Business context and reporting period
Takeda Pharmaceutical Company Limited’s Form 20-F, filed June 27, 2019, is an IFRS annual report for the fiscal year ended March 31, 2019—not a standalone 2018 fourth-quarter report. Results are consolidated; Takeda reports one operating segment. The year includes Shire only from its January 8, 2019 acquisition date, limiting comparability with the prior year.
Key financial metrics
Amounts are in ¥ billions unless stated otherwise.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | 2,097.2 | 1,770.5 |
| Operating profit | 205.0 | 241.8 |
| Profit before tax | 94.9 | 217.2 |
| Net profit | 109.0 | 186.7 |
| Net profit attributable to owners | 109.1 | 186.9 |
| Basic EPS | ¥113.50 | ¥239.35 |
| Operating cash flow | 328.5 | 377.9 |
| Cash and cash equivalents at year-end | 702.1 | 294.5 |
| Bonds and loans | 5,751.0 | 985.7 |
- Revenue rose 18.5%; Shire contributed ¥309.2 billion after closing. Excluding Shire’s contribution, revenue increased ¥17.5 billion, or 1.0%.
- Operating profit fell 15.2%, and operating margin declined to about 9.8% from 13.7%. Net profit fell 41.6%; reported net margin was about 5.2% versus 10.5%.
- Cost of sales rose to ¥659.7 billion, including ¥81.7 billion of mainly non-cash expense from unwinding Shire inventory fair-value adjustments. Product-related amortization and impairment rose to ¥203.4 billion.
- Net cash used in investing activities was ¥2,835.7 billion, primarily reflecting ¥2,891.9 billion of net cash consideration for Shire. Financing activities provided ¥2,946.2 billion, mainly from acquisition-related borrowing and bond issuance.
- Year-end total equity was ¥5,163.6 billion and total liabilities were ¥8,708.7 billion. The company reported ¥122.7 billion of interest and ¥988.1 billion of borrowing principal due within one year, alongside an undrawn ¥300.0 billion committed credit line.
- Cash dividends remained ¥180 per share annually. Cash dividends paid during FY2019 totaled ¥143.0 billion.
Material changes versus the prior comparable period
- Shire acquisition consideration was ¥6,213.3 billion, funded with cash and newly issued shares. Takeda issued about 770.3 million shares; year-end shares outstanding increased to approximately 1,565.0 million from 794.7 million.
- Acquisition-related debt and assumed Shire debt drove bonds and loans to ¥5,751.0 billion from ¥985.7 billion. Finance expenses rose to ¥83.3 billion from ¥31.9 billion, including acquisition financing costs and interest.
- FY2019 Shire results included ¥309.2 billion of revenue and a ¥126.1 billion net loss for the post-acquisition period. Shire-related purchase accounting, integration costs, and financing weighed on reported profit.
- Operating cash flow decreased ¥49.4 billion to ¥328.5 billion. Cash increased by ¥407.6 billion year over year, in part due to acquisition financing.
- The income tax line was a ¥14.1 billion benefit, compared with a ¥30.5 billion expense in FY2018, mainly reflecting acquisition-related tax effects and restructuring-related benefits.
Guidance, outlook, management commentary, risks and unusual items
- Management expects approximately $2.0 billion of recurring annual pre-tax synergies by the end of the third fiscal year after the acquisition, with approximately $3.0 billion of non-recurring cash integration costs over the first three fiscal years.
- Takeda stated it expects a net loss for the fiscal year ending March 31, 2020, citing integration costs, inventory fair-value step-up expenses, increased amortization and financing costs; some expenses are expected to continue into FY2021.
- The company targets net debt to Adjusted EBITDA of 2x or less within three to five years after closing, supported by operating cash flow and planned non-core asset disposals. Achievement depends on integration, earnings and disposals.
- Takeda said working capital was sufficient for current requirements. It was in compliance with debt covenants at March 31, 2019, including the JBIC loan covenant requiring profit before tax not to be negative for two consecutive years. A breach could trigger accelerated repayment and cross-default consequences.
- Key risks include realizing Shire synergies, high leverage and refinancing, potential credit-rating pressure, product development and regulatory outcomes, pricing controls, patent expirations and generic competition, foreign exchange exposure, and supply constraints. Management said plasma-derived therapy demand exceeded the supply of critical raw material during FY2019.
- Shire-related goodwill was ¥3,087.4 billion; total goodwill and intangible assets at year-end were ¥4,161.4 billion and ¥4,860.4 billion. Impairments could be material if expected product cash flows or acquisition benefits do not materialize.
- Notable contingencies include an Irish tax assessment of €398 million relating to a historical Shire break fee, which Takeda is appealing, and a jury award of $155.2 million in Bayer’s ADYNOVATE patent case; Takeda said it was considering its options and had established a purchase-accounting provision.
- Subsequent events included the announced sale of Xiidra for up to $5.3 billion, including contingent payments, and the sale of TachoSil for €400 million. In June 2019, Takeda issued ¥500 billion of hybrid bonds and used the proceeds to repay its short-term acquisition loan.
- Management concluded disclosure controls were effective at a reasonable-assurance level. The filing did not include management’s assessment or auditor attestation on internal control over financial reporting under the applicable transition period.
Important facts an investor should verify
- Track acquisition integration, realized synergies, one-time costs and performance against the stated net-debt/Adjusted EBITDA target.
- Review the debt maturity schedule, interest exposure, covenant headroom, credit ratings and refinancing plans, including the effect of the hybrid bonds.
- Separate underlying product performance from Shire contributions, purchase-accounting charges, divestitures, foreign exchange and other unusual items.
- Monitor product-level growth, patent challenges and expirations, pricing and reimbursement changes, and plasma supply capacity.
- Follow the Irish tax appeal, ADYNOVATE litigation and other material legal proceedings, as well as asset sale closings and contingent proceeds.