Takeda Pharmaceutical Company Limited (OTCPK:TKPHF) Q1 2016 Results Earnings Conference Call July 29, 2016 4:15 AM ET
Rudolf van Houten - Group Financial Controller
Andy Plump - Head, R&D
Hidemaru Yamaguchi - Citigroup
Kazuaki Hashiguchi - Daiwa Securities
Shinichiro Muraoka - Morgan Stanley
Fumiyoshi Sakai - Credit Suisse
Unidentified Company Representative
Good afternoon. Thank you very much for attending these first quarter results. Let me start, we have topics to cover today. One is Q1 results, financial results. And you will see that we are very satisfied with this result. We believe that we are up to a very strong start of the year. So, we’ll share that. Rudolf van Houten make a presentation. But before we do any presentation, I would like to introduce you James Kehoe, our CFO, who is here today. So, James is still in learning phase, so he will not do the presentation this quarter, but he will do it in the subsequent quarter. So that’s the first element.
But before we present this Q1, we would like to share with you how Takeda will become the leading research and development company in GI; oncology; and CNS, what is our strategy, and what is transformation that we are planning to do in order to be the leading research and development company in the therapy area we have selected. And Andy Plump, our Head of R&D will make this short presentation, and this presentation about our R&D transformation will be followed by the Q1 presentation. Andy?
Good evening, everybody. It’s a privilege to have an opportunity today to share with you where the R&D organization is headed. We had the pleasure of spending six hours together, many of us, on June 9th. And at that point, we talked to you about our R&D strategy. We talked to you about the recent launches that we had, I mean, success that in many ways is unparalleled certainly for Takeda with these handful of launches and in many ways, unparalleled for the industry.
We talked about our focus on ensuring the life cycle management of these products. We talked about the fact that in development, 50% of our resources is focused on ensuring that we recognize the full potential of these truly remarkable medicines for patients NINLARO, ENTYVIO, TRINTELLIX, ADCETRIS, TAKECAB and others. We also shared with you the state of our pipeline. And it’s not a pipeline that as it exists today is going to deliver at the level that we need.
We then rolled out our strategy, and I’ll share again elements of that with you today. And I think what we didn’t get into, and mostly because of timing, was the organizational change, the transformational organizational change that will be necessary to prosecute that strategy. So, if you may, I will spend a few minutes this afternoon telling you about the changes that we anticipate over the coming months and years.
As I’ve stood up here in the past and spoken with you, I always come back to fundamentally what makes this Company great, and that is our value system. We are unwavering around this value system. The Takeda is in principles and most importantly, a focus that begins and ends with the patients.
We talked about the cornerstone of our strategy for R&D. It’s therapeutic area focus. For us that means CNS, oncology, GI, plus vaccines. We have made the decision over the past several months that specialty cardiovascular which was an area that we indicated would be an area of concentrated strategic interest for us, will no longer be so. We felt that we didn’t have the pipeline and we didn’t have the resources to disperse over another therapeutic area.
This is our contract, this is our pipeline. Whenever I speak with you, I’ll share this with you, and this will be how you will measure the success of our strategy and of our transformation. Now, I’ll make a few comments because even since June 9th, but certainly since the Q4 discussion, the pipeline has evolved. As you can see, the pipeline is becoming more and more aligned with our therapeutic area strategy.
The second point that I’ll make and I won’t go through the elements that we discussed extensively on June 9th but the second point I’ll make is that in just the last quarter, we’ve brought three new programs into our GI pipeline. A program that actually has been filed in Europe together with the company called Phigenix, this is a mesenchymal stem cell, cell-based therapy for anal fistulas in patients who have Crohn’s disease. We are very impressed with the data that has got out from their Phase 3 trial. And we are confident that this medicine will become a meaningful medicine for patients with this horrible condition.
We also have brought in two pre-proof of concept studies, both that effect gastrointestinal motility, one with the company Theravance, a program that will start Phase 2 in early calendar year 2017; and then a second program with a company called Altos. I think what’s particularly interesting about this model is that, it speaks again to one of the core components of our strategy, which is external innovation. It also speaks to different models of working externally. Our intent is not just to buy and license and control everything because in some ways that defeats the purpose of what you get from external innovation, the diversity in mindset and the diversity in thought. So, a great example of this is this Phase 1 program that we have with Altos in gastroparesis for GI motility. So, it’s a program that we now have an option to purchase but that Altos will bring to the next key decision points.
So, I’ll remind you, again, and the last slide on strategy and then, I’ll get into the changes, that our strategy is fundamentally based on four pillars. The first, as we discussed extensively is this therapeutic area focus; the second and ultimately what will define our success is ensuring that we optimize a pipeline of meaningful and innovative products. Okay? We’re not going to advance me toos, we’re not going to advance programs that offer only incremental innovation. Our bar within these three therapeutic areas plus vaccines is very high.
Thirdly, we’ve talked extensively about our need to build capabilities to support our therapeutic areas. New modalities beyond small molecules, translational medicine, data sciences and then both the culture and the capabilities to operationalize our externalization strategy.
We also talked on June 9th about the importance of culture. We talked about the culture of leadership, of agility and of an externally facing mindset. And I said that if we didn’t get that right, nothing else that we’re talking about will work. And today is the last piece of this, and that’s the transformation of our organization.
So, let me give you some perspective on what that transformation will look like. And of course in the short time that we have here, I can’t get into all of the details. Suffice it to say that the transformational changes that we are making are significant. These are not small changes, these are very significant, very meaningful changes that will position us to be competitive and within these three areas, the best R&D organization in the industry.
I will also say that the intent of these changes is transformational, the intent of these changes is to help us rebuild the pipeline, and the intent of these changes is to drive our pipeline to a level of innovation that will be necessary to be effective for patients and for Takeda in the future. The changes that I am going to present to you are not cost cutting. We’re in a great position right now. As we project out over the next five and perhaps even 10 years based on conservative projections of growth of these recently launched products, we organically grow our top line year-on-year. And you’ll see our Q1 results are great and very consistent with what we’ve been telling you. The intent is not cost cutting. The intent is to position ourselves, so that three, five, seven year from now we have that next generation of new medicines to deliver.
So, let me give you some perspective of what these changes are thinking functionally across research, across development and across pharmaceutical sciences.
The first, if I dial up, what will the Takeda R&D organization be? The Takeda R&D organization will be a dual-centered R&D structure in Japan and Boston. In addition, as I’ll show you in just a second, we will have lean regional centers that will be dedicated predominantly to regional development and regional medical activities. One of the challenges that we face today, as I shared with you, is that our R&D organization is greatly fragmented. It’s very hard for our project teams to work effectively because we have key strategic leadership that’s dispersed across the globe. And so, part of what we’re doing here is to greatly simplify the organization. Another part of this change is to rebuild the skill sets and the capabilities and to free up resources, so that we can do more work with partners externally.
So, research: Today, we have four research sites and we have research scientists that are located at many of our sites. The transformation will bring our research organization together into three sites. A key site at Shonan, at our Shonan research center; a key site in Boston; and then a smaller biotech like site in San Diego. Each of these sites will have a rationalized and highly strategic responsibility for the Company. In Shonan, our focus will be in CNS and regenerative medicine. We also will be building something that is incredibly exciting for us and for the officials in Japan that we’ve spoken with.
We intend to over time convert Shonan into a research park, an open innovation research park that has not just Takeda and Takeda scientists, but a vast array of scientists from institutions, from other companies, from other healthcare sectors, from biotech et cetera. I’m not going to get into the changes in Boston, in San Diego in detail; you could see them in the slides. The last point though that I’ll make about, here on this slide is that in addition to the changes in research, we’re making substantive changes in our pharmaceutical sciences organization. Pharmaceutical sciences or what we previously called CMCC, is a group of scientists that bridge between research, development and then ultimately to commercial manufacturing.
Today, these individuals exist across nine sites on our network and they’re not adequately integrated with their key counterparts in research. Tomorrow, our intent is to co-localize these pharmaceutical scientists with our research scientists in Shonan, Boston and San Diego.
Development: Our development organization in the future will be a greatly simplified, highly flexible and outwardly facing development organization. We all know that a pipeline flexes, the pipelines are never constant in terms of their needs, yet we have a capacity that’s built to manage a pipeline of a certain level. If that pipeline dips, we have excess capacity. Our intent in the future is to always have internally less capacity than what we need and to use external sources to drive those fluctuations.
In development, we will have three types of sites. Firstly Boston, Boston will be our development center. Our therapeutic area units, our core operational pieces, our translation research and early clinical group will be primarily housed in Boston. Secondly, we will have, as I mentioned earlier, lean regional centers across the globe to help to manage local studies and also regional aspects of our global studies. And then thirdly, we’ll have an intermediate group of sites at Osaka, Deerfield and Zurich. These sites will be greatly focused and concentrated on both regional activities, as well as assuming one key capability. For example, in Osaka, we are bringing in a new capability to enhance the development group there and to create a group that’s not just regionally focused as it is today but to grow that capability to understand and become excellent at global development. So, we will be building a group there that manages the development of our mature marketed products.
Now, the changes that we’re proposing have significant impact on our employees, significant. We’ve been extremely meticulous, fully embracing the value system that we talked about many times, and have been very fair and thoughtful to our employees. Our intent is as much as possible to ensure that our employees have opportunities and jobs after this transformation. For many of those employees, those jobs will be still here at Takeda. For many of those employees, there will be jobs that will be relocated to other sites. But for those employees that don’t stay within Takeda, we have good, really good options for those employees, and I list some here. I’ve mentioned our intent to build Shonan into a research park. That will offer great opportunities to our employees. We actually have one example of an open innovation center that will become paradigmatic at Shonan, and that’s the center of T-CiRA with professor Yamanaka.
We will be building joint ventures. We will be forming spin-offs biotechnology companies that are focused on specific disease areas, there are two that I’ll mention. One is a company that will be spun out in our UK Cambridge site that I didn’t mention, when I went through the research footprint that we proposed to close as part of our future operating model. And to help preserve jobs of our scientists there, we intend to spin-off some of our discovery programs into a biotechnology company. And there is great interest from the venture community in this.
Likewise in Shonan, we are in advanced negotiations for a cardiovascular company with the top entrepreneur again with our programs and our scientists. We also are going to fund an entrepreneurial venture program such that it’s scientists in Shonan have an interest in taking their program out into their own company, we will support that courageous move.
And then lastly, and I’ll mention a big one is an international mobility program. So, we intend to create a highly structured mobility program for employees that are willing to move in particular but not exclusively out of Japan to R&D positions that are available as part of this transformation in the U.S. or to other functions within the Takeda global network.
Now, one big piece that I haven’t mentioned is how we intend to operate our development organization. We are in advanced discussions with a strategic development partner to take on the vast majority of our development work. It’s actually a partnership that I won’t have a chance to get into much detail today, and probably can’t because we are still working the details. But it’s a partnership that will be unlike any partnership that’s been formed between contract research organizations and pharma companies. But through this partnership, we will have the opportunity to transition hundreds of our employees to this new organization, thereby preserving both jobs and also the opportunity of those employees to continue to work on Takeda projects.
So, let me just end with a comment around the financial implications of this transformation. And the way I would suggest that you look at it is that Takeda is making a very significant investment in its R&D organization for the future. The one-time implementation costs will be ¥75 billion, ¥250 billion of that we anticipate will be booked in 2016. The savings from this we anticipate will be ¥180 [ph] per year. And the intent to is to reinvest that savings fully into our pipeline. So, again, this is not a cost cutting measure; this is an attempt to rebuild our organization so that we can become the best in the industry.
So that said, I’ll now hand it over to Rudolf to talk about the Q1 financials. Thank you.
Rudolf van Houten
So, good evening. As usual, it’s a pleasure for me to be here today, and to present the first quarter 2016 financial results. So, let’s turn to slide number four and start.
So, on a reported basis, revenue was down 2.8%, and this is really driven almost exclusively by the impact of FX and divestitures. And that was partially offset by strong growth in our growth drivers, as I’ll show a little bit later. Reported EPS was up from ¥31 to ¥127 per share, and that reflects the one-off gain on the transfer of the fast declining long-listed products business to Teva. Our core EPS, which excludes the impact of amortization and impairments and one-off items such as the LLP transfer gain, was up almost 9%.
If we look at underlying basis right now, our growth was up quite nicely, up 9% versus last year; core earnings were up 40%; and core EPS was up an impressive 54%. Growth came primarily from our growth drivers, GI; oncology; CNS; and emerging markets. Operating expenses were under control, ending the quarter below the level that we had last year. Project Summit also continues to perform very well and delivered ¥4 billion of cost savings in the first quarter. And we’re well on track to deliver our full year savings target. We are reaffirming our guidance for the full year and that’s both management guidance and our reported forecast. And we also remain strongly committed to shareholder return with the dividend being a key component.
So, let’s turn to the reported income statement. Reported sales, as I said before, were down 2.8%, and that was really driven 100% by the impact of divestitures and FX, offset by growth of our growth drivers. Gross profit was down 8%, leading to a reduction in our gross profit margin. And again, the margin was down largely due to FX and due to the impact of divestitures. In addition, there was an adverse impact due to the NHI price reduction in Japan coupled with some unfavorable product mix.
Operating profit was up ¥103 billion and that was mainly reflecting the one-off gain on the transfer of the LLP business to the JV with Teva. EPS was up from ¥31 to ¥127 as I’ve said before, and our core EPS which excludes one-off items in addition to amortization and impairment was up almost 9%. And that was helped by a more favorable effective tax rate and lower impairment charges in Q1 this year versus the prior year.
So, if we turn now to slide number six, this slide, you’re familiar with, it shows the performance of our growth drivers. For the first quarter, we were up an impressive 15%. And if you remember, maybe from the Q4 presentation we did a few months ago, the growth rate in 2015 was 9.5%. So, our growth in our growth drivers has accelerated very significantly.
GI was up 35% and that’s largely reflecting the continued very strong performance ENTYVIO. During Q1, ENTYVIO more than doubled sales versus the same period last year. And on an MAT basis, it now achieved ¥96 billion of sales at the end of June. Over 55,000 patients have been treated with ENTYVIO and the product is now registered in almost 50 countries around the world.
Our GI performance was also boosted by an acceleration in the sales of the anti acid TAKECAB, in Japan.
Oncology also performed quite nicely, up 6.6%. And our multiple myeloma treatment NINLARO is off to a very promising start with sales just under ¥6 billion in the first quarter.
CNS was up almost 32%, and that’s really driven by the antidepressant sales of TRINTELLIX in the U.S., which were up 38% for the quarter.
And emerging markets were up 3.9%. Quite strong start to the year in both China and Russia was offset by slower sales in the rest of Asia and in Brazil.
So, if I turn to slide number seven, that’s a new slide. So, I’m going to spend a couple of minutes on this slide. And it’s a slide that shows you a bridge between reported revenue, the green bars on the end of the slide; it also shows you a bridge between underlying revenues, which are the blue bars in the middle of the slide; and you can also see the bridge between reported and underlining lining. So, it shows you one slide, all the different bridges that I think would be useful for you.
So, let me walk you through the chart. If we start on the left hand side with the green bar, those are the reported revenues in Q1 of last year, ¥446 billion. Then, if you move towards the right, the first bar shows the impact of FX on revenues. And you can see that impact was ¥29 billion negative. And that reflects the fact that in Q1 of last year, the dollar-yen rate was ¥121 and the rate that we’re using for our underlying revenues is only ¥110 dollar-yen. And that results in that negative impact of ¥29 billion.
To continue to move to the right, you see the next pink bar and that reflects the impact of divestitures on our revenues. And that represents the impact of the transfer of our declining long listed products in Japan through the joint venture with Teva. It also includes the divestment of the respiratory business to AstraZeneca, which happened in April of this year. And then, it also reflects the return of the rights to Contrave, the U.S. anti-obesity drug back to Orexigen. And the impact for all three of those items was ¥29.4 billion.
So, maybe let me just pause and say a few words about the Teva deal. And this is very good deal for us, and we’re very happy with the performance during the first quarter. So, let’s just review again why that is.
So, first of all, we monetized highly declining products in Japan. These are products which are declining upto 50% per year. So, if we had kept these products and we had not divested them to Teva, we would have seen that 50% decline in our results in this year anyway. So, people have to keep that in mind. Second, we received 49% ownership share in the new joint venture with Teva. And we think that this is going to become a very successful and growing business going forward. And finally, we get income from this JV in the form of distribution fees, in the form of supply fees, we also get equity income in our P&L and in addition to that we are entitled to cash dividends. So, there is a lot of business coming back into Takeda because of this JV.
So, then, if we continue on this chart, in the middle of the red box, that shows the bridge underlying revenues. And you can see that underlying revenues were up by 9.1% for the quarter. And that really shows the impact -- reflects the impact of our growth drivers. Our growth drivers, as I said before, were up 15% versus last year. And then, in addition, you can see that in the purple box that our other products also performed quite well during the quarter. And most of that performance was in Japan, which did very nicely for the quarter. So then, if you continue to the right hand side of this graph, you see the green bar on the right shows the reported revenues for Q1 2016. And again, you can bridge going left back to underlying revenues by first looking at the impact of FX, and here the impact is smaller in that, the dollar-yen rate in Q1 was a ¥ 112 versus our planned rate of ¥ 110. So, that’s a relatively small impact.
And then, the next bar again reflects the impact of the divestitures on our business. And then those divestitures are again three things in there. It reflects the supply and distribution fees that we get from the JV with Teva. It also reflects the impact of one-month of respiratory sales. We divested the business at the end of April. So, we have one month of sales. And it also includes three months of contract sales, which will not be returned back to Orexigen until the second quarter of the year.
So, the next slide shows our growth by region and it shows both underlying and reported growth. And I will not spend a lot of time on the U.S. emerging markets, or you can, because I’ve already touched on the performances of ENTYVIO and TRINTELLIX and NINLARO. So, I’ll just spend a couple of minutes on Japan. Japan is the red box at the top left. And although our reported revenues in Japan were down because of the divestiture impact, our underlying revenues showed a very nice performance growing almost 10% versus last year. And that reflects very good growth in TAKECAB, which now reaches more than ¥6 billion, after the expiration of the prescription limitation and it also shows strong performances of AZILVA and LOTRIGA.
So, this next slide again, it’s similar to the bridge I showed you before but it bridges from our operating profit -- the reported operating profit to our underlying core earnings. And I’ll just concentrate on the box in the middle of the chart, the red box that bridges our core earnings. Our underlying core earnings were up 40%, and that really reflects the impact of the higher sales that we had. So, that’s in the gross profit bar that you see there of ¥17.9 billion. In addition, you can see that our SG&A expenses were down versus last year in the first quarter by ¥4.1 billion. Part of that reflects the phasing impact. And finally, R&D expenses were virtually flat, up about ¥1 billion versus last year. And then the last thing I want to point out here is the big difference between our underlying core earnings and our reported operating profit. And you can see that pink bar on the right hand side of the screen, and that’s really the impact of the one-off gain on the transfer of our long-listed to products to Teva.
This next slide shows the bridge from our reported net income to underlying core net income. Again, it follows the same methodology. And I’ll concentrate again on the red box in the middle. Our underlying core net income was up 54% versus last year, and that really reflects the 40% increase in our underlying core earnings, as I showed you on the prior slide. In addition, the tax impact was only very small, due to a lower effective tax rate for the quarter. We had a lower affected tax rate for a number of reasons. First of all, due to Japan tax reform that gave us a benefit, and then we also had a more beneficial statutory earnings mix across our legal entities around the world, particularly with our Swiss entity. And again, you can see on the right hand side of this graph, the big bar, the 43.9, which reflects mainly the after-tax impact of the -- a gain on the transfer of the LLP business.
So, maybe just to reiterate what Andy just showed you, the R&D transformation is expected to have one-time implementation cost of about ¥75 billion. This amount will be split over two years with approximately ¥25 billion coming in fiscal year 2016, and the remainder in mostly in 2017 with a very strong amount likely in 2018. The exact amounts of course and the timings are still subject to negotiations and any options taken by employees.
Annual cost savings are expected to amount to approximately ¥18 billion. And as Andy has stated, over time Takeda intends to reinvest these savings into an innovative pipeline. The transformation will have no impact on our dividend for 2016. And also it will have no impact on the guidance which we have given you for 2016.
So, then, turning to our guidance, first, the management guidance, and as I’ve said before, we will maintain our management guidance for this year. Underlying revenue growth in the mid single digits and underlying core earnings and underlying EPS growing more than twice as fast as the topline. And we maintain our dividend at ¥180 per share.
So, I’d like to take this opportunity just to say a few words about our dividend. So, considering our excepted growth acceleration, as you have already seen in the first quarter of this year, and considering the various cash optimization opportunities we have available, which again you saw during 2015. We believe that our dividend is sustainable. In the case of M&A, our ideal targets are either accretive or neutral to EPS, and therefore they would not impact our ability to pay dividends. From time-to-time, we may undertake pipeline acquisition deals that are not accretive in the short-term, but these are likely to be very large in size and we will partially reallocate internal resources to cover any impact.
So, let’s turn now to our reported forecast. At this point, we are also maintain our full year reported forecast. We’re very pleased with our performance in the first quarter of this year. The quarter was quite strong and that gives us confidence that we will achieve our full year forecast.
So, please note that during the remaining quarters of the year, we are expected to incur some significant one-off expenses. As I previously mentioned, the expenses related to the R&D transformation that we just covered. And these expenses are included in our forecast. In addition, our forecast also includes the assumption of 30 billion in potential impairments, and that’s the same number that we announced on May 10th when we had our Q4 results. Again, those -- that 30 billion assumption is included in our forecast.
And finally, as you all are probably aware, FX rates remain volatile and we will carefully monitor any potential impact on our results for the full year. And there is a slide in the appendix which shows you the sensitivity of FX. And approximately for the next nine months of the year a 10% move into yen would give approximately a 4 billion impact on net income. So, that is the final slide for today. Thank you very much.
Unidentified Company Representative
Now, we’d like to start the question-and-answer session. We have time until 6:15. And since the time given and available today is shorter than usual, we would like to entertain just one question from one person, and we will be also available for online questions asked by phone. So, please introduce yourself when you ask a question.
Yamaguchi from Citigroup. Just one question. I’d like to ask about a question regarding the progress of your performance. Aside from onetime factors, I think that you were outperforming than the projection. And however, you wouldn’t revise the full year forecast, why, could you explain the reasons?
Unidentified Company Representative
You’re right. We’re very pleased with the dynamic that we’re seeing especially in the sales. We’re especially pleased that this is driven by our growth drivers where the strategy is working. We’re focusing onto use doing well. So, all our growth drivers, we’re pleased. Actually emerging markets start slightly on the lower tone but we still believe that we could hit the high single-digit in emerging market. On the expense side, there will be some phasing. So, we might have more expense in the remaining of the year than in Q1. So, it’s always a pattern that we see in Takeda. On the reported side, it will be some one-off. So, we just feel that it’s too early in the year to update our guidance, good single -- good Q1, only three months in the year yet. So, I think that’s how we see it.
But is there any -- you are in the good shape in the three months; if everything is the same for remaining nine months, you’ll be ending up a lot on asset potential looking at those numbers.
Unidentified Company Representative
One can say that. Yes.
Daiwa Securities, Kazuaki Hashiguchi. On asking R&D transformation as of June 9th event, so what you’ve presented is in line with what you expect that means regarding what you heard in June, there is no revision, is that right? And also, regarding R&D transformation, as your own structure, you are going to have downsizing, and by that your ability to innovate will be strengthened, if that understand correct? And when you have this strategy, regarding expected positive return you mentioned, but there are some risk factors as always, what are cautions that are aware of possible risk? And what are possible actions to mitigate the risk as you implement the plan?
I apologize, but my translator was off for the first question. Can you please repeat the first question?
Unidentified Company Representative
100%. So, what we presented today is not a new strategy. The strategy is exactly as we presented in June. Therapeutic area focus, rebuilding key capabilities, externalization. What we presented today was operationalization of that strategy and how we are going to transform our organization, so that we can execute on that strategy. Now, the second question was around risk as we project out over the next several years. And I guess you can consider risk in many context, but you’re only allowed to ask one question, but I started to answer. So, you can talk a bit about risk as well. I would say that from an R&D standpoint, all of the recently launched products have very extensive lifecycle management programs ongoing. And so, whenever there is R&D activity, there is always risk. I’ll tell you that in our projections and we’ve talked here about our MRP projections, but in our long range forecasts, we considered very conservative conditions in terms of studies working and studies not working. So, there is always risk when running development studies, but I think the risk in terms of our recently launched products is relatively small.
Unidentified Company Representative
I think the question was about the risk linked to the R&D transformation. There is always an execution risk, when we do such a transformation. But, I’m very pleased with the preparation and the thinking behind this transformation. You can see that we are very consistent with our strategy as well. So, we are moving step-by-step on the implementation of our strategy. I think also one way to look at risk mitigation is that by -- we will reinvest the savings as a result of the focus that we want to do, into pipelines both internal and through external collaboration. And then one can see that as a way to mitigate risk as well. So, we are creating more options, if you like, in the future. Now, as Andy mentioned, in pipeline, there is always risk. So, basically we need more product, we need more pipeline options in order to eventually end up with the late stage pipeline and more product to be launched.
So, as your organization, you are going to downsize then try to strengthen, is that understanding correct?
It’s not a downsizing intent. The intent is to rebuild the organization and to transform the organization, so it’s more productive and more effective. A part of that includes the reduction of our internal workforce. But it’s very important the way we look at it is not downsizing, it’s really truly rebuilding the organization so that it can align with the strategy.
About the R&D restructuring, I have a question. Net-net the research scientists and the development people, the number of the headcount, net-net, it is not going to be reduced. Is my understanding correct?
So, the transformation, there will be ultimately a reduction of internal FTEs.
If it’s the case, what is the number of the employees to be impacted and also what are the regions to be impacted; is it possible to provide that information to us?
So, I’ll say the transformation is significant. There are a lot of people that will affected, and it’s a global -- it’s in transformation that includes our sites globally. It includes as I mentioned research, development and pharmaceutical sciences. But we are not at this point ready to talk about a number. There are ongoing discussions with our employees, there are ongoing discussions with various bodies, works councils in Europe, the unions here in Japan. And as I mentioned, our intent is to work to find employment, for the vast majority of our employees, whether that’s within Takeda or whether that’s within spin-off opportunities, joint ventures, new close et cetera. As you can imagine, we’re at varying stages of defining what each of those various opportunities might be.
Muraoka from Morgan Stanley. We understand now very well your R&D organization. And now talking about commercialization, restructuring your organization, and I have been always asking the same question. Japanese sales reps, what is your view towards the future? And American sales reps, how much downsizing do you consider or have the plan?
Unidentified Company Representative
So, currently, we don’t have in mind or transformation in our commercial organization like we are doing in the R&D transformation, every country in a different situation. So, for example in Europe, we are really focusing on ENTYVIO oncology, so especially T-CiRA, but in United States we are very much focusing on ENTYVIO, but we have also TRINTELLIX. And TRINTELLIX for example requires a large sales force. In Japan, the same, when we are supporting TAKECAB for example, TAKECAB is a primary care product as well as specialty care. So, depending on the product portfolio, when you require different type of organization to support this portfolio, very different stage depending on the countries. So, we do not plan -- we are always looking at efficiency but we do not plan large reorganization or downsizing for example our sales force but are adapting our organization with our portfolio.
TAKECAB, TRINTELLIX , we understand that you need the sales force but probably next year or so where I think almost you have the enough activities kind of resource taking activities because it’s been some time already it seems that the launches. Therefore, I think you don’t need any extra. [Ph]
Unidentified Company Representative
You’re right in the sense that we don’t need to increase anymore. Remember in 2014, we increased our sales force especially in United State to launch TRINTELLIX. In Japan, we reallocate resource, we did not increase our organization but we relocated resource on our new product launches. TAKECAB is a new product, there is no way we can start promotion now, we just launched, just get the new long-term prescription. And so, it’s a really a new product. [Indiscernible] so, we have a very new product to support in Japan. So for many years to come, we need to support this product in Japan.
The only area where we actually optimize our resource and reduce our cost has been by selling back CONTRAVE, we could reduce significantly actually our sales force we brought and we optimize the quite a bit our margin in United States with that.
Sakai from Credit Suisse. Dr. Plump mentioned at the end of your presentation you are in the transformation, you want to improve efficiency and you should not disturb our development and the various ongoing activities in the U.S. considering various collaborations. That’s the type of collaboration that we do not have experienced. And that means that unless you have that kind of collaboration, then you can’t really execute this transformation. But what is that type of collaboration exactly you are thinking in mind and when we got to completed? You have partners or you may not be fully aware of the timeline but what’s the timeline and what’s the type of collaboration, especially you don’t want to disturb the current ongoing R&D activities, can you explain that?
So, you are speaking specifically to the development partnership that I mentioned. So, we’ve been in a process over the last six months speaking with many potential partners. And I will tell you that what we were offering was incredibly attractive, both for us and for the partner. And this isn’t a simple we managing of employees, this is really creating a deep structured strategic partnership. And the extent of a partnership goes beyond what’s been done typically in the industry. So, we’re providing capabilities to the potential partner that allow for really end to end trial management. So, capabilities that include medical functions like pharmacovigilance and regulatory. We will still keep those critical strategic individuals that will be our interface with regulatory agencies, but a lot of the activities that are done in both groups will be transitioned to the partner.
We’ve chosen a partner we can’t provide today the name of the partner because we don’t have a final agreement in place. We chose the partner based on the fact that the partner A had a value system and a respect for people that was very consistent with ours, who is also a partner that was willing to work with us to create a model that was fit for purpose for Takeda. And then another key piece of this ultimately would be the potential to form a relationship in Japan as well. So, this would be a truly global partnership.
Now, to your question on timing, we hope to put this in place very soon within the next couple of months because we’re pretty close to finalizing terms. There is risk, to your point and question earlier, this is perhaps the one thing that I am most concerned about, because of the complexity of the relationship that we’re putting together. We have multiple partners right now and the way that this partnership with this new organization will work is that we’ll have flexibility; we’re not going to be committed to this organization. Now, our intent is to have a very tight relationship and to do most of our work with them, but we won’t be contractually limited. So, we can continue our current studies with our existing partners where we have the potential to transfer those studies to this particular partner. And we are going to look at each individual study on a case by basis before we make that decision.
Unidentified Company Representative
One more question we would like to entertain.
Yamaguchi from Citi. So, one quick question on R&D side. The NINLARO rejected by the European authorities. Do you have an update on that?
Unidentified Company Representative
So, we are in the appeal process. And that’s basically what we can say at this stage.
Is there something going on?
Unidentified Company Representative
Yes, the appeal process is progressing as plan and on time. And so, we’re in dialogue with CHMP through this appeal process; we’ll see the outcome.
So, the guidance which I think you’re talking about approval this year…
Unidentified Company Representative
We’ll know the result of the appeal process latest by the end of December, latest. That’s not changing.
Unidentified Company Representative
With this, we’d like to conclude this session. I believe you have more to ask but we would like to conclude this. And we would like to accept remainder of the questions through some other media to the IR department. And please leave this room, because we are scheduling for another session right after this session. Thank you for your cooperation. Thank you again.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!