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Business deals

Takeda chases global status with $64bn shortcut

Markets frown on drugmaker's wallet-draining gamble for Shire

Shire agreed Tuesday to keep alive discussions of a $64 billion takeover by Takeda Pharmaceutical.   © AP

TOKYO -- Takeda Pharmaceutical appears intent on pushing through a record $64 billion buyout of Irish drugmaker Shire, even if it means defying intense market pressure, because it sees overseas markets as crucial to its survival as government controls on drug prices in Japan limit its top line.

After the Osaka-based company sweetened its acquisition proposal on Tuesday, the Irish drug company agreed to extend negotiations until May 8, when Takeda would be required to finalize its offer.

The Tokyo stock market did not take kindly to the news of a heftier offer -- which even before would have been the biggest overseas acquisition by a Japanese company -- reasoning that Shire is simply too rich for Takeda's wallet. Takeda's shares fell for a second straight day on Wednesday, tumbling 7% to a year-to-date low of 4,510 yen.

Yet Takeda persists because it views Shire's portfolio of biomedical and rare-disease treatments as a critical shortcut for remaining competitive in an expanding global pharmaceutical market. Although demand for drugs has expanded by at least 30% over the past five years, developing new patented drugs is becoming exceedingly difficult -- and expensive.

The biomedical field has gained focus as a potential birthplace of blockbuster cancer and psychoneurological cures. But it typically takes billions of dollars of spending to develop such treatments, and a decade or more of time. Only one out of 30,000 drug candidates eventually become successful patented medications.  

Although Takeda is the biggest drugmaker in Japan, its independent development capacity is limited. Additionally, Takeda chose now as the time to go after Shire because it feels a sense of urgency owing to weak earnings. Takeda posted a net profit of 115 billion yen ($1.05 billion) for the year ended March 2017. That is about half what Astellas Pharma earns, even though the domestic rival's sales are lower.

Takeda generates 30% of its sales in Japan, where rising health care costs are pushing politicians to place curbs on drug prices. Even if Takeda has developed several patented wonder drugs in the past, its stable of such drugs has shrunk and the domestic market does not offer much in the way of growth prospects.

Although Shire is headquartered in Ireland, the U.S. -- a market that is 10 times larger than Japan's -- accounts for 60% of its sales. That calculus also plays into Takeda's strategy to buy time through a Shire takeover. If Shire is converted into a wholly owned subsidiary, the Irish company's steep earning potential can help improve Takeda's own earnings, at least in the short term.

Shire's collection of moneymaking drugs would also allow Takeda to avoid development risks. On the other hand, Takeda would certainly find it harder to develop another Opdivo, the pivotal cancer treatment being marketed by Bristol-Myers Squibb and Japanese rival Ono Pharmaceutical.

The history of the global drug industry is heavily colored by realignment. Multiple firms possessing in-demand drugs were swallowed up whole by bigger players during the 1990s and 2000s. The way Pfizer in the U.S. scaled up and diversified through takeovers -- hostile or otherwise -- has given birth to the term "the Pfizer model."

However, the Pfizer way of acquiring expensive targets is increasingly seen as out of date. Many deals in recent years have involved startups with the tools to develop miracle drugs. This year, Swiss heavyweight Roche bought American startup Flatiron Health for just $1.9 billion. Flatiron collects and processes oncology data, which can be used to further groundbreaking research.

Meanwhile, Pfizer offered to buy the U.K.'s AstraZeneca for $118 billion in 2014, and approached Irish drugmaker Allergan about a $160 billion purchase in 2015. Both attempts ended in failure.

Even if Takeda manages to land Shire, the Japanese multinational would still have to deal with the fact that Shire's stable of drug patents will start expiring around 2021. Shire would provide some short-term relief, but a strategy that extends beyond that would be up to the Japanese drugmaker to figure out.

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