Takeda Pharmaceutical Co Ltd (TAK) 2019 Q4 法說會逐字稿

Thank you, everyone.

Thank you for attending Takeda's conference call for the results announcement for fiscal 2018.

We just announced the full year results 6 hours ago followed by the web presentation.

Then we -- this is the global conference call in English.

I would like to introduce the management team of the management: Mr. Christophe Weber, CEO; and Mr. Andy Plump, President of Research and Development; and Mr. Costa Saroukos, CFO; also Julie Kim, President of Plasma-Derived Therapy Business Unit.

So you will be well covered tonight.

So we would like to start with a brief opening remark by Christophe.

Please.

Thank you very much for joining.

I don't think we have a long presentation right now because we just -- you probably have seen the presentation.

So what I suggest is that Costa do -- does a few statements, just summarizing the overall picture, and then we will be very happy to answer your questions.

Thank you.

Thank you, Christophe, and hello to everyone.

Let me give you a quick overview of our fiscal year 2018 results, our '19 guidance and our medium-term outlook to realize our financial commitments.

In fiscal year 2018, Takeda delivered excellent results, driven by key growth products and strict OpEx discipline.

Underlying revenue with legacy Takeda was up by 5.3%, with significant contribution from our growth driver products such as ENTYVIO and NINLARO.

Legacy Takeda underlying core earnings grew by 38.7%, with an exceptional margin expansion of 540 basis points against our target of 100 to 200 basis points.

Moving to consolidated reported results, which included the Shire contribution from January to March and also some significant onetime and noncash expenses such as deal-related costs and purchase accounting expenses.

Consolidated revenue increased by 18.5%, benefiting from the addition of 3 months of Shire revenue.

However, this period also included a significant onetime negative impact of inventory harmonization as we applied Takeda's distribution channel policies to legacy Shire products.

Looking at in-market demand for legacy Shire products, we saw strong uptake from newly launched TESARO and the impact of competition in hemophilia has been largely in line with our internal expectations.

Consolidated EPS was down minus 52.6% to JPY 113.

Although strong Takeda performance absorbed the acquisition-related costs, EPS was also impacted by large noncash purchase accounting expenses.

Now let's talk about fiscal year 2019.

So pro forma underlying revenue growth is projected as flat to slightly declining.

We expect business momentum to remain strong, growing by 6 to 7 percentage points, driven by continued volume expansion of key products such as ENTYVIO, NINLARO, TESARO and our Immunoglobulin franchise.

However, we also expect a large impact from loss of exclusivity in fiscal year 2019 of growth or USD 2 billion of revenue.

This includes an assumption for the launch of an additional competitor to VELCADE in the U.S. in July of 2019.

However, if an additional competitor does not launch, then revenue would be flat to slightly increasing.

Our underlying core earnings margin is expected to increase into the mid-20s.

Despite the loss of exclusivity headwinds, margins will expand due to full year consolidation of Shire, delivery of cost synergies and continued OpEx discipline.

Underlying core EPS is expected to be in the range of JPY 350 to JPY 370.

Next, some comments on our mid-term financial outlook.

Firstly, synergies.

After completing the Shire acquisition, we conducted a deep-dive, bottoms-up review of the synergy opportunities.

As a result, I'm pleased to say that we are confidently raising our 3-year annual recurring cost synergy target from USD 1.4 billion to USD 2 billion.

The items driving the upward revision to our cost synergy targets come from SG&A and manufacturing and supply as we drive deeper into reducing overlapping resources across central support functions.

I'm very confident in being able to deliver the new cost synergy targets due to the robust tracking platform we have.

Synergy targets have been embedded into the KPIs and incentives of all management, and we'll continue to closely track both synergies and the Global OpEx Initiative as we drive towards our mid-term underlying core earnings margin target of -- in the mid-30s.

As well as delivering on margin expansion, we are also actively disposing noncore assets to generate cash and focus on our 5 key business areas.

As part of deleveraging strategy, after the acquisition of Shire, we have stated an intention to divest noncore businesses.

And last week, we announced the divestments of Xiidra and TachoSil for a combined total of approximately $3.8 billion in upfront payments, with up to an additional $1.9 billion in potential milestone payments for Xiidra.

We intend to use the proceeds from these divestitures to pay down debt and accelerate deleveraging.

Next, let me highlight our capital allocation policies.

First of all, we intend to deleverage rapidly, targeting a net debt to adjusted EBITDA ratio of 2x in 3 to 5 years and maintaining investment-grade credit rating.

We will also continue to make strategic and focused investments in our growth drivers, including R&D and product launches.

Finally, we remain committed to providing attractive shareholder returns and intend to maintain our well-established dividend policy of JPY 180 per share.

In closing, Takeda has delivered against its commitments in fiscal year 2018, as exemplified in our strong margin improvement of 540 basis points and unlocking cash through noncore asset sales.

This track record exemplifies our ability to deliver, and I'm committed to focusing on relentless execution in fiscal year 2019 and beyond towards synergies, margins and deleveraging targets.

Thank you.

Thank you very much, Costa.

So we would like to move on to the Q&A.

(Operator Instructions) From Mr. Shinichiro Muraoka from Morgan Stanley.

It's Shinichiro Muraoka.

Can you hear me?

Yes.

Very clearly.

Thank you.

Great.

Two questions.

First, in terms of the headwinds for the fiscal March '20 guidance, I think 2 parts: One is the inventory harmonization; and second is so, as you said, [headwind].

So could you guide us the -- which one -- which of the 2 factors had a larger exposure to -- larger impact to your guidance?

And the second question is your medium-term core earnings margin target slide of -- on Slide 46.

So in the medium-term, you mentioned -- you described mid 30%.

But could you guide us the -- what's the medium term?

So it's a 3 to 4 years' time line or less than 3 years?

Thank you very much for your question.

It's Costa here.

So regarding the headwinds for fiscal year 2019, let me just clarify that the inventory harmonization impact was predominantly absorbed -- took place in the first -- from the 8th of January to the 31st of March fiscal year 2019.

So it's for -- sorry, for fiscal year 2018.

So if you look at it from the time that we acquired Shire, we were able to harmonize the inventory, and we don't believe there to be any material carryover of the harmonization of inventory impact in 2019 fiscal year.

And so that addresses the harmonization of the inventory question.

With respect to other headwinds, overall, our business momentum, overall, is growing by 6% to 7%.

We are being impacted by the assumption of the VELCADE loss of exclusivity, and that impacts us by approximately 2 percentage points.

And that assumption is off the base that we expect a competitive entrant to come into the U.S. market in July of 2019.

And then we have a significant group of other products.

If you refer to the presentation on Slide 43, you can see, we expect, in the U.S., FIRAZYR loss of exclusivity, ULORIC, ROZEREM, ADDERALL XR, and in Japan Enbrel, leuprorelin, 12w and Benet monthly.

So if you combine the overall impact of loss of exclusivity, we're looking at approximately USD 2 billion of impact in fiscal year 2019.

Having said all that, if the VELCADE competitor does not come into the market in 2019 fiscal year, we believe our target -- our guidance to be flat revenue -- to slightly increasing revenue growth.

Now with regard to Slide 46, you mentioned margin, and the question was around the timing.

So when we say medium-term, our assumption is between 3 to 5 years.

The next question is from Mr. Sakai from Crédit Suisse.

I have 3 questions.

Well, just first one is a follow-up question about inventory harmonization.

Costa-san, you said that all the harmonization was for Shire legacy product.

So that means there's nothing to do with plasma inventories that usually carries much longer period.

Can you confirm this?

Yes.

So thank you very much, Sakai-san, for your questions.

So when we had the opportunity to look at our days on hand past acquiring and closing the acquisition of Shire, we factored in all the Shire portfolio.

And we're able to manage the days on hand, whether it related to plasma-derived neuroscience and overall all of Shire's portfolio to bring it more towards the level of the Takeda inventory levels.

So as a result, we don't expect there to be any major material carryover of any potential inventory harmonization issues in 2019 fiscal year.

But if I may add, Sakai-san, is that the plasma-derived product, we are not so much impacted by the inventory harmonization because we are in a tight supply situation.

So we don't have much inventory in the channel anyway.

So there were more products really impacted by the harmonization.

Okay.

So that is creating, January-March period, about USD 1 billion.

So that's done.

So that's done, right?

Sorry, your -- you said that the impact was USD 1 billion.

I didn't quite hear you.

Because that's not what the overall harmonization impact is.

It's a little bit below that.

Okay.

All right.

Correct.

The second question is the asset divestitures.

I mean it was nice to have this -- nice to see this Xiidra.

And African -- which was, I guess, not African, but the other -- yes, TachoSil, the minor product.

To begin with, you have budget USD 10 billion.

So even including this potential milestone payment, you still got about $5 billion left.

When we see these $5 billion coming, and do you have any specific -- I mean you are already [firing] this asset divestiture, noncore asset divestiture is something to do with the product.

So do you have any, I guess, extra pocket for going forward?

Sakai-san, it's Christophe here.

Yes, it's -- I mean we are committed to the $10 billion, and we have a clear list of products that we have in mind.

We don't want to disclose those because we don't want to distract the process.

But in your -- 25% of our revenue is noncore, and these are a large number of products.

And that's where we are taking up the products to be divested where they are noncore, when [Vaya] could do better than us usually, because the product is more strategic or fit more with their portfolio, for example.

So we are continuing to work on that.

And so we are very pleased with this first divestiture, but there will be more to come.

Okay.

The last question was your cost synergy.

It's nice to see, well, bigger cost synergy now, $2 billion.

But at the same time, you have $3 billion execution cost left -- I mean not left, but execution cost planned.

Now this $3 billion, the cost, is going to be spread in 3 years?

Or it's going to be kind of weighted toward a year or years?

And what nature of this cost is going to be and where to be charged?

That's my final question.

Thanks, Sakai-san.

It's Costa here.

Let me just bring some more color to the synergy and the increase as well as the cost to deliver the synergy.

So yes, we did increase our target from USD 1.4 billion to USD 2 billion.

Just for the sake of managing your analysis, we expect approximately 70%, 7-0, to be addressed in the first 2 years post close.

However, for the cost to deliver the -- this synergy, that's a bit more earlier weighted.

So for example, we expect approximately 90% of the cost to implement and deliver these cost synergies to (technical difficulty), which is March 2021.

So 90% of that $3 billion is expected to take place by fiscal year 2020.

One of part of those, there's a number of different breakdowns of this integration cost to deliver.

Some of them are lease-breaking fees.

We have a significant platform of portfolio of real estate location.

We duplicated sides.

We've already announced our overlapping location.

And we've already announced a European headquarter in Switzerland, a consolidation of our London site, also consolidation of the Deerfield site in Boston.

And so significant amount of sort of real estate costs as well as elimination of duplicated IP systems.

So in fact, we have over 11 duplicated IP systems that we have between the 2 legacies.

And so these are just some examples of the costs to deliver.

On top of that, we obviously have retention and severance, which is also a big part of the overall cost to deliver.

(Operator Instructions)

Okay.

We don't seem to have no more questions.

So it's a little early, but we would like to wrap up this conference call.

If any of you has more specific question, please feel free to contact the IR and also your contact party of Takeda.

Thank you very much, and have a nice rest of the day.

Thank you.

Thank you for your taking time.

And that concludes today's conference call.

You may now disconnect your lines.