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Morningstar | Takeda Shareholder Approval Removes Final Realistic Barrier to Shire Deal; Takeda Shares Undervalued

We're maintaining our JPY 5,100 per share Takeda fair value estimate and Shire GBX 4,970 per share/$191 per ADS fair value estimates following Takeda and Shire's Dec. 5 shareholder votes in support of the Shire acquisition. With 88% of Takeda shareholder votes supporting a share issuance required as part of the deal (two thirds of votes were necessary) and more than 99% of Shire shareholder votes supporting the deal (75% were required), there are no more significant obstacles to the deal, which is now expected to close on Jan. 8, 2019. We have adjusted our Takeda model to include cash flows from Shire beginning in January, and we have also removed future cash flows from gastrointestinal immunology drug SHP647 (which must be divested, according to conditions from European regulators) and assumed that the product could sell for $2 billion (based on our assumption of at least $500 million in probability-adjusted peak sales). While Shire's rare disease and neurology portfolio support a narrow moat and positive trend, Takeda's significantly lower ROICs--largely due to poor use of capital in the past, including the Nycomed deal--prevent it from establishing an economic moat. Following the deal, we expect ROICs could begin to exceed cost of capital within a few years, and we could consider a positive moat trend on this basis. We continue to see Takeda shares as undervalued, as we think the firm is buying Shire at a fair price, and that the debt burden following the Shire deal will be very manageable given the steady cash flows from Shire's rare disease and plasma business, despite hemophilia competition.