Takeda Pharmaceuticals - a value play with exposure to the "genomic revolution"

A short summary of Takeda

Takeda is operating in an attractive segment of the market (less common diseases) which is growing, and is utilizing a differentiated, forward leaning and attractive research strategy within this market. We believe the company is trading below intrinsic value, and has additional potential to leverage the “genomics revolution”, a revolution that could potentially lead to a new golden era of pharma.

The asset also adds a noncyclical uncorrelated component to the portfolio.

Key active investors in this case are Glenview and Paulson & Company, both activist investors with a strong value tilt. Interestingly, ARK Investment Management, a frontier tech investor (among the first investors in Tesla) is also among the key investors (through their Genomic Revolution ETF).

See further down below for more details on the investment.

A quick note on Being and investments' Public Active Value:

  • Our investment strategy and process consist of evaluating active ownership cases, mainly in the US and Europe. All our investments thus have an active and engaged large owner (typically an Activist or Private Equity owner).

  • The companies we then chose to invest in have three main components. First, they are "cheap" (i.e., trading below intrinsic value). Second, the companies’ operations and/or strategy can be improved (i.e., there is potential to increase intrinsic value). Third, they represent what we call "quality", with a strong competitive position, and thus predictable free cash flows.

  • The strategy has a track record spanning back to 2010 and has produced 24% CAGR gross returns since, in line with the best Private Equity and Activist funds.

  • At the same time, our fees are ~50% lower than the typical activist/private equity fund.

Note: Historic returns are no guarantee for future returns. The value of any investment may fall as well as rise

More details on Takeda:

  • Takeda is operating in an attractive segment of the market which is growing…

We are investing in an area of the therapeutics market that is growing: less common diseases. These areas are growing due to population- and standard of living growth, and

a) exhibits limited competition due to limited size of diseases

b) enjoys preferential regulatory treatment (orphan status, faster time to market) which allows for attractive ROI on research dollars

c) requires frontier/innovative solutions (often reason for being unsolved in the first place), further differentiating companies who succeed, such as Takeda – which also opens potential to leverage this knowledge to find treatments to more prevalent diseases (something we see happening in the pipeline)

  • Takeda is utilizing a differentiated and attractive research strategy.

Takeda today acts like five biotech companies (five different therapeutic areas), which in turn are working almost like VC funds: outwardly looking and working mainly through partnerships (not in-licensing) and following build-to-buy-strategies for the vast majority of research programs. This allows them to further increase ROIC (and lower risk) on R&D, while still being able to be at the forefront of the “sexiest” research areas (which attracts talent and further partnerships). At the same time, the company possesses the typical big-pharma capabilities, such as global trial-, regulation-, manufacturing-, and distribution-capabilities, unlike pure play R&D/biotech players

  • We believe the company is trading below intrinsic value.

The company has a high free cash flow conversion, partly due to the more effective R&D spend, and is trading at around 10,5x EV/EBIT (compared to around 15 for larger pharma) and with ~40% net debt. There is some margin expansion potential (after recent merger with US based Shire) and the current product portfolio supports a slightly growing top line the coming years. We reach our base case with just a stable revenue profile and unchanged valuation but see high probability of acceleration of growth (and valuation) at exit given our analysis of the pipe­line

  • Additional upside if able to monetize on “genomics revolution”.

We have a strong thesis of a potentially new golden era for pharma, based on the intersection of DNA sequencing, AI, and Cell and Gene therapy (+ genetically y modified cell therapy). This has the potential to drive higher ROI on R&D towards 20-30% (like in the 80’s) instead of 10% average in industry today, partly based on the immense expansion of the total addressable market (50x larger over time with these therapies). We believe the intersection between genomics and medicine, an area occupied by Takeda, will be core to create effective treatments, and as such Takeda could very well be one of the front runners in this race. Indeed, one of the five core therapeutics areas of Takeda is Gene Therapy, with promising trials in the pipeline. We believe we will be able to capture this potential through a higher exit multiple. We do not include this in our base case but it adds gravy to it.

If you you wish to learn more please contact us here

Note: Historic returns are no guarantee for future returns. The value of any investment may fall as well as rise

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