Takeda Pharmaceutical Co Ltd (TAK) 2013 Q2 法說會逐字稿

(Interpreted). Thank you very much for coming to this meeting. It is a great pleasure for us to see such a big audience. Takahara will talk about the finance numbers and also Yamada, Dr. Yamada will talk about R&D pipeline, therefore, I would like to make more overall remarks here.

Regarding the finished first half months around May 14, together with the financial statement announcement, we also will cover the major items of the expected results, sales, R&D expenses, operating profit and expenses all of them cleared.

Total sales JPY1.5 trillion, R&D expenses JPY310b, operating income JPY160b and net income JPY1.55b, that is the announcement that we made. And at the moment, we believe that we don't have to change all those numbers.

But looking into the details regarding sales there are some contrasting situations observed in our business. In advanced countries, unfortunately compared with last year our sales came down either in Japan or also in the US and also what we call European Canada all inclusive.

One exception amongst the advanced countries is Millennium Company which has been growing the Velcade and they showed 20% plus growth rate. But in other advanced country market, unfortunately, the situation is just like what I have described.

And you can imagine that in the case of Japan the price adjustment, or NHI price revisions, that is regular revisions over every two years so we can estimate that. But in some countries in Europe there are some unexpected or un-estimated price revisions given the constraints of budget.

And also it is the conventional policy taken by the government that some governments have been promoting generics, and they have been encouraging the switches to generics. So just having the new product sales we couldn't cover all of those reductions.

Whereas emerging markets, in each of those markets, we have shown the two digits growth. Thanks to emerging market growth, the sales down in advanced markets were made up for and actually they are serving the driving force.

Regarding R&D expenses, which is JPY310b and given the first-half results you may think that we'll be exceeding the projection. And I heard that there was such a question came. But our largest challenge today is to maintain the operating margin or profit rate to be a higher level than the current 10.3% of the sales.

And the projects started, and as a part of that, regarding R&D, Tadataka Yamada is the responsible person. And within the JPY310b, we'd like to manage the expenses.

And concerning JPY160b operating income we'd like to achieve that target by all means. And also, JPY155b net income, we think that we will be able to achieve that.

But on May 14 when we made an announcement our operating income rate was so low, lower than your estimate so in a negative sense, we couldn't meet your expectation. And, of course, we understand that we need to make an improvement. Therefore, in FY 2014 that is the last year of this three year in RP today. By that time 2014 we would like to achieve 20%. That is the level close to the lower limit of the average range of the industry. We would like to make such improvement and we have started the global project.

When it comes to the cost cuts you may think that we may consider the restructuring, or headcount cut, but that is not our main focus. We need to improve our business processes or our shared service level is insufficient compared with the others. We haven't been leveraging it well enough.

And the top line and the bottom line R&D expenses, or manufacturing costs, or cost of goods sold, there should be improvement achieved in those items. So that we will be able to achieve improvement and enhancement across the board without any exceptions so that we'll be able to produce the robust, healthy P&L's

And one point I'd like to emphasize is that R&D shown at JPY10b that is about 20% of the sales. But in the first six months, more than the plan we had been spending. That means that our pipeline products have been progressing quite steadily, especially many items are in Phase III. That will be detailed later on by Dr. Yamada.

So as we promised in May, regarding the bottom line and operating income, with the bottom of FY12 we would like to achieve the compound annual growth of more than 16% by FY16. We need to achieve that target by all means.

But future investment for R&D, of course, have to be maintained, and yet achieving that target is not of course an easy thing to do. But for another one year or two, I think it's a tough time for us top management. But we would like to thoroughly implement this so that we will be able to reinforce ourselves. That is how we committed to achieve improving our business performances.

And with that I'd like to conclude my opening remarks. Thank you very much.

(Interpreted). Thank you very much. Next I'd like to call upon Mr. Takahara, SVP of Finance, to give you the explanation.

(Interpreted). I am Hiroshi Takahara. I will outline the consolidated financial results. This slide shows the consolidated financial results of the six month period ended September 30, 2012.

Net sales went up by JPY84.4b, or 12.0%, to JPY786.9b year on year.

Operating income dropped by JPY102.5b, or 48.6%, to JPY108.6b year on year.

Net income is down by JPY15.9b, or 11.7%, to JPY119.8b year on year.

The details will be presented from the next slide. First is on the breakdown of change in net sales by business segment. Of ethical drugs in Japan, net sales went up by JPY200m year on year thanks to the contribution by the new products such as Nesina and Vectibix in spite of the net sales decrease of the existing products such as Actos and Blopress having absorbed the impact from the NHI price revision.

In the overseas market, although net sales dropped in Americas and Europe by JPY83b due to the sales decrease of Pioglitazone and Candesartan because of the increase in net sales was approximately JPY166.1b through acquisitions of Nycomed, URL Pharma and Multilab.

Overseas ethical drugs our net sales in total increased by JPY83.1b year on year.

Next slide please, breakdown of change in net sales by product. In addition to the sales decrease of Pioglitazone by JPY79b year on year mature products such as Candesartan, Lansoprazole and Leuprorelin marked decline by JPY33.1b.

However, other than these mature products, sales of Velcade of Millennium increased by JPY7.6b and new products such as Nesina revenue and Azilva marked increase as shown in the slide. Furthermore, there is sales increase worth JPY166.1b due to acquisitions of Nycomed and others.

Next slide please. Next on the net sales in ethical drugs by region. Mainly because of the acquisition of Nycomed which has a broad business basis in Europe and the emerging markets, net sales increased in Europe, Asia, Middle East, Oceania and Africa.

In Americas, although the net sales dropped in the US, overall net sales declined only slightly due to the contribution by the former Nycomed business in Latin America and by the acquisition of Multilab.

Next slide please. Net sales in the emerging markets which Takeda position as the growth driver were as shown. The total net sales in the emerging markets, meaning in Latin America, Russia, CIS, Asia, Middle East, Oceania and Africa due to the acquisitions of Nycomed and Multilab increased by 5.5 times to JPY95.5b, accounting for as much as 13% of our total ethical drug net sales this period.

If the earnings of Nycomed and Multilab in the same period last year were to be consolidated to our earnings of the same period last year, excluding the negative impact of JPY10.1b from the foreign exchange fluctuation, net sales would have gone up by some 13% year on year. So in the actual term, the earnings have been steadily growing.

Next slide please. Next, is on the breakdown of change in operating income. As for the gross profit, in spite of the net sales increase by JPY84.4b mainly because of the changes of product mix, including the sales decrease of highly profitably Actos, the gross profit ratio went down by 4.7%. It increased only by JPY27.9b year on year.

SG&A expenses increased by JPY94.7b year on year because of the increased expenses and increased amortization of intangible asset and goodwill resulting from the acquisitions of Nycomed and others.

R&D expenses year on year basis increased by JPY35.7b because of the increased development costs, partly by steady progression of the late stage pipeline. As a result, operating income dropped by JPY102.5b or 48.6% to JPY108.6b year on year.

Excluding the special factors such as expenses related to acquisitions worth JPY69.2b, operating income dropped by JPY64.4b, or 26.6%, to JPY177.7b.

Next slide please. Next, on the breakdown of change in net income, operating income went down by JPY102.5b year on year. But because of the extraordinary income increase by JPY17.2b and the impact from the tax decrease by JPY63.4b, net income went down by JPY15.9b, or 11.7% only, to JPY119.8b year on year.

As for the positive change of the extraordinary income by JPY17.2b, it is the total of JPY17b of gains on sales of investment securities, JPY11.6b of interest on the refund related to transfer price backs and the expenses of JPY11.4b related to the overseas restructuring.

The decrease of tax by JPY63.4b includes the transfer price tax refund of JPY45.6b.

Excluding the extraordinary income and loss and special factors, net income went down by JPY39.4b, or 25%, to JPY118.2b year on year. The breakdown of the special factors is shown in the appendix.

Next slide please. This is the cash flow statement of this term. Net cash by operating activities was JPY180.4b but net cash by investing activities was JPY130.2b negative due to the payment for acquisition of subsidiary's share worth JPY77.5b along with acquisitions of URL Pharma and Multilab.

Net cash by financing activities was JPY77.9b negative due to the dividends paid worth JPY71.1b. In July, for the purpose of paying back the short-term borrowing in conjunction with the Nycomed acquisition, unsecured foreign currency denominated ordinary corporate bonds worth $3b were issued to have a roll over to permanent finance.

Next slide please. This is the actual results for the first half of the year compared against the forecast announced when Q1 earnings were presented.

Although R&D expenses increased due to the faster-than-expected progress of the activities related to the late stage development of our pipeline because of the less-than-expected impact on Actos in the US from the generics entry and due to the decrease of the SG&A expenses, net income and the income at each level were higher than forecast.

Next slide please. Lastly, on the FY 2012 financial forecasts, although there is sales downside of Nesina and Takepron in Japan and Uloric and Dexilant in the US, the sales upside of Actos and Velcade in the US and Azilva in Japan and the consumer healthcare segment are expected to absorb such downside and the net sales are expected to achieve the forecast announced in July.

Thank you very much for your attention.

(Interpreted). Thank you very much. Next, Chief Medical and Scientific Officer Tadataka Yamada will make an update on the R&D efforts. He will speak in English. Please utilize the receiver and the Japanese handout.

Thank you very much. I'd like to present an update of R&D activities in the second quarter fiscal year 2012. To begin with, just to remind everyone, that Takeda's R&D value is based on us being a pharmaceutical company committed to the discovery and development of innovative solutions, addressing unmet medical needs of patients through R&D investment.

We have four critical elements in our principles. To begin with, we focus on patients in all of our work. We work with urgency. We try to seek innovative solutions. We measure the impact of our work and we work closely with partners.

On the last point I'd like to discuss two very important partnerships that we've developed in the past six months. The first is the Shonan Incubation Laboratory which is a critical component of the construction of the new Shonan Research Center. It was developed with the idea that we would form partnerships with external institutions which would be housed in our research center and allow people to work side-by-side with Takeda researchers.

We had our first partner in this regard. It's the British Columbia Cancer Agency, focused on exploring new drug targets based on genetic analysis. We are very excited about this collaboration.

A second important collaboration is a partnership with an Indian company called Advinus Therapeutics. It is a company that has been developed by a large group of expatriate Indians who have returned from having had US experience in the pharmaceutical industry, returned to set up a company in India.

We have a collaboration. That's a three year collaboration based upon their selection of our targets from the group of targets that we are interested in working on and they will develop INDs from these targets for an agreed upon fee.

We have had one exciting acquisition which we've just recently completed. Acquisition of a company called LigoCyte which is based in Bozeman, Montana. This is a company that is a major step for Takeda's vaccine business and we told you earlier this year that this is a very important part of our growth strategy as a company. That this company has a special technology called Virus-Like Particle technology, which is particularly useful in including antigens in a particle which resembles a virus and it allows normal immune response to that particle.

What is exciting about this company is not only do we obtain the technology but we obtain a very important asset which is in Phase II. It is a first in class norovirus vaccine.

For those who may not know about norovirus, it is the largest cause of diarrhea epidemics in the United States, one of the largest causes of admission of children into hospitals in the United States for diarrhea. Some of you may know that this a very common virus that's obtained in cruise ships when people go on cruises. It is estimated that every day in the United States there is an outbreak of diarrhea associated with this norovirus. And the CDC has declared this one of the largest targets that require addressing by the vaccine community.

They also have earlier stage assets and vaccines for respiratory syncytial virus, influenza and rotavirus.

We have had a very active three months since we last reported to you in July. We've had three approvals today. As you've seen in our press release that we obtained conditional approval for ADCETRIS, which is an antibody drug combination for relapsed refractory Hodgkin Lymphoma and relapsed refractory systemic Anaplastic Large Cell Lymphoma. This is for marketing in the EU.

We've also had EU approval for Revestive, which is a peptide teduglutide for short bowel syndrome.

And we've had approval for Lotriga for treatment of hyperlipidemia in Japan.

We've also had four filings during this past quarter including Vortioxetine for major depressive disorder, Lurasidone for schizophrenia, ATL-962 or Cetilistat for obesity.

And an interesting request, at the request of the Japanese Government we have filed Lansoprazole for helicobacter eradication by concomitant therapy with amoxicillin and either clarithromycin or metronidazole.

We have had Phase III advancement of MLN9708, or the start of Phase III for relapsed refractory amyloidosis, primary amyloidosis.

Just to touch on a few of the assets that we've just named in the previous slide, to remind you, ADCETRIS is a collaboration with Seattle Genetics. It's an antibody drug conjugate. It links an anti-CD30 monoclonal antibody to monomethyl auristatin E.

It has the potential for further use in other CD30 expressing malignancies. And we have developed a collaboration with Ventana Medical Systems to identify a diagnostic for CD30 expression in patients.

As you heard today, we've had conditional approval for relapsed or refractory Hodgkin Lymphoma and relapsed or refractory Systemic Anaplastic Large Cell Lymphoma. The product is in Phase III for post-transplant Hodgkin's Lymphoma and for relapsed cutaneous T-Cell lymphoma. And it is in Phase I for frontline Hodgkin's Lymphoma, and Systemic Anaplastic Large Cell Lymphoma.

Two very important CNS products that are really the franchise makers for us in this area are the multimodal antidepressant Vortioxetine which is a collaboration with Lundbeck. It was filed in October for major depressive disorders. We've done six global Phase III studies which demonstrated significant efficacy in the dose range from 5 to 20mgs per day and we anticipate a filing in Japan for this product.

This product is particularly notable in that it seems to enhance cognition in elderly patients with depression. And we are exploring that aspect in further clinical trials.

The other product is Lurasidone which is a product for the EU in contrast to Vortioxetine, which is a product for the US. This is an atypical antipsychotic which is a collaboration with Dainippon Sumitomo Pharma. The EU MAA was filed in 2012 for schizophrenia. And it's supported by more than 50 clinical trials involving 3,800 patients. It was approved in the US in October of 2010 and Canada in June 2012.

One of the interesting aspects of the R&D organizations productivity was demonstrated in Citeline, which is a pharmaceutical R&D annual review which gets published annually. The 2012 review showed that Takeda was seventh in terms of pipeline size, and we were twelfth last year. We are thirteenth in terms of total sales. We are the first Japanese company to be included in the top 10 of the pharmaceutical industry.

What is not demonstrated here is that of all of the companies that were listed in this review we have the largest number of our assets -- more than 30% of our assets in clinical development or in Phase III.

So again, thank you very much. I appreciate very much your attention. We are very pleased with the progress of R&D in the past quarter.

(Interpreted). From this point onwards we would like to have a Q&A session. Today, in addition to this meeting room in Tokyo we have a venue in Osaka and also some people connected through the telephone line.

First, I would like to invite the questions from those at the Tokyo meeting room. Due to the time constraints we would like to limit the questions per person to two. For those who would like to ask questions please raise your hand.

(Interpreted). I am Yamaguchi from Citi. At the outset in the presentation Mr. Hasegawa talked about a need to control the cost. Each company in the industry are showing that effort and it is often said JPY1b or JPY2b scale to control the cost. It is very active in that regard. In the case of Takeda what is the feel of the scale as you are expanding the business very much? Can you indicate some information regarding the scale of the controlling cost, or cost control?

(Interpreted). As for this project it has just started, and in November interim report is expected to be made available so that we will have a clearer picture in December timeframe. And at this point in time there is no specific or concrete information in number, unfortunately, that we could share with you.

(Interpreted). So when it gets started and if you have a more clearer view, is it expected that the information will be made available?

(Interpreted). To what degree we will disclose in detail has not been decided yet, but we would like to be transparent as much as possible.

(Interpreted). Thank you. My second question is more of the qualitative question. As for the US research side, I would like to ask this question to Deborah. I will switch the language into English.

Office of Technology Assessment of the US Government put up a note that if they have to double the output within 10 to 15 years to collaborate with drug companies, especially on the unmet medical needs area which was a very interesting report by the Office of Technology Assessment and my understanding, your research is really in the middle of those areas. So do you see that your relationship with the FDA will change or FDA is already changed to collaborate, to double those innovative products for next 10 to 15 years. Can you comment on that one?

Thank you for your question. I think that the FDA has been making strong moves to make clear what they require for approval in a lot of different areas, but particularly areas of high unmet medical need so that it's easier for industry to know where the bar is set.

They have also demonstrated a very collaborative spirit when it comes to discussing end points for various high unmet medical need areas rather than just traditional end points.

So I think there has been a good spirit of collaboration developing within the FDA over a number of years. Commissioner Hamburg has been a leading light in that area, and I think she drives that spirit of collaboration. So I think FDA is well on the path.

One of the things of course we concern ourselves with is what will happen with the budget situation going forward, because as you know, sequestration is supposed to be implemented in January of 2013.

While we believe it will be delayed in the Mandate of Sequestration, the FDA budget would be cut. And then we would see, I believe, a chilling effect on the ability of FDA to move forward with the initiatives that would allow that type of advancement in the high unmet medical need areas. So it is something that we will be watching closely.

Is it on? One of the difficulties that the FDA has had is that there hasn't been a very good process by which the FDA can collaborate with the industry. But what was set up a few years ago and which is a very good vehicle is a foundation called the Rating Udall Foundation. It is a foundation that was set up, it's outside of the FDA but it is supported by the FDA and also by the pharmaceutical industry. And the main aim of this foundation is to establish collaborative interactive research projects that can hopefully improve and enhance the drug discovery, development and approval process.

(Interpreted). Thank you very much for your explanation. I have two points. I am Urushihara from Nomura Securities. One question is relating to the remarks by President Hasegawa. I think money has been taking place in your company and working capital should be restructured as reported in Nikki. And in the year ending in March the -- next year, well '15 and '16 and if we deduct the borrowings, or the working capital, I think there should be some time, at some point in the future that there will be some amount, excessive amount of money in your hand and you have already developed the infrastructure already. Therefore are you going to use those excessive amounts of money for making a return to the shareholders, or what is the plan? Are we going to have such excessive amounts of money?

(Interpreted). Well aside from that what we are now trying to do is of course -- well we have various internal discussions and also we have the borrowings as a global standard. For instance, compared with 30 multinational companies our equity ratio is still low, therefore, some discussions say we should enhance that. But as the top management what we have decided today is that first of all we need to improve the operating income or the bottom line. And achieving that to some extent then we will look into the investment opportunities, and we will think and make a decision.

But as I have been telling to you, our M&A's are based upon gap fitting strategy. In that sense, infrastructure wise, I think gaps have been almost fulfilled, therefore, the remaining is the pipeline.

And as for the acquisition of our pipelines as Tachi mentioned and also even before that, in [telecoms] and others we have found and we have done in the early of days of this year. But it's not going to be as big magnitude of more than several tens of billions.

And as for the shareholders, currently annual dividend JPY180 should be maintained. And if we could achieve the major improvement of income, then what is the better way to provide the short-term or long-term returns to the shareholders who would like to study and decide.

(Interpreted). My second question is about R&D and I'd like to ask this question to CEO. TAK-875, I understand that the planning timeline in the US is around the first half of FY15. And a CV study started and now it is a stage that requires a lot of money.

And given overall situations of other R&D pipelines, are you going to do this as standalone or you would like to partner with others so that we we'll be able to distribute the risks and costs and we'll be able to accelerate the progress?

(Interpreted). Well I think Tachi should be the appropriate person, but because you directed that to me, so I'd like to answer.

We have through discussions regarding this matter internally. And I am reluctant to do this, but we believe that this is a blockbuster potential. Therefore, from many companies there are some approaches that they'd like to work with us together. Still today we have those approaches.

But as of today we would like to do this alone. And also, including the development expenses of 875 within the planned budget of the mid-term we think that it's manageable and we can do that we believe at the maximum speed. Therefore, without seeing any substantial involvement or changes we will go that way. Thank you.

(Interpreted). I am [Muramatsu] from (inaudible) Shinbo. I have two questions to Mr. Hasegawa. My first question is with regard to the macro-economy. Looking at the slowdown of the expansion of the economy in the emerging markets, well as for the healthcare sector where you are pursuing new business, as for the future forecast of the business in the emerging markets, do you see the same trend upcoming compared to the trend of macro-economy or not? And what is the possible impact given to your strategy.

(Interpreted). In general our sector is not very much impacted by the macroeconomic trend and that principal I believe is applicable to the emerging markets as well. For example, speaking of China, they had been growing at the level of 10% plus, but it has come down to 7% nowadays.

Once you start providing the healthcare services in a country like China where you already have 100,000 riots a year against the government because of different dissatisfactions, I cannot imagine that they would stop healthcare service once you've started.

And in China they have planned 2020 for healthcare services. So although I do not assume that the China will grow at the level of 20% in the years to come, but I think that there will be a continuation of the growth mid-teen to late teen percent level.

And in the countries like Russia and Brazil where we have strong presence in conjunction with macro-economy we can refer to the index of macro-economy for our business.

(Interpreted). My second question is with regard to the Board members. You have more internationalized composition. And I think it has become well rooted that you have more non-Japanese members at the Board. Mr. Hasegawa, do you think that there has been change made to your governance and decision making process because you have more non-Japanese Board members?

(Interpreted). As for governance and decision making process I think that we are now able to have more active discussion and also we are able to make a good discussion in a speedy manner. Whether this trend will continue or not, at this point in time, I cannot make any comment. But we have all ready come to the point of no return. We cannot go back. We have surpassed a certain point. So in terms of globalization, we will continue focusing on our effort.

(Interpreted). Thank you very much.

(Interpreted). And now from Osaka office I think we have some questions. Please go ahead.

(Interpreted). Thank you. I am [Fujiwara] from the economic unit of [Sankei Newspaper]. I'd like to ask one question. It's not about this quarter result of April to September.

Kansai Electricity announced its price increase and you have obviously sites in Kansai. And regarding their fee increase, could you share with us your comment? And do you have any specific countermeasures to that? That is about the power tariff.

(Interpreted). From the users perspective, of course it's better not to see the price increase, but given the situation of Kansai Electric Power, 50% or more is dependent on nuclear power. And other than OE and nuclear power stations they cannot estimate the timing of the reopening of the operations. And now they have been accumulating more than the JPY120b and in two years or three years to come they may fall into deficit. And I don't think that the regulating agencies are quick enough to manage that. Therefore, I think we have to accept, to some extent, their tariff increase.

But our response is that there may be some planned blackouts to be implemented. Therefore, we have already purchased two generators, gas-driven generators, and that will be able to cover the -- a substantial part of our operations.

But, well in my memory, I think that is more costly. But if as a result of the tariff hike, if we think that gas generation is more economical, well then we'd like to make leverage of that. And for that we are prepared.

(Interpreted). From Tokyo.

(Interpreted). I am Onozuka from JP Morgan Securities. I have two questions. The first question is with regard to the domestic sales. For your annual budget you have not changed, but there is a change in your breakdown. What is -- this causes the decline of the domestic ethical drug business by JPY13.5b and the same amount was added to the overseas sales. Actually, because of the background of Nesina budget was so ambitious, is this the reason why this has changed, or is it because of the overall detailed share decline? How do you analyze this situation?

(Interpreted). I would like to answer to your question. As for the Nesina planning, I have to say that it is a fact that we were rather ambitious in our planning. And at this point in time we are still making efforts to achieve that target. To be honest with you, compared to the initial plan or forecast amongst the GP market, the adoption is rather slow.

The other point is that in fact there is no approved indication for the Nesina in concomitant used with insulin. Genevier has such an approved indication. And it was our miscalculation and that worked in a negative way.

But the -- looking at the characteristics of the DPP for market, of course, the market is more readily acceptable for the Midas state, so in that sense I think that there is still room for the market to adapt our product. And our target, whether it will be achieved or not, is not the question, but when we will achieve the target is the question.

Blopress, which is a blockbuster in Japan, we have already seen the same curve after the launch when it comes to Nesina. And also, the overall market growth of DPP-4 inhibitor considered compared to the average growth Nesina is growing faster by 10% or 20%.

It is true that the business is slow, but one factor is the launch of Azilva made on May 28. Azilva is highly evaluated by the market. But our MRs are very much preoccupied in responding back to the questions made by physicians in the market for several months. Therefore, we have seen the slowdown of Nesina business. And by now to Nesina, the focus has come back very much. So although we are rather slow, but I think that we will move into a good direction.

And the other thing is that we have the only FDC Liovel of Nesina and Actos, as for the evaluation on the usefulness of this drug amongst the doctors has become solid. And as Nesina family in that sense, although the progress is rather slow or growth is rather slow, but we don't think that we will not achieve substantial business.

(Interpreted). One other question is with regard to R&D and its budget. You mentioned many times that we will have maximum JPY310b of budget for R&D. In the second half of the year do you need to make some actions such as prioritization, or partnering acceleration, or scale adjustment? Do you think that you need substantial action? Or it could just happen to be the faster process, so you don't have to worry about making any extra action to observe the budget.

(Interpreted). I want to say that we would not require any substantial action, but Tachi does not agree so I will have him answer.

I think if you look at the numbers, actually we have spent less than half of our annual budget in the first half of the year. So we anticipate in the second half we will spend roughly the same amount as we had in the first half.

In any given year there may be more spending in the second half or more spending in the first half. Generally, we've spent more in the second half of the year and that's why we budgeted for less expenditure in the first half of the year.

This year we spent more in the first half of the year because we have some very active late stage programs such as 875 or 9708 or TAK-700 or 438. And these programs are requiring significant spending.

We anticipate that this will continue at a steady rate and that the actions that we've taken in prioritization will allow us to focus on our late stage programs and be able to support the full R&D pipeline within the budget that we've been allocated for the year.

(Interpreted). The second person in the first row please.

(Interpreted). I am Sakai from Credit Suisse. I'd like to ask a question to Mr. Hasegawa. You have mentioned operating income rate 20% in FY14. I think MRPs are sitting with 14% or so, although I am not sure because I don't have the material with me. But roughly speaking, with 6% improvement and introducing of this I think you'd lose the JPY30b or so. That I think the calculation tell us. So percentage wise, I think the room of improvement is only 3% or so. So I think it's not something that you can be boastful of making that -- we will be making a very big improvement.

(Interpreted). Well it's a matter of subjectivity. But even if it is 3% improvement it's not easy to achieve such improvement, especially our business portfolio has changed and overall profitability is secured but compared with the advanced countries products it's lower.

And we have a growing emerging market, and that's working as driving forces. But because of that SG&A expenses have to go up, therefore, given the situation only several percentage of improvement is not an easy target.

And also, in my initial remarks, as I told you, industry norm maybe lower limit range of the top level companies. That is the level that we would like to reach in FY14. But of course we have the goal going beyond that. But I think it's not worthy telling that here.

And I didn't mention this, but milestones like the end of October or December, and in May when we make announcement for the next MRPs with the financial results, we would like to give more easy to understand types of announcement.

(Interpreted). Following up that, my second question is that you have to make an investment into emerging markets, therefore, you expect that the cost although improving the margins. And according to newspaper report, URL Genetics business may be sold out. So in order to improve the margins, do you have any specific plan to -- of fine-tuning or are this in amoeba like manner so you have been partnering on the corporate risk as a company. So what is the way that you would like to do?

(Interpreting). Well when there is an opportunity, then depending upon the prioritizations, we will make a decision. Also, in product acquisition or M&As how much cash is available, we have been always looking at the cash level.

And so before [PUCC] and after how much investment should be made, within the senior management we had thorough discussions and we have a certain level in mind.

And then PDD talking with operational units, they have been exploring the opportunities. Therefore which one -- or which way to go forward I cannot answer.

As for your first question?

One of the things that we are observing is that profitability in emerging markets is by and large a function of size. We are most profitable in those countries where we are the biggest in Russia, Brazil and this is where we are trying to improve our profitability by growing faster than the market. And for the short period that we are observing this we can definitely say it is working.

And on the other hand, we have countries where we are still relatively small where we are investing. But nevertheless, I can say if I look at our average profitability in emerging markets, it's something that for a newcomer or even a latecomer to this business, it's something that is already quite good.

(Interpreted). Thank you very much.

(Interpreted). We can entertain questions from two more people in Osaka we would like to entertain questions from that end.

(Interpreted). I have a question to Mr. Hasegawa. I am Ando from Nikkei & Co Newspaper. My question to Mr. Hasegawa is not directly related to the earnings. On the part of Takeda, including the overseas manufacturing sites you are well prepared I understand. But looking at Japan, as for the outsourcing business for ethical drug manufacturing is growing, what is your view regarding the manufacturing outsourcing?

(Interpreted). I think you are talking about the manufacturing outsourcing in Japan. On our part, for example, for intermediate manufacturing outsourcing we are not only looking at the candidates in Japan but also on the global basis for the best possible quality and cost. So we are thinking of selecting an ideal partner in outsourcing manufacturing.

Speaking of Japan, we have Hikari facility where we have the formulation possibility with a state-of-the-art preparedness. And by increasing utilization of this site we can reduce the cost. We did not have this idea before, but we are now introducing three shift operations so that we can be competitive against the Indian operations. That's our target and objective.

In order to improve the utilization from the outsourcing partners, step-by-step we are talking to them actually to minimize the inconvenience on their part so that we can bring back the manufacturing to our internal facility. Some people would call it putting back the manufacturing effort. But we are pursuing this effort.

(Interpreted). Thank you very much. Hasegawa told me that we should entertain more questions, and it seems that there aren't any other the financial result announcement meetings held by the other companies, therefore I'd like to entertain more.

(Interpreted). I am (inaudible) from (inaudible). Well it's been discussed regarding the global issues, but now I'd like to talk about your positioning of your Company in domestic market. And also I think that the multinational or the overseas affiliated companies have been steadily expanding their businesses with stronger capital capabilities. How is your strategy operations amongst those circumstances and make your companies more reinforced?

(Interpreted). Regarding the domestic tactics strategies Iwasaki will follow-up, but first if I reply. Without acquisition of Nycomed I think that our domestic sales will be 50% or so in coming three or four years.

That's how we estimate it internally. Because relatively speaking, amongst the advanced countries even 2% or 3% growth rate is a relatively high growth rate. But if we are dependent on those markets, there is much risk in terms of the business portfolio. Therefore, relatively speaking, we wanted to decrease the ratio of advanced countries or domestic market. That's better we though for our future business too.

And given the current trend, also I did not mention the area, the emerging markets within our total portfolio probably by the end of this year it will account for 14% or 15%. And in coming three or four years it will be exceeding 20% whereas domestic ratio will shrink relatively and maybe in the mid or late 30% level within several years. So it depends how you count that, but on the actual business wise I think that will be probably the level of the domestic business ratio.

And regarding the second part of your question, Iwasaki will answer to your question.

(Interpreted). As you commented in your question, the fall in affiliated companies are quite strong in specialty areas. And our strengths are more on lifestyle-related disease areas. That might be your impressions.

And it is true that lifestyle disease is our core area Nesina in our pipeline, the once weekly DPP-4 or 875 or Azilva. And also, just recently, we announced 80962 anti-obesity. We have finished the filings and Lotriga that is [datorigricinide] improving agent.

Putting them all together to target the patients and the physicians, they are more or less in a similar population group so therefore we have -- we will be following up those people.

But then are we weak in specialty area? It's no, not really the case, as you saw in Vectibix case. We are not specialized in specialty areas but in our own way, Vectibix within the same category it went ahead of the preceding agents.

And for example in our rheumatoid arthritis we have been collaborating with Pfizer and Enbrel has been already the most selling product in terms of number of patients. So we don't cover every area generally speaking, but we have a special coordinator in oncology and immunologies we have those specialized people.

And also forthcoming products we have many items in the pipelines in oncology. And also again working together with Pfizer we have Jak inhibitor. So the specialty area is not our weak area. Thank you very much.

(Interpreted). I am Mizuno of Tokio Marine Asset Management. I have a question with regard to vaccine. At Takeda you have purchased LigoCyte. What is in Phase II? Commercialization timeline is what I am interested in.

And in globalizing the vaccine business I understand you need to have a good preparedness of the manufacturing facilities, which is serving as the barrier for entry. What is your plan in the future for that?

For the virus vaccine that's in Phase II, one of the important differences between vaccines and pharmaceuticals is the way the vaccines have sold. In the United States, for example, one of the most important ways is if the CDC declares the vaccine a mandate. And then of course then it becomes utilized in -- by most GPs or pediatricians who follow the mandate of the CDC.

Once a drug is declared something that all children should take then in fact that's what happen. So the uptake of the rotavirus vaccine in the United States was very, very quick as was the human papilloma virus vaccine.

All indications are the CDC will declare the norovirus vaccine a mandated vaccine. And we anticipate if that happens that the uptake will be very quick.

So the barriers to entry are quite low as opposed to a GP product which requires a very large sales force calling on physicians and changing the practice patterns of physicians in ordering prescriptions for their patients.

As far as manufacturing is, at this point we are looking to outsource the manufacturing of this product. And so we will probably use contract manufacturing.

(Interpreted). I have additional question. In the future, if you are to expand the vaccine business, not limited to this one particular product and yet for your policy regarding manufacturing, will you maintain the contract manufacturing?

We do have manufacturing internally in Hikari both for routine vaccines and also for influenza vaccine which was a vaccine that was supported by the Japanese government.

We have many different kinds of vaccines and we anticipate we'll make our vaccines in our existing facilities and in some instances, we'll use contract manufacturing. It will depend on the opportunity and the number of doses that will ultimately have to be made.

(Interpreted). Thank you. A person in the back please.

(Interpreted). I am [Okada] from Toyo Keizai. I would like to ask a question to Mr. Hasegawa and Dr. Yamada. In your materials you mentioned the number of pipelines, in terms of the number of pipelines you are ranked at number seventh.

But in terms of the actual ability or capabilities what is the ranking do you think you yourselves are right now? Since you assumed your position what are the challenges and how you improve the situations and how do you position Takeda as a company in terms of ranking? That's my first question.

And then my question to Mr. Hasegawa is that with this new top management how or more concretely what kind of improvements that you think you achieved?

Excuse me for my aspiration I would like to be number one. So number seven is great, but number one is better. It's a question of how long it will take. I think Takeda has a very strong base. It has very good research scientists. We have a strong development organization and an outstanding CMC organization. So I believe, at least from my prior experience at GSK, that there is no barrier to Takeda becoming one of the leading pharmaceutical companies in terms of R&D.

We are very fortunate in that we have a very strong late stage portfolio a record of recent approvals of many products, and many products that will be coming forward in the next three or four years. That will give us some time to build up what I think is a middle portfolio, new products that will come out of the R&D organization as well as through collaboration with partners. And we are working actively to do that.

I believe we have a portfolio that is sustainable. It is a very good late stage now and sustainable in the long run. We do have to increase productivity in many areas, and we are always aware of that need and we are looking at numerous ways to doing that. In fact, the partnership with Advinus that you saw on one of our slides is a reflection of our focus on improving our productivity.

We believe that this partnership may allow us to make an R&D product at a fraction of the cost it currently costs Takeda. And so we are exploring many different ways to improve our productivity even though we have a strong pipeline and many great growth opportunities in the near future.

(Interpreted). Following up Mr. Hishimoto's question our organization, so from my own viewpoint might have over-trusted our past successes. Therefore, what is our status quo and is it very -- the top notch level of activities underway? I think we probably haven't reflected ourselves good enough, therefore, that's how we are now seeing the results.

And Iwasaki didn't talk about that much but I think he shares the same view. But the record of Yamada and also Dr. [Izamo] I think some of you may know that he is also in our organization. So with these people, with the plenty experiences overseas I -- and they say also from their viewpoints that our organizations quality is very high. Therefore I can feel secure, but at the same time, of course, we need to look at the management once again so that we will be able to leverage their capabilities and abilities.

But Tachi, Po] and Dr. Izamo are now with us. And thanks to them from their experiences and the expertise they have been providing us the new approaches and ideas like Advinus for instance, there are some oppositions internally why you let these people do that. But giving the plausible or explanations we wanted to free up the capacity from the existing way of doing businesses, and we wanted to make the better use of them.

And also Tachi didn't tell this but so far we had some segment-wise activities which divided. And so in some compounds and cases we couldn't achieve the original target in that segment. But he called it a warehouse project. So some things are left on the shelves we needed to salvage them or we came up with some new functions.

We have been taking various different approaches, and open innovation is one of them that started since Tachi and Po came to join us. And by so doing we also could motivate the younger people. And having good results we'd be able to make positive cycles running.

And I shouldn't be boasting of this, but we have taken more than double of the time period for us to put our compounds into the market given the global standard. And our researchers say that if you do that in a very solid manner, then our success rate in ultimate result is higher.

But it's not really true. By showing them the facts, well everyone had the opportunity to review and look back what they have done. And so I think the people are now realizing what is a better way to do.

Therefore, well concrete improvement will be surfacing up taking some more time. But I think that shock wave have already, I think, had some repercussions even in the deeper part of the organizations.

(Interpreted). Thank you very much. And so we had some extra 10 minutes, and we will -- we could have probably a very good closing question. So thank you very much, having the -- so many people attending this meeting and giving us many good questions. With this, I'd like to express my appreciation and I'd like to close this meeting. Thank you very much.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.