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Shire rockets on Takeda takeover rumours

The Japanese pharma group has confirmed its interest in its struggling British peer
March 29, 2018

Executives at Japanese pharma group Takeda and its British peer Shire (SHP) seem to like catchy, date-driven targets. Takeda is working towards its Vision 2025. Shire was aiming for sales of $20bn by 2020 (although this target has since been lessened to the less-catchy “between $17bn and $18bn”). They might get along well.

IC TIP: Buy at 3497p

Takeda has floated the idea of a takeover of the rare diseases specialist, sending the prospective target’s investors into a flurry of excitement. Shire’s shares were up 22 per cent at one point on the day that Takeda’s management said it was at “preliminary and exploratory stage” of a deal. Shire was quick to confirm that it had not actually received an approach.

But Shire’s investors deserve a little respite after a difficult few months. The share price has fallen from peaks of 5286p in September 2016 to 3495p at the time of writing, after management cut its medium-term revenue target and revealed that extensive competition had hurt the sales of some of its top selling drugs.

It’s not the first time big pharma groups have looked to capitalise on share price weakness at Shire. In 2015, AbbVie made a 4626p a share offer which valued the company at £27bn and was scorned by chief executive Flemming Ornskov. The approach eventually fell through after a change in tax laws meant AbbVie would not be able to move its domicile to Ireland.

More recently, rumours have been circling that acquisition-hungry Pfizer might throw in an offer. The US-group, which is attempting to bulk up its cash position by selling its consumer healthcare business, has a dearth in its new drugs pipeline which Shire could fill. The British group has 15 programmes in the late stage of development, with several potential share catalysts in the next few months.

But conservative Takeda’s takeover consideration comes as a surprise. Historically, the Japanese group has refrained from engaging in risky mega-mergers and instead grown its portfolio of neuroscience, oncology and gastronomy medicines through a series of small acquisitions and in-house development. By contrast Shire’s string of M&A – including the $32bn takeover of Baxalta last year – has given it a sprawling portfolio, high level of debt and massive integration task.

Last time Takeda made a large acquisition its net debt was stretched so far that its credit rating was cut and that was only a $5bn deal. Shire has a current market capitalisation of just shy of $30bn. Factor in a premium and the group's $13.5bn debt pile and the Japanese group might have to fork out $50bn. The two companies would have a combined net debt of roughly $22bn - arguably a bit of a stretch.