Big pharmaceutical companies have begun 2019 with a bang.
Blockbuster deals like Bristol Myers Squibb's (BMY) $74 billion deal for Celgene (CELG) , Eli Lilly's (LLY) $8 billion deal for Loxo Oncology, and Takeda Pharmaceutical's (TAK) $62 billion buyout of Shire Plc have signaled the acquisition appetite in the space is strong.
A report from Chicago-based international law firm Baker McKenzie and Oxford Economics predicted that deals in the sector will increase to $331 billion in 2019, fueling speculation on what big deals remain on the horizon.
To understand the pipeline still ahead and the rationale for such massive mergers and acquisitions, TheStreet joined Takeda Pharmaceutical's CEO Christophe Weber on the New York Stock Exchange, shortly after his company rang the opening bell to celebrate the Japanese giant's U.S. listing.
"You need scale to conduct R&D," Weber explained. "R&D is very expensive if you want to deliver innovative medicine. You need financial and global scale to really finance your R&D."
The research and development angle is readily apparent in the trend in spending from a recently acquired company like Celgene, which increased its R&D spend six fold from 2008 to 2017. The competitive landscape only looks to heat up as big pharma stalwarts like Novartis (NVS) , Johnson & Johnson (JNJ) , Pfizer (PFE) , Merck (MRK) , and GlaxoSmithKline (GSK) continue to pump out hundreds of new drugs.
With the Shire deal, Takeda will look to tangle with these massive pipelines, a far cry from the company's humble beginnings as a traditional herbal medicine business begun in 1781.
To be sure, it might be a time before Takeda takes on more big deals to pump up its pipeline.
The company's debt pile has leapt from $8.8 billion at the close of the third quarter to a whopping $45.3 billion after the close of the Shire deal. The company even received a credit down grade, from A2 to Baa2, from Moody's.
"This transformative acquisition will cause Takeda's debt to increase almost six-fold, making the company one of the most leveraged pharmaceutical companies rated investment grade," Moody's analyst Yukiko Asanuma commented.
Still, Moody's rates the company's debt as stable as the Shire acquisition has catapulted the company into a top ten status globally, bolstered by the rare disease stable of drugs it will add from Shire.
Weber recently added that the company will look to divest $10 billion in non-core assets to unnamed buyers.
"Our commitment is to be investment grade and we have to deleverage rapidly," Weber told Bloomberg earlier this month. "We have already started the process [of divestment[."
Weber added that buyers could be private equity or pharmaceutical companies depending on the assets for sale.
Pricing Pressure
Of concern to the company as it adds weight to its balance sheet is the potential headwind from drug pricing legislation, which has become a rare issue of bipartisan agreement in the United States in particular.
On Monday, Representative Elijah Cummings of Maryland launched an investigation into the pricing practices of AbbVie (ABBV) Amgen (AMGN) , AstraZeneca (AZN) , Celgene, Eli Lilly, Johnson & Johnson, Mallinckrodt (MNK) Novartis, Novo Nordisk (NVO) , Pfizer, Sanofi (SNY) and Teva Pharmaceutical (TEVA) .
The move from a Democratic congressman adds to the pressure from HHS chief Alex Azar, who has touted discounting drug prices as a top priority.
Drug prices declined in 2018, the first time in nearly half a century. During the first 19 months of my Administration, Americans saved $26 Billion on prescription drugs. Our policies to get cheaper generic drugs to market are working!
— Donald J. Trump (@realDonaldTrump) January 11, 2019
"This is a global topic, not only in the U.S.," Weber noted. "We are very aware of it. Our response is to deliver and develop highly innovative medicine...we are very responsible in our pricing."
It is notable that Takeda is not under investigation by congress, despite the global scale of Cummings' call for scrutiny on prices.
Shutdown Impact?
Also on the federal front, the drag-on of the government shutdown presents problems for the company that is now U.S. listed, 40 years after its first entrée into the market.
The shutdown threatens the ability of the FDA to continue to review new drugs and also impacts federal employees looking to fill prescriptions and pay for existing medicines.
Luckily Takeda has been saved by reserve funds at the FDA so far as a scheduled expert panel was convened last week to discuss approval of the company's gout drug Uloric.
"So far we are not impacting us so much," Weber said. "I think like everyone, we hope it will not last too long."
Given the uncertainty once these reserves begin to be run through, it would not be surprising to see the hope turn to imploring in short order.
President Trump will be meeting with lawmakers on Tuesday afternoon to discuss the shutdown. Takeda and many more pharmaceutical companies will surely be looking on in anticipation of the meeting's results.
