Takeda Pharmaceutical Co Ltd (TAK) 2018 Q2 法說會逐字稿

Good day, everyone and welcome to the conference call of Takeda Pharmaceutical Company Limited. The conference call today is held based on presentation materials available at the company's website. Please note that this conference call contains forward-looking statements regarding Takeda's future business, financial position and result of operations, including estimates, forecasts, targets and plans. Any forward-looking statement in this conference are based on the current assumptions and beliefs of Takeda in light of the information currently available to it. And such forward- looking statements do not represent any guarantee by Takeda or its management of future performance. Please refer to the important notice page in the presentation material for a detailed explanation regarding forward- looking statements.

During the presentation, all telephone lines are placed on listening-mode only. Please be aware that this presentation and Q&A session will be broadcasted on the Internet. After the presentation, you can take part in the Q&A session. (Operator Instructions)

Thank you very much for joining our financial announcement today, despite your busy schedule. (Operator Instructions) I'm the moderator for this session. My name is [Oklubo]. I just joined in Takeda in August and I am assigned as the Global IR Head. Taking this opportunity, I'd like to briefly introduce myself. In my previous position, I was in IR position for 13 years in SoftBank. So I -- before that I was in the financial sector [MIHE] Securities and Deutsche Bank and Morgan Stanley and as a bridge between you and Takeda, I would like to play a role in the future and there are many of the participants whom I know from my previous position and I'd like to ask for your continuous corporation and support to me.

Now, I'd like to introduce today's presenters on the stage.

In the middle -- centre President and CEO, Christophe Weber. To the right, from your side is CMSO, Andrew Plump. To the left, CFO, James Kehoe. Those 3 presenters will answer to your questions after the presentation completion. Now, we would like to start with Christophe's presentation.

Thank you very much, and thank you for joining. I know it's a very busy day with many companies announcing their results, so it's a great pleasure to see you again today. So I will -- we will have a presentation in 3 parts. I will give a quick summary about where we are and I will focus on the portfolio and then Andy will talk about the pipeline and engines -- will finish by more details about our financial results. But what I can immediately share with you is that we have, we are seeing a strong growth dynamic during the first semester of 2017. If you look at our sales growth for example plus 6.7%, our underlying core earnings growth 44%.

Our core EPS growth, close to 30%, and our reported EPS growth 39.2%. So we are very pleased overall with this performance because it's a sales performance as well as good leverage of our P&L and good profit performance. And so, we are making good progress against our key priorities.

So what you will see today is that based on this first semester results, we are raising our full-year outlook in spite of some headwinds during the second semester. We'll talk about it, especially, I'm sure, we'll talk about Velcade little bit later. So strong dynamic in H1, which allow us to raise our outlook for the year and increase our guidance. So on the portfolio, strong sales growth. You will see that our growth drivers are growing close to 15%. Our key products are performing well.

ARIAD acquisition is delivering ahead of expectations, so we are very pleased with the integration as well as dynamic of Alunbrig and Iclusig. The pipeline, I will not dwell too much because Andy will cover it. Our R&D transformation is advancing well. The heavy lifting of our organization change is largely completed. And during the first semester of ' 17, we did 20 new collaboration -- 28 new collaboration which we think is a good testimony of our dynamic and attractiveness in the field of GI, oncology and CNS. On the profitability side, during the first semester, we improve our margin by 500 basis points. You might remember that our commitment is to improve our margin between 100 basis points to 200 basis points, so first semester is performing above that but we know that the second semester would be lower. So you will see the phasing. James will explain that a bit later, but it is a -- good performance during the first semester. So again, we are raising our guidance for the year. So let's focus a bit more on the portfolio. For us, it's really great to see this type of sales dynamic, why? Because we have launched different product than in the past, if you look, product like ENTYVIO and NINLARO, they are speciality product. They require a special mind-set, different capability than primary care product. So we should remember that Takeda was not very experienced in this before, this type of product but we have been able to do that, I think in 2014.

So I think, we are starting to see the result of that. And if you look at the first semester, our growth by region. What you could see is that, what you can see is that, we are growing in every region, different pace, but we are growing in every region. So Japan is growing 0.3% but if you take out -- exclude some product that we gave back to Pfizer, and they were low-margin product. Actually, our growth in Japan is 7.6% during the first semester, U.S. growth 16.7%, EUCAN is 4.2%. Emerging market growth is a bit low. The main reason is China. So we have strong growth in LATAM and Russia -- Russia, CIS but it's offset by a weaker growth in China. We can discuss later on, if you have question about that. It's a temporary headwinds, if you like in China for reasons that we know very well linked to the healthcare systems reform, [province funders], some commercial practice realignment internally that we have done. So we are very optimistic that our China business actually will regain some momentum in the near future. But overall, every region is growing very well. If you look at our growth drivers -- they represent now 62% of our total revenue. So -- and growing close to 15%, so of course, they are really pulling the entire growth of the company. GI growing 25%, oncology 13%, CNS 26.7% and emerging market 3.4%. So -- and if you look at specific product, ENTYVIO dynamics very strong. Now it's approved in 62 countries. It's performing -- in every country where we've launched ENTYVIO is performing very well. TAKECAB is performing very well in Japan. The oncology portfolio, overall, also growing very well. I won't show here Velcade, but actually the sales of Velcade in H1 were also strong. And then TRINTELLIX in the U.S. growing 58.7% and now, by far, the preferred branded anti-depressant. So I think, it's very good dynamic.

We show here the market share dynamic of ENTYVIO. I focus on the bio-naive patient, because this is by far the biggest pool of patients in term of dynamism of the market. And you can see that our market share in the bio-naive segment in the U.S. for example is growing very rapidly. This is -- we believe where the product should be mostly used, because it has excellent efficacy, safety profile, long-term remission. So I think, it's -- this is a great data. In the Switz segment, the market share is a bit lower. There is more competition, but basically the bio-naive patient segment is really fueling the growth of ENTYVIO and you will see the same pattern in if you look at the Europe market for example. We are planning to launch ENTYVIO in Japan, next year.

The more we generate data for ENTYVIO, the more we can reinforce its profile in term of long-term efficacy and we have now good real-world evidence data, which is reinforcing the data of efficacy that we saw in the Phase III programs. So all the data that we are generating is very supportive and because of this data, we are more and more negotiating outcome-based contracting with some governments. We are very much in favor of this model and we have good examples now on ENTYVIO, so I think, it's a very positive pattern.

So in NINLARO, you have the demand, it's actually steadily increasing in the U.S., you have the volume demand here on the third part of the graph and you have the market share in second line and third line, so we are expanding ENTYVIO progressively. We have launched in Japan in May, it's now approved in 49 countries, we are negotiating reimbursement in Europe progressively, it's already reimbursed in 7 countries; Germany, Belgium, for example. So we think that progressively the product will establish itself as one of the backbone therapy. Interestingly, we got very good data in China, which has really supported the registration profile in China . Potentially, we could get the approval in Q4 fiscal year ' 17, so basically, beginning of next year and so, we are planning to launch NINLARO in China next year. So I think, that's a very interesting development. And again, this data that has been generating in China is very strong in term of its efficacy profile.

Now, NINLARO will truly establish itself as a very strong profile and one of the backbone of multiple myeloma treatment, when we will have generated all the data which is ongoing in Phase III. And next year, I remind you that we have [ADCETRIS read out] in the first semester of ' 18 with frontline data and also in the [maintenance of SCT]. And we think that NINLARO is specifically well designed if you like for this type of patient, because it's efficacious treatment, convenient, safe, the promise is that it can allow long-term treatment, so that's why we developed NINLARO for frontline but also maintenance. The only product registered today for maintenance setting is Revlimid. So this data is very critical for the long-term success and potential of NINLARO. In parallel, we are also studying the combination of NINLARO with DARZALEX. We have 10 ongoing studies of NINLARO in combination of DARZALEX, because this is also potentially a very interesting combination for the treatment of multiple myeloma.

ARIAD acquisition is delivering ahead of expectation. The integration is now completed. The R&D expense are fully integrating into the R&D organization. The synergies are tracking ahead of plan and we are seeing a strong performance of both ALUNBRIG and ICLUSIG. And so, this is basically a great start and we still believe that ALUNBRIG will be the best-in-class ALK inhibitor, I'm sure you might have some question on that. But -- so we are very pleased with the overall ARIAD integration and the dynamic that we are seeing from ALUNBRIG and ICLUSIG. So let me now ask Andy to join me [on the project] to talk about our pipeline. Thank you very much.

Great. Thank you very much, Christophe. Hello, everybody, good afternoon. It's a pleasure and a privilege to have a chance to give you a very brief update on R&D and our pipeline. So as Christophe mentioned, the transformation is progressing quite well. We've made terrific progress on our 3 goals. The first is our therapeutic area focus, and you'll see as we discuss the pipeline, the great progress we've made in really refocusing our programs in alignment with our 3 core therapeutic areas. The second, rebuilding our capabilities, both internally and importantly through partnerships. So that we can be competitive within these 3 areas across all modalities. And then third and of critical importance have been the cultural and organizational changes that are really necessary to be effective in the very dynamic world that we live and we've made progress along all 3 [years].

So let me just spend a couple of moments walking you through some of the progress that we made over the first 6 months of 2017 and I'll put some context into the update that I will give you. So last year, we spent quite a bit of time talking about our transformation and the changes that came with that to our pipeline. So in 2016, we had extensive movement and a lot of dynamics in our pipeline, let me walk you through the numbers. We had about 15 programs that we either discontinued or externalized and the majority were discontinued either because of lack of efficacy in the clinical trial, a safety issue or for strategic reasons, because they didn't in many places reach the bar -- the innovation bar that we stood for, so 15. We had 8 programs come into our pipeline last year. All 8 programs came through partnerships and the ARIAD acquisition. So we had no new programs coming into our system from our internal laboratories. And in terms of pipeline progression, we only had 1 program that went through a stage gate and that was our [dyne] vaccine going from Phase II into Phase III.

So it was a quite remarkable year for us in terms of truly rebuilding the organization and that was reflected in the pipeline dynamics that I just outlined to you.

As you can see this year, in addition to the success that we've had in our LCM programs and I'll talk a little bit more about those in a second, we've already had 5 transitions. We've had 3 transitions from Phase I into Phase II and when we talk about a transition, this means that we started dosing patients in that Phase. So we have 3 now ongoing Phase II trials with patients being dosed and then we get 2 new programs coming into our portfolio preclinically and we expect more over the next 6 months. So this momentum, it's a really positive sign for the organization. I won't go through all of the programs and their significance for you, I'll just mention a few. The first is TAK-659, which we discussed at the Investor Day in June of 2016. This is a SYK inhibitor also with activity against with [III] for which we've seen quite interesting Phase I data, particularly in DLBCL, a form of lymphoma, these are refractory patients. We've now started a Phase II trial. The Phase II trial has -- is stratifying patients into 2 buckets. The first are all comers with refractory disease and then the second is that we've identified a gene expression profile that we believe could predict response. It's a hypothesis that we'll be testing in this Phase II study.

TAK-573 is a really interesting molecule. This is a CD38 monoclonal antibody that's conjugated to an attenuated form of interferon-alpha. So it's a next generation, if you will, CD38 inhibitor and it's representatives of 2 of our areas of strategic intent. The first is to leverage the very interesting data that are emerging from DARZALEX in CD38. We think this has the potential to be a truly best-in-class CD38 agent. And then the second strategic intent is our goal to move more and more into immuno-oncology and this is one of the first agents that we're now bringing into the clinic in that regard. The preclinical data are absolutely remarkable. We've just started dosing patients and we're hoping for the best.

And then the last program I'll mention is TAK-935. This is a cholesterol 24-hydroxylase inhibitor. It's an enzyme that's expressed only in the brain. It's actually a program that came out of our laboratory in Shonan. It's very novel. And it's a pathway that we think will affect glutamatergic and NDA receptor signaling. This is an excitatory signaling pathway in the brain. We've seen in our preclinical models that this inhibitor can have significant benefit in epileptic and seizure disorders. It's quite interesting.

Our Phase I program was very extensive. We have extensive biomarkers that lead us to a dose that we believe is the right dose to test in a Phase II study. And the way we're bringing this program forward because epilepsy and seizure is not part of our strategic intent, [it's with a] partner. It's actually a very progressive partnership with a company called Ovid, which is a company that was started about 1.5 years ago by Jeremy Levin. We gave them the molecule. We're risk sharing 50/50, both cost and profit. We gain access to their expertise in epilepsy and in CNS rare diseases and we also now have an equity stake in that company and will value from every significant deal beyond this program.

So really solid progress for us. So this is just now the snapshot of where the pipeline is today and more and more it's feeling like a pipeline aligned with our strategy, and again not just to our therapeutic areas, but to that innovation bar that we've been talking about throughout.

Now, on the previous slide on the right hand side, we've listed out in summary, the life cycle management programs that we have ongoing for our recently marketed products. In some ways, I don't like the term life cycle management because it has a marketing context to it. But really what we're doing is we're building out the science from these really interesting programs. And as we've talked about and as we continue to have today, the majority of our external spend in development is dedicated to these programs. About 2/3 of our external spend is dedicated to building out that science. Now that, of course, will reduce over the coming 1 to 3 years as our pipelines, as our novel pipeline starts to emerge and this is a really great trend for us.

I won't go through these programs with you in any detail. I'll only mention that we don't include in this visual our very extensive set of programs that we have ongoing in China. So as Christophe has discussed previously and as all of you know, there has been amazing and rapid reform of the regulatory landscape in China. We're entirely poised to take advantage of that. We have over the next 7 year -- I'm sorry, over the next 5 years, we expect 7 new medicines to be approved and launched within China. And in fact, we've just had great results from NINLARO as Christophe mentioned and great results from TAKECAB which will be called [Vozinti] in China and actually the opportunity for Vozinti or TAKECAB in China is quite significant.

So as I mentioned earlier, as Christophe has discussed and as we've discussed in multiple occasions, a foundation of our model is partnership. We will be the best partners and we're gradually becoming recognized as the best partners in our core therapeutic areas. Now, our goal is to have a very strong internal lab to support these partnerships. Last year in 2016, maybe a 16 or 18-month period, we mentioned that we signed over 50 partnerships. We continue to really drive partnership as our core model. And over the past 6 months in FY '17, we've put in place 25 new partnerships. Now, it's not about numbers, it's about quality of the partnerships and what we actually do with these partnerships. So I'll mention a few of them to you now. But it's important to note that we don't intend to keep this pace up forever. We have a few fundamental partnerships that we think are critical to filling our strategic plan, that will be coming up. At the same time, our internal labs have now really been rejuvenated. So we expect to come to more of a steady state in terms of the partnership [road].

Last year we did quite a few partnerships that brought in clinical assets. Our focus this year has been predominantly at rebuilding our research base in each of our 3 therapeutic areas. So I mentioned to you all, for example, our interest in immuno-oncology. Our interest in immuno-oncology is really new created around 6 or 7 extremely exciting next-generation platforms in immuno-oncology. So I'll mention just a few.

Noile-Immune and GammaDelta, they are our first 2 examples of cellular therapy in oncology and our intent is not to go after the same place that everybody else is going after, but to go after an area that's differentiated. So GammaDelta, for example, is a company in the U.K. that's focusing on a different class of T cells. As opposed to the alpha/beta class of T cells, GammaDelta is focusing on the gamma/delta class of T cells. And we are in a pole position working with the best people in the world in this regard.

Noile-Immune, really exciting technology that came out of the NCC here in Japan, in Tokyo. And it's an opportunity to direct T cells, not just to hematologic malignancies, but to solid tumors. A really interesting company that's going to colocalize with our scientists in our Health Innovation Park in Shonan. And then I'll just mention one other in the CNS and that's the recent partnership that we put together with AstraZeneca. So AstraZeneca through their MedImmune group has developed a preclinical monoclonal antibody that recognizes alpha-synuclein. It's an incredibly potent antibody. It will go into the clinic in the coming months and we believe has the potential to fully test the hypothesis of alpha-synuclein aggregation in several CNS disorders, such as Parkinson's disease and beyond and also to be the best-in-class in what is likely to be a crowded field. We also really like the model in areas like this that are very risky in terms of the science, but with very significant upside. We think it's a very highly validated target, but of course, lots of risk moving into neurodegeneration disease modifying therapies. We love the model of 50/50 partnership where we share cost and we share reward.

So before I hand it over to James to walk you through the financials, I'll just mention that we've done well this year in terms of delivering on our objectives. Christophe has already talked a little bit about NINLARO. We're expecting still in FY '17 the next interim analysis from our MM1 study in relapsed and refractory multiple myeloma for NINLARO where we will get a look at overall survival. You may remember, we've seen trends, positive -- very positive trends in our last interim analysis. So we're very much looking forward to seeing to this -- seeing this next read-out.

Unfortunately, and maybe it's good news, the first readout, the first interim analysis on the newly diagnosed multiple myeloma study for NINLARO is pushed out into the first half of fiscal year '18. We've actually executed quite well on this program. It was -- [last station in] was 4 months ahead of schedule. There's a lot of excitement within the investor community, but it's an event-driven trial and we haven't accumulated the final event and don't expect so for the next couple of months. And then the last one I'll mention is our your next Phase III program, which is pevonedistat, which we talked a little bit about at the beginning of the year. So we're very close to starting Phase III for pevonedistat in high-risk myelodysplastic syndrome. And then in parallel, we're running 2 progressive studies with collaborative groups, 1 in M.D. Anderson and 1 with Leukemia and Lymphoma Society in AML. So that, we're very excited about getting that program going.

So with that said, I'll hand it over to James. Thank you.

So, hello, everyone. Boosting profitability is one of Takeda's key priorities. And the first half results clearly show significant progress against that goal. We saw a strong growth on revenue, profit and EPS and our underlying core earnings margin increased by 500 basis points compared to the previous year.

Turning now to the financial highlights on Page 22. Reported EPS advanced 39% to JPY 221 per share. We reported solid revenue growth of 3.6% and this was achieved despite a negative 5.5 percentage point impact from divestitures. Reported operating profit grew 44%, and this performance was mostly driven by growth in core earnings. Our year-to-date results do include JPY 137 billion of onetime income from asset disposals. But you'll also recall that the first half of last year also had a sizable onetime gain of JPY 103 billion, as a result of the creation of the JV with Teva.

Our underlying performance was also robust. Underlying core earnings increased 44% benefiting from both revenue growth of 6.7% and the margin increase of 500 basis points. We do estimate that there was a timing benefit in the first half that added approximately 9 percentage points to the core earnings growth. The strength of our first half margin performance gives us the confidence that raise our full- year margin improvement guidance to approximately 200 basis points. And as you know, our medium-term guidance is to improve the underlying core earnings margin by 100 basis points to 200 basis points each year. So this year, we now expect to deliver at the top-end of that range. Underlying core EPS was up 29%, but this was held back by a higher tax rate in the quarter -- in the year- to- date. And this higher tax rate reduced the EPS growth by 11 points.

Operating free cash flow was JPY 84.6 billion, an increase of [12%] versus year ago. Turning to the reported income statement on Page 23. As I mentioned, revenue increased 3.6%, coming from underlying growth of 6.7%. A favorable currency impact of 2.4 percentage points, partly offset by 5.5 points of lost revenue from divestitures. Operating profit was up 44% to JPY 234 billion, and this was almost entirely due to core earnings. As I mentioned earlier, our first half results include JPY 136.8 billion of onetime gains, however, this has a limited impact on the year-on-year growth rate because the prior year include similar level of onetime income. EPS advanced 39% as the higher tax rate reduced the EPS growth by 13 percentage points. The 2016 rate was quite low, due to the subsidiary capital redemption in 2016. And finally, and importantly, return on equity increased by 2.1pp to 8.7%.

Let's turn now to underlying performance on Page 24.Underlying revenue growth increased 6.7%, that gross profit advanced 10.9%. Here you can see favorable product mix which led to gross margin expansion of 2.7 percentage points. And this was led by 2 factors. Firstly, our growth drivers grew by 14.9% and these products on average have a margin that's 15 percentage points higher than the company average margin, so the more you sell of the growth drivers, the higher your gross margin. The second one is, there is a favorable impact from discontinuing the distribution of low margin third party products in Japan, and both of these are strong contributors to the improved gross margin percentage. Operating expenses increased 2.3% versus year ago, well below the revenue growth rate. Interestingly, it comes -- coming from a combination of operating expense discipline and the early savings from the global OpEx initiative. Included in this performance, however are some items that are driven by external factors. Firstly, we have higher share-based incentive funds impact in the P&L and this is coming from the higher share price. Secondly, we have higher co-promotion expenses that follow revenue, if you exclude these 2 items, the actual OpEx growth was only 0.7%. Additionally, remember that this result includes the integration of ARIAD's expenses. If you exclude ARIAD expenses, our actual operating expenses year-on-year decline.

So you can clearly see the benefit coming from the enhanced focus on OpEx management. Underlying core earnings growth of 44%, therefore was driven by strong revenue growth, favorable product mix and disciplined OpEx management. This led to the 500 basis point improvement in margins, which is well ahead of our full-year goals and frankly not fully indicative of the full- year and as Christophe mentioned, we are revising the full-year guidance up to 200 basis points. As mentioned before, the EPS growth is held back by a 10 point impact -- negative impact from higher tax rate. Turning to operating free cash flow on Page 25. Net cash from operating activities is up 34.9% to JPY 150.8 billion, and as you can see from the chart, this is tracking basically in line with the net profit growth of 37.5%. However, the operating free cash flow is -- the growth is 12.4%. This is held back by higher investments both in fixed assets and in intangible assets. And 2 items to highlight here, the result includes upfront payments relating to the recent collaboration deals with TESARO and AstraZeneca. The sale of noncore assets generated JPY 131 billion of cash. And secondly, the net debt to EBITDA has been reduced from 2.7x at the end of fiscal year '16 to 2x at the end of the current period. I just want to give you a quick update on the global OpEx initiative on Page 26.

So firstly, on pay less, we are quite pleased with the progress to-date. As you'll note on the chart, procurement savings are 26% higher than last year. Buy less which talks more about consumption, we're working hard to reduce consumption and take down our absolute spending levels. Policy rollout is ongoing, and while its still in the early days, we are already seeing positive changes in behavior. And OpEx spend is clearly trending lower. We are also well advanced on cost package budgeting and this is a key tool for creating transparency on future spending needs, taking tough choices and prioritizing our future spend. Finally, on work better, we have benchmarked our main G&A functions and we are defining action plans to improve both efficiency and effectiveness. Obviously results matter, and as you can see the benefits in the first half margin performance. We have included an example to bring to life the global OpEx initiative and we will do a regular spotlight on one of the cost packages. So this one is contractors and consultants and that accounts for approximately 20% of the total project spend. So it's quite important in terms of cost package. We finished our benchmarking and we discovered that Takeda ranks in the third quartile compared to the PurePharma set. So we're spending on average more than the competitive set.

Interestingly, we found that we use over 1,400 different consultants or contractors. And this suggests that we can easily drive significant price reductions by consolidating with fewer more strategic suppliers. We also noted that we use -- sometimes use more expensive strategic consultants to do more operational work. Clearly, that's something we need to address. So what have we done to-date? We've rolled out a new global policy for consultants and contractors and this establishes new standards and expected practices. We've also set a goal to reach first quartile spend levels over the next 18 months. And in each business unit and function now has a specific target to deliver. Procurement is now more deeply involved, competitive bidding is mandated, and we will ensure that we match the work to the consultants' core competency and cost profile. And finally we will zero base our spend projections as we roll out budgeting over the coming months.

Moving to slide 28 to guidance. So we are raising our full-year earnings guidance to reflect the buoyant first half results. Specifically, we're raising the underlying core earnings guidance from mid to high -- mid to high teen to high-teen growth. We're raising the core EPS guidance from low to mid-teen growth to mid teen. We now, as I mentioned, expect full-year margin expansion of approximately 200 basis points. And this plays true to the reported forecast.

Our reported forecast is revised upwards. This compares the current forecast to the prior forecast. It's revised upwards on revenue by JPY 40 billion compared to the previous forecast. The favorability reflects our strong year-to-date performance plus a favorable currency impact of JPY 25 billion.

We are raising our guidance for core earnings by JPY 10 million to JPY 267.5 billion, also reflecting our strong start to the year. Additionally, we have reduced our forecast for amortization and impairment by JPY 5 billion. Impairment is now assumed at JPY 22.5 billion, down JPY 10 billion versus the previous forecast of JPY 32.5 billion. The reduction mostly reflects improved prospects for one of our U.S. products called Colcrys. This is offset slightly by a JPY 5 billion increase in the forecast for amortization entirely due to the impact of currencies.

Other income and expenses are now projected to come in JPY 5 billion lower than prior forecast. So the expenses will come in low. We expect lower one-time spending on the Global OpEx initiatives and R&D transformation. And on a combined basis, the spending on these 2 programs is reduced by JPY 11 billion versus the prior forecast.

However, and this an unusual item, we've had to increase our estimate for contingent consideration by JPY 6 billion and this also relates to the Colcrys product. So you'll recall this period last year we actually impaired, so we wrote down the value of Colcrys. And we offset it with a lower contingent consideration. This year, because the product is doing much better, we revised upwards the value of the intangible, but we have a higher contingent consideration. So that's quite complex accounting.

Operating profit as a consequence increases JPY 20 billion to JPY 200 billion for the fiscal year and that's an 11% increase versus our prior forecast. The tax rate is unchanged at 27% and this leads to an increase in the EPS forecast by 10% to JPY 195 per share.

Page 30 lays out what the forecast looks compared to the prior year. Revenue is forecast to decline by 0.7%, principally due to the impact of divestitures of 6.4 percentage points. Core earnings increases 9% as underlying core earnings growth of high teens is more than offset by the negative impact of divestitures. Please note that the negative impact of divestitures is approximately 13 percentage points on core earnings. Amortization and impairment actually decreases JPY 9 billion year-on-year. So although amortization will rise due to the acquisition of ARIAD, we expect lower impairment costs in '17 compared to '16.

Other operating expense is lower by -- improves by JPY 12 billion and this is mainly due to overall lower restructuring expenses compared to prior year. This leads to an operating profit forecast increase of 28% and profit before tax will grow 46% as we reflect also the sale of securities of JPY 30 billion.

EPS is impacted by the tax rate increasing from 19% to 27%, but we still anticipate strong 32% year-on-year growth of EPS. And on the right hand side, we've included the exact same assumptions if they change that we provided in May of this year.

And then I would like to provide some more insights on the first half, second half performance on page 31. You will obviously have noted that our first half operating profit of JPY 234 billion exceeds our full-year forecast of JPY 200 billion. The first key driver is that all of the full year one-time income of JPY 136.8 billion is already booked in the first half and we don't expect any material favorable income in the second half of the year. So that's the first box on the chart. Secondly, the majority of one-time expenses will be incurred in the second half. As you will note on the chart, the first half one-time expense was JPY 4 billion, whereas we expect second half expenses of JPY 60 billion. This JPY 60 billion includes impairments costs, plus the cost to implement Global OpEx and R&D transformation.

The third box, we also note some items that in the first half will reserve in the second half and I mentioned this earlier in the presentation. This includes slightly higher inventory levels in the U.S. business and the timing of some expenses between first half and second half. Obviously, this is not on exact science, but in total, we estimate that around JPY 10 billion or approximately 9 percentage points of growth was a benefit in the Q1 and that will be a negative in Q2 -- sorry, in the second half. And finally, our half 2 profitability is typically lower than half 1. This is historical, it's always been like this. This year, however, the impact will be compounded by the potential loss of exclusivity on Velcade in the U.S.

The chart -- the box at the bottom shows the Velcade revenue first half, second half. So in the first half of this year, Velcade revenues were flat versus prior year and in the second half of the year, our financial forecast assumption is that we expect Velcade revenue to decline by approximately JPY 33 billion. Obviously the situation on Velcade is very fluid and I would like to provide you with some additional insights on the next slide, Slide 32.

The impact on Velcade obviously will depend on the timing, the number of entrants and the substitutability of any generic products. To-date 20 generic applications have been filed. While the majority contained mannitol, there are 3 505(b)(2) generic products that do not contain mannitol. Of these, Fresenius Kabi's product has already obtained tentative approval from the FDA.

Moving forward, there are both regulatory and legal factors that will influence the possible timing of generic launches. On the regulatory side, we expect a response from the FDA to a [Citizen Petition] we filed in June. Depending on the FDA's position on certain language in Velcade's label, generics may have to wait until the expiration of our label exclusivity in February 2018. In the Citizen's Petition, we also raised concerns about non-mannitol generics, that contain potentially unsafe ingredients which are not present in Velcade.

On the legal side, we have filed patent suits against a number of generic filers, 9 of those filers, including Sandoz are bound by a Court of Appeals judgment in Takeda's favor, and their appeal for a rehearing has been denied. However, litigation cases are still ongoing with other filers such as Apotex and Teva, and they will continue at the district court. I would like to emphasize that we will refrain from speculating on ongoing litigation and upcoming FDA decisions. And the Velcade revenue estimate shown here are based on a certain scenario developed solely for the basis of financial forecasting.

This is in no way indicative of how Takeda perceives the comparative likelihood of any particular regulatory or legal outcome. Currently, we forecast Velcade revenue of around JPY 106 billion for fiscal year 2017 based on the assumption that 2 or 3 generics will enter the market in November 2017. However, the situation is fluid and there may be an additional revenue upside of up to JPY 30 billion, depending on the outcome of the events outlined above.

If there is any further insight, it may be partially reinvested in the business. Right now, we forecast fiscal year 2018 Velcade revenue at JPY 24 billion. And given the number of open questions, it is quite difficult to quantify the upside. However, fiscal year 2018 revenue, irrespective of the upside potential on a total basis is likely to be significantly lower than 2017 because generally, you encounter quite drastic share erosion following generic entry in the U.S. market.

And finally, I will summarize by saying, we are very, very pleased with our first half performance. And we're making solid progress against our 3 key priorities; grow portfolio, rebuild pipeline and boost profitability. We delivered strong revenue and profit growth and this led to double-digit EPS growth on both an underlying and a reported basis. Although, we faced some headwinds in the second half, the strength of our first half performance gives us the confidence to raise our full year guidance and forecast. We look forward to taking your questions.

We have a Q&A session now. (Operator Instructions).

From Citigroup, I am Yamaguchi, my first question is to James. You are not disclosing the revenue by products, so I don't know any number for Velcade but out of the [JPY 40 billion] increase, your main products, although it is not a product base indications but which one contributed the most?

The change to the forecast is more a general change, so the [JPY 40 billion is 25] of currency and [15] on the base business. And what it reflects is our optimism, as a result of the year-to-date performance. So the reported guidance is generally reasonably aligned with our underlying forecast. And -- so I think, we would generally say, the Top 6 brands that we have, all of them are performing in-line or ahead of forecast. So we are seeing general upside across all the products. We also see some upside in Velcade as well on the year-to-date, but it's across the board.

One more. About the Velcade explanation, you just made at the very end of your slide, it was very complicated, but it was very grateful to see some numbers. So let me confirm one thing. So [JPY 30 billion] upside -- potential upside in revenue, it's not included in this forecast this year. So this is just a suggestions for the possibility to entertain this upside. Is that correct?

The [JPY 106 billion] is what we've included in the revised guidance. And what we're seeing is depending on results from regulatory and legal, if everything goes right, there could be an opportunity of up to [JPY 300 billion] this year. And if that happens, we will come out and revise guidance again. What we have said is we may reinvest partially some of that, so it [mightened] all fall to the bottom-line. So we are able to quantify in the short-term what the maximum opportunity is for '18, we were unable -- there's too many open variable.

So that's why [JPY 106 billion] does not include that, right?

No, it does not include.

Could it be added?

We could have additional upside over and above the current guidance.

About the 573, the rights is global rights, and for the DARZALEX, against the DARZALEX, is it competitive enough? I just missed your explanation. So could you repeat your explanation about this?

Thank you very much Yamaguchi-san, I will tweet you the answer, So on TAK-573, it's a partnership with Teva. We are taking a lead, and we have global rights and global control over the program. And then there will be a royalty stream back to Teva. The question regarding its competitiveness with DARZALEX. The expectation is that it will be superior to DARZALEX and or effective in DARZALEX nonrefractory patients or nonresponsive patients, because it has 2 mechanisms of action. The first is efficacy through the CD38 mechanism, however that works. And then the second is that interferon alpha is a well-known anti-tumor agent with efficacy in multiple myeloma. The challenge is that it's hard to administer interferon alpha because it's toxic and it's not at all tolerated, so there are 2 ways that we get around that. The first is the conjugate is not interferon alpha, it's a modified form of interferon alpha, that's slightly less potent. And the second is by conjugating it with CD38, we're targeting it specifically to CD38 expressing cells like the myeloma cell.

(Operator Instructions)

I am Seki from UBS.

First, on the Velcade, so do you think the (inaudible) could obtain AB-rated product? So I am wondering because it contains significant amount of boronic acid as they claimed in their Citizen Petition. So I think, it's a -- not a Velcade generic but it's a bortezomib formulation and the non-AB rating status will be a bit programmed for the (inaudible) ? [So it will be operated].

That is the big question, we'll see the outcome. Our current assumptions here is that we will have some generic fully [substitutable to] Velcade. That's what our financial assumption is, but we'll see.

My second question for James. So on tax reform, so I think something will be [raised] tonight, but I'm not sure what it would be, but the current or your guidance on tax is 27 point or 27% for this fiscal year. So do you think, you can improve your tax rate to maybe [average 20] or something?

I think, we did provide some indication that longer term, we already see our tax rate in the mid-20s, so that implies maybe 25-ish, so on a range of [24%, 26%]. Tax reform may bring that down lower, but I think it's too early to call, I think you could see a corporate rate in the U.S. at 25%, but they've got it funded somewhere. And they could look at the deductibility of interest for M&A transactions. For a company that was acquisitive, that's not necessarily a good thing. But I think overall, it will be good for Takeda, because we don't have cost to repatriate money, so anything happens in the U.S. is a benefit for the tax rate. And when the tax rate will be implemented, you will have an impact immediately in the income statement, because there will be a reassessment of your deferred taxes and other items.

Sakai from Credit Suisse.

As for multiple myeloma of 573, you mentioned, so I'd like to learn from you just as a reference, so there are many new drugs extending overall survival over 3 years, so as the core area would you skew like to [pass through] multiple myeloma, because as there are key products available and the protocol is going to be more complex and also [OS] is going to be further extended. My point is, I think, your development program is going to be very costly, so would you still like to pass through multiple myeloma?

Sakai, thank you very much for the question. The answer is that today 5-year survival is still on the order of 50% to 50% of patients that despite existing therapies are not living beyond 5 years. Now of course, with DARZALEX with the evolving BCMA CAR-T program that look very exciting, that number could change. But our expectation is that this is going to maintain -- this will still be a chronic disease and that there will be patients that will become -- certainly will become refractory. So the answer is yes, we're a multiple myeloma company with commitment to the patients and a belief that the disease will persist despite existing therapies. And that could certainly change, I think the CAR-T experiment is really interesting one, and we will have to follow that really closely.

But to be clear, the program that we just brought into the clinic, it's very early. Obviously, there is -- there are all the risk that you see with an early program. But our focus is not going after at least initially the broad myeloma population, it's going after refractory patients. And then in research, we do have other programs that we intend to follow, but we'll obviously watch the competitive landscape very carefully.

Another question is about my confirmation of R&D strategy really and you have a lot of early stage collaborations and in Shonan, you have open innovation. But and really the biggest [program] is that, do you don't have much in the Phase III stage, and as Plump sum, you said, you have a lot of Phase I program, but then it still takes 4 to 5 years and they go to Phase III stage, which means that you need to purchase assets not only Alunbrig but you really need to purchase more assets, that's my understanding, but it requires funding. So what's your anticipated budget that really fill the pipeline at Phase II and the Phase III stages, what is the need for filling those Phase II and Phase III stages?

So of course, we are always looking for advanced clinical programs in our core therapeutic areas. And it was one of the drivers that -- for which we brought ARIAD for, because we believed in those programs and brought in Iclusig and ARIAD, which were both late stage assets. But it's expensive, there is incredible competition and to be fair, there are not a lot of programs out there that we think have the innovation bar that will be necessary to drive the kind of value for patients and reimbursement that we need. So to be clear, our R&D strategy is not to acquire an in- license, that's an enabler where it makes sense. Our R&D strategy is to build deep in our 3 therapeutic areas to diversify our modality base into advanced programs that have true transformative potential and in many cases have the potential for cure.

Now, the timelines are long, we acknowledge that, but when you start to work in new modalities, cellular therapies, antisense oligonucleotides and even to some extent large molecules. There are many ways of rapidly accelerating those timelines. So our focus is on validation and quality, but we're also equally focused on moving forward these programs with a sense of urgency. Now let's take 573 as an example, it's a hypothetical example, because it's just going into the clinic, there is several reasons why it may not make it, but if we start to see signals, it's a targeted patient population, we know exactly where to go after. If we start to see responses in our Phase I study, we can rapidly move to a pivotal Phase II study, if those Phase I signals are extremely powerful, there is precedent now on multiple occasions for registering off of Phase I data. So there are many ways of accelerating programs. Our R&D strategy is to build a sustainable pipeline and we believe that the right way to do that both from a fiscal responsibility standpoint and also from a scientific standpoint is to build a really, really deep research base through outstanding partnerships.

Now, we 'd like to move on to the next question.

From Morgan Stanley, I'm Muraoka. This is a question to James. [Yearly] 100 basis points or 200 basis points core earnings improvement was announced 6 months ago. I believe that you haven't changed any direction here, but 6 months after that, did you increase your confidence on the delivery or are you planning to -- or is there any potential to increase this range or this number?

What we said at the beginning of the year was 100 basis points to 200 basis points and in the near-term, we would be at the high-end of the range. What we're seeing today is, we'll be at the top-end of the range, which means 200 basis points. So the confidence I would say is much, much higher than 6 months ago, because we have 500 basis points year-to-date.

So I would say the -- we guide 200 basis points with almost a 100% confidence level for this year. We don't provide future guidance, but it is -- I would suggest that given the strong start, it indicates we have the capability to get margins on the right track. So we're still very comfortable with the 100% to 200% and very comfortable with prior guidance. But we'll give guidance for next year in May of next year.

About the next year's guidance, as often said by the investors lately, since you've achieved a very good performance this year, next year's reported base guidance will be reduced significantly, that's the concerns said -- mentioned by the investors. So next year reported basis, including the sales of the asset, are you aiming for the increase in revenue and the profits? I know it's still early to mention this but please give us some suggestions. I am talking about the reported base number?

So I am trying to figure it out when I said we are not going to talk about '18, then you ask me about '18. And I got to tell you, we are not talking about '18. But I think you have to come to your own models. I think the guidance were -- but the guidance were clear on this. We were very clear on the fact that we have strong underlying performance. And I know that's not the way you build up your model. And I think you should first come to an assumption on what you think the core underlying earnings are going to grow by, and we're quite comfortable with any guidance we gave previously on operating income expansion. I think on the one-time items, there is one-time items in all years. So, you have to be -- what we will admit to is the current level of one-time items, it's similar to last year, but it's quite high. So we don't know yet what one-time items we are going to have next year. I already have line of sight for some, but do they add up to [JPY 136 billion], not now, but we don't know what the future will hold, right. Actually we couldn't give you guidance even if we wanted to to because these transactions happen and we would never put them in the guidance until we had a signed deal on something. So you're actually asking for something that is far too early. I think when we get to May next year, we will have a reasonable idea. It's quite a hill to climb, JPY 136 billion. I do want to say that. But it's not giving you guidance, what I am saying is we will have transactions next year. We just don't know the magnitude of those.

One thing I would emphasize is that we are strategic in our transaction. So we sold Velcade because we felt it was not -- we were not the right host for this business, it was not core for us, not strategic. That's why [it was sold]. We are not doing these transactions to manage our financial result. We are doing these transactions because they are aligned with your strategy. That is, I think, important to understand.

I am Mizuno from Tokio Marine Asset Management. 2 questions. First Page 20 about the development milestone, Norovirus -- Norovirus vaccine. So the Norovirus outbreak was lower than expected. Does it mean that the program will be delayed or the program is unsuccessful? Can you please clarify? Another question about Trintellix, preferred choice in depression, that's the phrase that you used for Trintellix. I don't think it's used first-line, but is the second-line use increasing, what is the current status of usage of Trintellix?

Thank you. I will answer the first question on Norovirus. The answer is yes. It means the program will be delayed. It's a proof-of-concept study also, so it's a go/no-go study. So we don't know if we have a program at all until results from this study read out. It's a Phase IIb study. We made the decision to do it in an adult population and it's being run on a military base in the northwest of the United States. And good news for the people at the military base is that they're just were not -- there wasn't a Norovirus outbreak which is measured by diarrhea, acute gastroenteritis and there were only 5 cases on the whole base last year. So the study continues into this calendar year. And we know that the outbreaks, the epidemiology, are up and down. We think it's a 50-50 chance we'll get an outbreak that will be sufficient to drive a result that we can push a decision off of this year. So it's something that we'll have to be discussing mid 2018.

On Trintellix, the antidepressant market is so called highly managed in United States, meaning that for the vast maturity of patients, you need to have once -- often 2 steps of generic antidepressant before you can have access to a product Trintellix. So what we are seeing here is that it's a preferred choice for branded meaning often after these 2 steps. And we are are working a lot with payors to change that, but it's very difficult. So we don't make a massive change on that. So we remain a third-line treatment in many, many cases. But when -- the antidepressant treatment often patient change a lot because (inaudible) efficacy is not fantastic, so they change the product. So they have to change 2 times often before they can have access to a branded product like Trintellix. But then when they are in these steps, we are the preferred choice.

Thank you very much. That concludes the earnings presentation. Thank you very much for joining us despite your very busy schedule.

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