Takeda Myths

Takeda Pharmaceuticals Myths


In memory of Grant Imahara who died suddenly of a brain aneurysm I would like to devote this post to debunking some of the myths circulating on this forum around Takeda v CSL.

For those of you that don’t know, Takeda is a Japanese pharmaceutical company with operations all over the world. Like CSL it has a long history dating back to 1925 when the company was first formed. Since then, through numerous acquisitions it has grown to be one of the biggest pharmaceutical companies in Asia. In January last year the company completed its acquisition of the UK based Shire giving it a bigger slice of the US market.

The company focuses on 5 key areas: Gastroenterology, rare diseases, plasma derived therapies, oncology and neuroscience. Itis one of CSL’s many competitors in the plasma and rare diseases space.

Takeda is listed on the Tokyo stock exchange under the ticker code 4502 and the NYSE as TAK

Ihave used data from https://www.alphaquery.com/and financial reports from the respective company web sites. Other information canbe sourced from financial websites where I will include links where possible.

20-f_2020-06-24.pdf
asr_2020.pdf
CSL v TAK.pdf
CSL v TAK Interest Coverage.pdf
HAE-RAAG_111518.pdf
qr2019_q4_f_en.pdf


Some of my responses have already been raised by others on this forum notably Edgck, Redpencil, ThereAbouts and elchagie, I apologise if I haven’t named you here.

Please bear in mind the financial year end for Takeda ends on the 31^st of March each year unlike CSL who closes on the 30^th of June. Thus, I am comparing the full year 31^st March 2020 for Takeda against the full year 30^th June 2019 for CSL.

MYTH 1

CSL will implode as Takeda takes over

A quick scan of CSL’s balance shows that working capital is adequate at over 2 x
Debt is over 4 billion but is easily serviceable at an interest coverage of 14 x

	CSL Balance Sheet
1	Current Assets	$5.54B
2	Property, Plant, and Equipment	$4.48B
3	Long-Term Assets	$6.77B
4	Total Assets	$12.31B
5	Current Liabilities	$2.19B
6	Long-Term Debt	$4.24B
7	Long-Term Liabilities	$4.87B
8	Total Liabilities	$7.06B
9	Common Equity	$5.25B
10	Tangible Shareholders Equity	$3.37B
11	Shareholders Equity	$5.25B
12	Common Shares Outstanding	906.28M

1		EBIT	.50B
2	Int Exp	$176.7M
3	Int Cover	14.15

On the other hand Takeda’s balance sheet shows working capital at just over 1 x

Debt is over 41 billion USD and not easily serviceable by EBIT, interest coverage is 0.6 x

	Takeda Balance Sheet
1	Current Assets	$22.72B
2	Property, Plant, and Equipment	$12.75B
3	Long-Term Assets	$95.24B
4	Total Assets	$117.95B
5	Current Liabilities	$20.02B
6	Long-Term Debt	$41.46B
7	Long-Term Liabilities	$54.44B
8	Total Liabilities	$74.46B
9	Common Equity	$43.49B
10	Tangible Shareholders Equity	$-31.80B
11	Shareholders Equity	$43.49B
12	Common Shares Outstanding	3.12B

1		EBIT	3.75M
2	Int Exp	$1.534B
3	Int Cover	0.60

A look at Takeda’s P&L shows that while it is generating over 30 billion USD in revenues its not that profitable with income after tax at just over 407 million USD. Actually, if you look on page 112 (F-6) of the 20-F_2020-06-24 document lodged with the SEC the company actually reported a comprehensive loss for the year at 199,419 million yen.

	Takeda Income Statement
1	Revenue	$30.28B
2	Net Income	$407.02M
3	Cost of Goods Sold	$10.03B
4	Gross Profit	$20.25B
5	Operating Expenses	$29.36B
6	Operating Income	$923.75M
7	Non-Operating Income/Expense	$-1.48B
8	Pre-Tax Income	$-558.94M
9	Normalized Pre-Tax Income	$-558.94M
10	Income after Taxes	$407.47M
11	Income from Continuous Operations	$407.47M
12	Consolidated Net Income/Loss	$407.47M
13	Normalized Income after Taxes	$407.47M
14	EBIT	$923.75M
15	EBITDA	$6.29B
16	Weighted-Average Shares Outstanding (Basic)	3.11B
17	Weighted-Average Shares Outstanding (Diluted)	3.13B
18	Earnings per Share (EPS) (Basic)	$0.13
19	Earnings per Share (EPS) (Diluted)	$0.13

Based on the above I don’t think CSL is going to implode but I do have my doubts about Takeda with its mountain of debt.

MYTHBUSTED

MYTH 2

CSL does not add value to its shareholders


I won’t go into too much detail on CSL here as it is well documented, one only needs to look at the consistently high returns on equity, dividend payments, share buy backs with a steadily increasing share price over the years.

In contrast, Takeda’s value destruction began with its acquisition of Shire in exchange for cash and shares of Takeda’s stock. This deal has been a value destroying exercise for Takeda shareholders where the company has had to borrow money for the cash payment, hence the large debt sitting on its balance sheet and has had to issue shares resulting in a huge increase in the number of shares on issue. In return for all of this the combined entity now has revenues of over 30 billion USD but its profit are minuscule at 1.34%, ROE is not even worth mentioning. Earnings per share have gone from 140.61 yen to 28.41 yen (13 cents USD).

Takeda’s management has resolved to bring down the debt in a hurry and with good reason, some of the debts have conditions placed on them (Takeda needing to meet key financial ratios). Management has and is planning divesture of non core assets to help repay the debt but I won’t be surprised if they have to issue more shares on the market to help pay off the debt.

MYTHBUSTED

MYTH 3

Takeda does not have a debt problem

Edgck on this forum has already highlighted the debt problem facing Takeda.

On the bottom of page 8 of the 20-F_2020-06-24 document lodged with the SEC where it talks about the risk factors facing the business, there is this:

“Additionally, because we issued a significant number of additional shares of out common stock as part of the consideration for the Shire Acquisition, a failure to achieve the anticipated benefits of the Shire Acquisition could negatively affect our earnings per share.

We have substantial debt, including a significant amount incurred in connection with the Shire Acquisition, which may limit our ability to execute our business strategy, refinance existing debt or incur new debt, and if we are unable to meet our goals for deleveraging we could be at a greater risk of a downgrade of our credit ratings.

Our consolidated bonds and loans were 5,093.3 billion JPY as of March 31, 2020, the majority of which was incurred in connection with the Shire Acquisition or represents indebtedness of Shire now included for payments of interest and principal could adversely affect our liquidity. In particular, if we are unable to realize the anticipated benefits of the Shire Acquisition, we may not be able to service our indebtedness. We are also required to comply with certain covenants within various financing arrangement and violations of such covenants may require the acceleration and immediate repayment of the indebtedness…..”

MYTHBUSTED

MYTH 4

Takeda is backed by the Japanese government with unlimited money


Page 81 of the 20-F_2020-06-24 document lodged with the SEC lists the major shareholders, they are instit.utional investors.

On the company’s website https://www.takeda.com/investors/stock-and-shares/The share ownership is broken down between Japanese Institutional Investors, Japanese Securities Companies, Japanese Business Corporations, Overseas Institutional Investors etc, Japanese Individual investors etc. There are no shares held by the Japanese government.

It should also be noted that a few years ago before this pandemic began Japan was running a debt of 233% of its GDP. Now with the pandemic and the stimulus packages offered will only add to this mountain of debt. Central banks around the world face the issue of moral hazard on corporate bailouts, there needs to be extenuating circumstances with serious ramifications for them to jump in.

I refer to Ben S Bernanke’s book “The Courage to Act – A memoir of a Crisis and its Aftermath”

In recent times one only needs to look at the number of companies that have gone by the way side because the government has refused to step in.

MYTHBUSTED

MYTH 5

Takeda’s TAKHZYRO will be the HAE treatment of choice for all sufferers


Again, Edgck on this forum has already highlighted the cost v benefit of the treatment.

The Icer report (see HAE-RAAG_111518) confirms that while Haegarda and Takhzyro “…resulted in fewer acute attacks and improved quality of life for people living with HAE, current pricing of all three treatments exceeds traditional cost effectiveness thresholds.”

On page 4 of the documents it says that none of the treatments met established thresholds for long term cost effectiveness, both Haegarda (CSL) and Lanadelumab (Takeda’s TAKHZYRO)

Haegarda: $328,00 per QALY gained

Lanadelumab: $1.11 million per QALY gained

Annual net prices used were $277,786 for Haegarda and $423,344 for Lanadelumab

Note The quality-adjusted life year orquality-adjusted life-year (QALY) is a generic measure of diseaseburden, including both the quality and the quantity of life lived. It is usedin economic evaluation to assess the value of medical interventions. One QALYequates to one year in perfect health.

I am not a medical professional nor a sufferer of this terrible condition but if the effectiveness was the same with only Haegarda needing 2 injections a week over Takhzyro of 1 injection every 2 weeks, I think I will go for the cheaper option.

It should be noted that there was an issue raised with the long term effectiveness of Takhzyro, on page 2 of the Icer document:

“Promising but inconclusive. Although results from a pivotal clinical trial demonstrated important clinical benefits in terms of reducing HAE attacks, the possibility of net harm cannot be ruled out for a new biologic therapy with no long-term safety data.”

On page 10 of qr2019_q4_p01-en pdf document Takeda is promoting Takhzyro as its flag ship product to dominate the HAE treatment space. I’ve seen the broker report of over 300% growth. I would like to see a like for like comparison of its growth, its comparing 3 quarters in 2018 with 4 quarters in 2019. I need a baseline to be established first to draw conclusions from this.

In addition, on page 59 / 60 of the 20-F_2020-06-24 document lodged with the SEC there is a table showing the revenue earned from each therapeutic area and product. Takhzyro revenues only makes up 2% of the total portfolio product range.

MYTHinconclusive as the jury is still out

MYTH 6

CSL at a PE of 37 is one of the most expensive pharmaceutical companies in the world


Not so, because as it turns out, Takeda has a PE ratio of over 130, see TYO 4502 PE

On page 5 of the Takeda’s annual report (see asr_2020.pdf) the PE ratio on Mar 31, 2020 was 116.4

For the TAK ADR traded on the NYSE, at the close of business 16 ^th of July 2020, TAK was valued at $17.24 with a PE of 1,741.41, see NYSE TAK PE

MYTHBUSTED

Grant Imahara

1970 – 2020

Mythbuster

Rest in Peace