Takeda Pharmaceutical Co Ltd (TAK) 2019 Q3 法說會逐字稿

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

This conference call may contain forward-looking statements, beliefs or opinions regarding Takeda's future business, future position and results of operations, including estimates, forecast, targets and plans for Takeda.

Any forward-looking statements in this conference call are based on the current assumptions and beliefs of Takeda in light of information currently available.

Such forward-looking statements do not represent any guarantee by Takeda or its management of future performance and involve known and unknown risks, uncertainties and other factors.

(Operator Instructions)

Now we start conference.

Mr. Okubo, please go ahead.

Hi, good morning, good evening, ladies and gentlemen, thank you for joining Takeda's Conference Call for the Third Quarter of Fiscal Year 2018.

Participating in the call from Takeda are: Costa Saroukos, Chief Financial Officer; Rajeev Venkayya, Presenter of the Vaccine Business Unit; and Christopher Morabito, Head of IR of plasma-derived therapy.

We will begin with brief opening remarks from Costa on the highlights of the quarter, then, we will open up the line for Q&A.

As always, please take note of the important disclaimers at the beginning of the presentation.

Thank you, and I now hand over to Costa.

Thank you, Takashi.

Hello, everyone, this is Costa Saroukos speaking.

Thank you for joining this call on Takeda's quarter 3 results.

Many of you will have already have the time to go through the slides, I'm not going to go through the whole presentation again.

Let me just give you some highlights on our results and then we can dive into questions and answers.

I'm very pleased to report that our strategic focus and superior execution continues to drive robust year-to-date performance.

Underlying revenue was up 4.8% driven by our growth drivers of GI, oncology, neuroscience and emerging markets, which increased by 10.5%.

We saw continued robust performance from key growth products, including ENTYVIO and NINLARO, which both grew by over 30%.

Underlying core earnings grew 32.3%, with significant margin expansion of 530 basis points, of which 70% was driven by OpEx improvements.

Underlying core EPS was up 34.2%.

Operating free cash flow decreased 20.2% due to the cash impact of products sold to the Teva JV last year.

However, outside of this, we generated an additional JPY 72.9 billion from the sale of noncore assets.

This included business divestitures, such as Techpool and Multilab as well as sale of real estate and marketable securities.

In our reported results, revenue slightly increased but our profit continues to be impacted by large onetime gains booked in fiscal year 2017, as well as Shire-related costs in fiscal year 2018.

Reported revenue was up 0.8%, including the negative impact of foreign exchange, which was minus 1.1% and divestitures, minus 3%.

Reported operating profit declined by 11.7%, largely impacted by 2 large onetime gains booked in fiscal year 2017 on the sale of the Wako shares and additional long-listed products to the Teva JV.

Furthermore, in fiscal year 2018, year-to-date, we booked some onetime expenses related to the acquisition of Shire.

Excluding these major onetime items, operating profit grew significantly by 55.5%.

Reported EPS declined 32% due to the lower financial income and higher financial expenses.

There was also a negative impact from tax rate and an equity method loss resulting from impairment at the Teva JV.

In terms of pipeline updates, we hit a very important milestone just a few days ago, with the announcement that the pivotal Phase III trial of our dengue vaccine candidate met the primary efficacy endpoint.

TAK-003 was efficacious in preventing dengue fever, caused by any of the 4 serotypes of virus and was found to be well tolerated with no significant safety concerns identified in analysis to date.

Finally, I'm pleased to say that the integration of Shire is progressing as planned.

Since the deal closed 3 weeks ago, we have been working closely with our new colleagues on bringing the 2 companies together, and we will have comprehensive business planning discussions in the coming weeks.

Parallel to this, we're working with our accountants and auditors on the purchase price allocation of the deal.

This will confirm how assets will be allocated on the Takeda balance sheet and what impact that allocation will have on our reported P&L.

Once we have completed this process in April, we will announce revised guidance for full year fiscal year 2018 on a combined basis.

Then on May 14, we will announce the actual results for fiscal year 2018 and provide guidance for fiscal year 2019 on a combined basis.

Looking forward, we're really excited about Takeda's position as a global value-based, R&D driven biopharmaceutical leader with significant financial strength.

The substantial cash flow generation of the combined company will continue to support our capital allocation priorities.

And as we continue to focus on boosting profitability, we'll strive to realize top-tier margins in the medium term.

Strong cash flow, synergies, OpEx discipline all these will be -- will help us to rapidly deleverage down to our target net debt to adjusted EBITDA ratio of 2x in the medium term, with the potential to further accelerate with divestitures.

This is an exciting time for Takeda and our shareholders, and we look forward to coming back to you with more details soon.

Thank you.

And we open it up to Q&A.

Thank you, very much, Costa.

We would like to take your questions now.

(Operator Instructions) The first question is from Steve Barker from CLSA.

I'm Steve Barker from CLSA.

I have a question about the impact of Roche's HEMLIBRA on sales of Shire's FEIBA, and their other products for hemophilia.

Shire, themselves, has been guiding for potential negative impact on FEIBA of up to 50%, that's a 30% negative impact on the other hemophilia drugs.

So I was wondering if you are in a position to give any more color about your outlook for those, particularly.

Thanks, Stephen for your question.

If -- I just want to refer you to Slide 3 of the presentation.

Just to clarify the process and the guidance that we intend to present at a later date.

So firstly, we're currently closing out the Shire financials, it's still just about -- next week will be audited.

So we'll be in a position to finalizing the Shire 2018 results for the January to December 2018 period.

And that will be in mid-February.

So that's when we expect to communicate that.

But at this stage, I can tell you that there are no surprises, I mean, in general, direction guidance, it's tracking as to our expectations.

Okay.

I have another question.

I was looking at Slide 5 of your presentation and I noticed that there's something here about the NINLARO, your filing to the FDA has been withdrawn.

I was wondering if you could give us more color on that issue.

Stephen, this is Chris Morabito from R&D.

So as you may be aware we presented the NINLARO TOURMALINE-MM3 study results at ASH this year, the results were subsequently published.

So this is a trial looking at the prevention of relapse in patients who've undergone transplant after being diagnosed with multiple myeloma.

This is an area of significant unmet need because many of these patients, in fact, after transplant do relapse.

So the longer they can be maintained with the progression-free survival, the better for the patients and for their families.

The data, as you probably are aware, showed a significant improvement in progression-free survival in the patients in the clinical trial.

And based on these results, which we were made aware of in November and provide a top line summaries of, we submitted the data to FDA for consideration for an indication update.

After discussions with the FDA, the FDA came back to us and said that they'd like to see some overall survival data.

At the time of the data cut for PFS, frankly, there weren't enough deaths in either group for us to estimate the overall survival.

The median OS was not reached in either arm of the study.

So we have to wait for deaths to accrue before we can estimate what the overall survival impact is.

So as we wait, we've withdrawn the application from the FDA to avoid any regulatory hurdles.

And we will wait for this data to accrue.

When they come back, we'll go back to the FDA with those data and ask for consideration of the file.

Actually had -- if I may ask one more question.

I had a question about the data on your dengue-fever vaccine.

It looks very positive.

And I think Rajeev is there, I just wanted to see if he could give some comments about the commercial potential for that product.

Before Sanofi ran into problems with their product, there was a forecast out there that sales of that product could be as large as $2 billion per year.

I was wondering if you had some guidance or some -- any sort of color you could add to that?

It's Rajeev Venkayya from the Vaccine Business.

The burden of dengue around the world is massive and has just increased over time.

There are now an estimated 400 million infections occurring annually, it's about 30-fold more than we saw 50 years ago.

So the burden will continue and in all likelihood with climate change and urbanization and increased travel, that will -- the trend will continue.

It's -- the situation is evolved for the Takeda vaccine candidate.

The external environment has given the evolution of the market environment as you've suggested.

We see significant public health impact potential for the vaccine candidate, if and when we show that it's safe and effective and receive a license.

That's what the rest of this year we'll be focused on doing, and we'll file shortly after we have that data.

That's the current plan, subject to the data itself, of course.

So while we don't typically talk about commercial projections, you can use as a proxy the public health impact that this could have.

And just to come back to the numbers, there's an estimated 3.9 billion people living in places that have dengue.

So based on that alone, one can conclude that the public health impact potential is quite substantial.

The next question is Mr. Murakami from Economist.

I have 3 questions.

One -- first, is concerned about former Shire products, especially NATPARA and XIIDRA.

Takeda already declares the selling out the noncore asset.

Concerned about the NATPARA and XIIDRA, it's including that or not?

And the second, the cost, today, the conference of the cost -- cost department, Mr. Weber said, we are definement of the products.

And concern about the Japanese market, there is diabetes and circulation earlier products.

It's including that or not?

And the third, concerned about the share loss.

To date, explanation then share loss concerned about the Takeda Pharmaceuticals.

And that explains that change in the business environment, what kind of business environment?

Please explain in detail.

Mr. Murakami, it's Costa Saroukos.

So let me just walk you through the strategy of the combined company.

So firstly, there are 5 areas of key focus for us, 5 business areas, we mentioned was oncology, gastroenterology, neuroscience, rare disease and plasma-derived therapies.

And those 5 areas represent 75% of the combined business.

Then we have 25% we term noncore, and they're basically the areas that don't fit in those 5 areas.

And so what we're highlighting here is opportunities to deleverage, it's one of the key priorities that we have from a capital allocation policy, we want to improve our net debt-to-EBITDA ratio 2x in the 3 to 5 years period.

And that's without divestitures.

If we include divestitures, we can accelerate the deleveraging.

We've communicated potential divestiture cash flow generation of approximately $10 billion.

But we haven't identified exactly which products specifically, and we're not in a position to communicate that.

It's a bit premature, which specific product we're looking at divesting.

We are undergoing obviously, conversations regarding certain portfolios, but again, the priority is to focus on the noncore assets.

And also, if we sell, we sell based on being able to deleverage, so it would need to be a strong multiple impact to help accelerate the deleveraging.

With respect to the equity loss, so when there was an impairment, as a response to the Takeda JV, there was also an impairment last year in the same quarter.

So the impact from the variance wasn't that material.

But overall, we impaired 49% of the total Teva JV impairment.

And so the main challenges that we saw and the reason for the impairment was because it was an element of macroeconomic environment in particular, the additional price cuts that has been impacting the Japan market.

So that's really the key driver for that.

And really, what's important, just to clarify, this is another reason -- and strategically, another reason why Takeda continues to focus on innovation.

And another reason why we did form the JV in the first place, the joint venture, when we were a minority stakeholder.

So next caller, please.

Mr. Murakami, do you have additional question?

Yes, just one thing.

Concerned about the financial coding periods.

Now in Takeda it's March, by Japanese custom.

But most of the case, international company is now December.

Is there any idea to change this or not?

No, not at this stage.

We haven't consider changing our calendar year, fiscal year period.

At this stage, we believe it's signed away, it's off trading now.

We have many other key areas to focus on.

Our assets around integration, deleveraging, and that's really where I'd like to focus our efforts.

We are listed on the Tokyo Stock Exchange as a formally listing.

So at this stage, we stick with the fiscal year April to March, but in the future, it's too early to confirm.

The next question is Atsushi Seki from UBS.

This is Seki speaking.

So 3 questions, 2 for Costa and one for Rajeev.

So firstly, I fully acknowledge you will not publish fiscal year '18 guidance until April.

But could you help us understanding your Shire rated cost in Q4 for our modeling purpose.

In Q2, Costa mentioned JPY 40 billion to JPY 60 billion and what's your source here?

Also any comment on integration cost as well as interest rate expense would be helpful.

And second question on the pricing.

So other U.S. pharma companies have voiced concern over U.S. net pricing decline and the potential political risk.

Did you observe any change in U.S. pricing trend for ENTYVIO, NINLARO and Trintellix.

And then finally for Rajeev, for norovirus vaccine.

When do you plan to publish Phase IIb data with the DOD?

And what's your expectation for direction of Phase III observation period, it's 1 year or 2 year?

Last quarter we provided fiscal year 2018 guidance of JPY 40 billion to JPY 60 billion of deal-related expenses and that didn't include interest and certain other financial costs and integration expenses.

And we're on track for those expenses this year and there's no change to the guidance.

What I can tell you, however, is we've completed the financing of USD 30 billion to acquire the assets that we've already communicated the blended interest rate of that loan and it sits at around 2.5%.

So for your modeling purposes, you can assume approximately USD 220 million of interest for this fiscal year.

Outside of that there is no other further information I can share with you at the moment.

We're still currently working on assessing integration and total cost of other integration-related retention, et cetera.

And that's what we have planned, and we will update you in April.

In April, we'll also have an opportunity by that time to present the consolidated numbers, factoring, which is price allocation method as well.

From a pricing standpoint, I think we always communicated that we do take it seriously, we factor that into our acquisition.

We realize that there will be pressures on pricing overall, and particularly in the U.S. In Japan as well, we -- it's part of the environment we're living in.

But I think what's really important is our portfolio, we're in the situation where many of our assets and products in the pipeline are orphan drug designated.

I think this is also an opportunity from the basis of innovation and is a key -- growth driven by volume is a key driver in the U.S. And fundamentally, what we're seeing the growth coming from, in the U.S., is volume as opposed to price.

This is Rajeev Venkayya.

Coming back to your question about the norovirus program.

You're correct that we have completed the Phase IIb evaluation of the norovirus vaccine candidate.

This is the first time a norovirus vaccine has been evaluated in a field setting, where we looked at the potential of the vaccine candidate to actually prevent norovirus illness.

We are very encouraged by the results and we're working on a manuscript for publication.

I can't tell you what the exact date will be, but it will be soon.

We're also planning for future development of the vaccine.

But this is an area where we are consulting with external experts because the potential of a norovirus vaccine in terms of population health impact is quite substantial.

This is an unusual illness, norovirus, it causes approximately 600 million infections around the world every year, and no vaccine is currently available to prevent norovirus.

Those infections occur in young children, actually they occur in all ages.

But they predominate in young children, the elderly and in high-risk adult populations.

So the discussions we're currently having with key experts and stakeholders are around the relative priorities of these populations to guide our decision on where to go next, in terms of which of the populations to prioritize for future development.

The next question is Muraoka from Morgan Stanley MUFG Securities.

It's Shinichiro Muraoka.

Can you hear me?

Yes.

Yes, 2 questions.

One is -- so the -- you plan to long-term -- to disclose the long-term aspiration in May.

Could you give us a more color what's the -- what's kind of information can we hear, numeric numbers or change of your target?

Or anything to direct note more color of that information going forward in May.

And the second question is NINLARO maintenance indication issue.

As far as I know, so the OS, overall survival data of your competitor drugs were 7 years for placebo and 9 years for the actual drugs.

So assuming from that, foreseeing the OS data, it takes another 4, 5 years -- 5, 6 years from here.

Am I missing something or if I'm correct -- yes, whether I'm correct or not, please let us know -- let me know.

It's Costa Saroukos.

So in May, we expect to communicate the fiscal year 2018 Takeda results, including the combined entity, so that would be the actual 2018.

When it comes to 2019, we'll communicate guidance for the full year of 2019.

At the same time, we're not in a position, at this stage, to specifically tell you what additional long-term aspirational financials I'll provide -- we'll provide, but in essence there will be potentially an update on our midterm margin improvements, what that looks like from our cost basis as well as potentially updates on our synergy target and also potentially some updates on a number of product peak sales potentially.

But we're still working on this and of course, you can imagine we just closed a few days ago.

And we're now going through a period of a midrange plan from the combined company, but we'll be in a position in May to be able to provide more color on our future guidance beyond 2019.

This is Chris Morabito from R&D, I'll take the question about NINLARO maintenance.

So the topic is really how long will it take for us to get the OS data needed for approval of the MM2 -- sorry, the MM3 studies sNDA.

So the OS is a tricky one these days and as you refer to in the past with other medicines, it's taken years for the data to accrue.

FDA has consistently said that progression-free survival is a clinically important end point, but they have also said that they'd like to see more data behind that as well.

And FDA here isn't alone.

EMA will follow suit and PMDA may as well.

The challenge in today's world is that when a patient progresses on therapy, they will likely go on to another medicine, which delays the overall survival analysis.

So I can't give you a firm date here.

I do know that this is an event-driven analysis, and that we will be in continued active dialogue with the FDA and other regulators around the world as to how much OS data they need to see for them to feel comfortable with the endpoint.

There are other drugs in development that are facing the same challenge with PFS and overall survival.

And this is a topic that's been discussed in multiple forms among the clinical and drug regulatory community.

So you'll have to be patient with us as we work through this and be able -- and we'll be to provide some more guidance, I believe, in May, when we have our Q4 R&D update that will give more insights into where we are with the discussions with the regulators.

The next question is Fumiyoshi Sakai from Crédit Suisse.

Just a quick update on a couple of products.

The one is NINLARO I'm interested.

Now my question is this maintenance issue, is that going to impact your ongoing Phase III front line trial biannual?

With respect to the -- or this is event-driven trial from what I understand.

So you may not be able to tell us when the due date, but can you give the update on this frontline?

Sure.

Mr. Sakai, this is Chris Morabito from R&D.

So there are 2 studies that could, in fact, fit your description.

The first is MM2, which is a NINLARO therapy in patients who are ineligible for transplants.

And the second is MM4, is frontline therapy in patients who haven't had transplants.

So both studies are, in fact, event-driven.

The endpoint for both is progression-free survival.

The timeline for the MM4, which is NINLARO patients who don't get transplant study is on time.

We continue to follow that and expect to see those data come in 2019.

And currently, we're estimating the second half of 2019, which is according to -- it's right on track with what we've stated previously about the timelines.

MM2, which is the transplant ineligible study.

As you know, that study remains blinded after the first interim analysis and we're waiting for more data points to accrue there.

And at this point, I don't have a timeline update for you.

But again, perhaps by the next quarterly call, we'll have more information and then we can update you on the specific details.

Okay.

Right.

Just one more thing.

ALUNBRIG, it seems uptake is, well, my kind of observation, wasn't expected?

Is that your understanding, I mean, can you share something about the status and outlook for this product going forward?

Mr. Sakai, it's Costa here speaking.

So maybe I can start by saying that what we've seen since the acquisition on the area of products, combined, we've seen some strong performance in both ICLUSIG and ALUNBRIG.

In fact, combined, we're seeing the overall revenue is 20% above our original business case.

So I think at this stage, we're very pleased with the results.

And I think we're just continuing to see uptick every quarter.

(Operator Instructions) The next question is Hima Inguva from Bank of America.

Costa, if you can maybe give us a sense for the plans to optimize the structure by refinancing debt?

If that is the plan, would appreciate any thoughts on that, we're getting investors questions.

It's Costa Saroukos here.

So the plans for optimizing the debt, first thing, let me say that we've completed the refinancing of just under USD 30 billion.

We've completed that.

Firstly, the areas -- the key focus we looked at was to make sure that we're matching the cash flow of the combined business aligned to the debt.

So we -- the way we structured the debt was linked to U.S. dollar-denominated debt, euro-denominated debt, Japanese Yen.

And I think we found the right blend here to mitigate any foreign exchange impact.

We found -- on top of that what we were able to do is, from a combined basis, the total debt that we have of the combined business is interest of around 2.3%.

So I think from optimization in the current dynamics of what happening externally, this is a very optimal outcome.

And I think it's really critical for us, it's in fact a better outcome than our original plan, and this is also helping us, in the sense of helping us to have greater cash flow to continue with our deleveraging plan.

We have a next caller?

(Operator Instructions)

Thank you very much.

It appears that there are no more questions.

So we would like to conclude the call.

Thank you, everyone, for joining the call today and tonight.

We hope to speak with you soon again.

Thank you very much, and good night.

Thank you for taking time, and that concludes today's conference call.

You may now disconnect your lines.