In May of this year, a $62 billion deal for the acquisition of UK based pharmaceutical Shire by Japanese pharmaceutical Takeda was agreed. Upon completion, this deal would mark the largest-ever overseas takeover by a Japanese company and would give the company a combined revenue of $31 billion – enough to push it into the top 10 of global pharmaceuticals [1]. Throughout the process, Takeda has elicited the help of financial advisors at Nomura, JP Morgan Chase, and Evercore along with lawyers from Linklaters, Nishimura & Asahi and Ogier. Shire’s financial advisors include Goldman Sachs, Citigroup and Morgan Stanley while their lawyers include Slaughter & May, Davis Polk & Wardwell, Nagashima Ohno & Tsunematsu and Mourant Ozannes [2]. The deal has been approved by international regulators in China, Japan, Brazil and the United States and is currently awaiting a decision by the European Union where approval seems likely [3].

While shares in Shire have risen by almost 50% [4] since Takeda first officially announced interest in placing an offer for Shire in late March; shares in Takeda have fallen 20% [5] indicating worries on Takeda’s end for the acquisition. To add to this a small group of shareholders (which hold about 1% of Takeda’s stock) have explicitly expressed their opposition to the deal [6]. One major concern that shareholders have with the deal is that Takeda would have an estimated $48 billion of debt to pay should the deal go through – $13.7 billion of which would be inherited from Shire’s existing debt [2]. $31 billion of the net debt results from a bridge loan which was arranged by Takeda in order to help pay for the acquisition, the loan is led by JP Morgan Chase, Sumitomo Mitsui Banking Corporation and MUFG Bank [7].

Orphan Drugs

With such a staggering price to pay for the takeover, one might ask why Takeda wishes to pursue Shire in the first place. One reason for this is that Shire specialises in the development and production of “orphan drugs”. The definition of an orphan drug varies throughout the world, in the U.S the FDA the status is granted to a drug that’s designed for a rare disease that affects “fewer than 200,000 people in the U.S” or if the disease does affect more than 200,000 people in the U.S the drug must be considered uneconomical to develop and market [8]. While the European Union defines an orphan drug as a drug designed for “life-threatening or very serious conditions which affect no more than 5 in 10,000 people in the European Union” [9].

Under normal conditions, orphan drugs wouldn’t be profitable to develop due to their naturally low demand. Fortunately, there are various incentives in place to encourage their development, among which include market exclusivity of approved orphan drugs in the U.S for 7 years and the EU for 10 years under the Orphan Drug Act of 1983 [10] and Regulation EC No 141/2000 [11] respectively. These extended periods of market exclusivity allow for pharmaceuticals to charge high prices on their drugs for longer due to the lack of competition; moreover, there are often very little to no alternative treatments for the targeted disease due to its rarity, which often leaves patients with no option but to purchase the expensive drug. Pharmaceuticals also benefit from reduced research and development (R&D) costs for orphan drugs as part of these incentives, in the U.S 50% tax credit is given to the costs as well as grants for phases 1 to 3 in the clinical trials. The combined effects of high pricing and reduced R&D costs as well as other incentives through legislation are enough to offset the low population of patients for an orphan drug. This often translates to a higher profit for a lower volume of drugs compared to regular drugs as demonstrated by a 2016 study which concluded that companies with orphan drugs had a “9.6% higher return on assets” to those without orphan drugs [12]. Pharmaceuticals have clearly noticed the potential in orphan drugs as exhibited in EvaluatePharma’s 2018 Orphan Drug Report which estimated that at least until 2024, the orphan drug market is expected to grow at a rate of more than double that of the non-orphan drug market at a compound annual growth rate of +11.3% compared to +5.3% respectively [13].

Shire’s Orphan Drug Programme

Shire possesses an impressive drug pipeline with 16 programmes in phase 3 clinical trials and 11 in phase 1 & 2 clinical trials as of November 2018 [14] and of the 16 programmes in phase 3, 12 are identified as being made for rare diseases [15]. This is in great contrast to Takeda’s pipeline which currently possesses 3 drugs in phase 3 clinical trials and 28 in phase 1 & 2 clinical trials. Therefore, this acquisition would greatly bolster Takeda’s late stage drug pipeline and fast track Takeda’s orphan drug programme, bringing it up into the top 10 of pharmaceuticals for orphan drug sales. Takeda’s drug portfolio will be greatly diversified, particularly in drugs designed for rare diseases and especially in drugs designed for hematologic (blood) diseases where Shire generates most of its sales of orphan drugs.

While Takeda’s decision to acquire Shire is based off a great number of factors, there is no doubt in my mind that Shire’s knowledge of and influence in the orphan drug market is a strong motivation for the acquisition. Another significant factor is that this takeover will strengthen Takeda’s standing in the U.S as an estimated 48% of the combined revenue of Takeda and Shire would come from the U.S whereas only 34% of Takeda’s revenue in 2017 was from the U.S [16]. Additionally, upon completion the deal would introduce Takeda into the New York Stock Exchange (NYSE), making it the only pharmaceutical company in both the Tokyo Stock Exchange and the NYSE [17]. However, this deal is not without risk, while the large debt Takeda will take on from the deal is concerning, Takeda must also consider the possibility of incentives for orphan drugs being reduced in the near future as many studies have called for legislations to be adjusted to prevent companies from abusing the incentives [12] [18][19][20] – particularly in the case of extravagant pricing of orphan drugs which often results in them being unobtainable for the patients who so desperately need them. Thus, Takeda would do well to be careful in the orphan drug market so to not infringe upon their philosophy of ‘Takeda-ism’.

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