Takeda Pharmaceutical Company Limited (TAK) on Q1 2023 Results - Earnings Call Transcript
Christopher O'Reilly: Thank you very much for joining us today despite a very busy schedule for this FY 2023 Q1 earnings announcement. My name is O'Reilly. I am the head of IR. I'll be the master of ceremony for today's meeting. [Operator Instructions]. Before starting, I'd like to remind everyone that we will be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on the page 2 of the presentation regarding forward-looking statements and our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with comparable IFRS financial measures are included in the appendix in the presentation. I should also note the important notices are attached to the presentation material. Now we're going to start the presentation. Today, we have President CEO, Christophe Weber; R&D President, Andy Plump; Chief Financial Officer, Costa Saroukos, presenting to you. This will be followed by Q&A session. Now we'd like to begin.
Christophe Weber: Thank you, Chris. Thank you, everyone, for joining us today. It's a pleasure to be with you all. Our performance in the first quarter of this fiscal year again underscores the strength of our business and our ability to continue to deliver life transforming treatments to patient and communities over the long term. Looking at our financial result. In the first three months of fiscal year 2023, revenue was ¥1.06 trillion. Year-over-year growth at a constant exchange rate was plus 3.7%, driven by momentum in our Growth & Launch Products, which represent 40% of total revenue and grew in this first quarter at 16.2%. At actual exchange rate, our top line growth was 8.9%. Our top line performance contributed to core operating profit of ¥ 326.3 billion. The year-over-year decline at constant exchange rates reflect the impact of loss of exclusivity and lower coronavirus vaccines demand as well as our strategic investment in R&D and data and technology to ensure Takeda long-term competitiveness. Core EPS for the period was ¥150, flat versus prior year at a constant exchange rate. On a reported basis, EPS declined due to the impact of one-time financial income gains in the first quarter of last year. Our results at constant exchange rate are tracking well against our full year management guidance for fiscal year 2023 and there is no change to our guidance at this time. Moving to the right of the slide, we are advancing our innovative pipeline to reach new patient population, address unmet needs and provide new treatment options to improve patient outcome and quality of life. Our dengue vaccines, QDENGA, was recently approved in Argentina and Thailand. And we are pleased with the momentum we are seeing in both endemic and travel market. I will discuss QDENGA further on the next slide. In other regulatory development, we have filed GAMMAGARD LIQUID in the US for the treatment of chronic inflammatory demyelinating polyneuropathy, or CIDP. This follows on from the submission of HYQVIA for CIDP in Q4 of last year, representing near term indication expansion opportunities for two of the Growth & Launch Products in our PDT immunology portfolio. We have also filed Fruquintinib in the US and Europe for previously treated metastatic colorectal cancer, receiving priority review designation in the US. Metastatic colorectal cancer remain an area of high unmet need with poor outcomes and limited treatment options, and we are pleased to take a step further toward advancing treatment for patients. Priority review in the US has also been granted for TAK-755 for congenital thrombotic thrombocytopenic purpura, or cTTP, and ultra rare bleeding disorder, also with limited treatment options. In neuroscience, our ongoing Phase 2b study of oral orexin agonist, TAK-861, for both narcolepsy Type 1 and narcolepsy Type 2 is progressing well on track. We believe in the transformative efficacy potential of our vaccine programs, and this is supported by data published today in the New England Journal of Medicine from our discontinued study of TAK-994. Andy will explain the details in a few minutes. We are proud of all this progress, which represents the potential of our portfolio to make a meaningful difference in the lives of patients and to serve communities around the world. Turning to data on our dengue vaccines, QDENGA. We are very early in the launch phase for QDENGA, but we are encouraged by the positive momentum we are seeing in markets where it is now available, and we are already seeing early sign of higher-than-expected demand. We made significant progress in the last quarter with approval in Thailand and Argentina and our first launch is endemic countries, including Brazil and Indonesia. The vaccine's significant progress in endemic countries underscore its strong clinical data and the urgent need for safe and effective vaccines to prevent dengue fever, which is why we remain laser focused on endemic markets, which make up roughly 80% to 85% of our projected peak sales of $1.6 billion to $2 billion. At the global level too, dengue prevalence has continued to grow. The World Health Organization reported just last week that there have been close to 3 million cases of dengue reported so far this year, already surpassing the 2.8 million cases registered for the entire year of 2022. In travel markets, we have continued to see country level approval and launch across the EU, following the EMEA broad approval late last year. In the US, we made a difficult decision to voluntarily withdraw our biologics license application filing due to FDA request for additional data, including data that was not part of the previously agreed upon protocol and which could not be addressed within the current review cycle. This decision will not affect our overall approach for TAK-003 for QDENGA, which we believe can be extremely effective to limit the public health impact of dengue in endemic countries. Looking ahead, we are continuing to work closely with the WHO and look forward to the release of the recommendation from SAGE, the WHO advisory group, which is anticipated later this year. We're also in active discussion with a number of supranational procurement bodies, such as the Pan American Health Organization, relating to large scale procurement, following the WHO recommendation. To meet the vaccine's anticipated global demand, we have been expanding our manufacturing capabilities. We recently, in fact last week, celebrated the opening of a state-of-the-art building dedicated to drug substance manufacturing for our dengue vaccines in Singen, Germany. This was an important step in achieving our goal of end-to-end inhouse production capability for QDENGA by 2025 and achieving an annual supply capacity of around 100 million dose by the end of the decade. While we ramp up our manufacturing capabilities, we are exploring partnership with vaccines manufacturers, especially in endemic countries to secure additional capacity to meet current and future supply needs. We look forward to continued momentum of these programs in 2023 and beyond. Now, I'd like to turn to our high level outlook for the near, medium and long term. Based on our current assumption for fiscal year 2023, we expect to return to revenue, profit and margin growth in the near term, driven largely by the continued expansion of our Growth & Launch Products. We also see significant potential in our late stage pipeline assets and anticipate significant data and regulatory milestone this year. Following the generic competition for VYVANSE, which will impact revenue and profit growth in fiscal year 2023, we will have limited loss of exclusivity exposure until the launch of ENTYVIO biosimilars, which could occur as late as 2032. The momentum for our Growth & Launch Products, combined with our continued investment in R&D, will drive progress in the medium and long term. Looking ahead, we remain committed to returning to core operating profit margin in the low to mid 30s, supported by value creation enabled by data and technology, including AI. We will also continue to evaluate asset-specific business development opportunities to further enhance our pipeline and reinforce our growth profile. Finally, our progressive dividend policy of increasing or maintaining the dividend each year will allow us to continue to return value to shareholders. In closing, this quarter demonstrates that our growth strategy remains on track. We continue to deliver on our financial commitment to progress our pipeline and to create long-term value for our stakeholders while we fulfill our purpose of bringing better health for people and a brighter future for the world. With that, I will turn the call over to Andy to update you on our pipeline. Thank you.
Andy Plump : Thank you very much, Christophe, and a big hello to everyone on today's call. If we go to the next slide please. Our pipeline continues to advance, including considerable progress with the TAK-279 and orexin franchises, which we will describe later in this presentation. This quarter, the rest of our pipeline featured a number of incremental, but important, program milestones and a few small headwinds. As Christophe just mentioned, important regulatory milestones include filing for fruquintinib in both the US and EU for metastatic colorectal cancer; filing TAK-755 in again the US and EU for congenital thrombotic thrombocytopenic purpura, or TTP; and finally, GAMMAGARD LIQUID in the US for chronic inflammatory demyelinating polyneuropathy, or CIDP. Fruquintinib and TAK-755 are granted priority reviews by the FDA, reflecting their potential for increased effectiveness and/or better safety in areas of high unmet medical need. If approved, TAK-755 would be the first available therapy for routine prophylaxis in congenital TTP. Supporting these and other programs were a number of key publications and presentations. These include HYQVIA's Phase 3 ADVANCE-1 study results, demonstrating an approximate 10% relapse rate with HYQVIA. This is the lowest relapse rate observed in CIDP maintenance studies across mechanisms. Fruquintinib data from FRESCO-2 was published in The Lancet and showed a greater than 30% increase in overall survival versus the control arm in patients with metastatic colorectal cancer. In June, TAK-755 data were presented. These data demonstrate a reduction in the incidence of thrombocytopenia by 60% versus the standard of care and no acute TTP events were observed. And also in June, updated data from the Phase 2 SEQUOIA study of fazirsiran was presented at the European Association for the Study of Liver Congress, or EASL. Fazirsiran continued to demonstrate a dose dependent reduction in the pathological alpha-1 antitrypsin ZAAT protein in both serum and liver, leading to directional decreases in liver inflammation and fibrosis. We've started our Phase 3 REDWOOD study earlier this year. Now headwinds this quarter include TAK-611 for metachromatic leukodystrophy, or MLD, which missed its primary and secondary endpoints in our Phase 2 study. We are disappointed and wish to express our gratitude to the MLD children, parents and caregivers. We're currently evaluating options, but given these outcomes, the program unfortunately is likely to be discontinued. Following a planned interim analysis, the Phase 3 EXCLAIM-2 trial was stopped for futility. The trial compared EXKIVITY monotherapy to chemotherapy in first line, non-small cell lung cancer with exon 20 insertion mutations. We will be engaging with regulators required regarding these data and determining next steps for the program. As a reminder, EXKIVITY demonstrated a median duration of response of 17.5 months and a median overall survival of 24 months in patients being treated in the second line, who had progressed after chemotherapy. And lastly, as Christophe discussed, we had some positive and negative developments for QDENGA this quarter. It's very important to recognize that the unmet need for a dengue vaccine is not equally distributed around the world. We remain confident in the overall benefits of QDENGA. However, timing of approval may vary depending on local needs and experience. Finally, yesterday, as Christophe again mentioned, Phase 2b data from the first ever oral orexin receptor 2 agonist, TAK-994, was published in the New England Journal of Medicine. Next slide, please. We conducted a Phase 2b dose ranging trial that tested three doses of TAK-994 in an eight week study, with the option for patients to continue into an eight week extension. The trial was stopped early due to liver toxicity. Now, even with a truncated study, the impressive efficacy data indicate orexin receptor 2 is a promising novel biologic target for patients with narcolepsy Type 1. The mean wakefulness test scores range from 26 to 35 minutes on a placebo adjusted basis. For benchmarking, currently marketed agents have shown a placebo adjusted benefit of 8 minutes or less. Similar effects were observed with the Epworth Sleepiness Scale, a subjective task used to measure daytime sleepiness, in which patients were normalized to equivalent levels as those seen in healthy subjects at all doses. And weekly cataplexy rates were reduced or abolished, again, at all doses tested. We believe orexin 2 receptor agonists may be the first agents to address the underlying cause of narcolepsy type 1, offering the potential for functional cures. We are applying our learnings from TAK-994 and our deep understanding of orexin biology as we advance the research and development from multiple orexin assets. For example, TAK-861 has been enrolling ahead of schedule in two Phase 2b trials that started in January of this year, one for narcolepsy type 1 and a second for narcolepsy type 2. TAK-861 is a more potent agent than TAK-994, and thus provides efficacy at a much lower dose, therefore significantly reducing the potential for adverse effects, including liver toxicity. We're very pleased to report that a recently conducted external review by the data safety monitoring committee confirmed no liver toxicity signals to date. In addition, nearly all of the patients that completed the trial to date have enrolled in the long term extension study and will be followed for up to 102 weeks. We are expecting a go/no-go decision to advance to Phase 3 in the next fiscal year. TAK-925, our IV orexin receptor 2 agonist, showed exciting data earlier this year. In sedated healthy volunteers, TAK-925 reversed opioid induced respiratory depression and sedation without impacting pain control. The Phase 2 trial was started and is on track to have proof of concept in fiscal year 2024, which will inform the registrational studies. Later this year, we plan to file an IND for our next generation oral orexin receptor 2 agonist. Our goal is to expand into additional indications by developing orexin agonists that are tailored to meet unmet patient needs, and ultimately, make a meaningful impact on patients' lives. Next slide please. Depicted here are exciting late stage development programs. TAK-279, our highest priority, is on track to start a Phase 3 program in psoriasis later this fiscal year. We continue to believe we have a best-in-class oral therapy for psoriasis. We will have a Phase 2b readout for psoriatic arthritis this fall and are preparing at-risk to start a pivotal development program for these patients in fiscal year 2024. We are accelerating development of TAK-279 additionally in Crohn's disease, ulcerative colitis, and systemic lupus erythematosus, as well as exploring a range of other indications. These expansion opportunities are being developed in parallel with psoriasis. Finally, we want to remind everyone that we have important lifecycle management approvals and data readouts later this year. These include potential approval of ENTYVIO subcutaneous in the US for ulcerative colitis and ALOFISEL Phase 3 data for perianal fistulas. Lifecycle management program milestones can be found in the appendix. And now at this point, thank you very much. I'll turn it over to Costa.
Costa Saroukos : Thank you, Andy. And hello, everyone. This is Costa Saroukos speaking. Today, I'll walk you through the financial highlights of our fiscal 2023 Q1 results. Starting with the top line, revenue was ¥1.06 trillion or $7.3 billion, delivering strong growth of 3.7% versus prior year at a constant exchange rate, or 8.9% on an actual basis reflecting foreign exchange upside from the depreciation of the yen. Our top line performance was driven by our Growth & Launch Products, which represents approximately 40% of total revenue and grew at 16.2% at constant exchange rate. Core operating profit was ¥326.3 billion or $2.3 billion, with a core operating profit margin of 30.8%. Reported operating profit was ¥168.6 billion. We continue to see stable cash generation from the business with operating cash flow up 9.7% to ¥92.4 billion. Free cash flow is negative at minus ¥207.5 billion, reflecting ¥223 billion in cash out for acquisitions and in-licensing, including TAK-279 and fruquintinib, which occurred in Q1 as expected. Importantly, I want to note that there is no change to our full-year free cash flow forecast of ¥400 billion to ¥500 billion as these deals were already included in the forecast, which we gave in May. I'm also happy to announce that Moody's recently upgraded our credit rating from Baa2 positive to Baa1 stable. This is important to highlight because it's a reflection on the strong financial foundation of the business, with our robust cash flow outlook and manageable debt profile, with 100% of debt at approximately 2% fixed rates. With regards to the outlook for full-year 2023, there is no change from the guidance we presented in May. As we flagged since the start of the year, starting from Q2, we expect to see more significant loss of exclusivity impact, with generic versions of AZILVA having launched in Japan in June and, more importantly, generics for VYVANSE in the US expected to launch in August. Finally, while we're not changing our reported and core forecasts at this time, we do see some potential upside if the current FX rates continue. We'll provide an update on this at our Q2 earnings in October. Slide 13 shows our Q1 results in more detail. On the left hand side, you can see our reported results, with reported operating profit up 12%, reflecting revenue growth, completion of inventory step up related to the Shire acquisition and lower impairment charges compared to the prior year. Meanwhile, reported net profit and reported EPS declined as a result of substantial one-time financial income booked in Q1 of last year. Our core results on the right hand side. And as mentioned, we saw strong revenue growth of 8.9% or 3.7% at a constant exchange rate, driven by our Growth & Launch Products. Core operating profit grew at 2.3% on an actual foreign exchange basis, with a slight decline of minus 2% at constant exchange rate. This decline reflects product mix due to generic entry and lower COVID-19 vaccine revenues and also continued investment in R&D and data and technology to secure long-term success of the business. Even with this incremental investment, margins for Q1 remained above 30%. Core net profit and core EPS benefited from a lower core tax rate, with core EPS for the quarter of ¥150, up plus 0.3% versus prior year at the constant exchange rate. And as mentioned on the prior slide, free cash flow reflected the expected cash payments for TAK-279 and fruquintinib and there is no change to our full-year year forecast of ¥400 billion to ¥500 billion. Slide 14. On slide 14, we highlight our portfolio of Growth & Launch Products, which are the key drivers of top line growth. These products generated ¥424.1 billion or 40% of total revenue in Q1, with 16.2% growth at constant exchange rate. Within our five key business areas, GI grew at 3% on a constant exchange rate, a slight slowdown versus last year, mainly due to generic entry of DEXILANT in January this year. Our largest product, ENTYVIO, continues to perform well, with growth of 7%. This is a little behind our expectations for the full year, reflecting single-digit market growth, timing of US inventory shipments in the prior year, and pricing headwinds in Europe. ENTYVIO maintains the lead in US market share, both in overall IBD prescriptions and in IBD bio-naïve new patient starts. And with an approval decision in the US on the subcutaneous device expected in the coming months, we remain fully confident in the continued growth outlook for the product. In rare diseases, TAKHZYRO continues its strong momentum, with growth of 15%, having successfully launched now in 56 countries and with sustained demand in the US. We also recently launched in the pediatric indication in the US, making it the first HAE product indicated for use in children over two years old. We also see continued launch success for LIVTENCITY, up 71% with strong market penetration in the US and rapid geographic expansion within Europe. PDT immunology continues to deliver outstanding growth of 24%, including 23% growth of immunoglobulin and 36% growth of albumin. Both our IG and albumin products continue to see strong demand, with albumin also benefiting in Q1 from recovery in China following the lockdowns in prior year. We have continued to expand our plasma donation center network, adding three more centers in Q1, with the intent to increase by more than 20 new centers by the end of the fiscal year. And we have seen donor compensation continuing on a downward trend since fiscal year 2022 after significant increases during the pandemic. Next is oncology, which continues to decline as a result of VELCADE generics. However, the timing of loss of exclusivity in May 2022 does mean that the impact should washout in the coming quarters. Excluding VELCADE, the rest of the portfolio grew 5%, driven by products such as ALUNBRIG, EXKIVITY, ADCETRIS and ICLUSIG. Finally, neuroscience had a very strong performance in Q1, with growth of 17%, with VYVANSE benefiting from the expanding ADHD adult population, as well as lower supply of other ADHD medicines in the US. However, as a reminder, we are expecting multiple VYVANSE generics to enter the US market in August this year. Finally, the other segment is declining in Q1, mainly due to the lower revenue from COVID-19 vaccines in Japan. However, this other segment now includes our dengue vaccine QDENGA, our newest Growth & Launch product, which is seeing strong initial demand in both endemic and travel markets. On slide 15, you can see that, versus prior year, the Growth & Launch Products were the main driver of the 3.7% growth at constant exchange rate, more than offsetting the headwinds from loss of exclusivity and lower coronavirus vaccine revenue. On top of this solid growth, we had a constant exchange rate upside on the foreign exchange tailwind due to the depreciation of the yen, taking our top line growth on an actual FX basis to 8.9%. Moving to the year-on-year core operating profit bridge on slide 16. Here you can see how loss of exclusivity in coronavirus vaccines are having a larger impact on profit compared to revenue due to the higher margins, impacting our product mix. On the investment side, we continue to allocate resources to R&D to support high potential programs such as TAK-279 and our orexin franchise, while also making substantial investment in data and technology, including AI across the value chain. We believe these investments will have a transformational impact on Takeda's long term competitiveness and, therefore, we continue to allocate capital in these areas as they will play a major role in our return to growth in the near and long term. At the same time, we are applying strict cost discipline to hold other OpEx flat year-on-year. All these factors combined result in a Q1 core operating profit decline of minus 2% on a constant exchange rate basis, but when including foreign exchange benefit, we realized growth of 2.3%. Finally, moving to slide 17 and our outlook for full year fiscal 2023. Based on the Q1 results, we do not see any need to make changes to our management guidance or our reported and core forecasts at this time. We are still expecting a significant loss of exclusivity impact in the remainder of the year due to VYVANSE and AZILVA and, therefore, we are keeping our management guidance unchanged – low-single digit percentage decline in revenue, low 10s percentage decline in core operating profit and low 20s percentage decline in core EPS, all on a constant exchange rate basis. With regard to the reported and core forecasts on an actual FX basis, there is some potential upside if current FX rates continue. We will continue to monitor foreign exchange as well as the underlying business, and we'll revisit our full-year outlook at the Q2 earnings announcement in October. Thank you for your attention. And I'd like to now open it up for Q&A. Thank you.
Operator: Thank you. Now I'd like to take questions from the participants. In the Q&A session, Christophe, Andy and Costa, and Ramona Sequeira, Global Portfolio division president, Julie Kim, US business unit president; Giles Platford, PDT business unit president, are also joining. [Operator Instructions] First question from Yamaguchi-san, Citigroup, please.
Hidemaru Yamaguchi: I have two questions. The first question regarding your comments on ENTYVIO, you talk about the market is a little bit slow and there's a price pressure in Europe as well. And also, there is some kind of [indiscernible] effect of inventory building up. Can you elaborate a little bit, especially in the United States, which is a core market of this product, is weak? Why is the case? Is it coming from the HUMIRA or other biosimilars coming to the market or it's just news related to the COVID? So that's the first question on ENTYVIO market weakness – ENTYVIO weakness comments. That's the first one. The second one is regarding 994. On The New England Journal of Medicine, it is really efficacious, which is really an unfortunate situation out there because it did show the results, but at the same time, you have more 861 and also talk about some next generation product. Can you give me the sense that your kind of efficacy level of which you are sort of getting so far? As far as 869 is concerned, it's the same range of 984, is it better than 984 about the efficacy level? And also the second generation product as well?
Christopher O'Reilly: The first question on ENTYVIO and the market performance, so, first, I'd like to ask Julie to comment on the situation in the US. And then perhaps if Ramona has anything to add on the situation in Europe or other regions. And then, on 994, The New England Journal posting, what implications does this have on 861 and, more particularly, what are the efficacy levels that we've seen so far for 861 and what are our expectations for the next generation oral orexin agonist, I'd like to ask Andy to comment on that one.
Julie Kim: This is Julie. In terms of ENTYVIO in the US, a few comments in regards to your question as you had multiple components in your question there. First in terms of the impact of biosimilars to HUMIRA, it's a little bit too early to say, the impact of those biosimilars. We are monitoring that closely. But so far, as anticipated, the biosimilars are really within class versus having an effect across different products within IBD. When we look at ENTYVIO performance in particular, we're pleased with a very strong market share of ENTYVIO and we continue to be the leader when it comes to IBD share, and particularly in terms of bio-naïve share. For the market growth, as you mentioned there, market growth is still in single digits. So it hasn't returned to double-digit growth, as we've seen in the past. So those are the different parameters of the impact on ENTYVIO in the US. Ramona, do you want to add anything for Europe?
Ramona Sequeira: Yeah, I can comment a little bit outside the US. So in general, the market is growing double digits, and actually volume is also growing double digits O-US. Really, the impact O-US is due to rebates and price cuts in Europe, specifically. The underlying fundamentals, though, are looking good. So share is increasing, the market is growing, we do continue to lead in new starts globally, both in the US and outside the US. As you know, we've got the subcu expecting to launch in the US later this year. And we're continuing our evidence generation Phase 4 trials, looking at ENTYVIO in different lines of therapy. So we feel the fundamentals are looking good, and continue to keep an eye on ENTYVIO as we go through the year.
Andy Plump: We're just so excited to have now the 994 data out there in The New England Journal publication, both us and the principal investigators with whom we've been working for many years. And it's terrific that you now have a chance to see these data and understand why we're so enthusiastic about this mechanism. The question with respect to 861, 861 has every possibility to be as strong as 994 in terms of its efficacy profile. We don't have enough data now to know whether it will be equivalent to 994 across the multiple different parameters. And as you saw with 994, we're essentially able to take a type 1 narcolepsy patient and make them look like a healthy individual. The issue with 861 is going to be dose. So we're very thoughtful in terms of what our dose selection will be. And as we've said, because we want to be careful around the potential for liver toxicity, we'll cap our daily dose at somewhere around 10 milligrams. So, the question that we'll be asking with the Phase 2b study is, with a dose cap, what does that efficacy profile look like? And those are data that we'll have inhouse at some point over the course of this year and we'll share next year and will be the basis of a go/no-go decision to Phase 3. With respect to our backup programs, our first next generation molecule will be coming into the clinic later this year. And there are really two intents behind the backup program. The first, if 861 doesn't have what I would say is a maximally efficacious profile in type 1 narcolepsy, then there's the potential for a next in class best-in-class. If 861 is the ultimate molecule for type 1 narcolepsy with maximal benefits, then our intent would be to develop these molecules across a range of other indications. And then, I'll just add that we've only presented in this New England Journal paper a subset of the overall data that we have from our oral orexin. And there's data that point us in many different directions for this particular pathway. And so, that's one of the reasons we've been so really proactive in bringing a suite of molecules forward.
Operator: Moving to the next question, we'd like to call on Seiji Wakao from J.P. Morgan.
Seiji Wakao: This is Wakao, J.P. Morgan. I have two questions. In this first quarter, the gross margin is lower now. Why is this? Is this according to plan? And PDT margin, I was expecting to see some improvement there. But what is your view on this? And I just want to understand whether the margin is improving for PDT business. And the continuing on what Yamaguchi-san asked, 994 and 861, I read the New England Journal and the factors for liver toxicity for 994 was reactive metabolites, impact of reactive metabolites. What about 861? Is it a different type of a metabolite? Or are you going to do dosing correctly so that the metabolites will be low while smaller? Can you please explain, again, why you expect a lower liver toxicity with 861?
Christopher O'Reilly: So the first question was on reasons for the lower gross margin in Q1 versus prior year. Also related to that, the margins in the PTD business, how are they improving? So I'd like to ask Costa to take that question. And then the next question was on 994 and 861 and the reactive metabolites being the cause of liver injury for TAK-994? What's our thinking on that around the 861 program? I'd like to ask Andy to comment on that.
Costa Saroukos: Regarding the core gross profit margin, as you rightfully highlighted, there is a softening versus Q1 of last year. And the main drivers for that are three. The first one being the impact of loss of exclusivity. Products such as VELCADE, loss of exclusivity happened in May of 2022. So we're seeing the bulk of the impact of Q1 this year versus last year. So that's VELCADE, loss of exclusivity headwinds, as well as AZILVA, which we experienced loss of exclusivity in Japan in June. And furthermore, DEXILANT in the US loss of exclusivity in Q1. So, those three products alone have very high margin. So having that loss of exclusivity had an impact on the overall product mix of that. The second one is the European pullbacks that we experienced in Q1 versus last year. There was the impact of clawbacks in Europe that was not impactful in Q1 of last year versus this year. So that's another key contributor to the erosion of the gross profit. And then, the third component is really the strengthening of the euro versus the yen, given that we have more of our manufacturing plants and a lot of the OpEx is in euros. For cost of goods, we are experiencing some of those headwinds there. To your second part of the question on PDT, we are seeing in Q1 an improvement overall in PDT business not only on the top line, but also on the gross profit margin as well, given that the reduction in donor fees from last year we did – you start to see a reduction in donor fees of anywhere between 10% to 15%. That's helping the improvement in the gross profit overall, start to filter through the P&L this fiscal year, but not enough to offset the other components that I mentioned, mainly being the loss of exclusivity and the clawbacks. But, overall, very pleased with the PDT performance. You saw it's a key driver for Growth & Launch, growing at 24% at a constant exchange rate, and we're seeing really positive momentum on the gross profit and core operating profit lines.
Christophe Weber: This is Christophe here. I will add that we are pleased with the start. You asked whether it was – how do we see this first quarter? For us, it's a good start of the year. It's in line or above our expectations. So, let's see how things evolve for the remaining of the year, but a good start for sure.
Andy Plump: It's Andy. With respect to your question on the similarities and differences of 861 and 994, the 861 and 994 are distinct molecules. They have overlapping metabolic pathways, and so it's hard for us to know exactly whether 861 at a high enough dose would have the same liver toxicity liabilities as 994. And so, that's one of the reasons why we're proceeding with caution and limiting our dose to an empirical level where below which, across the industry, we just don't see liver toxicity. And as I think we all know, toxicity is always a function of dose, and this is particularly true for liver toxicity. Just to put this in context, the liver toxicity for 994 we're seeing at the 90 milligram BID dose, that's 180 milligrams per day of exposure. At the 30 milligram BID dose, 60 milligrams per day of exposure, we didn't see the liver toxicity. And if we were to make simplistic assumptions that there's a one to one equivalence, which I don't think is fair, we're targeting a less than 10 milligram per day dose for 861. So we're looking at a 6 to 18 fold margin to where that potential toxicity is with 994. With respect to the backup programs or next generation programs, we've developed a very distinct pharmacophore or very distinct chemistry. So the series looks quite differently. They're entirely novel metabolic pathways and pathways for elimination. So the issues, so we've dialed out fully any potential issues, I would say, with the next generation programs, and that's why we spend so much time trying to rework some of the novelty in the space.
Operator: I'd like to take the next question from Hashiguchi-san from Daiwa.
Kazuaki Hashiguchi: I'm Hashiguchi, Daiwa. My question is on orexin agonist. Other than narcolepsy type 1, other sleep disorders, what about a potential of orexin franchise indications other than in narcolepsy type 1. Looking at the New England Journal paper, regarding the dose demonstrating efficacy, it is low dose for narcolepsy type 1, but in other indication, sleep disorders, it may require a higher dose that's discussed. And regarding symptoms other than narcolepsy type 1 patients, there may be safety concern. That view was also described. And what is Takeda's view on this? And going forward, narcolepsy type 1 and others, what is your strategy going forward to develop for those different indications?
Christopher O'Reilly: We're actively developing TAK-861 in both narcolepsy type 1 and narcolepsy type 2. We'll be looking at the data from those studies later this year and making a decision as to whether we move forward in type 1 narcolepsy, type 1 plus type 2, plus additional indications, or whether we limit our future development in type 1 narcolepsy. So we're interested in a range of disorders and the data that emerge from the Phase 2b study on the 861 will inform on how broadly we intend to bring that molecule. And again, we're bringing additional molecules that we have, TAK-925 for postoperative indications and then we have our next generation molecules, which we'll intend to develop more broadly as well.
Operator: Next question Mike Nedelcovych from Cowen.
Michael Nedelcovych: My first question is on TAK-994. I was curious, the urinary urgency and urinary frequency, AE, was relatively prevalent. Are you seeing something similar with the next generation agents? And is the dose reduction that's intended to address the active metabolite, is that also addressing to some extent the urinary urgency? That's my first question. My second question is on ENTYVIO. Do you anticipate a return to double-digit growth in the US. And if so, do you have a general timeframe over which you expect that to happen? And to what extent might this subcutaneous formulation contribute to that growth as you expect it?
Christopher O'Reilly: The first question on 994, the urinary urgency and whether we're seeing that with 861, I'd like to ask Andy to answer and then the question ENTYVIO potential return to double digit growth. I'd like to ask Julie to comment on that.
Andy Plump: The urinary urgency appears to be an on target tolerability issue with the orexin 2 receptor agonist, not related, we think, to any of the metabolites. Even though it's prevalent in a large percentage of patients, it seems to be fairly mild. And one of the indicators that makes us feel quite confident that this is going to be something that won't be a problem for these patients is that we see almost no dropouts in our studies, both for 994 and for the ongoing 861 study. And we see almost 100% conversion from the main trial to our open label extensions.
Julie Kim: In terms of ENTYVIO growth, I would say there are a few factors that we're looking at to have double digit growth for ENTYVIO. First, as you heard Ramona say, we are anticipating approval and launch of ENTYVIO subcu in the US and we do expect that to bring a lift to our growth. And then there are two other factors that we are working on. One is in terms of further evidence generation to support ENTYVIO. We have three planned studies in the US, one of which has already begun initiation in terms of work with our HCPs and clinical sites. And the second is in terms of leveraging data, digital and technology to further enhance our marketing capabilities to have more targeted and precise segments and marketing for ENTYVIO. So those are the three aspects that we are looking at to help drive ENTYVIO to double-digit growth this year.
Operator: So, next question, I would like to call upon Shinichiro Muraoka from Morgan Stanley.
Shinichiro Muraoka: This is Muraoka, Morgan Stanley. Maybe I think it's too early to talk about the next fiscal year, but so far in this fiscal year, I think you are on track and that there may be some upside in your performance. That's my understanding. And the next fiscal year, no longer VYVANSE, and ENTYVIO may take a little longer time to recover. Then in the next fiscal year, core operating profit, do you think it achieves positive growth? Or it may be flat or negative growth in two years running? Do we have to consider that possibility, that risk?
Christopher O'Reilly: [Technical Difficulty] 2024 depending on VYVANSE and ENTYVIO, how they play out, is there a potential that 2024 could be a year of decline? So I'd like to ask Christophe perhaps to comment on this question.
Christophe Weber: While it's way too early to give a guidance for the next fiscal year, I think the one key factor here will be VYVANSE generic impact. Today we plan for generic entry in August, but you can imagine that, if it will be delayed, for example, if the number of generic would be lower or higher than what we have in our plan, that will have an impact on the erosion curve. At the present time, our assumption is that we will rebound in 2024, 2025 because we think that there will be a much more limited impact of generic in 2024, 2025. But it's really important that we look at what happened this fiscal year in order to predict better how we'll rebound. And if we will rebound as planned, it will be a rebound on both the core operating profit and the revenue. But let's see during the fiscal year 2023 how things are evolving with both VYVANSE and AZILVA actually in order to predict better how we can see 2024 and 2025 rebounds.
Operator: Next question, I'd like to call upon Steve Barker of Jefferies.
Stephen Barker: Steve Barker from Jeffries. Two questions. One about 861. I'd like to ask Andy about the choice of the 10 milligram dose. I understand the logic regarding wanting to reduce the risk of side effects. If you could explain what you're seeing in terms of the potency and, therefore, what you might theoretically expect to see in terms of the efficacy and some comments around that would be much appreciated. My second question is, perhaps for Christophe, maybe Costa. Christophe, you mentioned in your comments that you would expect to see the core OPM get back up to low 30s, low to mid 30s. And you mentioned that application of AI might be able to help efficiency. I'd actually be very interested to hear how you think AI can be applied to the pharmaceutical business.
Christopher O'Reilly: I guess first question, Andy and then maybe Christophe to start on that second question.
Andy Plump: Firstly, 861 is a significantly more potent molecule when we look at the in vitro pharmacology relative to 994. It's also a molecule that has a more extended exposure and a longer half-life. So there's very different properties than TAK-994. So it's going to be important for us to look at the data that come out of our Phase 2b study to understand whether with our dose limit, dose cap, we can achieve the same level of efficacy as TAK-994. But intrinsically, the molecule has the potential to do that even at lower doses. And I'll add that we plan to begin sharing data from the 861 program in type 1 narcolepsy patients later this year. So some of the healthy volunteer sleep deprived data, some of the PK/PD modeling that we've used, those data will start to be out there in the coming months.
Christophe Weber: We see a very high potential for the utilization of AI in our business, but I will emphasize that is data technology and AI. Without the data, you cannot train the AI. And without some technology like image recognition, you don't generate data in many parts of our business. So, we have been focusing on, I think, data lake and data domain well structure in order to train the AI algorithm and we are seeing application across our value chain. For example, in manufacturing, we are using image recognition on our manufacturing line in order to improve the efficiency of the line, for example. We are using AI as well to do some visual recognition that we are doing manually in the past. So in the manufacturing side, we see a lot of productivity implication. On the research side, we are using AI for molecule design or for toxicity modernization, for example. We will use also the AI to accelerate clinical trials test protocol, have higher patient activation. On the commercial side, we are looking at optimizing our interaction with doctors in a digital way, and we are using AI algorithm, as we speak, already. On the PDT side, for example, we are using some algorithm to have a better relationship with our donors. And so, it's really across the board. And I didn't talk about back office, but we are also using this type of technology in our back office. In fact, we think that all our employees eventually will have some application of AI for their jobs. So, this is really a very high priority for us.
Christopher O'Reilly: And with that question, it brings us to the end of our time today. So thank you, everybody, for joining us on this conference call and we look forward to talking with you again at a later date. Thank you and good night.
