Christophe Weber spoke about "boosting profitability" to catch up with foreign rivals at a press briefing Monday.

The key for Takeda will be the direction of operations in the U.S., the world's largest drug market, which made up just over 30% of total sales. The addition of Shire would bring the latter figure to around 50%.

Weber also said that Takeda will focus on innovative drugs -- an area Shire can help improve, given its strength in profitable medications for rare diseases.

Yet there is no guarantee that Shire will maintain a high level of profitability going forward. The Irish company's mainstay hemophilia drug is facing competition as Japan's Chugai Pharmaceutical develops a new product and Roche takes a new medication global. Some are concerned that Shire will face dull growth as well.

The deal could also saddle Takeda with about 3 trillion yen in goodwill. The Japanese company, which uses international accounting standards, faces the risk of booking a massive loss should Shire fail to lift earnings as expected.

Takeda is staking its future on the acquisition of Shire, but the deal could turn out to be a double-edged sword.

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