July 13, 2020 / 2:31 AM / a month ago

Breakingviews - Takeda feeling uncomfortable Shire side effects

A Takeda logo is seen in its research hub in Cambridge, Massachusetts, U.S., November 26, 2018. Picture taken November 26, 2018. REUTERS/Julie Steenhuysen

HONG KONG (Reuters Breakingviews) - Takeda Pharmaceutical is showing signs of recovery after a mega-merger, but shareholders keep feeling the pain. Some 18 months after completing a $62 billion takeover of Irish rival Shire, the Japanese drugmaker may sell another business to further pare debt. Promised cost savings are also materialising. A weak stock performance, however, suggests Chief Executive Christophe Weber overpaid.

Buying Shire required significant borrowing to cover the 60% premium it paid. To offset some of the expense, Weber has been offloading assets. Takeda is getting closer to divesting its consumer division, which includes Japanese energy drinks, for $3.7 billion, Reuters reported.

At that price, disposals would exceed $10 billion, the figure targeted following the Shire deal. The proceeds have helped chip away at the tab. Takeda’s multiple of net debt to adjusted EBITDA had fallen from nearly five times to 3.8 times, as of March. Takeda concedes it may take until March 2024 to shrink its multiple to 2 times, closer to where rivals such as Pfizer and AstraZeneca are now.

There also has been progress with synergies. Takeda set out to slash $1.4 billion of costs, but it recently raised the figure a second time to roughly $2.3 billion. Even that falls short of the amount Breakingviews calculated would be needed to pay for the Shire premium and hefty integration expenses. And although Takeda’s core operating profit margin has improved from about 22% to 29%, that measure strips out numerous items including transaction expenses. Its headline operating profit margin dropped from over 11% to about 3% over the same span.

Despite the post-Shire achievements, investors are unconvinced. Takeda’s share price is down more than a third since the company said it was considering a bid in late March 2018. Weber’s acquisitive strategy, which involved substantial deals before Shire, has not delivered results.

Since he was appointed CEO in March 2015, the company’s total annualised return, including reinvested dividends, has been minus 6.5%. The performance lags Pfizer, AstraZeneca, Japan’s benchmark Topix index and the MSCI World Pharma Index, all of which are in positive territory during that stretch. It’s yet another clinical study in a large body of research that big M&A is rarely the right prescription.

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