Mehta Analysis: Takeda and Alliance Bernstein Moves Contain A Message For Pharma

Buying Shire gives
Takeda the chance to exploit global tax benefits and gain other
profit-promoting advantages through integrating with Shire’s differently
focused business. Outside of pharma, business model rationales are changing
rapidly, and old certainties cannot be taken for granted. Pharma would ignore
the wider revolution at its peril, and Takeda’s move is a step in the right
direction, argues Viren Mehta, founding partner of Mehta Partners LLC.

Three examples capture
the pace of change all around us: the largest car company today does not own
any cars, the largest hotel company does not own any rooms or hotels, and the
largest marketing company does not take title to many goods. And rapid growth
at these three pioneers, Uber, AirB&B and Amazon, reminds us how this pace
of change is only accelerating.

Underpinned by
similarly accelerating change, money manager AllianceBernstein’s relocation
from New York City to Nashville, Tennessee has something of a parallel in Takeda
Pharmaceutical Co. Ltd.’
s proposed “acquisition” of Shire
 – which also is at least partly to “relocate” beyond

To be sure, both of
these moves are only a partial relocation, but the symbolic importance cannot
be overemphasized. The growing IT bandwidth now makes all of us a part of a
small village, just as a particular domicile is losing its significance. But
digital disruption goes much deeper in dismantling cost structures at every step,
including offering the opportunity to lower the tax burden while searching out
appealing locales to help attract and retain scarce talent.

Tax Benefits Beckon

Both Takeda and Shire
have already pruned their tax rates with their globalization strategies –
especially the latter with its tax-inversion-focused switch to Ireland as its
headquarters. Shire’s workforce has grown five-fold, and income three-fold,
while taxes have shrunk by two thirds—all while it has grown its US footprint
with high-priced “rare disease” therapies that enable Shire to report
operating margins close to 50%.

Takeda has some
distance to go in achieving such a global footprint, or such profit margins,
which goes a long way to explaining the appeal of Shire. Though this move is
not primarily driven by the so called “tax inversion” just to reduce
its tax obligations, efficient integration of its future combined operations
still can bring Takeda’s tax rates down from high-teens to low-teens.

Yes, Takeda would
accept a heavy debt load at five times EBITDA, the same as what Shire ended up
with after its Baxalta Inc. acquisition. The new Takeda
leadership aims to bring this burden down to two times EBITDA within its
planning horizon, hoping that the need to feed this newly created top-10 biopharma
giant would not face the same fate that Shire just did. (Also see “Takeda
To Unlock More Cash As It Preps For Shire”
 – Scrip, 14 May,
2018.) Shire reduced its 2020 sales target by 13% last January, as many readers
would know.

Shire’s Baxalta brings
another valuable and “rare” franchise, in the oligopolistic blood
plasma therapies market, which is shared largely by three dominant players.
This sector faces innovation-driven competitive threats, especially from Roche.
Shire also has lost some of the talent at this lucrative business unit. Still,
Takeda has an opportunity to build a worthy rival to CSL Ltd. of
Australia, which dominates this space, and sports over $60bn in market value.
If appropriately strengthened, this blood plasma business alone could justify a
good majority of what Takeda is paying for Shire – unless of course it chooses
to divest it so as to reduce the debt burden.

So it all comes down
to execution, as always, starting with the shareholders of both companies
accepting the risk of heavy debt and approving the merger. Retaining and
strengthening the talent across the ranks, and above all, building an efficient
global operation that is not addicted to the high margin “rare
disease” cash flow, offer the real challenge. Such high margins may
provide rich cash flow in the short term, but gathering storm clouds around
such franchises justify caution about their long-term sustainability, and call
for careful preparation for broadening of the management horizons.

New Paradigms

faces a financial industry that my generation can hardly recognize, hence its
relocation of a substantial portion of its people costs to a locale that
perhaps offers a better quality of life, even if it is in the financial
backwaters. This move may not be entirely surprising. An analyst can do her
analysis almost anywhere with near-universal access to data as well as to the
managements and experts through audio and video chats. So why not in Nashville,
a town a tenth of the size of New York that is often rated as one of the more
desirable places to live in the US? Why not, indeed! Whether AllianceBernstein
can retain its superior ranking in asset management after this out-of-the-box
move remains to be seen. No amount of cost savings would save AllianceBernstein
unless it in fact adapts to the transformed financial industry, and improves
its performance ranking to continue to attract talent as well as capital.

The biopharma industry
seems a decade behind the financial industry, not to mention Uber, AirBnB, and
Amazon—primarily due to the regulatory barriers. But such barriers are thinning
at the edges around the world. A new paradigm where the patient in her rightful
position is guided by her advisors (regulators, payers, and providers to name
the three key ones) to choose appropriate treatment at the right price can
align the role as well as incentives of all stakeholders, including biopharma.

Regulations already
are adapting to this reality with a focus on real world data, among a growing
list of initiatives, just as patients are taking charge of their disease,
learning about their options, and walking into doctors’ offices with a
folder-full of insights. Payers are ever-eager to explore such a paradigm for a
more rational cost framework. Providers, as usual, will need time to change.

leaders need to recognize the shift they must undertake from imbalanced
innovation and marketing infrastructures that limit their flexibility

Microsoft faces a
similar shift, where open source software developers are increasingly shaping
the future of IT, and doing so much more time- and cost-effectively. After its
own efforts in this space failed to gain traction, Microsoft made a major about-face
and bought GitHub so as to be able to put the software developer in the center.
GitHub has become the leader in this space with 28 million developers working
on 90 million software projects around the world—all of this in less than 10
years! Regulatory barriers notwithstanding, someone is going to actualize
open-source biopharma innovation, not to mention open-source marketing (as
selling is relegated with the advent of precision medicine) – possibly in less
than 10 years. The questions is: would it be biopharma innovating and
benefiting, or will a whole new frontier need to emerge to awaken the giants?

Time for Big Shift

The Microsoft purchase
of GitHub deserves a column of its own, but suffice it to say that its pivot
from calling the open-source developer platform a cancer just a few years ago,
to paying $7.5 billion, Microsoft is going all-in. This shift by Microsoft
offers a mirror for biopharma leaders to recognize the shift they must
undertake from imbalanced innovation and marketing infrastructures that limit
their flexibility points, and broadening their horizons to adapt to this
imminent future.

Takeda-Shire are
taking a tradition-worn step to buy time, but unlike earlier mega-mergers in
our industry, the newly globalized team of the combined Takeda-Shire can see
the handwriting on the wall, and has an opportunity (and now the resources) to
evolve its business model for this patient-centric future.

This column originally
appeared on Scrip Biopharma Intelligence, June 12th, 2018

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