Takeda Earnings: Top Line Buoyed by Foreign Exchange, Orexin Program Back in Focus

Narrow-moat Takeda’s 4502 first-quarter earnings were in line with our estimates on a constant-currency basis. Revenue was JPY 1,057 billion, which is 9% year-on-year growth but only 3.7% on a constant-currency basis. Core operating profit margin was 30.8% of revenue, or 2 percentage points worse than the same period last year. We think the company is on track to meet or perhaps exceed its full-year guidance of JPY 3.84 trillion in revenue and JPY 1 trillion in core operating profit. However, while earnings upside is possible, we think Takeda is fairly valued presently.

We increase our fair value estimate to JPY 4,500 per share from JPY 4,400. This is driven by our increased assumption of probability of success, or POS, for TAK-861, the lead asset in Takeda’s orexin program for sleep disorders. We think key drivers of share price performance will be TAK-861, which is scheduled to generate proof-of-concept data in narcolepsy Type 1, or NT1, patients by the end of this year (and a readout next year), and TAK-279, which will have a data readout in psoriatic arthritis this year. The upcoming loss of exclusivity for Vyvanse is well-understood by now. However, we think the potential market share loss in the immunoglobulin business to neonatal Fc receptor, or FcRn, blockers, including Argenx SE’s Vyvgart, is a notable headwind.

After seeing the data for TAK-994, the discontinued predecessor to TAK-861, which was recently published in The New England Journal of Medicine, we have a more positive impression of Takeda’s orexin program and have raised our POS assumption to 20% from 10%. Narcolepsy Type 1 and other sleep disorders are sizable indications with large unmet medical need, so Takeda’s orexin agonist program has high commercial potential if its molecules can overcome the liver toxicity that forced Takeda to stop TAK-994′s clinical trial.