TKPHF - Why Do We Keep Buying Takeda Pharmaceutical Shares

2023-04-03 03:51:40 ET

Summary

• Sales of Takhzyro amounted to 44.1 billion Japanese yen in the 3rd quarter of 2022, an increase of 42.7% from the previous year.
• Takeda Pharmaceutical's revenue was $8,354 million in Q3 2022, showing phenomenal growth both year-on-year and quarter-on-quarter.
• Takeda Pharmaceutical's dividend yield is 4.14%, higher than pharmaceutical industry giants Pfizer, AbbVie, and Merck.
• In October 2022, a Japanese company announced that the FDA had accepted the sBLA application for the potential use of Takhzyro for prophylaxis to prevent attacks of HAE in children aged 2 to 12 years.
• On March 18, 2023, the leader of the Japanese pharmaceutical industry published the results of a clinical study, according to which TAK-279 demonstrated excellent efficacy data and a favorable safety profile in patients with moderate to severe plaque psoriasis.

Takeda Pharmaceutical ( TAK ), Japan's largest pharmaceutical company and one of the leaders in the pharmaceutical industry, has a diverse portfolio of prescription drugs with competitive advantages in various therapeutic areas, including oncology, gastroenterology, and neuroscience.

In recent years, Takeda has faced enormous pressure following the acquisition of Shire, creating financial challenges for the company and raising doubts on the part of Wall Street about the deal's worth. However, the company's management successfully overcomes this crisis and begins to reap the benefits of this transaction, which, among other things, include strengthening its position in the fast-growing rare diseases treatment market and a significant increase in revenue and cash flow.

Takeda Pharmaceutical’s financial position and business prospects in the coming years

Takeda Pharmaceutical's revenue was $8,354 million in Q3 2022, showing phenomenal growth both year-on-year and quarter-on-quarter. Moreover, the company's gross margin is 69.4%, which is significantly higher than the average for the healthcare segment, but more importantly, it remains stable despite increased competition in the therapeutic market for oncology and gastroenterology and an increase in the cost of manufacturing medicines caused by increased inflation in Europe and Japan over the past 18 months.

The Japanese company's revenue growth was driven primarily by flagship patent medicines in areas with high unmet medical needs in three main therapeutic areas. These medicines are Entyvio (vedolizumab), Takhzyro (lanadelumab), and Vyvanse (lisdexamfetamine dimesylate), which totaled JPY 369.6 billion in Q3 2022, up 44.3% year-over-year.

Takeda's top-selling drug is Entyvio, used to treat certain autoimmune conditions such as Crohn's disease and ulcerative colitis. Its mechanism of action involves targeting lymphocytes. Specifically, Entyvio binds to a protein called ?4?7 integrin, found on the surface of lymphocytes that cause inflammation in the gut. Once the active substance of Entyvio binds to this protein, it blocks its interaction with MAdCAM-1 located on intestinal endothelial cells, ultimately reducing damage and inflammation of the intestinal mucosa. In addition, the mechanism of action of Entyvio does not suppress the human immune system, which reduces the risk of various complications when taking the drug.

Sales of Entyvio amounted to JPY 201.3 billion in the 3rd quarter of 2022, an increase of 44.3% from the previous year. The increase in sales of this medicine was driven by the continued growth in the number of patients with biologic inflammatory bowel disease in the United States in recent quarters and the launch of the subcutaneous formulation in Europe, Canada, and South America. At the same time, the company does not stop at the progress made and continues to conduct several clinical studies that evaluate the effectiveness of the subcutaneous administration of Entyvio relative to intravenous administration. There are several reasons why subcutaneous injection is preferable to intravenous and thus will allow maintaining the growth rate of Takeda's blockbuster sales. One such factor is the ability to provide subcutaneous injections at home and thereby eliminate the need to visit hospitals for intravenous infusions. In addition, subcutaneous injections reduce the risk of vein damage and cause fewer adverse reactions than intravenous infusions. In addition, Takeda Pharmaceutical is conducting phase 3 clinical trials evaluating the efficacy and safety of the drug for new indications, which could lead to a significant increase in the number of potential patients and physicians interested in prescribing Entyvio.

So, on February 18, 2023 , the company announced that the GRAPHITE study had reached its primary and secondary endpoints. A group of patients treated with vedolizumab achieved a statistically significant improvement in intestinal aGVHD survival compared with a group of patients taking a placebo by day 180 after a medical procedure called allogeneic hematopoietic stem cell transplantation (allo-HSCT), which is associated with significant risks and potential complications. Allo-HSCT is commonly used to treat various types of cancer and some non-cancerous blood disorders.

We expect that Entyvio sales growth will continue in the next two years and will only start to slow down from 2024 due to the emergence of generic versions of this medicine in Europe. Moreover, potential investors should be aware that the exclusivity of this drug ends in 2026 in the US and Europe, which will lead to serious competition with generics and thereby negatively affect the sales trajectory of Takeda's best-selling product.

Takhzyro (lanadelumab) is Takeda's top-selling drug in a segment that focuses on developing drugs to treat rare genetic diseases. Lanadelumab is used to prevent attacks of hereditary angioedema ((HAE)), which causes swelling in various parts of the body. Hereditary angioedema is a rare genetic disorder that affects approximately 1 in 10,000 to 1 in 50,000 people worldwide .

Its mechanism of action involves targeting a protein called plasma kallikrein, which is one of the causes of the development of HAE attacks and is ultimately able to inhibit its activity effectively. The active substance of Takhzyro prevents the activation of the kallikrein-bradykinin pathway, which is the leading cause of edema and inflammation associated with HAE attacks. According to clinical studies conducted by Takeda, the terminal half-life of Takhzyro is about two weeks, which means that it can provide long-term protection against attacks of this genetic disease at a relatively low frequency of use and thus positively affect the quality of life of patients.

Sales of Takhzyro amounted to 44.1 billion Japanese yen in the 3rd quarter of 2022, an increase of 42.7% from the previous year. The increase in sales of this drug was due to the rise in the number of patients, continued geographical expansion, and the weakening of the exchange rate of the Japanese yen, euro, and Brazilian real against the US dollar.

In October 2022 , a Japanese company announced that the FDA had accepted the sBLA application for the potential use of Takhzyro for prophylaxis to prevent attacks of HAE in children aged 2 to 12 years. In our estimation, there is a high probability that the FDA will make a favorable decision on this application, and, as a result, Takhzyro will become the first-of-its-kind treatment for hereditary angioedema for these patients.

In addition, Takeda Pharmaceutical is conducting a phase 3 clinical trial evaluating the efficacy and safety of Takhzyro for treating Bradykinin-mediated angioedema with a normal C1-inhibitor. One of the leading causes of this type of angioedema is the excessive release of an inflammatory mediator called bradykinin ((BK)), which ultimately leads to a significant accumulation of fluid in the tissues.

We expect Takhzyro's sales growth rate to continue to improve in the next three years due to the expansion of geography and indications for use and will reach 250 billion Japanese yen in 2026. However, starting in 2027, sales of this medicine will begin to fall due to the introduction of generic versions of Takhzyro into medical practice in the American and Japanese markets.

Takeda's EBITDA continues to improve

The company's EBITDA was $2,467.4 million in Q3 2022, up 7.7% from a year earlier.

This financial indicator continues to improve year on year due to Takeda's leading positions in the therapeutic market of gastroenterology and rare diseases and the company's management of the company's conservative financial policy in the current period of macroeconomic instability worldwide. In addition to the two drugs already discussed in this article, we believe Vyvanse (lisdexamfetamine dimesylate) is one of the critical products of Takeda's significant EBITDA growth. Vyvanse is a medicine used to treat attention deficit hyperactivity disorder ((ADHD)) and binge-eating disorder. Its mechanism of action involves stimulation of the CNS, mainly through an increase in dopamine and norepinephrine levels. Vyvanse is a prodrug, which means it is inactive until it is metabolized into its active form, dextroamphetamine. Vyvanse is unique in its long-acting formulation that takes approximately 3.5-7 hours to reach peak dextroamphetamine concentrations , depending on dose, after oral administration. As a result, this medicine has a more favorable safety and efficacy profile than other stimulant drugs approved for treating ADHD.

The Japanese company has an extensive portfolio of product candidates , which not only mitigate the risks associated with the loss of exclusivity of some blockbusters but also are potential sources of continued EBITDA growth in the next five years.

We expect Takeda's EBITDA to grow by 5.1% on average between 2023 and 2024. Moreover, thanks to the launch and expansion of the geography and indications for using new medicines by a Japanese company, this figure will grow to 6.8% from 2025 to 2026.

Takeda Pharmaceutical dividend policy and share buyback

Takeda Pharmaceutical's dividend yield is 4.14%, higher than pharmaceutical industry giants Pfizer ( PFE ), AbbVie ( ABBV ), and Merck ( MRK ). In addition to paying dividends, Christophe Weber, as the CEO of a Japanese company, actively used the company's share buyback policy between 2021 and 2022, taking advantage of the company's low share price to increase the investment attractiveness of Takeda on Wall Street. In 2021, the company bought back $636.9 million worth of shares, while in 2022, Takeda's management allocated $395.6 million for this purpose. The sharp increase in cash flow spending on share repurchases over the past two years was driven by a significant decline in the total debt/EBITDA ratio and improved sales of the company's products.

However, on the latest earnings call , Costa Saroukos, the CFO of Takeda Pharmaceutical, stated the following.

Regarding dividend increase of share buybacks or – we haven’t changed, we are not changing our capital allocation policy. Again, we are very much focused on investing for growth and growth drivers. We are pleased with the trend of our net debt to adjusted EBITDA coming down even from 2.8 to 2.5, even after the full year dividend has been made.

As a result, we believe that the company will not increase its dividend payout or engage in an active share repurchase policy in the next two years and will continue to focus on acquiring pharmaceutical companies or entering into partnerships to develop and commercialize product candidates with the potential to become the 'gold standard' in various therapeutic areas. In the table below, you can see dozens of deals made, the main goals of which are to strengthen the Japanese company in the global pharmaceutical market and level the risks associated with the loss of Takeda blockbuster exclusivity in the coming years.

Conclusion

It's been over a year since my article on Takeda Pharmaceutical was published in December 2021, and since then, the share price of the Japanese company has risen by more than 20% , significantly outperforming the S&P 500 ( SPY ) and such leaders in the pharmaceutical industry as Johnson & Johnson ( JNJ ), Roche Holding ([[RHHBY]], [[RHHBF]]), and Bristol-Myers Squibb ( BMY ).

Over the past twelve months, under Christophe Weber's leadership, Takeda has achieved excellent results in reducing its net debt and expanding its portfolio of product candidates. Thus, on March 18, 2023 , the leader of the Japanese pharmaceutical industry published the results of a clinical study, according to which TAK-279 demonstrated excellent efficacy data and a favorable safety profile in patients with moderate to severe plaque psoriasis. But more importantly, Takeda's product candidate has shown superior results in reducing the severity and size of skin lesions relative to other tyrosine kinases 2 inhibitors, one of which is Bristol-Myers Squibb's Sotyktu, whose potential sales could reach more than $4 billion .

Based on the results of the financial report for the 3rd quarter of 2022, the company maintains strong growth in revenue and net profit and continues to pursue an active R&D policy aimed at strengthening its position in key markets such as the US and Europe. We maintain our Takeda Pharmaceutical price target of $38 per share.

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