Takeda Pharmaceutical Co Ltd (TAK) 2017 Q2 法說會逐字稿

Good day, everyone. Welcome to the conference call of Takeda Pharmaceutical Company Limited. The conference today is held based on presentation material available at the Company's website.

Please note that this conference contains forward-looking statements regarding the Company's plans, outlook, strategies and results for the future.

All forward-looking statements are based on judgment derived from the information available to the Company at this time. Certain risks and uncertainties could cause the Company's actual results to differ materially from any forward-looking statement contained in this conference.

These risks and uncertainties include, but are not limited to, the economic circumstances surrounding the Company's business, including general economic conditions; competitive pressures; applicable laws and regulations; the success or failure of product development programs; decisions of regulatory authorities and the timing thereof; changes in exchange rate; grants, claims or concerns regarding the safety or efficacy of market product or a product candidate; and integration activities with acquired companies.

(Operator Instructions).

(interpreted) Thank you very much for coming to our 2016 first-half financial results report meeting. Thank you for coming; I really appreciate your presence. I am Higuchi. I am IR Head of the Company, very nice to meet you all. As for interpretation, channel one is for English, channel two is for Japanese.

We have Christophe Weber, CEO of the Company; James Kehoe, CFO of the Company. Two of the gentlemen are going to give us presentations. As for Q&A, together with the two presenters, we'll also have Andrew Plump, Chief Medical & Scientific Officer of the Company, joining us in the Q&A session.

We will open the floor for questions after all the presentations are over. Now, Mr. Weber, please take the floor.

Well, good evening. Thank you very much for joining us for this late Friday afternoon. A great pleasure for me to share with you very briefly our result for the first half of the year. James will follow with more details, but I wanted to give you an overall appreciation about our progress.

The first thing I would like to share with you is the fact that we remain very much focused on the strategy that we have outlined in the past. It will take many years to deliver this strategy. This strategy is, actually, addressing performance in both short, mid and long term. So, it's both a short, mid and long-term strategy.

We are very much focused on value, on people, on R&D. Also, very significant R&D transformation, aligned with the fact that we are focusing our R&D on GI, oncology, CNS. But it's even broader than that and we can answer any question you want on that point later.

Of course, regarding our business performance, very much focused on sustained sales growth. We have identified how we deliver this sales growth, not only by therapy area and our growth drivers, but also where, in which region. Again, very much focusing on GI, oncology, CNS and emerging market.

At the same time, we are very much focusing on improving our margin. We gave our guidance that we want to increase by 1 to 2 points our margin per year. So, we are very much focusing on our profit growth and with the right cost discipline.

What are our results for the first semester? Well, I can share with you that we are very pleased with our result. Our underlying revenue grew by 7.4%; core earnings grew by 12.7%; and core EPS, 49.3%. So, it's very strong and it's also led by our growth driver, so it's very much results linked to the strategy that we have outlined.

GI, very much driven by ENTYVIO, and we are very satisfied by the ENTYVIO trend and dynamic. NINLARO is very much track and the take-off in US is doing very well. Again, you will see all the details on both the reported and underlying.

But, today, we are raising our full-year profit guidance, both underlying and reported. That's, again, a testimony of our performance and the dynamic that we see in the first semester.

In addition to that, in the second quarter, we achieved what we believe are very significant milestone, again for the short, mid and long term. We got a positive CHMP opinion for the approval of NINLARO in Europe; of course, very important step for NINLARO.

We announced in July, our R&D transformation, and we are now executing this transformation. We are pleased by the speed and the -- in fact, we are even going slightly faster than what we expected, so that's very important.

We initiated our Phase 3 studies with our dengue vaccines. You know that very well; it's a very key step and it puts us much closer to a filing and launch of these vaccines.

Last, but not least, we have developed a very bold, very innovative access-to-medicine strategy in emerging market. This is very important, because this access-to-medicine strategy address how we will commercialize, how we will drive access for our innovative medicines.

ENTYVIO, NINLARO, ADCETRIS, they are the one which will benefit from this access-to-medicine strategy, very important. So, that's very critical, because we believe that the emerging market has the potential for this innovative medicine to be prescribed and utilized by patient and doctors.

If you compare our result to our guidance, 7.4% underlying revenue; 12.7% underlying core earning; and underlying core EPS, 49.3%. We are increasing -- revising our guidance upwards: core earnings from low to mid-teen, to mid to high teen. That's an improvement of our guidance.

Underlying core EPS, what we are signaling is that we'll be much closer to mid-teen than low, so, we are also upgrading that. And, of course, the dividend is unchanged.

Again, what we are especially pleased with is that these results are driven by where we focus, basically. This is really, again, the translation of our strategy: GI growing 39.4%; oncology 4.9%; CNS 28.2%; emerging markets 4.9%.

Overall, our growth drivers are growing 15.3%. Remember that last year the same growth drivers were growing 9.5%, so we see an acceleration of our growth on this key element of our business. Overall, these growth drivers represent 54% of the total Takeda sales, so it's a very significant part of our business.

A few highlights on two products, ENTYVIO and NINLARO. I will mention briefly TAKECAB in Japan as well, because it's doing very well and we are very pleased with its takeoff, but ENTYVIO is continuing on its trend.

We just actually passed the bar of the $1 billion MAT sales. In fact, last September ENTYVIO became the number one product globally for Takeda. In September, ENTYVIO became our biggest brand beyond VELCADE, so for us it's also a milestone.

We are launching ENTYVIO everywhere, so it's the first really global launch for the Company.

I'm especially satisfied with the performance of ENTYVIO, because this is a specialty product. Remember that Takeda has been mainly a primary care Company until now, so this is the demonstration that we are able to evolve and to transform the Company, in order to launch very successfully this type of product.

Very strong profile. You know about it, so I don't need to spend too much time reinforcing it, but we are really, I think, a very strong dynamic of ENTYVIO.

You can see that, if I look at the dynamic in the US, for example, it has not only a very strong penetration in the switch market -- in the biologic switch market, so after TNF-alpha utilization, but we are showing a strong penetration in bio-naive patients.

It's -- considering the profile of the product, it's efficacy profile, as well as its safety profile, it's very logical that the product is attractive for a bio-naive patient. The trend is very positive and we expect this trend to continue in the future.

Same trend in Europe than in US but, of course, different stage and Europe is always an aggregation of countries, which also have a different stage in the launch of the product.

NINLARO. Very stronger start in the US. You can see that in the second-line therapy for new patients we have already achieved 20% market penetration.

Of course, we are very pleased by having had the positive advice from the CHMP for the European approval. We are getting very strong feedback about the profile of the product, its efficacy, its safety and convenience. We remain very, of course, committed and pleased by the performance of NINLARO in the US.

We, really, are in the process of launching globally NINLARO. In fact, it will be the fastest ever, for Takeda, global launch and globalization of a brand.

NINLARO, in fact, will be available in -- much faster than ENTYVIO if I will compare the two globally. So, we are really having a very fast filing and approval of NINLARO globally. We filed in Japan last July. We got approval in Canada as well as Venezuela, Europe; we talked about it.

We have what we believe is the most comprehensive Phase 3 program in the multiple myeloma field. We are addressing all disease stages and these data will read out in the coming years. Of course, that's very important to reach our aspiration and our aspiration remains a $3 billion-plus product in the future.

One indicator that we are using to track, actually, the attractiveness of the product and how exciting it is for the medical community is to look at the number of investigators from such studies.

We have more than 50 studies already ongoing. It shows that there is really a very strong appetite by the medical community to test NINLARO, combine it with other treatments, and really develop it as a potential and what we think will be one of the backbones of multiple myeloma treatment in the future.

Of course, the R&D transformation is very important. We know that we need to be more productive in our R&D. We know that we need to deliver a stronger pipeline and, very importantly, a very innovative pipeline as well.

We know that the healthcare systems across the world are demanding that, focusing on oncology, GI and CNS plus vaccines. This transformation is on track. In fact, it's moving slightly faster than expected and we see that there are some financial consequences with that between 2016 and 2017.

Again, this is -- the intent here is not to reduce our R&D investment. There will be some savings, as we said, to this transformation but we are planning to reinvest these savings into pipeline projects provided, of course, that these projects are innovative and attractive for the future.

I would mention our vaccines as being a few announcements regarding vaccines. The dengue vaccine, I talked about it already. We did a partnership with the US Government. We are also in partnership, in discussion with the Japanese Government for Zika vaccines. Chikungunya vaccine we announced a partnership with Zydus Cadila. And you can see that we are still progressing, of course, with our norovirus vaccines.

Overall, a good dynamic here. Again, the most important milestone that we achieve is the start of the Phase 3 for our dengue vaccines.

As a wrap-up, before we go more deeper into our financial results, I would like to share with you a few examples -- it's not comprehensive examples, but a few examples on how we are progressing in the transformation of the Company.

You probably have noticed that we have set up a new governance. We are a Company with an audit and supervisory committee. We have a significant new Board with new Board members. We think that it will really reinforce the governance of the Company, but also our ability to be agile and to move fast.

We developed a very comprehensive compliance program, in order to make sure that we have the right set of values everywhere. We focus a lot on patients and customer centricity, and people development.

R&D, I talked about it. But, of course, this is absolutely critical for our mid and long-term success.

And, we will continue to very much focus on sustained sales growth, as well as profit growth. We are extremely committed at improving our margin in the future to a minimum 1 to 2 points per year.

I'll stop there, and I'll pass the mic to James for more details of -- on our results for the first part of the year. Thank you very much.

Thanks, Christophe. Good evening, to everybody. I'll start off on page 3. As Christophe highlighted, our strategic focus and good execution has driven strong financial and operational performance. I'd like to first talk about our reported results.

While underlying revenue growth advanced 7.4%, our reported revenue did decline by 5.9%. That was due to an 8.6 percentage point impact from currencies, and 4.7 percentage points from divestitures.

As a reminder, on the divestitures, we did divest our non-core respiratory business to AstraZeneca. Earlier this year, we transferred our long-listed products in Japan to a joint venture with Teva.

Operating profit increased 46%. Strong underlying growth, combined with a large one-time gain on the Teva transaction, more than offset the negative impacts from currency, and the impact of lost contribution from divestitures.

Reported EPS more than doubled to JPY159.

We're pleased to report that our first half operating free cash flow, that's after investment, increased 34% to JPY75 billion.

On an underlying basis, our first half performance exceeded our expectations, with underlying core EPS up 49%; driven by core -- underlying core earnings of growth of 12.7%, and a material reduction in our underlying tax rate.

Turning to page number 4. As Christophe highlighted, our first-half performance was stronger than we expected, thanks to very good execution across all of our business units. It's this factor that gives us the confidence to increase our full-year outlook.

Specifically, we have increased our full-year guidance on underlying core earnings to mid to high teen. That's increased from our previous guidance earlier this year of low to mid-teen. We also see upside on underlying core EPS. But at this stage, we would say that EPS is now trending to the upper end of the range.

Later in my presentation, I'll bring you through the more detailed reported forecast. For now, I would highlight that we've increased our full-year net profit and EPS forecast by 3%.

But within that forecast, we're recovering an acceleration of expenses of JPY15 billion, relating to the acceleration of the R&D transformation. That impact on reported operating income is approximately 11%. So actually, if we hadn't accelerated the expenses, our increase in reported profit would have been significantly higher.

We have revised downwards our outlook for revenue to JPY1.67 trillion. That's due to an adverse currency impact of JPY68 billion, and that's partially offset by the strength of our underlying revenue growth.

Finally, I do want to emphasize, we are committed to shareholder returns, and the dividend is an important component of that.

Turning to our reported income statement on page 5. I mentioned earlier the 8.6-point impact on revenue from currencies, and 4.7 point on divestitures. These two also have a negative impact on gross margin.

Our gross margin has declined 4% on a reported basis. But almost 2 percentage points is due to divestitures, and 1.3 points is coming from negative impacts from currency mix.

Operating profit increased 46%. We benefited from a JPY103 billion one-off gain relating to the Teva JV, and that was a non-cash gain. But we also benefit from very strong underlying performance. These two items partially -- were only partially offset by the negative impact of currencies, and that was JPY18 billion in the first half, so a sizeable number; and a loss to income contribution from divestitures.

Net profit and EPS more than doubled versus the previous year. Here, we had a favorable benefit from tax rate. It's quite a significant change. Our prior-year tax rate was 45% on a reported basis. That was unusually high; our statutory rate is around 30%.

Our rate this year for reported taxes is 19%. What we've had is a large shift in some discreet items. One example of those is, we resolved some tax audits in the US, and that benefited us to the tune of 4 percentage points. And, we had a capital contribution tax benefit of 6 percentage points. Last year, that happened in the third quarter instead of the second quarter.

The one thing I want to caution you on, the 19% rate is not sustainable. The second half rate will be higher. You should plan on a rate of around 28% to 29% full-year rate. Any benefit we saw in the first half will wash out of the system in the second half.

The 28% to 29% rate is, however, about 1 to 2 -- could be around 1 to 2 percentage points better than the prior-year rate. So, we are improving the tax rate, but not for the amount that happened in the first half of the year.

Turning now to the underlying P&L, and that's on page 6. Revenue growth increased 7%, and gross profit growth was up 5.6%. The gross margin was slightly below last year, 1.2 percentage points.

The good news here is, about 0.8 pp is entirely due to the timing of cost items between first half and second half, so that will turn positive in the second half. We have about 0.4 pp coming from adverse mix impacts.

I want to be clear, we do not expect this trend to continue. Second-half margins are forecast to improve versus prior year, principally driven by the strong growth we're expecting in ENTYVIO, NINLARO and TAKECAB. So, we will have favorable product mix.

Operating expenses grew at half the rate of revenue. Obviously, that drives favorable leverage. Thus, our core earnings increased by 12.7%.

Margins expanded by 70 basis points, and we expect that trend to accelerate in the second half.

Underlying core EPS growth of 49% was obviously impacted by the favorability in tax rate. So, on an underlying basis, the tax rate was reduced from last year's rate of 38%, to 16% this year.

However, if you take the full-year rate and apply it to the first half, our EPS growth would have been 28%. We actually delivered on a like-for-like basis, with full-year tax rate, around the 28% increase in EPS. So, that's the -- call it the like-for-like change on an underlying basis.

By now, you're used to our bridge chart, which starts on the left, with reported revenue for 2015, and end on the right with reported revenue for 2016.

I would draw your attention to the two blue bars in the middle. It's essentially the underlying, so excluding ForEx and excluding currency impacts, and excluding divestitures. We grew 7.4%, as Christophe said, and a 15% growth coming from GI, oncology, CNS and emerging markets.

The following chart is more important, and I'll spend a little bit more time on this one, because this is the story of good, strong execution against strategic focus.

We're focusing on these areas -- account for 50%, 54% of the size of the Company. Our research, our internal prioritization is all against these areas.

If you go to GI, it's frankly a spectacular performance. ENTYVIO continues to have remarkable uptake. Christophe mentioned the brand is now a $1 billion brand, and it's our largest product.

I'm pretty keen to emphasize that our commitment to maximizing the value of this brand. And, our confidence that this ENTYVIO will exceed $2 billion within fiscal 2018, which is in line with our prior guidance.

Oncology grew 4.9%, with NINLARO and ADCETRIS leading the Group. We are facing some headwinds due to the decreasing royalty stream on VELCADE. But I would like to stress our believe in NINLARO's potential, that it will be a much bigger product than Takeda, than VELCADE is today.

Spearheaded by NINLARO and ADCETRIS, we expect oncology to continue to be an important growth driver for many years to come.

CNS is very strong at 28%. That's probably about 75% of the growth is coming from TRINTELLIX in the US, and the product is performing very strongly.

Emerging markets continue to perform well. Our growth accelerated to 5.7% in the second quarter, and we expect it to continue to accelerate. I would highlight Russia grew 8%, China 9.7% and Brazil 11%. There are not that many companies that are growing at those rates in the three key emerging markets.

Our overall growth was held back by, what I call, issues in select markets. Health spending for example, in Saudia Arabia is much lower, because the Government has an issue with the oil price. That has impacted, short term, our performance, but we expect to work through those headwinds in the second half of the year. So, we're quite confident on the future potential of our emerging markets business.

The next chart, chart 9. Here you'll see that we reported good growth across all of our geographic regions. This takes every activity in the market; it's not a business unit structure.

Starting with Japan, revenue growth of 4.1% in the first half, and we're really excited about this performance.

TAKECAB is a huge success, but also AZILVA and LOTRIGA are growing double digit. They are the three principle products that are driving this very strong performance in Japan.

Europe and Canada grew 4.8%, led by our specialty portfolio. ENTYVIO more than doubled in size, and ADCETRIS grew by 15%. You can see the power brands are the key drivers when we talk about many of the segments.

Our US business grew very strongly, up 15% in the first half. ENTYVIO was up 90%. It's been launched some time ago, but it's still growing extremely strongly.

TRINTELLIX was up 44%. NINLARO contributed 6 points of the total growth rate. It didn't exist last year, so it's already accounting for one-third of the growth in the US business.

We turn now to earnings, and this is on slide 10. The 12.7% growth in underlying core earnings was driven by gross profit growth. You can see the bar here, JPY30.5 billion, so it's principally a high-quality earnings result, and the gross profit is principally driven by revenue.

We had operating expenses, I mentioned before, increase by 3.8%, and that's approximately half our revenue rate. That would be a measure we'd like to keep or improve upon, that we contain our operating expense growth.

Both of these were better than expectations, so both the performance on gross profit and the performance on overheads were better than we expected, compared to our internal plans. It's this factor that gives us the confidence to increase our full-year guidance.

Turning now to -- we do the same analysis for net income. This one is a little bit more complex, but it shows this is the contribution of underlying core earnings, which again is all driven by revenue.

Then we have a large contribution from tax. This is the unusually low tax rate this year, compared to an unusually high tax rate in the prior-year period.

As I said before, as you do your modeling or you think through the rest of the year, you probably should plan on a full-year tax rate of 28% to 29%, and you -- back into the full-year number.

I also mentioned that if you apply the full-year tax rate to the EPS growth, the growth would have been 28% on an underlying basis of EPS and that's important. This is not all driven by a tax rate; it's actually 28% has come in from the core business. That's the way I like to think about it.

We turn now to cash flow. We're extremely pleased; we've improved our cash generation by 30%. As you'll see on the chart, the biggest driver is, actually, change on change. It's all coming on the working capital line.

A lot of this work was started before I arrived, but I'm increasingly emphasis on improvement of cash. We are increasing our payment terms to suppliers and we will do it in all markets across the globe. And, we are making solid progress in our global manufacturing organization, on taking excess inventory out of the system.

More specifically, a data point, we reduced our cash conversion days by 18%, compared to prior year. So, this is actually taking days out of the system.

I would say though, that frankly, we still see lots of opportunity to unlock cash from the balance sheet. Our working capital is still too high and we will be working very hard to reduce cash conversion days over the coming years. We will be specifically focused on inventory and accounts payable, items that we can control internally.

Another area we are looking at is unlocking cash from the balance sheet, non-core fixed assets or investments, and we will be taking a hard look at this. We expect our balance sheet to generate quite a bit of liquidity over the coming 18 months.

The last point I would make here, the cash flow of JPY75 million (sic - see slide 12, "JPY75 billion") is approximately equal to our dividend payout for the first half, which was just over JPY70 billion.

We didn't cover this in the last meeting, Summit, and we're putting the chart in to, more as a signal to our commitment to margin improvement and cost efficiency. But message number one is we're fully committed to delivering on Project Summit. In fact, the program is tracking ahead of plan.

I do understand though, when I've met some of you, there is some frustration that the Summit savings were not fully visible in the P&L, so you couldn't see the savings. This was due to a number of factors.

First of all, we had implementation costs relating to Summit that probably we didn't explain very well. Two is, we made reinvestments to build the specialty capability globally, so a lot of the favorable revenue profile you're seeing now is thanks to the investments that were made 12/18 months ago to build sales capabilities in Europe and the US in a specialty business where we -- up until then, we weren't present. Now, you're seeing the payback in terms of strong revenue -- strong high-revenue growth.

The last item is, actually, specifically related to Japan. The deterioration of margins in the Japanese environment has been a drag on our overall margin. As we've addressed, the long-listed portfolio through the JV structure with Teva, it is a recognition that the sustainability of margins in Japan. We've now addressed it but it has been a drag on the absolute margin.

Back to Summit, we have now -- if you read the chart, we've reached JPY100 billion in cumulative cost savings versus the JPY120 billion target. We are confident that we will exceed 2016 and 2017.

A data point, year to date we're actually 30% -- the savings are 30% higher than prior year. This is now a capability thing, that our ability to reduce costs is getting better with each passing month.

Going forward, we will be increasing the focus on margin improvement and we will be scaling up the magnitude of the cost efficiency programs we will be launching.

We will -- at the same time, to get back to my first comment, we will be more focused on capturing the costs in the income statement. That has to be -- our commitment is now that we've made the investments, we need to have the savings fall through.

I do see a lot of opportunity on the cost side. Our margin is too long and we will come back in May with a comprehensive performance improvement plan, specifically targeted to margins.

But I do want to caution you, margin growth will also come from the investments made in a specialty business, which are highly profitable products and we expect strong growth in these products in the future.

I will give you one example of easy cost reduction we are looking at and that is, our procurement organization right now only addresses 40% of the total spend of the Company. We expect to enlarge the amount of spend they address dramatically over the coming months, and I emphasize months, not years. We expect far larger savings out procurement.

We, actually, almost consider Summit savings delivered, but we need to dramatically scale up. We invested in our capability and the team is extremely strong in procurement, and now we're going to get them to deliver even higher savings.

We will come back in May with more specifics and we will build up the drivers of how we think we will increase margins 1 to 2 points every year and how we will make sure we capture it in the income statement.

On to guidance, Christophe covered this already. The key point here is, it's the strength of the execution in first half that leads to confidence to increase the guidance. It's a simple message, so it's all down to execution against a strategic framework. I won't cover it, because we've covered it before.

This is your most -- I think you're all most interested in this chart. It is a little bit detailed but this is our reported guidance.

As I mentioned before, we've reduced our revenue guidance by JPY50 billion and the currency impact was JPY68 billion. Actually, we called up our operating performance, if you like, so the strength of the underlying performance partially offsets the currency impact.

Our R&D expenses, I've actually -- were originally forecasted JPY325 billion; we now expect them at JPY310 billion. We've put an explanation on the right-hand side for the change, so it's all due to currency.

On operating profit, and this is the one we have to explain the most, we are forecasting a sizeable upside on the base business, thanks to the better than expected first-half performance. But we are offsetting that with the acceleration of R&D transformation cost for this year.

If you think about this, if we hadn't accelerated the cost from next year, we would be, actually, calling up a reported operating profit by about 11% and the EPS would be up about 15%. That's a significant upside.

I do want to emphasize though, there is no change of this -- to the total estimate of JPY75 billion for the R&D transformation. The cost next year, in 2017, will be lower than previous guidance. This is a shift from one year to the other, as we firm up the estimates for, basically, restructuring accounting.

I do want to highlight though, restructuring accounting depends on multiple actions and decisions that need to be made, and we will always have volatility in the timing of restructuring. But this is our best estimate, at this point in time.

Finally, net profit and EPS forecasts are up 3% approximately. But, as I said, that's deceptive, because we are covering JPY15 billion of accelerated costs in the year.

There is a couple of other pieces of information that clarify how you should maybe think about certain items. One is, we've assumed a JPY101/$1 exchange rate, so we've put our assumptions for the rest of year on the year. There's obviously slight opportunity for that.

The second one is, we've clarified, and if you've good eyesight, in the footnotes, our assumptions on Teva for the full year. We do expect reported income on -- in the Teva -- as a result of the Teva JV of JPY120 billion, of which approximately JPY20 billion is not one-time in nature.

You could think about it, that's the ongoing business of the JV. It's approximately 50% commissions that we earn for distribution and co-manufacturing. The other 50% is our equity income in the venture.

Finally, the last point, I've said it twice, but the tax rate just 28% to 30%.

One final word on phasing, and I'll address it up front. Remember, it looks as if we've already delivered the full year in the first half. But the full year has the Teva gain of JPY102.9 billion. Then the second half has the majority of the R&D transformation cost.

We, actually, did incur approximately JPY5 billion of transformation cost in the first half. If you think about first half/second half, JPY5 billion was in the first half and JPY35 billion will be in the second half.

I'd just like to summarize. We are effectively increasing our operating income, the under-reported operating income, and then we're using that favorability to offset the acceleration of cost.

Finally, closing comments on page 16. We're quite pleased with the first-half performance. As you can see, all key measures grew nicely versus a year ago.

The second point we would make is the strong performance underpins our upwards guidance revision. We have, as you've seen, revised upwards reported and underlying guidance.

A strategic focus and good execution will continue to deliver robust results. As we move forward, you should expect to hear a lot more about our plans to improve margin and cash conversion. We will share these plans with you when we issue guidance for 2017.

So, that concludes my remarks. Thank you.

(Operator Instructions).

(interpreted) Citigroup, Yamaguchi. I have two questions. First is that in an underlying basis, in the first half, I think that your result was, actually, better than your forecast, which is not announced, and you gave us many numbers. But especially regarding revenue, what are the contributing factors?

Also, in terms of the cost, what kind of items contributed? You don't have to give us numbers, but which items contributed to revenue and profit?

Second is NINLARO performance. You showed us a diagram and it went up quickly at first, then it seems to be somewhat stagnant. But revenue-wise, it's been on an upward trend. Could you comment on this trend of NINLARO performance?

Thank you for the question. On the revenue, it's a strong performance, I would say, across the board. This is what we like very much. US business has a very strong first semester, mainly driven by ENTYVIO and NINLARO. NINLARO is performing slightly better than what we expected, both ENTYVIO as well.

So, very strong performance in the US. I'm not talking about -- US is not only in the ENTYVIO and NINLARO, but they are the two really driving our growth.

Europe also performing very well, also driven mainly by ENTYVIO and ADCETRIS; so, a very strong performance there.

I will mention Japan as well. Japan has been really performing well. I'm especially pleased by that, frankly, because I've been waiting for that since I joined the Company. Japan has been struggling a lot, but we have prepared the launch of many new products like TAKECAB, ZAFATEK, and we are really seeing now a good momentum with these launch. I think we are very pleased with that.

Emerging markets did not underperform either. Emerging market is, actually, performing well as well. James mentioned the three key countries which are really important for Takeda in emerging market. We had some downsides in MENA, in Middle East Africa, but overall it's performing very well.

I think that's what gives us also confidence. It's not like one haven, in one country, it's across the board we are seeing a good dynamic.

And then if you take the profit split, the upside we see is equally split between revenue and overheads. So, we have more cost discipline.

The only weakness we saw was gross margin but we think that will be a strength in the second half. Year to date, the upsides were all revenue and operating expenses, and roughly 50/50.

NINLARO, your question on the second line. This is a very narrow set of data. This is market share in second line, new patient. I think it's quite normal that you reach rapidly this type of plateau when you measure like that. But we are seeing a very strong dynamic on NINLARO. At the moment, of course, its label is very limited.

What we are monitoring a lot is the duration of treatment, because you remember in June when we did our IR Day in oncology, we believe that in the future, the average duration of treatment of NINLARO will be very important, because VELCADE today has an average duration of treatment of six months. Its label indicates 12 months, but we don't reach that point because of toxicity that NINLARO does not have.

I think it's still too early, but we will share with you in the future how we are tracking on the duration of treatment. But the feedback we are getting is positive.

Do you observe that six months of VELCADE is no longer the case with NINLARO? NINLARO is longer? Did you observe by yourself?

We are already higher than six months, yes. But I think it will take time, because, of course, you have new patients, so it takes time to get an average growing. But we are seeing already higher than six months.

And James, one quick follow-up. You talk about the gross margin is weaker. Gross margin is the only thing, which is a little bit weaker than you are expecting, gross margin. Is it coming from the product mix, generally, or cost, or currency? But it's underlying, so you don't need to worry about currency, it's more of a product mix.

Sorry, it was 1.2% and, I mentioned earlier, 0.8 points came from the timing of costs variances in the P&L. So, 0.8 points will reverse in the second half and the remaining variance, 0.4 point was product mix.

I wouldn't split the future forecast. The future forecast is we will increase gross margins in the second half, because you have the benefit of the cost shift coming from -- as well from the first half. That's why we're feeling reasonably confident about the year-to-go forecast.

Where to visualize the dynamic is that the long-listed product that we transferred to the JV had a high margin, that is impacting short term. But the growth driver, like ENTYVIO and NINLARO, have a margin much higher than the average of the Company, so over time I think it will stabilize.

(interpreted) We'd like to move to next question.

(interpreted) Mizuno, Tokio Marine. I have two questions. Back in September, a certain European sales site, Lundbeck CEO conference call, in which TRINTELLIX was mentioned, ADHD study was mentioned. When the results are positive, you can start a (inaudible) trial next year. That kind of comment was made. What's the prospect, what's your view on that? That's the question number one.

The question number two is about TAKECAB. TAKECAB is growing very fast, but in which indication the product is growing? Is it across the board, or is it in particular indication that it's growing faster than in other indications?

Thank you very much for the question. I'll answer the TRINTELLIX question first. The TRINTELLIX question was about our Phase 2 study and collaboration with Lundbeck on attention deficit hyper activity disorder.

The study is ongoing, it's on track and it will read out in FY17. At that point, we'll make a decision as to whether to proceed to Phase 3.

TAKECAB market share is growing across indication but when you see such a dynamic it means that it is officially penetrating now the (inaudible) segment which is the biggest segment of the untested market. So, we are very satisfied with the take off.

We are also very -- we are seeing very strong performance in some smaller indication. But they are usually a good signal that the product image is very strong. For example, in helicobacter pylori eradication we launch a combo pack and it's extremely successful, because this is an area where we have demonstrated superior efficacy of helicobacter pylori compared to other PPIs.

(interpreted) Well talking about PPI and TAKECAB. On volume basis is the market growing for PPI plus TAKECAB?

I can't answer that time top of my mind, but I believe it is slightly growing in volume, the overall market, yes, but slightly I believe. I can come back to you with specific number on that if you want.

(interpreted) Seki, UBS. I'd like to ask two questions. First the question is regarding the M&A; many [have you] reported. Previously from Mr. Weber up to the double, two times of annual EBITDA, you have a debt capacity or capabilities, that's what we had and if there is anything promising, let's say, $10 billion level or deal, would you possibly consider at a stretch? That's first question.

The second question is regarding R&D transformation. Three months ago, an announcement came out. After that, I think you have more detailed estimate and calculation.

The cost of the savings of JPY18 billion, do you think that there is any possibility of expanding this cost savings larger than JPY18 billion.

Thank you for the question. Regarding our ability to finance acquisition, our real intent to -- is to remain investment grade, which eventually means that we don't want to leverage our balance sheet further on a steady state, and 2 times EBITDA. It does not mean that we couldn't be higher for a short period of time and then go to EBITDA. I think that's how to see it and James can explain further.

The $10 billion to $15 billion, which ended up in the Financial Time, didn't come from us. I think it's better to see it like way I just described it.

Of course, it depends what you acquire as well. If you acquire a strong EBITDA, of course, it change -- it impacts your ability to move, but we want to remain investment grade. So, that's what I will say.

Do you want to add anything, James?

I think for short periods as Christophe said, you can quite easily retain investment grade and go to 3 to 4 times EBITDA, but you need a plan to bring it back down below -- well below 3 within about an 18-month period.

But that's known, you already know all this already. But that's the capacity of the Company and where our current leverage on a net debt basis is 0.7/0.8, so that's the situation we're in.

Just to elaborate a bit further is that we are looking at first reinforcing our strategy. Don't expect a move which is not in line with our strategy GI, oncology, CNS, this is what we are looking at.

We are looking at either our accretive views, so acquiring EBITDA or more pipeline. But, in this case, we would really look at how to include this by planning into our R&D plan and without incremental cost.

How do we reprioritize? Or how do we use the space that we are creating and which is also natural, because a big part of our R&D resource today are used for ENTYVIO and NINLARO still. But, over time, that will decrease and that will create, of course, more space to invest on the pipeline, so that's how to see it.

Regarding the R&D, it was about the savings; yes, cost savings. We flag JPY180 billion of cost savings. But let's be very clear again, we are not, don't reduce our R&D investment by JPY180 billion, because we are planning to reinvest that into the pipeline.

We are very much focusing on our pipeline long term, because I think you will agree with me that we don't have a rich enough pipeline. The entire intent of the R&D transformation is to have a best-in-class pipeline in GI, oncology, CNS.

Thank you.

(interpreted) Any questions please?

(interpreted) Sakai, Credit Suisse. First half and second half profit balance, I would like you to elaborate on that once again. JPY162 billion operating profit for the first half, this includes JPY120 billion from Teva JV, which is the real earnings. It's around JPY42 billion for the first half.

For the full year, you haven't really changed the operating profit, which means that for the second half, I think, you will be generating around JPY15 billion in operating profit; I mean, negative JPY15 billion. Is my understanding correct?

Yes, most of this --

(interpreted) Well, may I just continue? About transformation, R&D transformation.

PRA. PRA doesn't have a presence at all in Japan, but this is a global alliance, right? How are you going to value development activities here in Japan? Do you have any specific plans for that?

Yes, the second half on a reported basis will be down, but if you take out the costs, I'm talking operating income, but if you take out the costs of the R&D transformation, they will actually be up quite a bit.

If you think about it, we look at it a slightly different way. Our underlying core earnings guidance for the full year is middle to high single digit -- double digit, sorry.

Year to date we've delivered 12.7%. That actually implies that the core business will be growing at a higher rate than 13%, so the operating business will be growing faster but it will be offset by the majority of the charges were coming in the second half, JPY335 billion.

I mentioned before, the revenue profile will stay similar to the first half so we will be solidly in the middle single-digit range. The key change in the profit is instead of a negative gross profit margin in the first half, we will swing to a positive gross profit margin and we will have roughly the same diligence in managing overheads.

The biggest change is the quality of the mix of the sales plus the gross profit margin. But we will actually accelerate growth in the second half.

On a reported basis, you're fully right. It goes down, because you have all the one-time negatives in the second half.

(interpreted) So one-time cost you are talking about is to do with R&D transformation equivalent of JPY15 billion. Is that all?

On top of it. Yes, that's JPY400 billion full year, JPY5 billion in the first half, JPY35 billion in the second half. Yes, sorry. We should have put -- made that clearer.

Maybe I'll take on the second question around PRA and how we intend to continue our development activity here in Japan. First, I'll say that, as Christophe mentioned during the presentation, we've actually accelerated aspects of the transformation and one of the pieces that's moving along very nicely has been the PRA transition. We've already begun the transfer of employees in the United States and in the UK.

We are in active negotiations with PRA and are actively discussing with the unions here in Japan extending that partnership into Japan. It's a critical part of the overall relationship between us and PRA.

In fact, PRA is -- one of the reasons that PRA was so interested in taking on this partnership was the opportunity to develop a strategic stronghold in Japan.

PRA does, through an acquisition of an organization that it made a number of years ago, have a small base here in Japan, so they would be bolting on this piece on top of that base.

Now, the question, though, was how do we intend to do our development in Japan. We intend to do it with PRA through the staff that we will transfer to PRA.

Now -- but it's important for you to understand that the capability that we have in Japan and our development capability is outstanding. It was built to a capacity to manage a strategy that had us doing an intense -- a large amount of regional development in Japan.

As we've adapted our new therapeutic area focus strategy, while we always will take on opportunities that have value for patients and value for Takeda that are regional, our intent is to focus much more on global product launches. That capacity, as we move forward, will be greater than what we're going to need.

The intent long-term for PRA is to leverage some of our capacity to support other activity in Japan.

(spoken in foreign language).

(interpreted) Hashiguchi, Daiwa Securities. I have two questions. The first one is about NINLARO.

Earlier, you mentioned about the second-line new patient treatment shares and you've just explained about the trend. June IR day, first-line and other indications were also mentioned. Indication or other lines of treatment.

If you have any numbers about the trends of other lines, could you explain them? And if you don't have the number, do you think the curve or trend would be the same as a second line or there are some upsides or downsides for other lines?

Second question is about the Teva joint venture. You have explained a full-year forecast but, as a result of the first half, I think it is a loss in the income -- equity income, although the number is very small, but it's growing in the second quarter. I'm just wondering if this joint venture is going well as originally expected.

Thank you for this question. So, we don't have -- or we'd have eventually the -- provided that we have good result, of course, which we expect, we've had indication, one after one, in the multiple myeloma market, because, as I explained, we have Phase 3 running in all stage of the disease.

Today, we have some that are of market penetration in first line but it is off-label use. We don't promote; we don't have the indication. So, we don't want to talk about it and its marginal anyway.

I think the way to see it, and that's what we share -- we shared during the IR day what could be the assumptions of penetration by market segment, multiplied by an assumption of duration of treatment and what type of potential of product we are seeing. We wanted to demonstrate that the duration of treatment is, actually, very significant. That is why we have a great hope for this product.

At the moment, I think we focus on where we have the indication, where we have the label, where we are promoting the product, where it is mostly used. There is some, of course, use as it is always the case, with oncology product. But we'll update that information progressively as we develop our next indication.

Regarding the Teva JV. The way to see it is that the generic business very rapidly will become much bigger than the long-listed product business, which are declining.

Remember that the long-listed product business that we transferred this year, is declining by 50%, because of the generic penetration. Let's say you have a JPY80 billion last year, this year it will be less than JPY40 billion of sales. Next year, it will be again 30%/40% less.

This is the dynamic here. It is that we have transferred that business, hyper-declining, I will say. Then we have this generic business from the joint venture, which is growing and developing.

Our aspiration and the aspiration of this joint venture is to be one of the leading, if not the leading, generic company in Japan. So, that's really how to see it.

On your question, I don't have the exact numbers. You cannot look only on the equity earnings line. There's an equity earnings flowing in, but there's an unusual accounting transaction for how we're handling the intangibles on the set up of the JV. It's offsetting the favorable contribution from the equity earnings.

But that item that's doing the offset is booked somewhere else. I think it's other income expense. I'll have to get back to you with the specific line. But we do have equity earnings in the year-to-date P&L consistent with the JPY10 billion full-year forecast.

I was just looking it up, I just can't find the exact numbers. But there is another line impacted where there's an offsetting positive number. I think that's the question you had.

When you do the math, you can do the math, and you compare what will happen if we had kept this business compared to what we is happening with the transfer. Excluding the one-off, because that's -- you see that you are very similar numbers this year.

Of course, next year we'll benefit from the generic business, because we have 49% of the JV. We distribute the product; we have distribution fee; and we'll continue to supply our long-listed product, which will become more marginal.

But we will distribute the entire portfolio of the JV. So, you can see what's the dynamic here. This is why I think this is very good win/win operation that we did here with Teva.

(interpreted) Morgan Stanley, Muraoka. I'd like to ask two questions. First question is on ENTYVIO. How do you view the future competition against ENTYVIO? There is TNF and, also, many biosimilars will be put on the market.

In the business environment of ENTYVIO is in terms of price or share, or demotivation of the patients? Is it better for us to consider any potential impact, due to the competitive environment of ENTYVIO?

Second is about the next year performance on reported basis. I wish you consider and reply. Currently, I understand that your performance has been quite strong, and probably you hit the bottom this year. I wish that you'd come into a new era of generating positive profit starting from the next year. And, if so, what is your confidence level?

We are clearly in a growth dynamic in the coming year. For the precise number next year, you will need to wait for the May meeting, where we'll come up with precise numbers.

But, for us, the dynamic is clear. We see a continuous sales growth -- top-line growth; and, we will continue to optimize our margin and to have our bottom line growing faster. We are very committed to that.

I have to say I'm very glad that James is on board as well. He is coming from a sector -- a low-margin sector, the food industry, where they know better than our sector how to drive costs and manage costs. I think we will benefit a lot from his experience here, and there will be more details on that in the future as well.

Regarding ENTYVIO, yes, there will be biosimilars. The impact of those on one side, yes, it will be used in first line. It's still difficult, actually, to estimate the penetration they will have, because we see a huge variance in term of pricing of the biosimilar, depending on the countries.

But, on the other hand, what you will see is that they will expand greatly the biologic market. And, because the biologic market expansion was limited because of the price of the biologics, compared to the traditional [cost], and other therapies.

I expect an expansion of the biologic market. You know that some 40%/50% of the patients, after a while, do not respond any more to TNF-alpha. And, you have seen that ENTYVIO has a 50% market share of the switch.

The expansion of the market, we also create opportunity for ENTYVIO on the second line. I don't expect the biosimilar to have a hugely negative impact because of that. In fact, it could even have a positive impact.

(interpreted) Any other questions, please?

(interpreted) [Sabada], JP Morgan Asset Management. About a competitive landscape of ENTYVIO, you have mentioned biosimilars. But realistic competitor, which is Johnson & Johnson, [STELARA], what will be the impact of this product on ENTYVIO?

GED 0301 endoscope data , and JAK which is by Gilead, all of these oral products' data -- very interesting data is coming out recently. So, what is the potential of those products as your competitors in the future?

And another question is about ADCETRIS and IO, I think immuno oncology that is. Bristol or Myers Checkmate 025 -- 205 or 206 with such study, by using ADCETRIS early on. It seems to be a very good combination with their IO product. So, ADCETRIS, in relation to IO, do you think the duration of treatment can be extended, because ADCETRIS will be used earlier on? What is the possibility of that?

Thank you. Maybe I'll start with the ADCETRIS question. I think perhaps if I come back to IO in a second. The most important study that we have ongoing for ADCETRIS is ECHELON-1, which is our frontline indication study, in which we're positioning ADCETRIS together with chemotherapy against standard of care, ABVD.

That study will be out next year. I think, to your question, that study will determine the extent of uptake and use of ADCETRIS in the Hodgkin lymphoma market.

With respect to your question around the potential for a combination therapy with checkpoint inhibitors, there's clear rationale. In fact, our partner, Seattle Genetics, has initiated a study, a proof of concept study, looking at ADCETRIS in combination with a PD-1] inhibition.

Do you want to talk about --?

Regarding ENTYVIO, STELARA is, of course, a competitor. Interestingly, it could be used in a complementary way to ENTYVIO. We need to see how it can be used.

But I would just reinforce the profile of ENTYVIO. We just published some data showing that the -- actually, the treatment duration and the patient control can last for a very long time. So, the efficacy and safety of ENTYVIO is remarkable.

Now, of course, not 100% of the patients are responding, but the ones responding, the sustained efficacy and the safety is remarkable. We are very confident about the profile.

It does not mean that there is no need for other product, and I think there is a need. This is still a disease which is very difficult to treat. ENTYVIO is not the ultimate response, but it's one of the best responses out there. STELARA, I think, will complement that, and we'll see how it positions itself.

I think for other product, I will let Andy comment. But I don't speculate when we are at this stage of development. Let's see what type of data they generate in the future.

I won't speculate either.

I'm sure the company which are developing this product, I'm sure they speculate.

(interpreted) We'd like to take one more question. Any questions?

Since there is no other questions, with this, we'd like to conclude today's session.

Next Monday, we'd like to ask you to participate in our web survey. Thank you for your cooperation. Thank you again for your participation today.

Thank you for your time. That concludes today's conference call. You may now disconnect your lines.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.