Yahoo Finanza Takeda Pharmaceutical: A Long-Term Cash Cow
Takeda Pharmaceutical Co. Ltd. (NYSE:TAK) is the largest Japanese pharmaceutical company and holds a leading position in the global immunoglobulins market.
In recent months, the company's share price has continued to be in a downward trend due to two key factors. The first is growing concerns among institutional investors about the impact of generic versions of Vyvanse on the pace of recovery in Takeda's operating income margin. The second factor is President Biden's Inflation Reduction Act's negative impact on the pharmaceutical industry, as it aims to tighten regulation of prescription drug pricing, which could ultimately slow down the introduction of next-generation medicines to the market.
However, we believe financial market participants significantly overestimate the impact of these two risks on Takeda's financial position. Moreover, thanks to the steps taken by the company's CEO to optimize administrative and general expenses, label expansions for Adcetris and Takhzyro, as well as the growth in sales of Entyvio due to the launch of its subcutaneous version, Takeda's revenue and Ebit in the third quarter of fiscal 2023 grew significantly compared to the previous quarter.
This discussion will present a detailed analysis of several of its commercial products, one of the key ones being Adcetris. Adcetris (brentuximab vedotin) is a medicine developed in partnership with Seagen (SGEN) and approved by regulatory authorities for the treatment of Hodgkin's lymphoma and systemic anaplastic large-cell lymphoma.
Its sales were 30 billion yen ($193.85 million) in the three months ended Dec. 31, 2023, up 24.50% year over year, driven by its EMA approval in October for the treatment of patients with previously untreated CD30+ Stage III Hodgkin lymphoma as well as increased demand for it in Latin America, Japan and the European Union.
Source: Author's elaboration, based on quarterly securities reports.
According to the Global Cancer Observatory, approximately 67,200 thousand men and 46,800 women will be diagnosed with Hodgkin lymphoma in 2050, which is about 38% more than were diagnosed in 2022, thereby representing a prerequisite for continued growing demand for Adcetris in the long term.
Source: Cancer Tomorrow - Global Cancer Observatory.
An additional investment thesis we highlight is Takeda's dividend yield, which is about 4.46%, outperforming its key competitors such as Johnson & Johnson (NYSE:JNJ) and AstraZeneca (NASDAQ:AZN).
Source: Author's elaboration, based on GuruFocus data.
Furthermore, the Japanese company has a rich pipeline of experimental drugs whose effectiveness and safety profile are assessed in dozens of pivotal studies. These product candidates are being developed to treat patients with graft-versus-host disease, psoriatic arthritis, alpha-1-antitrypsin deficiency, Crohn's disease, Dravet syndrome, multiple myeloma and more.
Source: Takeda Pharmaceutical.
We initiate our coverage of Takeda Pharmaceutical with an outperform rating for the next 12 months.
Takeda Pharmaceutical's third-quarter financial results and outlook for 2024
Takeda's revenue for the third quarter of fiscal year 2023 was about $7.72 billion, up 9.40% quarter over quarter. Just as importantly, it beat our expectations by $270 million.
Source: Author's elaboration, based on GuruFocus data.
Simultaneously, the company's actual revenue beat analysts' consensus estimates in 10 of the last 12 quarters, which is one factor indicating that Mr. Market remains conservative about the commercial prospects of recently launched drugs, as well as product candidates, many of which demonstrate significant positive results in numerous pivotal clinical trials.
Takeda's trailing 12-month price-sales ratio was 1.43, which is significantly lower not only than the sector median, but also most of its competitors in the global cancer therapeutics market, including Pfizer (NYSE:PFE), Merck (NYSE:MRK) and GSK (NYSE:GSK).
Source: Author's elaboration, based on GuruFocus data.
According to our assessment, the key contributor to improving Takeda's financial position is Entyvio (vedolizumab), which is a monoclonal antibody whose mechanism of action is based on blocking the interaction of ?4?7 integrin with mucosal vascular addressin cell adhesion molecule-1 (MAdCAM-1), which ultimately reduces gastrointestinal inflammation.
It is approved by regulatory authorities to combat common inflammatory bowel diseases such as ulcerative colitis and Crohn's disease, which affect approximately 3.10 million Americans. Furthermore, according to the Crohn's & Colitis Foundation, up to 70,000 new cases of inflammatory bowel disease are diagnosed every year, which is one of the factors that will contribute to the growth of vedolizumab sales in the future.
Source: Author's elaboration, based on Takeda Pharmaceutical press releases.
Entyvio's exclusivity is not ending anytime soon, and a potential launch of its biosimilars in Japan is expected only in mid-2028. This will allow Takeda's blockbuster to further strengthen its position in the global Crohn's disease treatment market.
Source: Author's elaboration, based on Takeda Pharmaceutical's 20-F.
Entyvio sales were 227.6 billion yen in the third quarter of fiscal year 2023, an increase of 14% quarter over quarter due to the launch of its subcutaneous version in late September 2023, superior efficacy relative to AbbVie's (NYSE:ABBV) Humira, Johnson & Johnson's Remicade and the expansion of the global inflammatory bowel disease drugs market.
Source: Author's elaboration, based on quarterly securities reports.
In addition to Entyvio and Adcetris, we also highlight Takecab/Vocinti (vonoprazan), which will also help improve Takeda's Ebit margin. The mechanism of action of vonoprazan is based on the inhibition of the gastric proton pump ATPase, which allows it to effectively combat such widespread diseases as erosive gastroesophageal reflux disease, gastric ulcer and peptic ulcer.
According to a study published in Nature, the global prevalence of gastro-oesophageal reflux disease is approximately 14%, highlighting the significant commercial opportunities for Japan's largest pharmaceutical company.
Takecab/Vocinti sales were 49.30 billion yen for the three months ended Dec. 31, 2023, up 11.80% year over year due to its competitive advantages in treating acid-related diseases relative to AstraZeneca's Nexium, lansoprazole and rabeprazole, as well as its label expansion in China in November 2023.
Source: Author's elaboration, based on quarterly securities reports.
On May 9, Takeda Pharmaceutical plans to release its financial report for the fourth quarter of 2023. According to analysts, its revenue for this period is expected to range from $5.36 billion to $6.82 billion.
On the other hand, according to our model, this financial metric will exceed the median of this range by about $280 million and reach $6.40 billion, mainly due to a more optimistic outlook for sales of its immunoglobulin products, Adcetris, Takhzyro, Alunbrig as well as Gattex.
Takeda's operating income margin was about 6% for the third quarter, up 10.70% quarter over quarter, primarily due to increased demand for its products aimed at treating gastrointestinal disorders, which mitigated the damage from declining Vyvanse sales because of the launch of its generic versions in the United States in August 2023.
Source: Author's elaboration, based on quarterly securities reports.
Analysts forecast Takeda's fourth-quarter earnings per share to range from a loss of 11 cents to 10 cents, down only slightly year over year. According to our model, the company's earnings will be 5 cents above the median of this range and reach 5 cents.
Source: Author's elaboration, based on GuruFocus data.
Equally important to discuss is the company's debt, which skyrocketed in 2018 due to its $62 billion acquisition of Shire. The goals of this deal were Takeda management's desire to rejuvenate the company's portfolio of Food and Drug Administration-approved drugs and product candidates and expand its presence internationally.
From 2019 to 2021, the company sold $12.90 billion in non-core assets to strengthen Takeda's balance sheet and focus on four therapeutic areas: neuroscience, gastroenterology, oncology and rare diseases. As a result, its total debt/Ebitda ratio has declined significantly over the past five years and stands at around 4.83 times at the end of December 2023.
Source: Author's elaboration, based on GuruFocus data.
Overall, we believe Takeda will not have significant difficulty repaying the senior notes maturing between 2024 and 2060 due to its total cash and short-term investments exceeding $2 billion, as well as the continued recovery of its Ebit margin due to the launch of several new innovative medicines in Japan and the U.S. in 2023.
Source: Takeda Pharmaceutical.
Conclusion
Takeda is one of the leaders in the global gastrointestinal and cancer therapeutics markets, which is ultimately reflected in the high sales growth of its blockbusters such as Entyvio, Takhzyro, Gattex and Adcetris.
Moreover, its growing gross and operating margins quarter over quarter, dividend yield exceeding 4.40% and rapid expansion of its pipeline of experimental drugs, thanks in part to its strengthened balance sheet, are crucial to the investment thesis, making Takeda an attractive asset for conservative investors.
We initiate our coverage of Takeda Pharmaceutical with an outperform rating for the next 12 months.
This article first appeared on GuruFocus.
