EUR 850.00 For Business Accounts Only

Morningstar | Updating Our Model to Incorporate new Guidance, FVE Unchanged

We updated our model and estimates to reflect narrow-moat Takeda’s new reporting segments, balance sheet, and guidance. Our fair value remains unchanged at JPY 5,100 per share. Despite management’s affirmation of the company’s long-term margin expansion, the stock trades at a 23% discount to our fair value.

Our revenue assumptions have fallen to JPY 3.3 trillion in 2028, whereas we projected JPY 4.0 trillion in our previous model. This incorporates several changes, including lower forecasts for Entyvio and Vyvanse, and removing the revenue contribution from XIIDRA. We lowered our mid-cycle forecast for Entyvio (ulcerative colitis and Crohn’s disease) to JPY 200 billion from JPY 440 billion to the reflect greater effect from the loss of exclusivity in 2026. We are now modeling our revenue drop from the loss of exclusivity for Vyvanse (ADHD) starting in 2022 instead of 2023, because of the expectation of earlier competition from generics.

We removed the revenue contribution from XIIDRA (dry eye), which was sold to Novartis on May 9, and added the upfront payment of $3.4 billion. The deal has an additional $1.9 billion in potential milestone payments, but details have not been disclosed and we do not model this. The sale price is much higher than our expectation of $2 billion, and is accretive to our fair value compared with our forecast peak revenue of $980 million (JPY 108 billion). XIIDRA is a differentiated product and the only prescription drug approved for dry eye, but it did not have much overlap or cross-selling potential with the rest of Takeda’s portfolio. The product fits better into Novartis’ portfolio and clearly shows in the sale price.

We updated our balance sheet to reflect the fully merged entity, which results in a lower level of debt than our original model and has a modestly positive effect on our fair value. In summary, the sale price of XIIDRA and updated balance sheet offsets the revenue loss of XIIDRA and downward revisions of other drugs.

We also lowered our mid-cycle operating margin assumptions to 23.8% from 29.8%, although this is mostly because of higher amortization and does not materially change our fair value. Our operating margin forecast for core earnings (COS, SG&A, and R&D costs only) is almost unchanged at 33.8%.

Despite the market’s bearish view on Takeda, we believe the stock offers long-term value at current prices. Investors seem to be overly concerned about the near-term guidance on one-off items, such as higher restructuring costs, whereas we believe the progress that management has made in cutting ongoing costs and identifying new synergies will ultimately be more important.