Takeda Pharmaceuticals Co. Ltd.'s €9.6 billion ($13.6 billion) purchase of privately held Nycomed AS, confirmed May 19 after a week of speculation, satisfies a number of strategic and financial imperatives for Japan's largest drug maker, as it faces generic competition to best-selling diabetes drug Actos (pioglitazone) from 2012 and seeks to expand its footprint beyond Japan and the U.S.

The deal will double the Japanese firm's European sales, jumpstart its emerging markets presence and provide an immediate 30% revenue boost and increase operating income by more than 40%, according to the company.

Nycomed's agile, "can-do" culture will help in "further vitalizing" Takeda.

Swiss-based Nycomed brings to Takeda not only the fruits of recently launched chronic obstructive pulmonary disease drug Daxas (roflumilast), but also a more diversified product mix, including OTC and branded generics, regulatory expertise, and an entrepreneurial culture which President and CEO Yasuchika Hasegawa said he hoped could "vitalize" Takeda.

As such the deal helps accelerate the 2011-2013 mid-range growth plan unveiled by Hasegawa earlier this month (Also see "Takeda Unveils R&D, Commercial Realignments To Try For Post-Patent Gains" - Scrip, 11 May, 2011.).

The transaction – worth slightly more than initial reports suggested – values the Swiss-based Nycomed at about 3.4 times its 2010 revenues, excluding its U.S. dermatology business, which is not part of the deal.

Takeda will require a ¥600 billion-¥700 billion ($7.33 billion to $8.55 billion) loan to finance the deal, which is the largest yet in the Japanese firm's aggressive ongoing bid to expand its presence and pipeline through M&A: the company paid $8.8 billion in 2008 for cancer-focused U.S biotech firm Millennium Pharmaceuticals (Also see "Takeda’s Millennium Buy Brings In Potential Cancer Blockbuster Velcade" - Pink Sheet, 14 April, 2008.).

Ratings agencies Moody's and Standard & Poor’s have both warned that they are reviewing Takeda's credit rating in light of a possible downgrade, according to the Japanese business newspaper The Nikkei.

Key To Growth: Emerging Markets And Daxas

The deal's size reflects its strategic value to Takeda, both in the short and longer term. Takeda is well established in Japan and the United States, but has a smaller presence in Europe, particularly northern and eastern Europe, and is virtually absent from other markets, which make up just 2% of total sales.

Buying Nycomed raises Takeda's European ranking from 29^th to 18^th, and will multiply eight-fold its sales in emerging markets, where Takeda, like other Japanese firms, has been slow to establish its own presence. Emerging markets today account for 40% of the Swiss group's €3.2 billion total annual revenues, but are growing rapidly, and expected to increase to 60% of sales by 2015 (Also see "Japan's Takeda Reportedly Offering $12B For Europe's Nycomed" - Pink Sheet, 12 May, 2011.).

Daxas represents a second growth pillar for Takeda – including in emerging markets, where the company will have exclusive rights and where approvals are expected during 2011. Takeda is forecasting global sales of €500 million by 2015, excluding partner milestones and royalties. Daxas is co-promoted with Merck & Co. Inc. in Europe and with Forest Laboratories Inc. in the U.S.; Takeda is also said to be seeking a Japanese development partner for the drug.

Nycomed's aggressive emerging markets push has allowed it to compensate to some degree for the decline in sales of its own key drug, proton pump inhibitor pantoprazole, which lost exclusivity in Europe in 2009 and a year later in the U.S. But Nycomed's 2010 earnings still fell 21% in 2010 to €850.5 million as a result, prompting some analysts to criticize Takeda for overpaying. Takeda's management, however, claimed that the price is fair relative to similar deals, and reflects continued downward pricing pressure in Europe and in emerging countries.

Maximizing Takeda's Portfolio Value, "Vitalizing" the Culture

What's more, in a conference call announcing the deal, Hasegawa promised that the deal would be EPS accretive from year one and would deliver ¥30 billion in annual cost synergies in the third year after closing.

The transaction "will allow us to maximize the value of our products and pipeline," he enthused, referring to Nycomed's regulatory expertise, its global infrastructure (which more than doubles Takeda's country coverage, to 70 from 28 currently) and its low-cost manufacturing facilities in emerging markets.

Takeda will also take advantage of Nycomed's expertise in tailoring its product mix to meet individual market requirements, a skill becoming increasingly important given more challenging reimbursement hurdles and the very different dynamics in emerging markets relative to Western ones.

Not all the benefits of this deal will be financial or commercial: Takeda wants to capitalize on Nycomed's entrepreneurial, agile, "can-do" culture, which contrasts strongly with the heavily corporate, hierarchical set-up typical of many Japanese firms. Management talked about "transforming" and "further vitalizing" Takeda's culture.

Small wonder, then, that Takeda "will strive to keep as many [as possible] of the key people at Nycomed on board" following the deal, although the position of Nycomed CEO Hakan Björklund, who has run the group since its 1999 spin-out of what was then Nycomed Amersham, is "still subject to discussion," Frank Morich, Takeda's EVP International Operations, told 'The Pink Sheet'. Morich will oversee Nycomed's integration with Takeda.

The high degree of complementarity between the two sides' skills and infrastructure led Hasegawa to claim that "there have been few acquisitions quite like this in the pharmaceutical sector" during the conference call.

Nycomed's Owners Hit The Jackpot – And Retain U.S. Dermatology

Nycomed's majority private equity owner, Nordic Capital, would probably agree that the deal was exceptional.

The group, which owns a 41% stake, has approximately quintupled its money since March 2005, when it bought a controlling interest in Nycomed for €1.8 billion.

And that was Nordic's second dip into this particular company: it bought into Nycomed (via an earlier fund) at inception in 1999, paying about $700 million, or just over one-times revenues (the group as the time was focused only on the Nordic/Baltic area). Three years later, it sold Nycomed for $1.1 billion to a group of private equity investors.

As such, "it has been a very successful investment for us," said Kristoffer Melinder, a partner at Nordic Capital. And despite the long list of assets that Nycomed provides to Takeda, and the attractive risk-profile presented by its in-licensing focus and its product mix, "we didn't expect to have this strategic interest," he recounted. Takeda approached Nordic with an unsolicited offer for the company, Melinder clarified.

Nordic's own vision for Nycomed had always been an IPO, said Melinder, dismissing 2009 rumors of an aborted sale attempt and of moves to buy Belgian chemical firm Solvay SA's pharmaceuticals business (a target that Takeda also wooed, losing out to Abbott Laboratories Inc.) "We were looking at the end of 2011 or early in 2012," he said.

The certainty of money on the table today, however, was more alluring than holding out for a listing at some point in the future – particularly given still-fragile financial markets.

This deal may not be the last of the value that Nordic and its three other private equity co-owners will derive from their investment in Nycomed.

They will hold on to Nycomed's U.S. dermatology business, which generates about $400 million in sales from a combination of generics and branded products and is ranked number two in generics, with particular strength in topical drugs.

Buying this would have stretched Takeda's diversification remit too far, said Morich. "We would have had to run it [the dermatology business] like a financial investment, and we're not a financial investor. We had a long debate whether this was a potential to diversify, and we are diversifying quite a lot in branded generics and OTC, but dermatology was too far away," he explained.

Nordic Capital and the consortium plan to further develop the dermatology business. "It's an active space where there are lots of opportunities," commented Melinder.

By Melanie Senior, Daniel Poppy

Takeda's $13.6 Bil. Nycomed Buy Meets Multiple Strategic, Financial Imperatives

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