(Bloomberg) -- After five proposals and more than month of back-and-forth, it looks like this thing is happening.
Takeda Pharmaceutical Co Ltd. agreed Tuesday to purchase rare-disease drugmaker Shire Plc for $62 billion. But this blockbuster deal comes with blockbuster risk. Takeda will be paying a steep premium and taking on big debt to acquire a company with uncertain prospects.
Takeda’s desire for geographic and drug diversification led it to overlook a lot of warts. Shire’s hemophilia business provides more than a quarter of its revenue. It faces near-term peril from Roche Holding AG’s recently launched Hemlibra, and long-term threats from potential one-time treatments being developed by companies such as BioMarin Pharmaceutial Inc. that could reduce demand for Shire’s older drugs.
Shire has an attractive pipeline of high-margin rare-disease drug candidates, but its research projects will have to over-deliver in order to compensate for competitive threats to current core business. The substantial research and development cuts that Takeda plans if the deal goes through won’t help.
Takeda has a limited pipeline and is heavily dependent on the tough Japanese drug market, which is why it’s pursuing a risky deal that will make hash of its balance sheet.
If the transaction goes through, risks to Takeda shareholders — who have seen the stock decline nearly 20 percent due to doubts about the deal — will become risks for Shire shareholders, who would receive $30.33 in cash and 0.839 new Takeda shares. And the takeover won’t provide much of a return for any Shire shareholders who bought the stock at past highs. As my colleague Chris Hughes notes, the only prospects for a better outcome are an increase in Takeda’s stock price or a new bidder. Neither seems likely.
The combined firm’s net debt, at potentially five times-plus Ebitda, would put it in a neighborhood of highly levered companies like Allergan PLC that have risky businesses or have been performing poorly recently and trade at a discount to the rest of the industry. If Shire’s rare-disease drugs or expected synergies don’t deliver as expected, its debt load could get worrisome quickly.
A white knight with a healthier balance sheet is unlikely to swoop in. There are few firms with the financial firepower to attempt a deal of this size, and fewer still that would pick Shire as a target. Pfizer Inc., perhaps the most likely candidate to interject, denied any interest in this kind of transformative deal on its most recent earnings call.
A possible solution to the debt problem would be to sell or spin off some Shire assets. Two candidates that could make a dent are the ADHD-focused neuroscience business or the hemophilia unit.
But getting rid of the neuroscience unit would remove significant cash flow and synergy-producing overlap with Takeda. It would also tie the company more tightly to the risky hemophilia business. Also, the unit’s heavy reliance on Vyvanse and the prospect of generic competition may make it a tough sell. The risky hemophilia business could also have a tough time attracting a premium valuation.
This deal could have a happy ending for everyone involved. But as it stands now, the only group that seems assured of walking away smiling is the cadre of bankers collecting deal fees.
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