Earnings Call Transcript - TAK Q3 2022

Operator, Operator

Thank you very much for joining our fiscal year 2021 Third Quarter Earnings announcement. I am the moderator, and I’m Chris O'Reilly, the head of Global IR. We have the interpretation button at the bottom of that Zoom. If you'd like to listen to Japanese, please select the Japanese language, and if you'd like to listen to English, please select the English Channel. If you'd like to listen to the original audio, please turn the interpretation function off. 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 our most recent Form 20-F and in our other SEC filings. This also refers to the important notice on page two of the presentation material for today. Our presenters today include Christophe Weber, President and CEO, Andy Plump, R&D President, Costa Saroukos, Chief Financial Officer, Masato Iwasaki, Representative, Director of Japan General Affairs, Ramona Sequeira, President, U.S. Business Unit and Global Portfolio Commercialization, and Julie Kim, President of Plasma-Derived Therapies Business Unit. First, we will have presentations from Christophe, Andy, and Costa, and then we'll have some time to take questions from all of you. Let's get started.

Christophe Weber, President and CEO

Thank you, Chris, and thank you everyone on the phone for joining us today. If you could look at Slide 4. At Takeda, our vision is to discover and deliver life-transforming treatments, guided by our commitment to patients, our people, and the planet. Our growth strategy reflects that vision, and I'm pleased to discuss with you another quarter of growth and progress. In the context of Omicron, I am so proud of the dedicated and patient-focused colleagues who live our values and work tirelessly to support our mission. This is an incredibly exciting time at Takeda. We are growing faster than ever, with competitive scale and a diverse pipeline with approximately 14 molecules in clinical development. Our portfolio is growing, as demonstrated by two new products approved in the past six months. As you will see today, our performance in the third quarter of fiscal year 2021 reinforces that we remain well positioned for long-term business growth. We are in a position of strength. We have solid margins, strong cash generation, and top-line growth driven by our 14 global brands. We have consistently delivered on the fundamentals, and this quarter is no exception, with year-to-date underlying revenue growth at 7.1% and reported revenue growth at 11%. This growth continues to be driven by Takeda's 14 global brands with underlying growth of 12% year-to-date, which we expect to rise to the mid-teens for full-year results. Our diverse portfolio of 14 global brands represents an impressive 42% of our core revenue and should continue to grow. We expect significant revenue growth from our global brands over the near to medium term, particularly as we expand into new markets. Based on the strong third-quarter results, we are upgrading our full fiscal year 2021 forecast for revenue, reported and core operating profits, reported core EPS, and free cash flow. Our strong margins will continue to drive important cash flow, allowing us to invest in our growth drivers while also paying down debt towards our target of net debt to adjusted EBITDA by the end of fiscal year 2023. We are confident in our global R&D strategy. We continue to advance highly innovative life-transforming medicines in oncology, rare genetic and hematologic diseases, neuroscience, and gastroenterology. We have strategic R&D investments in plasma-derived therapies and vaccines. We are delivering with the recent approvals of LIVTENCITY and EXKIVITY. We just received a new indication approval for VONVENDI last week, which is the first and only routine prophylaxis to reduce the frequency of bleeding episodes in patients with severe Type 3 von Willebrand disease receiving on-demand therapy. This approval is a significant advancement for those living with this serious disease. This week, we also received approval from the European Commission for a new indication for ENTYVIO, which is now approved for intravenous treatment of appropriate adult patients with moderately to severely active chronic pouchitis, marking the first treatment indicated for active chronic pouchitis across the European Union. We continue to invest in developing cutting-edge cell and gene therapies that have the potential to redefine how we treat serious and life-threatening diseases. We are actively enriching the pipeline through partnerships and targeted acquisitions that align with our core therapeutic areas. The planned acquisition of Adaptate Biotherapeutics is an excellent example of this strategy in action. This is a valuable and strategic play for us, adding a novel antibody-based GammaDelta T cell engager platform to Takeda’s immuno-oncology portfolio. Following GammaDelta Therapeutics and Maverick Therapeutics, Adaptate is the third immuno-oncology built-to-buy acquisition we announced in less than a year. We go where the science is; you can expect to see Takeda continue to establish strategic collaborations with innovative partners that complement our world-class laboratories and capabilities. We truly believe that the strength of our portfolio and pipeline sets Takeda on a path to fuel sustainable growth. On the next slide, I would also like to share a few updates on our executive leadership team. This change will help Takeda continue to advance our commitment to transform the lives of patients and grow our business at a global scale. First, we are in the midst of a digital evolution that will fundamentally shift how we develop and deliver medicines to patients. Unleashing the power of data and technology will be crucial to our next phase of growth. We are investing in this area, and I am pleased to announce that Gabriele Ricci has taken on a newly created role of Chief Data and Technology Officer. Gabriele previously led our data and technology effort within our PDT business unit, and he has a vision that will put Takeda at the forefront of this exciting new area. Next, we are increasing our focus on launching our new life-transforming therapies. To do this, we are creating a new global portfolio division, bringing together a critical global organization to power our launch capability, such as Global Medical and global product launch strategy. The vaccines business unit, which we anticipate will see important approval ahead, will also be part of the global portfolio organization, together with original business units, including Europe, Canada, our China Business Unit, and emerging markets. The global portfolio division will be led by Ramona Sequeira. Rajeev Venkayya, who has led the vaccines business, will leave Takeda to become the CEO of a venture-backed company focused on pandemic threats. Gary Dubin, currently Head of our Vaccines Global Medical Office, has been promoted to lead this global vaccines business unit. With that, Julie Kim will transition from her role of leading our global PDT business unit to become the new president of our U.S. business unit, focusing on building momentum for our business in the U.S., which is obviously a very key market for our success. Giles Platford will be named President of the PDT business unit, which will remain one of the growth drivers for Takeda over the coming years. His experience with Europe, Canada, and emerging markets will be critical as we continue to expand our PDT business globally. Finally, I am pleased to share that Takako Ohyabu will expand our leadership role as our Chief Global Corporate Affair and Sustainability Officer with a goal of accelerating our leadership in purpose-led sustainability. As our first Chief Sustainability Officer, I'm confident that Takako will make a significant impact in this important area. I am personally very energized by the path ahead and completely confident that this group of dynamic and visionary leaders will help take us to the next level. On the next slide, I would like to update you on our effort to mitigate the impact of the COVID-19 pandemic. We are proud of the role we are playing to help bring vaccines to the people of Japan and are accelerating our efforts to meet the growing demand. We are partnering with Novavax in Japan for the development, manufacturing, and commercialization of TAK-019, which is a COVID-19 vaccine candidate. We have also entered into an agreement with the government of Japan for the purchase of $150 million worth of TAK-019. We are planning to distribute the vaccine in Japan in early 2022, subject to regulatory approval. We also continue to deliver on our three-way agreement with Moderna and the Government of Japan to import and distribute Moderna COVID-19 vaccines. To date, $50 million worth of Moderna vaccines have been imported to Japan, and we began importing an additional 93 million booster doses from the beginning of 2022, making for a planned total of 143 million doses. On the next slide, I would like to talk about our recent pipeline wins, which deliver our near-term momentum to our growth strategy using LIVTENCITY as an example. I'm very pleased to note once again that the FDA approved LIVTENCITY in November 2021, right on the heels of the approval of EXKIVITY in September. These approvals have demonstrated that we are successfully building a portfolio of new therapies that are well-positioned to not only drive Takeda’s future growth but, most importantly, make a true impact in patient lives. Transplant organs provide patients with a second chance at life but are in limited supply. Imagine the loss of hope when a transplant fails; it is devastating for patients and their loved ones. LIVTENCITY is redefining the way cytomegalovirus infection is treated. It is the first and only treatment indicated for transplant recipients that are 12 and older with refractory cytomegalovirus infection/disease with or without resistance. Patients now have access to the only approved therapy that can enable sustained and effective treatment against post-transplant CMV infection, which could save an organ or life that might otherwise be lost. We are seeing promising momentum. More than 150 patients have already been treated with LIVTENCITY in the weeks following the launch, and demand is continuing to grow. This speaks to the unmet need and the unique value of LIVTENCITY. Patient by patient, we are seeing the impact we are making. In fact, the team has shared inspiring stories of patients who are able to be home with their families for the holidays. Patients who would otherwise be vulnerable to CMV and unable to leave the hospitals now have hope for a better quality of life. This focus on patient needs is what fuels our innovation strategy. We strive to transform lives by addressing what really matters to patients, caregivers, and care providers. In closing, we are confident about the path we are on. Our diverse portfolio will position us to continue to generate steady organic top-line performance while also driving competitive margin and strong cash flow to fuel future innovations for patients. With the approval and launch of two new therapies in 2021, we are even more confident today that the strength of our commercial execution, combined with the potential of our pipeline, will help fuel our long-term growth. This brings us back to the vision that drives us to discover and deliver life-transforming treatments guided by our commitment to patients, our people, and the planet. With that, I would like to provide Andy with an opportunity to focus on our exciting R&D strategy. Andy?

Andy Plump, R&D President

Thank you very much, Christophe. If we can please move to the next Slide nine. We've had a number of significant pipeline events since October, starting with the U.S. approval for LIVTENCITY in resistant or refractory post-transplant CMV infection, as Christophe has mentioned. This is our second FDA approval this fiscal year and notably the most FDA approvals Takeda has had since 2014. Additionally, we are proactively submitting our final 4.5-year Dengue vaccine data to the CHMP as part of the EU medicines for all procedure designed to enable approval of high-priority medicines in markets across the globe. These 4.5-year data continue to support the overall benefit-risk profile and reinforce our regulatory package. Now this will lead to a short pause in our review as we gather and submit in the coming months. We are very confident in the profile and public health benefits of our vaccine and continue to believe we will see an approval in fiscal year 2022. As previously disclosed, we received a CRL from the FDA for Eohilia in eosinophilic esophagitis (EOE). We have judged the overall benefit-risk profile for Eohilia to be positive, and we are keen to bring this therapeutic option to patients. After an extended set of interactions and analyses, the FDA ultimately did not agree that our pivotal data supported registration. We have thus decided to discontinue Takeda’s development of Eohilia. Now, please let me provide a brief summary of events that have led to this decision in full transparency. In 2016, the FDA granted a breakthrough designation for this program. In 2019, Eohilia completed and met the Phase 3 induction study co-primary endpoint with statistical significance. In October 2020, we completed our rolling submission of the new drug application. In December 2020, the FDA granted a priority review. During the new drug application evaluation, we engaged in a series of data exchanges that resulted in an extended review cycle and importantly a delayed action date. Following over a year of active NDA review, which involved in-depth data requests and responses, we received the CRL, which notified Takeda that the NDA could not be approved based on the current data package. As part of the CRL, it was communicated that data from an additional clinical trial would be required to support an approval. After a deep and careful assessment of the evolving treatment landscape in EOE, as well as considerations including operational challenges required for an additional clinical study, we could not justify further Eohilia development. We do, however, remain fully committed to our R&D focus in GI diseases. Continuing on this slide, our geographic and label expansion efforts for our global and regional brands continue to progress well. As Christophe mentioned, we received approval of VONVENDI in the U.S. for von Willebrand disease prophylaxis. In Japan, we continue to advance the fight against the COVID-19 pandemic with approval for the 50-microgram booster of Spikevax, the mRNA vaccine against COVID-19, and we submitted an NDA to the MHLW for our Novavax partnered TAK-019. Additionally, again, as Christophe has alluded to, we received EU approval for ENTYVIO in acute inactive chronic pouchitis significantly earlier than had been expected. Finally, in business development, as Christophe mentioned earlier, we intend to acquire Adaptate Biotherapeutics, a GammaDelta T cell engager platform targeting solid tumors in oncology. Along with Maverick and Gamma Delta therapeutics, Adaptate is our third built-to-buy acquisition this year, further enhancing our oncology ambitions. We believe built-to-buys are good deals because we work closely with the partner company throughout the build process. We know exactly what we are getting, the price we are paying, and the steps remaining to fully develop the technology platform. If we can go to the next Slide 10, please. I just mentioned we received approval of VONVENDI as the first recombinant treatment for prophylaxis of adults with severe forms of von Willebrand disease. This label expansion to prophylaxis will greatly benefit patients with this disorder. As you can see on this slide from our Phase 3 trial, where we compared bleeding rates in severe von Willebrand disease patients on prophylactic VONVENDI to on-demand treatment, we saw an overall median reduction for all bleeds of about 55%. For spontaneous bleeds, about 76%, and for the particularly crippling joint bleeds, 100%. If we can go to the next Slide 11, please. Our R&D strategy is working, and it's beginning to deliver on our ambitious aspirations. As another example of our strong Takeda laboratories, we have added a promising new targeted STING agonist Tak-500 to our early-stage oncology pipeline. As we've noted, 90% of our pipeline did not exist six years ago. Takeda’s R&D engine is advancing an ambitious stream of next-generation therapies, as you will continue to see in the coming months and years. If we can go to the next Slide 12, please. Okay, let's focus now on our late-stage pipeline. This view highlights 10 of our late-stage approval and expansion opportunities for the coming years. We start at the bottom with the recent approved FDA approvals of EXKIVITY and LIVTENCITY in the U.S. Moving up the chart, we have filed TAK-019 in Japan. Next, our dengue vaccine TAK-003, as mentioned, is currently under review with various dengue-endemic countries and with European authorities, and we anticipate a decision in fiscal year 2022. Next, with TAK-755 and TAK-611, we expect near-term pivotal readouts, potentially providing transformative treatments for targeted patient populations with high unmet needs. Finally, again, moving up this chart, three of our Wave 2 programs are starting pivotal trials this or next year. We recently presented exciting early data at ASH from modakafusp alfa in extensively pretreated multiple myeloma patients. TAK-999, our collaboration with Arrowhead, and Alfa one antitrypsin-associated liver disease, will be starting Phase 3 development in the coming year, and pabinafusp alfa, our collaboration with JCR Pharmaceuticals to address neuropathic and somatic symptoms in Hunter syndrome patients, has already begun enrolling in its global Phase 3 study. We can expect potential approvals for these new stage ups in our late development pipeline between 2025 and 2027. Going forward, we see great potential to further enrich our pipeline and are excited by our robust partnership network. We will continue to access and nurture innovation in emerging areas of science with our own world-class laboratories to deliver sustainable innovation. We will also complement our exciting and maturing pipeline with selective late-stage in-licensing, as we have done with JCR and Arrowhead. If we can go to the next Slide 13, please. As you can see here, there is more to come as we continue to derisk our early development programs. I'd like to highlight five high-potential molecules that will have important proof-of-concept readouts in the coming two years, including our longer-lasting oral orexin agonists TAK-861 and the first-in-class cancer therapy subasumstat. These are just the first of many Wave 2 molecules in a rich and transformative early-stage pipeline being continuously filled through partnerships and our own powerful research engine. I want to underscore the importance of having built an innovative R&D engine that will continue to generate new opportunities going forward. Our pipeline is dynamic in nature. We follow the science. Some of our programs have faced unexpected challenges, but we are encouraged by the emergence of strong proof-of-concept data in programs like modakafusp alfa, and we expect to further fortify our pivotal pipeline with more positive data inflections. I can say with a high level of confidence that as we continue to advance our development programs and generate new data, the value of our pivotal stage pipeline will continue to increase. I'll now hand it over to you, Costa.

Costa Saroukos, Chief Financial Officer

Thank you, Andy, and hello everyone. This is Costa Saroukos speaking. I'm pleased to report that in the first three quarters of fiscal 2021, we have continued to make excellent progress in terms of top-line growth, margins, and cash flow. Our top-line growth continues to accelerate with underlying revenue growth of 7.1%, driven by our 14 global brands, which grew at 12%. This truly demonstrates the resilience of our portfolio through the COVID-19 pandemic, including the recent wave of Omicron. We remain focused on maintaining competitive margins, delivering an underlying core operating profit margin of 29.4% in quarter three year-to-date, with underlying core operating profit growth of 5.4%. We continue to generate robust free cash flow with ¥671.3 billion year-to-date, and opportunities to unlock working capital have enabled us to raise our full-year target to ¥700 billion to ¥800 billion. We saw steady progress with deleveraging, reaching a 3.0x net debt to adjusted EBITDA ratio, and our abundant cash has allowed us to recently call an additional U.S.$1.5 billion of fiscal 2023 debt for prepayment. With regard to the full-year outlook, we are upgrading our forecast across the reported and core P&L, reflecting business momentum, OpEx discipline, and some foreign exchange favorability. We are also working on track towards our management guidance and trending towards the high end of mid-single-digit growth for underlying revenue, underlying core operating profit, and underlying core EPS. Let me go into more detail on the year-to-date performance on Slide 16. Q3 year-to-date reported revenue was almost ¥2.7 trillion, up 11% versus the prior year, benefiting from ¥133 billion booked as revenue from the sale of our Japan diabetes portfolio in quarter one. Core revenue, which excludes this one-time impact, grew at 5.6% as business momentum and favorable foreign exchange more than offset the impact of divestitures. Underlying revenue, which further adjusts for foreign exchange and divestitures, delivered strong growth of 7.1%. Reported operating profit was ¥462.5 billion with significant growth of 28.9% versus the prior year. This was partially driven by the gain on the sale of the diabetes portfolio in Japan, as well as lower purchase price accounting and integration costs compared to the prior year. Core operating profit, adjusted for purchase accounting and non-recurring items, was ¥757.9 billion. This was a decline of 2.9% versus the prior year, mainly due to the impact of divestitures and also reflecting an increase in R&D investment. If we adjust for foreign exchange and divestitures, underlying core operating profit increased by 5.4%. Our core and underlying operating profit margins are both above 29%, even with the increase in R&D investments that we've made this year. This also reflects the impact of a lower gross margin due to product mix, largely driven by temporary cost of goods dynamics within the plasma-derived therapies. Reported EPS was ¥154, with growth of 34.5%, and core EPS was ¥333. Underlying core EPS growth was 9.9%. Operating cash flow was ¥747.5 billion, up 22.6% versus the prior year, while free cash flow was ¥671.3 billion, a reduction of 6.4% due to higher non-core asset sales in the previous year. Slide 17 gives more insight into our top-line growth dynamics. Reported revenue for Q3 year-to-date grew at 11%, almost ¥2.7 trillion, including ¥133 billion or 5.5 percentage points benefit from the sale of the Japan diabetes portfolio. Adjusting that out, core revenue grew at 5.6% to ¥2.56 trillion. This reflected 7.1 percentage points of underlying growth driven by business momentum, plus 4.8 percentage points from favorable foreign exchange. This was partially offset by 6.3 percentage points headwinds from the divestiture of non-core assets we have completed over the past year. Turning to Slide 18. Our underlying revenue growth of 7.1% is supported by an innovative and balanced portfolio across five key business areas. GI, which represents approximately a quarter of total core revenue, delivered 8% growth spearheaded by ENTYVIO. Rare diseases declined by 1%, impacted by the continued decline of rare hematology as expected, and PDT immunology grew at 10%. As we continue to deliver improvements across the value chain, we remain on track towards our full-year revenue and plasma volume targets. Oncology grew at 8%, and neuroscience was up 10%, with Vyvanse and Trintellix both posting double-digit growth as market dynamics returned toward pre-COVID levels. For more details on each of the five key business areas, please refer to the slide in the appendix. Finally, on the other column products grew at 11%, reflecting the completed divestitures of several declining portfolios as well as including distribution revenue for the Moderna COVID-19 vaccine in Japan. Slide 19 shows the revenue of our 14 global brands that are driving Takeda’s top-line growth. In total, these products generated over ¥1 trillion or U.S.$9.3 billion of revenue year-to-date, with growth of 12% on an underlying basis. To highlight a couple of brands in particular, ENTYVIO performance remained strong as our number one product, with ¥395 billion in sales year-to-date and underlying growth of 17%. Now this is despite a slowdown in biological new starts due to the pandemic, with a reduction in colonoscopies and diagnosis impacting the initiation and switching of therapies. IG growth of 7.3% is on track towards full-year guidance fueled by continued expansion of our subcutaneous portfolio. Albumin is also strong at approximately 30% growth driven by growing demand for Flexbumin in China. Slide 20 emphasizes the momentum of these 14 global brands, as they delivered 12% underlying growth year-to-date and remained on track towards full-year guidance of mid-teen growth. As we look towards fiscal 2022 and beyond, we expect this momentum to continue as we expand market penetration in more countries, increase disease awareness, expand access, and continue the global rollout of products, including in Japan, China, and other emerging markets. Also, as we recently announced, we no longer expect ENTYVIO biosimilars to launch upon anticipated end-of-data exclusivity timing, which gives us the potential for significant upside in the second half of this decade. Moving to Slide 21, we showcase the factors impacting the 2.9% decline of our Q3 year-to-date core operating profit versus the prior year. Starting from the left-hand side of the chart, you can see the first dark gray bar indicating a strong profit improvement from our underlying business, primarily driven by our global brands while also reflecting SG&A discipline. This underlying business momentum was partially offset by a 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, indicating the profit loss due to divestitures that are having a significant impact on growth rates this fiscal year as a result of multiple non-core asset divestitures that were closed in fiscal year 2020 or early 2021. While this is a major headwind for fiscal year 2021, the impact should be much smaller from fiscal year 2022, and our core operating profit growth rates should more closely correlate to our underlying profit performance. As a result of these factors, as well as some benefits from foreign exchange, our core operating profit landed at ¥757.9 billion, giving us the confidence to raise our full-year forecast, as I'll explain shortly. Moving now to the cash flow, please refer to Slide 22, which shows the evolution of our cash balance over the first nine months of the year. Operating cash flow was ¥747.5 billion. This includes cash from the sale of the Japan diabetes portfolio and proceeds from working capital optimization initiatives, partially offset by litigation settlement in quarter one. The free cash flow was ¥671.3 billion, comfortably covering the full-year dividend payment, interest costs, and initial progress of our share buyback. Furthermore, we made significant debt prepayments in the first nine months of the year. In total, we prepaid ¥635 billion, or approximately U.S.$5.5 billion of debt maturing in fiscal year 2021, fiscal year 2022, and fiscal year 2025. A part of this prepayment was refinanced with the 10-year ¥250 billion bond issue in quarter three. Despite the substantial debt prepayment, we ended December with healthy levels of liquidity. Slide 23 shows the net debt balance over the first three quarters. We continue to make steady progress with deleveraging. As of December 31, our net debt to adjusted EBITDA ratio had come down to 3.0x even after the full-year dividend payment has been reflected. Slide 24 is the latest snapshot of our debt maturity ladder. As shown on the previous slides, we paid off approximately $5.5 billion of debt in the first nine months of the year, including all remaining debt during fiscal year 2021 as well as prepayments for fiscal year 2022 and 2025 maturities. Furthermore, our abundant cash flow enables us to call an additional U.S.$1.5 billion of debt maturing in fiscal year 2023, which we expect to pay in March. I'm very pleased with how we have structured our debt profile with a weighted average interest rate of approximately 2% and importantly, 98% of our total debt at fixed interest rates, giving us protection from any potential rate hikes. In terms of the maturity profile, we are also very comfortable with an average of approximately ¥200 billion per annum out to fiscal year 2025. As a reminder, our free cash flow forecast for this year is ¥700 billion to ¥800 billion. Going forward, we are very comfortable with our ability to continue servicing this debt while maintaining the dividend and also making the right investments in the business. Moving now to Slide 25 and our revised outlook for the full fiscal year. We are raising our forecast for reported revenue to ¥3.51 trillion, an increase of ¥140 billion versus the previous forecast, reflecting strong performance across the portfolio, additional revenue from the Moderna vaccine in Japan, and also FX benefits. Reported operating profit is now expected to be ¥515 billion, and we are raising our forecasts for core operating profit to ¥970 billion, an increase of ¥40 billion. These upgrades largely reflect the increase in revenue, with OpEx discipline offsetting a slight increase in cost of goods versus our initial plan. Reported EPS is now expected to be ¥155, with a revised reported tax rate assumption of 37% for the full year. While we expect the tax rate to increase in Q4, due to timing of some tax costs from legal entity restructuring, the total of these costs is now expected to be lower than in our previous forecast. Core EPS is expected to be ¥416, with a core tax rate of 24%. Free cash flow, as explained earlier, is now expected to be ¥700 billion to ¥800 billion. On the right-hand side of the slide, we show our management guidance on an underlying basis, which excludes the impact of foreign exchange and divestitures. While we are maintaining our previous guidance of mid-single-digit growth for underlying revenue, underlying core operating profit, and underlying core EPS, we now expect to deliver at the high end of the range. Finally, on Slide 26, I'd like to close by once again emphasizing our focus on top line, on margins, and on cash flow. Underlying revenue growth for Q3 year-to-date was 7.1%, putting us well on track to land at the high end of our full-year guidance of mid-single-digit growth. On margins and profitability, our year-to-date core operating profit was ¥757.9 billion, and we are raising our full-year forecast to ¥970 billion. Our year-to-date underlying core operating profit margin is 29.4%, in line with our projections for the full year. Finally, on free cash flow, we have delivered a strong year-to-date result of ¥671.3 billion, and we are raising our forecast to ¥700 billion to ¥800 billion. We continue to maintain a focus on deleveraging towards a low two-times net debt to adjusted EBITDA target by fiscal year 2023. With leverage at 3.0x at the end of Q3, we are well on track to potentially breaking the 3x threshold within this fiscal year. Thank you for your attention. We will now open it up for Q&A.

Operator, Operator

Now we'd like to open the floor for taking questions. Please use the raise hand button. If you are listening to Japanese, please ask questions in Japanese. If you are selecting the English Channel, please speak in English, and if you are listening to the original audio, you can ask questions in either of the languages, and please limit the number of your questions to two. The first question is from Hidemaru Yamaguchi from Citi.

Hidemaru Yamaguchi, Analyst

Thank you. This is Yamaguchi from Citi. Congratulations on the good numbers. Two questions, please. The first one is, you changed your full year guidance and you gave me some numbers. Just given the reason why the sales are up by ¥140 billion, and with the cost control, our operating profit, and core earnings go up by only ¥40 billion, which sounds like a lot lower than expected, as you mentioned. Can you elaborate on what kind of reason is behind it, including PDT and other things? That’s the first question. The second question is that the full-year number chart shows that you raised the global sales range from 5% to 10% to 10% to 20%. Can you give me the reason behind it and also provide the pricing and collection details, which are the usual kind of questions on the PDT front? Thank you.

Costa Saroukos, Chief Financial Officer

Thank you, Yamaguchi. What I understood from your first part of the question was about the reason for the upgrade in revenue of ¥140 billion. What we're seeing is strong business momentum overall. In particular, the 14 global brands are driving that momentum. In addition to the 14 global brands, we're also adding additional doses of Spikevax in Japan. So we're seeing, as we mentioned, including approximately anywhere between 40% to 50% of the incremental 93 million doses of the Spikevax vaccine. We also have some portion of favorable FX. I didn't get the other question that you had; could you repeat it?

Hidemaru Yamaguchi, Analyst

Given the sales were up by ¥140 billion as a delta, but operating profit delta is only ¥40 billion, which sounds a bit low. You hinted the cost is higher than expected on your new guidance; can you provide the reason why costs are higher on your new guidance compared to the old guidance?

Costa Saroukos, Chief Financial Officer

So we have seen some cost of goods headwinds, as we alluded to in the first half of the fiscal year, driven by the donor fee and the dynamics in the U.S. for PDT. We've also seen an increase in cost of goods due to FX, mainly because many of our operations in Europe are in euros. So that's really the key message. And remember, in Q4, we typically have more phasing on acceleration of expenses, and we do expect an uptick in R&D investment to accelerate in Q4.

Operator, Operator

Maybe I'll jump in. This is Chris O’Reilly speaking. On your second question regarding the PDT guidance. So yes, we have upgraded the reported forecasts for immunoglobulin. But this essentially reflects FX; you'll see the underlying growth forecast is unchanged at 5% to 10% growth.

Hidemaru Yamaguchi, Analyst

Okay, it's currency.

Operator, Operator

It's currency, yes.

Hidemaru Yamaguchi, Analyst

Okay. Can you elaborate quickly on the pricing environment currently in the U.S. if you have any words?

Julie Kim, President, Plasma-Derived Therapies Business Unit

Yes, this is Julie Kim. Thank you for the question. In terms of the pricing dynamics in the U.S., the continued impact of the pandemic is prolonging the ability to return to more normal levels. At this point, we see continued fluctuations in pricing in terms of donor fees. We continue to moderate and push towards normal levels, leveraging our transformation efforts throughout the Biolife organization, which is our plasma infrastructure. So, as you've heard from both Costa and Chris, we continue to mitigate the impact, but the prolongation of the pandemic does make it a bit harder to completely offset those costs.

Operator, Operator

With that, we want to move on to the next question from Stacy Ku from Cowen.

Stacy Ku, Analyst

Hi, Stacy Ku from Cowen. Thanks for taking our questions and congratulations on the progress. My two questions. First, given your updated commentary on ENTYVIO LOE, can you remind us of your thoughts on the ENTYVIO market share in Crohn's disease, as we approach the loss of exclusivity for Humira and Stelara in 2023? Can you expect differentiation to be protective in Crohn's disease as we expect it to be in ulcerative colitis? That's the first question. And then the second question is, could you narrow the timing for when we would expect investor disclosure of the Phase 1 data for the orexin 861 program in healthy volunteers and Type 1 narcolepsy patients? Thanks so much.

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

Yes, absolutely. Hi, Stacy. Thanks for your question. So, if you look at, first of all, what we see in the biosimilar market in the U.S. right now, we don't see an impact outside of the molecule for the biosimilars. So we're not seeing an impact on ENTYVIO either on our payer access or our uptake or prescribing as a result of biosimilars. As you start looking at the Crohn's situation, we would expect much the same can continue. So what's happening with Crohn's now is that as physicians start treating earlier, ENTYVIO actually becomes a better choice. People might prefer some of those other products when they’ve got a crisis patient with Crohn's, but as we're starting to see more earlier use of biologics in Crohn's, people prefer ENTYVIO because it's safe, effective, and has really good long-term data available. So we don't expect any impact on ENTYVIO from the other biosimilars.

Andy Plump, R&D President

And Stacy, this is Andy. We'll spend some time in Q4 mapping out timelines for the vaccine program. But I’ll remind you, there are four ongoing relevant activities. The first is our evaluation of the 994 Phase 2b data setting; there is some very important information in that data set, including chronic dosing in the effects of orexin agonists and chronic dosing. The second, as you mentioned, we are accelerating our TAK-861, our next-generation molecule. We'll have data from our Phase 1 studies and plans to move forward into later development. Thirdly, we're bringing back TAK-925, our oral TAK-925 program. Lastly, as we've mentioned, we'll have next-generation molecules that will be coming into the clinic. So we'll have at least a timeline for each of those four events to share in Q4.

Operator, Operator

Now, let's move on to the next question from Jeffries.

Stephen Barker, Analyst

Hello, thanks for taking my question. I'd like to ask about TAK-003, your Dengue vaccine candidate. You've pushed back guidance for a possible CHMP advisory decision from the second half of the current fiscal year to sometime next fiscal year. At the same time, the head of your vaccine business is leaving the company. What's going on there? I can think of a couple of different reasons—either the European authorities have a problem with the data, or is it something else? You did say that you're in discussions with the governments of the countries where you hope to sell the vaccine? Are there some reservations coming from that side? Any color would be appreciated?

Christophe Weber, President and CEO

Thank you for the question. First, we have submitted the data, which is complex. That's why we had to fast-track the process first. When the EMEA saw the data, they decided they would go back to the normal review because of the complexity of the data. We are submitting more long-term data as well. So we shouldn't view this new timeline as a sign that there's a problem with the data. It’s just because of the complexity of the data and the fact that we are submitting long-term data. As Andy mentioned, we are fully convinced of the value and public health impact that these vaccines will have in countries where Dengue's endemic. Don't read anything between that and the departure of Rajeev. Rajeev has been leading the vaccines business unit for 10 years; he's going for a new step in his career. We have a very strong leader in Gary to lead the vaccines business unit. We are very committed to it, so there is really no connection between the two. Regarding other countries, at the same time we filed in Europe, we filed for any countries and the process is that they are reviewing the dossier. In parallel, they can use the expertise of the EMEA if they want. So that's the current regulatory process. We are very excited about the vaccines. Dengue is complex because it has four serotypes, and you have seropositive and seronegative cases. Of course, there is increased scrutiny because of what happened with a previous vaccine, so there's likely to be a lot of debate, but we are very convinced about the value of the vaccines.

Operator, Operator

Next is JPMorgan, Seiji Wakao.

Seiji Wakao, Analyst

This is Wakao, JPMorgan. I have two questions. The first is about SG&A cost, and as a percentage of sales, I think your management is lower than the previous year. But at an absolute level, I think it exceeded the previous year. Do you think in the absolute term it will be further increasing? Core operating margins of 30% is the target for management; we understand that. But how do you view the absolute amount of SG&A? The second question is about Velcade. Last time, we expected the genetic range to be in the middle of FY 2021, but now it is expected to be at the end of FY 2021. If you have any information, could you disclose the latest situation? Is there any possibility it won't come within the 2021 fiscal?

Costa Saroukos, Chief Financial Officer

Thank you very much, Wakao. To answer your question regarding SG&A expenses, in the appendix Slide 39, you can see the SG&A expenses on a reported basis for Q3 year-to-date. They have gone up versus last year by 3.4%. However, excluding FX impact, they were flat. The organization is laser-focused on cost optimization and management, in particular in SG&A, by leveraging a lot more data, digital, and technology. Our TBS organization is ramping up, so SG&A is being managed very well. The only incremental increase is FX-driven. Thank you for your question.

Christophe Weber, President and CEO

Thank you. Regarding Velcade, we still believe that there will be a 505(b)(2) sub-Q launch in Q4 of fiscal year 2021. So that's our current estimate, and that's our guidance. We must keep in mind that Velcade's growth rate does not necessarily reflect the long-term dynamic of the product because there have been some pandemic effects last year, especially. Velcade and others were impacted depending on the cycle of the pandemic. One needs to be careful when reading the growth rate of the product.

Operator, Operator

Next question from Credit Suisse, Fumiyoshi Sakai.

Fumiyoshi Sakai, Analyst

I have a few questions. I have a follow-up for you. We've been hearing about the shortage of blood supply in the U.S. because of the Omicron situation. Can you just give us the overall observation of how the business is running? If this situation persists, assuming it's going to be an upside or downside for your business in FY 2022? That’s my first question. The second question is for Costa Saroukos as always. Your cash flow; I'm not going to ask for hard guidance for FY 2022. Given that you have more flexibility and maneuverability in your cash management, are you expecting the same rate of cash flow generation for FY 2022? If so, you could say just yes, but if not, can you give me some variables you're thinking about going forward? Thank you.

Julia Kim, President, Plasma-Derived Therapies Business Unit

In regards to your first question around the dynamics in the U.S. market. Clearly, because of the impact of Omicron and the ongoing pandemic, it is still challenging for the entire industry to collect at levels that are equivalent to or better than pre-pandemic. As we've shared previously, we did surpass our pre-pandemic levels back in April 2021, and we continue to be able to grow our collection. While we can't give specifics going into FY 22, what I can confirm is that we will be in that 15% to 25% range for growth of our plasma collections this year, which is where we wanted to land. That will support our ongoing growth of our IG portfolio and albumin across the globe. While I cannot comment specifically on the situation from a competitor standpoint, we are monitoring the situation closely and will continue to do what we can to ensure that patients have continued access to therapy.

Costa Saroukos, Chief Financial Officer

We're not giving guidance on cash flow now in Q3, but in principle, we're seeing acceleration of our revenue. We're also seeing acceleration in our core operating profit margins as we move forward. As a result, that will reflect in our overall free cash flow as well. So there's no reason why we will differ from that strategy.

Fumiyoshi Sakai, Analyst

Okay. I mean, just a brief follow-up question. It’s nice to hear that 98% of your debt is fixed-rate. What about currencies? I could see the U.S. dollar dominating and the Euro, but what about Japan? I mean, Japanese yen dominated, how much exposure is there to foreign currencies out of your total ¥4 trillion debt?

Costa Saroukos, Chief Financial Officer

It's a great question! The way we've financed our debt was really to match the currencies of our business, so it's very much equal to the currencies that we receive, in USD, Euro, and also Japanese yen, so there's very little exposure there.

Operator, Operator

Next is Morgan Stanley, Shinichiro Muraoka.

Shinichiro Muraoka, Analyst

Novavax vaccine, I have a question. The ¥140 billion revenue was up, but Novavax vaccine sales were not included. Is that right? According to Japanese media reports, PMDA's review pointed out a rhabdovirus impact and which may delay the program. Is it true? If so, what’s the progress going forward? That's about the Novavax vaccine-related question. Another question I'd like to ask you is about the page 58 of your Slide, ENTYVIO needleless syringe injector. I think it's discussed, and however, there were some technical issues, and as a result, the pivotal study is delayed to FY 2023. Could you elaborate? What is this technical issue? How will it be solved? That's my second question.

Masato Iwasaki, Representative Director, Japan General Affairs

This is Iwasaki. Thank you for your question. Concerning rhabdovirus, during the manufacturing process, I cannot disclose the details of the manufacturing process due to our contract with Novavax. However, we are exchanging information with PMDA and are discussing this issue. Of course, we will address this issue, and the EU authority, EMA, has assessed that rhabdovirus is proven; therefore, it is not a concern. That’s the conclusion of the report.

Shinichiro Muraoka, Analyst

Yes, excellent. Sorry. So, there is no risk of a delay?

Masato Iwasaki, Representative Director, Japan General Affairs

At the moment, we don't see any delay due to that particular reason.

Costa Saroukos, Chief Financial Officer

It's Costa here. Thank you, Muraoka, for your question. Just to confirm, in our updated guidance, there's no revenue factored in for Novavax for fiscal year 2021.

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

Christophe, I can step in and take the question around ENTYVIO and the device strategy. So, maybe I'll just comment on both devices that are part of our LCM program. We've got our sub-Q that we've been talking about, and I will mention that this has been launched in Europe, and the launch uptake is going really well. So we're very pleased with what we're seeing, particularly in markets like the U.K. and Germany, which are some of our early launch markets. We're seeing the sub-Q driving incremental growth for ENTYVIO. In the U.S., based on our discussions with the FDA, we have now more clarity on the path forward for the sub-Q in the U.S. We've disclosed that we expect to be able to launch that in FY 23 in the U.S. The other program we have for ENTYVIO is the needle-free device, which is a little earlier in the process through development. We're continuing to look at that, and there's a great opportunity there for patients who don't like needles or are needle-phobic to be able to bring that needle-free device forward into the future. Thank you.

Operator, Operator

And the next question is going to be the last question. The last question is from an unidentified analyst.

Unidentified Analyst, Analyst

Thank you, Akana from Nikkei Newspaper. I have two questions. First, regarding Novavax. Around the beginning of 2022, you will start the supply, but we are already in February. So when you talk about early 2022, what is exactly the timing? Are you talking about January to March or up to June maybe? The booster vaccination has started in Japan. Could it be also used for booster vaccination? So that's my first question. The second question, and this is to Mr. Weber, is a very broad question. For instance, in France or in Europe, economic activities have been returning even with the spread of the Omicron variant and no more restrictions on economic activities or lifting of those restrictions. Here in Japan, we are still continuing to see it's not so much of an emergency declaration, but the government has not really relaxed those restrictions on vaccination and the Omicron variant spread. There are differing responses among different countries. How do you see that, Mr. Weber?

Masato Iwasaki, Representative Director, Japan General Affairs

As announced already, we have submitted a letter which is under review right now. We can't mention a particular month for the launch of Novavax. Regardless of the timing of the launch, we have had tech transfer and manufacturing. As early as possible during this calendar year 2022, we'd like to get an approval and, right after the approval, we'd like to launch the product. That is the schedule. As for the booster of Novavax, the data package submitted for application includes part of the data from the booster vaccination as this is under review right now. It is up to the Japanese authorities to determine.

Christophe Weber, President and CEO

Thank you very much for your question. First, I would say that the Omicron pandemic wave is not synchronized. In Europe, this pandemic wave of Omicron started before the wave in Japan. In many European countries, they are seeing declining numbers of Omicron cases, which we are not in this phase in Japan. Every country is managing that situation while also managing the economic impact. One thing I can say is, it’s clear that the Omicron wave is unstoppable because it is highly transmissible. Therefore, I don't believe in a zero COVID strategy, which is not the strategy of Japan. I think that when there will be signs of declining numbers, it will be time to restimulate the economy because the Omicron will be with us for a long time. This is, I think, the new reality that many governments are facing: the pandemic is still with us and might still be with us for a long time. Therefore, we need to find a way to manage that while keeping the economy going because we cannot stop the economy forever. This is the new reality that governments are facing. Thank you for your question.

Operator, Operator

Thank you very much. Thank you. With this, we conclude the webinar. Thank you for your attendance. Thank you all, and I look forward to working with you.