NO WITHDRAWAL

Takeda Can't Kick Its Shire Habit

With the Japanese drug market shrinking, this pursuit is about long-term survival.
Photographer: JB Reed/Bloomberg News
SHIRE PLC
+24.00
As of 7:50 AM EDT
4231.00 GBp

Japanese firms aren't known for disciplined dealmaking.

But Takeda Pharmaceutical Co.'s pursuit of London-listed Shire Plc, at ever-higher cash outlays that have pushed the price tag to more than $60 billion and hammered its stock, should be applauded. Christophe Weber, Takeda's French chief executive officer, will ensure the 237-year-old drugmaker's survival for decades if he pulls off this purchase.

Takeda's fourth proposal is 53 percent higher than Shire's share price before the first offer on March 28. The per-share bid of 47 pounds ($65.81) includes 21 pounds in cash and 26 pounds in stock. The cash component has risen to 45 percent, from 36 percent originally (16 pounds in cash and 28 pounds in shares).

The cost will be a strain. Takeda has an already-high debt to Ebitda ratio of 3.1 times, according to Moody's Investors Service. Convincing shareholders outside Asia to accept so much Japanese stock for a U.K.-listed company may also be a problem, as my colleague Chris Hughes has written.

That Bloated Feeling

Takeda is one of the most leveraged pharma companies with debt to Ebitda of 3.1 times in the past 12 months

Source: Moody's Investors Service

Note: Data for year ended Dec. 31, 2017.

The company has little choice but to keep upping the ante. Like its Japanese peers, Takeda is struggling with a shrinking domestic market that still accounts for more than a third of sales. It also lacks a strong pipeline of wonder drugs. A lot is riding on the success of two medicines that have yet to achieve blockbuster status: Entyvio, a gastrointestinal treatment acquired when Takeda bought Millennium Pharmaceuticals Inc. in 2008; and myeloma medication Ninlaro.

Shire brings a bench of rare-disease drugs, including for hemophilia and hereditary angiodema, that will catapult Takeda into a higher league. The acquisition would also boost its earnings from the U.S., where Shire's Adderall treatment for attention deficit hyperactivity disorder is popular. The American drugmaker, which is largely run from Lexington, Massachusetts but has a legal address in Dublin, sold its oncology business recently, but that accounted for a mere 1.8 percent of revenue.

This all means Takeda won't give up easily, even if Weber is keen to keep the company's investment-grade credit rating. It can count on support from Japan's cash-rich megabanks. The company has already locked in 1 trillion yen ($9 billion) in financing from Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. Wall Street and European banks will also inevitably be clamoring to lend for what would be Japan's biggest overseas takeover.

Drug-Induced High

Takeda's bid for Shire would be Japan's biggest overseas takeover, beating SoftBank's $40 billion Sprint purchase

Source: Bloomberg

Funding through equity sales is another possibility, though the slump in Takeda shares may make that a challenge. The stock has dropped 11 percent since Takeda confirmed in March that it was considering an approach to Shire and is down 23 percent year-to-date.

But shareholders concerned that the company's attractive dividends may be at risk would do well to remember: Long-term survival is more important than short-term returns, even if that comes at a cost.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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