Takeda’s bid for Shire; time to invest in Pharmaceuticals?

The takeover by Takeda of Shire Pharmaceuticals seems all but unstoppable now, but what about the pharmaceutical business, is it still a good bet?

Article updated: 7 December 2018 9:00am Author: Michael Baxter

It’s a deal! Takeda has offered £46 billion to takeover Shire Pharmaceuticals, which represents a significant premium on the Shire share price before the deal was announced. Shareholders in both companies have approved the deal, we are running out of reasons to think the merger won’t happen.

It is not without controversy, however, Takeda has taken on even more debt to fund the deal, which will now have net debt at five times earnings before interest, tax, depreciation and amortisation.

As for the Shire share price, considering we have known about Takeda’s interest in the company for some time, it is hard to understand why its share price had dropped so low. Shares had fallen from over 5,000p in the summer of 2017 to less than 3,000p this summer. Shares are now at 4,610p.

Wider outlook

But I want to look beyond Shire and Pharmaceuticals in general.

I have been a fan of this sector for some time, but when I look at share price performance I feel a tad disillusioned.

Shares in GSK, for example, were higher five years ago. On the other hand, Astra Zeneca, which was subject to an offer from Pfizer four years ago, has seen shares rise 71 per cent over the last five years. Look at the share price and dividends since Pfizer was turned away, it had offered £55 a share, and it seems the company was right to resist the bid; as I write its shares are just under £6, but then there have been dividends too.

The obvious bull and bear case

There is an obvious case for investing in Pharmaceuticals. Demographic pressures make growing demand for Pharmaceuticals inevitable.

However, the Pharmaceuticals industry hasn’t been innovating like it used to, the drug pipeline is not what it used to be.

The charging elephant behind the sofa

But look at technological advances and I find it inconceivable that we won’t see new truly radical treatments coming on the market.

Let me summarise relevant technologies:

  • CRISPR/cas 9 — which enables the editing of DNA.
  • Stem cell technology — the ability to grow human parts from stem cells removing the need for donation.
  • Computer modelling supported by AI: As we create computer models that simulate the human body, drugs can be developed and even tested at incredibly fast speeds.
  • Nanotechnology: Creates the potential to target drugs with extraordinary accuracy, with devices delivering a payload of drugs to specific cells.
  • Genome sequencing: Creating the potential to personalise medicine
  • Big data: AI systems will analyse data taken from wearable devices that monitor our vitals, combine this with results from the the sequencing of our genome and then scour medical research to pinpoint ailments and recommend treatments with a degree of accuracy that no doctor using traditional diagnosis techniques could match.

The future of healthcare is extraordinary. Pharmaceuticals that can build on the technologies I mention above can excel.

It’s a case of waiting for that moment when technologies converge and the healtech revolution changes us.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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