May 8, 2018 / 1:53 PM / 2 months ago

Breakingviews - Takeda swallows big dose of risk to buy Shire

LONDON (Reuters Breakingviews) - Takeda Pharmaceutical is swallowing a big dose of risk to buy Shire. The Japanese drugmaker finally struck a deal to take control of its Irish peer, for $62 billion. It can just about make the math work, but requires big spending cuts and a load of debt.

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After weeks of haggling and multiple sweeteners, Takeda on Tuesday unveiled an agreed deal with Shire, which specialises in attention-deficit disorder and rare-disease medicines. Hacking out $1.4 billion of costs after a few years is part of the promise. Add those to Shire’s expected earnings before interest and taxes in 2020, according to estimates compiled by Eikon, tax them at about 20 percent and the return on invested capital for the $80 billion enterprise, including hefty integration costs, would be about 7.6 percent. Shire’s cost of capital is just over 7 percent, Morningstar reckons.

That leaves little room for error. The anticipated savings equate to nearly a tenth of Shire’s sales, the upper end of what is typically achieved in healthcare mergers. Part of that involves eliminating research costs equivalent to nearly 40 percent of Shire’s drug development budget. Beyond some clear overlap between the two companies and research in less inventive areas, there’s a danger that growth gets hit, too.

Then there is the debt. Shire already has borrowed over two times EBITDA. The cash component of Takeda’s offer will push the combined company closer to five times, according to Breakingviews estimates. Takeda expects to shrink that back to a multiple of two times “in the medium term”. If the anticipated deal savings don’t fully materialise or sales falter, the goal could be tougher to achieve.

Takeda Chief Executive Christophe Weber has other options. For one thing, he could offload assets, if markets and prospective suitors cooperate. Even so, many of Shire’s patents are expiring and competitive pressures are mounting for its haemophilia business. Analysts at Bernstein expect no sales uplift through 2025. 

Following the announcement, Shire’s shares were trading about 16 percent below Takeda’s offer price. That discount may partly reflect concerns about Takeda’s ability to secure the two-thirds majority needed from its shareholders. The heady mix of debt and cost cuts, though, is more likely to make investors think twice.

Breakingviews

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