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Executives

Christopher Hohman – SVP, Corporate Communications

Tsudoi Miyoshi – Head, CMSO Office

François-Xavier Roger – CFO

Analysts

Hidemaru Yamaguchi – Citigroup

Atsushi Seki – Barclays Capital

Tim Race – Deutsche Bank

Ryoichi Urushihara – Nomura Securities

Shinichiro Muraoka – Morgan Stanley MUFG

Emilia Falcetti – Cantor Fitzgerald

Fumiyoshi Sakai – Credit Suisse

Yasuhiro Nakazawa – SMBC Nikko Securities

Takeda Pharmaceutical Co., Ltd. (OTCPK:TKPYY) F3Q13 Earnings Call February 5, 2014 2:30 AM ET

Operator

Please note that this telephone conference contains certain forward-looking statements and other projected results which involve the known and unknown risks, delays, uncertainties and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions.

During the presentation from the company, all the telephone lines are placed for listening-mode only and the question-and-answer session will be held after the presentation. This conference call is being broadcasted through internet live, but only for listening-mode. Now we start the conference. Mr. Hohman, please go ahead.

Christopher Hohman

Thank you very much for your participation in the conference call of the Third Quarter Financial Results for Fiscal Year 2013 of Takeda Pharmaceutical Company Limited. My name is Christopher Hohman, Senior Vice President of the Investor Relations and Corporate Communications Department.

Now please let me introduce today’s presenters and panel. Mr. François-Xavier Roger, CFO; and Mr. Tsudoi Miyoshi, Senior Vice President, Head of CMSO Office.

First, we would like to start with the presentation on the topic of R&D activities followed by the third quarter financial results for fiscal year 2013. After that, we will have a question-and-answer session. Now we start the presentation. Please have the presentation materials in hand. First of all, we would like to start with the presentation from Mr. Miyoshi.

Tsudoi Miyoshi

I am Miyoshi, Head of CMSO Office. Today, I am going to discuss updates related to R&D activities. The topics I would cover today are: recent pipeline stage-ups since the second quarter announcement; data from MLN9708 and ADCETRIS presented at ASH, A-S-H; and Natura-alpha, treatment for ulcerative colitis for which we entered into an exclusive license and option agreement with Natrogen in December last year. Next slide please.

Last month, we obtained approval in Japan for ADCETRIS for the treatment of relapsed or refractory CD30 positive Hodgkin lymphoma, and relapsed or refractory CD30 positive anaplastic large cell lymphoma. ADCETRIS has been approved in over 35 countries.

Regarding CONTRAVE, the interim results of the cardiovascular outcome study, Light Study was submitted by Orexigen to the FDA in December 2013. The PDUFA Action Date has been assigned as June 10, 2014.

As for MLN9708, we have begun the Japanese Phase III study in patients with relapsed or refractory multiple myeloma, which would be a part of the global Phase III program which is really underway in the U.S. and Europe.

MLN0002, we have begun Phase III studies in Japan. It has already being filed in the U.S. and Europe for ulcerative colitis and Crohn’s disease.

AMITIZA is already marketed in the U.S., and now we have commenced a Phase III program for the indication of pediatric functional constipation.

TAK-659, we are disclosing for the first time today. It has entered Phase I. This is a tyrosine kinase inhibitor for solid tumors and hematological malignancies.

As we have previously announced at the end of the December 2013, development of TAK-875, which was in Phase III was terminated due to concerns about liver safety. Patient safety is Takeda’s highest priority. We had plans to file in Japan in FY14 and the U.S. and Europe in FY15. So this was unfortunate, but we still have a deep and rich pipeline including the high potential later stage assets such as, MLN9708 and MLN0002 as well as many assets in earlier stages which are progressing steadily. We will continue to invest in R&D to deliver innovative medicine to patients. Onto next slide.

The slide shows data presented at the 55th Annual Meeting of the American Hematological Society from a Phase I/II trial of oral proteasome inhibitor in the MLN9708 in combination therapy with lenalidomide and dexamethasone in patients with previously untreated multiple myeloma. With the whole oral regiment of MLN9708 lenalidomide and dexamethasone, one cycle being 21 days, treatment continued up to 16 cycles. In case of four cycles, complete response and a very good response pulled out to 61% which increased to 75% in the end.

The increase in response over the course of treatment suggests the possibility and utility of this treatment. This product has also demonstrated efficacy in monotherapy with less peripheral neuropathy and being an oral agent, we expect that the profile will be optimal for the maintenance therapy.

Global Phase III trial is already underway in relapsed or refractory multiple myeloma patients and we plan to obtain interim analysis results in the latter half of 2014. As I told you earlier, Japan showing that this trial in November last year.

In addition, we are also conducting the Phase III trials in untreated multiple myeloma patients, and relapsed or refractory, primary AL Amyloidosis patients, each of which is progressive smoothly in terms of enrollment. Next slide please.

Now I will introduce data for ADCETRIS which was also presented at ASH. The graph on the left shows a three-year follow-up data and long-term remission from the ongoing Phase II trial in patients with relapsed or refractory Hodgkin lymphoma.

As you can see, in these patients observation, the medium survival from the first dosing of ADCETRIS was 40.5 months. On the right is a graph showing a three-year survival data in patients with relapsed or refractory systemic anaplastic large cell lymphoma. The three-year survival from the first dosing of ADCETRIS was 63%. The data provides further evidence of already demonstrated benefit of ADCETRIS in patients with relapsed Hodgkin lymphoma and relapsed systemic anaplastic large cell lymphoma.

There are other ongoing Phase III studies of ADCETRIS to target earlier aligned settings including a trial in Hodgkin lymphoma patients with high-risk of relapse after stem-cell transplantation, a front-line study in advance Hodgkin lymphoma and a front-line study in mature T-cell lymphoma.

Our effort includes broad lifecycle management to expand indications of ADCETRIS. Next slide please.

Now I would touch upon Natura-alpha, which we in-licensed from Natrogen in December. Natura-alpha is a small molecule that is believed to suppress inflammation of digestive system by inhibiting expression of pro-inflammatory cytokines such as Interleukin-1, Interleukin-6 and tumor necrosis factor which can promote inflammation and make disease worse.

Currently we are conducting a Phase II study for the treatment of ulcerative colitis in a strategic fit with our gastrointestinal portfolio which also includes MLN0002, a monoclonal antibody for the treatment of moderate to severe ulcerative colitis and Crohn’s disease. Next slide please.

Finally, I would like to show you our expected approval timeline for the next few years. In the fourth quarter, we expect in Japan, the approval of an influenza vaccine and a fixed-dose combination of azilsartan and calcium channel blockers. And in Europe, we anticipate an approval of lurasidone for treatment of schizophrenia. The ultimate expected approvals in FY2014 including MLN0002 for ulcerative colitis and Crohn’s disease which we received a positive opinion from the FDA Advisory Committee in December and CONTRAVE for treating obesity.

Regarding TAK, we have 472 and TAK-700. And regarding TAK-700 as we announced in July last year, we are currently conducting a Phase III trial in chemotherapy naïve prostate cancer patients. We will wait for the results of the study before we finalize our filing strategy and announce the timeline.

BRINTELLIX or Lu AA21004 was approved in the U.S. and was launched in January. In Japan, we have the BRINTELLIX Phase III study and we have decided to conduct additional studies. We are discussing the timeline now. We will make announcement when our filing schedule gets clear.

We have strong vaccine pipeline and development is in accelerated, including the Norovirus vaccine obtaining through the LigoCyte acquisition few years ago and the dengue vaccine obtained with the acquisition of Inviragen. We now expect in Norovirus vaccine approval around FY16 to FY17 which we added in the table here.

This is the end of my presentation. Thank you very much.

Christopher Hohman

Next is a presentation from Mr. Roger, CFO.

François-Xavier Roger

Good afternoon. I am François-Xavier Roger, Chief Financial Officer of Takeda. Thank you for joining on our earnings conference call today. I am happy to give a brief description of our earnings performance and forecast.

First, I would like to open by saying that we are pleased with our Q3 and year-to-date returns, which we believe mark important early steps in achieving our strategic targets relating to growth, innovation and efficiency.

Please move to Slide 2 of our earnings presentation were you can find the highlights of our quarterly announcement. First of all, we are pleased to achieve underlying sales growth in Q3 at 5% on a like-for-like basis which is in line with our mid-range guidance.

On the product side, we saw a good start of new products such as ADCETRIS in Europe, NESINA in Japan and the U.S. and we are happy to say that we have launched BRINTELLIX in the U.S. in January 2014.

So you are aware, we announced in December the termination of Fasiglifam, TAK-875. And I can confirm once again that these have no material impact on our mid-range guidance, which we are therefore fully reiterating.

On the other hand, we are pleased with the positive recommendation of the FDA’s Advisory Committee for ENTYVIO, MLN0002 for both ulcerative colitis and Crohn’s disease indication.

In terms of capturing efficiencies, I can report a strong start to our Project Summit with over 30 billion yen of expected savings in fiscal year 2013. We think that these results will present the beginning of a sustainable improvement of our cost base and demonstrate as well our ability to execute such transformational projects.

As I have mentioned before, Takeda has a strong balance sheet and low net debt. And I will come back to that later on.

And finally, we are pleased to upgrade our sales and operating income guidance for fiscal year 2013.

Slide 3 remains every one of our guidance for sustainable growth, first announced in May of last year. In light of our Q3 results, we are confident to reiterate these top line objectives which are mid-single digit sales growth CAGR, as well as profit target which is over 20% operating profit CAGR and 25% core earnings to be reached by 2017.

As you know, we value shareholder return. And as such, we have committed to maintaining the 180 yen per share level of our dividend till 2015.

Slide 5 shows reported growth of 14% in Q3, supported partly by foreign exchange, but more importantly we can now say that for the third quarter in a row, our underlying sales growth was around 5%, showing the sustainability of our organic growth. This growth is also fully consistent with our mid-single-digit medium-term guidance.

Slide 6 looks more closely at a 5% like-for-like top line growth, benefiting from both our new products on our base business. We are happy to achieve resilience in our base business, and our solid growth is mainly coming from innovation as more than 85% of our growth comes from new products.

Slide 7 shows more details about our top selling products, providing the changes in yen basis as well as like-for-like percentages. We are pleased to see the growth of products particularly in our general medicine category where PANTOPRAZOLE and DEXILANT, both grew above 21% year-on-year. Further, it is great to see that VELCADE, even 10 years after launch, still continues to grow. Of course ACTOS sales continue to fall as a result of the LOE [ph]. However, in the long-term the comparative negative impact is getting smaller and smaller and ACTOS is likely not to be a top-10 product next year.

Slide 8. In particular, I want to point out the growth of our two new products, namely NESINA and ADCETRIS. Not only are these products growth drivers in terms of sales, but their contribution to profit is meaningful. These successes are important as we have high expectation for our upcoming launches in calendar year 2014, particularly in the U.S. with BRINTELLIX, ENTYVIO and CONTRAVE.

Turning to the sales growth by geography on Slide 9. We are pleased to report that all regions achieved positive growth underlying growth in Q3 again. Most notably is our achievement of 15% growth in emerging markets. Japan had the benefit from wholesalers restocking our products in the last quarter.

Slide 10 shows the details of our emerging market sales. Please note that some deceleration in growth has been experienced in emerging market and that the first quarter will be impacted further on. It should also be noted that this slowdown is more reflection of market drivers and not link at all to Takeda’s specific performance as we continue to gain market share in these markets.

Let’s now move to a discussion on our P&L on Slide 12. This slide shows our Q3 profitability as reported in J-GAAP, as well as on the like-for-like basis. Here you can see comparable evolution of gross margin, SG&A and R&D, all showing positive momentum compared to the same quarter of last year.

We recorded an impressive 7.7 percentage points of improvement of our operating income margin driven by gross, cost management and OpEx discipline supported by some favorable phasing of costs, especially in R&D. Our costs are under control and Summit Project, which I will describe more in a moment, has begun to deliver attractive results.

Again, please be aware that R&D benefited in Q3 from some favorable phasing which will lead to higher costs in Q4.

Slide 13 shows that supported by underlying profitability improvements and boosted by some extraordinary income, EPS more than doubled in J-GAAP and increased by 88% on a comparable basis.

Slide 14 shows SG&A and R&D progress in Q3 and year-to-date, further supporting a sustainable improvement in our cost base, which is mainly the result of Project Summit. At the same time, I will reiterate that the timing of expenses particularly in R&D played a role in this improvement and that these costs will be higher in Q4.

However, both SG&A and R&D will decrease in absolute value on the like-for-like basis in the full-year 2013.

Slide 15 shows how our strong profit improvement was driven mostly by a combination of better product mix and Summit cost savings.

Moving to Slide 16. It describes our achievements in Project Summit, a company-wide efficiency initiative. This project has progressed very well and we are happy to disclose that we expect to reach over 30 billion yen in annual on the recurring cost savings in full-year 2013, which is the first year of the project. These savings are described on this chart, diverse across the company on the wrong geographies. We will provide more details and the breakdown by activity in Q4, on the occasion of our full-year earnings in May.

Here, I want to remind all that our savings curve was a period to full-year 2017 is not completely linear. We expect more savings to be captured in the beginning of the period mainly in ‘13 with what we can define as low-hanging fruit and again in 2015 to 2017 when savings from more complicated programs such as industrial and IT-related projects can be achieved.

We will provide the guidance for the savings for the year of 2014 at the occasion of our full-year results for 2013 in next May.

Now, I would like to quickly review our balance sheet and cash flow from Slide 18. Slide 18 describes what we believe as the strong – what we believe is a strong balance sheet.

If we move to Slide 19, it shows our low net debt which is standing at just 59 billion yen as of December 31, 2013, which is equivalent to a net debt to EBITDA ratio of 0.1 times.

Slide 20 shows our strong cash flow generation. I should point out here that our working capital levels require some improvement, which we plan to accomplish in 2014 as we are actively working on working capital as we speak.

Next on Slide 22, we have raised our guidance for the full-year fiscal 2013, reflecting a positive impact of Forex on sales and better cost management in operating income. The revised forecast also includes Q4 [ph] sales growth in line with year-to-date. Friends, even including a slowdown in Japan on emerging markets, but that will be offset by higher growth expected in the U.S.

Higher R&D and commercial investment is expected in Q4 to support our product launches and especially BRINTELLIX in the U.S., as well as our strong pipeline which mean that we expect a loss at operating level mainly as a consequence of the phasing of expenses. There is some kind of seasonal impact as well, as traditionally we incur more operating expenses in Q4 especially in R&D as we recruit more patients in Q4 than in Q3, because in Q3 there is a break with the New Year and Christmas.

Once again our launch program, and especially BRINTELLIX in the U.S. is also contributing to the fact that we have more SG&A in Q4 this year.

As a conclusion, I will reiterate that we view Q3 as another quarter, which is fully in line with our expectations. We are pleased to see good execution of cost savings resulting from Summit. We are achieving growth in operating income above, both prior year and prior plan, and are revised guidance for operating profit at 1,500 local yen, means a 23% increase in terms of operating profit over last year, which means a level which is even above what we have provided as a guidance in terms of further medium term at 20%.

With that, I conclude my formal remarks to make time to answer your questions.

Christopher Hohman

Now, we would like to field your questions. We will be taking questions from listeners in both Japanese and English. And please limit your questions to two. In addition, please state both questions in the beginning.

Question-and-Answer Session

Operator

We have a question-and-answer session now. (Operator Instructions) The first question is from Mr. Yamaguchi, Citi Securities.

Hidemaru Yamaguchi – Citigroup

Can you hear me?

Christopher Hohman

Yes, we can.

Hidemaru Yamaguchi – Citigroup

My first question is on Project Summit, its progress status. This time 30 billion yen was disclosed. And percentage-wise 4% down, that’s also disclosed. Out of 30 billion yen, by Q3, how much savings have you already achieved? And 4% – does all of 4% come from the Summit Project? That’s my first question. My second question is TAK-875. I understand it’s terminated, and there was a liver safety concern and warning sign. Have you ever seen any warning signs in Phase II, because I think that is quite mature to terminate it at the very end? So haven’t you seen any warning signs of this liver safety concern during the quarter in Phase II? That’s my second question.

François-Xavier Roger

Mr. Yamaguchi, to answer your question regarding Summit. We don’t disclose the amount that we have achieved in Q3. So we just provide the guidance for the full-year as we have already almost 10 months out of 12 in the year, we are very well advanced out of this total amount, and we will come back with a final number which will be above 30 billion yen in May, the occasion of our full-year quarter results.

Regarding the 4% that you were mentioning which is a cost reduction, most of it is coming from Summit, as we are really focusing the entire organization on the project. There are always a little bit of additional savings here and there, but you can consider that the bulk of it is coming from Summit. As you can see the reduction that we have achieved year-to-date is significant, we may end up with a reduction of costs on a like-for-like basis in absolute value. That would be a little bit lower than what we have achieved year-to-date that it will be obviously in negative territory.

So taking into consideration the fact that we grow at constant rate of about 5% on the top line. So we will have an absolute reduction in our cost base in both, in SG&A and R&D. This means that we are obviously improving significantly our operating profit. I will let now Tsudoi to answer the second question.

Tsudoi Miyoshi

Regarding the TAK-875, during the quarter of the development, the side-effect levels were comparable to the other diabetic agents, but coming into December, highs and lows for the first time was seen and we discussed with independent moderating level. And highs low actually was observed. And their maybe some possibility of such liver concern in the diabetic patients in the future, that’s why we terminated this development of the project. Thank you very much.

Christopher Hohman

Next question please.

Operator

From Barclays, Mr. Seki. Please go ahead. Mr. Seki, please go ahead. Hello?

Atsushi Seki – Barclays Capital

I have two questions. One is mentioned in [indiscernible] royalty income and service revenue in the quarter, overseas 28.6 billion yen is mentioned. Do you have any breakdown of this? There seems one-off event related to this. So can you disclose details? And the second question is on TAK-875. In the presentation, you mentioned no major changes in the strategies and the guidance inclusive – or the impact of termination of 875, and why there is no major impact? For example in R&D organization, maybe you thought of reorganize some teams, you won’t have anything like that? Thank you.

François-Xavier Roger

I will take the first question on the royalties. We don’t disclose the detail of the royalties by product. One of the reasons why there was a significant increase in Q3 is linked to a certain extent to the fact that there has been tender for VELCADE in Russia and that has contributed to increase the value of royalties in the quarter.

Regarding TAK-875, I will let Tsudoi answer.

Tsudoi Miyoshi

It is true that for the huge revenue obviously, we expect some decline but as you know we have vedolizumab or ENTYVIO and also Vortioxetine, 9708 CONTRAVE, BRINTELLIX, we have those major assets as you know or those candidates associated with probability of success. We make sure that those products will successfully deliver to the market and then it will offset the impact of 875.

And regarding R&D team, our organization reshuffling, what we happen to see now in this diabetic area and this is a very important area and we have very strong presence globally in this therapeutic area, we will continue to invest. And as of now, although it is still in early stage, we have some promising assets and there are some unmet needs in this area. And we will continue to research and development. Thank you.

Christopher Hohman

Next question please.

Operator

The next question is from Mr. Race from Deutsche Bank. Please go ahead.

Tim Race – Deutsche Bank

Hi there gentlemen. This is Tim Race here from Deutsche Bank. Just a couple of questions please. First of all, I suppose just talking about your U.S. primary care sales force. We’ve seen now six months of prescription data from NESINA and the various combination products. And according to IMS data, the launch looks pretty weak so far. Could you perhaps talk to me about how you are incentivizing your sales force and how you can get to the NESINA launch going back to outside of Japan? And then just perhaps a certain question just on the BRINTELLIX. Can you talk about how the launch is going so far in the U.S. and what we should expect in the early stages? And just maybe a little comment on why the delay to BRINTELLIX in Japan? Thank you.

François-Xavier Roger

Thank you. Regarding BRINTELLIX, I think it’s too early to comment and discuss because we have just launched in January. So it’s not even a month I think since we launched.

Regarding the NESINA in the U.S., so far we are in line with our plans, so there is no significant disappointment. I think that the data are publicly available might not be fully accurate I think at this stage. The only thing I can comment as well regarding NESINA in the U.S. is that we saw that actually the development of the combination was greater than what we expected. So this is the only change I would say versus what the original expectations, but in terms of sales, there is no deviation against our original plans at this stage.

Tsudoi Miyoshi

Miyoshi talking. Regarding BRINTELLIX Japan, as I told you earlier, additional study is planned and we are now reviewing the timeline of the studies. Therefore it will be delayed from the timeline shown in the table in these materials, but we would like to disclose the timing soon after we revised our plan.

Christopher Hohman

Would you please go to the next question?

Operator

Next question is from Mr. Urushihara from Nomura Securities.

Ryoichi Urushihara – Nomura Securities

Hello, you hear me all right?

Christopher Hohman

Yes, go ahead.

Ryoichi Urushihara – Nomura Securities

Two questions to Mr. Miyoshi. The first question, TAK-875. Development is terminated. Regarding GPR40 you said, it that a class effect, did that impact the liver, is that your view? So I suppose you have backup compounds but regarding the GPR40 development. Is it completely terminated as a project? That’s my first question. And the second question is about ACTOS, KPNC 10-year study. I suppose you more or less data available, and what’s the progress so far? Thank you.

Tsudoi Miyoshi

Regarding TAK-875 whether the side-effect is class effect or not. Well, until December the development has been smooth and we have no other liver effect. And we need to investigate exactly why that was the case. We can’t really say whether it is a class effect or not. And in that sense, this therapeutic area including the compounds that we have as backup, we will continue to discuss and review.

Regarding the second question, ACTOS, pioglitazone, KPNC 10-year study. KNPC study is already available, but I suppose data is more or less available for the 10-year study. What’s the situation regarding KPNC 10-year, it will be published with the end of FY2014. And I told you that in the beginning of the fiscal year that is, that we still have to wait. Now regarding the timeline, we can’t really say for sure. We expect the data will be available within FY2014.

Ryoichi Urushihara – Nomura Securities

So you don’t know whether it’s going to be the first half or second half?

Tsudoi Miyoshi

No.

Ryoichi Urushihara – Nomura Securities

Thank you.

Christopher Hohman

Thank you. Next question please.

Operator

Next question is from Mr. Muraoka, Morgan Stanley MUFG.

Shinichiro Muraoka – Morgan Stanley MUFG

Muraoka speaking. My first question is regarding cost forecast for Q4. As you continue, you say that you will be spending in R&D but are you going to really spending that much? And are there any possibility – I think I heard that you won’t spend up all the forecasted numbers for R&D. And other SG&A expenses other than R&D, I expect probably in Q4 it will be greater than the last year at the same time build by more than 10 billion yen, but is it really that high level spending in Q4? I couldn’t really understand the reasons behind. Second question is regarding termination of TAK-875. You mentioned that it doesn’t have any impact on the mid-term forecast, but R&D, I think that from next fiscal, it will be reduced in terms of the investment. And also in the U.S., enrolled 1,700 people. I believe that you will be able to achieve major savings in terms of number of enrollments. Could you comment on that?

Tsudoi Miyoshi

Regarding the R&D expenses. From R&D perspective, I would like to answer to your questions and others will be answered by François. Concerning R&D expenses, last fiscal in this timing, if you look at Q3, Q4 of the last year, the same sort of growth progress was experienced due to the impact of patient recruitment. C&O [ph] expenses are always generated in Q4. And Japanese invoice of course also will take place at this timing of the year.

We need to conserve balance but some already finalized therefore we believe that that we’ll be able to grow in line with the forecast.

François-Xavier Roger

From that we expect to spend the amount that we have indicated in our guidance, both in terms of R&D and once again there is some phasing which has happened last year, which is essentially linked to the enrollment of patient which is not something that we fully control ourselves, but as I said in December there is hardly any enrollment of patients and then there is kind of a capture in January where we enroll more patient.

Regarding SG&A, as I mentioned earlier, there is a specific case this year because we will spend significantly more than last year as a consequence of the launch of BRINTELLIX in the U.S., so which is something that didn’t happen last year. So the comparison has to be adjusted for the specific case of the launch of BRINTELLIX. Just one other word on TAK-875, because we have the questionnaires earlier, so I want to make sure that we clarify the issue.

TAK-875 did not impact our medium term guidance. Why? Because there were obviously some sales in the later part of the planning period, but there were a lot of costs as well. So even this sounds well not material enough, even in ‘16 and ‘17 to make us revise our guidance to start with. And in terms of operating profit impact over the planning period was fairly negligible because we had some positive impact with margin that we were expecting and that we will lose as a consequence, but we are going to stay at a couple of hundreds of millions of dollars as well in terms of planned R&D and commercial costs as well for the launch. So in net, there is no impact.

The issue is really for us – are we going to save these amounts? This is not the main topic today, because we believe that it is likely that we will reinvest whatever we have saved in terms of development on commercial cost on TAK-875. It is our intention to reinvest this savings of few hundreds of millions of dollars as I said earlier for growth. So we have a little bit of a gap in terms of growth coming from the termination of 875, but we believe that we have opportunities. It could be under commercial side, it could be on the business development side, it could be on R&D to reinvest for our growth in order to fill the gap.

We are currently looking at different options between these three categories, essentially business development, commercial and R&D.

Shinichiro Muraoka – Morgan Stanley MUFG

Thank you very much.

Christopher Hohman

Next question please.

Operator

The next question is Ms. Falcetti from Cantor Fitzgerald.

Emilia Falcetti – Cantor Fitzgerald

Hi, good afternoon. This is Emilia Falcetti from Cantor Fitzgerald. I have two questions. One on CONTRAVE. You mentioned that this drug is one of the contributing drivers. And even in the other obesity treatments you launched in the U.S. in the last three years have disappointed significantly. I was just wondering if you could give me, your thoughts on the markets and how this products or maybe some Takeda’s sales force is going to differentiate from the others. And secondly on the emerging markets given what sort of going to experience, a little bit of a slowdown in Q4. What impact is that going to have on the margin, i.e., what sort of level of profitability have we reached in the emerging markets overall? And the question is – sort of the question on the targeted a little bit to China. I’m trying to understand what the profitability of that market is and whether it has sort of anything from repercussions of the Glaxo bribery scandal. That’s it.

Tsudoi Miyoshi

This is Miyoshi speaking. In U.S. in obesity patients, 70% of those who receive prescription medicines are female. Recently there are other obesity drugs, but [indiscernible] is a concern with those competitive products, but CONTRAVE have no concerns for female. It is very female friendly. And regarding other new products, two products from competitors, they are scheduled drugs that means that we would tend to have addiction, but CONTRAVE have no addiction, so it is very safe and it is easy to use. And also CONTRAVE has really only and the first obesity – anti-obesity drug with new logical data. So we are competitive enough against those two Asians in the market.

François-Xavier Roger

I mentioned earlier, we have seen already significant slowdown in our growth between Q2, were we had a growth of 28%. In Q3 where we were at about 15%. And we can see that there is a possibility even that this growth will even slowdown even further in Q4, but this further slowdown in Q4 could be linked to some exceptional items. This slowdown in emerging markets is obviously something that we are looking with lot of attention. We are absolutely convinced as of today that this is not linked to any specific issues with Takeda that is more linked to momentums in emerging markets. And most of our peers have actually provided this information regarding emerging market growth in terms of slowdown.

We don’t see that as significant issue and it doesn’t impact our guidance, neither for Q4. I said earlier that we expect in Q4 to have a top line growth, which will be in line with what we experienced in both Q2 and Q3. So no impact in terms of slowdown.

You were mentioning about margin. We don’t expect an impact in terms of margin. Why? Because even if there is a slowdown in emerging market, we expect that things are actually doing better in Europe than what we originally expected. And potentially in the U.S. as well we expect that things could perform better than what we had originally expected. So this is a little bit I would say part of – the normal course of business with some regions doing better or some doing worse.

You were asking the question about margins in emerging market. They are overall satisfactory. If we look at the margin to simplify, we have a margin which is lower than in developed market, namely Japan, the U.S. and Europe, but since most of our portfolio is still as of to-date will change overtime linked to branded generics, which means that the need for R&D is lesser. As a consequence, if we were comparing apples-with-apples which means the margin after R&D on the one hand in developed market and before R&D because that was literally emerging markets, we have level of margin which is more or less equivalent, so which means that the return that we get is good and satisfactory.

You mentioned more specifically China. We have profitable business in China, and I think that we manage to strike the right balance between growing very strongly in China, but growing profitability as well, which in my opinion has been very satisfactory as far as we are concerned.

Finally, just one word. Even if our growth is going down, it is clear as well that we have to draw the necessary conclusion of what it means in terms of resources that we need to invest on the commercial side in emerging market, which means that obviously if we grow by half of what we were growing few months ago, we may have or we will probably address our commercial investments accordingly.

Emilia Falcetti – Cantor Fitzgerald

Okay, thank you.

Christopher Hohman

Thank you very much. Next question please.

Operator

Next question is from Mr. Sakai, Credit Suisse.

Fumiyoshi Sakai – Credit Suisse

Thank you. Sakai speaking. I would like to ask a question regarding products. TAK-700. So your conclusion will be coming around the summer this year. I might have misheard you. Regarding this compound, at some stage in time – well, I think it would be not disclosed but do you have any backups? That’s my first question. Second question is on ADCETRIS. Compared with your forecast, I think still it has been progressing better. It’s not a great, but especially in Europe in the first half about 4.5 billion, I think was the number. So what’s the sales up to Q3, and what is the further forecast both for ADCETRIS sales, not in Australia and Japan, but in Europe and other countries?

Tsudoi Miyoshi

Well, regarding the TAK-700. As I told you, pre-chemo study, currently Phase III study is underway. We expect that this study will be ending earlier, but around summer I believe that we’ll be able to disclose some information, but we cannot make any promise at this moment. After having the results of this pre-chemo study, then together with the results of 21005, we will decide the strategy and then we will disclose.

Fumiyoshi Sakai – Credit Suisse

How about your backup project? Do you have any backup compounds that you can disclose to us?

Tsudoi Miyoshi

In the same TAK-700, I don’t have any to disclose.

François-Xavier Roger

We do provide the details of – we provide detail indications, so you have chart in my presentation that gives you the level of sense, so you can draw conclusion from that. You are absolutely right in saying that ADCETRIS is doing better than expected, doing really significantly better than expected, which we are very pleased with. So we are satisfied with that.

Fumiyoshi Sakai – Credit Suisse

You were satisfied. That’s fine, but can’t you explain the situation in more details? Takeda has been marketing in Europe and so I think you know the situation over there.

Tsudoi Miyoshi

Miyoshi speaking. Well, rather than marketing, the data that we have shown to you indicates that whether it’s Hodgkin lymphoma or the anaplastic large cell lymphoma, for both indications, a very high efficacy which couldn’t be seen in any other proteasomes [ph] were shown. And that’s how widely affected, therefore it would be widely used. And so we could actually also get additional indications for this, we thought – we expect greatly for this compound.

Fumiyoshi Sakai – Credit Suisse

I’m sorry to ask you for that questions and I think that you said the profitability is very high and it is in-licensed product, but still as of today, is it true that you have been making profit, substantial level of profit from ADCETRIS sales?

François-Xavier Roger

It’s third-party product, so we have a good margin but we need to remunerate the company that they got the product originally. So the margin is obviously lower in a product that would come from Takeda originally, but the margin is very satisfactory to us. The one additional thing that I can say that in some markets we have very high market share, for the indication that we have got, which mean that even in some market the potential for further growth might be limited today because we are close to having, as we’ve said most of the patient that we could address for these specific product, but we are still developing the product in some new countries as well. So there will be some additional growth coming from that product.

Christopher Hohman

Thank you very much. Well, the next question will be the last question because of the time limitation.

Operator

Next question is from SMBC Nikko Securities, Mr. Nakazawa.

Yasuhiro Nakazawa – SMBC Nikko Securities

Hello my name is Nakazawa from SMBC Nikko Securities. I have two questions. Regarding pipeline, TAK-875, it was mentioned already before, but in GPR40 with a certain mechanism, you will be challenged. Is that your policy? According to some news reports, [indiscernible] to deliver because of the structure of this kind of compound, it is likely to impact the liver and so if you are to continue development, are you going to challenge different structure of compounds. That’s the first question.

Tsudoi Miyoshi

As I said before, it’s not exactly the same type of products we work on sort of every option and we would continue our investment in this area including backups, and whether the structure itself is a problem or not, we don’t have a definite answer yet and we do not comment on this as of now.

Yasuhiro Nakazawa – SMBC Nikko Securities

Thank you. For example, SGLT2 inhibitors with DPP-4 inhibitor to be combined, that could be a golden standard for pharma companies to promote and SGLT2 maybe in-licensed?

Tsudoi Miyoshi

Well, diabetic area is very important area for Takeda and we will consider every option, but to have fixed-dose combination with specific SGLT2, no, we can’t comment regarding.

Yasuhiro Nakazawa – SMBC Nikko Securities

Thank you. And my last question regarding SG&A, as of course you have room and I am not fully convinced that you will use that for the budget, according to what you had in the third quarter and the fourth quarter, 30 billion yen increase in SG&A that is your plan, but you mentioned the BRINTELLIX sales cost and also impact of FX, all that could expand this much increase? May I ask that question once again…

François-Xavier Roger

I confirm that we expect to spend up to 19 billion yen in Q4 which is the reason why we provided the revised guidance. I confirm that the main driver is indeed the investments in BRINTELLIX. There are other factors, but I mean there is a collection of different other factors, none of them being significant in itself, but we do confirm the fact that we expect to – that increase which is mainly driven by the investments in BRINTELLIX in the U.S.

There is a minor impact in terms of LTIP, but it’s not significant. It’s part of traditional item that I was mentioning, none of them being very significant in itself, but I mean all of them combined may contribute to the increase in Q4 versus Q3.

Regarding LTIP, we have made an assumption of share price at closing at 5,000 yen, which on our guidance with a revised operating profit at [indiscernible] is based on this assumption of 5,000 yen. So there is a little bit of cost increase coming from LTIP as a consequence because of share price when we closed at the end of December, was at lower level.

Christopher Hohman

Thank you very much. With this…

Yasuhiro Nakazawa – SMBC Nikko Securities

Hello, just one more clarification. In Europe, lurasidone was approved and you paid – you will pay 8 billion yen to Dainippon.

Is that an R&D item?

Tsudoi Miyoshi

No. It’s not in R&D cost.

Yasuhiro Nakazawa – SMBC Nikko Securities

So are that SG&A?

Tsudoi Miyoshi

Yes.

Yasuhiro Nakazawa – SMBC Nikko Securities

Thank you.

Christopher Hohman

Thank you very much. With this we conclude today’s conference call. Thank you very much for your participation.

Operator

Thank you for taking your time. And that concludes today’s conference call. You may now disconnect your lines.

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