Earnings Call Transcript - TAK Q2 2022

Christopher David O'Reilly, Global Head of IR

Thank you very much for your participation in this FY 2021 Second Quarter Earnings Conference Call. I am Christopher O'Reilly, the Global Head of IR. I'd like to serve as a moderator today. And well, first, I would like to explain about language settings. In the lower right corner of the Zoom, there is a setting button group sign. Click on it and select Japanese if you want to listen in Japanese and click English if you want to listen in English. If you would like to listen to the original voice in English with Japanese without the interpretation, please Audio Gap. 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. Well, from our side, as presenters and also the panel, we have President and CEO, Christophe Weber; and Andy Plump, President Research and Development; Costa Saroukos, Chief Financial Officer; and Masato Iwasaki, Japan General Affairs; and Ramona Sequeira, President of U.S. Business Unit and Global Portfolio Commercialization. And Julie Kim, President Plasma-Derived Therapies Business Unit. Now from Christophe, Andy, and Costa, we will give you presentations. And after that, we would like to take questions. Now we'd like to start.

Christophe Weber, President and CEO

Thank you, Chris, and thank you to everyone on the phone for joining us today. It's a pleasure to be with you. We will discuss the progress we are making in transforming Takeda as we review our performance in the first half of the fiscal year. Our vision at Takeda is to discover and deliver life-transforming treatments, guided by our commitment to patients, our people, and the planet. Despite the challenges of the pandemic, our employees have united with a strong commitment to making a difference for patients. I am inspired by the spirit and determination shown by the entire organization during this time. Our transformation journey is yielding strong results, as evidenced by our first-half performance. Specifically, we've consistently delivered on the fundamentals, with underlying revenue growth accelerating to 6.8% and reported revenue growth at 12.8% compared to the previous year. This growth is driven by Takeda's 14 global brands, which saw underlying growth of 11.4% in the first half. Notably, these 14 global brands now comprise an impressive 42% of our total revenue. Looking back, it's a remarkable transformation since Takeda launched its first-ever global product in 2014, when we had no global brands at all. We expect to see continued acceleration in the second half of the year and significant revenue growth for these brands in the near to medium term, especially as we expand into new markets. We are on track to meet our full-year 2021 guidance of mid-single-digit underlying revenue and core operating profit growth, thanks to the performance of our global brands. Our strong financial position, with robust cash flow generation, bolsters our confidence in our strategy and growth potential. We believe that our growth dynamics are not currently reflected in our share price, which is why we are initiating a share buyback of up to JPY 100 billion, demonstrating our commitment to delivering shareholder value. Our growth strategy is clear, focused on bringing life-transforming treatments to patients. We plan to drive growth in our global brands through new indications, label extensions, and geographical expansion. These brands are set to grow significantly in the coming years, especially until ENTYVIO faces biosimilar competition in the U.S. We will also invest in approximately 40 clinical-stage pipeline assets that hold the potential to transform patient lives. Our strong pipeline and portfolio are diversified and target high unmet patient needs. In fact, over one-third of our Wave 1 pipeline has received breakthrough therapy designation, underscoring our innovation and commitment to new categories and modalities. Despite experiencing some setbacks this year, we remain enthusiastic about the potential to deliver numerous new therapies to patients over the next decade. These challenges are part of pursuing scientific innovation. Recently, we identified a safety signal in Phase II studies of TAK-994, an investigational oral orexin agonist for narcolepsy type 1. We are analyzing the data and remain committed to advancing our orexin franchise, including TAK-861, which is in Phase I development. Additionally, the Phase III PANTHER study of pevonedistat did not meet its primary endpoint for event-free survival compared to azacitidine. However, the diversity of our pipeline, with around 40 clinical-stage assets, ensures we have the strength and resilience to move forward. On another note, I'm pleased to share that we received confirmation this month that we successfully addressed an FDA warning letter related to our manufacturing site in Hikari. The FDA has issued a revised status for the Hikari site, indicating an agreement to maintain dialogue regarding ongoing commitments. This change reflects our strong track record of quality standards and collaboration with the FDA. In our contribution against COVID-19, Takeda is committed to playing a key role in the fight against the pandemic in Japan. As the marketing operational holder for the Moderna COVID-19 vaccine, we have distributed 50 million doses in Japan and plan to import and distribute an additional 50 million starting in early 2022. We are also partnering with Novavax to manufacture up to 250 million doses per year from our Hikari facility. We aim to start distributing these vaccines in early 2022, pending regulatory approval. This quarter, we celebrated significant pipeline wins, including the approval of EXKIVITY in the U.S. and a unanimous recommendation by the FDA Advisory Committee for Maribavir. EXKIVITY is groundbreaking for adult patients with certain types of lung cancer, providing an effective treatment option that has historically been limited. Maribavir has the potential to transform CMV infection treatment in transplant recipients, making it a critical advancement in this area. These milestones demonstrate our commitment to tackling serious patient needs with limited treatment options. Our pipeline continues to grow, driven by our aggressive plan to build a transformative set of therapies in oncology, rare diseases, neuroscience, and gastroenterology. We have made significant investments in these areas, and approximately 50% of our pipeline is focused on rare or orphan diseases, emphasizing our commitment to high unmet medical needs. Our specialized R&D capabilities in plasma-derived therapies and vaccines reflect our dedication to innovation. We have increased our R&D investment to JPY 522 billion in fiscal year '21, representing a 14.5% growth from last year, to ensure we can deliver transformative therapies. In conclusion, our transformation journey is making Takeda's future clearer. Since 2014, we have focused on global growth and turning Takeda into a values-driven, R&D-focused global company. We have made significant strides, gaining leadership in key business areas and successfully integrating significant acquisitions that enhanced our portfolio. With our 14 global brands providing a foundation for growth, coupled with a robust pipeline and approximately 40 clinical stage assets, we are positioned for an unprecedented number of regulatory approvals in the coming years. This aligns with our vision to discover and deliver life-transforming treatments, guided by our commitments to patients, our people, and the planet. Now, I will turn it over to Andy to discuss our R&D strategy and pipeline progress. Thank you.

Andrew Plump, President Research and Development

Thank you very much, Christophe, and hello, everybody. Fiscal year '21 continues to be an inflection year that we firmly believe will kick off a decade of innovation from our pipeline. Our pipeline is diverse and dynamic. And as anyone would expect in pursuit of novel life-changing or transformative medicines, one will experience headwinds and tailwinds from time to time. I would like to provide some color and additional context on these recent events. So first, let's start with the tailwinds or the positive events. As you just heard from Christophe, EXKIVITY was approved in the United States. This approval comes just five years after this molecule entered the clinic. And importantly, EXKIVITY is the first of our Wave 1 new molecular entities to be approved, and it's certainly a moment worth celebrating. As Christophe mentioned, we also had a unanimous FDA advisory panel recommending approval for our anti-CMV drug Maribavir, and we anticipate a final decision next month. So let's talk a little bit about our R&D life cycle management efforts for our global and regional brands, which continued to progress and do well. For ENTYVIO subcutaneous, we recently received written feedback from FDA, which provides much greater clarity on the regulatory package and data elements needed for resubmission. We thus have more confidence for potential approval now in fiscal year 2023. We also received an additional six months of pediatric exclusivity for VYVANSE from FDA. We now have market exclusivity in the United States until August of 2023. In addition, we had approval for ALOFISEL in Japan as well as label expansions for CABOMETYX and Vocinti in Japan and China, respectively. These R&D life cycle management efforts are important to our future and will continue to drive revenues for Takeda in the short and medium term. We continue to invest in novel mechanisms and capabilities and aim to unlock innovation wherever it originates. Our strong emphasis on partnerships continues to bolster our exciting pipeline with potential therapies that may provide step-function improvements or cures for patients in the future. We just completed in-licensing, as Christophe went through, of JR-141, a potential next-generation recombinant fusion protein that pairs iduronate-2-sulfatase to an antibody to the human transferrin receptor allowing shoveling through the blood-brain barrier. This innovative new treatment for Hunter syndrome patients was recently granted prime designation by the EU and could potentially address both central neurologic symptoms as well as peripheral symptoms in Hunter's patients. We also continue to build on our platform technologies. And again, as Christophe mentioned, we announced this week the acquisition of GammaDelta Therapeutics. This was a build-to-buy collaboration that we initiated in 2017. We really know this company well. We really like the technology and the progress that has been made. And just yesterday, we exercised our rights to purchase this company and add to our cell therapy ambition. And then finally, we announced three next-generation gene therapy collaborations that will provide tools to potentially help us address some of the issues with first-generation gene therapy constructs. And these partnerships include Selecta, Poseida, and Immusoft. So if we can please go to the next slide. Actually, before I start to mention the next slide, I'll also mention that, of course, we've had some headwinds that you are very aware of over the past quarter. These are events that stall or oppose some of our forward momentum. As Christophe mentioned, pevonedistat did not achieve statistical significance for the primary endpoint of event-free survival in the Phase III PANTHER study for patients with high-risk myelodysplastic syndrome, and we expect to present information at an upcoming medical conference. And in addition, importantly, TAK-994 had a safety signal. This was a liver safety signal, which we will discuss in much greater detail later in this call. So our pipeline, despite these events, despite these headwinds, is strong and is starting to deliver value. This is our pipeline. We have approximately 40 new molecular entities in development. And over the past quarter, we've added new molecules like TAK-105, a peptide used to treat conditions that result from nausea and vomiting. This is a peptide that was discovered in the Takeda laboratories. And also JR-141, where we continue to invest in cutting-edge technologies for rare diseases like Hunter syndrome, as I just went through. So if we can please go to the next Slide 10. I wanted to spend some time walking you through our orexin franchise. And I'd like to first reiterate why many experts and regulatory authorities remain excited and optimistic. Importantly, we have seen transformative efficacy in multiple patient populations, including type 1 narcoleptics, where we see responses in the maintenance of wakefulness test of greater than 30 minutes above placebo response, a result pushing up against the upper limit of this 40-minute test. And just by reference, the standard of care today shows less than 8 minutes above placebo. In addition, we've received positive feedback from health authorities, securing prime designation in the EU and breakthrough designation in both the U.S. and China all over the past four months. These regulatory designations speak to the strength of the data and the excitement in the field of orexin-2 receptor agonists. But unfortunately, over the last few weeks, we've faced a significant setback, a liver safety signal for TAK-994 in our 8-week 1501 Phase IIb study and our 1504 long-term extension trial. As a result of this safety signal, we discontinued the trial early to protect patient safety. Ending the studies will allow us to holistically assess the risk benefit prior to making a decision on possible next steps, of course, in conjunction with regulators. So let me just spend a moment explaining exactly what we saw. We saw a single patient in a long-term extension trial who had significantly raised liver enzymes. This was, in fact, a serious adverse event. Treatment was discontinued. The patient is being closely monitored and remains asymptomatic and clinically stable. The decision to stop the Phase II study as well as its extension was based on the degree of liver function test elevations in this patient as well as the recent identification of additional patients who were discontinued from the trial for smaller increases in liver function tests. We are in close contact with clinical sites and principal investigators to ensure appropriate follow-up and to gather all necessary information to fully understand these cases. We are now working to analyze the data and further understand the mechanism underlying these liver findings. This full risk-benefit assessment will be made, and we are committed to publishing the results at a medical meeting in 2022. So we can go to the next Slide 11, please. I want to spend a minute talking about our leadership position in Orexin and our future plans. And I'll underscore, this setback in no way deters our ambition to develop and deliver a transformative therapy for patients with type 1 narcolepsy and other hypersomnolence disorders. If anything, we are more determined than ever to achieve this goal. We have a number of differentiated molecules in our pipeline that are part of our orexin franchise. And we are now exploring the best paths for acceleration. So these include two molecules you have heard of before, as well as multiple additional molecules in preclinical stages. First, there's TAK-861, a differentiated longer-acting oral agonist compared to TAK-994. It's currently in a Phase I single and multiple ascending dose study. This study will provide initial safety and PK data as well as information on initial efficacy in both sleep-deprived healthy volunteers and type 1 narcolepsy patients. This will provide us data in narcolepsy as well as its effect in people with normal orexin levels. Together, these results will inform our future development plans. And then there's TAK-925, the IV formulation that provided us initial proof-of-concept of the mechanism in type 1 narcolepsy as well as type 2 narcolepsy and idiopathic hypersomnia in excessive daytime sleepiness with obstructive sleep apnea and is currently being explored in the post-anesthesia setting in patients with obstructive sleep apnea. Obstructive sleep apnea patients are at high risk for respiratory issues when recovering from anesthesia. We believe our short-acting IV infusion can help in this setting. It's important to note that we are additionally developing multiple molecules with differentiated profiles in our research labs. We have an army of scientists working on Orexin and now have a deep understanding of the orexin-2 receptor agonist pathway and have gathered incredibly valuable clinical data. We know we have an efficacious mechanism with transformative potential. Equipped with this knowledge, we will accelerate development of our current molecules, and our chemists will design new molecules for the future. We will be in a position to make a data-driven decision on next steps for these programs in 2022. This has and will continue to be a top priority for Takeda and our R&D organization. We are now working harder than ever and equipped with knowledge to build this franchise. We will continue our leadership in the orexin agonist field and build on our foundation. We are dedicated, fully dedicated, to bringing transformative orexin agonist medicines to patients suffering from narcolepsy and other related sleep disorders. We want to thank all the patients and their physicians for participating in our clinical trials. So we can go to the next slide, please. As you heard earlier from Christophe, and as you're aware, we received unanimous support at the October 7th FDA Advisory Committee panel for Maribavir, and we expect a decision in the next month. CMV is the most common viral infection after transplantation, and we have seen robust efficacy. In fact, greater than twofold greater than standard of care, with a significantly better safety profile, tenfold lower toxicity specifically related to neutropenia and kidney injury. We are very excited about bringing this novel therapy to transplant patients. You could see some of the timelines on the left side of this slide, including the potential approval in the EU early next year. You'll also see timelines for our frontline trial and post-hematopoietic stem cell transplant, which is on track to read out in the first half of the fiscal year '22 with filing shortly thereafter. So if we can move to the next slide, please. Finally, I want to highlight GammaDelta Therapeutics. This recently announced acquisition is scheduled to close in the first quarter of fiscal year 2022. And as you can see in this slide, we position GammaDelta in our overall oncology strategy and our pipeline. So what is this? Gamma-delta T cells have shown potent antitumor activity that is not antigen-specific. So we should anticipate the potential for advantages across a wide range of tumors, including solid tumors. This acquisition continues to build our rich pipeline of oncology therapies and help fulfill our cell therapy ambition. So as we move to the next slide, please. Before handing it over to Costa, let me just say that we have an exciting and dynamic pipeline, and it continues to advance. Beyond what we have mentioned earlier, we want to highlight one of our earlier stage programs, something that we'll be doing more and more of. We have seen exciting clinical proof-of-concept data with TAK-573 in patients with relapsing and refractory multiple myeloma, and we will be sharing these data at a medical conference this calendar year. We remain highly optimistic about our prospects, and we believe we have the right R&D model that is focused on treatments with the potential for step-function benefits or cures for patients. We continue to drive growth in our 14 global brands through new indications and global expansions. We will continue to invest and drive our innovative pipeline of now 40 new molecular entities that have the potential to transform the lives of patients. With that, I will hand it over to Costa Saroukos.

Costa Saroukos, Chief Financial Officer

Thank you, Andy, and hello, everyone. This is Costa Saroukos speaking. I'm very pleased to report that our acceleration of top line growth has continued throughout the first half of fiscal year 2021. And we're confirming our full-year guidance of mid-single-digit underlying revenue growth and underlying core operating profit growth. During our first half, our underlying revenue growth was 6.8%, up from 3.8% in Q1. This acceleration was driven by our 14 global brands, which grew at 11.4% and now, as Christophe mentioned, represents 42% of total company core revenue. In addition to our top line growth, we remain focused on maintaining competitive margins and delivered an underlying core operating profit margin of 29.1% in the first half. We also continue to generate strong cash flow with first half free cash flow of JPY 315.6 billion, putting us well on track towards our full-year target of JPY 600 billion to JPY 700 billion. And our net debt to adjusted EBITDA ratio has further reduced to 3.1x. We have continued to accelerate our debt pay down. And in the first half, we paid off a total of JPY 441 billion or USD 4 billion, including all remaining debt maturing in fiscal year 2021, as well as prepayment of debt maturing in fiscal year 2022 and fiscal year 2025. We believe that the company is in a position of strength and that our growth prospects are not being reflected in our current share price. Therefore, we have announced the initiation of a share buyback, and this program is up to JPY 100 billion. To underscore our confidence in our business strategy and our commitment to shareholder returns, this buyback does not compromise any other aspect of our capital allocation strategy, and we remain committed to investing in our growth drivers, deleveraging towards our target of low 2s net debt to adjusted EBITDA, and maintaining our existing dividend policy of JPY 180 per share annually. Let me walk you through a summary of the first half financial results in the next slide. Please turn to Slide 17. So our first half of H1 reported revenue was JPY 1.79 trillion, up 12.8% versus the prior year, benefiting from JPY 133 billion booked as revenue from the sale of our Japan diabetes portfolio in Q1. Core revenue, which adjusts out this onetime impact, was JPY 1.66 trillion with a growth of 4.4% as business momentum and favorable FX more than offset the impact of divestitures. Underlying revenue, which further adjusts for foreign exchange and divestitures, delivered strong growth of 6.8%. Reported operating profit was JPY 346 billion with significant growth of 60.5% versus the prior year. This was mainly due to the gain on the sale of the diabetes portfolio in Japan as well as lower purchase price accounting and integration costs. Core operating profit, which adjusts for the purchase accounting and nonrecurring items, was JPY 485.7 billion. This was a decline of 4.3% versus the prior year due to higher cost of goods and an increase in R&D investment and the impact of divestitures. If we adjust for FX and divestitures, underlying core operating profit increased by an impressive 6.4%. Our core and underlying core operating profit margins are both above 29% in spite of the increase in R&D investment. They also reflect the impact of a lower gross margin in Q2 due to product mix, and this was largely driven by cost of goods dynamics with the plasma-derived therapies. Reported EPS was JPY 117 with growth of 111%, and core EPS was JPY 214. Underlying core EPS growth was 9.1%. Operating cash flow was an abundant JPY 400 billion, up 2% versus the prior year, while our free cash flow was JPY 315.6 billion, a reduction of 25.8%. Slide 18 gives more insight into our top line growth dynamics. Reported revenue for the first half grew at 12.8% to JPY 1.79 trillion, including JPY 133 billion or 8.4 percentage points benefit from the sale of the Japan diabetes portfolio. Adjusting that out, core revenue grew at 4.4% to JPY 1.66 trillion. This reflected 6.8 percentage points of underlying growth driven by business momentum and our 14 global brands plus 3.9 percentage points from favorable FX, partially offset by the 6.3 percentage point headwinds from the divestitures of non-core assets we completed over the past year. Our underlying revenue growth of 6.8% is supported by an innovative portfolio across five key business areas as reflected on Slide 19. You can see GI, which represents approximately one-fourth of total core revenue, delivered 8% growth spearheaded by ENTYVIO growing at 18%. Rare Diseases declined slightly by 2%, impacted by the continued decline of rare hematology as expected. The PDT immunology bounced back to 11% growth for the first half, with the quarterly phasing that negatively impacted Q1 balancing out in Q2. Oncology grew strongly at 8%, and Neuroscience was up 9%, with VYVANSE and TRINTELLIX both posting double-digit growth as market dynamics return towards pre-COVID levels. For more details on each of these five key business areas, please refer to the slides in the appendix. Finally, the All Other column to the right side of the slide, these products grew at 10%. And this is reflecting the completed divestitures of several declining portfolios and also included distribution revenue for the Moderna COVID-19 vaccine in Japan. Slide 20, I want to emphasize that our Plasma-Derived Therapy business continues to deliver on its commitments with strong underlying PDT immunology growth of 11.1% for the first half of the year. The business is more resilient than ever, with plasma donation volumes consistently surpassing pre-COVID-19 levels from as early as quarter 1 fiscal year 2021. This is a testament to our growth and transformation efforts across the BioLife network. You will notice that we revised our plasma donation growth projections to 15% to 25% for fiscal year 2021, which reflects the volume needed to meet our supply commitments to patients and revenue growth targets while simultaneously improving network efficiency and managing donor fees and cost of goods. There is incredible upside in the area of our business with the core operating margin of the PDT business expecting to improve as revenue growth and transformation initiatives are fully implemented in the coming years. Turning to Slide 21. This shows the revenue of our 14 global brands, which are driving Takeda's top line growth. In total, these products generated JPY 692.2 billion or USD 6.2 billion in the first half of the year, meaning they are now representing 42% of our core revenue. Versus the prior year, our 14 global brands grew 11.4% on an underlying basis or JPY 96.3 billion in absolute terms. Now if you were to annualize that, it means that these brands are generating close to JPY 200 billion of incremental revenue year-on-year. On Slide 22, I'd like to emphasize the momentum of these 14 global brands. As explained on the previous slide, our H1 underlying growth of the 14 global brands was 11.4%. This reflected a strong acceleration in Q2 versus Q1, and I'm pleased to report that these brands are driving growth in all regions, including in emerging markets. We believe the acceleration of the 14 global brand revenue will continue into the second half of the fiscal year. And our outlook for the full year underlying growth is for around 14% to 16%. We should see the proportion of total revenue contribution expanding to approximately 45%. As we look beyond fiscal year 2021, we expect momentum of the 14 global brands to continue as we expand market penetration in launched countries, as we increase disease awareness and continue global rollout of products, including in Japan, in China, and other emerging markets. Moving to Slide 23, which shows the factors impacting the 4.3% decline of our H1 core operating profit versus the prior year. Now starting to the left-hand side of the chart, you can see the first dark gray bar indicating a strong profit improvement from our underlying business. This was primarily driven by the 14 global brands, although it does reflect some year-on-year cost of goods headwinds in PDT due to the donor fee dynamics. This underlying business momentum was partially offset by a significant step-up in R&D investment, which we have called out in the red bar next to it. Next to that is a larger decline, which indicates the profit loss as a result of the divestitures. This is having a significant impact on the growth rate this fiscal year as a result of multiple non-core asset divestitures that were closed in fiscal year 2020 or early 2021. While a major headwind in fiscal year 2021, this impact should be much smaller in fiscal year 2022, and our core operating profit growth rates should also be more closely correlated to our underlying profit performance. As a result of these various pushes and pulls, as well as moderate FX benefits, our core operating profit for the first half landed at JPY 485.7 billion, putting us at a well-positioned track to deliver our full-year guidance of JPY 930 billion. Moving to Slide 24, which shows the bridge from reported to core operating profit. You can see that reported operating profit was JPY 346 billion. From this, we adjust out the noncash items related to purchase accounting and onetime items not related to the core operations of the business. In H1, the main adjustment items were JPY 204.1 billion of intangible asset amortization, partially offset by onetime gains from the sale of the Japan diabetes portfolio of JPY 131.4 billion. Moving now to cash flow. Slide 25 shows the evolution of our cash balance over the first half of the year. Operating cash flow was an abundant JPY 400 billion. This includes cash from the sale of the Japan diabetes portfolio, offset by cash out for a litigation settlement and some phasing in working capital. Free cash flow after CapEx was JPY 315.6 billion, comfortably covering the half-year dividend payment and our interest costs. Furthermore, we made significant debt prepayments in the first half of the year, totaling JPY 441.1 billion or approximately USD 4 billion. This included all remaining fiscal year 2021 maturities and prepayments for fiscal year 2022 and fiscal year 2025 debt. In spite of this substantial debt prepayment, we still ended September with healthy levels of liquidity at approximately USD 10 billion. Slide 26 shows the net debt balance over the first half of the year. We continue to make steady progress with deleveraging. And as of September 30, our net debt to adjusted EBITDA ratio had come down to 3.1x. Slide 27 is the latest snapshot of our debt maturity ladder. As shown on the previous slide, we paid off approximately USD 4 billion of debt in the first half of fiscal year 2021, including all remaining debt due this year, as well as prepayments for fiscal year '22 and fiscal year '25 maturities. Furthermore, in October, we issued JPY 250 billion of 10-year yen-denominated bonds at 0.4% fixed interest. This issuance will be neutral to leverage, and the proceeds will primarily be used to refinance the remaining $1.7 billion of JBIC loan maturing in 2025, shown as called in this slide. We intend to put most of the remaining proceeds towards additional prepayment of debt, particularly for fiscal year 2022 or fiscal year '23 maturities. Our weighted average interest rate is approximately 2%. And once the JBIC loan prepayment is complete, approximately 95% of our debt will be at fixed interest rates. As a result of our accelerated debt paydown and recent refinancing, we have a well-positioned maturity profile, which averages JPY 200 billion per annum over the next five years. With expectations for continued strong cash flow generation, we'll feel very comfortable in our ability to service this debt while maintaining the dividend and also making the right investments in the business. Moving now to Slide 28, where we are confirming our full-year fiscal year 2021 guidance of mid-single-digit growth for underlying revenue, underlying core operating profit, and underlying core EPS. We are also maintaining our previously communicated forecast for reported revenue, reported operating profit, core operating profit and core EPS. With regard to the reported net profit and reported EPS, we are updating our forecast to reflect a tax provision related to a tax assessment of the break fee Shire received from AbbVie in 2014. As a consequence of this, our full-year reported EPS forecast is now JPY 117. As a reminder, our full-year forecast is based on an assumption of JPY 108 to the dollar. Therefore, we do see some potential upside to core EPS in the region of JPY 10 to JPY 15 if current FX rates continue for the full year. On Slide 29, we have included our updated capital allocation policy. In parallel with the share buyback announced today, we have revised the language on shareholder returns to state our intention to maintain our well-established dividend policy of JPY 180 per share annually, alongside share buybacks when appropriate. The addition of share buybacks does not have any impact on our other priorities of investing in growth drivers such as R&D, new product launches and investment in our Plasma-Derived Therapy business, and continuation of our deleveraging journey towards low 2x net debt to adjusted EBITDA by March 2024. Finally, on Slide 30, I'd like to close by once again emphasizing our focus on the top line, on margins, and cash flow. Underlying revenue growth in H1 was 6.8%, putting us well on track towards our full-year guidance of mid-single-digit growth. We believe the growth momentum we built through this year will put us in a strong position going forward as we continue to maximize our 14 global brands, launch new products from our Wave 1 pipeline, and continue to roll out COVID-19 vaccines. Thank you for your attention, and we will now open it up for Q&A.

Operator, Operator

First from Citi, Yamaguchi-san, please.

Hidemaru Yamaguchi, Analyst

This is Yamaguchi from Citi. I have two questions. The first is about the trigger for a share buyback. The recent stock price and the setback of 994 suggest these events could be triggered. However, Costa, other companies have been cautious in the past regarding such activities. Is this event period prompting this, or is it the right time for your company to reassess its dividend policy or shareholder strategy? If you decide to make changes, will they be sustained in the future as well? My second question pertains to 994. Andy, your detailed comments on 994 were helpful. Can you share how many years the launch of this franchise has been delayed? If resources are being shifted from 994 to 861, how many years is that? Additionally, considering 994 had a liver toxicity risk, how clear is the risk for 861 at this point? I understand the molecule is different, but can you provide further reasons for your confidence regarding the safety of 861 in terms of liver toxicity?

Costa Saroukos, Chief Financial Officer

Maybe I'll start. Thank you, Yamaguchi-san, for your question. Let me break it down into the key drivers for announcing the share buyback. Firstly, we thought that this is an opportunity to buy back shares at a considerable discount. We think our share price is significantly undervalued. In fact, even if we compare it with the recent sell-side analyst average, the current trading of our share is 30% discounted. So from that standpoint, we truly believe it's an opportunity to buy back shares in the company and deliver also value to our shareholders. The second point I want to highlight here is we're doing this based on a position of strength. You saw in our first half of the year results, the acceleration of our revenue from 3.8% growth to the first half at 6.8%, driven by our 14 global brands, which will continue to grow. And on top of that, we're seeing an abundant cash flow, a strong cash flow position. Again, we think that this is an opportunity to deleverage and utilize our cash flow, our strength of our cash flow to do some share buybacks because we don't see it derailing our net debt to adjusted EBITDA target of low 2x by fiscal year 2023. And finally, the key message we want to send is also that this share buyback underscores our confidence in our business, in our strategy. We have, as Christophe and Andy mentioned, approximately 40 new molecular entities in our pipeline. We have many potential proof-of-concept readouts in the next 12 months. So we're very confident in our deliverables of our top line revenue. The pipeline will deliver. Some will succeed, some will not, but we're very confident that we have many shots at goals. And that's why we felt that this is the right time, given the discount on our share price. And just to reinforce the message, this is not a one-time. We have updated our capital allocation policy to be able to decide on doing share buybacks when appropriate. So we'll continue to monitor this situation as we go. So thank you very much for your question.

Andrew Plump, President Research and Development

Yamaguchi-san, you had two questions regarding timelines for TAK-861 and the potential for liver toxicity associated with it. Unfortunately, we cannot provide a specific launch timeline for TAK-861 at this time as it is too early to predict. However, TAK-994 entered the clinic in November 2019, and we anticipated with reasonable confidence that it would receive approval by the end of 2024, which is roughly a five-year timeline. TAK-861 began clinical trials about 18 months after TAK-994. It's worth mentioning that TAK-994's timeline was impacted by COVID. Currently, we need to reassess our timelines, particularly in light of regulatory requirements related to the liver safety signal, which will affect the duration of our Phase III study and the number of patients involved. We are still gathering more information as we progress. Regarding our confidence in TAK-861 and the potential liver signal, we have quickly worked to understand this unexpected finding and have gained insight into what may be causing the liver toxicity observed with TAK-994. We have preclinical assays available to compare different molecules, including TAK-861, and we are in the process of conducting this work. We remain optimistic about TAK-861, as it is a distinct molecule with a different pharmacology and pharmacokinetic profile than TAK-994. We feel confident in advancing this molecule with respect to patient safety, and we will provide more information in the coming months.

Operator, Operator

Moving on to the next question. Hashiguchi-san from Daiwa Securities.

Kazuaki Hashiguchi, Analyst

Yes. This is Hashiguchi, Daiwa Securities. I have a question about the Orexin program. TAK-994 LFT elevation, what is the cause of this elevation? And is it something that is common across the whole orexin franchise or is it really specific only to TAK-994? And also, you saw the safety signal in TAK-994 and the clinical study design for TAK-861 and TAK-925 dosage administration inclusion criteria, have you changed any of these things for the other assets in the same franchise?

Andrew Plump, President Research and Development

Thank you, Hashiguchi-san. Your first question concerns the mechanism behind the liver toxicity. As I previously mentioned, we are developing a growing understanding of this issue. We believe we have identified the cause of the toxicity, but for competitive reasons, we won't disclose this information. We are using this knowledge to enhance our understanding of the profile of TAK-861 and to expedite the development of our next generation of compounds. You also inquired whether this is a class effect or a molecule effect. It is challenging to say definitively, but we strongly believe this is a molecule-specific effect rather than a class effect. Historical data from small molecule drug discovery and development supports the occurrence of these unique molecule-specific toxicities. You also asked if we have adjusted the study design for our TAK-861 and TAK-925 trials based on these insights, and the answer is no. We have sufficient safety measures and protocols in both studies. We have extensive patient experience with TAK-925, which is a fundamentally different molecule that is administered IV and acts quickly. Based on our clinical experience and current knowledge of its pharmacology and clinical profile, we do not believe that TAK-925 carries this risk. Regarding TAK-861, we have reasons to be hopeful that it won't present the same safety concerns, but we will need to explore this further. A crucial consideration moving forward will be how we monitor safety as we conduct longer trials with larger patient populations and treatment durations. We need to determine what level of monitoring is necessary to ensure safety and what regulatory agencies will expect from us. This is a discussion we have not had yet.

Operator, Operator

From Goldman Securities, Mr. Ueda please.

Akinori Ueda, Analyst

We have two questions. The first one is pipeline strategy. So recently, the company licensed many early stage products. But concerning the current pipeline status after the negative development of TAK-994, do you think Takeda earns to license in the late stage products? Or do you still focus on the license for the early stage ones? You have noted that TAK-994 is one of the most promising products in the Wave 1 pipeline product. And the second question is about the policy for dividends. Considering that negative development for TAK-994, more cash will be needed for the enhancement of the pipeline. So therefore, we try to confirm the current status for the dividend. The company guidance, we know that the company guidance includes JPY 180 of the dividend as the shareholder and return policy. But could you confirm that whether that is a long-term commitment? Or that is just a plan for this fiscal year?

Christophe Weber, President and CEO

Thank you, Ueda-san. I'll take the first question, and Andy can add on. I would like to first point out that we have many assets in our pipeline, which are very promising. They were perhaps not as visible to you as TAK-994 because TAK-994 was quite advanced, and we highlighted it a lot, but we have a lot of assets in our pipeline with very high potential. For example, in oncology, TAK-573, and TAK-981, for example. So that's the first point to mention that a lot of assets have a lot of potential, but have not been fully visible yet. And I'm looking forward to the future milestone when you will start to see the value in our pipeline. The second point I want to stress out is that we only have a growth question mark once ENTYVIO will face biosimilar. And the date when ENTYVIO faces biosimilar, the worst-case is 2026 in the United States, not before. And that's the worst-case. So we can discuss what could be the possible date. But as you know, we have a multiple family of patents expiring, many of them in 2032. So there is uncertainty, but when biosimilar will enter. But the reality is that our 14 global brands led by ENTYVIO within these 14 global brands will drive our growth until really ENTYVIO faces biosimilars. And so it's really in the later part of the decade that we need to have the pipeline really starting to deliver to continue to grow. And we believe that we have a lot of ammunition in our pipeline. Having said that, we continue to do in-licensing and partnering. We are looking at all stages, frankly, but we know that late stage 1, there are not many; 2, they are often overvalued. So we tend to prefer early or mid-stage. And that's where you see that we have done a lot of partnerships. But take a product like TAK-999 that we partner with Arrowhead, that's a product that could be launched at the beginning of this second part of the decade, '25, '26, and it's a very promising product. So I think that's what we are really trying to do is to continue to build this pipeline, which will deliver this value progressively. Andy, did you want to add anything?

Andrew Plump, President Research and Development

Nothing to add, Christophe.

Costa Saroukos, Chief Financial Officer

Thank you for your question about the dividend. We are very confident in maintaining our dividend policy of JPY 180 per share annually for several reasons. Firstly, our R&D strategy is showing positive results. We have already increased our R&D spending, which we highlighted in Q1, and our overall target has risen by about 15%. We have allocated more resources to R&D to support our pipeline. Secondly, our cash flow position is strong, and we have significantly prepaid maturities this year, amounting to USD 4 billion. When considering our annual maturity obligations, we anticipate around JPY 200 billion of debt on average to pay down. Our cash flow ranges from JPY 600 billion to JPY 700 billion each year, driven by our strong revenue growth. Overall, we are in a strong position to maintain our dividend payments over time. There is no reason for us to alter our dividend policy. We have robust cash flow and operational performance, and we have already begun to increase our investment in R&D to meet our pipeline needs. Thank you for your question.

Operator, Operator

For the next question, we would like to ask Stacy Ku from Cowen.

Stacy Ku, Analyst

Stacy here from Cowen. I have two. First question is for Julie. Argenx has recently communicated that their FcRn pricing will be premium to IVIG. So what are your thoughts for read-through to the plasma-derived franchise? And then my second question is around regulatory timelines. Given that we have some new product approvals pending, can you give us a sense of what is happening with any upcoming FDA inspections and your thoughts on the timing of regulatory decisions? Should we be building in some slippage for products like Maribavir or Eohilia? Any comments around that would be appreciated.

Julie Kim, President Plasma-Derived Therapies Business Unit

Stacy, thanks for the question. In regards to the pricing that argenx has shared, we don't comment on competitive pricing strategy. But what I will say is that the initial indication is a relatively small one. As you know, Myasthenia Gravis. So we will be watching closely to see if the pricing has any impact on the uptake of the product in Myasthenia Gravis. So far, as you've also seen, the data that they've released out of their Phase II seems reasonable in Myasthenia Gravis. So again, we will be monitoring closely.

Andrew Plump, President Research and Development

I can address your question about the timelines for regulatory approvals, which relates to our site inspection strategy. We have a solid track record with site inspections for GCP, GMP, and GLP activities, and we are routinely undergoing these inspections as part of our regular procedures, not just during filings. Regarding Maribavir, we recently had a positive Advisory Committee meeting, and we are approaching the PDUFA date at the end of November, so we are very confident in receiving approvals for Maribavir. Given the site inspections we’ve conducted, we are assured that this product will not face any delays before its launch. On the other hand, Eohilia is facing a different scenario. The challenge with Eohilia relates to the regulatory review process, not site inspections. We missed our PDUFA date in April and have been actively communicating with the FDA to provide the requested information. Currently, we do not have any updates on potential timelines for that program.

Operator, Operator

Next question, Steve Barker. Mr. Steve Barker from Jefferies.

Stephen Barker, Analyst

It's Stephen here. I have two questions. The first one is for Julie regarding your plasma forecast and collection targets. In your guidance on Page 20, you mentioned that you expect growth of 15% to 25% for the full fiscal year, which seems to be a reduction from your previous guidance of 30% growth. Could you provide more detail about that change in perspective? My second question is for Andy about your collaboration with JCR for Hunter syndrome. What implications does that have for your existing product, elaprase, and for TAK-609, which I believe is an intrathecal version of elaprase?

Julie Kim, President Plasma-Derived Therapies Business Unit

Thanks for your question. In regards to your question around the plasma donation levels. So yes, you're correct. At the beginning of the year, we did guide that we would have growth of approximately 30% to support what we were targeting for revenue growth and commitments that we've made from a patient standpoint with IG supply. So through the year, given our performance in plasma collections thus far, plus the efficiencies that we gained across our entire network from BioLife, our plasma donation infrastructure, through to manufacturing, we're able to reduce the amount of plasma we need to collect this year in order to meet those commitments. And given the ongoing challenges that you've seen, particularly in the U.S. with the pandemic, the cost of plasma collections is higher than we would like at the moment. And so it is prudent for us to pull back on the collection so that we are targeting the commitments to patients and the overall revenue targets that we have made, which we are still on track to deliver for the year. I will note a little bit of a plug, we do have an investor event scheduled for November 17, where we'll be going into much more detail regarding our performance in the PDT business.

Ramona Sequeira, President of U.S. Business Unit and Global Portfolio Commercialization

Steve, maybe I can jump in next on ELAPRASE and the JCR agreement, and I'll ask Andy to comment on TAK-609 as well. So I think this is an area, Hunters, where there is really a dearth of treatments on the market. We're actually very excited to have one product that is on the market that has an amazing impact on children on their somatic symptoms and to have two in development, TAK-609 as well as the new one that we have with JCR. And I think as we think about all of these, part of the risk is in the development, right? So we'll push these through development, doing everything we can and then look at what that means from a co-positioning standpoint as we get closer to commercialization of the JCR molecule, but no clear direction on that yet that we're ready to disclose or give, other than there is room for more treatments, and there's a high, high unmet need in this population. We're very excited about the JCR molecule and the opportunity to treat both cognitive as well as somatic symptoms. Andy, did you want to comment on TAK-609?

Andrew Plump, President Research and Development

Thanks, Ramona. Just very briefly, Stephen, TAK-609 is an intrathecally administered IDS replacement therapy that would need to be administered in conjunction with a peripherally acting enzyme like ELAPRASE. So it's a very niche product. And as we presented previously, our peak sales forecasts are very small for TAK-609 because of that reason. We're still in dialogue with agencies right now. We'll have a better sense of the path forward over the next six to nine months.

Seiji Wakao, Analyst

This is Wakao from JPMorgan. I hope you can hear me. My first question is about TAK-994. The hepatic function safety signal, was it for low dose, medium dose, or high dose? So if you're going to do the trial once again, is it from Phase II or Phase III? If you're going to continue development, if that decision is made, from which stage will it restart, Phase II or Phase III? And my second question, JPY 450 billion to JPY 500 billion was the cash at the end of the fiscal year, but you are going to do a buyback of JPY 100 billion. And what is the operating capital? Thank you.

Andrew Plump, President Research and Development

So Wakao-san, the two questions you had for TAK-994. The first was around the dose at which we saw the toxicity and the second was around what would be our plans regarding starting clinical development. So on the first question, we haven't disclosed those yet; it's still a blinded data set. There are some of us who have been unblinded, obviously, to ensure patient safety, but we'll provide more information next year regarding the full safety data set and dose response relationship. With respect to your question regarding trial restart. Right now, there's a serious patient safety issue. We've paused those trials. We stopped those trials. We are not dosing patients. Before we have any possibility of restarting a trial, if there is a possibility, we need to really look at the full data set. So there are no plans in place right now.

Costa Saroukos, Chief Financial Officer

Thank you, Andy, and Wakao-san for the question. The share buyback is back, and we are funding that with our operating cash flow. We are seeing stronger operating cash flow and believe we will comfortably meet our free cash flow and operating cash flow targets. Additionally, we are unlocking even more working capital. This gives us the opportunity to fund these initiatives from our strong operating cash flow, meaning we do not anticipate any impact on our deleveraging targets. Thank you for your question.

Operator, Operator

Credit Suisse, Sakai-san, please.

Fumiyoshi Sakai, Analyst

I have two questions. My first question is for Costa. Regarding the shareholder program, do you not think it sends a misleading message to the investment community since you are proposing a JPY 100 billion share buyback with 30 million shares, which suggests you're buying back shares below JPY 3,000, the current closing price? What justifies the magnitude of this share buyback? My second question is for the U.S. team. With the U.S. transitioning to a post-pandemic situation, what can you tell us about the pricing outlook as the budget approaches? We've been receiving inconsistent information over the last year. Can you provide any concrete insights into the pricing pressures we should be aware of?

Costa Saroukos, Chief Financial Officer

Thank you very much, Sakai-san. I can address this. I'll reiterate what I mentioned earlier. The key takeaway is that we believe our share price is significantly undervalued, and now presents an opportunity to acquire shares at a discount. Additionally, we are in a position of strength with strong cash flow and solid revenue growth. While the window for action is six months, we will look to start buying from next week. A crucial message from the leadership team is our confidence in our strategy and deleveraging efforts. This indicates our commitment to enhancing shareholder returns, as reflected in our updated capital allocation policy. I agree if this was a one-time situation, but the signal we are sending is consistent with our policy updates. We will continue to monitor this regularly. Thank you very much.

Ramona Sequeira, President of U.S. Business Unit and Global Portfolio Commercialization

Thank you. And maybe I can take the question on U.S. pricing. So very high level today, it appears the administration is getting closer to some sort of package. I think what's up in the air still is the size of the package, and that means the size of the pay force from pharma as well. So it's difficult to say concretely because we don't know concretely at this point exactly what's going to happen. I will say that we're pleased that the administration has expressed support for lowering patient out-of-pocket costs. The unpredictability in the U.S. of patient out-of-pocket has been a challenge for patients and a challenge for us making our medicines available to patients. And so we do expect there will be some pay force from pharma within that. We've provided a number of solutions to the administration that we're hoping they're looking at carefully, and we believe they are. But the final decision has yet to be shared. And certainly, we're looking at all options, assessing the impact. And as soon as we have any more information, we'll definitely be passing that on to you. but we do very much support the administration's goal of making our medicines accessible to more patients and reducing out-of-pocket costs and increasing predictability and affordability of medicines in the U.S.

Operator, Operator

Morgan Stanley, Muraoka-san.

Shinichiro Muraoka, Analyst

This is Muraoka, Morgan Stanley. I hope you can hear me. My first question is about cost ratio. In the second quarter, the cost of goods cost ratio, more than a 3-point deterioration. I understand this is due to plasma collection, but 15% to 25%, so you are slowing down the plasma collection. What does it do to the full year performance target? Do you think you would miss the target of JPY 930 billion because of the lower gross margin? And for the next fiscal year, once the collection cost normalizes, do you think it can contribute to the improvement of the gross margin for the whole company? That's my first question. And the second question is about Novavax vaccine. I didn't fully understand, but the pricing in Japan will be lower than JPY 2,000 or higher than JPY 2,000? I wasn't quite sure about that. So can you please clarify this for me? And also, so this was filed in the U.K., and therefore, you would have no problem filing in Japan. Is that a correct understanding? And also the production capacity, 100 million. There is excess capacity according to your agreement with the Japanese government. Do you think it's likely that you would export the excess production to outside of Japan?

Costa Saroukos, Chief Financial Officer

Sure. Thank you, Muraoka-san. If I understood your question, it was about the gross margin on the core results. You're correct that we faced some challenges in the first half of the year mainly due to two reasons. The first reason is the impact of foreign exchange, as our manufacturing costs are largely in euros, which posed a challenge. The second reason relates to increased donor fees for plasma-derived therapies, which we previously mentioned. However, we anticipate an improvement in the overall gross margin for the second half of the year as we no longer face that issue. Additionally, we expect the acceleration of our 14 global brands, which have a higher gross margin than the company average, to contribute positively. We are confident that we will achieve our target of JPY 930 billion in core operating profit for the full year. In fact, our run rates in the first half are already at 52% of that target. We believe we are well-positioned to meet our guidance. Thank you, and I'll hand it over to the next speaker.

Masato Iwasaki, Japan General Affairs

This is Iwasaki. Thank you for your question. So pricing and also timing of filing approval, how does it impact a filing in Europe? I think those were the questions. As far as the pricing is concerned, it has not been fixed yet. The Japanese government will be the biggest buyer from our perspective. So we consult MHLW as we decide on the pricing. Timing of filing, as well as approval, we have not really shared this with you specifically, but the supply of product will be early 2022. That is the plan. Again, Novavax and MHLW, we need to collaborate with them very closely to make sure that there is no delay in manufacturing. So we're getting ready for that right now. I hope that answers your question.

Shinichiro Muraoka, Analyst

Well, what is the difference between the manufacturing capacity, 150 million versus the 250 million?

Masato Iwasaki, Japan General Affairs

Yes, 250 million doses can be manufactured with the capacity, and we don't know what's going to happen in the future, but we are discussing with Novavax. And excess production, if we produce more than we supply to the Japanese government, we are checking if it's possible for us to export to outside of Japan. That's one of the potential options that we're considering. Thank you.

Christophe Weber, President and CEO

Thank you, Masato. I will add one element that was said but not in the translation, is that remember that the government of Japan helped us to finance the investment for the manufacturing capacity. That's what we wanted to express, is that they help us with the financing of the manufacturing capacity. And that's why we wanted to say that, logically, they will have a preferential price linked to that investment that the government made at the time.

Operator, Operator

With that, I would like to close the webinar for today. Thank you so much for your participation despite your busy schedule. We ask for your continued support.

Costa Saroukos, Chief Financial Officer

Thank you. Thanks, everyone.

Christophe Weber, President and CEO

Thank you.