Takeda Pharmaceutical Co Ltd (TAK) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to the conference call of Takeda Pharmaceutical Company Limited.

The discussion during this call will include forward-looking statements that are subject to the risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.

This presentation and the question-and-answer session are not intended to, and do not constitute, represent or form part of any offer, invitation or solicitation of any offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities or the solicitation of any votes or approval in any jurisdiction.

No shares are being offered to public by the means of this presentation.

You should read the presentation materials, as it contains important information.

(Operator Instructions)

Thank you very much for attending our 2017 annual results announcement despite your busy schedule.

For the translation receiver, channel 1 is English.

Channel 2 is Japanese.

Let me introduce today's presenters: President and CEO Christophe Weber, CMSO Andy Plump, CFO Costa Saroukos, JPBU President Masato Iwasaki.

We will have the presentation first and then take the questions after the presentation.

Before we start the presentation, there are some notes.

The contents that we are going to explain and answer should be referred to the indemnity in the presentation documents.

Now we will have President and CEO Weber.

Mr. Weber, please.

Good afternoon, everyone.

Thank you very much for joining us today.

It's a great pleasure for me to welcome you and to share our 2017 result and 2018 guidance.

So I will first explain overall our results, then I will focus on our portfolio, more specifically on some products.

And then Andy will focus on the pipeline, and Costa will finish by focusing on the financial results and outlook.

The first thing I would like to say is that 2017 for us is a great year in term of results.

I think you will see that we have a very strong momentum in our business, very strong growth, first starting with the revenue growth and of course trickling down with a much stronger profitability and core earning, our operating profit growth.

And that's driven by our revenue growth but also by our margin improvement that, as you know, we have been working on.

So I think it -- on the financial side, it has been a great year, but I'm also -- we are also very pleased with our pipeline progression.

And of course, long term, we all know that everything is about the pipeline, in the long term, so it's very important to see a strong pipeline progression.

And I'm sure that you will see that we have a very strong dynamic in our pipeline progression.

And so we have a pipeline moving from early stage to late stage.

And it's we are not in the late stage yet, but it's really moving very well, which is very important.

So we have 2 disclaimers, especially linked to the TiGenix takeover.

Here, we can talk more about it.

So here is our result again.

Both on the portfolio, pipeline and profitability, I think we are ticking many box.

So for us, it's really a great year because, after all the transformation that we initiated back in 2014, we are really starting to see very strong results as a consequence or the result of our strategy.

If you look at our 2017 results.

On a reported level, first, revenue plus 2.2%, operating profit plus 55.1%, EPS plus 62.7%.

On an underlying, if you extract currency impact, one-off, our revenue growth is plus 5.5%, core earning plus 42 -- plus 40.2% and the core EPS plus 44.8%.

And we have seen a margin expansion of 420 basis points.

And as you know, our goal is to improve our margin by 100 to 200 basis points per year, so clearly a very strong margin improvement in 2017.

And again, that's explained by our revenue growth with a product mix in favor of our margin because our growing product have higher margin at the average of the company and also margin expansion linked to our Global OpEx Initiative and strong and good cost management.

If you combine the two, and you have an increased margin of 420 basis points.

A few words on '18, but of course we'll detail more about '18.

We are committed to our 100 to 200 basis points margin improvement every year, so including '18 of course.

And what we are seeing in '18 is that we are able to offset the decline of VELCADE.

Now I'm sure we have a debate about our assumptions regarding VELCADE, but what we assume is that we have a significant penetration of generics products, more generic product than the current one available.

That's our assumption.

And we assume to lose JPY 54 billion of VELCADE sales.

And that's about 3.5 points of revenue that we are losing through VELCADE, and in spite of that, we are able to grow in 2018.

And so we are able to offset that decline, and that's because of the strong momentum in our underlying business.

So I think that's -- again, we are very pleased with these results in 2017.

I will not re-explain.

I think I see many faces that have been here for many years now.

And you know that we have been really focusing on transforming the company to globalize some products and globalize our organization, and we are seeing the results of that.

I mean, you have a product like Entyvio today, which is very close to [2,000] (inaudible) of sales.

And that's because we launched it globally, and we focused on a few products and a few therapy area.

Our R&D engine has been really redesigned, and we are starting to see the result of our pipeline progression.

And we have been -- we have made all this change not forgetting, keeping in mind, the fact that we have very strong values at Takeda.

Actually, if you are more interested about our values: They are on the wall over there at the back of the conference room.

And we always focus on the patient, reinforce trust with society, improve the reputation of the company and develop our business, in that order.

That's how we think when we make decision on our business.

We think patient, first; trust; reputation; and business.

And all this change have in mind to grow our business, grow our portfolio, improve our pipeline for the future and improve our profitability.

So on the portfolio side, I'll go through some key products, but again, underlying revenue plus 5.5%.

Our growth driver grew by 12.8%, Entyvio growing close to 36% in 2018, NINLARO 54%.

We have completely finalized the integration of ARIAD.

And we are seeing a strong performance from ALUNBRIG and Iclusig.

Of course, we are waiting for the first-line data of ALUNBRIG because we believe that this product has a potential to be best in class.

And so we are eagerly waiting for this first-line data.

And then we -- as you know, we are in the process of acquiring TiGenix in order to -- first, to -- mainly driven by Alofisel, which will be -- which is a first cell therapy approved in EU.

And of course, we developed the product in order to launch it in Europe and in other countries -- in U.S. and in other countries.

On the pipeline, we have seen 17 stage-up in the pipeline.

Andy will detail further, but it's very impressive.

And the majority of this stage-up happened between Phase I and Phase II, which means that we have a much stronger Phase II pipeline.

And hopefully, it will move towards Phase III and beyond, but it's very important.

We have continued to be very active on the partnership.

And today, about 36% of our pipeline is partner, but we do this partnership very early stage for most of them, which means that we co-create the value of the assets.

It's not like we are buying assets in the late stage where the value has been already creation -- has been already created.

These partnership often are very early stages, so we co-create the value with the partner.

And as you know, we have launched our Shonan Health Innovation Park.

And we are very ambitious about creating this ecosystem in Japan.

And our margin improvement for -- 20 basis points of margin improvement, that is really behind the core earning growth of 40.2%.

Costa's will give you more details about the split between what is coming from product mix and what is coming from our OpEx management, but we are very pleased with that results.

And that's really what is behind the growth of our core earning and reported EPS and underlying core EPS growth.

And we have continued to also sell noncore assets.

And as you know, one of the big sale, for example, has been the sale of this building, which will impact 2018.

But we are also very much focusing on freeing up cash flow for the company.

So in '17, you'll remember that our initial guidance was low single digits in revenue, mid to high teen on the underlying core earning and low to mid-teen on the underlying core EPS.

We upgraded this guidance in February because we saw the strong momentum in our business.

And we finished at plus 5.5% on revenue, plus 40% on underlying core earning and plus 44.8% on the underlying core EPS.

And now that -- again, this is driven by a combination of top line growth and positive product mix effect as well as good management of our OpEx driven by the global OpEx initiatives, which is really starting to yield very strong result.

On our Growth Drivers is they grew close to 13%.

And you see gastroenterology plus 22%, oncology plus 12%, neuroscience plus 23%.

Emerging market is a bit disappointing in 2017, but it's mainly driven by China.

And our -- we -- our Chinese -- our growth in China has been lower than what we expected.

We had very strong growth outside of China, so you had a country like Brazil, Russia growing very well, but China got impacted.

We are very optimistic about rebouncing in China in 2018 onwards, for a couple of reason.

One is that we are starting to see the stabilization of the impact of the new health care reform in China.

And then we will start launching new product, starting in 2018.

And we are planning to launch 7 new products in the next 5 years in China, which is important because in China as well as in many countries, innovation will drive the growth.

And the ability to launch new products is very critical.

And we are very pleased that we made a few years ago a dedicated investment to develop products in China for the Chinese market, and we are starting to reap the reward of that by launching new products in the future.

So overall, our Growth Drivers grew by 13%.

And they represent today 62% of Takeda total business, which very, very significant.

Overall, we are very pleased, so -- except emerging market, which is lower than we will expect.

We are very pleased with the overall regional performance.

Japan seems slow, but we terminated some contract and licensing contract with some products with very low margins.

So in fact, this impact then -- impacts the profitability of the company.

In fact, this is improving our products mix, but if you exclude this termination of contract in Japan, we grew 7% in Japan, so we are very pleased with that performance.

And I will explain a bit further with products like TAKECAB, for example.

U.S. grew 13.5%; EUCAN 7%, which I think is very strong for the EUCAN environment.

And the consumer business, which is much smaller, a slight decline at 4.9%, but here also we had some business that was terminated in Japan.

So if you exclude that business, which was terminated or given back to its originator, we grew at 1.2% in our consumer business in Japan.

This is our guidance for 2018.

So again, this is in spite of a significant VELCADE impact.

We are able to offset that.

And we are planning to increase our revenue by low single digit; underlying core earning high single digit; underlying core EPS low teens, so like the 10% to 13%.

And we are, of course, committed to our dividend of JPY 180 per share irrespective of any potential transaction.

So let's focus on the portfolio.

And then Andy will explain the pipeline, and Costa the profitability situation.

So I think here it's a great success story because we are -- we decided a few years ago to focus on a few therapy area also in the business, globalize a few brands.

And we are starting to really see the result of that.

And these brands were not the typical brands that Takeda was commercializing because Takeda was not as strong expected in primary care product, but a product like Entyvio is more specialty care, so it require a different set of skills that we develop and, I think, with great success when you see a product like Entyvio or the oncology portfolio, for example.

So here is some update on Entyvio, growing 36%.

And you'll remember, for us, that a few years ago we said that Entyvio will hit -- will generate USD 2 billion of sales by fiscal year 2018.

Well, it's very clear we will be there quite early in the year, fiscal year '18, because our 2017 sales are JPY 196.6 billion.

So it's not far from USD 2 billion.

So I think we are early compared to our early projection.

And that's why with strong confidence we believe that Entyvio will reach USD 3 billion of sales by fiscal year 2019.

So we see very strong momentum when you look at key countries.

And we are launching Entyvio this year, in fiscal year '18, in Japan as well.

A very strong momentum in bio naive patients.

And its profile has been also reinforced by data and realized that our -- and I mentioned here the VICTORY consortium, which was published.

And it's very clear, very strong data on the efficacy profile and the safety profile of the product as well.

So we see very, very stronger momentum.

TAKECAB has shown a great performance in 2017, growing 61.7%.

And however, as you know, TAKECAB will have a price impact in '18.

It will slow down the growth of TAKECAB quite significantly, but it will not stop the product to grow.

And the volume growth is strong, and the price cut that we will experiment will not make the product decline.

It will continue to grow, but it's a significant price cut in Japan.

And we have submitted the application, the NDA application, in some emerging market countries, so hopefully, in the near future, we'll be able to launch TAKECAB in country like Brazil or China.

And NINLARO has been approved now in more than 55 countries.

We are continuing the global readout (sic) [rollout].

The independent committee has reviewed the first-line indication study.

And we have not reached yet statistical significance, so they asked and they recommend that we pursue the study further.

So effectively, it delayed by 1 year the result of this study.

And we'd have preferred a better result, but that's what it is.

And less than 50% of the patients’ event has been collected yet, so I think we just need more data to conclude about this study.

And we are, however, waiting still for the maintenance data, another trial which is reading out very soon if -- fiscal year '18 first semester.

And so that's another very key data readout that we are awaiting.

ADCETRIS was also a great year with some new indication obtained, grew by 23.2%.

And ALUNBRIG, we are still waiting for the first-line data.

We'll have hoped to share it with you today, but we cannot.

We need to wait a bit more, but of course, as you know, we believe that this product has a potential to be the best-in-class ALK inhibitor.

This first-line data will be very important, and we will get it in the near future.

And then Trintellix has shown a very great performance in 2017 with a growth of 47.9%.

I'm very pleased to update you that we got an improved label on Trintellix, which is the recognition of the strong data that we have on cognition.

And it's in the clinical trial section.

And it -- Trintellix will be the first product with a label indicating that the product improve processing speed of patients with major depressive disorder.

We can go more into details, if you wish, later about what does it mean, processing speed; and how we end up there, but we are very pleased with this outcome, especially if you remember there's a different, [second referral] that we had to do with the FDA.

So we are very pleased to be able to come up with this outcome at the end of this long process.

And we think that it will be -- it will make a difference for the patients with major depressive disorder.

And actually, I have here a bit more information on that.

So we had 2 studies, FOCUS and CONNECT.

And they were using this test called DSST.

And you measure basically how people connect concepts and at a speed -- it's a memorization speed test, I will say.

And you have a huge -- I mean you have a significant increase between people under Trintellix and the control arm.

And that's how we were able to convince the FDA that this product deserve a specific label in the clinical trial section.

So again, we are very pleased with that result.

A few words on Alofisel because, of course, we decided to buy TiGenix.

It has been approved by the European Commission in March 2018.

It's the first allogeneic stem cell therapy to receive approval in Europe.

And we think that it has a great potential to help patients with perianal fistula.

This is a very severe and complex disease and situation, and it affects people with Crohn's disease.

And here you have the result on the right, but what you need to have in mind is that in red you have the Alofisel group, and in gray you have the control group, which is not placebo.

It's surgery.

So basically you are comparing patient surgery versus patient surgery plus Alofisel.

And you have this type of a efficacy difference, so it does create potentially a significant difference for the patients.

I will stop there, and I will let Andy develop the pipeline a bit.

Thank you very much.

Thank you very much, Christophe.

Good afternoon, everybody.

I will make my comments brief.

I know that Costa's, our new CFO, has quite a bit of information to share with you.

These are the major milestones for 2017.

I won't go in any great detail.

Christophe went through most of these with you already.

I'll spend a few moments talking about overall the pipeline movement.

It's been an opportunity in 2017 for us to really level set our pipeline.

We've been in a discussion over the past 2.5 years around our R&D transformation, and I would say that we're really starting to stabilize.

We're now reaching a point where our very dynamic pipeline is turning less to discontinuation and externalization and more to progression.

So since Q3, the last time we had a chance to interact with you, this gives you a sense of what kind of movement we've had in our pipeline.

And I won't go through it all.

I'll just say that we're in the process of finally cleaning up and focusing our pipeline on our 3 core therapeutic areas, plus vaccines.

I'll make a few comments.

We had 3 first-in-humans over the past several months that I'll call your attention to.

The first is TAK-079.

So this is our CD38 monoclonal antibody.

And this monoclonal is being brought forward in patients who are refractory to DARZALEX, the marketed CD38 antibody at J&J.

And we believe, based on the features of this antibody, that it has the potential to be effective in those individuals.

We think it has other potential advantages in both myeloma, other oncologic indications and potentially also in autoimmune diseases.

And so we're taking a very focused and streamlined approach in Phase I with a very high bar to test this antibody.

And it's 1 of 3 CD38 antibodies that we will have in the clinic.

The other, TAK-573, which is an ADC with interferon-alpha, was brought into the clinic last year and is in dose escalation.

And the third is another CD38 antibody drug conjugate that we've yet to disclose.

It's in preclinical development and will enter into the clinic next year.

We very much believe in this mechanism and believe that we have an opportunity to add beyond existing therapies.

The second is the GI first-in-human TIMP-gliadin.

This is the first of 2 celiac programs that we will be bringing into the clinic.

This is a tolerizing vaccine that we intend to bring forward in patients that have severe forms of celiac disease.

And then any day, there will be a second agent, an oral gliadinase, an acid-resisting gliadinase, that we'll bring into the clinic shortly.

And then the last program I'll mention to you is our partnership with AstraZeneca, the MEDI1341, which is our very potent anti-alpha-synuclein monoclonal antibody.

So really good progress with our pipeline.

So our pipeline is now focused.

It's enriched in mechanisms that we believe in.

We continue to have a very high bar.

And we're not advancing programs that we don't think have the opportunity to drive transformative potential to humans.

You're starting to see in our pipeline, as with the programs I just mentioned to you, the front wave of this large number of partnerships that we've built.

These partnerships are really foundational to our future, and they're predominantly research-based partnerships.

And what you're going to see is you're going to see a diversity of modalities and a number of programs that are really focused on patient populations with significant unmet medical need.

You get a sense for the pipeline.

I won't go through this in much detail.

I'll just point out that we have opportunities in certain cases.

And I'll mention one, but there are several in our pipeline to rapidly progress compounds through phases.

So TAK-788, for example, which is the third molecule that came in with the ARIAD acquisition.

This is an EGF receptor and HER2 inhibitor that hits a category of mutations in exon 20 that none of the other EGF receptors hit or have an appropriate therapeutic index around.

And we have in our Phase I study open-label data that look quite encouraging.

And over the next couple of months, we'll make the decision to bring this potentially into a pivotal Phase II study.

The other comment that I'd like to make about our pipeline is in relation to the acquisition that we've announced about Shire.

We are very interested in going after high unmet medical need and focusing on as well a circumscribed population of patients as possible.

And often, that means going after either orphan or rare disease patient populations, and you can see that our pipeline is heavily enriched in these mechanisms.

About 1/3 of our pipeline targets orphan or rare disease populations.

In 2017, we continued on our strategy of partnership.

And last year, we established 56 partnerships.

Some of these were quite substantial and some of these were smaller, but all of them are very meaningful and very much aligned to our strategy.

A couple of points.

One is that we put the partnership in place that makes most sense not just for Takeda but also for our partners.

We truly believe that the only way to win in a partnered model is if our partners also win.

The second, as you can see, is that there are a range of partnerships.

So with Shire, it will be essentially our third acquisition: ARIAD, the TiGenix acquisition and Shire, so 3 out of 180-plus partnerships.

So greater than 98% of what we're doing externally is not acquisition.

It's through partnership because we believe that by leveraging innovation and diversity of thinking through our partners we have a much greater chance of delivering the kind of innovation that we aspire to towards patients.

Now I don't expect that we'll be continuing our partnering at the same level going forward, all right?

Our intent is to at some level stabilize and execute on these partnerships, but we will always partner.

We will always look to find value through externalization, whether that's putting programs in our pipeline externally where that makes sense or bringing innovation in through partnerships.

Now I'll focus a bit on the neuroscience partnerships that we've established over the last year.

They're fewer, but they're quite substantive.

We've talked about AstraZeneca.

Mindstrong is a digital health partnership.

Mindstrong is a company that's created an app on the iPhone that can track behavior and functions.

We're now bringing that app into many of our CNS development programs.

And then the other 2 are Wave and Denali, which I'll just spend a minute focusing on because they're foundational partnerships for our future in neuroscience.

So our neuroscience footprint, if you will, will now be our own research labs in Shonan; will be this antibody technology at Denali that allows for peripherally administered antibody to target into the brain; and then Wave, which is the -- all of the nucleotides , stereoisomer, pure, all of the nucleotide, partnership that allows us to scale up to tens of potential programs.

And of course, with all of the nucleotides, you can very rapidly go from target to proof of concept.

Both Denali and Wave are focused on genetically defined targets.

For Denali, we're focusing on Alzheimer's disease.

For Wave, we're looking across a range of different targets.

And as you can see, 2 of the programs that we have option rights to in Wave are already in Phase Ib/IIa trials, and over the next few months, we'll make decisions on these programs.

So before I hand it over to Costa's, just to give you a sense of a subset.

This is not all but a subset of some of the major events that we'll be tracking over the next year: submissions, approvals, data readouts and key progressions.

And I won't go through this in any detail because Christophe already have.

I'll just mention one that Christophe has not already touched on, and that's our pevonedistat program.

So you'll recall that we started our Phase III trial in high-risk myelodysplastic syndrome, low-blast AML patients, with pevonedistat last December.

That trial is progressing well and actively enrolling patients.

We started that trial before the end of our Phase II study.

We're now seeing maturing Phase II data, and it continues to look very exciting.

This summer, we'll have a chance to finalize that trial and look at that data formally.

And we'll be very proactive in trying to bring those data to regulators, potentially for accelerated regulatory designations like breakthrough and prime, potentially even to drive registration based on those Phase II data.

So with that said, I'll hand it over to our CFO, Costa's.

Thank you, Andy.

(foreign language) My name is Costa Saroukos.

And I think I've met most of you in the last few weeks, but it's my absolute pleasure to present to you today Takeda's financial performance.

As Christophe mentioned, we had a stellar year in 2017.

We expect our strong business momentum to continue driving underlying revenue and earnings growth into fiscal year 2018.

But before I drive -- dive into the details, allow me to say a few words about myself.

As you may have noticed from my accent, I was born and raised in Australia, but I've spent much of my life in Asia Pacific.

I took on the role of Takeda's CFO 1st of April this year, but I've been with the company for over 3 years.

Previously, I was the CFO for Takeda Europe and Canada business unit, or EUCAN.

This also included a 6-month period where I was Interim President for the region.

During my tenure, Takeda EUCAN business transformed into one of the fastest-growing companies in the region, and we delivered compelling revenue and double-digit core earnings growth year-on-year.

Furthermore, as a member of the Takeda finance leadership team, I've been an integral part of the development and rollout of the Global OpEx Initiative.

And I was the global cost leader for travel, one of the largest cost packages.

I have a strong background in the pharmaceutical industry spanning over 18 years.

And before joining Takeda, I held senior financial leadership positions in Allergan and Merck across Asia Pacific, Europe, Middle East and Africa.

I look forward to building on this success on a global scale.

So turning to Slide 25.

We delivered stellar results in 2017.

First, the reported numbers.

Revenue growth was solid at 2.2%.

This was driven by strong underlying growth of 5.5% and favorable foreign exchange of 2.5 percentage points.

This was partially offset by a negative, minus 5.8 percentage point’s impact of divestitures, mainly Wako.

Reported operating profit growth was very strong, plus 55%, with 90% driven by core earnings growth.

Reported EPS grew at 62.7%, benefiting from a lower tax rate due to reassessed remeasurement of the deferred tax liability.

Please note that both 2016 and 2017 reported tax rates were unusually low.

And we expect that the tax rate to normalize back to the mid-20s in 2018 and slightly lower in 2019 and beyond.

Underlying performance was particularly impressive, delivering industry-leading growth rates.

Underlying revenue was up by 5.5%, led by our Growth Drivers.

Underlying core earnings increased by 40.2% with a huge margin improvement of 420 basis points.

This significant boost in profitability was driven by favorable product mix and the Global OpEx Initiative exceeding our targets for the year.

Underlying core earnings per share for the year increased by 44.8%.

Overall, these are truly excellent results.

We also had a very strong year from a cash perspective, with operating free cash flow up by 53%.

We exited the year with net debt-EBITDA ratio of 1.8x, rapidly reduced from the 2.7x the previous year.

Slide 26 shows the reported profit and loss statement for fiscal year 2017.

Revenue was JPY 1.77 trillion, an increase of JPY 38 billion or 2.2% over prior year.

As I mentioned on the previous slide, underlying revenue growth and favorable FX more than -- was more than enough to offset the negative impact of divestitures.

Operating profit improved by JPY 86 billion, representing growth of 55.1%, versus the prior year.

This was mainly driven by core earnings up JPY 77 billion or 31.6%.

We also benefited from lower amortization and impairment due to a favorable revaluation of Colcrys intangibles.

The net impact of other operating income and expenses was less favorable than the prior year.

We had a large onetime gain of JPY 106.3 billion from the sale of Wako in 2017, but this was similar in size to the onetime gain from the creation of the JV with Teva in 2016.

On top of that, we had some benefit from the sale of real estate.

However, this was offset by higher other expenses mainly due to a negative JPY 41.7 billion currency translation adjustment.

This was in response to the newly enacted U.S. tax laws.

Reported EPS increased by JPY 92 or 62.7% to JPY 239.

This growth tracks broadly in line with operating profit.

There were some onetime items here as well with a negative impact of an equity loss at the Teva JV, offset by a positive impact of remeasurement of deferred tax liabilities.

Both of these were explained in more detail during quarter 3.

So to summarize.

We had a number of onetime factors influence our reported P&L.

The key takeaway is that our strong profit performance was driven by underlying business and core earnings growth.

Finally, we are very happy to report that our return on equity increased 3.6 percentage points to 9.6%.

Slide 27 shows the underlying P&L.

Underlying revenue was very strong with growth of 5.5%.

This included 1.4 percentage points from the addition of the ARIAD products, but also the negative minus 2.3 percentage point’s impact from returning distributed products in Japan.

Gross profit grew by 9.7%, with the underlying gross margin increasing 2.8 percentage points to 71.8% of revenue.

This growth came from favorable product mix, with strong momentum of growth driver products such as Entyvio and NINLARO that have gross margins between 15% and 20% higher than the company average.

In addition, we benefited from the return of low-margin distributed products.

Operating expenses increased by 2.9%, tracking well below revenue growth.

And this was due to strong cost discipline and savings from our Global OpEx Initiative.

Furthermore, this number includes additional overheads due to the ARIAD acquisition, and if you exclude those, our operating expense grew by only 0.6%.

Underlying core earnings was extremely strong at 40.2%, a growth rate that places us in the top tier in the industry.

This was driven by mid-single-digit revenue growth, favorable product mix and disciplined OpEx management.

This result increased our underlying core earnings margin by 420 basis points, which is a major, major achievement.

Finally, underlying core EPS growth was equally impressive at 44.8%.

Moving now to the cash flow on Slide 28.

So operating free cash flow was very strong, growing at 53% to JPY 243 billion, mainly driven by higher net profit growth.

This improvement came despite higher cash outflows for the acquisition of assets, which included upfront payments for pipeline assets in oncology from TESARO and neuroscience from AstraZeneca.

We have also seen good performance in trade working capital with overall improvements in the cash conversion cycle; in 2017, we also benefited from an additional JPY 164.4 billion on the sale of noncore assets, which included income from the sale of Wako shares, other shareholdings and disposal of real estate.

Regarding cash flow, I want to emphasize 3 key takeaways.

Firstly, we are extremely pleased with the speed of deleveraging to reduce our net debt-to-EBITDA ratio from 2.7x at the end of '16 to 1.8x by the end of fiscal year 2017.

Secondly, our operating free cash flow has exceeded our dividend for the third consecutive year.

And finally, this strong performance is being driven by both internal cash generation and also the aggressive disposal of noncore assets to unlock cash from the balance sheet.

Turning now to the Global OpEx Initiative on Slide 29, which I'm pleased is tracking ahead of target.

Under pay less, which focuses more on pricing, procurement savings delivered JPY 29.1 billion for the year, improving on our strong performance last year and exceeding internal plans.

Under buy less, we exceeded the 2017 cost package goal by 26%.

And we have seen significant consumption behavior changes in major spend areas.

We have also completed the 0-based budgeting process for the cost packages, which is a key tool for creating transparency on spending needs and prioritizing our future spend.

Finally, on work better, we have identified opportunities for organizational optimization.

And we have initiated a number of functional transformations.

In 2017, we formed the Takeda business services with HR, finance and procurement in scope for initiatives to realize greater standardization and efficiencies.

Overall, 2017 was a great year for global OpEx, as verified by our margin improvement.

And I look forward to driving this initiative in 2018 and beyond.

Now let me shift from 2017 achievements to our outlook for fiscal year 2018.

We are very pleased to announce that we expect underlying revenue to grow in 2018.

And this is despite the sizable headwinds of VELCADE loss of exclusivity and portfolio changes.

First of all, I want to emphasize that, excluding these 2 headwinds, our business momentum continues to be very strong, growing in the range of 5% to 6%.

This is in line with the underlying revenue growth rate we saw in 2017 despite a less-favorable price environment.

This is especially the case in Japan, where our products took an average price cut of 6.5% effective 1st of April 2018.

With regards to VELCADE, we expect global revenue of JPY 75.5 billion in 2018, a reduction of JPY 54 billion versus prior year.

This will negatively impact underlying revenue growth by 3.5 percentage points.

Our financial assumptions for VELCADE is based on one additional therapeutically nonequivalent competitor launching in September 2018 with both IV and subcutaneous administration.

Portfolio changes will have a negative impact on underlying revenue of approximately 0.9 percentage points.

Although we assume additional revenue from acquisitions, we will lose revenue from the return of distributed products in Japan and in emerging markets.

The revenue results are a testament to the strength of our underlying business that we can absorb the loss of over JPY 50 billion of VELCADE and JPY 20 billion of returned portfolio and still realize underlying revenue growth this year.

Moving to underlying core earnings margin on Slide 31.

You will recall that, when we introduced our strategy to boost profitability last May, we committed to increasing the underlying core earnings margin by 100 to 200 basis points per year.

I'm delighted to say that, in the first 2 years, we expect to deliver cumulative margin expansion of over 500 basis points, which is an outstanding achievement.

In 2017, we saw a huge margin improvement of 420 basis points.

Roughly 2/3 of this came from gross margin improvements driven by expansion of Growth Drivers, and 1/3 came from cost discipline and the rollout of the Global opEx Initiative.

In 2018, we anticipate the underlying core earnings margin to continue expanding in line with our commitment of 100 to 200 basis points.

We said that in some years it would be higher, and in some years lower.

And in 2018, we expect to be at the low end of that range.

We will see continued product mix improvements, although slower in pace due to VELCADE.

And the Global OpEx Initiative will continue to underpin margin improvements.

And of course, the journey does not stop here.

We have a long-term vision to improve profitability and are committed to delivering sustainable margin improvements.

This long-term vision to boost our margins will be underpinned by continued execution of the Global OpEx Initiative, and I want to emphasize my complete commitment to delivering on this program.

On Slide 32, I introduce the global OpEx priorities for 2018.

First, we will continue to drive initiatives in buy less and pay less to control overall cost spending.

We will initiate the second cycle of 0-based budgeting for our 11 cost packages, which addresses over JPY 170 billion in spend.

We will continue to realize further procurement savings by exploiting a huge increase in cost transparency.

And finally, we will continue to roll out control and monitoring for the 11 cost packages.

In work better, we have established the Takeda business services or TBS to drive organization optimization and improve efficiencies.

Finance, HR and procurement are in scope.

And for each of these functional areas, the focus is on creating simpler processes, leveraging scale and bringing greater insights through analytics.

This will lead to much improved cost efficiencies and improved overall operational excellence.

Moving to Slide 33.

As Christophe mentioned in his section, we are pleased with the outlook to maintain revenue and earnings momentum in fiscal year 2018.

Underlying revenue growth is projected at low single digit, with continued strengths from our Growth Drivers more than offsetting the headwinds from VELCADE loss of exclusivity and the loss of revenues from returned portfolio.

Underlying core earnings guidance is for the high single-digit growth, reflecting continued margin expansion.

Bear in mind this includes the impact of losing around JPY 50 billion of VELCADE contribution.

Excluding VELCADE, the growth would be in the mid to high 20s.

Underlying core EPS is expected in the low teens, growing higher than underlying core earnings due to a favorable underlying tax rate as a result of higher subsidiary capital redemptions in 2018.

Also, we are pledging a dividend of JPY 180 per share irrespective of any potential transaction.

Now on to Slide 34 and the reported forecasts for 2018, where the strength of our underlying business will lessen the impact of a significant decline in onetime income.

Reported revenue forecast is JPY 1.74 trillion, a decline of 1.9%.

By then -- low single-digit underlying revenue growth will be offset by the negative impact of divestitures and foreign exchange.

Core earnings is projected to decrease by minus 4%, also impacted by divestitures and foreign exchange.

You can see in the box on the right that for core earnings there is a negative 3 percentage point’s impact from foreign exchange and around 7% impact from assets divested in 2017.

These include the sale of 7 additional products to Teva and the return of Xeljanz.

Operating profit forecast is JPY 201 billion, declining JPY 40.8 billion or minus 16.9% versus prior year.

Key items between core earnings and operating profit are shown in the box on the right.

Amortization is favorable by JPY 30.1 billion versus prior year, mainly due to the end of VELCADE amortization.

Impairment is unfavorable by JPY 16 billion due to a favorable revaluation of Colcrys intangibles in 2017.

In other income and expenses, we expect a year-on-year unfavorable impact of minus JPY 41.9 billion.

The key drivers for this variance include some large onetime items in fiscal year 2017.

Other income is hugely unfavorable by JPY 104.4 billion due to a large onetime gain last year.

This includes the sale of Wako for JPY 106.3 billion and deferred income from the Teva JV.

The lack of these large items in 2018 will be slightly offset by a ramp-up of real estate divestments, where we are targeting gains of JPY 55.5 billion, an increase of JPY 36.7 billion year-on-year.

Other expenses is favorable by JPY 61.1 billion with lower restructuring costs and the absence of a JPY 41.7 billion loss on currency translation adjustment that we booked in 2017.

However, these will not be enough to fully compensate for the decline in onetime income.

Profit before tax is projected to decline minus 15.7%, in line with operating profit.

Although we booked an equity income loss from Teva in 2017, that is not expected this year.

It is offset by the fact that, from 2018, gains from the sale of securities cannot be recognized as financial income due to a change in IFRS accounting.

As noted earlier, 2017 benefited from an unusually low tax rate.

And we expect the effective tax rate to be roughly 10 percentage points higher in 2018 at around 24%.

This leads to reported EPS of JPY 178.

So I want to emphasize that the declines in operating profit and EPS in 2018 are mainly driven by onetime items and that the underlying business is strong.

I'll remind you that underlying core earnings growth is projected in the high single digits, and underlying core EPS in the low teens.

Slide 35 shows the cash gained on real estate and security disposals.

In May 2017, we gave guidance that we would dispose a total of JPY 130 billion over an 18-month period.

We are now revising that guidance upwards to JPY 190 billion, which we expect to complete by the end of fiscal year 2018.

Of note, within real estate we will receive JPY 44.5 billion for our Tokyo headquarter building late in fiscal year 2018.

And we also have some other properties in scope, including facility properties in Juso in Osaka.

We also have plans to dispose of securities, but please note that from this year the gains will no longer be booked on the P&L under revised IFRS accounting principles.

The increase of the total to JPY 190 billion is a clear indication of our strategic directive to unlock cash from idle assets on the balance sheet and then to invest for profitable growth.

And so to Slide 36, in which I want to reiterate my focus on strict investment criteria and commitment to the dividend: Our capital allocation policies remain unchanged as we focus on internal investment in R&D and product launches; the dividend as a key component of shareholder returns; thirdly, maintaining our investment grade credit rating; and finally, disciplined and focused partnerships and acquisitions.

The dividend language remains untouched, with Takeda strongly committed to shareholder returns with the dividend as a key component.

And so to summarize on Slide 37.

We are excited to see that our strategic focus and superior execution is driving really strong results.

Fiscal year 2017 was a stellar year on both the reported and underlying basis with industry-leading growth rates and a massive step-up in our underlying core earnings margin by 420 basis points.

I am pleased to report that we expect revenue and earnings momentum to continue to grow in 2018 as the strong underlying business offsets the decline of VELCADE.

Importantly, we are committed to continue to deliver on margin improvement.

And despite the headwinds in 2018, we will still deliver at the lower end of the range of the 100 to 200 basis point commitment.

Looking forward, I'm confident in the outlook for continued profitable growth as we steadily execute against our mid-term priorities of growing our portfolio, strengthening the pipeline and boosting profitability.

So my commitment.

I would like to finish by declaring my commitment to you as the new Global CFO for Takeda.

First and foremost, I want to emphasize that I will be maintaining relentless focus on Takeda's strategic priority of boosting profitability.

I am committed to execution of the Global OpEx Initiative and to delivering 100 to 200 basis points of underlying core earnings margin improvement every year for the foreseeable future.

I also want to confirm our existing dividend policy and also our capital allocation priorities that include a commitment to investment grade.

All of this, of course, will be done within a framework of strict financial discipline.

And I look forward to continued communication with the IR community in an effective and transparent way.

(foreign language)

Thank you very much for your attention...

(Operator Instructions)

(inaudible) your hand if you have question.

I'm Hashiguchi from Daiwa Securities.

I have 3 questions, briefly.

First one is about, based on your outlook for fiscal '18, you don't incorporated yet a Shire impact, but I'd like to understand.

What is the potential upside and downside out of Shire acquisition?

What I'm asking is that it's not after the acquisition closed.

Well, my question is based on the assumption that acquisition will be completed in the future, so you are going to reduce overlapping business or the streamlining of pipelines in order to get the synergistic effect.

So you have to prepare well before that closing, and there might be some downside effects.

Or there might be some upside effects on the underlying results.

So please answer to that.

And the second question is about the sales outlook by product.

The TAKECAB and Trintellix, as compared to the last year, is going to be -- declined, according to your forecast.

And TAKECAB may have a price cut impact, but rather than that, it is flat this year.

And compared to the last year, the 60% increase, this is a significant decline.

And for Trintellix, as compared to the last year's growth, this year's growth is expected to be much lower, so I'd like to understand what environmental change you expect.

And for Trintellix, you are going to have a label change.

And what is the impact, the upside impacts out of that?

And the third one is the Phase III study in NINLARO.

Next interim analysis is out.

When do you expect that data readout?

That is all from me.

Thank you very much.

I'll answer Shire and Trintellix.

Masato, TAKECAB.

And then Andy, the Phase III in NINLARO.

So this outlook in 2018 does not include a Shire consideration.

And so -- and when we gave our guidance of Shire, we said that the closing will happen in the first semester in 2019.

So it might be before end of fiscal year -- or after our fiscal year.

The reality is that there will not be a significant cost occurring before closing.

Why?

Because the financing stop really at closing.

The one-off costs of integrating the 2 company will start at closing.

Before that, it's mainly thinking and preparation, but there are not significant one-off costs at all.

So there might be some impact, but I don't expect a significant, material impact if the closing happen after the fiscal year-end.

If the closing happen, let's say, in January, for example, then there might be some impact during 2 months of the year, but we will give you further guidance when we know more about that, yes.

For the Trintellix, this outlook does not include the label, so we need to work more on what is the potential impact on Trintellix.

And we got the label.

Frankly -- I mean, you know the saga of this label.

I mean it has been a roller coaster.

We got 2 complete response letter.

We went into a specific procedure with the FDA, and we won the case.

So until we got the result, we were a bit cautious.

So this number does not include -- and I will expect some upside against this number because this is a good, significant label improvement.

And we can't promote because it's in the clinical trial section.

So the team is working on that.

And I guess, at a subsequent quarter, we could give you a bit more update on that.

Thank you very much for your question.

Regarding TAKECAB price cut, other than that, what's impacting TAKECAB negatively greatly?

There is nothing to impact negatively greatly.

When we launched TAKECAB in the [past phase], there are some refractory patients to PPI.

And those patients have switched at the [adia] phase to TAKECAB.

And also, H. pylori eradication, we had very early ramp-up.

So in terms of the growth, we cannot expect the same level of growth in the following years, but other than price cut, we don't see any negative impact or negative elements.

So before I comment on NINLARO, I can't help but talk briefly about Trintellix also.

So it's an incredible win for Takeda and for patients.

And this was 6 years in the making and 3 years since I have gotten here and since we filed the NDA and now have approval, but I'll make another comment, which is that we submitted for a second supplemental NDA for treatment-emergent sexual dysfunction.

We ran a study, a comparator-driven study, of Trintellix versus SSRI; and Trintellix was superior.

So we expect to hear back and feel very confident around that submission and that likelihood for a label update later in the year.

Regarding NINLARO, the simple answer to your question is that the next interim analysis, which is event driven, so we can't predict exactly the time line will be in about a year.

I will make a couple of comments, though, regarding this first interim analysis; and then the overall picture with respect to data and NINLARO, emergence of data.

So of course, we're disappointed in this interim analysis, but it is the first interim analysis.

And as Christophe mentioned, it's with less than 50% of events.

So if there were a dramatic effect, we would have seen that.

And the IDMC would have let us know.

But there's still -- we're still very optimistic for this trial and to see the results.

We know that there are no additional safety signals other than what is in the label.

Otherwise, the IDMC would have let us know that.

We didn't do any subgroup analyses as part of this interim analysis, and we knew it -- from MM1 that there were differences of effects across subgroups.

So we'll have a better sense for the overall PFS data but also the subgroup data in the year.

Over the next 2 years, we'll have a lot of data beyond this front-line study coming out for NINLARO.

And again as Christophe mentioned, the next big results will come out over the next few months, which will be the first interim analysis for the post-transplant maintenance study.

And we're, of course, optimistic about those results.

The person in the front row in the middle.

Seki from UBS.

(inaudible) franchise.

The first is on VELCADE.

So it seems that you assume to lose U.S. VELCADE revenue by half this fiscal year 2018, but also you mentioned (inaudible) competitor is non-therapeutics equivalent or non-AB rated.

So why do you assume such an aggressive erosion?

So do we miss anything here?

And then two, on NINLARO.

So now you've missed interim overall survival analysis [worked] to MM1.

And also, you missed the first interim for the MM2 trial, so do you still assume more than $3 billion of the peak revenue for NINLARO?

So on VELCADE, your analysis is correct.

Well, we assume that the entrance of a second generic will create much more pricing pressure and competition around pricing even though they are not therapeutically equivalent.

And the current product does not have subcutaneous formulation.

We assume that the second entrants or the third, the next one, will have subcutaneous formulation, which is very important to compete against VELCADE.

So even though they are not therapeutically equivalent, price pressure could happen.

And it could -- so that's what we assume.

And so we will see.

We also assume that the new product will arrive in September, but that's also an assumption.

So we are dealing with very -- a lot of unknown here.

And so -- and then NINLARO, at the moment, it's we think it's too early to revise our peak sales because the product has a good momentum.

And we still have a lot of data waiting.

So let's see what more data we are generating.

The maintenance data is very important in term of value.

It's probably even more important than the front-line data.

And so I think it's another important one, but we are assuming a readout is coming in the coming year.

So let's see this data coming.

(foreign language)

One question.

Sakai from Crédit Suisse.

Regarding the Shire -- agreement with Shire.

For Shire, 1 share, [0.837] of Takeda share, that's the agreement.

So your stock price goes down.

That means Shire's shareholders value would go down.

And the biggest concern is, going forward until closing of the deal, it will take about 1 year.

During that 1 year, if I may say, what happens to the stock price?

It continues to be exposed to the market's pressure.

And my question is, first, you have this guidance.

And are you aware of this risk?

And it should be incorporated in your forecast.

And if the stock price goes down, what is your action possible for you?

You have reached an agreement with Shire.

That means a commitment to the market, so how do you -- what's your thinking regarding this as the management of Takeda, please?

So as part of the agreement with the Shire board, for every Shire share, we have [0.869] new Takeda share and -- or the equivalent of -- in ADR.

So you are right.

In a way, the Shire acquisition does fluctuate with our share price fluctuation.

Well, in term of what I can -- I want to guarantee you is that, in term of the integrity, we manage our business, we manage our guidance without having Shire in mind.

So if we will not have Shire in the landscape, if you like, we will have given exactly the same guidance in term of the where the business is going and how do we manage the VELCADE decline et cetera.

And I think the market will judge whether there are what we think are exceptional result in '17 and a strong guidance in '18.

Now of course there is a lot of now movement in the trade because there are a lot of arbitrage as well between Shire share and Takeda share.

So in a way, the entire market is also -- the dynamic has changed.

Well, I think, when closing time, we'll -- when shareholder meeting will happen, of course, the situation of the 2 company will have evolved, but we believe that the rationale for the Shire acquisition will remain.

Otherwise, we will not have entered into this agreement and this acquisition.

Now we'd like to take questions from the phone line, telephone line.

The next question is Mr. Barker of CLSA Securities.

It's Steve Barker from CLSA.

So I have a few questions about Slide 34.

You've got the CTA restructuring -- no, the CTA expense of JPY 41.7 billion.

I just wanted to confirm if that was all booked in the fourth quarter.

And then secondly, restructuring expenses, you had JPY 44.7 billion in the year just finished, and you're forecasting JPY 40.5 billion for this year.

What's in that JPY 40.5 billion, please?

Stephen, it's Costa here.

Just the CTA, just confirming that it was -- the JPY 41.7 billion was booked in quarter 4 of 2017.

Now regarding the restructuring, I don't have all the specific details on that, but we can come back to you.

I'll get my IR team to come back to you with that, yes, because I don't have all the breakdown of that.

So we go back to the floor.

(inaudible) from Tokio Marine.

I have 2 questions.

Number one, Wave and Denali partnerships.

It's to diversify modalities.

And knowledge and experience that you gain can be used for other franchise.

So there can be some knowledge exchange function.

Is that what you assume?

The reason why I'm asking this question is that with Shire rare disease area can benefit from a variety of modalities.

And there will be new knowledge coming in about new modalities with Shire and that you can tap into your own, so do you think you can share this acquired platform going forward with other franchise.

Another question is about dengue vaccine development.

Have you made any change in terms of the time line?

And the Sanofi advanced vaccine, since they have a lot of problems, has it boosted your potential?

Or is there any requirements to get additional safety data because of the Sanofi issue?

So thank you for the question.

With regard to our interest in modality diversification, in principle all of our partnerships enhance our expertise and our ability to work across modalities.

There is a know-how and a wisdom that -- knowing the difficult and the challenging points and the failure points in a new modality that you always can feed back.

So I would say that the answer to your question is absolutely.

We can leverage our learnings from working across our partnerships with our pipeline more broadly.

And specifically, of course, as it relates to IP that Denali owns or that Wave owns, obviously we can't leverage that unless we decide to extend our partnerships.

I will mention before Christophe tells you a bit about dengue that Shire themselves has tremendous expertise in large molecules; recombinant proteins that they've used for enzyme replacement therapies; monoclonal antibodies; their lead pipeline program lanadelumab, which has been registered as a monoclonal; and then earlier in their pipeline, gene therapy.

And they actually have a GMP manufacturing facility for gene therapy vector.

So very significant experience levels at Shire across a range of modalities.

For the dengue, thank you very much for mentioning it.

No, we are not changing our time line, so we expect readout in 2018, probably around the summer.

And so we are looking forward to it.

We think that our vaccines is very different from Sanofi's vaccines, so we hope that we will not have the downside or the drawback of the Sanofi vaccines.

Now it's interesting in term of commercial potential.

On one side, there might be less competition because we'll be -- we might be much better.

On the other side, because of what happened with Sanofi, many authorities might be very cautious for adopting new vaccines, and we might have to demonstrate more.

So I think that, in a nutshell, there might be less competition because, clearly, we might be much better.

And the Sanofi vaccine has taken a bigger hit.

On the other hand, government might be more -- much more cautious, considering what happened, with the second vaccine.

So it will all come back to data and the type of efficacy and safety we'll be able to show.

Just to add.

Dengue vaccine, when you are successful with that and if you are successful with the acquisition of Shire vaccine and plasma-derived therapeutics, I think you will be the only pharma company which has both vaccine and plasma-derived products.

Do you think that this will bring about a very strong competitive edge to your business?

Thank you.

It's a great thinking.

So with Shire we expressed last week we'll have 4 therapy area, plus 2 businesses, so GI, oncology, neuroscience, rare disease, plus plasma-derived therapy and vaccines.

And indeed there are some -- there are different markets, plasma-derived therapies and vaccine, but they have similarities.

It's 2 markets where there is a high barrier of entry.

It's very manufacturing intensive, more than R&D.

And there is no generic exposure in these businesses, so they are quite different but they are similar by this, the additional market, but similar by these features, if you like.

And also, what is interesting is that they are both in many countries [a thunder market].

So it's different type of business relation you have with your government.

So that's interesting, yes.

Well, Takeda, with the acquisition of Shire, will be a unique company by many other ways, I think, because of the -- just the nature of what the company will be, yes.

(inaudible).

From Merrill Lynch, Watanabe.

For noncore asset disposal was a increase.

That's Page 35.

Along with that noncore business -- what is your thinking regarding noncore business?

Regardless of Shire acquisition margin improvement, you will continue to do that for domestic business and for other business areas other than ethical drugs.

The company's margin improvement.

And for that, maybe you will have some activities and you can include some diseases as noncore.

What's your thinking on this point?

Yes, thank you.

So we release cash by, for example, selling this new headquarter.

By the way, the next quarter, I will be delighted to welcome you in our new headquarter, which I hope you will like.

I think it's -- it will be truly a global headquarter.

And so don't come here next quarter.

Don't visit.

Otherwise, it will be empty here.

But also, in term of portfolio management, we are quite active at improving our portfolio situation.

So for example, we terminated some business because they were dragging -- we were allocating resource against this business but we were not creating a lot of value.

And the margin was very low, so we preferred to terminate.

We sometimes sell assets when they are not -- noncore or when we think that we are not creating sufficient value.

We will continue to have this mindset moving forward beside on looking cash.

And it's in the portfolio management.

And of course, sometimes, we sell assets which are low margin and we don't create value.

That's the ideal, of course.

You sell that to multiply your EBITDA.

But in the past, we did sell some assets where there were quite good margin but we are not competitive.

Remember the respiratory portfolio that we sold 2 years or 3 years ago.

It was good-margin business, but we were not competitive.

We are not improving market share.

We were not doing a good job because we are not a respiratory company.

That's also part of the equation.

Thank you very much for taking time.

It's time to close this session.

With this, we'd like to conclude today's financial announcement.

Thank you very much for your participation.