Is This 250-Year-Old Japanese Big Pharma Giant Selling For Half Price Right Now?

When it comes to Big Pharma, Japan’s Takeda Pharmaceutical Co Ltd TAK is a conservative play that could prove to be a big winner given its cheap valuation and suite of new drugs that portend to dominate in treating niche illnesses.

Takeda Pharma is Japan’s largest pharmaceutical company with some innovative products in the pipeline across the cancer, gastro, neuro, rare diseases and plasma therapeutics sectors. These potentially lucrative specializations put it at the forefront of global pharma innovation in what is increasingly looking like a sluggish sector, some say.  

On September 13, Takeda said that the Food & Drug Administration (FDA) had accepted for review its second ENTYVIO drug application to treat Chron’s Disease following an April acceptance for its first submission. ENTVIO represents a much more user-friendly improvement over the present treatments on the market which are administered intravenously.

Two days earlier, Takeda said that it was entering its TAK-249 oral drug for active psoriatic arthritis into Phase 3 trials after it showed a clear 20% percent improvement over the placebo in the Phase 2b trial. That followed news in March that Takeda’s ulcerative colitis treatment resulted in an 18% improvement over the placebo in a Stage 4 trial.

The announcements follow further positive news over its cancer and psoriasis treatments and its dengue vaccine prospects in Europe. Is a big growth spurt about to come for Takeda then?

Bumpy Growth

The case for Takeda isn’t as clear cut as for other value stocks. Since listing on NYSE over a decade ago, the company hasn’t shown much in the way of stock performance, declining by over 50% in value since 2011. During this time, management has gone on a spending splurge, making some multi-billion-dollar acquisitions that sector analysts such as Credit Suisse's Fumiyoshi Sakai have criticized for being a tad too expensive.

The company has fared poorly with some of its vaccine sales too. In February 2023, Takeda was told by the Japanese government that it would be cancelling 90% of its 150 million dose order for Nuvaxovid, a non-mRNA Covid-19 vaccine it had partnered with upstart Novavax Inc. NVAX to market into the once virus-ridden Japanese market. In July, Takeda announced the voluntary withdrew of its dengue vaccine from FDA trials after there were problems with some of the trial data.

Then there’s Bank of Japan’s stated intention to intervene in the USD/JPY currency markets later this year. Some of Takeda’s additional earnings gains are bound to reverse if the yen goes significantly higher as a result. The company’s management also said on its latest earnings call that some of its core drug sales will likely face headwinds from generic copycats.

But those short-term concerns don’t seem to be bothering traders. Short-selling interest in TAK has collapsed this year from over 8 million shares to just over 6 million by late August, according to Benzinga data.

Mega Cash Discounts

A big part of the reason for the bull case is Takeda’s consistently strong earnings. Takeda showed a whopping 6% jump in year-on-year profits and a 37% rise in net profits in FY22 to over 4 trillion yen (around $27 billion) and 317 billion yen respectively (though over half of that was derived from a historically-weak yen).  

Over the past decade, Takeda has grown revenues on average by 7% a year and made average annual growth of 12% in operating income. The main reasons for this stellar growth are the company’s big market position in its stable of niche drugs as well as great management, say analysts.

“Such respective compounding growth in income is telling. For one, it tells of TAK's ability to reinvest its earnings back into additional growth programs, producing growth in free cash flow at high rates of return,” wrote Zach Bristow, equity strategist at Bristow Family Trust, in a Q2 research note.

“TAK was founded in 1781, in Japan. It has been operating that long, growing the business every decade or so. You have here a Japanese bastion of a firm that has deep customer networks, cost-relationship advantages and literally centuries of business growth.”

Bristow forecasts a humongous leap ahead for Takeda, with the stock rising as high as $41 a share. This represents upside of 150% from the present price which is the price of the stock if the forward owner earnings per share for TAK meet the sector average, he wrote.

Analysts who focus on Takeda’s business closely are excited by about the Japanese drug maker’s prospects going forward, mainly citing strong operating growth and massive market discounts.

Takeda currently trades at a 40% discount to its enterprise value of $80 billion. Merck & Co. Inc. MRK and Pfizer Inc. PFE, by comparison, both trade at 10% discount to their enterprise value. Even by this more conservative metric, if Takeda is valued in line with its peers that works out at $22.50 a share.

Plus, Takeda’s product portfolio diversity offsets any risks that a single product falls short - as can be seen with the Covid-19 vaccine sales disaster. This sort of competitive advantage can give a company a big edge over time. With its wide-ranging portfolio of niche drugs, analysts project growth of over 6% in EBITDA year-on-year from 2024 onwards. That would validate a share price of $38 or higher.    

The takeaway is that Takeda is a high-quality value pick that trades more like a growth company. The unusual profile might make for interesting diversification for some investors’ portfolios.  

Disclosure: Author holds no postions in the stocks mentioned.