Takeda Pharmaceutical Co Ltd (TAK) 2006 Q3 法說會逐字稿

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(technical difficulty) Conference call of third-quarter financial results for fiscal year ending March 2006 of Takeda Pharmaceutical Company Limited. My name is Hirofumi Inoue, Senior Manager, Public Relations, Investor Relations of Corporate Communications Department of Takeda.

Please let me introduce today's participants from Takeda -- Mr. Hiroshi Takahara, General Manager of Finance and the Accounting Department; Mr. Kazuaki Ikeya, General Manager of Strategic Product Planning Department; Mr. Yasuhiko Yamanaka, General Manager of Corporate Strategy and Planning Department.

We would like to start with a presentation and a financial overview of the third quarter, which is followed by the R&D update. After that, we will have a question-and-answer session and your questions will be welcomed.

Now, we would like to start the presentations. Please refer to the presentation materials and also the earning report.

Hello, everyone. It is my pleasure to present to you a summary of Takeda's consolidated financial results for the first three quarters of fiscal year 2005. Please bear in mind that the amounts that I will be presenting are all cumulative amounts for the first three quarters.

Now please take a look at page 3. This slide shows the outline of consolidated results. Let me begin with an overview of the cumulative results for the first three quarters of fiscal year 2005.

Net sales were 935.2 billion yen, up 64.2 billion yen or 7.4% over the same period of the previous fiscal year. Operating income was 346.6 billion yen, up 7 billion yen or 2.1%.

Ordinary income was 418.9 billion yen, up 35.6 billion yen or 9.3%. Our net income was 281.1 billion yen, up 35.5 billion yen or 14.4%. Extraordinary income of 32.6 billion yen was recorded.

R&D costs were 116.1 billion yen, up 30.6 billion yen or 35.9% from the previous year. Cumulative earnings per share, EPS, were 317.6 yen, up 40.07 yen from the previous year.

As for exchange rates, the yen fell from 109 yen per dollar last year to 112 yen per dollar this year, and from 135 yen per euro last year to 137 yen per euro this year, both indicating a weaker yen. As a result, the positive effect year on year of the exchange rates on revenues was 7.5 billion yen and the positive impact on net profit was 3.0 billion yen.

Please turn to the next page. Here on page 4, I will summarize the key points of our business results. Sales of ethical pharmaceutical products expanded with the growth of our core products in Japan and Europe, as well as Actos at Takeda Pharmaceutical North America, herein after TPNA, which offset the impact of the transfer of life-environment business in April and generated higher net sales than last year.

There was a significant increase in R&D costs by the progress in development projects in licensing and the alliance activities and the research activities at Takeda San Diego, which joined our group in March 2005.

There was also an increase in sales and marketing expenses for new products such as Rozerem by TPNA. However, these incremental core expenses were absorbed by higher gross profits derived from expanded net sales, resulting in an increase in operating income.

Nonoperating income improved as a result of an increase in accretive income from TAP Pharmaceuticals, which is a U.S. joint venture with Abbott Laboratories, and augmented interest income by higher U.S. interest rates, resulting in an increase in ordinary income.

Net income soared, due in part to extraordinary income recorded in the first half of this year.

Please turn to the next page. I would like to talk about the change in sales from the last year. Net sales of our core ethical pharmaceutical products in the domestic market have grown, Blopress by 16.1 billion yen, Actos by 6.1 billion yen, Takepron by 6.2 billion yen and Basen by 3.4 billion yen, and generated a total year-on-year increase in sales of 33.7 billion yen, or 9.5% up.

Net sales of ethical pharmaceutical products overseas had an increase of 42 billion yen or 11.8%, which includes a positive currency effect of 7.5 billion yen. Royalty revenue from TAP Pharmaceuticals included in the net sales declined, but sales of TPNA's Actos have grown by 21.3 billion yen, as well as the sales of core products such as Leuprorelin and Actos in the European area.

The consumer health care business enjoyed a slight increase of 200 million yen or 0.5% in sales from the same period last year. Sales of Alinamin drinks were down -- this is minus 600 million yen -- but those of Actage AN tablets, that is plus 500 billion yen, and the Nicorette, that is plus 700 million yen, were up.

Sales in other businesses fell by 11.7 billion yen as revenues from subsidiaries and our affiliate companies of the life-environment business by 10.9 billion yen dried up due to the transfer of the business in April. Consequently, overall net sales by Takeda Pharmaceutical Group increased by 64.2 billion yen, or 7.4% up from last year.

Next, please. I would like to explain the components of the change from last year in the sales of TPNA, that is Takeda Pharmaceutical North America. Sales of its main product, Actos family, were $1301 million, representing an increase of $153 million or 13.4% from the same period of the preview year. This figure includes $5.4 million in sales of ACTOplus Met, which promotion was started in November 2005.

Royalty revenue from copromotion with Kos Pharmaceuticals were $31 million higher than the previous year. In addition, sales of Rozerem, which was launched in September 2005, were $12 million. As a result, total sales at TPNA reached $1364 million, a year-on-year rise of $196 million or 16.8%.

The lower yen produced a positive currency effect of 4.8 billion yen, meaning that total sales grew by 26.1 billion yen or 20.6% up on a yen basis. TPNA's results thus accounted for about 40% of the total increase in consolidated net sales of the Takeda Group.

Next, please. Let me now discuss worldwide sales of our in-house ethical pharmaceutical products, including sales at TAP Pharmaceuticals and other [equity method] affiliates. Globals sales of in-house ethical pharmaceutical products enjoyed a year-on-year increase of 70.1 billion yen or 8.9% to 855.6 billion yen. If excluding favorable currency effect of 14.4 billion yen, the sales increase would have been 55.6 billion yen.

By region, sales went up by 27.4 billion yen or 6.8% in the Americas, which would have been 14.2 billion yen if without currency effect and by 27.1 billion yen or 10.3% in Japan, by 13.4 billion yen or 12.5% in Europe, and by 2.1 billion yen or 20.7% in Asia.

By product, Candesartan increased by 32.7 billion yen, Actos by 31.6 billion yen, Lansoprazole by 6.6 billion yen and Leuprorelin by 1.0 billion yen. All in all, these four international strategic products enjoyed a 71.1 billion yen rise in sales, or 10.4% year on year.

On page 8, I will give a breakdown of the change in operating income from the first three quarters last year -- higher sales of ethical pharmaceutical products, that is 75.7 billion yen, which have a high gross margin rate, and the elimination of sales from the life-environment business with a low gross margin rate, which is negative 10.9 billion yen. The improvement of total gross margin rate was 1.3 points from last year to 76.6%. The result was a year-on-year rise in gross income of 60.3 billion yen.

On the other hand, R&D costs and the selling, general and administrative expenses both increased. R&D costs have risen by 30.6 billion yen or 35.9% up from last year, due to Phase III costs stemming from progress made in development projects in license and alliance activities, as well as incremental R&D costs at Takeda San Diego Inc., which joined our group in March of last year.

Selling, general and administrative expenses were pushed up 22.7 billion yen or 9.8% by, among others, sales and marketing expenses for the launch of Rozerem and ACTOplus Met at TPNA. As a result of the above, operating income slightly rose year on year by 7 billion yen or 2.1%. The increase of net sales absorbed in the investment for the future growth.

Next, please. Looking at nonoperating income, there was a year-on-year increase of 9.5 billion yen in accretive in earnings of our affiliates of which 8.6 billion yen came from TAP Pharmaceuticals. The net sales at TAP for the nine months from April to December came to $2.499 billion, down $3 million or 0.1% from the same period last year.

On the other hand, selling, general and administrative expenses dropped from last year considerably, because of the copromotion fee payments to Abbott and the results for serial litigation related to Lupron business, both of which happened in the previous period.

Consequently, TAP's net income improved by $170 million or 31.2% to $717 million. 50% of the increase, $85 million, was accretive income to us. If without the $41 million impact from Lupron reserve happened last year, the increase would have been $45 million, which seems coming from ordinary cost of business.

On a yen basis, we had 8.6 billion yen increase to 40.2 billion yen in TAP equity income. This 8.6 billion yen could be broken down to the business effect of 4.8 plus the effect of Lupron result at TAP last year, 4.5 plus; the effect of Lupron result at Takeda consolidated adjustments also happened last year -- that is negative 2.0; and 1.3 billion plus from favorable currency effect.

Please look at the page 10 -- net income key factors. Due to the increase in accretive income, that is 9.5 billion yen, as well as the increase of other nonoperating income, that is 19.1 billion yen, mainly in our U.S. holding company, Takeda America Holdings, by rising U.S. interest rates, the total nonoperating income increased by 28.6 billion yen from the last year.

Ordinary income cost rose by 35.6 billion yen or 9.3% from the previous year. In addition, extraordinary profits have a year-on-year positive effect of 33.7 billion yen. As a result, the net income from last year has increased by 35.5 billion yen or 14.4%.

Although cumulative net income for the first three quarters looks nicer than projected, it is expected that sales in the domestic market in the fourth quarter may slow down as a result of the scheduled drug price cut by national health insurance, as well as the progress of end licensing activities. Accordingly, financial forecasts for the full year are unchanged from those announced in November 2005.

This concludes my presentation of our business results as of the third quarter of fiscal year 2005. Thank you very much. Next, Mr. Ikeya, General Manager of the Strategic Product Planning Department, will be discussing the state of progress made in pipeline.

Hello, everyone. My name is Kazuaki Ikeya, General Manager of the Strategic Product Planning Department. I'm going to explain pipeline updates since October 2005.

Please look at page 12. As to AD4833, Actos, we submitted an application for an indication reduction of the risk of macrovascular in patients with Type II diabetes mellitus and pre-existing macrovascular disease in Europe, based on the proactive study results that were announced last year.

We started to conduct Phase III study for SYR-322 in the United States and Europe. This compound is DPP IV inhibitor that is considered to be new option among all other anti-diabetics. We judged that the result of Phase II showed efficacy and safety profile which we had expected. However, we do not think that it is appropriate to make any comments about the precise profile of the compound at this time because we have just finished the Phase II study.

We started to conduct Phase II study for ATL-962 in Japan based on the result of Phase II conducted by Alizyme in Europe and Phase I study in Japan. I will explain the overview of DPP IV inhibitors and the result of Phase II for ATL-962 conducted by Alizyme in Europe.

Please look at page 13. Glucagon-like peptide-1, or GLP-1, is a hormone which increases insulin segregation by stimulating beta cell of pancreas and improves beta cell function. DPP IV is an endogenous enzyme which causes degradation with GLP-1. Thus, DPP IV inhibitors work by blocking DPP IV, suppress the degradation of GLP-1 to keep its concentration for a longer period of time. So DPP IV inhibitors are expected to be a new generation of oral agent for treatment of diabetes with new mechanismal action.

There are competitors, however. Now, Takeda San Diego is a pioneer of DPP IV inhibitor. It was the first organization in the world to announce that it had obtained the three-dimensional instruction of DDP IV. So we believe we are successful with SYR-322, which was designed based on the X-ray crystallography technology.

I will explain about the Phase II trial of ATL-962, cetilistat, conducted by Alizyme. Please look at page 14. As to discuss, cetilistat 80 mg and 120 mg caused statistically significant reduction in weight under hemoglobin A1C similar to the result obtained with orlistat.

So I found a mistake in the slide, saying that efficacy significant reduction to weight loss and hemoglobin A1C. Please (inaudible). The corrective clause is significant reduction, weight and hemoglobin A1C. As to the safety, the incidence rates of treatment withdrawal and gastrointestinal adverse events were substantially lower than those who took orlistat. These results have shown that cetilistat has [significant] efficacy and a safe profile as compared with orlistat.

Thank you for your attention.

Thank you for listening to a brief presentation resulting Takeda's third-quarter financial results for fiscal year ending March 2006. Next, we would like to move to the question-and-answer session. Please start the session.

(OPERATOR INSTRUCTIONS). Jon Greenhill, UK.

It is Jon Greenhill from Lazard. I just wondered, the initial sales of Rozerem, I think, have slightly disappointed the market. I wondered if you could comment on how you think that launch has gone, and could you give us some idea of the outlook for your marketing efforts on that? And do you have any roadmap in terms of sales in the months ahead? Thank you.

[translated] Yes, the question about Rozerem, we have started with our strategy for promotion since September, and so far the actual achievements of performance of prescriptions is fluctuating above our original plan. And we believe that it will continue in this way going forward.

And with respect to the share of prescriptions, compared to other companies' products, we can say that Rozerem has made a slow start. However, I would like to say that our product, Rozerem, is a drug with an entirely new concept as an agent for insomnia, and therefore we are targeting the patients who have not experienced using agents for insomnia so far. So we believe that because of this, the start has been slow. But we are sure that going forward, the sales trend will continue to increase.

(OPERATOR INSTRUCTIONS). Jon Greenhill.

Could you just update us on the cash position at the end of Q3 and whether you conducted any share buybacks in Q3?

[translated] In answer to your question, as of the end of December, the cash position was 1.7 trillion yen, and we did not conduct any share buyback in the third quarter.

And one follow-up question was your R&D budget, I believe, is 180 billion yen, of which you appear to have only spent about 116 billion. Is it likely that you won't spend all of your R&D budget this year?

[translated] In the fourth quarter, we have plans of introducing a few major products, and therefore we plan to use all the 180 billion that we have in the budget.

Benjamin Moyer, Merrill Lynch.

I did not have a chance yet to look at the quarterly results year to date, and I wonder if you could just give me your operating margins for the first quarter, second quarter and third quarter, and also your R&D expenditure for each of those quarters?

[translated] If you could look at the bottom of page 5, we have disclosed the numbers of operating margin and R&D expenses for each quarter. Excuse me, it is page 6 of the English version.

Okay. Page 6. The handout I am looking at has change in TPNA sales on page 6 -- on slide 6.

This is page 6 of earnings report.

Okay, I have to look at that. Okay, I did not have that in front of me. Okay. I guess I will look at that later.

And then I have another question. Could you comment on the anticipated effect of the price reduction coming in April on Takeda's revenue next year and then what kind of effect you think it might have on the fourth-quarter revenue in Japan?

[translated] With respect to the price cut in April, we still do not have any comments on that, so there's nothing that we can say about how much the price cut would impact Takeda at present. We cannot say anything for sure right now. But at least since there would be a price cut, we can say that there could be some impact in our Company, though I cannot give you any precise numbers as to how much that impact would be.

And for fiscal year 2005, mainly in the month of March, there could be an impact on volume because of a trend of refraining from purchasing the products, looking forward to the price cut that will take place in April.

And with respect to our total domestic sales in the fourth quarter compared to the previous year, we believe it will be a slight increase of about 2 to 3%.

And then I just wonder if I could ask one more question. In the U.S. market, you announced the results of your proactive study I believe it was September or October. Could you just comment on if you have seen any impact on sales of Actos or Actos-related products since the release of your proactive study?

[translated] With respect to the proactive study, that was a study done in Europe, and the results of the study was announced in Europe. So the influence in the American market is not that big as the influence in Europe.

And this year, we intend to do a new study to be announced in the U.S., and we hope that as a result of that release, that may influence the performance of Actos.

Has there been much impact on the sales of Actos in Europe as a result of this proactive study?

[translated] With respect to the actual impact in terms of the numbers, it is difficult to say which was the influence of the results of the proactive study. But I should say that in Europe, there has been a major increase. And the results of the proactive study being announced had a positive impact on the sales in Europe. And in countries where Actos was being regulated, like France or Italy, we could see a relaxation of the regulations imposed on Actos in these countries. So we can see that there has been a positive result. And together with that, there has been a major increase of 40% compared to the previous year.

Steve Lomas, Northland Capital, U.S.

First question is if you could talk about when do you expect to start DTC advertising for Rozerem?

[translated] At present, we're not doing any DTC. And if we are to conduct a DTC in the future, we are studying the possibilities of doing so. And if we are going to do any DTC, we would consult in advance with FDA and consider how should it be conducted and what should be the content of DTC.

And if I may add to that question, before pursuing an introduction of DTC in starting with the marketing, I think that first of all, we must have understanding of the doctors about the uniqueness of Rozerem, and have them understand that this has a unique position, different from other drugs against insomnia. And after that, we believe that it is for us to consider the introduction of DTC.

Okay, so could you give us some idea as to what is the procedure with the FDA? How long would it take? When -- what kind of timeline should we expect?

[translated] Well, with respect to the DTC, there is an industry, a voluntary restriction in the America pharmaceutical industry that it should be conducted six months after the launch. So six months after the launch, I understand that it is possible to conduct a DTC. However, I am sorry that I am not aware of how long would the procedure with FDA take.

Next question is regarding the DPP IV inhibitor. When should we expect to see the Phase II data in a public form? As well, could you give us some idea of what the Phase III trial design is going to look like?

[translated] I'm sorry that at present, we have not yet made any concrete plans as to when and how would the Phase II results be announced. So I'm sorry that I cannot give an answer to your question.

And the Phase III trial design? Any idea you could give us in terms of what the size of the trial -- where it's going to be conducted?

[translated] I believe your question is about our Phase III study protocol. And I believe that soon that will be announced. So you could refer to the webpage of Takeda. I believe soon you will be able to see what will be the protocol for that study.

Excellent. And if you could talk about Blopress, it has had very good growth year to date. And if you could just talk about what are the dynamics in the ARB market in Japan and how should we think about this over the next several years?

[translated] Yes, it is in fact true that in the Japanese market, Blopress has been doing very well this year. And this product has achieved a growth of 20% compared to the previous year. And in October last year, as in the ARB market in Japan, this product was approved for one additional indication of chronic heart failure, and therefore we would like to continue to search for more value-added and add more indications to this product going forward.

And in the ARB market, Blopress is now the top product in Japan. And in terms of yen, this is also the number one product in Japan. And therefore, with the addition of the new indication of chronic heart failure, we hope that we will be able to continue its good position.

Are there other indications for which you either have clinical data that is coming that could further expand the market?

[translated] With respect to Blopress, at present in Europe and in the U.S., we are conducting tests about one additional indication of diabetes retinitis. And for this, we are planning to announce the results in 2007.

Okay, this is all for Blopress, right?

Yes.

Okay, and last question was regarding the royalty income you get from Kos Pharmaceuticals. Since your deal with them will be up I think at the end of '06, is it distracting to have a copromotion with them while you are trying to launch Rozerem?

[translated] With respect to your question about the copromotion with Kos, I believe that you're asking whether with our launch of Rozerem a copromotion with Kos would pose any obstacles of that respect. And if that is the meaning of your question, I would like to mention that we have the sales force for Rozerem and we have secured the first call. And in that sense, there would be no problems, even with the copromotion with Kos.

And going forward, looking into our products in the pipeline, we are also taking in consideration the possibility of drugs against hyperlipodemia, and therefore, in that sense, that copromotion would be an advantage.

[Etzu Gonokajima] from the U.S.

Could you comment on the market potential in Japan on ATL-962? You are now conducting Phase IIb in Europe. And some in that space are talking about the market in Japan, extreme obesity is very, very small. So market potential in Japan may be quite small for this ATL-962. So could you comment on this, please?

[translated] So far in Japan, if you look at the drugs against obesity in Japan, the safety is not very high if you look at such products in Japan. And therefore, the market in this category is not yet established. And therefore, we believe that there is still a potential in this market in Japan. And also, from the diseases point of view, looking at obesity as a metabolic syndrome accompanying diabetes, for example, this could be one area that we could further explore. So in that sense, I believe that there is a big market potential.

And also from this point of view, already in the American/European market, there are other products in the same category like orlestat, with the same efficacy, with low side effects. And therefore, I believe that the market for ATL-962 in Japan also has a potential.

May I ask one more product question?

Yes, please.

Do you have any data how many percentage of diabetes patients in Japan can use this ATL-962 -- 20%, 30% of diabetes patients in Japan now?

[translated] Among the diabetes patients with obesity, what percentage would be able to use this drug, from that point of view, we are analyzing that right now. And very roughly speaking, I think that it would be somewhere around 20 to 30%.

(OPERATOR INSTRUCTIONS). We have finished the question-and-answer session. Back to Mr. Inoue.

We would like to express our sincere appreciation for you taking the time to attend this conference. Now we would like to end the conference. Also, we all thank you for all of your cooperation in the past and we look forward to your continued patronage. Again, thank you for your participation.

Thank you for attending the conference. We have now finished the conference call.