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

Good afternoon. My name is Shinichiro Muraoka, covering Japanese pharma in Morgan Stanley Japan Pharma team. Today, in this session we were with Takeda. Well, I'm extremely pleased to have Costa Saroukos, CFO of Takeda; and Andy Plump, President of R&D. Costa and Andy, thank you for joining us today.

Thank you, Muraoka, for having us. Appreciate it.

Thank you. So sorry, before starting this session, important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/disclosures.

So okay, let's get started with Costa first. So your earnings -- current earnings, going forward, so -- and your current growth driver. First, about ENTYVIO, it's a quite amazing robust growth we had seen. But in the last 2 quarters it looks a bit moderating. And we understand that our market rate a bit slowing down. But could you elaborate the reason behind and how can we expect -- what can we expect going forward?

Sure. Thank you, Muraoka, for the question. Firstly, before I jump into ENTYVIO, let me say that we're very pleased with the start of the year. First quarter we're seeing solid growth of top line revenue of 3.7% at a constant exchange rate and 8.9% growth at a reported basis. What's the key driver for that growth is our growth and launch products. What's in that growth and launch products? PDT business, we're seeing that growing at 24% year-to-date, strong performance there. TAKHZYRO, another stronger performance in Q1, growing at 15%. And then ENTYVIO, growing at a slower rate at 7.1%. What are the reasons behind that? Twofold. Firstly, we're seeing in Europe -- in the European markets, we've had some price cut in January of this fiscal year, mainly in the U.K. with [indiscernible]. We're also seeing price cuts in France and Germany. So that's putting a significant pressure on the growth. However, by January next year, that will wash out. So we're comparing apples-to-apples from that standpoint. And then when I look at the U.S., you're seeing, with the U.S., there's a couple of things. One, last year quarter 1, we had some timing of some shipments, so that sort of skewed the growth rate last year. But we are also seeing some softness in the overall IBD growth. There's some more competition pressures there, but we're continuing to keep an eye on it. What we're very excited about is the potential approval of ENTYVIO subcutaneous UC, and we expect that to happen this month. So that will be potentially another catalyst to drive new patients. But end of the day we're still very confident that we're going to deliver a peak revenue for ENTYVIO anywhere between USD 7.5 billion to USD 9 billion. So that's something that we're very excited about. And I think the subcutaneous UC approval and potentially also the CD subcutaneous approval will be another catalyst for accelerated growth.

So you believe -- so the 2 quarters are single-digit growth, but maybe you can become...

Absolutely. Absolutely. Well, we expect total revenue for ENTYVIO to be approximately USD 6 billion this fiscal year. So the $7.5 billion to $9 billion, especially with the extended life cycle of ENTYVIO where we expect the biologic -- biosimilars to come into the market late -- in early next decade, we have a good runway. But of course, with the approval of subcutaneous that will be another catalyst to accelerate the growth.

Great. And in terms of the -- as you said, of biosimilar situation, as far as I know, so they are not so visible yet. Can I -- are there any changes?

No changes to our guidance and forecasted time line at the moment. We think it will be early -- maybe 2032, 2031, time will tell. But we still have that sort of runway that we expect no changes to that overall time line of biosimilar entrants.

Okay. So maybe we can expect the recovery of the momentum in the upcoming quarters.

Correct.

Great. Thank you. So yes, so ENTYVIO, yes, it's okay. So on PDT, as you said, quite robust, quite a good momentum of the [ sales ]. So maybe in terms of the top line, I believe you can maintain such a robust sales going forward, like peers as well. But -- so how can I say? So -- are there any risks for the top line likely FcRn coming.

So understood. We've known about FcRn. It's already factored in our guidance, in the short, medium and long term. We're very pleased with the performance of our PDT organization. Since the acquisition of Shire, we've created our own plasma-derived therapy business unit, end-to-end process. We've increased the number of collection centers. We're ramping up capacity. We're improving immensely the cost base and efficiencies, leveraging data digital technology. We are the first ones from a volume standpoint compared to our peers to come back to pre-pandemic volume levels. And last year, we also reduced our donor fees by approximately 15%. So that's also improved our overall [ pharmacy ] improvement in our cooperating profit, so that's a good signal. At the same time, Q1 has been phenomenal, growing at 24%. The full year target or full year forecast is anywhere between 10% to 20%. So I'm very confident that we're going to deliver that and also believe on the future state to grow at or faster than the market in 2024 and beyond.

Great. So the top line, so quite robust, and how about the bottom line or margin?

So margin, we don't disclose the actual margin, but I can tell you, with the actions that the team has done in the last couple of years, in particular, the ramp-up of capacity, the end-to-end process efficiencies, leveraging data digital technology throughout and value chain from the donor experience, from the time the donor comes into the site, until the operational efficiencies overall, and also the donor fee reduction since last year, that's starting to filter through to the P&L and improve the bottom line. And I believe that overall today, the PDT business is dilutive to the overall Takeda cooperating profit margin. But all the signs are very positive, and we're seeing it already in Q1. And I believe that this business will be no longer dilutive in the next 3 to 5 years.

Great. So -- and in terms of the collection, so it's also going quite well. So are there any concerns over the collections as well.

I mean the collections are doing well. We've ramped up the number of collection centers as well. So there are over 230 collection centers globally. And then this year we're expecting to increase the number of collection centers by approximately 20. So the team is doing a remarkable job on the collections and ramping up capacity as well to deliver that 65% capacity volume base as well.

Great. And so the other side of the current business, your [ EoE ] is now coming. So in terms of VYVANSE, so in the last -- in the end of August, U.S. EoE has come. What -- could you update what's ongoing?

You can imagine it's very fresh and dynamic, but we have already seen some generics coming to the market in the U.S. We had lots of exclusivity end of August, as you highlighted. It's been 10 days since there's a lot of exclusivity and we're monitoring the situation, and we have seen that there has been some generics. We still don't know how many yet, but we have also given -- our forecast assumes an erosion rate of anywhere between around 35% to 38% erosion. We're continuing to monitor the erosion curve. At this stage, no further information I can share with you. Perhaps we'll have more information in Q2 once we have some more data points, and that's where we are.

Roughly, mostly on track.

On track to our guidance at the moment, which means that we'll take a hit this year on the loss of exclusivity impact and that means if we deliver -- well, if the loss of exclusivity erosion curve is aligned to our forecast, that means that we expect '24 to be a return to growth. We've given our guidance on top line of low single-digit negative growth this year due to VYVANSE and AZILVA. AZILVA in Japan has already had its impact from June loss of exclusivity. So that happened.

Yes, great. But just to confirm, in terms of VYVANSE. So as of -- before the EoE, sales momentum. Well, its higher, amazingly strong. So that in the past 1, 2, 3, 4, 5 months of this fiscal year, you are like, closing down, maybe a bit better, higher than you had aimed or expected. Is that correct?

Yes. But again, it's so volatile. It's so dynamic. We continue to monitor how many generics will come into the market. We've got our own assumption and then we'll see whether that plays out. If less generics, less erosion curve, that means we have better performance this year, which means that the growth will probably be not in '24, about '25. But at this stage, we think that the erosion curve will be quite aligned to our guidance, and hence, the reason we believe '24 will be the return to growth story for Takeda.

Yes. Thank you. So you already have answered to my next question. So what's the total earnings on this fiscal year ending in March, fiscal March '24? And what we can expect in fiscal March '25? So my question is, so better than -- including currency benefits, so your current fiscal year, initially, we have expected negative growth in cooperating profit. But it's -- the negative growth -- negativity is moderated more...

So when we give guidance, we give it on a constant exchange rate -- so all the constant exchange rates captured there. So we don't benefit from the fluctuations. But on an actual basis, you're right. We are seeing the weakening of the yen versus the U.S. dollar allows us to have greater revenue on an actual basis. Having said that, the weaker yen to the euro puts pressure on our cost of goods because many of our manufacturing plants are in Europe. So yes, we may get the upside on an actual basis on revenue but we're being impacted relatively consistently on the cost of goods. So net-net, on the cooperating profit, it might be neutralized, but time will tell.

Got it. And in terms of the next fiscal year, so you also have mentioned but -- so it's up to the alloys on the velocity of the erosion.

Correct. The good news is that after VYVANSE, we don't have any major loss of exclusivity for Takeda until ENTYVIO biosimilar entrants come in, which could be 2032. So it's all about, okay, we understand we're being very transparent on the headwinds on loss of exclusivity with AZILVA, VYVANSE. The VYVANSE, whether it happens completely this year or next year, but beyond that, we have a small amount of loss of exclusivity impact to ENTYVIO biosimilars, and we have so much exciting new product launches that we expect in the next 6 years. And that's where Andy can also play a big role on executing on the pipeline with the launches. We're very excited with the future growth.

Yes. So I would like to move to the Andy's part, the pipeline. So first of all, sorry, before going to that -- so in terms of QDENGA, you already have said the $1.6 billion to $2 billion better -- big potential. But after that, so you withdrew in the U.S. market for filing, proper filing. But does that affect that your big size estimates?

Sure. So of course, it's disappointing that we have to withdraw in the U.S. But overall, the size of the U.S. market for QDENGA was very small. So no impact to the peak revenue of USD 1.6 billion to USD 2 billion guidance.

Okay. Great. So then I'd like to ask the pipeline to Andy. So first, so today, this morning -- sorry, you made a press release of TAK-279 Oral TYK2, the good successful Phase IIb is out for psoriatic arthritis. So could you elaborate briefly ever it's about the result fast, please?

So it's great to see. And of course, it was coincidental that we put out the press release on the day of [indiscernible]. But -- so it's just a directional press release. We'll be presenting the data at an academic conference later this time of the year. So we have a chance to see their data. This is psoriatic arthritis. We felt there was a very good chance, we'd be successful, and we are quite excited about the data set. It's now the second group of concept that we have for TYK2 [ kinase ], and the first is in psoriasis and we presented those Phase IIb data earlier in the European - American association of dermatology, and based on those data, we feel very confident that we have a best-in-class drug. We're in the process of kicking off our Phase III program, and we expect to have our first patient enrolled have a 30 milligrams dose sometime later this calendar year. So that's going full speed. We're in the process of planning a head-to-head study against [ TYK ]. We think that based on the Phase IIb data, based on the consistency of the PASI endpoint or PASI 100 endpoint, in particular, a very specific measure. There's not a lot of noise on that. We think that we have a very good chance, and the recent study to demonstrate superiority. And our hope is that by the time we launch, we'll have our 2 Phase III study for [indiscernible] head to head to really drive market access and penetration. So those 2 are off and moving. And then we've got 3 other indications that we're pushing forward in [ dialogue ] very aggressively lupus, ulcerative colitis in chronic disease. And for ulcerative colitis and chronic disease, there are substantive data to suggest that we'll need more TYK2 inhibition than what you would need to see efficacy of the first 3 indications. So that gets to really think the differentiation is from a highly selective TYK2 inhibitor, TAK-279. And that's said, we kick through and we have no activity [indiscernible], so we can go up significantly above that 30 milligrams dose. We've actually decided what we think that dose will need to be and we use to have very positive interactions with the agents. And so we'll be moving forward with UC and Crohn's. So these are 5 core indications. And then if you know the biology of TYK2, I said we have over 20 potential indication. So we're going through a process where we're looking at biological rationale. We're looking at the competition and the medical needs across these diseases, and of course they're looking at the commercial opportunity. And then with another time, and we'll probably end up pursuing an additional 46 indication during core -- now IRI fund center for everybody, ourselves included, you can't do this sequentially. So we'll be bringing forward these indications in parallel. And the way we think about it, this is -- it lines up this way that by the time biosimilar entry comes in from ENTYVIO, our expectations, we will have approvals and hopefully launches for that entire array of potential indications.

Great. Yes. In terms of the sole competition, so in June -- July, sorry, I forgot the detail, but so oral IL-23 that was available. What is your take away?

So I mean, of course, the other immunoinflammatory space, IBD in particular is incredibly competitive, both with respect to biologics and with respect to oral agents. There are very few -- in some of these diseases, IBD including psoriasis. There are very few oral agents that really have an efficacy profile that patients with more moderate to severe disease need. So we think that we need for multiple entrants. Certainly, within the 2 class, we have -- including the floor runner and that's behind us, we believe we have the best-in-class molecule in terms of potency selectivity, the behavior of the molecule, the [ decay of the ] molecule, and of course even now support that same. So that's about executing on this mechanism. What will happen with the other mechanism, there is still lot of potential, but also a lot of unknown. So we're just focused on ensuring that we can do this development program well and fast.

Yes. Great. So in terms of that, so your guidance of the timing of filing 2025 to 2027, to be honest, quite broad. So -- but is that possible you to file the fast indication for oral TYK2 in 2025? Is that doable?

Throughout '25 to '27, so '25 would be the fastest to '27 related. So I think the bottom line is that we need to -- this will be the largest program that we've ever run in terms of number of sites, number of countries that are involved. We actually have implemented a new development model, we call [indiscernible] and it involves really bringing digital and data and patient analytics solutions that we -- this is the first time we're doing this. I understand that where these patients are and how we can more rapidly access these patients through campaigns. So this is a bit of a new space for us. So once we started enrolling that trial and we start to see what the trends are, we'll certainly be able to pay more precision what exactly the following time I would look like.

And moving to the orexin program, TAK-861. So maybe this week, next week, you will be presenting in the past initial clinical data at the medical conference. I saw the -- [indiscernible] efficacy wise, it's quite robust. But safety-wise, we have forward the world. Mixed reason, risk is also highlighted. So could you let me understand what the pros and cons of 861?

Sure. So just dialing up for a second. We've been working in orexin biology now for 12 years, together with 279, this is our largest investment, both clinically and for orexin preclinically. We think the orexin pathway -- we just -- there's immense enthusiasm about this pathway, the potential to cure, to functionally cure patients with pipeline orexin, not just there the necessities, expected cataplexy and then many other associated symptoms with the [indiscernible] in nature. But when we start to look at the biology of this [ Neurocrine ] circuit, you start to uncover not unlike what we have with 279 perhaps 8 or 10 or 15 different potential indications. And we believe that, that will likely require a number of different molecules with different characteristics and biophysical features. The one example is [indiscernible], which is IV molecule that we're now in the process of developing in hospital settings. So we're looking at it in postoperative recovery setting. We're very excited about, not just visibility of this molecule, these patients at certain change, their physiology, really interesting elements that we'll be planning out over time. So 861, the opportunity with 861 is quite significant. We think we have the potential to have efficacy like the best-in-class orexin receptor agonist like 994, we shared the 994 data and some people have seen other than the [indiscernible] that came out earlier this year. The issue with 861 is that we're quite cautious in terms of the maximal dose were conservative. And we've said this many times. But comparatively, we don't want to be much above 10 milligrams in terms of our aggregate daily dose. And a lot of history around presently deliver, and I guess if you can keep your exposure above 10 milligrams, just don't see [ what's ] the reason for that [indiscernible] systems that exist in the orexin that can clear what we think of as the toxic metabolite we've got in the [indiscernible]. You're referring to the orexin on-target mechanism just tolerability issues of which there are 2 that we focused on. One is obvious, it's insomnia. So we've learned, we think, how to mitigate insomnia and the second for -- I think, that we're beginning to understand better and better and perhaps how to mitigate with next-generation compounds or urinary urgency. We're not worried about this as a showstopper, all with the exception of one patient that we studied with the entire 861 Phase IIb program, it's mild in severity. One patient had a moderately severe incident and no patient has dropped out of the study. And furthermore, we actually have the Phase IIb study that's ongoing and patients can opt into an open-label extension, which is a 1-year study, and then continue and we see a 100% conversion of patients from the IIb study into the alternative extension. I think that really tells you something about the experience of these patients on these [indiscernible] the fact that these urinary tolerabilities are really not [indiscernible].

So simply speaking, so it's manageable one.

That's right.

Great. So I'd like to also ask about the -- in terms of orexin, so complex landscape. So [ Astellas Pharma ] and Sumitomo Pharma, their product is, I understand 1 year or 1.5 years behind to your 861 program. So of course, information is quite limited. But what's your current understanding of the compatible landscape?

So we're acutely aware of the competitive landscape, and it's something that we think a lot about because we own this mechanism. We own this chemistry space, and we own this translatability. And we have to make sure that we win ultimately in the end. We think that it's one of the potential to be a winner, and it's nearly a year out. I think it's not rocket science to develop in this space, but actually, we've grown from our 994 to 861 exceptionally not a simple severe disease. It's not a simple population to enroll, and we think we have some advantages that can help to accelerate our program versus competitors. It's another reason why we have beyond 861 and 925, as I said, generation molecules that over the course of the next 6 months, we'll be coming into the clinic. So we take these competitors very seriously. We think we have an understanding of what those molecules are and what their pros and cons are. And so they're watching it very carefully. In the end, the clinical experience with these molecules will tell us how competitive they actually are.

Great. So yes. Now I'd like to have -- only 3 minutes left. If you -- from the audience have any questions, please raise your hand. But if not, maybe, no. It's okay. So I will continue again. So I'd like to move to the question to Costa, so capital allocation. So in TYK2 acquisition, in the end of the last 2 years, it was $4 billion acquisition. But I understand you -- now you are not so much focused on large size acquisition, but we were talking like the acquisitions are more [ what realistic ], I think. But could you let us know, again, your current strategy of the acquisition.

Sure, let me update you on our capital allocation policy. So in May, we updated our capital allocation policy to focus on 2 areas. First one being investing in growth drivers, and that means we continue to invest in our R&D, invest in new product launches, and also tuck-in deals, bolt-on deals, not major M&As. Now I don't think we need to do an M&A -- an acquisition the size of the Nimbus. I mean, that was a $4 billion acquisition, very excited about that asset. But in the future, it will be -- they'll be more smaller in magnitude. Having said that, we were able to add that $4 billion, $3 billion we paid out of cash on hand because of the great work we've done deleveraging, delivering our synergies and improving our core operating profit margin. At the same time, I did want to highlight that our total debt level as a company, we had the foresight 3, 4 years ago to fix our interest rates and so the total debt profile that we have, our interest rates are fixed at 2%. So we're in a strong position from a cash flow -- free cash flow standpoint. So we'll continue to invest in R&D, new product launches, and small bolt-ons that are aligned to our therapeutic area of focus and aligned to our R&D strategy, number 1. Number 2 is enhancing our shareholder returns. What does that mean? We added a new focus area where we're saying, it's a progressive dividend policy where we say we will either increase or maintain the dividend. So in May, it was the first time we increased our dividend from JPY 180 to JPY 188. Our first time we've increased the dividend in 15 years. This is something -- why are we doing that? Because we're very confident in our future growth, very confident in our debt profile and management of our deleveraging profile. And at the same time, we have the ability to -- and we've captured share buybacks when appropriate. So we have 2 levers to pull from a shareholder return policy, increase or maintain the dividend or share buybacks when appropriate.

Yes. So the dividend increase for the first time in the last 15 years, the market appreciated a lot in half year ago. And -- but so it's a tricky question, but I know -- but so -- next year, of course, it's up to the VYVANSE [indiscernible]. But if we assume that Y-o-Y deep earnings, in this case, you maintain the dividend, not the increase of the dividend. Is that right?

Look, it's too early to communicate that. So we'll come back to you in the market -- in May of next year. But we're very confident with our free cash flow projection. We're confident in our return to growth and the debt profile is well maintained and well managed. So again, we don't envisage ourselves not to continue to focus on our shareholder return policy. So that's something that we'll provide more color in -- towards the end of the fiscal year.

Great. Great. Thank you. So it's now time -- time has come. Thank you. Thank you very much, Costa and Andy for joining us in today's session.

Thank you very much. Thank you, everyone.