Earnings Call Transcript - TAK Q4 2021

Operator, Operator

Good day everyone, and welcome to the conference call of Takeda Pharmaceutical Company Limited. During the presentation from the company, all the telephone lines are placed in listening-mode only. And the question-and-answer session will be held after the presentation. Now we'll start the conference. Mr. O'Reilly, please go ahead.

Christopher O'Reilly, Global Head of Investor Relations

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

Christophe Weber, CEO

Thank you, Chris, hello everyone. Thank you for taking the time to discuss with us our 2020 results and 2021 outlook. The 2020 results, we believe have demonstrated our resilience as an organization, but also as a business, we're delivering our management guidance. We're very pleased with the fact that we were able to deliver our synergy target one year in advance. So that puts us in a very good position in terms of margin, profitability, and cash flow. We're closing the year 2020 with a 2.2% revenue growth on an underlying basis. And if you look at 2021, we're seeing this growth outlook to accelerate to a mid-single-digit underlying revenue growth, which is driven by our core businesses, our 14 global brands where we do see this momentum. We do describe 2021 as an inflection year, not only for our business again, because we have delivered our synergies, our growth is accelerating, but because of the pipeline, and we do expect the year 2021 to be a very special year in terms of pipeline maturity and progression. So in a nutshell, that's where we are. It's an inflection year for us, and we're looking forward to discussing it with you. Thank you.

Costa Saroukos, CFO

Hi everyone, it's Costa here. I want to take the opportunity to just quickly run through a few financial highlights from our earnings presentation earlier today.

Christopher O'Reilly, Global Head of Investor Relations

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

Operator, Operator

The first question is from Mr. Muraoka from Morgan Stanley MUFG. So Mr. Muraoka, please go ahead.

Shinichiro Muraoka, Analyst

Hello.

Christophe Weber, CEO

Yes, yes. Hello, we hear you. Please go ahead.

Shinichiro Muraoka, Analyst

Hi, hi, yes. So two questions, first, regarding the Novavax vaccine, could you address more about the potential impact on your operating margin if its launch happens maybe half a year or nine months later? The second question, sorry, I’m sure about this English quote, but in terms of TAK-994, you said the next update would be at the end of 2021 or early 2022. What kind of updates can we expect around that time?

Christophe Weber, CEO

Thank you, Muraoka. Regarding the vaccines, I would just like to reconfirm what we have in our guidance and what we don't have. In our guidance are 50 million doses of the Moderna vaccine that we distribute on behalf of Moderna. Of course, it's a bit wider than distribution, because we have files of products on their behalf. We conducted the Japanese clinical trial and manage the pharmacovigilance and communication with doctors. So, we're essentially importing on behalf of Moderna and distributing. For these 50 million doses, you should visualize it financially as a distribution fee, not typical revenue.

Andy Plump, Chief R&D Officer

Yes. Thanks, Christophe. And thank you, Muraoka. In terms of updates for the end of the year, there'll be substantial updates for the overall Orexin franchise, starting with TAK-994, which is our lead oral Orexin 2 receptor agonist. This molecule is in a complex Phase 2, 2b study that has four parts. The first part has been completed, which is a proof of concept with two doses in Type 1 Narcolepsy. The second part, which is ongoing, is a dose-ranging study in Type 1 Narcolepsy that will be an eight-week study with an extension beyond that. Part C is a proof of concept study in Type 2 Narcolepsy, and Part D is a China Type 1 Narcolepsy study. We hope to complete all four parts by the end of the year, and we should have a clear sense of dose, efficacy, and safety profile to share with you then, as well as plans for our Phase 3 design for TAK-994. We'll have data by the end of the year on TAK-861, including proof of concept data. TAK-861 is a unique molecule aimed at addressing opportunities in sleep-wake cycle disorders, not due to concerns with TAK-994, which we are quite pleased with everything we've seen so far, including our chronic toxicology study. Lastly, regarding TAK-925, we will share thoughts on its development program for IV indications at the end of the year.

Christopher O'Reilly, Global Head of Investor Relations

Great. Thank you. Next question, please.

Operator, Operator

The next question is from Mr. Ken Cacciatore from Cowen. Mr. Cacciatore, please go ahead.

Ken Cacciatore, Analyst

Thank you so much. Congratulations on all the good progress. Just a couple of questions around your healthy cash generation. So, I understand we're going to continue to aggressively pay down debt. At these depressed share prices, is there contemplation of share buybacks? That’s one question on excess cash. Second question is regarding your debt progress; is there a chance you'll be more aggressive on business development? And my last question is just around PDT, maybe a discussion around the competitive landscape and long-term growth expectations. Thanks so much.

Christophe Weber, CEO

Thank you, Ken. It's Christophe. I’ll start with business development, then Costa can cover the share buyback questions and Julie will cover the PDT. On business development, obviously we are not contemplating a larger transaction, because we believe that our growth momentum is strong. We are focusing on pipeline investment, but we are also looking for early-stage partnership opportunities aligned with our therapy area focus. Some partnerships are very early-stage like research platforms, while some, like TAK-999, are more product-oriented.

Costa Saroukos, CFO

Thanks, Christophe. Hi Ken, thanks for the question. Yes, we continue to consider the share price and believe it is undervalued. Our capital allocation policy remains focused; we are investing heavily in growth drivers and R&D, including external partnerships, and we are continuing our efforts in China with 15 new product launches over the next five years. These efforts will help us grow the top line. We are also seeing improvements in the overall business and margins in PDT. Deleveraging is a key focus; we are clarifying that our net debt to adjusted EBITDA ratio in our capital allocation policy should be stated as reaching low 2s, allowing us some flexibility for potential share buybacks or future incremental in-house partnerships.

Julie Kim, Chief Commercial Officer

Hi Ken, this is Julie. Regarding the long-term growth perspective for the PDT business, we expect to be able to continue to provide year-on-year growth for the total plasma-derived portfolio, primarily driven by strong growth in the IG portfolio, particularly our subcutaneous brands, as well as robust demand for albumin, especially from China. As we continue to invest in R&D, we expect that these investments will start contributing to our overall growth from a PDT portfolio perspective. Looking at the competitive landscape, we have strong differentiation and competition, not just in terms of our product portfolio but also our ability to manage our overall business effectively. Despite competition from alternative therapies, particularly the anti-FcRn space, we believe there will still be strong demand for our IG portfolio.

Ken Cacciatore, Analyst

Thank you. Thanks to the entire team.

Christopher O'Reilly, Global Head of Investor Relations

Thank you, Ken. Next question, please.

Operator, Operator

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

Hidemaru Yamaguchi, Analyst

Hi, can you hear me?

Christopher O'Reilly, Global Head of Investor Relations

Yes, we hear you. Hello.

Hidemaru Yamaguchi, Analyst

Okay, thanks. The two questions from me: First of all, regarding Eohilia PDUFA data, can you remind me what's been the issue and when will those things be sorted out on your side? That's the first question. The second question is about ENTYVIO's autoinjector pivotal study starting from H2. Do you think this injector will become a majority of the product in the future to protect the product from entering the market within a few years?

Christophe Weber, CEO

Thank you, Yamaguchi. For the first question, I'll turn it over to Andy and for the second question, to Ramona.

Andy Plump, Chief R&D Officer

Thank you, Yamaguchi. We don't have a lot to share on Eohilia. The FDA missed their PDUFA date, which is quite unusual. We are in dialogue with the FDA and hope to have more information to share. We remain confident in the overall profile of the product and expect to have it approved soon.

Ramona Sequeira, Chief Business Officer

Yes, thank you for your question, Yamaguchi. Regarding the needle-free device, we are excited about the opportunity it presents for patients to gain access to ENTYVIO without the needle. However, this should not be seen as a loss of exclusivity extension strategy. We disclosed that the earliest we would see biosimilars on the market for ENTYVIO is 2026 in the U.S., 2024 in Europe. This is mainly aimed at patients who may have needle phobia or difficulty with needles to ensure they have access to ENTYVIO.

Hidemaru Yamaguchi, Analyst

Okay. Thank you.

Christopher O'Reilly, Global Head of Investor Relations

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

Operator, Operator

The next question is from Trevor Polischuk from OrbiMed. Trevor, please go ahead.

Trevor Polischuk, Analyst

Thank you for taking the question. Three questions if I may. First question is just on the fourth quarter particularly to get a little bit more color on some of the one-timers that might have boosted operating profit and earnings per share. Second question is on guidance; the lack of leverage in 2021, is this mainly due to the investment you've been talking about, or perhaps a mix issue, or is it just maybe a little bit conservative? Finally, I’d like to know about the COVID impact to the business both to the top-line as well as potential OpEx impact, not only for 2020 but for 2021. If you could share some insights on that, thank you.

Costa Saroukos, CFO

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

Trevor Polischuk, Analyst

Yes, sorry, Costa. I can hear the feedback. I apologize for that. The first question was just to get a little more color on the fourth quarter results, specifically any one-timers that boosted operating profit and earnings per share. I think you mentioned tax benefits. The second question was on guidance, which suggests a lack of leverage in 2021. I'm curious whether this is due to investments, a mix issue, or perhaps being a bit conservative.

Christophe Weber, CEO

Can you cover the first two questions and I’ll cover the third? Yes? Okay.

Costa Saroukos, CFO

Yes. Thanks, Trevor. I can cover all three. In Q4, we did see an improvement in the overall tax rate, both on the core and underlying tax rates, driven by legal entity optimization. After acquiring Shire, we reduced the number of entities from 400 to 240, which helped us achieve those tax benefits. Our tax rate improved by 6% compared to the previous fiscal year. Regarding your second question, if I understood correctly, you were asking about margin. We expect our margin to be approximately 30%. In fiscal year 2020, we landed at 30.2%. This margin remains stable despite a significant increase in R&D investment of over $600 million. We are absorbing this investment while still maintaining a strong top-line revenue growth, moving from 2.2% in 2020 to a mid-single-digit growth expected in 2021, along with the acceleration from synergies delivered a year in advance.

Trevor Polischuk, Analyst

Yes, that was great. Thanks, Costa. I really appreciate the detail.

Christopher O'Reilly, Global Head of Investor Relations

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

Operator, Operator

It appears there are no more questions. We will close out this meeting. Thank you everyone for joining us today. If you have any follow-up, please don't hesitate to get in touch with the IR team. Thank you very much and let's speak again soon.

Christophe Weber, CEO

Thanks, everyone.

Operator, Operator

Thank you for your time. That concludes today's conference call. You may now disconnect your lines.