Earnings Call Transcript - TAK Q1 2021

Takashi Okubo, Global IR Head

Thank you very much for coming to join in FY 2020 Q1 earnings announcement. I'd like to serve as a facilitator today. In this conference call, the Private Securities Litigation Reform Act of 1995, the forward-looking statement, and related information will be discussed. The results of discussions may differ substantially from the actual results. The latest Form 20-F and other SEC-submitted documents describe all those potential factors. On Page 2 of today's presentations, there is an important notice discussed. Please also refer to that page. We have presenters and responders to your questions. We have Christophe Weber, President and CEO; Chief Financial Officer, Costa Saroukos; Avanti President, Andrew Plump; Japan Pharma Business Unit President, Masato Iwasaki; and PDT Business Unit President, Julie Kim. They are participating in this earnings call. First, CEO, Christophe, will discuss the overview of the results, and then Andrew will cover R&D situations, followed by Costa, CFO, covering the financial aspects. After those presentations, we will have a questions and answers segment. So please be prepared with the presentation materials. Christophe?

Christophe Weber, President and CEO

Hello, everyone. It's a great pleasure to be with you today. I will go to Slide 4, which summarizes the situation. Considering the COVID-19 circumstances, the first quarter of our fiscal year 2020 has been positive. Our revenue growth has been strong, especially in our core business, growing 6%, with our key 14 global brands growing 20%. This demonstrates that our overall portfolio is resilient to the coronavirus situation. We also see strong growth in our PDT business, growing at plus 19%. On a reported basis, we are declining, but that's explained by the divestment on one side and also foreign exchange effects. On revenue, it's positive for us. The only product impacted by the coronavirus crisis has been VYVANSE, but we can come back to that later. In R&D and pipeline development, we are progressing and planning to file 7 NDAs this year, which is quite remarkable. We've just received a breakthrough designation for pevonedistat this week. Furthermore, our core operating profit margin for the quarter has been 34.7%. This translates into cash flow, and we are leveraging it further despite the half-year dividend payment. So it's a very positive Q1 as far as we can see. Our integration continues to progress; by December 2019, we were operating as One Takeda. This enables us to demonstrate and show performance during Q1, and we are working to be an even better company. One example is that we are introducing an employee stock purchase plan first in the United States, Singapore, and Switzerland. An existing plan is in Japan, and we plan to expand it globally. On Slide 5, we are focusing on three areas regarding the coronavirus situation: keeping our employees safe, maintaining our business continuity without supply disruption, and resuming our clinical trials. I think we see a return to normal in many areas. We are committed to develop potential therapies, including our hyperimmune globulin development first and also exploring potential products in our pipeline that could be effective against the coronavirus. I would like to finish the introduction with the next slide, providing an update on the Hikari situation. First, I want to emphasize that quality has always been a priority for Takeda. We know how to resolve this situation, and we have a clear path to remediate it. We submitted our response to the FDA and are working intensively to remediate it as quickly as possible. We aim to limit the potential impact and potential shortage for patients. We were able to resume production of leuprorelin for the Japanese market and other countries on July 20. This will significantly limit any potential shortages, and we expect to resupply the product in September. We've guided doctors in Japan on managing their patients. I apologize to doctors and patients for any inconvenience, but we are doing our best to limit that impact. We don't believe there will be a global shortage of leuprorelin, although there may be periodic shortages in Japan and possibly in the U.S., but we don't expect it to materially impact the company financially. I see this as more good news in terms of managing the situation and our capability of resupplying leuprorelin. Thank you, and I will now pass it to Andy for the R&D presentation.

Andrew Plump, Avanti President

Thank you very much, Christophe, and good evening, everybody. If we could please advance to the next slide. As many of you know, we had a chance at the end of 2019 during our R&D day to roll out our core R&D strategy and pipeline. It's a very diverse pipeline, one of the most exciting new molecular entity pipelines in the industry, defined based on two waves: Wave 1 has 12 new molecular entities that we hope to submit and have approved over the next 3 to 4 years, and Wave 2, which includes a group of NMEs and platforms that will sustain us well into the future. Over the next 12 months, we expect significant milestones in Wave 1. As Christophe mentioned, we have the potential over the next year to submit up to 7 of these new molecular entities, which is unprecedented. We also expect key pivotal study data readouts from several of those 7 programs and important proof-of-concept data from several of our Wave 1 programs, with two key examples being TAK-935 and TAK-994. TAK-935 is our partner program with Ovid, where we expect three proof-of-concept studies to read out in the second quarter. TAK-994, our first oral orexin agonist, has started its Phase II proof-of-concept study in Type 1 narcoleptic patients, and we'll expect data from that study as well. We're not forgetting about our global brands, where we have an active set of indications and expansions, including continued investment in China. I've been at Takeda several years now, and our previous investment skewed heavily towards indication and global expansion, whereas now we are emphasizing our pipeline more, with the majority of our development spend focused on it. Please go to the next slide. As we introduced in late 2019, we have a dynamic visual for our pipeline. We're showing it in a way that emphasizes the anticipated delivery of these exciting therapies. In just a moment, I will provide a shallow dive into four of the upcoming Wave 1 programs, all with breakthrough designation. Then, I'll talk in-depth about two of the programs in the latter half of Wave 1. Briefly, we have announced a significant partnership with Neurocrine for seven of our psychiatry medicines, three in development and four preclinical. For the three programs in development, we have optionality for 50-50 development and look forward to working with Neurocrine. Next slide, please. Let’s start with pevonedistat. As Christophe mentioned, we've received breakthrough therapy designation for it this week. Pevonedistat is a first-in-class agent with a novel mechanism of action being tested in various hematologic malignancies, particularly high-risk myelodysplastic syndrome and AML. Our Oncology team presented Phase II study data in high-risk myelodysplastic syndrome earlier this year, and we are excited about the effects on event-free survival and trends in overall survival and tolerability of the agent. While we had initially hoped this data could serve as a pivotal dataset, the high bar required because it was a small, open-label study led us to close the study down. We do have an ongoing Phase III study that will read out later this year in high-risk myelodysplastic syndrome. I'm also excited about the potential of this agent in full-blown AML, where we have trials ongoing, including the PEVOLAM trial and additional combination studies in Phase II in AML. Next slide, please. TAK-721 is a reformulated version of budesonide, specifically for eosinophilic esophagitis, a brutal disease with no approved therapies. This will be the first new molecular entity to go through approval in this condition, and we are on track to start our Wave 1 submissions soon. Next slide, please. TAK-620, acquired from Shire, was initially considered for divestiture, but after looking at the data and the market for post-transplant CMV infection, a major unmet medical need, we opted to keep it in our portfolio. Maribavir is a first-in-class antiviral, with promising proof-of-concept data that initiated us toward further development. Finally, mobocertinib, our EGF receptor exon 20 inhibitor in non-small cell lung cancer, has ongoing studies providing exciting overall efficacy potential. Thus, we're eager to see data from these programs. Let's discuss three programs, with emphasis on those with transformative benefits. TAK-994, TAK-007, and our CAR-NK platform, plus TAK-981, which we aim to expand into a broader Phase I/II program. In summary, our diverse and exciting pipeline is on track, with Wave 1 milestones expected soon.

Constantine Saroukos, CFO

Hello, everyone. This is Costa Saroukos speaking. As Christophe highlighted, we're off to a strong start, confirming the resilience of our portfolio. Our strong Q1 results and cash flow reinforce our confidence in our ability to meet our fiscal 2020 and medium-term financial targets. Underlying revenue growth in Q1 was approximately 1%, consistent with our full-year guidance of low single-digit growth. This growth was driven by our 14 global brands, which more than offset headwinds like ULORIC's loss of exclusivity and the NATPARA recall. The underlying core operating profit margin was very strong at 34.7%, benefiting from operational efficiencies, synergies, and lower spending due to COVID-19. As in prior years, Q1 tends to be our strongest quarter for margins, and this great start puts us on track towards a full-year target of low 30s. Free cash flow for Q1 was robust at ¥146.3 billion, including proceeds from the sale of marketable securities. We're progressing well in unlocking incremental cash from the balance sheet and will discuss this in further detail later in the presentation. We continue to make excellent progress with divestitures, and since our Q4 earnings, we have announced an additional deal to divest select non-core and OTC products in the Asia Pacific region. This brings the total of our announced divestitures to up to USD 8 billion. With robust cash flow and earnings growth, we continue to make steady progress with deleveraging. As of June 2020, our net debt to adjusted EBITDA ratio was 3.7x, improved from 3.8x in March, even after paying the half-year dividend of ¥133.1 billion, equivalent to approximately USD 1.2 billion. In summary, I am very pleased with our performance in Q1 as we continue to execute toward our financial targets. We remain committed to driving revenue growth that will accelerate in the medium term, achieving top-tier margins and completing our divestiture program of USD 10 billion as we target 2x net debt to adjusted EBITDA within the fiscal year 2021 to 2023.

Hidemaru Yamaguchi, Analyst, Citigroup

Can you hear? This is Yamaguchi speaking. Let me ask you a few questions, and I may put forth all the questions I have. My first question is about the PDT business. What are the reasons driving this PDT business, which is quite strong? The second question is about PDT collection. Many companies say they have some impact in the U.S. Regarding PDT collection, what about you? Finally, regarding the warning letter, various comments were made. In normal operations, to solve these inspection-related issues, several quarters or more might be required. Could you please tell us how long it would take to resolve the inspection-related issues?

Christophe Weber, President and CEO

Thank you, Yamaguchi-san. I will address the questions regarding the Hikari situation. Julie, I believe, will answer your question regarding the PDT business and collection situation. The FDA audit of the Hikari facility occurred last November, and we were aware of the issues at that time, so we started working on remediation immediately. Typically, in our industry, this process takes about 12 to 18 months to be inspection-ready, and we believe we’ll be ready for an inspection within 12 months, likely by the end of this calendar year. Julie?

Julie Kim, PDT Business Unit President

Hello, thank you for the question, Yamaguchi-san. In terms of the drivers of the growth, I must point out that part of the exceptionally high growth is driven by timing issues in Q1 of 2019, which was particularly low in terms of immunoglobulin (IG). However, there is strong underlying demand growth, particularly for our subcutaneous portfolio. Since the close of the transaction, we’ve continued to grow our collections and capacity, providing more medicines to meet the demand for our IG portfolio. Strong underlying growth exists, but the exceptional growth is also a result of comparing it to a lower Q1 in 2019. Regarding the impact on our collections, we saw a decrease during various quarantine and shelter-in-place orders across Europe and the U.S. Currently, our European collections have recovered, while U.S. collections still show some impact as the pandemic is not fully under control. That said, we continue to build out our collection centers and grow our overall network, with locations less affected in springtime, but we remain vigilant as the U.S. battles the pandemic.

Kazuaki Hashiguchi, Analyst, Daiwa Securities

Yes. This is Hashiguchi. I have a question about TAK-994. In Phase I, what was the data you obtained? For the IV Phase I, even healthy volunteers showed strong signs of efficacy. What about TAK-994 Phase I? How did it work? Are you happy with the data obtained regarding its PK profile? Oral formulations versus IV formulations—do you consider IV establishes stronger efficacy but need to shift toward oral for convenience? Furthermore, in Phase II, how many administrations are expected per day? I have another set of questions related to the rising unemployment in the U.S. How has that impacted Takeda's performance in the first quarter, and which products are most likely affected?

Christophe Weber, President and CEO

Thank you, Hashiguchi-san. I will answer the question regarding the U.S., and Andy will cover your inquiries on TAK-994. In the United States, we have seen an increase in unemployment levels, but at Takeda, we have not experienced a significant channel shift due to our portfolio. So far, we have not seen major impacts. Of course, we'll need to monitor the situation, but at the moment, we haven't noticed significant shifts. We’ve also enhanced our patient assistance programs to help patients cover their medicine costs amid job losses due to the coronavirus crisis.

Andrew Plump, Avanti President

Thank you, Christophe, and thank you, Hashiguchi-san, for your question. To clarify, we only ran TAK-994 Phase I studies in healthy volunteers and did not conduct formal efficacy assessments yet, which we anticipate will come from our Phase II study. In our Phase I studies, we were pleased with the oral bioavailability and PK profile, with significant levels found in the CSF based on our modeling, which should ensure efficacy comparable to our IV formulations. Of course, the biology is complex, and we don't know everything regarding exposure profiles. However, we’ve observed that higher evening exposure could disrupt sleep, and insomnia was one of the frequent adverse effects noted during our Phase I studies. Regarding dosing for the Phase II study, it will be a dose-ranging study focusing on both once-daily and twice-daily administrations.

Fumiyoshi Sakai, Analyst, Crédit Suisse

My first question is about your updated information on pevonedistat and its marketability. I understand the high-risk patient population is your first target. Last year's R&D conference projected at least ¥1 trillion total revenue for 30 products. At that time, what proportion does pevonedistat represent of that ¥1 trillion? Also, are there any performance gaps you see? The second question is for Iwasaki-san regarding the transitions happening with early retirement programs for those wanting to switch jobs. How will Takeda address the Japan market and ensure efficiency going forward as transitions in partnerships happen?

Christophe Weber, President and CEO

Thank you, Sakai-san. Regarding pevonedistat, the prevalence of high-risk myelodysplastic syndrome is about 20,000 patients across the G7 nations, with about 60% of those potentially eligible for treatment. In AML, within the same group, approximately 45,000 patients are present, with roughly 50% able to receive treatment from pevonedistat. For the overall market opportunity, we estimate it could reach the billion-dollar range in the future. While pevonedistat is not alone in this market, there’s an unmet medical need, making it a significant opportunity.

Masato Iwasaki, Japan Pharma Business Unit President

Thank you for your question, Sakai-san. Currently, our focus in Japan centers on five key areas. We aim to strengthen our focus in these areas even more. In the ethical pharmaceutical business, our goal is to achieve 31 approvals over the next five years, supported by our human talent. Each employee should have the opportunity to build meaningful careers. Several programs exist to assist them in this, which are not specifically targeted at cost-cutting but aimed to support employee transitions. The Takeda-Teva deal will affect our handled products, but we will continue to ensure proper supply.

Seiji Wakao, Analyst, Mitsubishi UFJ Morgan Stanley Securities

I understand that you are running out of time. Just one question about costs. It seems cost control has been successful, and you've noted the significant impact of that in Q1. Was the cost reduced because of lower activity levels due to COVID-19? What do you anticipate for the full-year SG&A forecast? Will it possibly decrease because of lower activity levels?

Constantine Saroukos, CFO

Thank you, Wakao-san, for your question. You can see our underlying core operating profit margin improved from 28.9% in fiscal year 2019 to 34.7% in Q1 of fiscal year 2020. This was predominantly driven by the execution of synergies and integration. Despite the cost reductions observed, the key driver of the margin improvement was our enhanced execution speed. While there was underspend in certain areas, like travel and meetings, the integration strategy has been our fundamental success. COVID-19 did provide some extra improvement to our margin, but the key groundwork was already laid.

Unidentified Analyst, Analyst, Nikkei

Hello? This is Takagi from Nikkei Newspaper. Can you hear me? I have several questions. First, regarding COVID-19 treatment or clinical trials and approval timelines. Are there any changes from the beginning of this fiscal year? If so, please explain. Next, what is your CapEx plan for this fiscal year? How much is it, and is it going to increase or decrease from last year? Please mention any potential impacts due to COVID-19.

Christophe Weber, President and CEO

Thank you, Takagi-san. Andy will address the clinical trial questions, while Costa will cover the CapEx plan. Andy?

Andrew Plump, Avanti President

Certainly, Christophe. Takagi-san, we have four molecules outside of COVID-19 being studied in COVID patients. Two are pipeline molecules: TAK-981 and TAK-671, where we’re hopeful about advancing to larger-scale efficacy studies in a couple of months. The other two molecules are FIRAZYR and TAKHZYRO, with studies commencing between August and October. So we are still on track with anticipated data by year's end. Julie?

Julie Kim, PDT Business Unit President

Thank you, Andy. In terms of hyperimmune development with our COVID-19 plasma alliance, we remain on track. The clinical supplies have been produced, and NIH has filed the IND. We expect to ship supplies once we receive FDA clearance, allowing patients to enter the study swiftly. We anticipate top-line data will arrive and perhaps emergency use authorization just before the end of the calendar year.

Constantine Saroukos, CFO

Regarding our CapEx forecast, we've estimated it will range between ¥180 billion to ¥230 billion for the fiscal year. In Q1, we spent ¥40.5 billion, and there’s been no change to our revised forecast—still within that range.

Takashi Okubo, Global IR Head

With this, we'd like to close the earnings conference call. Thank you very much for joining. I would like to ask for your continued support. Thank you.

Operator, Operator

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