Open Letter 10.01.18

October 1, 2018

An open list of questions regarding the proposed acquisition of Shire

Question 1: 

What is Takeda's plan to repay debt it takes on for this acquisition?

What is the projected impact on earnings per share (EPS)?

Every acquisition has pros and cons, and it is not possible to make a sound decision without grounded information about both. This particular case is a mammoth acquisition valued at 7 trillion yen, and given the current state of Takeda's finances, any slip-up could rattle the company to its core. Naturally, as shareholders, we will have to exercise our voting rights with extreme care, but unfortunately as things now stand there is a clear lack of objective information on which to base a decision.

For example, in matters of acquisitions one must know about the plan for repaying the debt required, and the projections for the acquisition's impact on earnings per share (EPS). These are things that every ordinary shareholder should want to know and confirm about the acquisition. In this case, however, Takeda has consistently refused to disclose this information, citing the U.K. Takeover Code, as the law governing the acquisition. The reason why we have to ask this question again is that, the way things stand, no one is in any position to make a proper decision about whether this acquisition is advisable. We have not even received any information about the Takeover Code or other regulations that are limiting your disclosure of the plan to repay the debt, and the projected impact on EPS. We would like to receive a detailed answer about your reasons for refusing to disclose this information.

On this, the only information you have disclosed asserts that EBITDA will triple after the merger/acquisition. However, EBITDA, as an indicator, is not sufficient in that it cannot incorporate negative factors related to the acquisition, and as such it is not in keeping with generally accepted accounting practices. The cumulative debt amount after the acquisition will be as much as 6 trillion yen, but you have not made public any plan to repay it.

After the acquisition plan was announced, Takeda shares lost 1 trillion yen in market value. You have made no projection of EPS, which are the basis for calculating dividends, and which will be diluted (by a factor of roughly 2x) by the acquisition. The only thing you have made public, on which you expect investors to make a decision on whether the acquisition should be allowed to proceed, is an EBITDA projection that reflects only the positive factors. This is tantamount to asking shareholders to exercise their voting rights while blindfolded. This is a deplorable state of affairs for deciding on the largest corporate acquisition in Japanese history. In our Group's study of the proposed acquisition of Shire, we are struck by the paradox that the proposed acquisition to strengthen Takeda is, in fact, exposing its vulnerability.

If Takeda is convinced that the dangers presented by this acquisition are in fact small, we would ask that you make public the information that would be needed to make a sound judgment. We ask that you disclose, fully and without delay, your plans for repaying debt after the acquisition and your EPS projections based on generally accepted accounting principles.

Question 2: 

Given that difficulties are foreseen in the area of blood products, which lies at the base of Shire's profitability, how do you justify paying a 65% premium to Shire's enterprise value?

With respect to this acquisition, our Group sees two major dangers. The first is the excessive size of the deal, relative to Takeda's financial resources. The second is that we think 7 trillion yen is too high a price to pay for Shire. Question 1 touched upon the first of these issues, and Question 2 deals with the second.

Shire proclaims itself to be the "global leader in rare disease." Its $8.2 billion (roughly 900 billion yen) sales in this area make it the world's biggest company in this field. That said, it acquired most of its products in the rare disease field through M&A in the past two years. Many observers have pointed out potential problems in the R&D structure that is needed to develop next-generation products and secure future growth. One outstanding example of this is the blood products activities of mega-pharmaceutical company, Roche, which generated the largest sales of any drug company in the world in 2017. Genentech, a member of Roche Group, applied to the U.S. Food and Drug Administration (FDA) for approval of the hemophilia treatment Hemlibra. The drug was recognized as a "breakthrough therapy" in April, and in June it was designated for priority review. Hemlibra is superior to current conventional treatments in terms of both effectiveness and treatment applications. There are analysts who forecast that sales could grow to $5 billion (roughly 550 billion yen) (BioSpace report of September 18, 2018). The FDA was quick to recognize it for priority review, and it may be approved as soon as in October.

As you know, blood-related drugs form the nucleus of Shire's business. Shire has been a main driver of this field worldwide. Once sales of Hemlibra begin in the U.S., however, this situation is likely to change, resulting in major losses. In other words, Shire's business model has been to seek to dominate specific fields, but when Roche and other mega-pharmaceutical companies embark on developments in such areas, there is a strong chance that business model will no longer render it viable. That is the lesson we can deduce from the Hemlibra case. In other words, Shire's business structure of concentrating on defined fields has been a strength so far, but it could turn into a weakness, as a single slip-up could quickly result in overall failure. Indeed, Shire's sales of blood-related products account for one-quarter of its total sales. Certainly, Shire is a company that deserves to be looked at, but can it truly be said to have sufficient value to be worthy of an acquisition with such great risk?

In this acquisition, Takeda has pushed for a premium of roughly 65% for Shire shares. According to media reports, acquisition premiums paid by Japanese companies average roughly 30%, or about half the figure for the Takeda/Shire deal. Regarding the potential impact of the market entry of Hemlibra, a report from Merrill Lynch dated July 5 (page 25) forecasts a 50% drop in market share for recombinant Factor VIII medicines. You seem to be underestimating the impact, and keeping a tight lip on important details, again behind the cover of the Takeover Code. At the risk of repetition, it is not possible to determine whether the proposed acquisition is a good idea without knowing more about the basis on which the acquisition value is calculated. It would appear, however, paying a premium for Shire shares in this deal that is more than double the average level is beyond extraordinary. If Takeda wishes to move forward with this acquisition, and is so very confident of this acquisition, we would ask that you make a clear, public statement of the basis for your price determination.

Question 3: 

Will you make public the minutes of your Board of Directors meeting(s) when this acquisition was discussed, and any statements made by the Directors?

Presumably, in the time leading up to Takeda's formal announcement of its plan to make this acquisition, your management team conducted a careful and vigorous discussion of the merits and demerits. To this point, however, at the regular ordinary general meeting of shareholders, news conferences, and on other occasions, the members of Takeda's Board of Directors, including yourself, have made only positive statements that the deal is right and proper. Nothing whatsoever is known about the process through which the Board of Directors came to this conclusion. In the circumstances, our Group cannot avoid the conclusion that this management decision regarding the acquisition of Shire is ill-advised and without rational foundation, ignoring the threats to the viability of Takeda and the possible impairment of shareholder equity.

In your explanations, your management's decisions, including the one about this acquisition, have all been debated in various committees as well as by the Board of Directors, where outside directors are in the majority. If that is the case, public disclosure of the minutes of your Board of Directors meeting(s) where this acquisition was discussed, and any statements made by the Directors, would only be a positive move for Takeda, as it would provide a broad expression of the healthy state of your corporate governance, enhance public trust in this acquisition, and satisfy the desire of our Group to know more about your process. It is our desire that Takeda make public the minutes of your Board of Directors meeting(s) where this acquisition was discussed, and any statements made by each Director, without resort to legal action on our part for this disclosure.

Question 4: 

Is the Shire acquisition the only way for Takeda to ensure sustained growth?

We believe, and hope you would agree, that the Shire acquisition is not an end but a means, and that the "end" is the sustained growth of Takeda. The question our Group has been persistently asking is, "what makes the Shire acquisition the best means to that end?" Is this the only means available to Takeda?

Right now, expectations are high that Takeda must come up with some breakthrough new pharmaceutical products, and we believe such expectations are shared by the company. Throughout the world, with every passing year, it becomes harder and harder to develop new drugs. It is a well known fact that there are limits to what any company can accomplish on its own. In these circumstances, there is no doubt that corporate acquisitions can be an effective tool.

What you are proposing, however, is to pay over 7 trillion yen by Takeda, the acquiror, which is currently valued at only about 50% of the acquisition price, borrowing 3 trillion yen in the process to expand its debt to a total of 6 trillion yen. We find it hard to accept that this is the only way for Takeda to move forward toward sustained growth.

What is the future of Takeda? That is the question that is perennially on our minds. The deal you are proposing is nothing more than a corporate scale expansion, ignoring the structure and culture of the company that is Takeda. It is difficult to imagine your proposal as the future of Takeda. 

Takeda has long waved the banner of globalization, but what should globalization mean for Takeda? Takeda should be able to be its best self, and become a company that the world invariably seeks out. It is Takeda's history and culture that define what Takeda is. Staking the company's future on this giant acquisition threatens to destroy the company's true self.

Our Group believes there are many other things Takeda can pursue to ensure sustained growth, things that only Takeda could do, instead of acquiring Shire. For example, Takeda could strengthen efforts in the area of open innovation, create life science industrial clusters, acquire a few small to medium-size bioventures, and shake up the pharmaceuticals sector in Japan. Takeda need not depend on acquiring Shire.

It seems to us that Takeda is stubbornly fixated on the Shire acquisition. In response to any and every question, you simply repeat your arguments in favor of the acquisition. You seem to have blinded yourself to any potential negative aspects, or to other ideas for things to do. A recent report in the Nihon Keizai Shimbun (August 30, 2018) suggests that only 10-20% of Japanese companies' acquisitions of foreign firms have been successful. 

There are many reasons for this. An acquisition is a one-time event, like a street festival. At some point, the acquisition becomes an end in itself rather than the means. Once the merger is completed, people with different backgrounds, in terms of work culture and corporate philosophy, must strive to learn how to put their heads together and get the work done, but they fail more often than they succeed. Many have foreseen the glimmer of the truth of failure during the acquisition process, which later becomes a stern reality. 

Too often that seems to be what happens. It seems to us this is what will happen if you carry out your proposal. Please stop and think before you act. It is not too late to turn back. Do you really think the Shire acquisition is the only option available to Takeda? Our Group is made up of people who truly love Takeda. Won't you sit down with us once more, to think about Takeda's future together, and plan its future for sustained growth. Please explain to us why you think acquiring Shire is the only way forward. We look forward to this opportunity to speak with you.

END