The Third Open Letter sent to Mr. Weber
November 20, 2018Mr. Christophe WeberPresident & CEO Takeda Pharmaceutical Co. Thinking about Takeda's Bright Future / Shareholder volunteers as shown on attachmentAttorney: Toshiyuki MurabayashiLaw Office LOI UnitedToranomon Toho Bldg.9F1-1-23 Toranomon, Minato-kuTokyo 〒105-0001TEL 03-3592-1791Regarding the proposed acquisition of Shire:
Open questions before the extraordinary general meeting of shareholders (Part 3)
Greetings!
As autumn approaches winter, we wish to share with you our best wishes for the vitality of your company.
Our group, Thinking about Takeda's Bright Future (hereinafter, "the Group"), is grateful for the understanding your company has shown for our activities.
As an expression of the Group's resolute opposition to your proposed acquisition of Shire, on October 1 we summarized our understanding of problems and questions regarding this matter in the form of a list of "Open Questions." We sent this list, to your company, with a follow-up dated November 6. We also shared these documents with a group of institutional investors and openly with media/internet outlets. The responses we have received from your company to date, however, are not really answers, and in no way address any of our questions or concerns.
The announcement to convene an extraordinary general meeting of shareholders (EGM) on December 5 (Wednesday) for shareholders to decide on the proposed acquisition of Shire, was made on November 15. This notice came just three weeks before the EGM, so that our Group’s intention to submit certain written proposals for the EGM could not be exercised in time. These pertain to the following Questions 7 and 8, in addition to the Questions 1 to 5 that we have addressed previously in ore Open Letter.
It is our hope that you will answer all our questions, to the satisfaction of all shareholders, prior to the EGM.
As we have stated in the past, the proposed acquisition is the largest in the economic history of Japan, and will have effects extending far beyond your group of shareholders, to include all the people of Japan. It is for that reason that we are sharing our questions widely via the media and the internet at the same time as we communicate them to you. We urge you to reconsider the facts, and think once more about whether the proposed acquisition is the best way for Takeda to move forward. It is our sincere desire that you will make the necessary decision to alter this course and change this plan.
Sincerely yours.
November 20, 2018
Proposed Acquisition of Shire: An Open List of Questions (additional questions)
[Question 7]
Is it true that the U.K. Takeover Code or other regulations prevented you from disclosing your plans for repaying the debt and to make projections of EPS post acquisition ?
Even as you move forward with your preparations for the acquisition, you have consistently refused to share publicly with shareholders and investors any of the information they would need to make an informed decision about the deal, including your earnings projections for the new, merged entity and your plans for repaying the ¥3 trillion debt, citing the U.K. Takeover Code and other regulations as your reason.
Our Group, however, contacted senior members of the U.K. Takeover Panel to check on this. We were told there is nothing in the Takeover Code that would preclude your company from making public your estimates of how the deal would impact financial results. On the contrary, the Code encourages companies involved in takeovers to share with shareholders the information they need to make informed decisions. We received a written statement expressing skepticism regarding Takeda's use of the Takeover Code to justify its decision not to disclose pertinent information. If this statement is true, then we can only conclude that Takeda's refusal to disclose information to shareholders, including our Group, citing the Takeover Code as its rationale, reflects Takeda's misinterpretation of the Takeover Code, which is itself a violation of the company's own Corporate Governance Code, which is intended to ensure the rights and fair treatment of all shareholders. Please explain to us once more your refusal to disclose pertinent information to shareholders, in light of the facts presented above.
[Question 8]
To date, your company has declined to respond to our questions, saying that in the interest of fairness it would be inappropriate to respond to questions from individual shareholders (minority interests). Based on the first principle in Chapter One of the Corporate Governance Code, please reconsider your refusal to respond?
In your response of October 31, you stated, as one reason for your refusal to answer our questions, "Information should be provided equally to all shareholders. It is not appropriate for us to respond to individual shareholders." Our Group's "Open Questions" were formulated and submitted by 14 shareholders who are members of our Group, and represent not only of all 130 of our members but of all shareholders. What we are urging you to do is to provide the necessary information to all of your shareholders.
The first principle in Chapter One of your Corporate Governance Code (specifically, part 1-2 (1)), stipulates that you must provide all shareholders with the information they need to make decisions about the proposed deal. We believe this is your obligation as a corporation. Therefore, we are asking you to reconsider that position, based on the first principle in Chapter One of your Corporate Governance Code, or explain your refusal to do so.
November 7
On October 1, we sent an open letter to Takeda, publicly posted, with a list of 4 questions, to which we received a de facto ”Refuse to Reply” from the company. The Group Thinking about Takeda’s Bright Future (TTBF), submitted the original list of questions once again, and added 2 more questions.
While declining to respond to our questions, the company revised previous statements that, in fact, takes into account TTBF’s query. This is reflected in the press release dated October 31, in announcing its fiscal 2Q results, under the caption “aiming to be a leading global company in biopharmaceuticals R&D, which is grounded in core management strategy (page 12)”.
Heretofore, the company has only explained that “earnings per share will increase significantly in the first fiscal year after the merger”. But in the recent announcement, it has changed to
It alters the mistaken impression that there will be a large increase in EPS in the first year after the merger. Also, it was the first time the company specifically made a projection of EPS in accounting terms.
It makes us wonder if he has been telling untruth throughout. That besides, what has now been explained is insufficient still. Should ordinary shareholders and investor interpret it to mean that EPS would decline in the first and second fiscal years (2019 and 2020)?
Even in the third year (2021), depending on declines in the market for hemophilia treatment, it could lead to further declines from write offs of goodwill. It appears that the company is estimating mere 30~50% declines in Shire’s hemophilia drug sales.
The company has added a statement that the impairment risk on intangible assets is low. However, no explanations have been given.
At the ordinary general meeting of shareholders, the company said
On this point it is necessary to ask the company to release the board minutes and then verify the content.
Based on materials released on May 8, the company said “as a major factor to provided returns to shareholders, the company will maintain its established dividend policy. But this has also been modified to
The issues we take up with the company’s announcement of 1H results are on page 12. Original text can be viewed below.
Question 5:
The first chapter of Japan’s Corporate Governance Code states the rights of shareholders, and the need to ensure fairness. This requires transparency and the appropriate disclosure of information, with due consideration given to the shareholder interests of individual and minority interests, and foreign investors.
For the proposed acquisition, it is planned that financial institutions will extend loans to Takeda and securities firms will engage in underwritings of debt and equity issuances. It is a precondition that they will naturally be briefed on Takeda's cash-flow projections.
Ordinary individuals and foreign investors, however, have not been given such information, based on reasons Takeda has referred to as the U.K. Takeover Code. These two classes of investors do not enjoy equal access to information. Requiring them to exercise their voting rights amid this disparity is a clear violation of the principles of securing equality and shareholder rights as advocated in the Corporate Governance Code.
If financial institutions entrusted with assets from individuals vote to approve the proposed merger for their own benefit, it will present a major problem in terms of the Stewardship Code.
Question 6:
The proposed acquisition is huge, valued at ¥7 trillion. Considering Takeda's current financial situation, this is enough to rock the entire company if this mega deal fails to produce results. We discussed this in some detail in our previous list of open questions. Put plainly, the acquisition value exceeds Shire's entire market capitalization by roughly ¥3 trillion. The new, merged entity will have to carry this enormous sum on its balance sheet as "goodwill." Add to this the roughly ¥2 trillion in goodwill from Shire's acquisition of blood products company Baxalta last year, and the roughly ¥1 trillion that Takeda already carries on its books, (and) the total goodwill of the new company will become roughly ¥6 trillion.
In its accounting, Takeda currently uses International Financial Reporting Standards (IFRS). These standards do not use fixed-term straight-line depreciation of goodwill, but there will be a huge gap to the new company's initial earnings projections. If there should be serious impairment to the value of this "goodwill," valuation will will need to resort to the judgment / opinions of accountants. This could lead to a severe write down of the value of the asset.
At the same time, as anticipated, on October 4 U.S. authorities approved enhanced uses for Roche's Hemlibra. In terms of both effectiveness and treatment applications, Hemlibra appears to have competitive advantages over Advate, Feiba and other products that are core components of Shire's business portfolio. This development could mean a drastic reduction in Shire's blood related projected earnings. This is just as we predicted in our open list of questions. If these expectations come true, sooner or later the value of Shire's blood products business may be slashed by ¥1-2 trillion. A recent report from Merrill Lynch corroborates this view. In these circumstances, the rosy view presented by your management team may prove to be a pipedream.
Your company has been reiterating its commitment to the current dividend of ¥180 per share, but how will you maintain that if earnings are sharply reduced? We repeat our request for an adequate explanation of Takeda's projections of future cash flow and EPS for the new, post-merger entity.
October 1, 2018
Takeda's share price has dropped sharply from the beginning of the year. Why is Takeda alone among major Japanese pharmaceutical companies performing so poorly?
The Group TTBF sent an Open Letter to Mr. Weber. We are asking for a reply by the end of this month (October).
October 1, 2018
Question 1:
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:
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:
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:
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