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

Welcome to JPMorgan Healthcare Conference. I'm Seiji Wakao, Japan pharma analyst. We will conduct this session via fireside chat form. And James Gordon will lead the fireside chat. He's a European pharma analyst. And he and I will be covering Takeda. And I'd like to introduce the speakers from Takeda: Christophe Weber, President and CEO; Andy Plump, President, R&D; and Costa Saroukos, CFO; Ramona Sequeira, President, Global Portfolio division; and Julie Kim, President, U.S. Business Unit. Let me turn it over to James.

Good evening, everyone. I'm James Gordon. As mentioned, I'm a pharma analyst at JPMorgan. Along with Wakao, we both look at Takeda. And the plan for today is we're going to have a fireside chat. So I'm going to go for a couple of questions with the team. And then we both may have some further questions as well, and we'll leave time to take your questions from the audience. So yes, thanks a lot for coming to the conference.

Maybe just to start with a big picture question, if we could, which would be -- I think it was January 2019, I remember the Shire acquisition, $60 billion. So we're now actually 5 years on from that. So could you just describe what's changed since then? How was Shire integrated into Takeda? And maybe if we start there.

Yes. Thank you very much. Great pleasure to be with you. Well, it was a very bold move, for sure. But it's really accelerated the transformation of Takeda. We -- it allowed us to focus more in innovative medicine, both on the portfolio and pipeline. It allowed us to be competitive globally, which we were not at the time. So we were more a regional player, but now we can compete in every key countries, especially in the United States, which represent today 50% of our revenue. We became much more attractive as an employer as well through that process, which is very important, of course, for the long term. And financially, it's changed the company. We doubled our revenue. We tripled our EBITDA. We were able to generate very strong cash flow, which we can now reinvest on the shareholder return, on our growth drivers. So it was really a very strong and a good move for the company. We are much better positioned. And if you reflect as well, back then, there were 4 midsized companies of our -- with our revenue profile. They were Shire, Allergan, Celgene and Takeda. And you know what happened to the 3 others. So it was, we think, a very necessary move. Now we are not finished yet. I mean the integration is done. We are one company. But of course, now we are focusing on our long-term growth outlook and -- but we are much better positioned now.

And do you think that the market appreciates the progress of what Shire did add to Takeda? And if not, maybe what are they missing?

Well, I think the market was very surprised and, frankly, scared by the scale of the acquisition at the beginning. So we saw very strong negative market reaction. There was a lot of doubt about our ability to execute, to integrate. So very negative market sentiment. That has changed in 2022. When we completely finalized the integration, we started to see the benefit of the new company. And we have seen the market sentiment evolving very positively since 2022. We are not done yet. We think we have more to go. But clearly, a change of market sentiment since 2022 when we completely financially finished the integration.

And if we think about how the company is performing at the moment. So for the year, financial year 2023, you're guiding for a revenue and a profit decline. And I believe that's because of a generic headwind, a heritage Shire product, VYVANSE in the U.S. But what are you thinking about the return to growth? And how quickly will you return to growth? And how quickly will you be growing coming out of this VYVANSE patent expiry?

Yes, it's mainly driven -- it's a very exceptional year in terms of generic exposure. It's driven by 2 product: VYVANSE in the U.S. mainly; and AZILVA, which is a product in Japan. Together combined, it's about 10% of our revenue exposed to generic. So that's why we are declining this year. In fiscal year '24 -- our fiscal year is April to March. In fiscal year '24, we will see a washout of that effect. So we'll -- but not -- it will happen at the end of the fiscal year '24 because there is a carryover effect. So -- but in the second semester of fiscal year '24, we'll start to see our growth rebounding, and for sure in 2025. So we have been knowing about that for a while. We have prepared for that, and we will start rebounding in '24 and '25.

And looking beyond that, what do you think the longer-term revenue outlook is for the company?

So between now and the end of the decade, we have 10 products growing. We called them our Growth & Launch Products, product like ENTYVIO, product like TAKHZYRO. We just launched our dengue vaccines, for example. They will drive our growth until the end of the decade. Our generic exposure is much lower from '24 onwards. So we are very confident about our ability to grow. From 2030, '32 onwards, our main medicine, ENTYVIO, will face biosimilar. But by then, our pipeline will have progressed. We are aiming to launch very significant medicines between 2025 and 2030, and that will offset the decline of ENTYVIO. That's our long-term outlook.

Thank you. I'll definitely come onto the pipeline. But maybe just before that, one other bigger picture question, which would be margins. So I believe your 2023 period, you've guided for 25.5% margin. But what are you thinking about longer term for the margin? Because I know you have had a higher margin than that before. Where do margins go over that longer time period you're talking about?

So we want to go back to low to mid-30s margin. In 2022, we finished at 32. As you said, in '23, we'll be at 25, 26. We want to go back to low to mid-30s margin. We think this is very important for us. We are very committed to it. By the way, we spoke about the acquisition. We gained 10 points of margin through the acquisition that we described earlier. So we want to go back to low to mid-30s margin. At the same time, we want to invest in R&D. We have some efficiency programs that we are working on very actively, leveraging, especially data technology and AI, which will really improve our efficiency across our value chain. So going back to low to mid-30s margin is a very important priority for us.

Maybe we'll shift to talking about some individual products and some of the growth products at the moment. So I believe the #1 product at the moment is still ENTYVIO, but growth has slowed a little bit over the last few quarters. So could you just talk about the market dynamics for ENTYVIO? And what are your expectations where we might see a reacceleration for the product?

Yes. Perhaps I will pass to Julie, our Head of the U.S. business.

Sure. So thanks for the question. When we look at ENTYVIO, we are still the #1 prescribed biologic across the IBD market overall as well as in the bio-naive segment. But we did, early this year, revise our growth to 8% for FY '23, and that's based on a number of different factors. One, when you look at the overall market growth, we're still seeing the market growing in the mid-single digits, which is lower than historical rates. And you can see that reflected in a number of areas, one being diagnosis rates, particularly for Crohn's disease. And we think some of this is caused by the continued capacity constraints in the IBD centers as well as less clinical time out in the community practices. So we do expect that to correct itself over time. I'd say the second thing is that although this has been a very competitive market for a while, there's been an increase in the number of entrants in the recent year. And so that increase in competition, particularly when you look at later lines of therapy, has created some changes in market share. And I would say the final thing, when you look at our global, although this is not part of my responsibilities, it's in Ramona's area, we continue to see very strong double-digit growth from a volume perspective in Europe outperforming the market. But we've also seen significant clawbacks, which has impacted the revenue. So those things combined have slowed the growth of ENTYVIO overall. But I would say we're very excited about the recent approval of our ENTYVIO subcutaneous formulation, or ENTYVIO Pen, in ulcerative colitis. And we expect to have approval in Crohn's disease in the coming months. And so this is going to be one aspect that will help us to reaccelerate growth of ENTYVIO. But bottom line, we're still very confident in our ability to hit our peak sales number of USD 7.5 billion to USD 9 billion.

And maybe a couple of follow-up questions on ENTYVIO. So one would be the pen that you mentioned. I know it's early days or early months. It's been a few months. But how is the uptake of the pen going?

So as with all subcutaneous products, you do have an IV induction period, but we're very excited about what we're seeing anecdotally in the marketplace. For example, we just recently did a survey, and we had 98% awareness in target HCPs of ENTYVIO Pen. And we've gotten quite a number of requests in from health systems to distribute the pen as well as requests from individual patients -- sorry, physicians with the reimbursement going through from a pre-authorization standpoint. So all point to a very positive start for ENTYVIO Pen.

And ENTYVIO plays in an area where there's been quite a lot of innovation, and there is competition as well. And that there's newer therapies. There's things like oral IL-23s, there's 21As. What are you seeing at the moment in terms of competition? And are you concerned about competition heating up?

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Yes. So it has become, certainly from the time we've launched ENTYVIO almost 10 years ago now to today, it's become a very competitive and segmented market. I think the things we have going for us, we have head-to-head data showing superiority to TNFs. We have a wide body of evidence now showing long-term efficacy as well as safety. And over the past few years, we've more and more been positioned in first line. So we tend to be the first biologic that people go to after they failed conventional therapies. So that's really helping us to continue to grow and continue to reach more patients as we go. What we see with a number of other products coming into the market now, there is, unfortunately, for patients with IBD, there's nothing that is really breaking that efficacy ceiling. So they're kind of all in a crowd, and they all have a similar type of efficacy depending on the individual patient. And nothing is really breaking that efficacy ceiling. So we're seeing the newer agents start to get used more in maybe a little bit later line of therapy while ENTYVIO is being preserved in first-line therapy. We are actually doing some work right now at a number of trials globally looking at different modes of combination therapy. So because you haven't broken that efficacy ceiling, there is a desire now for some thought leaders to combine therapies, particularly during an induction stage. And so we're doing a few trials because people tell us, our thought leaders tell us that really, if you're going to combine therapy, ENTYVIO is your ideal foundational therapy because of the body of evidence, because of the safety, because of the long-term efficacy. So we're starting to do some work now looking at different combination therapies, looking at different ways to treat, to target, to see if there's more we can learn about how to best treat these patients given the number of new agents in the market right now.

And would you just be looking at combining ENTYVIO with other companies' drugs? Or could you also combine it without your -- maybe your own TYK2?

Well, certainly, that's a question we're asking. So right now, our focus for TAK-279, which we're very excited about, is obviously psoriasis, psoriatic arthritis and starting our work in ulcerative colitis and Crohn's this year. So we're very focused on getting that work going. But certainly, that is a question we're asking ourselves as we look at kind of the next stage of development. Do we want to look at that in combination with ENTYVIO? We haven't ruled that out, but nor is our first priority as we work to get these indications approved.

I'm aware I've asked a few ENTYVIO questions, so maybe I'll shift a bit to a heritage Shire area, which was plasma-derived therapies. So you've had strong growth there. It's a double-digit revenue growth area. But what's the longer-term outlook for plasma therapies? Because -- like I cover Argenx, for instance. You've got an FcRn inhibitor. So there's some new innovative therapies coming along. Do you see those significantly displacing your plasma business?

I mean I can take an answer, and maybe Julie has some things to add too. She spent a very long time in the plasma-derived therapy area. But what we see happening in the IG space is we've seen the indication for myasthenia gravis, which is a fairly small limited indication. And so we don't see that impacting our business. The next place people are going is CIDP. It's a fairly heterogeneous disease. And so there is a role for plasma, but there are some patients that do not respond to plasma. And there's a hope that those patients will respond to an anti-FcRn because it's a very, very difficult life for those patients if they don't respond to plasma. At the same time, primary immunodeficiency is growing. Secondary immunodeficiency is growing. The need for plasma around the world, the diagnosis is growing around the world. So we continue to be in the type of market in the space where trying to keep up with growing demand is going to be a constant challenge for us. So we welcome new entrants, and we see the growth happening in all of these areas overcoming some of the new entrants coming into specific areas. And Julie?

Yes. And when you look at the growth for IG and specifically, we've taken into account the impact of other alternate therapies, like the anti-FcRn. So we still see long-term growth for the IG portfolio and for our plasma portfolio overall, specifically for the U.S., which is the largest market for immunoglobulins globally. We look to see mid- to high single-digit range growth year-over-year. And there isn't an alternate therapy that's on the horizon that can entirely replace IG across all the indications that Ramona mentioned. So we're pretty confident about the ability to continue to grow.

And what about margins for the plasma business? Because I think the margin has been below the group, has been dilutive to margins. But is that something that can change? Can this be a business which can have a big margin improvement?

So we are starting now for the first time since we acquired this business, we are starting to see margin improvement. The margin was under pressure during COVID crisis because of the donor fee increasing. We are starting to see a reversal of that for the last 2 quarters, with more actually. And so that's important because this is a business with lower margin. Gross margin is lower than the biopharmaceutical business. The overall PDT business margin will become non-dilutive to the company margin in the long term because there is less R&D investments required for this business. But we are starting to see now a gross margin improvement. And we believe it will continue because we are managing better this business. We are managing better our donors. We are utilizing in a better way our manufacturing capacity. All the growth that we have generated until now, and that we will generate in the next 5 years, will be delivered through our existing manufacturing capacity that we are using better. And that's, of course, improving our margin. So that will help us to return to our low to mid-30s margin.

And I think you've got quite an ambitious target to expand capacity by about 50%. So can you do all of that with your existing capacity despite using it in other ways? Or are you actually going to need to do a lot of CapEx to increase your capacity within plasma?

No, that's -- 50% will be done with our existing manufacturing capacity, but we are actively working on our efficiency. So the yield improvement is very important and optimizing the way we work. But that will be within our existing manufacturing capacity. We still need a little bit of capital investment, but we are not talking about new site, for example, or massive investment. We have actually announced a new investment in Japan, but that will come after this 50%. So it will come online in the year '28, '29.

And complementary to your plasma business, you've got a rare disease business, including therapies like TAKHZYRO. But do you think there's going to be more competition there? How are you viewing the outlook for that product? And do you think we could see a big impact, for instance, from oral options coming along?

Well, you know, there is more competition everywhere. So I think the key is your product good, better than standard of care? And is it -- and are you able to compete as well? I think we have a very strong rare disease capability not only with TAKHZYRO, but our immunoglobulin business treat rare disease as well. So we have actually developed a rare disease capability in the last few years, which is very interesting. And it allowed us to launch new rare disease product as well. So we launched LIVTENCITY recently, which is also a very different space for managing post-transplant. But that's a rare disease too. That's the same type of mechanism or go-to-market, if you like, capability that we have developed over the years.

And if I may with TAKHZYRO, it's 5 years post-launch, and we continue to see very strong growth, 13% year-over-year, first half of this fiscal year. And when you look at new patient starts, we've actually had a resurgence in new patient starts, with over 50% coming from patients who are new to Takeda HAE therapies and 45% of the subscribers -- prescribers, sorry, are new as well. And so that's really reassuring in terms of TAKHZYRO. And to your point about standard of care, TAKHZYRO is the standard of care when it comes to prophylaxis in HAE. And although we did experience a bit of decline once first oral launch, we've also seen patients come back because of the proven efficacy and safety of TAKHZYRO.

And shifting from rare disease to a product that could be for a lot more people. So I know you've got QDENGA, your dengue vaccine, approved and you've launched that. Maybe to start with, how had the initial launch go?

Yes. So I can give you a high level. And maybe it will be important to just start with the fact that we waited to submit this for approval until we had 4.5 years of data, and that was because there had been a previous launch where there had been some issues. And so we really wanted to make sure we had a very solid product. We were looking for not only efficacy against dengue infection and against hospitalization, but also we were looking for sustainability. And we were looking for every subset to make sure that we weren't -- there was no signs of people getting worse from taking the vaccine. So we came to the market with a very solid data package and a lot of years of use on the market. I think that helped us a lot overcome some of the concerns that had been prevalent with the prior vaccine. So since then, as we've launched now, we've had very favorable uptake in feedback. So we've launched in Europe, a number of travel markets in Europe, and have very favorable feedback and uptake and utilization there. We've made it available now in a number of endemic markets: Indonesia, Thailand, Brazil, Argentina. Just got approval in Colombia. We just signed our first national immunization program in Brazil, which was actually faster than we were even expecting given this type of market. Usually, it takes some time for governments to work out their immunization plan. So I mean the reality is the burden of dengue is growing globally. We're starting to see dengue in places where it wasn't before, and we're seeing more and more cases in places where it has been. That's due to globalization, climate change, et cetera. And so this vaccine is just being launched at the right time. So we're seeing -- I would say we're tracking to all -- at or slightly above all of our expectations right now, but it's still very early days. And so we're still in the launch phase, where we still need to go, make it available in the endemic markets. We start with private, and then we move to public. So even in these endemic markets, you don't jump into public right away. You start with private market while the governments work out their immunization schedule, which cohorts they want to immunize and then we move into public. But all of that is progressing as we would have expected, and very good feedback so far.

And some of the countries where you'll be selling the products are less affluent. Has that been a challenge? Are governments able to afford this product? And is it always governments that are going to pay for it? Or are there sometimes other mechanisms whereby this could get paid for?

So there's a number of things we do. One is in the private endemic market. So think about in Indonesia. We want to make sure that people in the private segment can afford it. And so we did price it specifically lower than a lot of other private vaccines so that -- because this is a community type of vaccine. Unless enough people are taking it, it's not really going to work. And so we did price it to make sure that people in the private market could access it and take it, and we see that happening in these markets. Then we go to the public negotiations. And with the public immunization programs, they tend to pick very specific cohorts. So they might pick a specific age group. They might go to certain regions, but they have to kind of plan where they want to roll out their immunization program. So those 2 things happened in parallel. And then there will be other groups like PAHO and GAVI that will help some of these very low-income countries. The middle income countries were doing quite well. And so far, these low-income countries will come on board as we get PAHO and GAVI. I will say we're ramping up manufacturing as we speak. And so our initial plan to start with private and go to public means that you don't get the full capacity for another couple of years on our manufacturing plant. So we have a CMO in Germany. We have our own plant that we're standing up as we speak, and we're just in the process of finalizing another CMO in India that will do the multi-dose vials to the endemic market. So all of that is progressing as planned. It's going to take a few years to actually get that full ramp up and running.