MoU between Chugai, SoftBank and SB for joint research using generative AI

Chugai Pharmaceutical, SoftBank Corp and its subsidiary, SB Intuitions have recently signed a Memorandum of Understanding to conduct joined research aimed at innovating clinical development processes in new drug development using generative AI. The MoU, effective January 30, 2025, aims to make substantial improvements in the productivity of clinical development processes and accelerate new drug development.

Established in 1943 and headquartered in Tokyo, Japan, Chugai is a Japanese company that engages in the research, development, manufacture, sale, importation, and exportation of pharmaceuticals. Additionally, the company markets drugs, especially for cancer, bone and joint disease treatment, and kidney diseases. In FY24, domestic sales i.e. from Japan, formed 39% of the sales mix; overseas sales contributed 46%; and other 15%. Notably, Switzerland contributed to 94% of overseas sales during the same period. The group employs 7,778 people globally.

Positive financial trajectory

Chugai has delivered consistent performance over the past 5 years, registering a revenue CAGR of 13.9% to reach JPY1,111bn in FY23, driven by business from Switzerland, which grew at a CAGR of 31%, while the contribution in total sales mix jumped to 46% in FY23, up from 23% in FY18. EBITDA registered a CAGR of 27.3% over FY18-23 to reach JPY471bn, and margins expanded by over 18% to reach 42% in FY23. Positive consistent bottom line performance led to sustained positive FCF over the same period, enabling the cash position to increase over 3x to JPY459bn as of FY23 end from JPY147bn as of FY18 end.

Chugai fared better compared to its peers, Daiichi Sankyo and Takeda Pharmaceutical, demonstrating superior EBITDA margin performance over the last five years. Daiichi’s revenue grew by a CAGR of 11.5% reaching JPY1,602bn in FY24, and Takeda’s revenue delivered a CAGR of 15.3% to JPY4,264bn. The EBITDA margins for Daiichi expanded by 296bps, reaching 17% in FY24, while Takeda reported margins of 27%, reflecting a contraction of 126 bps.

Sustained performance exceeding estimates

The company demonstrated impressive results, record-high revenue, operating profit and net income exceeding the revised forecast estimates. Revenue continued on its growth trajectory, exceeding JPY1tn for the third consecutive fiscal year to reach JPY1,170.6bn in FY24, driven by the growth of new products Phesgo and Vabysmo. The growth has also been aided by an increase in sales of mainstay products such as Hemlibra and Actemra. Overall, overseas sales pushed the total revenue forward, increasing 28.9% YoY to JPY236.8bn, supported by a substantial increase in the exports of Hemlibra to Roche. Consequently, operating income surged 23.4% to JPY556.1bn, complemented by a margin expansion of 690 bps to reach 47.5%.

Encouraging upgrades in 2025 forecast

The company has published their revised consolidated earning guidance upward for FY25. Chugai now estimates revenue of JPY1,190bn, and operating profit is anticipated to reach JPY570bn, reflecting 2.5% YoY growth. Domestically, the growth is expected to be driven by new products Phesgo and PiaSky, as well as main products, offset by the impact of drug price revisions and the market penetration of generic drugs. The overseas sales are anticipated to witness better traction owing to Hemlibra’s growth in sales volume and the positive impact of forex, despite the decrease in the export unit price.

Valuation comfort to investors

Chugai is currently trading at a P/E ratio of 28.3x, based on estimated FY25 EPS of JPY245.9, lower than its global peers of 34.8x and at a discount compared to peers, Daiichi and Takeda, which are trading at 34.4x and 58.2x respectively. Chugai is also trading at a discount to its 11-year historical average P/E of 32.2x. Similarly, the company’s EV/EBITDA stands at 17.8x, lower than its global peers' multiple of 21.6x and Daiichi’s multiple of 21.9x, but higher compared to Takeda’s multiple of 9.9x.

The company’s stock has delivered returns of over 29% in the last twelve months. The stock price has gained further traction following the release of recent FY24 results. Out of the 15 analysts covering the company, 5 have given a ‘Buy’ recommendation, 2 gave an ‘Outperform’ rating, and 8 gave a ‘Hold’ rating for an average target price of JPY7,496, suggesting an upside potential of approximately 11% from the current market price. The positive analysts’ views further gain traction from the anticipated CAGR of 2.4% in net sales over the period FY24-26 to reach JPY1,214.1bn.

Overall, the company appears poised to sustain its positive fundamental trajectory, backed by solid overseas sales, increased focus on using generative AI and upward revision of guidance. Additionally, outperformance in FY24, achieving record levels in key metrics lays a strong base for future growth and illustrates the significance of the company as a key player in the drug manufacturing industry. However, some of the major risks include changes in healthcare regulations, shifts in customer preferences, intensifying market competition, risk of manufacturing defects or drug side effects, cybersecurity risk and dependency on suppliers and logistics.