Takeda-Nycomed Roiling Investment Suffering 40% Loss: Real M&A

Takeda Pharmaceutical President Yasuchika Hasegawa
Yasuchika Hasegawa, president of Takeda Pharmaceutical Co. Photographer: Seokyong Lee/Bloomberg

Takeda Pharmaceutical Co. is pursuing its biggest acquisition after destroying more value for shareholders than any drugmaker and hoarding the most cash.

Owning Takeda has cost investors almost 40 percent of their money in the past five years, the most of any pharmaceutical company with more than $10 billion in market value, according to data compiled by Bloomberg. Over that span, the average drugmaker returned 35 percent as the Osaka, Japan-based company held onto $10.4 billion more cash than debt.

Now, Takeda President Yasuchika Hasegawa is betting his $9.1 billion acquisition of Zurich-based Nycomed will offset declining sales in Japan and boost earnings that may slump to the lowest in more than a decade by 2013. While the deal, the largest by a Japanese drugmaker, gives Takeda a business that gets more than a third of its revenue in emerging economies, its last billion-dollar takeover has left shareholders with a 27 percent loss since it closed three years ago.

“Takeda has just gone absolutely nowhere,” said Michael Obuchowski, chief investment officer at First Empire Asset Management in Hauppauge, New York, which manages more than $4 billion. “It’s a traditional knee-jerk reaction of a large pharmaceutical company without much growth to acquire somebody. You always have to question whether it’s really worth it.”

Tobias Cottmann, a spokesman for Nycomed, didn’t immediately respond to a call and e-mail requesting comment outside normal business hours.

‘Great Contribution’

“The deal will enhance our European and emerging markets franchise,” said Mihoko Shinomiya, a spokeswoman for Takeda. “We believe that this deal will be a great contribution.”

Takeda, which traces its origins to a medicine wholesale business opened by Chobei Takeda in Osaka in 1781, has dropped 39 percent since May 2006, including dividends, through May 18, the day before the deal was announced. That’s the biggest decline among the 21 drugmakers worth more than $10 billion, according to data compiled by Bloomberg. Of the 10 largest by market value, none fell more than 10 percent.

New York-based Pfizer Inc., the world’s biggest drugmaker, had a total return of 13 percent, while London-based GlaxoSmithKline Plc, the largest in the U.K., gained 11 percent.

“Takeda has been an underperforming stock,” said Michael Yoshikami, chief investment strategist at YCMNet Advisors, which manages $1 billion in Walnut Creek, California. “That certainly has been a problem, obviously, for its shareholders in recent years.”

Hoarding Cash

Even as Takeda’s shareholders lost out, Asia’s largest pharmaceutical company was still hoarding the most cash. Takeda had $10.6 billion in reserves and less than $200 million in debt at the end of March, more than twice the net cash of any other pharmaceutical company, data compiled by Bloomberg show.

Takeda’s cash holdings represented about a third of its equity value, the data show. On average, the biggest drugmakers had $3.7 billion more debt than cash.

Hasegawa, 64, who joined Takeda in 1970 and has led the company since 2003, is now using some of that cash on the largest takeover in the company’s history. Takeda is paying Nycomed’s owners, including Stockholm-based Nordic Capital and Zurich-based Credit Suisse Group AG’s private-equity unit, 6.3 billion euros ($9.1 billion) in cash.

Including net debt, the purchase values Nycomed at 9.6 billion euros ($13.7 billion), dwarfing Takeda’s $8.9 billion acquisition of Millennium Pharmaceuticals Inc. in 2008.

Jury’s Out

“Companies typically employ a strategy -- if they’ve had problems -- to go out and buy growth. The acquisition is probably an attempt on their part to try to do that,” YCMNet’s Yoshikami said. “The jury’s out on whether that is going to be a reasonable strategy that will work for them.”

The purchase of Nycomed, founded in Norway in 1874 by pharmacist Morten Nyegaard as an agent for imported pharmaceutical products, comes three years after Hasegawa completed Takeda’s takeover of Millennium. That deal led to a 27 percent loss for Takeda’s owners, including dividends, the data show. Without the payouts, the decline widens to 36 percent.

Hasegawa is spending 31 percent more for Nycomed than prior deals in the industry, data compiled by Bloomberg show.

The takeover values Nycomed at 11.3 times its adjusted earnings before interest, taxes, depreciation and amortization last year. That includes the results of the company’s U.S. dermatology business, which it isn’t buying. Acquirers paid a median of 8.6 times Ebitda in drug takeovers of $2 billion or more in the past two years, according to data compiled by Bloomberg.

‘Double-Edged Sword’

Takeda said it plans to fund part of the deal with a loan of as much as 700 billion yen ($8.6 billion). Moody’s Investors Service placed the company’s credit rating on review for a likely “multi-notch” downgrade. The drugmaker is rated Aa1, Moody’s second-highest investment grade.

“It seems they’re attempting to change things, but these big acquisitions have a very poor track record,” said First Empire’s Obuchowski. “An acquisition could bring new products, a new team, new research. But it’s always a double-edged sword.”

Nycomed will boost Takeda’s sales in Europe and emerging markets including China and Latin America. Takeda’s annual revenue and per-share earnings will increase by more than 30 percent and bolster operating income, excluding certain items, by more than 40 percent, Takeda said.

Emerging Markets

Takeda generated 85 percent of its 1.42 trillion yen of revenue in Japan and the U.S. in the last fiscal year. Nycomed makes pantoprazole for heartburn and the smokers’ cough drug roflumilast, sold in the U.S. as Daliresp and as Daxas in Europe. Emerging economies accounted for 39 percent of Nycomed’s 3.17 billion euros in revenue last year, while Europe was the dominant region making up 44 percent of sales, according to the company’s annual report.

Drug sales in the 17 fastest-growing emerging markets will expand 13 percent to 16 percent annually over the next five years, reaching as much as $315 billion by 2015, the IMS Institute for Healthcare Informatics in Parsippany, New Jersey, said this week. That compares with growth of 1 percent to 4 percent in developed economies.

Takeda’s Nycomed deal comes after Japan fell into its third recession in a decade. The Cabinet Office said yesterday the economy shrank an annualized 3.7 percent in the first quarter.

Atsushi Seki, a Tokyo-based analyst at Barclays Plc, said that Nycomed may not be enough to offset the decline in revenue after generic versions of Takeda’s best-selling drug Actos go on sale in 2012. Actos, first sold in the U.S. in 1999 and now the world’s top-selling diabetes medicine, accounted for 27 percent of Takeda’s sales last year.

‘Had to Happen’

“This deal was something that had to happen, given their cash position, their drug pipeline over the next few years and the cost of debt right now,” said Paul Gyenge, an investment analyst at Sydney-based PM Capital Ltd., which manages more than A$1 billion ($1.1 billion). “But you have to be mindful of the returns you get on a deal like this versus the potential returns you would get from R&D or doing buybacks.”

Overall, there have been 9,528 deals announced globally this year, totaling $942.4 billion, a 22 percent increase from the $771.4 billion in the same period in 2010, according to data compiled by Bloomberg.

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