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 PLC – which also is at least partly to “relocate” beyond Japan.

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

AllianceBernstein 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.

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

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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