Takeda Pharmaceutical Company Limited (OTCPK:TKPHF) Q3 2016 Earnings Conference Call February 1, 2017 2:00 AM ET
Noriko Higuchi - IR
James Kehoe - CFO
Christophe Weber - CEO
Andrew Plump - CMSO
Hidemaru Yamaguchi - Citigroup
Kazuaki Hashiguchi - Daiwa Securities Co. Ltd
Atsushi Seki - UBS
Fumiyoshi Sakai - Credit Suisse
Shinichiro Muraoka - Morgan Stanley
Stephen Barker - CLSA Securities
The discussion during this call will include forward-looking statements that are subject to the risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Additional information regarding these factors is discussed under the cautionary statement regarding the forward-looking statement section in the press release we issued on January 20, 2017, Japan time, as well as in the tender offer statement filed by Takeda with the SEC on January 19, 2017.
The forward-looking statements during this conference call speak only as of the original date of this call and we undertake no obligation to update or revise any of these statements.
We also urge you to read both the tender statement filed by Takeda with the SEC on January 19, 2017 and the solicitation recommendation statement filed by ARIAD with the SEC on January 19, 2017, including the amendments to each because they contain important information including terms and conditions of the tender offer.
Good evening, thank you very much for participating our financial results conference call for the Q3 2016 fiscal year. I am the moderator of this meeting, Higuchi, the head of IR. At the beginning, for today, we will have the presentation from James Kehoe, our CFO, about the fiscal 2016 Q3 financial results. Following the Q&A session, we invite the CEO, Christophe Weber, and Andy Plump, the CMSO. Please visit the presentation materials during the presentation to be conducted by James Kehoe, our CFO. James, please.
Hello, everyone, and thank you for joining our third quarter earnings call. I would not read all of the forward-looking statements, but please do note the additional disclaimers specific to the potential acquisition of ARIAD.
Turning now to Slide number 5. 2016 is on course to be a great year with our strategic focus and good execution driving profitable growth. As a result, we have been able to upgrade our full year profit guidance for the second time this year. Our year-to-date performance has continued to track ahead of our expectations, and we have seen good underlying revenue growth across all regions of the world led by our growth drivers. Importantly, we also saw continued improvements in profitability, driven by a better balance between revenue growth and margin management.
These results underline the success of our strategy to transform Takeda by focusing on our three therapeutic areas, GI, oncology, and CNS. The decision to acquire ARIAD Pharmaceuticals shows just how determined we are in delivering on that strategy. And in the last 18 months, we have announced 50 external collaborations in our core therapeutic areas.
Turning now to Slide number 5. On a reported basis, we delivered a strong profit performance but our revenue declined 5.6% due to unfavorable currencies and the impact of divestitures, strong underlying core earnings growth, and a onetime gain on the Teva JV transaction more than offset the impact of unfavorable currencies and divestitures.
As a result, reported operating profit grew 29.8% and EPS was up 46%. Operating free cash flow increased by 9.3% versus prior year. On an underlying basis, our performance continues to track ahead of our expectations, revenue growth was 7.4%, an underlying core earnings advanced by an impressive 23.5% leading to a 23.5%, leading to a 2.1% margin increase versus prior year. Underlying core EPS grew 31% reflecting strong core earnings growth and a lower tax rate due to timing. This continued strong performance underpins an improved full year outlook and I will cover this in more detail at the end of the presentation.
Turning now to slide number 6, as I mentioned, revenue was down 5.6% on a reported basis and this was impacted by 8.4 percentage points negative impact due to currencies and a 4.5 percentage point impact from divestitures. These factors also had a negative impact on our reported gross margin. Of the 3.4% decline versus prior year 1.1% was due to ForEx and 1.4% due to divestitures. Of the remaining 0.9 percentage points approximately 0.6 PP was due to the phasing of costs.
Operating profit increased by almost ¥50 billion or 29.8%. The strong underlying core earnings growth together with ¥103 billion pretax gain on the Teva transaction, more than offset the impact of unfavorable currencies which was ¥22 billion and the divestiture impact of ¥58 billion. Net profit and EPS growth was aided by a lower tax rate due to favorable statutory earnings mix, a lower tax rate in Japan, and some timing benefits. Our reported tax rate in the first nine months of the year was 19.5% and we anticipate the full year rates to be in the high 20s. Finally a quick comment on the negative equity income of ¥0.4 billion, we have included a comprehensive breakdown of the Teva equity accounting impacts on page 28 of the appendix.
Turning now to our underlying P&L on Slide 7, our revenue growth of 7.4% was exactly equal to the growth rate we had in the first part of the year. Our underlying gross margin is 0.9 points lower than prior year in an underlying basis, but this is mostly due to the timing of product cost adjustments. I mentioned in the last quarter's call, and I confirm it again today, that we will exit the year with improving margins as we continue to see strong growth of products such as ENTYVIO, NINLARO and TAKECAB.
Our operating expense growth continues to be much lower than revenue growth which along with its strong business performance, contributed to our significant underlying core earnings increase of 23% and a 2.1 percentage point margin improvement versus prior year. Underlying EPS grew 31.7%, and this also included a benefit from a lower tax rate versus prior year. Our underlying tax rate was 19.7%, and we still anticipate the full year tax rate to be in the high 20s.
Turning now to slide number 8, this chart you are familiar with, it starts with reported revenue for full year, fiscal year 2015 on the left hand side, and ends with reported revenue for fiscal year 2016 on the right hand side.
In between, you will note the adjustments we make to reach our underlying revenue growth, essentially removing currency and divestiture impacts from both years. Our growth drivers advanced 15.5% and they now account for 54% of Takeda's total revenue. As an aside, in the same period of last year, the growth rate was 10% and those same products accounted for 51% of the revenue, so there has been a strong acceleration in the prospects for growth drivers. GI sales were up 37% reflecting continued rapid growth of ENTYVIO.
ENTYVIO has now passed ¥ 100 billion of revenue in the first nine months of the fiscal year, boosted by geographical expansion and increasing usage in biologic naive patients. Additionally, TAKECAB is performing very strongly in Japan. Oncology revenue growth was accelerated to 6.3% led by NINLARO, which reported year-to-date sales of over $190 million in the US in the first nine months.
Now, about one in six new patients in the relapse refractory setting has now been started on NINLARO. And based on the data from the first 12 months on the market. We are well on track to be the most successful proteasome inhibitor launched to date. We are also preparing for NINLARO launches across multiple countries, including Europe where we were granted approval in November of last year. In addition, ADCETRIS grew 21.9% and our oncology portfolio will be significantly enhanced by the planned acquisition of ARIAD pharmaceuticals. CNS growth of 28% was driven by strong performance of TRINTELLIX in the US.
Turning now to our performance by geography on Slide number 9. We continue to deliver balanced revenue growth across all regions of the world. Japan has accelerated to 5% growth, driven by strong performance of AZILVA which was up 14%, Lotriga which was up 25%, and TAKECAB which has already reached sales of almost ¥ 25 billion.
Europe and Canada growth was 4.6%, led by our specialty portfolio. ENTYVIO sales in the region have doubled versus last year, and ADCETRIS was up almost 12%. The US continues to deliver double-digit growth with significant contributions from ENTYVIO, which grew 85%, TRINTELLIX, which was up 44%, and NINLARO, which has already achieved year-to-date sales of almost $200 million. Emerging markets growth was 4.9%, we continue to see robust growth in the key markets of Brazil 9%; China 8%; and Russia 7.3%. But this was held back slightly by weaker performance in select countries in the Middle East and Southeast Asia.
Turning now to underlying core earnings on slide number 9 -- 10, sorry. So this shows the bridge from reported operating profit to underlying core earnings. By now, you are well aware that we exclude amortization, impairments, and other increment expenses. And then we adjust both years for the impacts of currency and divestitures to arrive at underlying core earnings numbers.
Given the magnitude of Takeda's transformation and the number of one time impacts as we go through the transformation, we believe core earnings are a good indicator of the long-term earnings power of the business. Underlying core earnings increased 23.5%, driven by gross profit growth of 6% and strong benefits from overhead expense leverage. Overhead expenses increased by 1.5%, well below our revenue growth. And this reflects improved cost management, procurement savings, and some benefits from the timing of expenses.
Turning to Page 11, this lays out the net profit bridge from '15 to '16. The underlying core earnings growth combined with a lower tax rate leads to underlying core EPS growth of almost 32%. As I mentioned before, the underlying tax rate in the first nine months was 19.7%, but we still do anticipate a full year rate in the high 20s.
On slide number 12, you will note that operating free cash flow increased by 9% to ¥120 billion. We continue to see and drive working capital improvements but there is still a lot more opportunity to reduce our cash conversion days with a specific focus on inventory optimization and further extending supplier payment terms. Please note that we have excluded a number of cash outflows from the reported cash flow. The first of these, we excluded the impact of ¥40.8 billion payment into escrow for a potential future transaction in emerging markets. We cannot disclose more at this point in time, and we will announce the transaction once the customary closing conditions have been met. We also excluded a ¥15.7 billion payment to buy back future royalties and we are not disclosing the product involved. However, we are quite encouraged by our cash performance year-to-date.
Moving now to slide 13 on full year guidance, we are increasing our full year profit guidance for both underlying core earnings and underlying core EPS. We are also revising upwards our reported forecast, specifically we are increasing revenue from ¥1.6 trillion to ¥1.7 trillion and this mainly reflects revised currency assumptions for the remainder of the year.
We are also increasing our reported core earnings forecast by ¥16 billion to ¥17 billion, and this will allow us to absorb previously unplanned costs relating to the ARIAD acquisition, and a further acceleration of the R&D transformation. Operating profit is unchanged and we are increasing our net profit forecast by approximately 2%.
We are also now providing additional input on the potential impacts from ARIAD, and we assume that the transaction closes as expected by the end of February 2017. Firstly, we reiterate that we expect this deal to be accretive to core earnings by fiscal year 2018. In 2016, we expect a negative impact of approximately ¥9 billion to ¥10 billion, of which, approximately 80% is transaction and integration costs. Finally, we are also providing a preliminary estimate of ¥20 billion to ¥21 billion per annum for amortization costs associated with the deal and this is specifically guidance for 2017.
I would point out that this is based on our preliminary purchase price analysis and it is, of course, subject to change. And lastly, we reiterate our commitment to shareholder returns with the dividend as a key component. The ARIAD transaction will not impact Takeda's dividend.
Turning to Slide 14 which has the management guidance. You have seen by now the continued strong year-to-date performance and this allows us to increase our full year guidance for the second time this year. We are raising our guidance for underlying core earnings from mid-teen to high-teen growth to high-teen growth. We are also increasing our underlying core EPS guidance from low-teen to mid-teen growth, to mid-teen growth.
Moving to Slide 15 where we cover reported, full year reported forecast, as mentioned earlier, both revenue and EPS have been revised upwards. I would like to highlight the significant changes within operating profit and this is laid out on the right hand side of the chart.
Firstly, reported core earnings will be higher by approximately ¥16 billion to ¥17 billion, reflecting the strong year-to-date business performance. This allows us to absorb two previously unplanned costs. The first of these is acceleration of an additional ¥7 billion of R&D transformation costs from 2017 to 2016 fiscal year.
This increases our 2016 fiscal year R&D transformation charge to ¥47 billion, this is an increase of ¥7 billion versus our prior estimate of ¥40 billion. And here, I do want to emphasize that the total program spending is unchanged at ¥75 billion. The second item relates to potential ARIAD impacts of approximately ¥9 billion to ¥10 billion. The adverse impact is predominantly due to transaction costs, and they are typical closing costs such as banking fees and initial estimates relating to integration and transition costs. We will give more guidance on the full cost of the program when we issue guidance in May two thousand -- of this year.
As a result, strong core earnings performance is allowing us to hold operating profit flat despite the higher onetime costs. In summary, it's been another strong quarter, and we expect the momentum to continue. We have a clear strategic roadmap to transform Takeda and we will one, drive solid revenue growth into the future, revitalize our R&D and rebuild our pipeline, and thirdly, work hard to improve our profitability to match the performance of our peers.
In R&D, we all right setting the innovation bar high, and we will continue to double down on our therapy area focus through flexible partnerships and external innovation. We are transforming our portfolio as we have demonstrated through two major deals in the last two months. Firstly, the sale of Wako Pure Chemical allows us to free up resources to invest in our core therapeutic areas. Secondly, we expect to complete the acquisition of ARIAD in the next few weeks, this is a truly strategic deal that will transform our oncology business. And finally, we see our quarterly results as a compelling data point that demonstrates that our transformation is fully on track in delivering strong results.
Thank you for your attention and we will now move to the Q&A session.
Now, we would like to take questions. [Operator Instructions]
This is Yamaguchi from Citigroup. My first question is about the reported base Q4 numbers. And if you subtracted that number from the year-to-date, there is the negative 80 billion and ARIAD and R&D transformation was explained but even reflecting those factors, 80 billion negative number may not be explainable including the special factors in Q3. Could you explain this difference once again? And the second question, please, and my second question is about the TRINTELLIX, at the beginning of the year, brokers [concerted] the label discussion on cognitive function in the United States went well and the FDA response is expected to the calendar year, so please confirm about this status? That is all. Thank you.
Great. I will take the first question and then Christophe will take the second one. It's a good question on the Q4 outlook and you are right. It's, first of all, it's burdened by, the biggest single item is actually on an absolute basis, is the R&D transformation costs. So that is approximately ¥270 oku. And then we have all of the ARIAD costs, call it ¥9.5 billion.
The interesting thing about Q4 though, it's less about the, so we do have an excess of the restructuring costs were falling in Q4, but Q4 is historically and it has been for all the years, our lowest quarter in terms of revenue and our lowest quarter in terms of profitability. And the reason is the low revenue combined with, traditionally it actually has the highest expense, so literally, our operating profit, our underlying operating profit is very low in the quarter. And on top of that, you have all the expenses coming in. So the outlier number is we do expect amortization of impairment of about 400 million and I think you need to factor it out into your calculation. So I would have said 400 million of amortization and total restructuring of approximately 400 million, and of which R&D transformation is 270 million. And that is how you kind of get our operating core earnings of flat to potentially up ¥10 billion, oku Yen, sorry.
This is Christophe Weber, hi, everyone. On the second question, you know the history with the commission label, this is not an easy topic. You remember the positive assessment by the advisory committee and then the complete response later received by the FDA. Since then, we have pursued the dialogue with the FDA, but until we get the final response, one should not speculate about the potential outcome because it is not a simple topic. It is about the paradigm change in the way you will treat such a symptom and how you will recognize that in the label so it is a very difficult topic. So certainly, in the coming months, we will know more, but even on the timing, I wouldn't commit on a day because again, it's a very difficult process.
And in my answer, don't think that I am pessimistic or optimistic, I'm neither optimistic nor pessimistic, because we have seen in the past that there has been very conflicting response from the FDA. We are very -- we think that there is a strong compelling argument, the data is strong, it doesn't mean that we will get a recognition for that because of the complexity of the topic
I don't know if Andy wants to comment further. Andy?
Andy, can you switch on your microphone.
Can you hear me?
No. I was just saying, I apologize, I was just saying I don't really have much to add other than what we're -- what's clear is that the data are very compelling, that we see a reproducible effect on cognition in patients with major depressive disorder. I think just to underscore Christophe's comments, we've seen that the process of worthiness as a new indication through the FDA has been an interesting process. We were pleased last year at the Advisory Committee meeting that, through our efforts together with our partner at Lundbeck, we were able to convince the community and the FDA that this is in fact not a pseudo-specific endpoint but a true endpoint and merits a potential label claim. How the FDA will respond in the coming months, we'll have to wait and see.
Thank you very much.
Thank you very much. Next question is from Daiwa Securities, Mr. Hashiguchi. Please go ahead.
Hashiguchi from Daiwa Securities. My first question, R&D transformation, regarding that overall process seems to be working very well making good progress, that's what you mentioned.
And since your announcement about six months past, so, employees had communication with you, I suppose. Compared to your first assumption, what is working well and what is not working well? I suppose you have various feedback. And can you disclose some more specifics regarding the process of R&D transformation?
Second question is about new label development process. Probably for this year there are two clinical data. And one is frontline MM2 study results readout will be available. And for refractory relapse patient group, you have the approval already, and for that, OS data is coming out this year, I suppose. Is my understanding correct? And specifically, if you know the timing of the readout, can you share that information with us?
Thank you, it's Christophe, for the question. I think I will ask Andy to cover these two questions about the R&D transformation stages. I will just remind everyone that we are still in the middle of the transformation, it's not finished, but it's progressing well. And then he will cover also the question regarding NINLARO. Andy?
Yes. Can you hear me, Christophe?
So, thank you for both questions, and perhaps I'll take them in reverse order. So, on the NINLARO extension studies, firstly, on the newly-diagnosed multiple myeloma study, we do expect our first readout to occur in mid calendar year 2017. With respect to the Tourmaline MM1 Study, the relapse refractory study that we filed on in the US and Europe based on PFS data, the, it's hard to predict obviously when we'll have overall survival data since it's not a time driven analysis, it's an event-driven analysis.
So we expect to have another look at some point mid-to-late this year, but that's going to be dependent on accumulation of events in that trial. I will remind you, the data that we presented last year when we rolled out the first set of PFS data, we actually were seeing at that point non-significant trends in overall survival. So we'll wait to see what the data tells us, but we're certainly optimistic. On the transformation question, thank you very much for the question. I'd say that, as you could perhaps garner from James Kehoe's comments, with the fact that we moved some of our costs forward from 2017 into 2016, I think that overall the transformation is preceding certainly at a pace that's better than what we had expected. And I think in terms of how it's being handled by the organization and how it's being perceived by the outside world, I think, overall, we're very pleased about where things are headed.
As Christophe mentioned, the intent of the transformation was to align our organization with our strategic redirection. And the strategy change that we announced last year around therapeutic area focus, modality diversification, and externalization in particular, really mandated very significant internal organizational changes. And as we discussed last year, these changes were quite significant.
I would tell you, on all of the organizational changes, we've been in close dialogue with our employees, very close dialogue. We've done, we've gone to great extents to ensure that all employees have options for the future. And I think we're quite proud of how much and how well we've worked together with our employees to find opportunities for many of them. We're nearing completion of many of the changes in Europe and in the United States. In Japan we continue to have discussions with the employees and with the unions. We're also in discussions with potential partners in Japan. We've discussed PRA and our intent to include Japan in that PRA partnership, and that's progressing. And then we're also quite advanced on a discussion with the partner for some of our pharmaceutical science employees in Juso. So overall everything is going quite well. I'll just make one last comment, which is that the -- how well we're doing in terms of driving our strategic imperative around our three disease areas and externalization. And as James mentioned in his presentation, the ARIAD acquisition is a great example of our strategic redirection. It's entirely aligned with our focus in oncology, entirely aligned with our intent on targeted therapies and translational medicine. I can't imagine programs that are more translational in nature than the targeted therapies that we'll bring in through the ARIAD acquisition.
And then, in addition, because we've made some of these changes and we've been able to create some flexibility around our budget, we're able to absorb fairly significant spend to manage these programs with essentially a year-on-year flat budget. So I think ARIAD is a great example of our intent when we announced the transformation last year.
And then the last point and then I'll hand it back to questions, the -- James also mentioned that, not only have we done the ARIAD acquisition, we've also, over the past 18 months, put together 50, five-zero, partnerships, collaborations. And over the last two months only, we put together eight very significant collaborations or partnerships, including one with Exelixis, for development of cabozantinib in Japan. So I would say that, in terms of driving our R&D strategy, in terms of rebuilding our pipeline, which you recognize is a long-term effort that we're very committed to, we've made very substantial progress.
Thank you very much. We'd like to take the next question.
I have two questions. I am Seki from UBS. The first question is about the R&D transformation. As James mentioned that it's on track and it's at a speed, then, as you presented before, cost reduction for full year is estimated at ¥18 billion. So, is it okay for us to model higher number because of this result? This is the first question.
Second question is about the oncology strategy. About the cabozantinib deal, in-licensing deal, you're targeting the solid cancer -- solid tumor as well. Historically, Takeda has a strength in hematological cancer. But if you have a good deal in the solid tumor arena, are you going to include and in-license more solid tumor deal?
Thank you, Seki-san, for the question. It's Christophe here. So, on the first question, don't assume more saving because the transformation is doing well and it's slightly faster than what we expected, but the overall scope of the transformation is not changed. Actually, the one-off cost also of the overall transformation is not changing as well.
Do also remember that this 18 billion savings, our intent is to reinvest these savings into the pipeline, and this is exactly what we are doing with brigatinib for example. So in fact these savings are allowing us to do the ARIAD deal with 100% R&D synergy, and that's also part of the transformation. On the second part of the question, in fact, we do progressively want to be a global oncology company, not only in hematology but also in solid tumor. And the partnership that Andy mentioned in Japan will contribute to that in Japan. The ARIAD acquisition will contribute to that as well, because brigatinib will, is targeting solid tumor. And remember that ARIAD deal is a global deal, it's not only a US deal. So we will launch brigatinib globally including in Japan.
So, progressively we will broaden our pipeline and portfolio beyond the hematology dimension, where we are targeting very innovative medicine. So that's overall our intent.
Thank you very much. Next question please.
From Credit Suisse Securities, Mr. Sakai. Please go ahead.
This is Sakai speaking. My first question is, in December, LOE of VELCADE is going to take place. On quarterly basis, there is sales in US is flat. For the LCM going forward, you would need inventory adjustment six months prior to LOE. What's your projection regarding sales of VELCADE? How should we foresee that? And you did not mention AGs, but do you have any idea, if you can disclose information regarding authorized generics? That's my first question.
Second question is, for the domestic business, according to the industry journal, there is a supply issue of Teva-Takeda joint venture, there are some reports. So, legacy Taiyo, old Teva business, Mr. Iwasaki mentioned you had good due diligence and that was clear distinctly in the event, but you still have a supply issue like that regarding that.
What action, what kind of action are you taking? And for Takeda-Teva joint venture started six months ago, you had six months already, what's the current state? I'd like to get your opinion on this. Thank you.
Thank you, Sakai-san, for the question. So, regarding VELCADE, of course, yes, loss of exclusivity. In fact at the end of November 2017, very close to the beginning of December, we expect very rapid loss of our sales with VELCADE. Whether we launch or not an authorized generic, it will not change the outcome, we lose a lot, because this is the nature of the US market.
By then, NINLARO, sorry, will develop, will have developed, and we are able to offset the loss of VELCADE. What we are seeing at the moment in our overall forecast is that we are able to offset the loss of VELCADE at a global level so it will not create a massive dent in our growth. It will reduce our growth rate for sure, but we'll, for example, we'll not go into negative territory on an annual basis. That's what we are planning. So that's to put things into perspective.
On the Takeda-Teva joint venture, first, I will emphasize the fact that we -- this is a long-term partnership. The intent here is that together we can be a major player in the generic business. We knew that in the past there were some quality and supply issue, leading to supply issue. We have worked very hard with Teva, and Teva has taken it very seriously, to solve these issues. So there are still some supply issues but they are much more limited than what they were in the past. So we are very pleased with the way things are developing.
And I would also emphasize one thing regarding the joint venture, is that you have seen that the Japanese government has introduced yearly price revision, mainly targeting long-listed products, which means that this product will decline even faster and further in the future. So we think that it has been the right move to transfer this product and monetize this product before they decline completely, and do this partnership with Teva. So I think this is a business which will continue to grow in the future by adding more generic in the portfolio, and the collaboration is working solidly.
Thank you very much. Next question please.
Next question is from Morgan Stanley, Mr. Muraoka.
Good afternoon, I am Muraoka from Morgan Stanley. Thank you for taking my question. My first one is about ARIAD Pharmaceuticals. SEC filing document, SEC 14D, according to that, there is the long-term forecast. ARIAD management forecast, for example, the $1.2 billion sales in 2022 and operating profit it is $950 million. Do you think these numbers are reasonable from your viewpoint? I'd like to understand Takeda's viewpoint. That is the first question.
My second question is, as reported over media coverage at the beginning of the year, according to your, Christophe's, interview, Salix business, for Valeant deal, it is a fact that you've considered that deal, but this is already past and it's already gone, or is there any opportunity that you can leverage? Could you comment on this?
Thank you for the question. Specifically for any discussion possible on that with Valeant, I will not comment further. So I will go directly on the ARIAD. We have seen of course as well the filing. And I mean, you have seen the revenue that they have forecasted on their earnings, so for us it's just encouraging to see that. It's another way to validate the potential of brigatinib and it is very much aligned with the value potential that we saw in the company. In fact, even potentially slightly higher. So I think it just shows the potential of brigatinib.
Overall, linked to your question, I will just reemphasize that we are very careful when we look at potential acquisition of businesses. We are very disciplined, we are very strategic. And this is, ARIAD demonstrated well, it's within our core therapy area. We are very disciplined in what type of price we are prepared to pay. And also, we can afford not to do any acquisition in the future, so it does not mean that we will not do more, but it's just I want to make sure that it's very clear for everyone that it's not, we are not in the acquisition frenzy mode. In fact, we are much more focusing on partnership and alliance in R&D than acquisition. We did, in the last 18 months, we did 50 partnerships and alliance for one acquisition. And that's, I'm very fine with that.
Thank you very much. Next question please.
From Yomiuri newspaper, Mr. [Yonezawa]. Please go ahead.
Thank you for taking my question. So here's my question. In the US, and I want to ask about the market environment, President Trump is criticizing weaker yen, the Japanese policy, he's criticizing. What's impact on your Company regarding his comments? Second question, that's also comment from President Trump, in the US, drug prices to be down and also the price cut is being requested. What's your action on this point?
So, a few comments here. First is that, I mean, the yen volatility to the dollar is not new. Since I joined Takeda it has been quite a rollercoaster. So it might continue like that. So, look, since 2014, the yen evolution has been quite incredible year-on-year. So there might be still the same volatility in the future. And you have seen and we have shared with you in the past what type of volatility there is for Takeda when the yen and the dollar exchange rate change a lot. On the pricing environment, first, I will say that, I will always remind everybody that discovering and developing a new medicine is a risk and expensive, and there needs to be a reward for innovation in order for the model to work. So that's always important. Having said that, there is always a debate about price of medicine.
I think it's too early to speculate about how the US market will evolve in the future because detail matters. So we need to see what will be the policy of the new administration, how the Affordable Care Act or Obamacare is replaced and by what, and what are the, how the regulation will evolve. The only thing I will comment on is that Takeda has been for many years very reasonable in its price increase in the US, and we are very committed to a single-digit price increase. So we are not growing in the US because of price increase; we are growing in the U.S. because our products are very innovative and are treating more patients.
Thank you. We'd like to take the next question.
The next question is from Mr. Stephen Barker, CLSA Securities. Please go ahead.
Hi, it's Stephen Barker from CLSA Securities. Thank you for taking my questions. Firstly, I would like to, there was a mention of buying back royalty streams. I'd like to get your thoughts on what you think an appropriate multiple or a return on investment level would be for making that sort of investment.
And the second question is about cabozantinib. I was looking at what clinical work is being done in Japan today. It looks like there's been some Phase 1 studies. How much new clinical work will you have to do in Japan to get it approved for renal cell carcinoma and how long do you think it will take to reach the market?
And if you could also add some color to your comment about the ¥40 billion you've put in escrow for an acquisition, that would be welcome. Thank you.
Thank you, Steve. James will cover the first question for the royalty stream, and then Andy will cover the question regarding the work in Japan.
Okay. So on the first one, as I said, we won't disclose our royalty stream, what the product was involved and it's generally not something we do that often. What we were presented with, an attractive opportunity. And all I would say is the internal -- we targeted an internal rate of return in excess of 20%. So it was -- but it was a unique opportunity. So we applied rigorous financial discipline to these transactions because to some extent you can see them as a financial transaction.
And I'll just -- I'm not sure what color we would add in terms of the emerging markets escrow. We have a contract and there is certain conditions to be filled over a period of time. And those conditions are quite uncertain. But it's reasonably probable the deal will occur. And as part of the deal, we've put the money in escrow. So, once you put something in escrow, it's out of your available cash, so that's why it flows through the cash flow. So there's nothing ominous about it. There's a series of conditions that need to occur to make us comfortable with completing the acquisition. So that's all the color we can add. We're not giving the country, we're not giving the product, we're not giving any further details. But it's emerging market.
Perhaps we can say that the deal is not bigger than what the number is here in this escrow.
Yes, exactly. That's a fair point. There is no other payments being made. It's approximately, it's slightly higher, it's $450 million. And there is no extra payments concerned, it's a one price deal and it's all or nothing. The conditions are fulfilled, it's $450 million. If they're not fulfilled, we don't go through with the deal.
Andy, the question regarding Japanese product.
Yes thanks. So Steve, so the potential indications for cabozantinib are fairly broad. The three proximal indications are second and first line in renal cell carcinoma, and then second line in hepatocellular carcinoma. And we, and then for other trials, there's a range of solid tumors that potentially could be pursued. Our intent is to pursue each of those three lead indications with relatively small single-arm Phase 2 studies. And obviously this will require a dialogue, a deeper dialogue, with the PMDA, we've just signed the deal. But our base case assumptions are such that our first filings would be in the approximately 2020 timeline, with approval starting in 2021.
Great. Thanks very much.
Well, time is almost up, so we would like to close Q&A session. With this, we are closing the conference call. Thank you very much for your participation.
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