Takeda Pharmaceutical Company Limited

Good day, everyone, and welcome to the conference call of Takeda Pharmaceutical Company Limited. During the presentation from the company, all the telephone lines are placed for listening mode only, and a question and answer session will be held after the presentation. 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 20F and in our other SEC filings. Please also refer to the important notice on page two of the presentation materials. So let me introduce the panel for this session today. So we have Christoph Weber, our President and CEO, Andy Plump, President of R&D, Costa Sarucos, 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 Christoph 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 email your questions in, send it to someone from the Takeda IR team or to Takeda.ir.contact at 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 2021 outlook. The 2020 results... We believe that 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 to one year in advance. So that put 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, which is driven by our core businesses, our 14 global brands. So we do see this momentum. And we do describe... uh as a 2021 year as an inflection year not only for our business again because we have we have delivered our synergies our our growth is accelerating but because also about the 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 a it's an inflection year for 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 it was driven by our 14 global brands. This demonstrated the resilience of our portfolio. Underlying cooperating 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 one 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 1.24 trillion yen, or approximately 11.2 billion US dollars. 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 3.2 times. 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 Intivio, Taxio 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 cooperating 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, reported revenue forecast is 3.37 trillion yen or $30.5 billion. cooperating profit forecast is 930 billion yen or 8.4 billion dollars and core EPS forecast is 934 yen. We also expect to deliver free cash flow between 600 to 700 billion yen. In line with our shareholder returns policy, we intend to maintain the dividend of 180 yen 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 realised synergies of $2.3 billion one year ahead of the plan and they have actually enabled us to expand our margins. reaching 30.2% underlying cooperating profit margin in fiscal 2020. We have also exceeded our non-core asset divestiture target with up to $12.9 billion of deals announced versus the initial goal of $10 billion. And we have made excellent progress with the leveraging, reaching 3.2 times net debt to adjusted EBITDA in March 2021, down from 4.7 times two years prior. Pivoting 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 one 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 two times 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?

You are now in a Q&A session. Press 01 to join the queue to ask a question. Press 02 to cancel your request at any time during the session.

We have a question and answer session now. If you have a question, press 01. If you want to cancel a question, press 02. Please start your question with your name and the company name. If you have a question, please press 01. The first question is from Mr. Muraoka from Morgan Stanley MUFC. So, Mr. Muraoka, if you please.

Hello, Muraoka-san.

Hello, it's Mr. Muraoka. Hello. Yes. Yes. Hello.

We hear you.

Oh, hi. Hi. Is this my turn? Yes. Thank you. Yeah. So, two 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 a year or nine months later, can it be a dilutive or we were cooperating margin of around 30% or more higher than we were cooperating margin of 30%. That's the first question. Second question, sorry, I'm not sure Andy is on this English call, but in terms of TAC-994, at the Japanese conference call, he said the next update would be end of 2021 or early 2022. What kind of updates can we expect at the time in terms of COVID-19? That's all.

Thank you, Murako-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 doses of the Moderna vaccine that we distribute on behalf of Moderna. Of course, it's a bit wider than a 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, you know, importing on behalf of Moderna and distributing. For this 50 million dose, You know, you should visualize it financially as a distribution fee. It's not a typical revenue. So that's more the setup for this Moderna vaccines. We don't have any Novavax revenue in these guidelines 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, yeah. And for TAC994, Andy, can you cover it?

Yeah, thanks, Christophe, and thank you, Marokos. So, in terms of updates for the end of the year, there'll be substantial updates for the overall orexin franchise. Just starting with TAC994, which is our lead oral orexin to receptor agonist, that molecule is in a very clever phase 2 2B study that has four parts. The first part has been completed, which is two doses proof of concept in type 1 narcolepsy. The second... Part B, which is ongoing, is a dose-ranging study in type 1 narcolepsy. That will be an eight-week study with an extension beyond eight 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 four 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 three design for 994. We'll have data by the end of the year on PAC 861, including proof of concept data. PAC 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 TAC994. In fact, quite the opposite. We're quite pleased with everything we've seen so far with TAC994, including our chronic toxicology study preclinically, which is always an issue when you think about CNS active molecules. And then lastly, the original molecule that we brought in, TAC925, which is still a molecule that we have as an IV formulation, we'll be sharing that with you at the end of the year in terms of a development program for IV indications.

Thank you.

Great. Thank you. Next question, please.

The next question is from Mr. Ken Kashatore from Cohen. So, Mr. Kashatore, if you please.

Thank you so much. Congratulations all on all the good progress. Just a couple 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. Thanks so much.

Thank you, Ken. It's Christophe. I'll start with BD. then Costa can cover the share buyback questions and then Julie will cover the PDT. On the BD, you know, 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 end, 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 TAC999, for example, we did recently, or Maverick, which is in between platform and product. That's part of our model, and we'll continue to do that.

Christophe? Thanks, Christophe. Hi, Ken. Thanks for the question. Yes, indeed, we continue to consider and continue to keep an eye on the share price. 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 You know, 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 five 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 is something that we continue to focus on. It's one of our key focus to rapidly deleverage. We have, however, changed the wording. We've made it a bit clearer that our net debt to adjusted EBITDA ratio in our capital allocation policy, we had reached two times. but now we've made it clearer to say reach low twos because we wanted to clarify that. We used to get a lot of questions around, does it have to be 2.0 times or can it be 2.1, 2.2, 2.3 times? And we want to allow ourselves a bit more flexibility here in the event that we may want to consider potentially a share buyback or future incremental partnership R&D acquisitions. So in a nutshell, we are continuing to look at our share price. We think it's undervalued, but 2021 is our 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 450 billion yen or approximately 4.1 billion US dollars 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 three the three times net debt to adjusted ebitda ratio and that's also a good signal for us to to allow for you know continued investment in our capital allocation principles thanks for that ken hi ken and 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 two 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 and through our ability to deliver the products to our patients. And here, I think our performance in 2020, even though we're a relatively small new business unit just over two 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 therapies, particularly the anti-FCRNs. We continue to believe that there will be robust demand growth for the IG portfolio even with the anti-SCRNs 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 underdiagnosis and underoptimization or suboptimization 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.

Thank you. Thanks to the entire team.

Thank you, Ken. Next question, please.

The next question is from Mr. Yamaguchi from Citigroup. So, Mr. Yamaguchi, please go ahead.

Hi, can you hear me? Yes, we hear you. Okay, great. So, yeah, thank you. The two questions for me. First of all, that euphoria, I guess, euphoria, Purdue has passed and you put some notes that the U.S. is under 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 the first question. The second question is that you mentioned about Tybio's auto-injector pivotal study to start from H2. And do you think this auto-injector will become a majority of the product in the future to maybe protecting the product from entering within a few years over your patent expirations? Thank you.

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 Eosilia. 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 Ramon, and I think you're referring to the needle-free device that we'll be starting our pivotal studies in later this year.

Yeah, 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, into our clinical trial with that. We're very excited about that. as an opportunity for patients to get access to Antivio and, you know, without the needles. I will say that is not a LOE extension strategy. So we have disclosed earlier for Antivio that the earliest we would see biosimilars on the market for Antivio is 2026 in the US, 2024 in UCAN. 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 Antivio. It's not an LOE extension play for Antivio. Thank you.

Okay, thank you.

Thank you, Yamaguchi-san. Over to the next caller, please.

The next question is from Mr. Trevor Polistak from OB Med. So, Trevor, if you please.

Thank you for taking the question. Three questions, if I may. First question is just on fourth quarter. I just wanted to get a little bit more color on some of the one-timers that have gotten a little old in operating stock, I think you mentioned something about . The second question that was on the value, suggest a lack of leverage in 2021. Is this mainly due to the investment you've been talking about, perhaps a mixed 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. You know, 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. Thank you.

Hi, Trevor. It's Costa here. Sorry, you were breaking up when we heard the third question. We couldn't hear your first two. Can you just repeat the first two?

Yeah, 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 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 investment that you spoke of, or perhaps a mixed issue, or maybe just conservative to start the year?

Can you cover the two questions, the first two, and I'll cover the third? Yeah.

Okay.

Yeah, thanks, Trevor. I can cover, I think, all three. So on quarter four, 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 an acceleration of legal entity optimisation. So we reduced the number of entities and we went actually, we started after the acquisition of Shire, we had 400 entities and we reduced those down to 240. And so we 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're the key drivers that were able to really drive an 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 the legal entity optimisation as well as the tax restructuring. Your second question was regarding leverage. I think you meant, if I understood you correctly, it's the margin. Is that what you mean by leverage here? I think that's what you mean. And so what we're saying is our margin will be approximately 30%. This year in 2020, our margin... we landed at 30.2. So the margin will be underlying both underlying cooperating 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 600 million US dollars. 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 digits, 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 one year in advance. And so we'll see a significant carryover there as well, predominantly driven by, you know, 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 Trintelix had some challenges because of the lockdowns in the US. So we saw that impact margins, and Vyvanse does have a high margin. 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.

Yeah, that was great. Thanks, Costa. I really appreciate the call.

Great. Thank you, Trevor. Any other questions on the line?

If you have a question, please press 01.

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.