Takeda Pharmaceutical Company Limited (4502) Earnings Call Transcript & Summary

We'll get start with our next session. I'm Shinichiro Muraoka of Morgan Stanley Japan Pharmaceutical team. And today, in this session with Takeda Pharmaceutical -- sorry, before starting that. So important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So let's start. So today, we are with Andy Plump of -- President of R&D of Takeda; and Costa Saroukos, CFO. Thank you, Andy and Costa for joining us. Thank you.

So let's get start my question first to Costa about earnings for this year, next year and beyond. First, in this year, your last quarter earnings were quite good, not just with currency support, but quite good earnings. Could you -- I believe -- market believes you can lead more for the inside guidance. So could you wrap up your outlook -- near-term outlook of the current fiscal year's earnings?

Thank you, Muraoka. Great to see you. It's great to be here today. So we've already presented our Q1 results, and I'm very pleased that we started the year very strongly. Our revenue -- core revenue grew at 8.3% at a constant exchange rate. And that's driven by our growth and launch products. We have a cluster of products that we term growth and launch products. Some of those products contain ENTYVIO, TAKHZYRO, immunoglobulin portfolio and also EXKIVITY and LIVTENCITY, new product launches. So that cluster of products -- growth in launch products grew at 26% in Q1. So we're very -- a good start to the year. We also saw some strong margin improvements as well. So our core operating profit margin was just shy of 33%. There is a really strong performance on OpEx management and particularly in the SG&A lines. And so as you mentioned, what's the growth potential for the rest of the year? So what we -- management guidance for the full year on the core revenue at a constant exchange rate is low single digits. And then our core operating profit and core EPS growth is high single digits. Now it's still early and in a few weeks, we'll have our Q2 results. We had -- on the actual FX, we have seen upside, the tailwinds because of the weakening of the yen is favorable for Takeda because 50% of our revenue is coming from the U.S. business. So we do have potentially upside there in the actual base. And also, I think from a core growth on the revenue, we see that as a good start to give us confidence that we may be able to exceed.

Yes. Yes, yes, good. So good earnings for the current year. But in the next fiscal year, as everybody knows, you will see -- face patent expiration of VYVANSE in Japan, Azilva as well. So what should we expect in the next fiscal year?

It's a great question, and we don't give guidance yet for 2023, but we have telegraphed that in 2023, we do have this loss of exclusivity headwinds such as VYVANSE and Azilva, Nevertheless, we still think that our revenue will be flattish. And the reason for that is because we're seeing strong growth coming from our growth and launch products. ENTYVIO, Q1 grew at 19%, TAKHZYRO grew at 19%. Our immunoglobulin portfolio is growing at 22%. We believe this growth and launch product momentum every year would generate an incremental USD 2 billion. So we think that, yes, '23 will be challenging with VYVANSE coming off that. But remember, with VYVANSE, it's not a full 12-month loss of exclusivity. We still generate 5 months of non-generic entrants. So we think by the time the generics come, the impact of the loss of exclusivity offset by the growth could put us in a flattish type of revenue. Having said all that, what happens beyond 2023 is exciting because we think we'll start to see acceleration of top line revenue growth because the impact of loss of exclusivity is much less in 2024 and beyond, at least until loss of -- biosimilar entrants come in for ENTYVIO, which we have highlighted to be up potentially to 2032 because we have -- we think we have strong patents, both dosing formulation patents and also manufacturing patents that will sustain the ENTYVIO growth up until biosimilar entrants in 2032. So that's our revenue somewhat forecast for the next decade or so.

Yes. Great. Great. So you said that revenue-wise next year is flattish. So in terms of the profit wise, maybe small deep and then go back.

Well, we've -- on a profitability standpoint, we've committed to low 30s to mid-30s cooperating profit margin. So that's what we're targeting, whether we have loss of exclusivity or not. So that's where we're looking at that. And we're driving a lot of efficiencies. You see the efficiencies were driven in the SG&A line in the last couple of quarters. We're driving, we're investing heavily in data, digital and technology throughout the whole value chain of Takeda, whether it's in R&D, whether it's in finance, HR, with products that are coming off patent, we're already turning around the marketing mix from face-to-face to a significant amount of digital marketing. And so we're managing the overall P&L despite the LOE and maintaining our margin commitments of low to mid-30s. That's what we're aiming for.

Great. Great. So moving to the respective business like, as you said, growth and launch products, several products, which should -- I should ask a bit detail the ENTYVIO, the competition and adversaries. So competition is increasing definitely in UC and CD area. And biosimilar risk, you said, yes, maybe it will be pushed back. But maybe right now, current consensus already discounts consensus-wise maybe 2 years or 2 to 3 years extension of the ROE. What -- that might take. But could you elaborate to the ENTYVIO in the near future, please?

So maybe I can start and maybe Andy can talk about the competitive landscape. But the way we look at ENTYVIO, the fact that 2026 was the initial original assumption where we had biosimilar entrants, that's no longer the case. So we're expecting 2032 now. I mean we have solid patents and the timing it takes for competitors to come into the market with clinical trials is -- no one started yet. So every month, that's delayed also the probability to hitting the 2032 market is higher. Having said all that, we're in a position where ENTYVIO previously peak revenue was anywhere between USD 5.5 billion to USD 6.5 billion. Well, now with the delay biosimilar assumption, we have an opportunity to increase that peak revenue target. And we will probably come out in the coming months with an update to the street of what we can -- so I think there's great opportunity there. And at the same time, ENTYVIO has very high margins. So any incremental revenue, any incremental delays is also coming down to the bottom line and also cash flow. So I think, overall, we're in a pretty good position there. And then maybe from a competitive landscape, you could add some color there, Andy.

Yes. Thanks, Costa. One of the great parts of the business we live in is the innovation that's coming forward for patients. And that's true in inflammatory bowel disease. We have tons of great innovation coming forward. As Costa has alluded to, with every innovative new class that's come into the IBD space, ENTYVIO has continued to grow. And we imagine that to continue moving forward as new mechanisms. We actually pick 2, which is now out there for psoriatic arthritis has the potential to emerge in IBD and there are many additional new mechanisms. But what makes ENTYVIO so unique is it's the only in class. It's the only alpha-4-beta-7. It's the only integrin inhibitor that's really actively used in IBD. And I wouldn't say that its efficacy profile is better than anything out there. Everything has kind of a ceiling on efficacy, but its safety profile is outstanding, the convenience of dosing and the experience that physicians and patients have had with this agent. I think as Costa has mentioned, I think it continues to be a very important piece of the IBD landscape.

Great. Great. So I'd like to move to the plasma business, PDT business. So now -- so demand is increasing quite strong, double digit. So -- but -- so demand-wise, supply-wise and cost-wise, let' say, cost-wise, what can we expect going forward, i.e., the donor fee -- as you said, in the last quarter, the donor fee declined. But even now, maybe it's higher than the pre-COVID level. So can we expect a further decline -- sequential decline of the donor fee as a result of the -- can you continue the improvement of the gross margin of the business going forward. Could you elaborate that, please?

That's a great question. And it's obvious that this donor fee dynamics is moving. It's very volatile at the moment. So it's very difficult to predict exactly what's happening with the donor fees, but I can reinforce that in our Q1 results, we had reduced our donor fees by 15% compared to the previous year. And we're continuing to monitor the market dynamics, and we'll see whether we can continue on that path. When we get to pre-pandemic levels, I'm still not clear on, but there's more to just the plasma economics than donor fees. To improve your margins, you have to look at it throughout the whole value chain of PDT. And that entails manufacturing capacity increases. It entails leveraging our data, digital and technology, which we've invested in, that we're seeing significant efficiencies throughout the marketing, the donor experience and also yield improvements. So the yield we're seeing is starting to increase there as well. And thirdly, it's the investments we've done since the acquisition. So we've increased the number of donor -- the collection centers at the BioLife. So our overall network is 212. Q1, we added 8 collection centers. We expect to be over 20, increasing another 20 this fiscal year. So I think it's a combination of all these factors that helps improve our overall volume trends on the revenue and also improve our margins.

So margin improvement. Well...

That's absolutely right. So we've always committed to having the plasma-derived therapy business non-dilutive to the overall Takeda margins, in the midterm. So we still have some work to do. But overall, we haven't seen a dilution versus pre-pandemic as well. So we've been able to manage the pressures that we've seen from the marketplace and the cost, we're driving other levers such as data, digital and technology as an example.

Yes. And the competition from FcRn would be maybe limited, right?

I mean the FcRn inhibitors are really exciting new class of medicines. And we've seen with myasthenia gravis, the potential in diseases that are driven by pathological auto antibodies of the IgG subclass. One of the interesting parts of the immunoglobulin therapeutic landscape is the -- and I don't think we fully understand why, but the breadth of indications across immune-mediated disorders for which there's efficacy. You have immunodeficiencies where you have no immunoglobulin. So clearly, the FcRn's don't make any sense. That ends up being about 40% of today's market for immunoglobulin but growing more diagnosis of primary immunodeficiency with depleting agents in cancer, there's a growing market of secondary immunodeficiencies. Then, there's a whole range of inflammatory diseases that are, again, not driven by autoantibodies, of which CIDP, which is about 1/3 of the overall immunoglobulin subclasses probably falls into. And then there are a number of autoimmune diseases like myasthenia gravis. Now the FcRn's are very exciting. We just don't know what the extent to which they'll be effective. And given the breadth of indications for which immunoglobulin has been actively effective and studied over decades and decades and decades. We're not worried about the competitive pressures. We've done scenario analysis and in almost every scenario, our immunoglobulin franchise continues to grow.

Great. So yes, so I'd like to move to the main part of pipeline.

I like to go the fastest part, so I'll give my point.

But so your dengue vaccine successful approved in Indonesia recently. What -- but in EU and in Europe and U.S., what can we expect to -- in the near future?

Yes. So QDENGA, we're really excited about QDENGA. It's been a labor of love for us. This is, for Takeda, decade in the making and the vaccine was actually innovative substantially before that. It's -- luckily, dengue is not a disease of United States. But for travelers, this will be an important vaccine. We have yet to file in the U.S. that's coming shortly. Indonesia was a great first step for us because it's a big endemic region for dengue. Label is fantastic. It's a broad label, no restrictions. Really the big hurdle for this vaccine will be in the EU, where we're actually using a process called EU medicines for all. This is a harmonization process by which the European Union has a review and an approval that's harmonized typically by many other countries and often -- and the endemic countries outside of Indonesia will leverage this process. We're extremely optimistic, but it's been a long process. We actually submitted the file about 2 years ago, and the EU has asked for more data. We've now just submitted our final data analysis, which is a 4.5-year data analysis. We see about 85% efficacy against severe dengue that probably resonates with many people because that's about the level that we see with the COVID vaccines. And so we really think that this is something that can drive a regulatory decision and then uptake it. It's a difficult market because of the -- some of the geopolitical channels that we face from the predecessor vaccine.

But so in terms of the labeling, so as you said, so in Indonesia, so no testers. Can we expect the similar levering in the major regions?

So the issue is Dengue has 4 serotypes. We're highly effective in serotype 1 and serotype 2 with QDENGA. Serotype 4, we just didn't have enough experience in our Phase III study to know whether we're effective or not. And in serotype 3, we're highly effective in patients who are sero positive that means patients who have been exposed to dengue prior to getting our vaccine, but we don't have efficacy in sero negative patients with type 3. And the big question is -- I think we can handle the fact that we're not efficacious in that relatively small population. The question is, are we harmful in that small population? So our data would suggest no evidence whatsoever that there's any harm but the level of scrutiny by regulatory authorities, given the precedent is quite high. If we have a label, where patients have to be tested for baseline serotype prior to getting vaccinated, it significantly reduces our ability to drive access. So we'll know in the next 1 to 2 months, what the solution is. But we feel quite optimistic.

Previously, you said the peak -- potential peak sales of $0.7 billion to $1.6 billion.

That's right.

Any more cut up?

So I can answer that. Based on -- we'll wait and see what the label is. I mean if it's a broad label, definitely at the higher end of that range is what we're...

Okay, great. And moving to the other pipeline. So I think TAK-999 with Arrowhead, so for alpha-1-antitrypsin disease. So maybe -- so I think you -- the Phase II data was pretty assuring. So what's your plan going forward?

Yes. So TAK-999 or Fazirsiran, it's very hard to say. I'm practicing it, we're going to be saying it more and more. We just gave it a generic name. So this is an in FRNA that's administered quarterly and it knocks down the alpha-1 antitrypsin gene and in particular, the PiZ variant of alpha-1 antitrypsin, which is a variant that causes these pathological alpha-1 antitrypsin aggregates in the liver that cause liver damage, eventually liver injury and cirrhosis. Only treatment for these patients is liver transplant. There's no palliative, there's no therapeutic options. So it's an incredibly high unmet medical need. It's a rare disease, underdiagnosed. These patients actually typically come to us from pulmonologists because they have also some pulmonary manifestations of the disease. Phase II, incredible data, 90-plus knockdown of this mutant gene. We see -- in liver biopsies, we see almost resolution of these pathological aggregates. I personally think we should be -- the FDA should be more aggressive. We should be looking at an accelerated approval because the pathophysiology of this disease is so well demarcated. The problem is that the NASH is a very challenging area from a regulatory standpoint. So -- and we've actually also seen in relatively small numbers, reversal of fibrosis in these patients. So we have incredible enthusiasm for this program. We're about to start a Phase III program. We're gearing up, hopefully, that first patient will be dosed this fiscal year. And we've angled that -- our hope is to submit sometime in the '25 to '27 time frame with a very significant Phase III efficacy and safety data set.

How about the interim analysis?

Well, so we haven't disclosed the nature of the Phase III program. There's still some dialogue ongoing with the agency as to what the eventual endpoint will look like. So you -- in the disease like this, you have 3 tiers. You've got knockdown of the pathological entity. That's not enough to drive registration. We know that. You've got intermediate liver signals like fibrosis and inflammation, which actually have been accepted as registered land points for other forms of NASH. And then you have clinical outcomes, progression to cirrhosis, liver transplant or death. Those are long-term measures. We don't think that it's feasible to do a study looking at those clinical end points. So when you talk about an interim analysis, it's really going to depend on which endpoint we end up with. I think if you know the field well, the only real practical one that would be meaningful is looking at liver histology like fibrosis. And then longer term, creating a longitudinal data set that links changes in liver fibrosis to clinical endpoints.

Okay. I got it. So -- and one more about pipeline. So TAK-861 narcolepsy product, market interest are pretty, pretty high, as you know. When can we see the -- can we know the results of the Phase Ib for NT1 based on the study?

So just so everyone knows, 861 is our orexin-2 receptor agonist. It's the third agonist that we've studied in the clinic. The first 925 is an IV administered agent, still very actively being studied in hospital indications. TAK-994, which we're very excited about, an oral orexin-2 receptor agonist, we had to discontinue because of drug-induced liver injuries and now TAK-861 is our next oral compound. It's in Phase Ib now, and our hope is to have enough data by the end of this calendar year to trigger a go decision. This is a very exciting mechanism, right? We have a tremendous amount of preclinical and clinical data to help us understand what the potential of this pathway is. And in my many, many, many decades in this industry, I've rarely seen a mechanism with this potential.

Okay. So by the end of this year currently. So not to add the second quarter reporting in.

Well, so when we say year, we're ambiguous because we have the calendar year and the fiscal year, and I'm not really angling as to which one.

Okay. So yes, I'd like to have a question from the audience. If you have any questions, please raise your hand. Maybe microphone will delivered. Is there anyone? Maybe nothing. Okay. So I'll go back to some other questions. So in terms of the pipeline -- sorry, Andy, today, we talked about 4, 5 products, but you have many list of the added to mid-stage pipeline. Could you pick up several projects which you favor a lot?

Well, we only have 5 minutes left. So maybe I just -- I'll talk about 3 near-term readouts that are emerging that represent different parts of our overall strategy. So one, a pipeline program, TAK-755, which is an enzyme replacement therapy that's being developed for TTP. We have our first Phase III data that will be coming out in the next few months, that's in congenital TTP. It's really interesting. We presented some data already that's just quite striking in terms of the potential of this mechanism, cTTP is the smaller of the indications. The immune-mediated TTP or acquired is the bigger one, and that will come later. A second will be actually a really interesting cell therapy that we have registered in Europe. It's a mesenchymal stem cell therapy that's used to treat inflammatory diseases and fistulas in the operative setting known as a Alofisel. So we're now running a very large 550 patients, a global Phase III study for U.S. and rest of world registration. That study will read out this year. And then a third representative of what we do in R&D, you've talked about plasma earlier, and plasma R&D is so different than anything else. And actually, our biggest product, as we've discussed, is immunoglobulin. And one of the gaps in labeling of our immunoglobulin franchise has been CIDP especially don't carry a label for activity of any of our immunoglobulin products in CIDP. Of course, there's an immense amount of off-label usage. So we see use of our product in CIDP. But we actually just completed a Phase III study for HYQVIA, which is a subcutaneously administered form of the immunoglobulin that's administered about once a month, which is one of the most favorable administration regimens of any of the agents out there, highly efficacious. We presented some data at the last quarterly earnings and the full data set will be coming out, and we'll be submitting that. And then one pipeline program that I'd love to mention -- it's modakafusp alfa. This is actually a program that we, through our research and partnership model, started to work on several years ago. It's an immuno-oncology agent. It's a targeted agent that really engages the innate immune system through activation of interferon alpha. And we've seen really interesting results in refractory myeloma patients. In fact, if we had come out with these data a couple of years ago, we'd have a path to registration in a single arm study. FDA has become a little bit more conservative, particularly in indications like myeloma where there are so many agents. So we're now in the process of taking these exciting data, and we are going forward with the single-arm study of Phase II study, but we're also now starting combination studies to move up in lines of therapy. I'm really keen on this program. It's also a bellwether for us. It's our first immuno-oncology program in innate immunity that we're moving forward.

Okay. Great. So Costa. So maybe it would be the last question for you. I'd like to ask you about the capital allocation. So what -- first of all, so in terms of M&A activities, what can we expect going forward? Are you -- the size of our acquisitions?

Thank you, Muraoka for the question. I mean it depends on -- if I needed to explain what are we trying to solve -- so in the -- for the next decade, we don't have a major cliff except for 2023, which we have VYVANSE and we expect to offset that by the growth and launch products. The biggest gap we have is once ENTYVIO biosimilar entry happens into the marketplace, which could be potentially 2032. So how are we looking at this strategically. We'll be looking at targeted asset acquisitions that are complementary to our pipeline and also our therapeutic area of focus. So that revenue is generated from, say, later part of this decade that way, they could grow the business post ENTYVIO biosimilar entry. So it's more -- potentially, we're shifting a little bit from early stage to more mid- to late stage. And that's really the -- but do we need to do a major M&A acquisition of a company? Absolutely not. We have scale. We don't need more scale. It's more just targeted assets to offset the decline in another 10 years' time, for example. So that's where we are. And that's how we're thinking about that from overall. And at the same time, the good news is you can see our net debt to adjusted EBITDA ratio coming down. So Q1, 2.8x. That's factoring even half year dividend payment. So in the next few weeks, when you see our Q2 results, I'm hoping -- I haven't seen it yet, but I'm hoping to see a much more, even more improved net debt to adjusted EBITDA ratio as we're getting towards the long time. So of course, we're going to have a lot of levers. We have strong cash flow coming through, and I think we'll have a lot more levers to pull for acceleration of later stage and looking for future growth.

So you look quite confident. So from that sense, how can I say? So when can we expect you to start to raise the dividend?

So it's a great question again. And you know what I like about that question? The narrative has changed. I mean 3 years ago, I used to get questions like, can you pay for the dividend because of your debt levels? Today, we're getting a different narrative and different dialogue with investors saying things like, can you do a share buyback? Can you increase your dividend? Because obviously, we've been able to deliver really great results on the synergies, our margin improvement. Our cash flow is very strong. So we will look at it. We'll continue to balance and outweigh the difference between prioritizing investment in R&D, of course, looking at asset acquisitions and where appropriate, look at share buybacks and potentially even dividend increases in the future.

Okay, great. So yes, now time is up. So thank you, Costa and Andy.

Thank you so much, Muraoka. Thank you, everyone.

Thank you.

Thank you very much. Thank you. Thank you.