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Takeda Pharmaceutical's shares ended yesterday on the Tokyo Stock Exchange down 0.4% at 6,740 yen ($58.64), nearly 11% below a six-year high of 7,540 yen hit on May 17. But analysts attribute the fall to an overall selloff in the Tokyo stock market rather than concerns about Takeda's business. They say Takeda, Japan's biggest drug maker by sales, has a combination of drugs under development and research prowess that should produce steady profit growth ahead.
Takeda's current price -- which comes after the Nikkei Stock Average of 225 companies as a whole has dipped nearly 17% since it started a steep slide May 9 -- is well below the level analysts think the company merits. Based on the earnings and cash flow it can generate, the drug maker's shares warrant a price tag of 8,200 yen to 8,300 yen, says Shinko Securities analyst Takumi Yamagishi, who doesn't own Takeda shares. Mr. Yamagishi has a "2-plus" rating on Takeda, which means he expects its shares to outperform the Topix index of all major Tokyo Stock Exchange issues by as much as 10% over the next six months. "The stock is clearly undervalued," he says.
Takeda forecasts single-digit increases in net profit and sales each year through the fiscal year ending March 2011, when it expects its prescription-drug sales to total 1.4 trillion yen ($12.2 billion), up 37% from 1.019 trillion yen in the latest fiscal year, which ended March 31.
Takeda has a fully stocked medicine chest to back those upbeat projections. Prevacid and Actos brought in a combined 404 billion yen in revenue last fiscal year. Those drugs, along with a hypertension treatment called Blopress and prostate-cancer drug Lupron, accounted for 59% of its group sales in that year and likely will continue to generate solid earnings for the next several years, analysts say.
Based on these strong forecasts, J.P. Morgan Securities thinks Takeda's shares are worth 7,800 yen. Merrill Lynch on June 9 raised its price target for Takeda -- the amount it thinks the stock is worth, based on the company's expected earnings over the next five years -- to 9,000 yen, from 8,500 yen.
To be sure, some analysts warn that investing in Takeda has risks.
The Japanese government, which is trying to rein in ballooning public medical costs, is considering lowering the limits on prices that hospitals and doctors can charge patients for drugs from April 2007, according to local media. That would eat into Takeda's earnings, analysts say.
In addition, new drugs being developed by Takeda's foreign competitors may dent its outlook. AstraZeneca, Merck & Co. and Pfizer all are developing drugs that could directly compete with those Takeda is preparing. AstraZeneca, for example, is developing a diabetes drug with a treatment mechanism that is similar to TAK-654, the drug Takeda hopes will replace its current diabetes drug Actos.
Still, some analysts say Takeda has sufficient time to develop follow-ups for its big prescription drugs. The U.S. patent on Prevacid will expire in late 2009, while the one on Actos will expire in 2011, allowing rivals to start producing cheaper generic versions of its products. But Takeda has replacements in the works.
Takeda also aims by 2010 to launch several new drugs in the U.S., the world's biggest pharmaceutical market. These will treat conditions and diseases such as ulcer and diabetes and will boost its prescription-drug sales to two trillion yen by March 2016, Takeda predicts.
"The visibility of potential successors to the current strategic global drugs is rising," says J.P. Morgan analyst Masayuki Onozuka. "Aggressive licensing activities have also strengthened the R&D pipeline."
What's more, before these new drugs go on sale, Takeda is planning to reward its shareholders with higher dividends and share buybacks, which analysts say should support its stock price.
Takeda plans to boost its dividend-payout ratio -- the proportion of its profit that it pays in dividends -- to around 45% in the year ending March 2011. For this fiscal year, Takeda is raising its dividend per share to 120 yen, from 106 yen last fiscal year, lifting its dividend-payout ratio to 33%, from 30% last fiscal year.
For the first quarter of this fiscal year, which started April 1, Takeda will buy back 80 billion yen, or 1.4%, of its own shares outstanding and will decide on further buyback plans on a quarterly basis. When a company buys back some of its shares, fewer shares are left among which to divide up the total dividend payment. That means each share gets a higher dividend.
Merrill Lynch analyst Masatake Miyoshi expects the company to buy back shares with a total value of between 700 billion yen and one trillion yen over the next five years. Mr. Miyoshi, who doesn't own Takeda shares, has a "buy" rating on them.
"Shareholder profits are likely to increase dramatically through the dividend increases and share buybacks" planned by Takeda, he says.
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