Takeda Pharmaceutical Company Limited — FY2020 Form 20-F
Reporting period: Fiscal year ended March 31, 2020; filed June 24, 2020. Financial statements are audited and prepared under IFRS, in Japanese yen (JPY). Figures below are JPY billions unless stated otherwise. This is an annual report, not a standalone 2019 fourth-quarter filing.
Business context
Takeda is a global biopharmaceutical company operating in approximately 80 countries, with principal focus areas in gastroenterology, rare diseases, plasma-derived therapies, oncology and neuroscience. The January 2019 Shire acquisition substantially expanded its product portfolio, U.S. presence and debt. FY2020 includes a full year of Shire revenue, whereas FY2019 included Shire only from January 8, 2019, so year-over-year comparisons are materially affected by the acquisition.
Key financial metrics
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | 3,291.2 | 2,097.2 | +56.9%; Shire products contributed 1,522.2 in FY2020 |
| Operating profit | 100.4 | 237.7 | −57.8%; operating margin approximately 3.1% versus 11.3% |
| Profit (loss) before tax | (60.8) | 127.6 | Turned to a loss |
| Net profit attributable to owners | 44.2 | 135.2 | −67.2% |
| Basic EPS | ¥28.41 | ¥140.61 | Substantial decline, also reflecting increased shares after the acquisition |
| Cost of sales | 1,089.8 | 651.7 | +67.2%; includes acquired operations and acquisition inventory step-up unwind |
| SG&A expenses | 964.7 | 717.6 | +34.4%, mainly from Shire operations |
| R&D expenses | 492.4 | 368.3 | +33.7%, primarily from acquired programs |
| Product intangible amortization and impairment | 455.4 | 178.6 | Includes a 250.6 increase in Shire-related amortization |
| Net cash from operating activities | 669.8 | 328.5 | Increase of 341.3; includes substantial non-cash add-backs |
| Cash and cash equivalents | 637.6 | 702.1 | Down 64.5 |
| Bonds and loans | 5,093.3 | 5,751.0 | Down 657.7; year-end net debt was approximately 4,455.7 |
| Total assets / equity | 12,821.1 / 4,727.5 | 13,792.8 / 5,186.0 | Both decreased year over year |
FY2020 other key measures: income tax benefit was 105.0, including a 94.6 non-cash benefit from Swiss tax reform; capital expenditures were 246.3; and dividends were ¥180 per share annually. Cash and cash equivalents plus an undrawn ¥700 billion committed facility supported liquidity. Contractual obligations totaled ¥6,296.2, including ¥768.7 due within one year; the company also reported ¥102.5 of interest and ¥587.1 of borrowing principal due within one year.
Material changes versus the prior comparable year
- Revenue growth principally reflected the full-year contribution from Shire, rather than equivalent organic growth. The U.S. rose to 48.5% of revenue from 39.5%; Japan represented 18.0%, down from 27.2%.
- Operating profit fell despite higher sales. Cost of sales included a ¥125.7 increase in non-cash charges, mainly the unwind of acquisition-related inventory fair-value adjustments. Product amortization and impairment rose sharply, and restructuring expense increased to ¥181.0 from ¥83.0.
- Net finance expenses rose to ¥137.2, mainly due to acquisition-related borrowing costs. The company reported a pretax loss, while the Swiss tax-reform benefit supported positive net income.
- Operating cash flow more than doubled, aided by non-cash depreciation, amortization and impairment adjustments and lower inventory. Investing cash flow turned positive, reflecting the absence of the prior-year Shire purchase outflow and proceeds from business disposals, including Xiidra. Financing cash flow shifted to an outflow, including debt repayment, dividends and interest.
- Total bonds and loans declined, but leverage remained substantial. Takeda remained investment grade (S&P BBB+; Moody’s Baa2) and reported compliance with financial covenants at year-end.
Outlook, management commentary, risks and unusual items
- Integration and deleveraging: Management targets approximately US$2.3 billion of annual recurring pretax Shire synergies by March 31, 2022, with approximately US$3.0 billion of cumulative non-recurring costs to achieve them. The filing describes substantial ongoing integration costs and plans to sell non-core assets to accelerate debt reduction. No clear consolidated FY2021 revenue or profit guidance is provided in the supplied filing text.
- COVID-19: Management said the pandemic’s financial impact could not then be reasonably estimated and was limited in the reported results to date. Responses included remote work, reduced in-person commercial activity and a pause on most new trial starts. Takeda warned of potential effects on demand, clinical development, plasma collection, suppliers and product supply; it was collaborating on a potential COVID-19 plasma-derived therapy.
- Product and regulatory items: NATPARA was recalled in the U.S. in September 2019 over potential rubber particulates; Takeda did not expect U.S. revenue from it in FY2021. On June 9, 2020, the FDA issued a warning letter following an inspection of the Hikari manufacturing plant; the company said corrective actions were underway. In June 2020, Takeda disclosed an ANDA filing seeking a generic version of VYVANSE, which could challenge its patent protection.
- Other material risks: Debt servicing and refinancing, realization of acquisition synergies, potential goodwill or intangible-asset impairment, pricing and reimbursement pressure, patent expiry and generic competition, R&D and approval uncertainty, supply dependence (including plasma and single-source inputs), foreign-exchange exposure, and litigation or regulatory investigations. Takeda disclosed ongoing U.S. DOJ inquiries involving patient-assistance programs and possible promotion or kickback issues.
- Contingencies and unusual items: Takeda is appealing an Irish tax assessment of €398 million concerning a Shire break fee; outcome was uncertain. Aggregate provisions for legal and other disputes were ¥49.7 billion. Separately, after year-end the European Commission released Takeda from an obligation to divest SHP647; management estimated a one-time operating-profit gain of approximately US$564 million for the quarter ending June 30, 2020.
- Audit and controls: The auditor issued unqualified opinions on the IFRS financial statements and internal control over financial reporting. Critical audit matters included estimating U.S. rebate provisions and valuing Shire-acquired marketed-product intangible assets.
Important facts for investors to verify
- How much of revenue and future cash generation is attributable to Shire products, and whether the targeted synergies are achieved within the stated timetable and cost.
- Debt maturities, interest expense, covenant headroom and progress against deleveraging goals; confirm the effect of foreign exchange and any asset-sale proceeds.
- Whether operating cash flow remains strong after adjusting for non-cash amortization, impairment, inventory movements and the one-time acquisition effects.
- Developments in the Hikari FDA warning letter, NATPARA supply and the VYVANSE generic challenge, including potential effects on sales and valuation assumptions.
- Outcomes of the Irish tax appeal, disclosed litigation and government investigations, and the basis for the estimated SHP647 gain.
- Whether the Swiss tax benefit and other tax effects are non-recurring, and how recurring earnings compare with reported net profit.