The success or failure of this massive acquisition will hinge on whether a growth strategy can be realized.
Takeda Pharmaceutical Co.'s purchase of major Irish biopharmaceutical company Shire PLC has been approved at extraordinary shareholder meetings at both companies.
The acquisition will turn Takeda into a huge pharmaceutical company and marks the first time a Japanese company will rank among the world's top 10 in terms of sales in this industry. The enlarged company will come into being as soon as early next year.
The purchase price is 46 billion pounds, or about 6.5 trillion yen. The deal is the most expensive acquisition of a foreign company by a Japanese firm. Developing new drugs requires huge amounts of capital, so Takeda apparently aims to strengthen its research and development by expanding the scale of its operations.
Shire's strengths lie in medicines for treating neurological disorders and rare diseases, such as those involving blood and the immune system. In particular, Shire has few rivals in the field of drugs for rare diseases, so the company is forecast to rake in relatively high profits in this sector.
It is hoped that the acquisition will lead to the creation of new drugs that will be new primary sources of revenue while there is surplus management capacity arising from the deal, which will enable Takeda to survive the intensifying international competition.
The success rate of new drug development is reportedly about 1-in-30,000. It is not unusual for drug development to take 10 years or longer. Consequently, U.S. and European companies with promising new drug candidates have often been snapped up by other firms.
Takeda has failed to concoct new drugs that become hit products and its profitability has been declining. If Takeda sat on its hands, the gap with European and U.S. rivals would only widen. It appears a sense of urgency about this prospect pushed Takeda to decide on acquiring Shire.
Address debt concerns
After purchasing Shire, Takeda plans to boost its annual R&D expenditure to more than 400 billion yen. Even so, this figure is said to pale in comparison to the money poured into R&D by major European and U.S. pharmaceuticals. Bolstering Takeda's development system will be an issue that needs to be addressed.
It also must not be forgotten that this acquisition comes with significant risks.
Once the purchase procedures are completed, Takeda's net interest-bearing debt -- such debt minus cash reserves -- is projected to swell to 5.4 trillion yen, about eight times what it was before the acquisition.
Some members of Takeda's founding family opposed the purchase because they felt the risks were "too great." Takeda's share price has dropped at least 40 percent since the start of the year, and whether concerns about its deteriorating financial situation can be wiped away will be vital.
In recent years, a number of mergers and acquisitions by Japanese companies have failed to deliver the expected results. A growing number of these cases have resulted in companies being forced to write off massive losses. This point is disconcerting.
The focus will be on the recording of the goodwill asset. When the purchase price is high, as in Takeda's case, this goodwill asset -- the difference between the price and the net assets of the acquired company -- also increases. If the business performance of the acquired company deteriorates, a loss needs to be booked.
Goodwill impairment also triggered Toshiba Corp.'s management crisis.
Ensuring Shire smoothly generates profits will be essential if Takeda is to avoid hefty losses. The prowess of Takeda's management will be put to the test.
(From The Yomiuri Shimbun, Dec. 13, 2018)
Read more from The Japan News at https://japannews.yomiuri.co.jp/
