We published our initial analysis of Takeda Pharmaceutical (NYSE:TAK) in September 2022, and it proved to be timely as the stock has gained a total of 16.79% in the past 50 weeks. However, upon revisiting the recent results, we find that the risks are accumulating. Loss of exclusivity, heavy reliance on non-organic growth, and a significant debt load all contribute to the increased risk without a proportional increase in return, making a recommendation to buy at this point more challenging.
Transitioning from the Old…
The pivotal point in Takeda’s current fiscal year lies in the introduction of biosimilars for their major pharmaceuticals, Velcade and Vyvanse. Velcade, although a significant therapy for multiple myeloma, experienced a massive 90% drop in revenues compared to the previous year’s Q1 results, mainly due to biosimilar competition. Vyvanse, a top-prescribed drug for ADHD management, also faces upcoming biosimilars, which will lead to a substantial decline in revenues. This loss of exclusivity puts additional pressure on Takeda’s future performance.
Furthermore, the flagship drug Entyvio, with a few more years of exclusivity remaining, faces challenges in maintaining market share. Although Takeda intends to expand Entyvio’s label and introduce a subcutaneous formulation, their GI portfolio lacks a comparable pipeline drug. The market share erosion caused by the introduction of Humira biosimilars further compounds the competitive landscape.
…Embracing the New
Takeda is actively diversifying its portfolio to explore new markets and mechanisms of action for value creation. Several promising treatments are under development in the areas of GI, immunology, neurology, oncology, and plasma-derived therapies. These opportunities exhibit potential growth, but their impact on financials remains to be seen.
Operational Considerations
Aside from the pipeline, Takeda’s financial performance requires examination. While margins are improving, concerns persist about organic growth, debt load, and exchange rate fluctuations. The recent acquisitions have contributed to a higher debt burden, but the company’s balance sheet remains stable. However, the cash reserves are relatively low, and volatile cash flow could pose challenges during lean periods.
Acquisitions
Acquisitions have been Takeda’s strategy to overcome pipeline challenges. The acquisition of a subsidiary of Nimbus Therapeutics brought in the TYR2 Janus kinase inhibitor TAK-279, which shows promise for autoimmune conditions. Additionally, Takeda entered into an exclusive licensing deal with Hutchmed for the ex-China rights to fruquintinib. While these acquisitions have not significantly increased debt, they impact the company’s cash flow.
Fundamentals
Takeda’s balance sheet has remained steady, but the cash reserves are a concern. Debt load, although lower than during the Shire deal, still demands attention. Forex fluctuations continue to affect revenues, and volatility in the yen-dollars exchange rate is a prevailing risk. The operating margin has improved, leading to a slight increase in return on equity.
Management
Takeda’s management has shown interest in incorporating AI across the value chain. While AI could bring various benefits to the pharmaceutical industry, it is essential to consider the practicality and effectiveness of applying AI in every aspect of Takeda’s business. It is vital for Takeda to demonstrate a comprehensive and strategic approach to AI implementation.
Valuation and Conclusion
Our valuation of Takeda has not changed significantly compared to other analysts’ optimistic forecasts. The anticipated increase in free cash flow seems to have leveled off, and growth prospects remain on track. Considering the increased volatility resulting from loss of exclusivity, acquisitions, and currency fluctuations, we believe the stock is currently fairly priced. Therefore, we recommend a hold position until further developments solidify a long-term investment thesis.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
