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

Good afternoon. Welcome to the JPMorgan Healthcare Conference. I'm Seiji Wakao, Japan pharma analyst, JPMorgan. It's my great pleasure to introduce Christophe Weber, President and CEO of Takeda. I'm going to pass it to Christophe. Please go ahead.

Thank you. It's a great pleasure to be with you this afternoon. Thank you very much for spending your time here with Takeda. We are in a very interesting phase at Takeda after many years of acquisition, integration, business rationalization, we are in a phase where we have a very strong financial foundation, and we are very focused on growth, and we are committed to long-term growth and shareholder return. So a very exciting phase. So I hope that you will share my excitement this afternoon. And actually, investors, the market already took notice. Last year in 2022, our share price increased by 28%. So I think the market is starting to recognize the phase we are in. The traditional disclaimer. Here I want to focus on what we do and how we do it because this is what is motivating our 55,000 colleagues around the world, 20,000 here in the U.S. We are very much focusing on engaging this workforce. We are measuring that every year. Last year, we did our employee survey in September. First, we had a response rate of 87%, which is very high. And we have an engagement index, which measure the motivation of our colleagues. And it was, 82% of them are highly engaged, highly motivated and this is because of what we do and how we do it. First, our purpose is to discover, develop and bring to the patient life-transforming treatments, medicine and vaccines. So just that is very motivating for our science-based organization, for our R&D organization because we are focusing on life-transforming medicine, and we are focusing on access, making sure that this treatment, these medicines reach the patient, not only the wealthy in developed countries, but also in emerging countries. We focus a lot on providing the best working environment for these 55,000 colleagues of us. And this is something that we have been focusing since a long time, but even more focused now with COVID, so creating the best people environment. Of course we are embracing a hybrid way of working in many cases. We want to do that well. I think every company is trying to do its best here. This is, of course, an area of great focus of us. I will also highlight the data and technology part. We are in a very significant transformation using AI, data and technology. This is transforming completely the way we work at Takeda; in R&D, in manufacturing, in our commercial operation, in our back office. This is a big change. This is exciting, but also a change. It can be scary sometimes about this is a pace of change is tremendous. Very exciting. In 5 years, the way we operate will be completely different, completely transformed by technology. So our goal is to become a leading digital biopharmaceutical company. And then of course how we do that is very values driven. When we ask our colleagues what is differentiating Takeda compared to other pharmaceutical company and many of them are coming from other pharmaceutical company. Our value system always come first. And we use this simple yet very powerful formula of patient trust reputation business to make our decision in the company, do the right thing for the patient, reinforce trust with society, develop the reputation of the company and then develop our business, in that order. And this is pragmatically very powerful to make the right decision in health care, in pharmaceuticals, and this is extremely motivating actually and engaging for our colleagues. But of course, we are also a very performing organization. And it's very important also for all of us and also for our 55,000 colleagues. Last year -- I mean, in the beginning of fiscal year '22, in the first semester, we grew, our business grew by 5.5%. We have now a very strong operating margin of 31.7%, which has been the result of all the transformation that we did in the last few years. Of course that translates into cash flow that we can reinvest in the business to grow our business and that's how we can also focus on shareholder return. Our total revenue is close to $30 billion, 50% coming from the U.S. We are growing very fast in China as well. So a very interesting phase as well in terms of growth, but also in terms of margin. This growth is led by a group of 10 products that we call growth and launch product. These 10 products represent 38% of our revenue. It's growing as part of our revenue, and they are growing close to 20%. And this group of 10 products will grow over time because we are adding new product launch. Recently, we launched LIVTENCITY. We launched recently EXKIVITY. All of this product will continue to grow until the end of the decade. So none of these 10 products are facing generic or biosimilars or end of life, if you like, until the end of the decade. So this is what is driving our growth in the company and that this is what will continue to grow and help us grow until the end of the decade, until 2030. I'll mention rapidly Entyvio. This is our leading product. We launched -- this was actually the first product launch globally by Takeda back in 2014, has been doing fantastic well in all countries where we launched it. We just raised the peak estimate for this product to $7.5 billion to $9 billion for a couple of reasons. One is that it's -- the data we have supporting this product is best in class in terms of efficacy, in terms of safety, it is the only product which has demonstrated head-to-head superiority versus the TNF alpha product. We believe that biosimilar entry will not happen before the end of the decade, potentially up to 2032 because we have some patent expiring in 2032. So the product profile combined with an extra duration of life make us very confident to raise the peak of the product. So that would be our main growth drivers among these 10 growth products in the coming years. I'll say also a few words about our plasma-derived therapies franchise, which is also growing between 10% and 20%, growing fast. We have truly turned around this business in the last few years by creating a dedicated business unit, which is managing this business end-to-end from research, manufacturing, fractionation, allocation. We have a dedicated R&D organization to also innovate in the long term. We just got a positive readout of the CIDP indication for HyQvia, so we are about to file this indication. And this is a business which is growing. It started with a low margin, but we are -- our goal is to improve the margin of that business progressively in the coming years just by managing better the capacity that we have and by continuing to grow the top line without the requirement for extra investment in manufacturing, for example. So naturally, while growing this business, margin will increase over time. Now -- so this growth and launch product will help us to grow until the end of the decade. Of course, after we need the pipeline, we are a research-based organization. R&D is what we do. We have built over the years, actually, a very strong science-based R&D organization. I think we have a very strong science knowledge and knowhow in the company led by Andy. And in the last few months, we had actually very positive news on our pipeline progression. I will talk a little bit about QDENGA later. So I'll focus first on 2 products for which we had positive Phase III readout, LIVTENCITY and TAK-755. So great news. We are preparing the filing. We are engaging with regulatory authorities to file these 2 products, so TAK-755, LIVTENCITY, first line -- in the first-line indication. And then we had 2 products with a positive milestone, which allow us to move to the next stage. One is fazirsiran TAK-999. If you have listened to the Arrowhead presentation earlier, we are collaborating with them. The results are aligned with our expectations. So we are planning to move into Phase III with this product. And then TAK-861, we had -- we were in Phase I. We met all the pre-specified criteria to move into Phase II. So very positive for us. TAK-861 is the backup of TAK-994, which was a product with which we had a safety issue in the past. So we wanted to make sure that we could move to the Phase II. We met the criteria, and we are about to move into Phase II very rapidly because we prepare that study at risk. So it will take only a few weeks between the readout and the start of the study. So we are moving full speed in Phase II with TAK-861. So good -- very good pipeline progression in the last few months. A few words on our dengue vaccines. It has been 10 years of development, a long project. Well, it's 10 years of development because we generated 4.5 years data of efficacy. Not 6 months, like recently with some vaccines, but 4.5 years data. And we have a sustained efficacy, a very strong sustained efficacy. And we believe that we have a very strong proposition here for all endemic countries. There are 4 billion people living in endemic countries in the world, about 400 million infections per year, a lot of hospitalization. The issue with dengue is that, first, it's a very severe disease. You can also die from dengue. But when you have a dengue flare in a country, you have -- everybody is going to the hospitals. You have the same type of destabilization of your hospital system and the one you are seeing with COVID. Actually many dengue endemic countries are comparing dengue with COVID. They are living with this type of public health disruption all the time with dengue. So this is a very important product for its public health impact. And this is truly the first vaccine with an efficacy across all stereotype and you can use the vaccines regardless of prior exposure. What does it mean? It means that whether you are someone who had been infected before or whether you are someone who has not been infected before, you can be vaccinated, which was not the case of the previous vaccines. So it's, of course, very important because it's very difficult to know if someone has been exposed before. So we are very excited to prepare the launch. We will launch first very soon in Indonesia. We got approval in Europe. We got a positive CHMP opinion in the 4 endemic countries in a collaborative process with endemic countries. So this is a big milestone for us after 10 years of development for these vaccines. The overall efficacy is sustained over time. So we don't see a drop of efficacy. We have 84% reduction of hospitalization after 4.5 years. So very strong data supporting the launch of these vaccines. This is also the -- one of the first vaccines, which is actually dedicated to emerging countries. It's -- of course, in U.S., in Europe, it will be relevant as a traveler vaccines, actually, Puerto Rico is an endemic country for dengue in the U.S., but it is mostly dedicated to emerging countries, Latin America, Southeast Asia, India. And so we are looking forward to launch these vaccines. I'd say a few words about a recent acquisition to enrich our pipeline. We want a pipeline, which is very strong to allow us to grow after 2030. Why I'm talking about this period of time, because I mentioned Entyvio earlier. Entyvio will be a $7.5 billion to $9 billion product. It will start declining potentially facing biosimilar in 2030, 2032. So of course we need the pipeline ready by then to offset the decline of this significant product. We have a very rich pipeline. We have 40 products in clinical stage. Some of these products have a very high revenue potential like TAK-861 I mentioned. But we wanted to enrich our pipeline and we are looking at IBD for that. Our financial strength is strong for that. So we -- just before Christmas, we were in a competitive process to acquire this molecule, and we are very pleased that we were able to prevail. We think that it can be the best-in-class TYK2 inhibitors. And we think that it is very differentiated molecule compared to the recently launched BMS molecules. It has a much higher affinity on the TYK2 receptors, much lower affinity on JAK receptor. So we think that the therapeutic margin will be much wider. So we will be able to use higher dose. And we think that we will gain efficacy, especially on disease like IBD, for example. So we are very excited. We'll move into Phase III this year, and that's a product potentially which will be launched before the end of the decade. So it's -- it will reinforce our GI franchise. It is also broadening our GI franchise to more inflammation, but IBD is actually a very significant focus as well. And that -- we got interested to this molecule through the IBD lens, but we are very confident that we will be able to develop these molecules in psoriasis and other indications. So very exciting. It was, again, a very competitive process, and we were able to prevail with a razor thin margin. So very exciting to add this molecule to our pipeline. So in -- to close my talk before answering your question, and then we are very committed to growth. In the near term, this year, we are growing 5.5%. Next year will be a tough year for us in terms of growth because we are facing very significant generic exposure for a very short period of time, 2023, basically with a loss of one product, VYVANSE, which is a very big product. From 2024 to 2030, the growth and launch product I described will carry on our growth. It would be our growth drivers. We are very confident about these 10 products plus the new product that we will launch. And then after 2030, the pipeline will be with a lot of -- we have 10 late-stage assets, which will be filed and launched before 2030. We just added this new asset, the TYK2. And we really believe that we have now a strong R&D engine. We don't talk too much about our research engine, but we have a very good flow of IND every year coming from our research engine. And therefore we are confident that in the long term, we'll be able to grow. That combined with very solid financial foundation that we built over time, you saw that our margin currently is at level 31%, will allow us to invest -- to continue to invest into our business and to also focus on shareholder return. So again, an exciting time for Takeda, focusing on growth and shareholder return. And now I would like to open to the Q&A by inviting a few TET leaders. By the way, I think that Takeda executive team is one of the most diverse team in the industry. We have about 10 nationalities on the team, very strong gender diversity. And I think it's one of the most talented TET executive team in the industry. So please join me and very happy to answer your questions. Thank you.

Okay. Thank you, Christophe. And let's get started. So let me start with my question about capital allocation. So in your presentation, you emphasized your long commitment to long-term growth and shareholder returns. We understand also from this that there has been no change in your capital allocation policy. However, since the amount of the Nimbus deal is large as $4 billion. So please explain once again whether there will be any change in your capital allocation policy? I understand that your capital allocation is investment in growth drivers, deleveraging rapidly and shareholder return.

Thank you. Costa, do you want to -- Costa is our CFO.

Yes. Thank you very much for the question. Absolutely, from a deleveraging, we're very encouraged with the speed of the way we've deleveraged from the time that we completed the Shire acquisition, our net debt to adjusted EBITDA ratio was 5x. And as of the first half of this fiscal year, it's down to 2.6x. So the capital allocation policy around deleveraging rapidly is being achieved. And we anticipate to get down to low 2x, low to mid 2x this fiscal year. And that's despite the acquisition of the $4 billion upfront for Nimbus, which the majority is coming through cash. So for cash on hand, given the strong and abundant cash flow, we've been able to deliver. Having said that, we are very much committed to growth, investing for growth, growth drivers, in particular, investing in new product launches, investing in R&D, both in-house and partnerships, investing in PDT. So we expect to see an acceleration of top line revenue growth. And then with the abundant cash flow we're experiencing, we expect to also have more opportunities to enhance our shareholder returns in the future. So overall, the capital allocation policy is -- we're still very much committed to that. But the deleveraging, we've already -- we're tracking ahead of plan, and that gives us the ability to continue to invest in growth drivers.

Okay. Thank you. So I take a question from audience. Any question? Okay. So next question about dengue vaccine, QDENGA. So please comment on the current marketing and manufacturing capacity areas. And also, you have, you said you have peak sales at $0.7 billion to $1.6 billion. Do you think you can aim for higher sales than these peak sales because QDENGA was approved for broad labeling regardless of prior exposure?

Yes. So our peak sales at the moment for QDENGA is, first, is quite broad, $700 million to $1.5 billion. So it's a difficult product to forecast, frankly. But the label that we got with the age group from 4 years old above, whole stereotype, regardless of prior exposure is what we were aiming for, but the best we could get. So I'm very excited to launch this product. We are actually in the process of expanding our manufacturing capacity because we believe that the demand could be very strong. And we will see where we get from there. With the vaccines is, there is a private market, but there is also a public market. So when it will -- the public will kick off and how it will happen, we have to see that. But I think we are really excited about the launch of this product, yes.

Okay. Thank you. So any questions? One more, yes. Okay. So you have presented some update on some products. So firstly about TAK-861 in narcolepsy. So I'd like to -- more color on the Phase I result in terms of safety or efficacy because you decided to start Phase IIb.

Yes. So we're, of course, really excited about the fact that we have a go decision to Phase IIb. And as we've -- so this is our orexin agonist for narcolepsy and other related sleep-wake cycle disorders. And as we've said, we've accelerated 861 following the news of discontinuation of 994. We've been running a Phase Ib study, which has been a 1-month study in type 1 narcolepsy patients, relatively few patients. And then at risk, we've been planning to start the Phase IIb study, as Christophe mentioned. We understand this mechanism quite well and we were quite enthusiastic about the profile of 861. But there are a couple of key questions that we needed to answer around safety, around dose. We wanted to make sure that the dose was relatively low given the potential for drug-induced liver injury that this class has demonstrated and, of course, efficacy. And so we set -- we preset criteria, that will go, criteria. We're not going to share those criteria today, but they're in line with the criteria that we've presented previously for 994. And as Christophe mentioned, we have sites activated, and we're very excited to get this Phase IIb program going this year, this month. Yes.

Okay. Could you comment on Phase B trial design or targeting this launch timing?

We will comment on it, but not today. I think what we'd like to do is this is -- we're going very quickly with this program. These are data that just came in on the days before Christmas. We're still synthesizing the full dataset. The Phase IIb study has been posted on clinicaltrials.gov. But in upcoming events, perhaps at 3Q and certainly over the course of this calendar year, we'll be presenting a lot more with respect to our plans for the program, the broader dataset for TAK-994, which is quite significant and then specifics for TAK-861. And also, if I may, we have an IV molecule, TAK-925, which we've been developing in in-hospital indications, and we'll also be sharing with you some of the data that we're seeing there and plans for pushing forward into late-stage development for that program as well.

Okay. Thank you. So any questions? Okay. So next, about Arrowhead product, 999. So could you comment on Phase IIb data and Phase III design on TAK-999? So I'd like to confirm whether the results of Phase II trial were in line with your expectations?

Well, so we're very excited about this program. We've been very excited from the beginning from, we just having seen a few patients worth of data when we put this partnership in place with Arrowhead 2 years ago. Arrowhead was running a Phase II study non-blinded. So we continue to see data that made us feel very compelled. So what is this program? This is a rare disease. It's actually a relatively common rare disease. There are almost 150,000 patients with Alpha-1 antitrypsin deficiency. A subset of those, we don't really know what that exact number is, but it's probably somewhere between 1/4 to 1/3 will develop liver disease. And there's no treatment for these individuals other than liver transplant. And the cause of this liver disease is the accumulation of this mutant form of Alpha-1 antitrypsin in the liver, these aggregates of Alpha-1 antitrypsin that we know damage the liver, that cause inflammation, that cause fibrosis and then eventually they cause cirrhosis and without transplant, death. We were very excited by the data that we had seen prior to this Phase II study, and this study confirms everything that we've seen prior. So what are those data? We see 90% or more knockdown of the expression of this mutant Alpha-1 antitrypsin protein. We see 90% knockdown in the presence of these toxic aggregates. We see reductions in liver function tests. And then in very small numbers of patients, we see very significant reductions in liver inflammation, and we even started to see trends in tiny numbers of patients in liver fibrosis. So we're really excited. We're actually starting our Phase III study. We hope to have that first patient. We have sites activated. We hope to have the first patient enrolled in this fiscal year, so by the end of March. And it's going to be a study with a 2-year endpoint looking at liver fibrosis as the primary endpoint and then, of course, a number of secondary endpoints and safety measures as well. And our hope is that between '25 and '27 -- fiscal year '25 and '27 we'll be ready to readout that study and to file.

Okay. Thank you. So any other question? So I want to know about outlook for 2023 and 2024. So you have commented that fiscal year 2023 will see a slight decrease in operating profit due to the VYVANSE patent drift. You also mentioned that from fiscal year 2024, the company will return to growth phase. Could you tell us the growth drivers for fiscal 2024 and beyond? The Japanese market consensus is that operation profit will continue to decline in fiscal year 2024 and beyond?

Yes. So in 2023, we believe that our revenue will be flattish because we are losing VYVANSE, which is a very significant product in the U.S. This year, we had VELCADE also declining. So 2023 is a very special in terms of generic exposure. But our growth and launch products are generating incremental revenue of $2.5 billion every year. And so you do the math, it's balanced. So '23 will be flattish in revenue. From '24 onwards, our growth and launch product I just described, these 10 products, will continue to grow until the end of the decade. And today they generate 38% of revenue of the company, it will rapidly increase. And very rapidly they will generate 50% of our revenue. So I think that's why we are confident to grow beyond -- after 2023 until the end of the decade. In terms of geography, our revenues repetition completely changed in the last few years. So today, 50% of our revenue comes from the U.S., about 15% from Japan, we are the leading, obviously, a company in Japan, but it's only 50% of our revenue. I'm saying only because the Japanese market is a most difficult market among developed countries today. It's a declining market. The price cuts are very significant. And actually, strategically, we wanted to reduce our exposure to the Japanese market. So today, 50% of our revenue is coming from the U.S., about 15% from Japan. And then in Europe, we have -- we are growing very well actually in Europe, and that's a good sign because it means that we are able to gain good reimbursement in a tough market, and our business has been growing very well in Europe. And then one of the fastest-growing country today is China. We are growing very rapidly in China. We developed specifically our pipeline in China in the last few years. We are now launching very rapidly new product in China, and we have been very successful at getting reimbursed and being on the NRDL list as well in China. So this is our fastest-growing market today in China. And we have not seen such a very significant slowdown during COVID as well. So we are very committed to grow in China. I should mention that we are extremely committed to China, but we are not dependent on China in any way. For example, we don't -- if you look at our supply chain, we have 0 dependency from China in our supply chain, for example. So in case there is a very significant geopolitical risk, we are covered on that side.