March 28, 2018

Breakingviews: Takeda takes a turn at Shire’s risky M&A strategy

by Breakingviews.

Takeda Pharmaceutical may take a turn at Shire’s risky M&A strategy. The $42 billion Japanese drugs group is mulling a bid for $45 billion takeover machine Shire. There’s not much overlap, and uncertainties hang over key businesses. But Shire is cheap, and its shareholders exasperated. While that may appeal to Takeda boss Christophe Weber, it’s also a warning.

Takeda prospered for decades in its cozy domestic market. A declining population, government-reimbursement cuts and increased competition from cheap generic pills have forced Takeda and its peers to look abroad for growth. That’s a difficult prescription to fill. Takeda is large enough to suffer from declining lab productivity, but too small to compete with bigger firms in licensing and marketing biotech drugs.

The Osaka-based company’s answer has been to double down on globalization and dealmaking. Unfortunately, it’s tough to find available, durable businesses at reasonable prices. Annual revenue is roughly a third higher than it was a decade ago, but operating profit has declined by about two-thirds.

Shire knows plenty about acquisitions. Chief Executive Flemming Ornskov grew the business rapidly since 2013. Yet the $32 billion acquisition of Baxalta in 2016 left Shire exposed to a hemophilia business under threat from Roche. Concern over competition from Roche and generic competition to other drugs sent its shares down almost 40 percent over the last year.

Buying Shire would allow Takeda to grow in oncology, gastrointestinal and neuroscience treatments. But there’s probably not much overlap, and Shire also faces loss of exclusivity on drugs and potential pricing pressure in its rare disease division.

Price is a draw. Analysts at Bernstein reckon Shire could be worth 52 pounds a share, even assuming it can’t grow sales over the next seven years. The price before Takeda’s approach was nearly 40 percent below that. Investors’ lack of enthusiasm for the stock could enable Takeda to avoid paying too big a premium. But given the target’s size, investors may also have to be willing to accept a large slug of equity in a Japanese firm. Alternatively Takeda could issue its own stock at home and pay cash.

However Weber tries to make it work, he should be wary that the bigger the deal, the greater the risk.

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