Takeda And Shire - One Japan CEO's Take
Executive Summary
The planned combination of Takeda and Shire has dominated headlines in recent weeks, but how is it viewed within the industry in Japan? One CEO shares his thoughts.
The planned $64bn effective merger between Takeda Pharmaceutical Co. Ltd. and its larger acquisition target Shire PLC has dominated the pharma industry headlines and commentary over the past few weeks, but has received a mixed reception from analysts and commentators, and from some Takeda investors worried over the financing of the deal, its impact on future share performance, and whether the two large companies can be fully integrated successfully.
It has also taken the rest of the Japanese industry largely by surprise, although there is a degree of pride that finally a Japan-based pharma firm will now rank within the global top 10 and become a worldwide player.
One top pharma executive in the country willing to share his views on the deal said the transaction "can be clearly understood from a strategic global point of view," with Takeda president and CEO Christophe Weber seen to be aiming to secure "a truly global position" through the new merged entity.
From that aspect, “I can support the transaction. Takeda needed economies of scale to support the bottom line," new Chugai Pharmaceutical Co. Ltd. president and CEO Tatsuro Kosaka told Scrip. "The combined company will also have a joint R&D spending of around $5bn, which is around the level needed to sustain a truly global pharmaceutical company” of that size, irregardless of whether this is through M&A or not, he said in an interview.
In addition, the valuations of smaller ventures for potential targeted acquisitions are also “becoming very expensive”, a factor that may have led to Takeda's decision to support a larger transaction of the whole company, said Kosaka, who was appointed in March.
Takeda's Weber has said that the company initially looked at the various components of Shire separately, but decided that an outright deal made more sense in terms of the perceived benefits across areas including rare diseases and the plasma business, as well as adding several late-stage assets to the pipeline.
Lingering Investor Concerns
However, Kosaka also pointed to several main issues of concern to investors around the acquisition, which is expected to complete in the first half of next year and still needs to be approved by shareholders.
“One is the financing of the deal, and another is how EPS [earnings per share] will be affected, the CEO told Scrip during the course of a wider interview at Chugai’s Tokyo headquarters. “The management of the debt used to finance the move will be a key responsibility of management.”
Takeda has set up a $31bn loan facility from a consortium of banks including J P Morgan, and says it will convert or pay down parts of this to a mix of long-term debt and through free cash, asset divestments, and ongoing cost savings.
In the latter case, it is aiming to raise around JPY190bn ($1.74bn) in free cash in the current fiscal year to next March 31, up from a previous target of JPY130bn, but the bulk of the financing will come from debt. The assets that might be divested remain unclear given the status of the acquisition, but there has been speculation that dry eye drug Xiidra (lifitegrast) may be seen as non-care.
Multiple investors and analysts in Japan have highlighted the performance of Takeda shares both ahead of and after the merger will be a key factor, given that the issuance of new stock, along with cash, is a core component of the financing.
Effective Integration
Kosaka sees effective integration as the other main mid- to long-term challenge for the merger. “How will the two companies be combined, and in particular how can they improve research productivity?" he asked. "The capability to create new drugs is key to sustainable business growth in this business. Takeda will gain access to gene therapy expertise through Shire, which is one positive in this area.”
Takeda’s Weber said on the company’s recent fourth quarter earnings call that his aim is for rapid integration, stating that “many M&As fail because integration is not well done" and “the organization doesn’t match the strategy or it’s too slow.”
As to whether the acquisition might spark M&A activity among Japanese majors, Kosaka was cautious. “Other companies in Japan have a different business model to Takeda, which is aiming to become a global company,” rather than maintaining its main focus solely on Japan, he said. Despite rising valuations, “They [other firms] may be more likely to consider targeted acquisitions of specialist ventures or projects” to strengthen core areas, he commented.
This has been borne out by the series of modest focused acquisitions of small companies and assets, particularly in oncology, over the past few years by major Japanese firms such as Astellas and Daiichi Sankyo, which are taking strategic steps into this area.
In general though, Kosaka was upbeat on the Takeda/Shire combination, concluding: “I am in support of the deal, which will create a truly global, Japan-based company.”
(For the first part of the interview with the Chugai president and CEO (Also see "Interview: New Chugai CEO Lays Course As He Takes Reins " - Scrip, 23 May, 2018.).)
From the editors of PharmAsia News.