Astellas Pharma Inc. (ASTELLAS) is a Japanese pharmaceutical company dedicated to improve the health of people worldwide through the provision of innovative and reliable pharmaceutical products. The group’s prioritized therapeutic areas are Urology, Oncology, Immunology, Nephrology and Neuroscience, while conducting research and development in new therapeutic areas and discovery research by leveraging new technologies. Besides, ASTELLAS also researches, develops, manufactures, and promotes its prescription drugs through subsidiaries in the US, Europe and Asia.

Strategic plan in place to boost future growth. According to the group’s Investor Relations website, one of the main challenges to overcome by ASTELLAS is the impact of the patent expiry for the OAB treatment Vesicare and anticancer product Tarveva from 2018 to 2020. To mitigate the impact and maintain long-term growth post the expiry, the company has formulated a Strategic Plan 2015-2017, which involves maximizing value of existing mainstay products and also making steady progress on development projects. In tandem with that, the group will also look to explore new opportunities by creating new drugs in therapeutic areas such as muscle diseases and ophthalmology. ASTELLAS will maintain levels of investment in their current therapeutic areas, while investing sufficient resources to explore long-term growth opportunities while cultivating alliances with influential external partners.

Profitable company with expanding margins. Recording a commendable 5-year CAGR revenue and net profit growth of 7.6%/23.4%, world renowned pharmaceutical player, ASTELLAS, has over the years saw improvement in its operational efficiencies that led to improved profitability. The company managed to bolster its EBITDA and Net Margin of 19.4%/7.1% in FY11 to 25.4%/14.1% in FY16. Moving forward, consensus estimates are expecting further margin expansion by the group with industry analyst forecasting a net profit margin of 14.9%/15.3% for FY17E/FY18E.

Buy on ASTELLAS, as per consensus. With a 66.7% buy rating among 12 international research houses, including J.P. Morgan (TP @ JPY2000) and Goldman Sacs (TP @ JPY2100), Bloomberg consensus is positive on ASTELLAS outlook with a revenue and net profit growth forecast of -2.9%/+2.8% for to JPY1,333b/JPY199.2b respectively for FY17E. The aforesaid consensus numbers is in line with the company’s internal revenue and net profit forecast of JPY1,350b/JPY199.0b respectively for FY17E, as per mentioned in their 2016 Annual Report. The earnings growth is expected to come from the group’s 3 tier strategy plan of (i) maximizing value of growth drivers, including prostate cancer treatment XTANDI and OAB franchise by investing actively on label expansion, and (ii) pursuing operational excellence by creating a more efficient, higher-quality business operation infrastructure to enhance the group’s ability to correspond to the changing environment.

Undemanding valuation? ASTELLAS is currently trading at FY17E fwd PER of 17.0x, which is undemanding as compared to similar-sized peers such as Takeda Pharmaceutical (30.0x) and Otsuka Holdings (32.5x). Besides, the group is currently trading at a 23.8% discount to MSCI Japan Health Care Index FY17E fwd PER of 22.3x. Considering it is a blue-chip counter coupled with positive growth prospect as well as strong balance sheet with a net cash position of c.JPY373.2b, ASTELLAS is likely to be on investors' radar, especially those are keen to look for undervalued blue-chip healthcare players.

Source: Kenanga Research - 2 Sep 2016