Looming Velcade freefall shows why Takeda paid big for Shire

The multiple myeloma blockbuster Velcade has been Takeda's cash cow for years, but those sales are already starting to dry up, and fast. After a quick drop over the past three months, that key drug is expected to slide over 30% in the coming year, executives said in the company's year-end earnings release.

Luckily for the company though, the $62 billion Shire buyout will fill that gap—and far more—nearly doubling the company's 2018 revenue guidance.

The company's full-year results, for fiscal year 2017 ended March 31, didn't suffer much from Velcade's late decline; the drug still brought in $1.25 billion. And Takeda reported total revenue of 1,770 billion yen ($15.8 billion), or 5.5% growth excluding foreign exchange and asset sales.

But Takeda’s forecast for the drug is gloomy to say the least—without the expected contribution from Shire, at least. Because of the U.S. rollout of Fresenius Kabi’s alternative, Takeda now expects Velcade sales to plummet more than 30%. That'll hit profits hard—18 percentage points off core earnings in fiscal 2018. The Fresenius rival, bortezomib, replaces the mannitol ester in Velcade with boric acid, a change Takeda has criticized as potentially unsafe.

Velcade had been expected to lose exclusivity last November, but in July, a U.S. appeals court reinstated the drug’s key patent till 2022. But it’s not clear yet when equivalent copycats will hit as a dozen companies are challenging that patent.

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The Japanese pharma hopes multiple myeloma oral newcomer Ninlaro and inflammatory bowel disease therapies will grow enough to fill the gap. Last year, sales of Ninlaro jumped 58.1% to $424 million, while Entyvio’s $1.84 billion represented a 40.6% increase. For 2018, Takeda still expects more than 30% growth from both drugs.

For fiscal 2018, Takeda forecast revenue of 1,737 billion yen and a 16.9% decline in operating profit, to 201 billion yen, which it attributes to various one-time transactions in fiscal year 2017.

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Obviously, those guidance numbers don’t include the $62 billion merger with Shire, which, with total 2017 revenues of $15.2 billion has about the same as Takeda’s full-year haul. The Shire acquisition will combine the two firms’ specialties in gastroenterology, neuroscience and oncology—three core therapeutic areas Takeda recently identified amid an R&D shakeup—and adds additional strength in rare diseases and plasma-based therapies.

It will also tip the balance between the U.S. and Japanese markets for Takeda. For 2017, each market constituted about a third of the company’s revenue. But about 64% of Shire’s 2017 sales came from the U.S., not to mention the dramatic decline in U.S. expected of Velcade going forward.

Even as the two await a few final hurdles before the acquisition goes through, Takeda has already laid out a cutback plan that involves laying off 6% to 7% of the combined workforce. It is aiming for $1.4 billion in savings by the end of the three years following deal closure. Because of the two companies’ similar focus in GI and CNS, most of the cuts will be coming from SG&A and R&D, according to Jefferies analyst Peter Welford.