Culture shift at Takeda a sign of things to come

Takeda's pursuit of UK pharma major Shire has not only made headlines over the last few months, it also heralds a sea change within Japan's largest drugmaker. The proposed deal has led to a clash between Takeda's centuries-strong corporate culture and the drive for growth from overseas markets, thanks to the company's first non-Japanese CEO, Christophe Weber. If approved by shareholders, the deal will catapult Takeda into the top ranks of the global pharmaceutical industry, but it also comes - somewhat ironically - as Japan's latest drug pricing policies threaten to demote the country as one of the world's most sought-after pharma markets.

Takeda's acquisition of Shire promises many benefits. The company expects the acquisition to yield cost synergies of at least USD1.4 billion, including USD600 million in research and development (R&D) expenses.

However, on 28 June a group of some around 130 Takeda shareholders attempted to block the proposed deal at the company's Annual General Meeting (AGM). The group holds a combined 1% of Takeda and is made up of ex-Takeda employees who argue that the acquisition goes against the company's long-held corporate values.

The amount of debt required to fund the proposed deal is an "abuse" of the values of "Takeda-ism", argued the dissenting group's representative, the 88-year-old Yujiro Hara, a distant relative of the Takeda founding family.

The statement led many observers to wonder: What is Takeda-ism? And why should it be allowed to block a multi-billion deal that would propel Takeda to the top global ranks?

According to Hara, Takeda-ism is a corporate credo that entails avoiding carrying overly high risks" or "burdening the company with excessive debt".

Says Mr. Hara, a former Takeda employee: "We were told not to upgrade our seats on bullet trains during business trips as the company worked to cut down costs and had a reserve of over JPY2 trillion. But now, it's already a debt-ridden company with debts exceeding JPY1 trillion, and the Shire acquisition will further add to that, making it a company with debts of over JPY6 trillion." (source: Pharma Japan)

(In response, Weber has said that Takeda's ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) stands at 1.8, which rating agencies see as controllable.)

Still, a lot of international investors would appear to agree with Mr. Hara. Since the proposed acquisition was announced in March 2018, Takeda's shares have slumped by over 20%, primarily due to concerns over the amount of debt required to fund the deal.

Takeda's falling shares have also dismayed stalwart investors who viewed the blue-chip as a safe retirement holding. "I've owned Takeda shares for a long time because of high dividends, thinking it's better than saving money in the bank. But share prices have been falling since the beginning of the year, and things didn't change even after the Shire announcement. I don't want to sell them at a loss now, so have no choice but to hold onto them," a 74-year-old man from Osaka Prefecture told Pharma Japan.

It's easy to understand Takeda shareholders' dismay. The concerns reflect a clash between the old and the new. Takeda was founded in Osaka in 1781, which means it predates most of the modern Western pharmaceutical industry. Our modern-day pharma giants, including Eli Lilly, Roche and Burroughs-Wellcome (now GlaxoSmithKline) started as local apothecaries that took on wholesale production in the middle of the 19th century. In addition, Weber's entrance as Takeda's first non-Japanese CEO in 2014 - a disruptive event in itself - came with an unprecedented drive for overseas expansion.

It also doesn't help that Takeda plans to sell its original Osaka headquarters, which the company has owned since 1781, to fund the acquisition of Shire. To many Takeda shareholders, it must feel like the company is not just morphing into an unfamiliar global behemoth, but is also slashing its Japanese roots.

Ultimately, the dissident shareholders' bid to block the deal failed. But that does not mean they will stop fighting. The group aims to block the Shire takeover by drumming up as much support as possible for 'nay' votes at an extraordinary shareholders meeting, to be held sometime between late this year and early next year. Takeda needs to clinch two-thirds approval for its planned issuance of new shares - a de facto vote on the deal itself.
"The Shire acquisition will probably go through even if we gather the shares of founding family members and ex-employees," Mr Hara said. "We know that we probably don't have a chance to win, but we can't just sit by and see Takeda going in the wrong direction."

The Takeda-Shire acquisition will not be the last major M&A deal out of Japan. The country's drug pricing policies have become increasingly unfavorable to drugmakers over the years. The latest round of National Health Insurance (NHI) drug pricing reforms have significantly narrowed eligibility for the price maintenance premium, introduced cost-effectiveness as a major factor in drug pricing, and accelerated the pace of price cuts. Pharmaceutical associations EFPIA and PhRMA have warned repeatedly that Japan's drug pricing reforms will discourage drug makers from investing in research and development in the country.

Weber is mindful of Japan's reduced growth prospects.

"This (the Shire deal) is a unique opportunity for Japan, because Japan doesn't have a global champion and might never have one if we don't do this deal. The countries that have one, they all built it by M&A -- GlaxoSmithKline, Sanofi. It's easy to say their M&A has been bumpy along the way, but what would those companies be if they had not done it?" he told Bloomberg.

Even some Takeda shareholders agree.

"Japan is facing a shrinking population, and the market will become smaller and smaller. Just like Softbank, Takeda should take risks to grow," a 61-year-old man told Pharma Japan.

The dissenting shareholders are right: Takeda is moving away from its traditional roots. But that is likely what is required for the company to guarantee its future - by looking beyond Japan.