Takeda Pharmaceutical Co Ltd (TAK) 2021 Q4 法說會逐字稿

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

Now we start the conference. Mr. O'Reilly, please go ahead.

Hello. Good morning, good afternoon, good evening. My name is Christopher O'Reilly, Global Head of Investor Relations. Thank you for joining this follow-up conference call on the fiscal 2020 financial results of Takeda Pharmaceutical Company Limited.

Before starting, I'd like to remind everyone that we will be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in the most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on Page 2 of the presentation materials.

So let me introduce the panel for this session today. So we have Christophe Weber, our President and CEO; Andy Plump, President of R&D; Costa Saroukos, Chief Financial Officer; Ramona Sequeira; President of the U.S. Business Unit and Global Portfolio Commercialization; and Julie Kim, President of the Plasma-Derived Therapies business unit.

So we're going to start with some opening remarks from Christophe and then a financial summary from Costa, after which we'll open up the lines for Q&A. If you have any questions, you can obviously ask over the call or if you'd like to e-mail your questions in, send it to someone from the Takeda IR team or to takeda.ir.contact@takeda.com.

With that, I'll hand over to Christophe for some opening remarks.

Thank you, Chris. Hello, everyone. Thank you for taking the time to discuss with us our 2020 results and '21 outlook. The 2020 result, we believe, have demonstrated our resilience as an organization but also as a business. We are delivering our management guidance. We are very pleased with the fact that we were able to deliver our synergy target 1 year in advance. So that puts us in a very good position in terms of margin and profitability and cash flow.

We are closing the year 2020 with a 2.2% revenue growth on an underlying basis. And if you look at 2021, we are seeing this growth outlook to accelerate to a mid-single-digit underlying revenue growth, so -- which is driven by our core businesses, our 14 global brands. So we do see this momentum.

And we do describe the 2021 year as an inflection year, not only for our business, again, because we have delivered our synergies, our growth is accelerating, but because also because of the pipeline. And we do expect the year 2021 to be a very special year in terms of the pipeline maturity and the pipeline progression. So in a nutshell, that's where we are. It's an inflection year for us, and we are looking forward to discussing it with you. Thank you.

Hi, everyone. It's Costa here. I want to take the opportunity to just quickly run through a few financial highlights from our earnings presentation earlier today. First, I'm pleased to announce that on an underlying basis, we either delivered or exceeded fiscal 2020 management guidance on every measure. Underlying revenue growth was 2.2% and was driven by our 14 global brands. This demonstrated the resilience of our portfolio.

Underlying core operating profit growth was 13%, with a 30.2% margin, reflecting the accelerated delivery of cost synergies as we have achieved our $2.3 billion synergy target 1 year ahead of plan. Underlying core EPS growth was 24.6%, benefiting from a lower core tax rate. In addition, we delivered abundant free cash flow of approximately JPY 1.24 trillion, or approximately USD 11.2 billion. This has enabled us to make great progress on deleveraging, and we ended the fiscal year with a net debt to adjusted EBITDA ratio of 3.2x.

With synergies captured and the bulk of the divestitures closed, we are now pivoting from integration to a phase of accelerating the top line and ramping up investment in our innovative pipeline. For those of you with a printout of the earnings presentation, I'd like you to turn to Slide 36, where I will quickly comment on our fiscal 2021 guidance. Our guidance is for the top line to accelerate in fiscal 2021. We expect to deliver mid-single-digit underlying revenue growth driven by our 14 global brands. In particular, we expect strong double-digit growth to continue for ENTYVIO, TAKHZYRO and our PDT portfolio. Furthermore, 2021 will be an inflection year for the pipeline. And we are intending to make the necessary R&D investments to support development of our innovative Wave 1 and Wave 2 programs. In spite of this ramp-up of R&D investment, we still expect to deliver mid-single-digit underlying core operating profit growth due to the improved product mix and the impact of our accelerated synergies. Underlying core EPS is also expected to grow mid-single digit.

With regards to numerical forecast for the coming fiscal year, revenue -- reported revenue forecast is JPY 3.37 trillion or $30.5 billion, core operating profit forecast is JPY 930 billion or $8.4 billion and core EPS forecast is JPY 934 (sic) [JPY 394]. We also expect to deliver free cash flow between JPY 600 billion to JPY 700 billion.

In line with our shareholder returns policy, we intend to maintain the dividend of JPY 180 per share.

So in summary and as you can see on Slide 43 in the deck, we have continued to deliver on our financial commitments. We have consistently delivered management guidance over the past few years through the integration and through the COVID-19 pandemic. We have realized synergies of $2.3 billion 1 year ahead of the plan, and they have been -- they've actually enabled us to expand our margins, reaching 30.2% underlying core operating profit margin in fiscal 2020.

We have also exceeded our noncore asset divestiture target with up to $12.9 billion of deals announced versus the initial goal of USD 10 billion. And we have made excellent progress with deleveraging, reaching 3.2x net debt to adjusted EBITDA in March 2021, down from 4.7x 2 years prior.

Moving to the future. We expect top line growth to accelerate in fiscal 2021, with guidance of mid-single-digit underlying revenue growth, and we expect this momentum to continue over the medium term, driven by our 14 global brands and Wave 1 pipeline launches. Fiscal 2021 will be an inflection year for the pipeline as we ramp up investment in R&D. We are now targeting margins in the low to mid-30s over the medium term. Meanwhile, we expect to continue making progress with deleveraging and are on track towards low 2x net debt to adjusted EBITDA ratio.

Takeda is in a position of financial strength. And with the integration essentially completed, I'm excited about the opportunity for acceleration of the top line and delivery of our pipeline of innovative medicines.

Thank you, and we can now open it up for Q&A.

Thank you, Costa. Operator, can you open the line, please, for Q&A?

(Operator Instructions) The first question is from Mr. Muraoka from Morgan Stanley MUFG.

So 2 questions. First, Novavax vaccine. Can we -- I would like to know about -- could you guide us the margin of the Novavax vaccine? If it's launched, maybe half year, over 9 months later, can it be dilutive of your core operating margin of around 30% or more higher than the -- your core operating margin of 30%? That's the first question.

Second question. Sorry. I'm not sure on this English quote. But in terms of TAK-994, at the Japanese conference call, you said the next update would be end of 2021 or early 2022. So what kind of updates can we expect for -- at the time in terms of TAK-994? That's all.

Thank you, Muraoka-san. Regarding the vaccines, I would just like to reconfirm what we have in our guidance and what we don't have. What we have in our guidance are 50 million dose of the Moderna vaccine that we distribute on behalf of Moderna. Of course, it's a bit wider than the distribution because we have filed the product on their behalf. We conducted the Japanese clinical trial. We will manage the pharmacovigilance. We will manage the communication with doctors. So -- but we are basically importing on behalf of Moderna and distributing.

For this 50 million dose, you should visualize it financially as a distribution fee. It's not a typical revenue with -- so that's more of a setup for this Moderna vaccines. For the -- we don't have any Novavax revenue in this guidance today because it's too early in the context of Novavax to put any number. So when we will know more, we will give you more information about the Novavax vaccines in the coming quarters.

And for TAK-994, Andy, can you cover it?

Yes. Thanks, Christophe, and thank you, Muraoka-san. So in terms of updates for the end of the year, there will be substantial updates for the overall orexin franchise. Just starting with TAK-994, which is our lead oral orexin 2 receptor agonist, that molecule is in a very clever Phase II/IIb study that has 4 parts. The first part has been completed, which is 2 doses, proof-of-concept in type 1 narcolepsy. The second part, Part B, which is ongoing, is a dose-ranging study in type 1 narcolepsy. That will be an 8-week study with an extension beyond 8 weeks. Part C is a proof-of-concept study in type 2 narcolepsy. And Part D is a China type 1 narcolepsy study. And we hope to complete all 4 parts by the end of the year. So we should have a clear sense of dose and an efficacy and safety and tolerability profile to share with you at the end of the year as well as plans for our Phase III design for 994.

We'll have data by the end of the year on TAK-861, including proof-of-concept data. TAK-861 is a unique molecule. We're bringing that forward because we see huge opportunities broadly for sleep-wake cycle disorders, not because we see concerns with TAK-994. In fact, quite the opposite. We're quite pleased with everything we've seen so far with TAK-994, including our chronic toxicology study preclinically, which is always an issue when we -- when you think about CNS active molecules.

And then lastly, the original molecule that we brought in TAK-925, which is still a molecule that we have as an IV formulation, we'll be sharing thoughts with you at the end of the year in terms of a development program for IV indications.

The next question is from Mr. Ken Cacciatore from Cowen.

Congratulations on all the good progress. Just a couple of questions around your very healthy cash generation. So understand we're going to continue to aggressively pay down debt. At these depressed share prices, wondering if there's contemplation of share buybacks. That's one question on excess cash.

Then second question is, again, making really good progress on the debt. Wondering if there's a chance that you'll get more aggressive on business development. Wonderful pipeline progress by Andy and team, but wondering if you're also looking to maybe augment it by getting a little bit more aggressive now on BD.

And then third question is just around PDT. Maybe just a discussion around the competitive landscape and long-term growth expectations.

Thank you, Ken. It's Christophe. I'll start with the BD, then Costa can cover the share buyback questions, and then Julie will cover the PDT. On BD, obviously, we are not contemplating a larger transaction because we believe that our growth momentum is strong. We are investing, doubling down on our pipeline investment.

But on the other hand, as part of our R&D model, we always look for partnership more early stage and, of course, partnerships which are aligned with our therapy area focus. So that will continue. And some partnerships are very early stage like research platform. Some partnerships are more product-oriented, like TAK-999, for example, we did recently or Maverick, which is in between platform and products. So that's part of our model, and we'll continue to do that. Costa?

Thanks, Christophe. Ken, thanks for the question. Yes, indeed, we continue to consider and continue to keep an eye on the share price. We do believe that the share price is undervalued. It's not truly reflecting the true fundamentals of the business, especially what we've done and how we've been able to deliver since the acquisition on the financial deliverables.

But at the same time, our capital allocation policy, we're still not shifting away from that. One, being the fact that we're focusing heavily on the growth drivers, the investment in R&D, whether it's both in-house or external. Some of these external partnerships we'll continue doing on early-stage assets as well. We continue to invest in China for 15 new product launches for the next 5 years. These are going to help us grow the top line.

And PDT, we continue to invest in PDT. And as you can see, we're really improving the overall business in PDT. We're improving our margins in PDT. And this will -- this is something that we continue to focus on.

Deleveraging, it's one of our key focus to rapidly deleverage. We have, however, changed the wording. We've made it to be clearer that our net debt to adjusted EBITDA ratio in our capital allocation policy, we had reached 2x. But now we've made it clear to state reach low 2s because we want to clarify that. Many -- we used to get a lot of questions around does it have to be 2.0x or can it be 2.1, 2.2, 2.3x? And we want to allow ourselves a bit more flexibility here in the event of we need -- in the event that we may want to consider potentially a share buyback or future incremental in-house -- sorry, partnership R&D acquisitions.

So in a nutshell, yes, we are continuing to look at our share price. We think it's undervalued. But 2021 is an inflection year for R&D, and we think the fundamentals will prevail. We have, in our cash flow, you'll see that we have allocated for 2021 a prepayment of JPY 450 billion or approximately USD 4.1 billion of debt. That's -- we're going to pay down in 2025 a portion of that being $2 billion JBIC, and the remainder in other years. We haven't dedicated exactly which years they are. So we're very much focusing on continuing to pay down the debt. We've had strong cash flows, and we'll continue to drive that moving forward.

2021, we also expect to break the 3x net debt to adjusted EBITDA ratio, and that's also a good signal for us to allow for continued investment in our capital allocation principles. Thanks for that, Ken.

Ken, this is Julie. I'll take your PDT questions. In terms of long-term growth perspective for the PDT business overall, we do expect to be able to continue to provide growth year-on-year for the total plasma-derived portfolio. This is primarily driven by the strong growth of the IG portfolio, in particular, our subcutaneous brands as well as robust demand for albumin, particularly from China. We do expect as we continue to invest in our R&D and those investments start coming to fruition in a few years that, that will also start contributing to our overall growth from a PDT portfolio perspective.

Now when looking at the competitive landscape, which was the other part of your question, I'll put this into 2 different categories. First, our plasma competitors; and the second, the non-plasma competitors. So when we look at the plasma competitors, here a significant part of our ability to differentiate and compete is not just in terms of our product portfolio, which we're very proud of, but also in terms of how effectively we can manage our overall business unit from our plasma donation centers through manufacturing, through our ability to deliver the products to our patients. And here, I think our performance in 2020, even though we're a relatively new business unit, just over 2 years with Takeda, I think that 2020 has demonstrated our ability to effectively perform and even perform above the industry.

From a non-plasma perspective, here we do keep our eye on the alternative therapy, particularly the anti-FcRn. We continue to believe that there will be robust demand growth for the IG portfolio, even with the anti-FcRns eventually coming to market. We will see how they fare as they bring their first indications to market within the coming year. And then we'll have to wait and see what happens with CIDP, which is the larger usage of IG where they can potentially compete. But again, as we've shared in past meetings, the CIDP population is a very heterogeneous population. And while the anti-FcRns, if they do demonstrate safety and efficacy in CIDP, we do not expect them to be able to service the entire CIDP patient population.

So when you look at that, combined with the continued level of under-diagnosis and under-optimization or sub-optimization of therapy in primary immune deficiency and secondary immune deficiency, then there's still a significant runway for growth. And this is why we feel confident that we would be able to support year-on-year growth for the IG portfolio, which then supports the overall plasma portfolio to be able to grow.

The next question is from Mr. Yamaguchi from Citigroup.

Two questions for me. First of all, Eohilia, I guess, PDUFA date passed. You put some notes that the U.S. -- under the discussion with the U.S. FDA. But can you remind me what's the issue and when those things will be sorted out in your side? That's first question.

The second question is that you mentioned about ENTYVIO's autoinjector pivotal study to start from H2. And do you think this injector -- autoinjectors will become a majority of the products in the future to maybe protecting the product from entering within a few years over your patent expirations?

Thank you, Yamaguchi-san. Perhaps, Andy, the first question; and Ramona, the second question.

Thank you, Yamaguchi-san. So we don't have a lot to share on Eohilia. As you mentioned, the FDA missed their PDUFA date, which is quite unusual. So we're in a dialogue right now with the FDA. We should have more information to share. We're still very confident in the overall profile of the product, and we hope to have it approved. We just don't have a keen sense exactly on timing at this point. And then I'll pass it on to Ramona. And I think you're referring to the needle-free device that we'll be starting our pivotal studies in later this year.

Yes, I can speak to that. Thank you for your question, Yamaguchi-san. So yes, on the needle-free device, we are proceeding, as you can see in our results with -- into our clinical trial with that. We're very excited about that as an opportunity for patients to get access to ENTYVIO and without the needle. I will say that it's not an LOE extension strategy. So we have disclosed earlier for ENTYVIO that the earliest we would see biosimilars on the market for ENTYVIO was 2026 in the U.S., 2024 in EUCAN. However, that is the earliest. We do have patents that go out until 2032 and beyond. And this is really just a way to have more patients who may have needle phobia or difficulty with needles have access to ENTYVIO. It's not an LOE extension play for ENTYVIO.

The next question is from Mr. Trevor Polischuk from OrbiMed.

Three questions, if I may. First question is just on the fourth quarter. If we can maybe get a little bit color on some of the one-timers that might have boosted operating profit and earnings per share. Particularly, you mentioned something (inaudible) perhaps a certain benefit.

The second question is on the guidance. So just the lack of leverage in 2021, is this mainly due to the investment that you've been talking about? Perhaps a mix issue? Or is it just maybe a little bit conservative?

And then my final question is just on COVID impact to the business, both to the top line as well as potential OpEx impact, not only for 2020 but for 2021. If you could just give us some color there, if there's any sort of notable impact for this past year and what might be coming up for the coming year?

Trevor, it's Costa here. Sorry, you were breaking up. We heard the third question. We couldn't hear your first 2. Can you just repeat them?

Yes. Sorry, Costa. I can hear the feedback. I apologize for that. The first question was just to get a little bit more color on the fourth quarter results specifically, some potential one-timers that might have boosted operating profit and earnings per share in the quarter. I think you mentioned something about perhaps a tax benefit. So just a little bit of color there.

The second question was on guidance, which suggests a lack of leverage in 2021. I'm just wondering, is this mainly due to the investments that you spoke of or perhaps a mix issue? Or maybe just conservative to start the year?

Can you cover the 2 questions, the first 2? And I cover the third? Yes? Okay.

Yes. Thanks, Trevor. We could -- I can cover, I think, all 3. So on quarter 4, we did see an improvement in the overall tax rate, both on the core tax rate and underlying tax rate. And that was predominantly driven by an acceleration and acceleration of legal entity optimization. So we reduced the number of entities. We went -- actually -- we started the -- after the acquisition of Shire, we had 400 entities and we reduced those down to 240. And so we've got some tax benefits there. We also improved or accelerated some tax structures, where we were able to reduce the Japan or Japanese CFC taxes.

And so I think they are the key drivers that were able to really drive and improved core tax rate and underlying tax rate. In fact, our tax rate improved by 6% versus fiscal year 2019. So I think that was a testament to the speed of integration, also legal entity optimization as well as the tax restructuring.

Your second question was regarding leverage. I think you -- if I understood you correct, is the margin. So what you mean by leverage here, is that what -- I think that's what you mean. And so what we're saying is our margin will be approximately 30%. This year, in 2020, we -- our margin, we landed at 30.2%. So the margin will be underlying -- both underlying core operating profit margin, we think it will be pretty close to what we saw in fiscal year '20. And that's despite the R&D investment, a step-up of R&D investment of over USD 600 million. And so how are we absorbing this investment in R&D in 2021, yet still have the same margin that we delivered in 2020.

The key reason for that is twofold. One, the acceleration of the top line revenue. So that's growing. You'll see, in 2020, our underlying revenue grew by low single digit, 2.2%. In 2021, we're accelerating the top line revenue to mid-single digit. And the second reason why we believe we can maintain the margin is because we delivered the synergies 1 year in advance. And so we'll see a significant carryover there as well, predominantly driven by procurement savings, headcount savings and also SG&A was a key driver for that OpEx efficiencies.

And then the third piece, you asked about the COVID impact. You may recall this time last year when we gave our guidance, we said we were going to deliver the management guidance because we truly believed and felt that our portfolio was resilient. And I'm happy to say that after the results, we did prove that the portfolio was resilient. The headwinds we only had, in general, was the Neuroscience business with VYVANSE and TRINTELLIX had some challenges because of the lockdowns in the U.S. So we saw that impact margins, and VYVANSE does have a high margin. So -- but on the flip side, we did see some underspend in travel and meetings and events, but they were about the same amount as the negative impact on the revenue for our neuroscience. So both of them basically netted off on the bottom line. So there was net-net neutral based on the COVID impact.

I think -- hopefully, I answered your question. Thanks, Trevor.

Yes. That was great. I really appreciate the color.

(Operator Instructions)

Okay. Well, it appears there are no more questions. So we'll close out this meeting. Thank you, everyone, for joining us today. And if you have any follow-up, please don't hesitate to get in touch with the IR team. Thank you very much, and let's speak again soon. Thank you.

Thanks, everyone.

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