We have dedicated two recent research notes to discussing the ongoing merger of Japanese pharma giant Takeda (TSE:4502) and the even bigger Shire (NASDAQ:SHPG). In our first entry, we discussed the abortive attempt by Allergan (NYSE:AGN) to make a play for Shire in opposition to Takeda. Our second, focused on the significant challenges still ahead for Takeda, including justifying the leveraged purchase of the Hiberno-American biopharmaceutical company to skeptical shareholders.
In this note, we will dig deeper into a point we made in our last entry: the promised big cuts to the combined entity. More specifically, we will be discussing the proposed cuts to the R&D budget and staff, as well as reflecting on the proposed merged entity’s pipeline prospects.
Shire’s top candidate
Shire’s top pipeline prospect is lanadelumab, a therapy for the prevention of the emergence of angioedema (a serious skin swelling condition afflicting about 100,000 Americans) in individuals with hereditary angioedema. In 2017, Shire projected peak annual sales on the order of $2 billion – putting it in legitimate blockbuster contention. The company submitted a New Drug Application in February and was awarded Priority Review status by the FDA. That means Shire may get the verdict before the merger closes, which will not happen until early 2019. Success on lanadelumab would probably soften Takeda’s shareholders on acquiescing to the merger. Rejection of Shire’s top pipeline candidate might precipitate a revolt.
Investing in the future
The fate of lanadelumab may play a deciding role in the Takeda-Shire merger, but it also reflects a potential big win for an R&D department that has not seem massive successes since the approval and commercialization of Vyvance. Thus, it is critical to consider the pipeline that Takeda is buying. This is a very important question, especially considering that the principal – but far from only – value of Shire is bound up in two assets: a profitable but aging ADHD product and a blockbuster hemophilia therapy that is soon to face mounting competition. The future of the merged entity, and the justification of the $62 billion purchase price, demands an attention to the future in addition to the present.
Cutting back on R&D
In 2017, Takeda and Shire spent $2.85 billion and $1.7 billion on R&D, respectively. With a merger on the cards, Takeda says it now plans to rationalize the operations of the combined entity, with total cost-cutting on the order of $1.4 billion. Of that, $600 million is slated to be carved out of the R&D department. This will consist of slashing a couple underperforming research subsidiaries as a start, but that will still leave plenty of cutting on the docket for Andy Plump, Takeda’s R&D head.
The question is whether the cuts will actually rationalize operations by eliminating waste and redundancies. Part of the focus, Plump has said, will be on focusing in on Takeda’s and Shire’s individual strengths, which may prove synergistic. Shire has a fairly extensive rare disease pipeline, with a range of cutting edge therapies, such as lanadelumab. Rare disease therapies have become the most coveted of prizes among pharmaceutical companies of late, so Shire offers a fairly rich haul – though the value of the pipeline and experimental therapy concepts will have to be proven out over several years.
Externalizing to prosperity
In the short run, cutting R&D may compromise future growth down the line, something Takeda’s shareholders will no doubt be considering in the months ahead. Plump promises to play to the strengths of both Takeda and Shire and to pursue an R&D strategy balanced further toward “externalization,” or collaborating with outside developmental biotech and biopharmaceutical companies to trial new drugs and therapies. Such a strategy is less expensive, but it can also mean ceding control – and profits – to the development partner. But it is undoubtedly a necessary move if the new Takeda is to succeed in cutting its R&D budget substantially but still hope to have a new generation of big money products down the line.
Outlook uncertain
The ultimate fate of the Takeda-Shire merger remains in flux for now and is reliant on a number of factors, not the least of which is a vote of Takeda’s shareholders. The deal will not be closed for quite a while yet, if it is allowed to proceed. But the story will no doubt evolve in the meantime.
Looking at the proposed cuts to R&D and rebalancing toward externalized drug development makes sense in the context of the necessary actions to get this deal done. Whether they are value-additive actions for the long-term remains an open question. No doubt we will revisit it again before all is said and done.
Disclosure: I/We own no stocks discussed in this article.
