Founded in 1969 and based in Kyoto, Japan, Nippon Shinyaku operates in Pharmaceuticals and Functional Food. The Pharmaceuticals segment focuses on urology, hematology, gynecology, and rare diseases. The Functional Food segment offers dietary supplements and health foods, addressing issues like food loss. The Pharmaceuticals business contributed 86.3% of the sales mix in 2QFY24, while the Functional Food business contributed 13.7%.

Focus on overseas sales expansion

The 7th Five-Year Medium-Term Management Plan, launched in April 2024, aims to sustain growth beyond Uptravi’s patent expiration in FY28. Accordingly, the management is focused on launching over one new product annually and has started in-house sales of Viltepso in the U.S., raising overseas sales contribution to 42.6% in FY23, from 34.1% in FY22. Hence, Nippon Shinyaku anticipates significant investments during FY24-28, with a focus on reducing its reliance on royalty income and introduce products like Jaypirca and Yuvanci as new growth drivers. Consequently, the Group targets revenue of JPY230bn in FY28 and JPY300bn by FY30, supported by enhanced revenue contribution of over 50% from the overseas markets.

Riding high on the positive performance from the pharmaceuticals business, Nippon Shinyaku has revised its FY24 business forecast upwards. The company now expects revenue of JPY157bn, up from the earlier JPY154bn, and operating income of JPY33bn, from JPY32bn. As a result, net income is forecasted to increase to JPY30bn, from JPY29bn.

Growth fueled by the pharmaceuticals business

The company registered a CAGR growth of 5.2% in revenues to reach JPY148bn over the period FY18-23. Operating income grew at a faster pace, with a CAGR 8.7% to JPY31.3bn, aided by an expansion in margin by 318 bps to 21.1%. In comparison, Nippon Shinyaku’s peer, Kyowa Kirin, witnessed similar revenue trends, growing at a CAGR of 5% during the same period to JPY442bn. However, Kyowa demonstrated better operating income performance, which increased at a CAGR of 10.5% to JPY95.8bn, supported by a 491 bps increase in margins to 21.7%.

Additionally, Nippon Shinyaku’s other peer, Shionogi & Co, did not perform on similar lines and delivered revenue CAGR of 3.6% to JPY435bn during the same time, while operating income grew at a CAGR of 3.9% to JPY168bn, expanding by only 43 bps.

Nippon Shinyaku delivered resilient performance during 2QFY24, growing overall revenue by 8.2% YoY to JPY79.3bn. The Pharmaceuticals business saw a 12.3% YoY increase, reach JPY68.5bn, driven by a rise in sales of Uptravi and Viltepso, and also aided by the launch of new products including Vyxeos in May. Ethical drug sales were further boosted by increased royalty revenue from overseas Uptravi sales. However, the Functional Food business declined 12.1% YoY to JPY10.8bn, owing to lower prices of protein preparations as well as lower demand for milk protein. Operating profit decreased 14.4% YoY to JPY17.9bn owing to high R&D and SG&A expenses. Consequently, net profit remained broadly flat, depicting a 1.2% increase to JPY16.4bn

The management has declared an interim dividend of JPY62 per share, and forecasts to pay a total FY24 dividend of JPY124 per share, reflecting an attractive dividend yield of 3.1% on the current price.

Favourable valuations

The company is trading at a reasonable P/E valuation of 8.8x, compared to the historical 10-year average of 31.2x and global peer average of 24.3x. The Group's peers – Shionogi and Kyowa are also trading at relatively higher P/E of 11.3x and 18.2x, respectively. Valuation through an EV/EBITDA approach also yields similar results, with Nippon Shinyaku trading at a multiple of 5x, while Shionogi is trading at 7.5x and Kyowa is trading at 7.9x.

The stock performance of the company over the past year has not been much encouraging. However, the stock staged a comeback in the past six months, delivering returns of over 7%. The stock rose sharply by 14.1% on September 25, 2024, following the receipt of approval by Johnson & Johnson for YUVANCI® combination tablet for the treatment of pulmonary arterial hypertension.

Out of the eight analysts covering the stock, two have given a ‘Buy’ rating for an average target price of JPY4,131, indicating an upside of over 8% from the current price. Recent run-up in prices caps the upside, however, any correction in near-term prices could provide a decent opportunity for investors to evaluate the company.

Overall, Nippon Shinyaku appears poised to deepen its overseas reach through the launch of new products and expand the top line. Moreover, reasonable valuation levels should provide comfort to long-term investors, seeking value-based stocks. However, the company is exposed to a few risks including legal, wherein the company has been implicated by a U.S. District Court of Delaware to pay Sarepta Therapeutics, Inc. compensation for damages linked to patent infringement. The Group is also prone to risks such as technology obsolescence and increased competition.