Takeda Pharmaceutical's (TKPHF) CEO Christophe Weber on Q3 2015 Results - Earnings Call Transcript

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Takeda Pharmaceutical Co., Ltd. (OTCPK:TKPHF) Q3 2015 Earnings Conference Call February 3, 2016 3:00 AM ET

Executives

Noriko Higuchi - Head of Investor Relations

Christophe Weber - President and Chief Executive Officer

Rudolf van Houten - Group Chief Financial Officer, Acting Chief Financial Officer

Azmi Nabulsi - Head of R&D Strategic and Professional Affairs

Analysts

Hidemaru Yamaguchi - Citigroup

Fumiyoshi Sakai - Credit Suisse

Kazuaki Hashiguchi - Daiwa Securities

Operator

Please note that this telephone conference contains certain forward-looking statements and other projects that results within both 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, liquidity of secondary markets, level and the 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 a question-and-answer session will be held after the presentation. This conference call is being broadcast through Internet [indiscernible] but only for listening mode.

Now, we start the conference. Ms. Higuchi, please go ahead.

Noriko Higuchi

Thank you very much for your participation in the conference call of the third quarter financial results for fiscal year 2015. My name is Noriko Higuchi, the Head of Investor Relations. Thank you for your participation again. We have the presenters, and respondents to the questions from our company including Mr. Christophe Weber, President and CEO; Mr. Rudolf van Houten, Group Chief Financial Officer - Acting Chief Financial Officer, and Dr. Azmi Nabulsi, Head of R&D Strategic and Professional Affairs. After Mr. Weber will make the brief update about the latest data and then followed by the Q3 financial results presentation by Mr. van Houten based on the prepared presentation materials. And then we will take question.

Now, please refer to the presentation materials at hand. Christophe, please.

Christophe Weber

Thank you very much. Good afternoon, everyone, and good morning for those who are in Europe and elsewhere. I will be very short. I will just say that the third quarter is confirming that we are on the way to delivery - out to delivering our commitment, that we are confirming that this is a turnaround year in both sales growth and profit growth. I will not detail anymore the situation. I prefer Mr. van Houten to present our reasons and then I will be very pleased to have any question at the end of the presentation. Thank you.

Rudolf van Houten

Thank you, Christophe. So, if you please turn to slide number 4. We'll start the financial presentation. So, as Christophe said, Q3 was a good quarter for us. Underlying revenue growth year-to-date is up 3.8%. Core earnings is up 1.5% and core EPS is up 17.3%. Takeda's growth drivers , s we defined them last quarter, GI, oncology and emerging markets, they represent roughly half of our revenues and they were up by a robust rate of 8.5%.

ENTYVIO continues to do very well and it's on the way to deliver over $2 billion in peak sales. Another milestone was the launch of NINLARO in the U.S. in December of last year.

in Japan, Q3 was a quarter where new product growth offset generic declines, so that was a nice performance for Japan entity. Project Summit, I'm very happy to say that as of the end of Q3, we already exceeded our full-year savings target, and we still have more to go in the last quarter of the year. And then I'm also very happy to say that our operating free cash flow showed a very large improvement versus last year, and we put a lot of effort in this area, but a lot more work remains to be done. And we are also reaffirming our management guidance for the full year 2015.

So, if we now turn to slide number 6, we'll first go to the reported P&L, as usual. So, our reported revenue was ¥1,393 billion, which represents an increase of ¥53 billion or roughly 4% increase versus the same period the last year. Revenue was driven by strong performances primarily, ENTYVIO, up ¥43 billion, AZILVA, up about ¥12 billion, and VELCADE which also continue to grow, up about ¥12 billion. And this was partially offset by the continuing decline of CANDESARTAN which is known Blopress in Japan, was down ¥35 billion, and COLCRYS which was down ¥10 billion. Both of them are impacted by generic penetration.

On a geographic basis, our ethical revenues in overseas market was ¥844 billion, which represents an increase of about 8.5%, which is really driven by robust growth in the U.S. And our ethical revenue in Japan was ¥428 billion, which was a decrease of 2% versus the prior year.

And in Japan, the contribution from sales increases of products such as AZILVA and LOTRIGA could unfortunately not fully offset the decline of products such as BLOPRESS which continues to suffer from generic penetration as previously mentioned.

Consumer health revenue was ¥64 billion, which was an increase of almost 10%, very nice performance, mainly increased due to sales of ALINAMIN vitamin tablets. And then the revenue in our Other business section was ¥57 billion, and that was a decrease of 14.5%. That's really the result of the divestment of the Mizusawa business back in April of 2015.

Going down the P&L, gross profit increased by ¥37 billion or about 3.9%, which was in line with sales growth. And the gross margin percent remains largely unchanged at around 71%. Our operating profit was down by ¥32 billion or 16% decline.

There were a number of factors which can be attributed to that. We had higher operating expenses to support new product launches, particularly ENTYVIO and CONTRAVE in U.S. and TAKECAB and ZAFATEK in Japan and then also the establishment of global functions as we've previously disclosed.

2014 also included a onetime gain on the disposal of assets of ¥25 billion. It was mainly disposal of real estate. And then we had a net gain in 2014 as well of ¥26 billion on COLCRYS. And both of those events were one-off events and will not be repeated in 2015.

Net income and EPS were both up approximately 43% despite the low operating income and the impact in the net income EPS was related to the decrease in income tax expenses of ¥67 billion. And this decline in income tax expenses was largely the result of the net income tax of 2014, R&D tax credit revaluation loss, which we explained in our 2014 results. And then in 2015, we had the tax impact due to the capital redemption from a subsidiary which had a positive impact.

So, if we now turn to slide number 8, we'll go through the underlying results starting with revenue. So, slide number 8 shows that the bridge from the reported revenue numbers which I just spoke about and then to the underlying revenue. And there are really two main adjustments in the past. First one is related to FX which restates both years using constant exchange rates. And the second adjustment relates to acquisitions and divestments. And that really aims to place both years on a constant population basis.

So on 2014, we're removing primarily the divestment of several smaller businesses, most notably, the Mizusawa sale that I previously spoke about. And then in 2015, we removed the impact of the small acquisition we did in Turkey earlier in Q1 of this year. And when adjusting for these items, our deposit revenue of 4% actually stays largely unchanged and becomes to be 0.8% for the first nine months of the year.

So, please note, I'll turn to the next slide, slide number 9, in fact. This slide shows the growth and revenue coming from our two growth drivers. And again, they are GI, Oncology and Emerging Markets. And on year-to-date basis, our growth drivers increased by 8.5% versus the 3.8% underlying sales increase for the full business. We continue to grow strongly in GI which is really led by ENTYVIO. Emerging markets also continue to perform very well in a volatile environment that everybody knows about. And oncology was impacted by lower VELCADE income outside of the U.S., but the U.S. VELCADE is still performing very well, as is ADCETRIS, and we anticipate that oncology will start growing with the recent launch of NINLARO.

So, if we turn to the next slide, slide number 10, this shows the breakdown of our underlying revenue growth into the impact coming from our growth drivers versus the remaining base business. And our growth drivers contributed ¥53.5 billion to our revenue growth. And apart from difficult drivers, however, CANDESARTAN continue to provide headwinds, dropping by ¥36 billion. However, the impact during Q3 of CANDESARTAN decline was considerably less than during the first two quarters of the year, and that's because generics first came into the market during Q3 of 2015. It's also interesting to note that ENTYVIO sales for the quarter were now actually higher than sales.

And something else I should point out is that aside from our growth drivers, we also saw a broad based growth in our portfolio of other products such as AZILVA and LOTRIGA, and BRINTELLIX. And growth of these products virtually completely offset the adverse impact from CANDESARTAN.

So, if we turn to next slide, slide number 11, for those on the phone, this gives a breakdown of our underlying sales growth by region. And as we have seen in previous quarter, our largest regional growth driver continues to be the U.S., which was up almost 12% in the first nine months, really driven by ENTYVIO and BRINTELLIX. Emerging markets also continue to grow well, albeit, at a slightly lower rate in Q3, which is no surprise given the recent emerging market turmoil, but still continue to do quite well.

Asset growth sales in Japan decreased by 1.7% year-to-date, and that's really because of generic penetration. If you recall from our last earnings release for the half year, Japan was down by 3.4%. So, in fact, if you take Q3 alone for Japan, Japan sales grew by 1.5%, and that's because of the decline of [indiscernible], which was actually significantly reduced during the quarter versus the previous quarters.

And, of course, the products such as AZILVA and LOTRIGA continue to perform well in Japan. The Japan other business continue its robust growth. And that's really reflective of our Consumer Health business I spoke about earlier.

So, please turn to slide number 12 and this gives a breakdown of our global sales by region, and also a little bit more detail on emerging markets. Globally, sales were very well balanced with about a third coming from Japan and another third coming from the U.S., and then the remaining third coming from the rest of the world. And as you can see, this slide also gives a breakdown of our emerging market sales. During Q3, we saw some slowdown in emerging markets. However, our key markets of China and Russia both continue to grow well. In fact, they were up at a double-digit rate.

And Brazil showed some recovery during the third quarter versus the results that we posted in the first half. However, there were other countries such as Venezuela and Mexico, which saw some slowdown while CIS countries also were a little bit more difficult.

So, please turn now to slide number 13. So, within oncology, we had a very significant milestone at the end of last year with the approval and launch of NINLARO in the U.S. for relapse and refractory multiple myeloma, and it is the first and only oral proteasome inhibitor in the market. And in addition to good efficacy, NINLARO also has a favorable safety profile and the simple convenience of being one capsule once a week. This profile allows patients to be treated for a longer period of time and with a better quality of life.

Since NINLARO was launched in the U.S. in December, the Q3 sales, of course, are still very small because we've only had a couple of weeks' worth of sales in third quarter. However, we expect this to be one of the key products driving Takeda's growth over the midterm. We have also filed in Europe, and we're planning to bring this product to market rapidly in Japan as well as in emerging markets.

So, please turn to slide number 14. And this slide shows our ENTYVIO performance, and it's always a pleasure to present this slide because it's a real success story for ENTYVIO. As of December 2015, we've achieved a moving annual total of about ¥70 billion, which is really a fantastic performance considering that the product only came on to the market about 18 months prior. And this positions the product very well to achieve our peak sales target of over $2 billion.

And maybe I'll just mention a couple of interesting facts about ENTYVIO. We now have approvals in 6 continents and in over 40 countries, and over 350,000 vials have been manufactured and nearly 30,000 patients have been treated with ENTYVIO so far.

During Q3, ENTYVIO also became our fourth largest product globally. And total sales of ENTYVIO in Q3 exceeded total sales of BLOPRESS. And then in addition, during Q3, we purchased a biologics manufacturing facility in Minnesota in the U.S., and we will use this facility primarily to manufacture ENTYVIO. And that gives us a second production source and will ensure that we will be able to meet future demand for the product.

So, please turn to slide number 15. And this slide shows the profit of BRINTELLIX and ADCETRIS and we've shown you this slide many times before, and I'm pleased to say that the trend of strong growth continues for both of these products. And these are two important new products for us that are really making a meaningful difference in patients' lives.

For BRINTELLIX, the FDA is currently reviewing application at data regarding the effect of cognitive function to the product label which could be important catalyst for this product. ADCETRIS continues to generate great data such as the five-year follow-up data in relapse refractory Hodgkin lymphoma that was presented at ASH.

In addition, we have a label update approved in Europe recently to include data on the treatment of adult patients who have responded to previous treatments of ADCENTRIS but later relapsed. We anticipate that both of these products will continue to be steady contributors to our revenue growth going forward.

So, please turn now to slide number 16. Over the last few months, we have been analyzing our external disclosure with the aim to increase the level and transparency of the information that we provide. In particular, external analysts and investors have asked for more product-based disclosures.

And today, we'll take the first step to provide more detailed information by product and by region. And going forward, we will continue to review our disclosure materials with the aim to improve further. So, the report you see on this slide and also on the following slide shows our main product sales by region, both on a reported as well as underlying basis. It's not the intention for us to go through each of these products per products and explain each bearings for each of the region and each of the product. It's really valid intention to provide more information so that investors can make more informed decisions regarding our performance.

We will present this report on a quarterly basis and we're now analyzing whether to also add a future sales trend by product. And this product will report the top 10 products of the company in addition to 4 other products that are either large in terms of revenues or had been of particular interest for investors in the past. And a total of these products account for more than 60% of our year-to-date sales.

So please turn to slide number 18. We'll skip 17 because it's just a continuation of the same report. So, slide number 18 is a similar type report. It's also a new report, and people have asked for more information on emerging markets. And so here, we want to share our three largest emerging markets, China, Russia and Brazil. Again breaking out both the reported as well as the underlying growth for each of these markets. And as with the product report, we will present this report going forward on a quarterly basis. And these three markets, China, Brazil and Russia account for more than 50% of our emerging market sales today.

So please to turn to slide number 20. This slide shows our underlying core income statement. So revenues as we discussed were up 3.8%, really due to robust increases in our growth drivers, GI, oncology and emerging markets. And in addition, decline [indiscernible] were largely offset by growth in other products such as BRINTELLIX, AZILVA and LOTRIGA. Our gross profit was up ¥25.7 billion, which is an increase of 2.6%, which largely follows the sales increase. And the gross margin was slightly down, from 72% to 71.2%, mainly due to product mix in our Japan business.

Sales and marketing expenses were up to support the new product launches including NINLARO, which was recently launched in the U.S. G&A expenses were up about 2% due to the introduction of new functions while R&D expenses were up about 3%. The net of other income and other expenses had a positive impact unlike in 2014 when we had higher expenses related to the determination of the pipeline asset. This resulted in a 1.5% increase in underlying core earnings. Underlying EPS was up by 17.3% mainly due to a lower tax rate resulting from the tax impact due to a capital redemption from a subsidiary.

So, please turn to slide number 21. When we give our full-year management guidance, we always say that we expect the underlying core earnings growth to exceed the revenue growth. Now, when you look at the year-to-date results for the first nine months, this is not yet the case, the revenue increasing 3.8% per quarter and is up 1.5%. So, I'd like to explain why we feel that for the full year, our core earnings growth will still be higher than our revenue growth.

So, on this slide, you can see the quarterly SG&A and R&D expenses for the four quarters in 2015 as well as the first three quarters in 2015. And you'll note that in Q4 2014, there was a large increase in both SG&A and R&D expenses for the quarter. And during 2015 Q4, we do not anticipate such large increases in expenses particularly in R&D expenses. And since we anticipate having lower operating expenses versus last year, this will increase our core earnings growth for the full year.

So, you may wonder why we expect R&D expenses to be lower in the fourth quarter. Because since there was a big spike in R&D expenses last year, during Q4, and there are a number of reasons for that. The first reason is that our R&D budget for this year is much smaller than last year. And so, Q4 spending, naturally, since we're tracking roughly in line with our budget spend, would be smaller than last year. In addition, we had a number of product terminations in Q4 2014. And when we have a product termination, we require, under IFRS, immediate recognition of all future expenses related to that project. We do not expect to have such terminations this year. So again, that would be a favorable variance versus last year. We also had a ramp up for new study starts in Q4 2014, which we do not have this year.

So, all in all, again, we expect our underlying core earnings to grow faster than our underlying revenue as a result of the lower operating expenses during the fourth quarter.

So, let's turn to slide number 22 and that shows our progress on Project Summit. We previously made a commitment to reduce expenses by ¥120 billion over the five-year period. And we remain fully committed to this call. During 2013-2014, we made total cumulative savings of about ¥62 billion, which is roughly half of the commitment. Such savings came from the consolidation of production facilities, commercial site closures and establishment of shared service centers. And our savings targets for the period 2015 to 2017 are targeted to be about ¥20 billion per year.

And when you look at the savings this year up until the end of Q3, they were already higher than our full year ¥20 billion target for the year. And savings during Q3 alone approached ¥10 billion, meaning that we now have already exceeded our full year target.

So, during the quarter, we saw savings accelerate in all areas, most profoundly in production and supply, in R&D and in G&A. And procurement savings did particularly well during the quarter, accounting for almost ¥7 billion of the total ¥10 billion of increases in Summit savings for the quarter. So, again, we remain fully committed to this project, and it's proceeding very well.

So, please now turn to slide number 24, which gives an overview of our operating free cash flow. You can see that cash flow for us this year, I've mentioned that before, is really a big area of focus, and that's really starting to pay off. And during the first nine months of this year, our operating free cash flow, which is defined as our operating cash flow less CapEx and less the acquisition of intangible assets, that improved by ¥47 billion again versus the same period last year. So, it almost doubled versus same period last year.

Most of that improvement came from better working capital management and that improvement really came across all levers of working capital including receivables, inventory and accounts payable. However, despite the improvement, we still have a lot more work to do, and cash flow will continue to be a big focus area for us going forward.

So, please turn to slide number 25. So, this slide shows our debt maturity profile. And we have about ¥100 billion coming due in the fourth quarter 2015 and additional ¥180 billion coming due next year. And as I indicated during my first half earnings announcement, we are planning to raise about ¥350 billion in new debt - in yen-denominated debt within the next several months. And maturities for that will probably be in the range of 7 to 10 years. And this will allow us to refinance the debt that's coming due within the next 12 to 24 months.

I'd also like to give an update on Actos. We anticipate making the Actos payment, the $2.5 billion payment, now in March of this year, so next month, using balance sheet cash.

So, let's turn to slide number 27. And I would like to spend some time on slide number 27 and 28 because it is our forecast for the full year. So, for the full year, we are upgrading our reported operating profit forecast from ¥105 billion to ¥120 billion. We are leaving our net profit and our EPS forecast unchanged.

So, where does that ¥15 billion come from? The increase in our operating profit forecast really comes from three main areas. As you know, we launched NINLARO in December of this year, which was several months earlier than we had initially expected when we made our forecast, and that will give us an upside for the year.

In addition, as I just mentioned, our Project Summit savings are running ahead of the full year, and we have also reflected this in our latest forecast.

And then finally, during the first quarter of this year, we initiated a project to contain our G&A expenses versus our original forecast. And this will also deliver an incremental operating profit improvement.

So, while we're on this page, I would just like to say a few words about our R&D forecast. We've kept that forecast unchanged, since R&D is impacted by FX and other items. We may have a small overspend in R&D but that would be offset by an under spend in SG&A. So, really, no material impact on our total operating profit forecast for the full year.

So, if we turn to the next page, I would like to spend some time explaining the rationale for our forecast, and also the rationale why we are maintaining our net profit forecast although we are increasing our operating profit forecast.

So, I'm now on slide number 28. So, there are two things I would like to address on this slide which are important, I think. The first, as you can all see, our year-to-date operating income and net income are already higher than our full-year forecast. So, I would like to explain the reason why that is. And secondly, since we are increasing our operating forecast by ¥14 billion, ¥15 billion as shown on the previous page, why are we not also increasing our net income forecast by the same amount? And again, I would like to explain this topic as well.

So, let me address the first issue first. So, why is the full year income forecast lower than our actual year-to-date Q3 results and everybody can do their very simple math, and see that in that case, we expect to generate a loss in the fourth quarter.

Now, I don't want to alarm anybody. This loss is not unexpected. It's included in our budget, and it's fully in line with our historical result patterns. So if you look at 2014, exclude the historical impact, we had a loss. If you look at 2013, 2012, 2011, et cetera, you can see that generally the fourth quarter is a weak - is weaker than the other quarters.

And there a number of reasons for this particularly for this year. So in Q4 this year, we are expecting sales to be below the year-to-date average run rate and particularly this is coming from Japan. And as a result of the expected destocking in anticipation of the NHI price revision in April. This is largely just a phasing issue between the months of March and April, but we will still affect this fiscal year for us.

Second, as I have already said during the half year results presentation, there has been a general weakening of the emerging market currencies over this past year and this will impact our results also as to be expected.

And thirdly, as I've shown on slide number 21, we generally have had higher operating expenses in the second half of the year particularly the fourth quarter when compared to the first few quarters of the year. And again, this is fully in line with our expectations and it's also fully in line with our internal budget. And it's also fully in line with our historical patterns.

And then finally as a result of our internal planning process, which we go through quite a robust long-term planning process where we look at the long-term potential for all of our products. And on the basis of that process, we then tend to look for indicators of impairment. And since that process falls toward the end of our year, we would then tend to book most of our impairment losses during the fourth quarter.

And again, I don't want to alarm anybody. This is just in line with our expectations. It's in line with our internal budget, and we do not anticipate that impairment losses will be substantially different from our initial forecast. It's just that from a phasing perspective, they tend to fall majority in the fourth quarter. So, I hope that this explains why our fourth quarter results tend to be somewhat lower than our first three quarters. And again, it is fully in line with historical patterns and in line with our internal budgets.

So, the second item I need to explain is why the ¥15 billion improvement in our operating profit, as shown on the previous slide, does not carry through down to the net income. And there are really two items that explain this.

First, due to the very poor economic situation in Venezuela and, as people may have known and have been reading in the press, because of the low oil prices, Venezuela is in a crisis situation. We are now in discussions with others about a possible write-down in our exposure to this business.

This is a new item and this is an item that was not previously included in our forecast, and we have now included that in our forecast today. And that offsets approximately half of the ¥15 billion in operating income improvement that I showed you on the previous slide.

Second item, which is a new item which we've included in the forecast, is FX losses stemming from the revaluation of emerging market currencies. So, that's also been included in our full year forecast. And although we have a very comprehensive hedging program, there are just simply certain currencies that are not possible to be hedged because it will develop the hedging market simply does not exist. So, this accounts for the other half of the ¥15 billion in our operating income improvement offset.

Finally, there's one additional item I'd like to mention on this slide, and that's as a result of the recent tax reform announced in Japan. We have included in our forecast a revision of our deferred tax asset balance, which is a negative on the tax line for the full year.

So, we have included that in our forecast, but this is broadly offset by the positive impact from the previously-mentioned capital redemption. So, there is really no large material impact in our net income after tax. However, I did want to point out to people that this is an item which is included in our forecast.

So, then turning to slide number 29. This is our management guidance. And as we said before, at this point, we remain fully committed to our annual management guidance, as you see on this page.

And then finally, turning to slide number 30. I'm pleased to announce the date of our IR event later this year. We will hold the event on June 9 in Tokyo, and we'll focus on our updated R&D strategy and our oncology business unit including NINLARO. And we'll provide more details about this IR event in the near future.

So, that concludes the presentation for today.

Noriko Higuchi

Now, we would like to entertain questions. For those who are in the Japanese channel, you can ask in Japanese. If you're on English channel, you can ask questions in English. And please limit the number of questions to two per person. Thank you.

Question-and-Answer Session

Operator

We'll have the question-and-answer session now. [Operator Instructions] The first question is from Mr. Yamaguchi, Citigroup. Please.

Hidemaru Yamaguchi

Hello. Yes, [indiscernible]. Thank you. I have two questions. First question is for classification, ¥15 billion in operating profit that - regarding that increase, I have several - you have mentioned reasons but things do not change in your guidance. And so, Summit and other projects we're going to build. So, costs for the year will be lower, that's the reason for the increase in operating profit. So, regarding revenue for the year, it's going to be in line with the expectation? That's the first question.

Rudolf van Houten

So, thank you for the question. You are correct that we did not update our revenue forecast. I did mention that we have some upside as a result of NINLARO. But when you look at the total impact on revenues, it's really less than one half of 1% of total revenue. So, for us to be able to forecast at that level of precision is just not possible, so that's why - since it's more of a [indiscernible] issue, we've kept the revenue forecast unchanged. So, that is correct.

Hidemaru Yamaguchi

Thank you very much. May I go into the second question?

Rudolf van Houten

Yes. Go ahead.

Hidemaru Yamaguchi

Regarding NINLARO, it's a bit premature to mention sales projections by doing field prescriptions in the U.S. The number of patients ins not big in this field, about 800,000 prescriptions. That's what I understand. What's the update so far regarding the promotion activities and the client feedback in the U.S.? It can be qualitative comment, if you could share that with us, could you, please? Thank you.

Christophe Weber

Yamaguchi, in Q4 question is Christophe for the [indiscernible]. Look, the early feedback on NINLARO is very positive. We believe that we have slightly more than 500 patients already under treatment by NINLARO. The managed care and the reimbursement process is also going well, and the feedback from the key opinion leaders and from the prescribers is very positive. So, too early to say, but it is already doing good so far. And so, we'll see how it continues on this trend. Thank you.

Hidemaru Yamaguchi

Thank you very much.

Operator

Thank you very much. We'd like to move on to the next question. Next questionnaire is from Nikkei, Mr. Ito [ph].

Unidentified Analyst

I'm Ito [ph] from Nikkei Newspapers. Do you hear me?

Christophe Weber

Yes, we do.

Unidentified Analyst

I have two questions. First one is about emerging markets. Based on yen, the revenue in Russia and Brazil were significantly reduced. This is only because of the FX impact or is there any sluggishness in the sales in that region? That's the first point I'd like to confirm.

Christophe Weber

Christophe Weber again. Thank you for your question. It's mainly the currency exchange impact. In many countries in emerging market, we don't necessarily see a slowdown of the market. In some countries, there is a restructuring of the market with, for example, low-priced generic having more attractiveness when it's an out-of-pocket market. But it's emerging trend, so we'll see how it is evolving. So, this evolution here in term of reported is mainly the exchange rate factor.

I want also to stress out that our policy at Takeda is not increase price significantly when we are facing this type of exchange rate situation, because we want our product to still be affordable to the patients. I mean, we do increase price sometimes, but we are very careful about that to make sure that our product remain affordable.

Unidentified Analyst

One more question. Earlier, you mentioned about the some losses to be incurred in Venezuela. So, what is the target of the - that re-evaluation loss in Venezuela in terms of the business in there?

Rudolf van Houten

So, we haven't finalized all the discussions with our auditors. But if I venture, I guess, it would be somewhere the ¥5 billion to ¥10 billion.

Unidentified Analyst

Well, I'd like to understand the scope of the assets. What is the actual asset to be impacted by that re-evaluation loss?

Rudolf van Houten

So again, we remain - at this point, our view is that we have an inter-company receivable between Mexico and Venezuela for supply of products. And that receivable is denominated in U.S. dollars and because there is a large differential between the coded government - official government exchange rate which is ¥6.3 local currency to the $1 and the non-official exchange rate which could be as high as ¥800 to the $1. We would take a write-down in that inter-company receivable.

Christophe Weber

I will also add that we are - I mean, I'm not - we are not worried about our exposure in Venezuela because for me, quarter now in many years, we have been very careful about our exposure in the country. So, we have to potentially take these impairments here today but we don't have a huge exposure in the country.

Unidentified Analyst

Thank you very much.

Noriko Higuchi

Next question please. From Credit Suisse Securities, Mr. Sakai, please.

Fumiyoshi Sakai

This is Sakai. I have two questions. BRINTELLIX [indiscernible] our local churn today I suppose. In the briefing paper, what should we pay attention to in disclosing document? That's the first point regarding advisory committee.

And also, this cognition function that's going to be added to the label in the package insert, that means in expanded indication in broad definition of indication. Is that a good extension of labeling? Is that what it is?

Christophe Weber

Sakai-san, thank you very much for your question. It's Christophe Weber here. Don't go too fast on assuming that we will get an indication with the commission. It's a significant scientific debate on regulatory debate which is going on as we speak actually because it's today or starting today.

So we'll see the outcome in debate. It's quite difficult to predict what will be the outcome. What we know is that there is an interest by the FDA to have the debate. Otherwise, we won't have this meeting today. And the meeting will be in two parts. One, it will be fundamental discussion about how to recognize effect in the field of depression and how should we do that. In then in the afternoon, it would be a more specific debate on BRINTELLIX on the data that we are providing.

It's very difficult to predict exactly what would be outcome and the advice that the Advisory Committee will give to the FDA. And it will translate into an indication, clinical features or nothing. And of course, this has significant potential, positive consequences on BRINTELLIX, not negative, but potentially only positive depending on the outcome that we will see. It's difficult to predict them.

Fumiyoshi Sakai

I have one more question to ask. That means in your policy, you think of the first addition to the label is important for you. Is that the right understanding?

Christophe Weber

Well, depending on the outcome, associated to that, there is the ability to promote or not. So, I think that will - of course, label is important because it will define what we can say about the future of this product in the future, but details matter. So, that's why we need to see really the outcome of the Advisory Committee. At the present time, I want to stress out that our forecast do not assume yet that we have the ability to promote our combination in the future as in the United States. So, we will what the outcome of the Advisory Committee.

Fumiyoshi Sakai

So, when you say outcome, that means outcome from Advisory Committee, you were waiting for the recommendation? You're not talking about outcome of studies?

Christophe Weber

No, no, no. I'm talking - sorry - about the conclusion of the advisory committee. So, the advisory committee will conclude and will give an advice to the FDA as how to recognize this commission data. And yearly - I mean, often we follow the advice of the advisory committee, not always by the way. So, we need to wait for the advice of the advisory committee and then wait to see how the FDA manage this advice.

Fumiyoshi Sakai

Understood. Thank you.

Operator

Thank you very much. I'll move on to the next question. The next questionnaire is from Life Insurance, Life Securities, Mr. Hashiguchi.

Kazuaki Hashiguchi

I'm from Daiwa Securities. I have two questions. The first one is although it was not stated today, but at the very end of this presentation, there is a slide about the joint venture with Teva. Long-listed products to be transferred to joint venture. I believe Takeda, going forward, continues to manufacture those products. But what is the price set to be sort to the joint venture? The gross margin, how are you going to split gross margin between Takeda and the joint venture? And in conjunction with this joint venture or transfer, I believe you are going to get the profit share. And what is the level of the profits you can get? And relative to the release, expected release in long-listed product sales? Are you going to have the positive net result or in the future inclusive of generic profit which will be generated from Teva Pharmaceutical, basically, through this joint venture, you think that you can get the profit positive status.

Noriko Higuchi

So, first question should be answered first.

Christophe Weber

So, thank you very much for your question. So, we are transferring some LLPs product to the joint venture. And at the same time, we have 49% of this joint venture. So, any profit in the future generated by the joint venture will be split 51% to Teva, 49% to Takeda. So, that's the overall scheme.

The way we structure the joint venture, we made sure that this move is EPS and cash flow accretive in 2016 and beyond. So, that's how we have balanced the economics of the deal, if you like. So, we made sure that we don't transfer too much, for example, profit, and we don't want to have an EPS dilution in 2016. So, it's complicated. I don't want to give you all the details about the economics of the joint venture, but what is important is that we - it's EPS accretive for us in 2016 and beyond, and it's cash flow as well.

So, long-term in the future, of course, these LLP product are declining significantly and they will continue to decline, and we'll continue to own 49% of the joint venture which, at the same time, is we'll develop a generic business in the Japanese market. So, that's how the overall deal structure.

So, what we will do in May when we will express our guidance for 2016 is that we will pay special attention to the EPS guidance because there will be an impact in our net profit on our EPS, so we will give you some guidance on that so that you can bridge from the core earnings with the EPS if you like. Did I answer your question?

Kazuaki Hashiguchi

Yes. Understood very well. The second question is about the NINLARO, the series of development direction about this product. We can see in multiple myeloma, there are a series of antibody product delivered positive data one after another. So combination development are already ongoing in the competitors, together with the proteasome inhibitors. So, in Takeda, do you have any directions to combine with the antibody drugs therefore, your proteasome inhibitor?

Christophe Weber

So, we know that the - there are so many agent that have been registered last year that the - everybody will look at what is the most effective combination possibly by this stage and by treatment. So we will be part of this research if you like which is what is the best sequence of combination, looking at efficacy as well as cost effectiveness, as well as toxicity and long-term sustainability of the treatment. And this is where we believe that NINLARO has a key advantage of being effective but with low toxicity and very easy way of administration.

So, we believe that it could become the backbone, one of the backbone of treatment of multiple myeloma over time because it could provide to the patient strong efficacy with good quality of life, but we know that NINLARO will be combined within the products in many cases. We do have a Phase III maintenance team in monotherapy. Phase III, NINLARO has always been combined mainly to [indiscernible] so far. But there will be a change of combination.

I think it's quite difficult at the moment to predict which combination will end up being used because there are so many possible combinations. And we're talking with [indiscernible] as we know that they are all looking at exploring that. And we will support that exploration in order to optimize the treatment of multiple myeloma.

Kazuaki Hashiguchi

Thank you very much.

Noriko Higuchi

We are approaching the time to close, so next question should be the last question. Please go ahead.

Operator

[Operator Instructions] Next question is Mr. Izawa [ph] from Asahi Newspaper. Go ahead.

Unidentified Analyst

Hello?

Christophe Weber

Yes. We hear you.

Unidentified Analyst

Nizawa [ph] from Asahi Newspaper. Today, you announced Consumer Healthcare and it's now a subsidiary. What's the intention behind this? Takeda Teva have joined business now. And regarding Consumer Healthcare, maybe you are going to lower your capital ratio from 100% to much lower level. Is that the plan? That low?

Christophe Weber

Thank you for the question. So, the intent here is to really reinforce our Consumer Healthcare business in Japan. Today, it's a very strong business unit. But we know that in the future, we'd like to add more brands and we know it's also a different business than our pharmaceutical business, so we'll give them more autonomy to develop themselves.

But also, it will potentially open to opportunities to grow further our activities in the consumer business which it's a long-term strategy here that we are having in mind.

Unidentified Analyst

Thank you very much.

[Foreign Language]

Noriko Higuchi

Are there any other questions?

Unidentified Analyst

I have one more question. Maybe it's not directly related to earnings. But in December, at quarterly conference, there was discussion regarding recalculation of prices based on market size and there are various issues and what you think are most important topics in the discussion of the insurance council. Thank you.

Christophe Weber

Well, to me, the most important is that the Japanese government and the policies remain committed to rewarding innovation. That's the key. And I think that's very important, so at the moment, there is a very strong generic development. And we understand that and we support that. And that's also why we are doing the joint venture, because we believe that that could create financing resource for the healthcare system but also to rewarding innovation. That's the most important part. Yes?

Unidentified Analyst

Thank you.

Operator

For Maria [indiscernible] thank you for your question. With this, we'd like to conclude today's conference call. Thank you very much for your participation despite your busy schedule.

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

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