Takeda Pharmaceutical Company Limited (NYSE:TAK) Q2 2023 Earnings Call Transcript

Takeda Pharmaceutical Company Limited (NYSE:TAK) Q2 2023 Earnings Call Transcript October 27, 2023

Christopher O’Reilly: Thank you very much for joining us out of your busy schedule today for the earnings call for Second Quarter Fiscal 2023 with Takeda Pharmaceutical Company Limited. I am going to be the moderator today O’Reilly, the Head of IR. Now let me explain about a language setting. At the bottom of Zoom window, there is language button. If you wish to listen to Japanese, please choose Japanese. And if you wish to listen to English, please choose English. If you just listen to live audio, please turn it off. 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 and page two of the presentation regarding forward-looking statements and our known 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 appendix to the presentation. Let’s get started with the presentation today. CEO and President, Christophe Weber and President of R&D, Andy Plump; and Chief Financial Officer, Costa Saroukos who will be making presentations each. And then we will open the floor for questions. Let’s get started. Christophe, over to you.

Christophe Weber: Thank you, Chris. Thank you, everyone, for joining us today. It’s a real pleasure to be with you all. At Takeda, our vision is to discover and deliver life transforming treatments guided by our commitment to patients, our people, and the planet. This proposed lead approach is at the core of our strategy to deliver long-term value creation for our stakeholders. We are rapidly embracing the use of data, technology, and AI, transforming the company across all functions. We’ll provide more details on this remarkable change next year. Our performance in the first-half of fiscal year 2023, while facing two setbacks with our pipeline further demonstrate our progress in executing on our strategy. As we look to maximize our portfolio, advance our pipeline, and deliver on our commitments.

Turning to slide five. Our first semester performance underscores the strength of our core business, and our ability to deliver life transforming treatment to patients and communities. Looking at our financial results, revenue for the period was JPY2.1 trillion or $14.1 billion. Year-over-year growth at the constant exchange rate was 1.4%, driven by momentum in our growth and launch product, which represents 42% of our total revenue and grew at 13% at a constant exchange rate. At actual exchange rate, our top line growth was plus 6.4%. This top line growth is despite generics for VYVANSE launching in the U.S. after a patent expiry in August. To-date, the impact of generics and VYVANSE market share has been broadly in line with our expectation.

Core operating profit was JPY588.8 billion or $3.9 billion with a decline versus prior year of 9.5%. The year-over-year decline is in line with expectation and reflect the impact of loss of exclusivity for higher margin products, lower of Coronavirus vaccines demand, as well as our strategic investment in R&D and data and technology to ensure that Takeda long-term competitiveness. Core EPS for the period was JPY261. On a reported basis, operating profit on EPS were impacted by large non-core item booked in the second quarter including impairment of intangible assets related to EXKIVITY and ALOFISEL. While very unfortunate for patients on material to the company, the two setbacks triggering this impairments don’t impact our strategy for delivering a near-term return to growth.

And long-term sustainable value for shareholders. Costa will go into this item in more detail later in the presentation. Turning to the outlook for the reminder of the fiscal year, we are raising full-year revenue on core EPS forecast to reflect updated ForEx and tax rate assumptions. We are on track to our management guidance for core growth at the constant exchange rate and there is no change to our guidance. There is also no change to our full-year free cash flow forecast of JPY400 billion to JPY500 billion. On a reported basis, we are lowering fully a profit forecast due to the impact of the non-core item booked in the second quarter. On slide six, we are advancing our innovative portfolio to reach new patient population, address, and meet needs, and provide new treatment options to improve patient outcome and quality of life.

Last month, we received FDA approval for the subcutaneous administration of ENTYVIO for maintenance therapy in moderate to severely active ulcerative colitis. This makes ENTYVIO the only FDA approved biologics in ulcerative colitis and offer patients a choice of two type of administration. We expect ENTYVIO subcutaneous to be available in the U.S. by end of October, and we are fully committed to the success of its launch. I will come back to ENTYVIO progress and growth outlook on the next slide. The FDA is also evaluating our application for subcutaneous administration of ENTYVIO for the treatment of Crohn’s disease, and we expect a decision in the first-half of fiscal year 2024. Our dengue vaccine QDENGA continues to be recognized as a critical step forward in the fight against dengue fever.

Last month, the WHO strategic advisory group of experts on immunization recommended its use in high dengue burden on transmission areas for children aged six to 16 where it believes the vaccines will have the greatest public health impact. Other milestone in the first-half of the year, include approval of CUVITRU as our first subcutaneous immunoglobulin product in Japan. Delivering on our commitment to reach patients with high unmet needs. And in our oncology portfolio, ADCETRIS received a label extension in Europe for stage free patients as a first line treatment for Hodgkin lymphoma. The approval was based on updated positive overall survival results. From the Phase 3 ECHELON-1 study for Stage 3 and 4 Hodgkin lymphoma, which demonstrated the first significant improvement in overall survival in two decades in Stage 3 and 4, Hodgkin lymphoma.

Moving to the right side of the slide to look at progress in our innovative pipeline. In September, we resubmitted TAK-721 to the USFDA for the treatment for Eosinophilic Esophagitis. We expect a decision from the FDA during the first-half of calendar year 2024. Also in September, we announced positive top line result from our Phase 2b trial of TAK-279 for active psoriatic arthritis. This is a significant milestone in our effort to develop a new treatment option for patients with this debilitating condition. We had a number of filing in Japan in the first-half with Fruquintinib filed for previously treated metastatic colorectal cancer. And TAK-755 filed for cTTP. We are pleased to have entered an exclusive licensing agreement with immunogen to develop and commercialize Mirvetuximab for FRalpha positive ovarian cancer in Japan.

But we also faced some headwinds. In October, we made the voluntary decision to withdraw EXKIVITY in the U.S. Based on the outcome of the EXCLAIM-2 confirmatory trial and discussion with the FDA. We are discussing next steps with regulators in other countries where EXKIVITY is available as we intend to initiate voluntary withdrawal globally. Patients are our top priority and EXKIVITY remains available to be prescribed in the U.S., while we work with the FDA to formally withdraw within an appropriate time frame. The withdrawal decision on timeline outside of the U.S. will vary by country. Also in October, we announced that the Phase 3 ADMIRE-CD II study of ALOFISEL for the treatment of complex Crohn’s perianal fistulas did not meet its primary endpoint.

The study was designed to support a filing in the U.S., and we are currently evaluating next steps. Importantly, the safety profile was consistent with prior studies, and there were no new safety signal identified. This events highlight the inherent risk in research and development, but as a company focused on delivering life transforming treatment to patients, we must continue to challenge ourselves at the forefront of innovation. Andy will speak further about our pipeline later in the presentation. Turning now to ENTYVIO growth and outlook on slide seven. In the first-half of fiscal year ‘23, ENTYVIO continued its growth trajectory, increasing market share globally. In the U.S., ENTYVIO maintained the lead as number one in inflammatory bowel disease overall, as well as in IBD bio-naïve new starts.

Volume growth remains strong in the in the EU in Europe. At approximately 15%. Outperforming the overall IBD advanced therapy market despite pricing headwinds. In the U.S., the IBD market is growing, but diagnosis and advanced therapy session remains suppressed compared with the 2016, 2019 periods, so pre-COVID. Patient data suggest that new diagnosis still haven’t recovered to pre-COVID level. Nevertheless, the majority of moderate to severe patients remain untreated or on an conventional therapy, so we continue to see significant opportunities and our commercial organization is working very hard to expand our leadership in this area. Moving to the right side of the slide and near and long-term growth catalyst. The U.S. approval of the subcutaneous administration for maintenance therapy in ulcerative colitis was a major milestone, making ENTYVIO the only FDA approved biologic in ulcerative colitis that offer patients a choice of two type of administration.

Subcutaneous therapies are estimated to represent approximately 35% to 40% of the total U.S. IBD market. So this is a very significant milestone that will allow us to access this new market segment. We expect ENTYVIO Pen to be available in the U.S. by the end of October, and we are fully committed to the success of its launch. The FDA is also evaluating our application for subcutaneous administration of on ENTYVIO for Crohn’s disease, a decision is expected later this fiscal year. We are pursuing new and ongoing life cycle management to enhance long-term growth on making significant investments in both ulcerative colitis and Crohn’s disease studies to support targets of disease clearance and transmural healing. And we are initiating new studies to support the scientific community to investigate the potential role of combination therapies to break the efficacy sailing with vedolizumab as a backbone.

Healthcare professionals and patients are continuing to see the benefit and value that ENTYVIO offer in IBD. And we remain confident with our peak revenue forecast at $7.5 billion to $9 billion with no change to biosimilar entry assumption timing potentially as late as 2032. On slide eight, QDENGA continues be recognized as an important development in the fight against dengue fever. We are seeing strong initial demand in private market in endemic countries as well as strong launches in travel market led by the EU. This make us optimistic considering that public vaccination program have not started yet. QDENGA has already launched in Dengue endemic countries in Indonesia, Brazil, and Thailand, and recently received approval in Colombia. We expect launch in Argentina in the third quarter of this fiscal year.

The vaccine is available in 16 European countries on travel recommendations supported series to help protect travelers to dengue endemic areas. And we are pursuing private and public partnership with government, institutional businesses, NGOs, and manufacturers to expand access. Last month, the WHO strategic advisory group of expert on immunization or SAGE, recommended its use in high dengue burden and transmission area for children aged six to 16. SAGE assess that the recommendation in this population will have the greatest public health impact as the vaccines could be administered to children prior to the time in which they are at the greatest likelihood of possible dengue related hospitalization. The evaluation was based on data from QDENGA clinical programs with more than 28,000 participants.

The recommendation is significant, because it will ultimately provide overarching guidance to countries around the world on how and when to implement vaccines into their public vaccination programs and lay the foundation for access to vaccines worldwide, particularly in developing countries. In countries where QDENGA is ultimately approved, it is now up to national authorities to consider as a size recommendation and decide how QDENGA should be used locally. Now I’d like to turn to our high level outlook for the near, medium, and long-term. Our strategy remain on track as we enter the second half of the fiscal year. Based on our current assumption for fiscal year ‘23, we expect to return to revenue profit and margin growth in the near term, driven largely by the continued expansion of our growth and launch products.

We also see significant potential in our late stage pipeline assets. We achieved significant data and regulatory milestone this year and anticipate a number of additional pipeline milestone in the second semesters. Following generic competition for VYVANSE, which is impacting revenue and profit growth in this fiscal year and also in 2024. We will have limited loss of exclusivity exposure until the launch of ENTYVIO biosimilars, which could occur as late as 2032. The momentum from our growth and launch product 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 margins 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, our strategy remain on track and we are maintaining our management guidance for the full-year. We continue to progress our pipeline and manage our own market portfolio to create long-term value for our stakeholders. While we fulfill our purpose of bringing better health for people on the brighter future for the world. I will now pass it on to Andy to talk about our pipeline progress. Thank you.

Andy Plump: Thank you very much, Christophe, and a big hello to everyone on today’s call. If you can go to the next slide, please. We’ve made solid progress advancing our pipeline this quarter as you just heard from Christophe, I’ll take this opportunity to dive a bit deeper into several of the updates that Christophe just provided. TAK-279 readout positive Phase 2b data for the treatment of psoriatic arthritis. Based on these positive data, we will advance TAK-279 to a Phase 3 development program for psoriatic arthritis in fiscal year 2024. The full results will be presented at the meeting of the American College of Rheumatology in November as a late breaker abstract. The subcutaneous administration of ENTYVIO received a significant approval in the U.S. this quarter for maintenance therapy in adults with ulcerative colitis.

This new route of administration provides an additional way for patients to benefit from ENTYVIO at home. ENTYVIO subcutaneous administration has also been filed for the treatment of adults with Crohn’s disease in the U.S. and is currently under review by the FDA with a potential approval in fiscal year 2024. In Japan, ENTYVIO subcutaneous administration is now available for both UC and Crohn’s disease following successful approvals in fiscal year 2023. As you just heard from Christophe, QDENGA received a very important recommendation from the World Health Organization’s Advisory Group endorsing public vaccination programs in countries with high dengue burden in children ages six to 16 years. We expect the WHO to update its guidelines shortly based upon these recommendations and look forward to continuing discussions with public health authorities in dengue endemic countries.

The resubmission of TAK-721 for eosinophilic esophagitis or EoE to the FDA is an essential milestone for this program, as well as for patients. I will describe the process that led to this filing later in the presentation. Momentum this quarter also came from two new additions to our pipeline. We licensed TAK-212 from AcuraStem. TAK-212 is an intrathecal antisense oligonucleotide targeting PIKFYVE for the treatment of Amyotrophic Lateral Sclerosis or ALS. We look forward to bringing this near IND ready program to the clinic in the very near future. We also licensed from immunogen Japan rights to mirvetuximab, a promising antibody drug conjugate targeting folate receptor-alpha positive ovarian cancer. In addition to these major updates, we also faced a couple of headwinds this past quarter.

As Christophe just alluded to, we announced that ALOFISEL did not meet the primary endpoint in the ADMIRE II study. The results are disappointing, particularly given the robust benefits previously demonstrated in the ADMIRE I Phase 3 study, which served as the basis for approval in Europe and Japan. We continue to believe in the benefits demonstrated by ALOFISEL and ADMIRE I, as well as in other trials such as the positive Japanese pivotal study and the INSPIRE registry, an 800 patient European real world body of evidence. In addition, last quarter, we announced that the confirmatory trial for EXKIVITY in EGF receptor exon20 insertion positive non-small cell lung cancer hit futility. We intend to initiate a global voluntary withdrawal of EXKIVITY.

If you can go to the next slide, please. Depicted here are exciting late stage programs. TAK-279, our highest priority program has posted the first in a series of Phase 3 protocols for psoriasis on clinicaltrials.gov and is on track to begin enrollment very soon. We believe that TAK-279 is a potential best-in-class oral therapy for psoriasis. As previously mentioned, based on the Phase 2b readout in psoriatic arthritis, we will move forward TAK-279 into a second pivotal Phase 3 development program early in fiscal year 2024. We’re also accelerating development of TAK-279 in Crohn’s disease, ulcerative colitis, and systemic lupus erythematosus, as well as exploring a range of other potential indications. These expansion opportunities are being developed in parallel with psoriasis and psoriatic arthritis.

A new addition to the late stage pipeline is now TAK-721, which was filed in the U.S. for EOE, and I’ll talk about that on the next slide. PAK-721 is a viscous topical steroids specifically designed to locally treat EoE. You can see on the right side of this slide, the significant responses at week 12 on both histology and symptoms, the co-primary endpoints of this pivotal trial. The clinical response in these patients started as early as week four. There’s a high unmet medical need in the U.S. for an oral treatment option that can act rapidly and locally in the esophagus. There’s only one approved agent for EoE in the U.S., a systemic biologic that showed significant benefits at 24 weeks. The strong data and remaining unmet need in the U.S. spurred significant grassroots support for TAK-721 from the GI and EoE community.

We have been collaborating with these communities to uncover additional benefits. Package with additional data analysis focused at week 12 and are cautiously optimistic for our filing of 721 for the treatment of EoE. Next slide, please. Here we show our promising mid-stage pipeline. We continue to be energized by recent developments in our orexin franchise. We believe orexin receptor 2 agonists have the potential to be the first agents to address the underlying cause of narcolepsy type 1, offering the potential for functional cures. PAK-861 is completed enrollment well ahead of schedule in two Phase 2b trials that started in January of 2023. Combined, the narcolepsy Type 1 and Type 2 Phase 2b trials have enrolled approximately 180 patients.

TAK-861 is a more potent agent that may provide efficacy at a much lower dose than previously tested oral orexin agonist. Significantly reduces the potential for adverse effects, including liver toxicity, which tends to be dose related. The external reviews conducted by the drug monitoring committee confirmed that no liver toxicity signals have been observed. We continue to see nearly all patients, who complete the trials enrolling in the long-term extension study, which can extend up to 102-weeks. We remain on track to make a final go no go decision to advance TAK-861 to Phase 3 in Type 1 narcolepsy and Type 2 narcolepsy in the first-half of calendar year 2024. We were also on track to file an IND for our next generation oral receptor 2 agonists — oral orexin receptor 2 agonists later this fiscal year.

Additional oral orexin receptor 2 agonists will allow us to expand into a range of more prevalent disorders with sleep wake cycle disruptions to fully explore the potential of these agents. Mezagitamab is our fully humanized anti CD38 monoclonal antibody that has been studied across several rare autoimmune and inflammatory diseases. Mezagitamab depletes plasma cells resulting in substantial and durable reduction of pathogenic immunoglobulins leading to potentially meaningful improvements in IgG and IgA mediated autoimmune diseases. In addition, there is a suggestion that Mezagitamab improves the rapidity of the clinical response in immune thrombocytopenic purpura or ITP by eliminating CD38 positive immune effector cells, which are directly responsible for platelet disruption.

Later this fiscal year, we are looking forward to emerging data in IgA nephropathy and ITP. If you go to the next slide, please. Here are select regulatory approvals and Phase 3 readouts for fiscal year 2023. In addition to updates described previously for subcutaneous ENTYVIO and ALOFISEL, QDENGA received approval in Columbia this quarter. This is the fifth endemic country that has approved QDENGA. With the potential approval of PAK-721 later this fiscal year, we now have an opportunity to receive three new molecular entity approvals in the U.S. in fiscal year 2023. This next quarter, we expect to hear a decision in the U.S. about fruquintinib, our selective oral VEGF inhibitor for metastatic colorectal cancer. And we also expect to hear the FDA’s response to our submission of PAK-755 and ADAMTS13 enzyme replacement therapy for the treatment of congenital thrombotic thrombocytopenic purpura or CTTP.

Approval for this rare pediatric disease would fulfill a major unmet medical need. Thank you very much, and I will now 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 first-half results. Starting with the top line, revenue was JPY2.1 trillion or $14.1 billion, delivering growth of 1.4% versus prior year at constant exchange rate or 6.4% on an actual basis, including FX upside from the depreciation of the yen. Our top line performance was driven by our growth and launch products, which represents approximately 42% of total revenue and grew 13% at constant exchange rate. Core operating Profit was JPY588.8 billion or $3.9 billion with a core operating profit margin of 28%. Reported operating profit was JPY119.2 billion, reflecting the significant impact of non-cash impairment losses and other non-core items that I’ll explain in the coming slides.

Core EPS was JPY261 and reported EPS was JPY27 also impacted by several non-core items. While many of these were headwinds to profit, we did book a positive tax gain in H1 as a result of our settlement with Irish revenue over the tax treatment of an acquisition break fee received by Shire in 2014. Moving to cash flow, we continue to see strong cash generation from the business, with operating cash flow of JPY291.3 billion or $1.9 billion for the first-half of the year. Free cash flow was minus JPY71.1 billion, reflecting over JPY250 billion of cash out for acquisitions and in licensing so far this fiscal year, including the bills for TAK-279 and fruquintinib. In Q2, we continued to make progress with debt reduction, paying down a $1 billion bond that matured in September.

And we maintain a resilient financial base with 100% of outstanding debt at fixed interest rates with a weighted average rate of approximately 2%. With regards to the outlook for full-year fiscal 2023, we have made updates to our foreign exchange rate assumptions, and our reported forecast also reflects the impact of the large non-core items we booked in the first-half that were not part of the original forecast. Importantly, we continue to track well towards our management guidance for performance at a constant exchange rate. Also, I want to emphasize that we are on track to delivering our full-year free cash flow forecast of JPY400 billion to JPY500 billion. On slide 18, let me run through the details of our first-half financial performance.

Starting with our core results on the right of the slide. You can see that revenue was JPY2.1 trillion, with growth of 6.4% or 1.4% at a constant change rate driven by our growth and launch products. Core operating profit was JPY588.8 billion, a decline of 5.8% on an actual FX basis or 9.5% at constant exchange rate. This reflects the impact of generic competition for high margin products, such as VELCADE, DEXILANT, and a AZILVA, as well as lower COVID-19 vaccine revenue. There was also a core gross margin impact from the setbacks to EXKIVITY and ALOFISEL, due to inventory write off and impairment of manufacturing facility. Meanwhile, we have continued to make the necessary investment in R&D and data and technology to secure the long term success of the business.

Core net profit and core EPS is impacted by a slight — a slightly higher core tax rate compared to last year, with core EPS for the first-half of JPY261, down 14.4% versus prior year at constant exchange rate. On the left hand side, you can see our reported results. Reported revenue is the same as core revenue. Reported operating profit was significantly impacted by some large non-core items that we booked in Q2. This included JPY115.8 billion of impairment of intangible assets, mainly related to the Phase 3 study readout of ALOFISEL and our voluntary global withdrawal of EXKIVITY. We also booked higher restructuring expenses in the prior year, and an additional legal provision resulting in total other operating expenses of JPY110.2 billion.

These are reflected in our reported operating profit result of a JPY119.2 billion a year-on-year decline of 53%. Reported net profit and reported EPS declined approximately 75%. Although we did book a JPY63.5 billion tax benefit due to the settlement of a tax dispute with Irish revenue, our year-on-year net profit comparison was substantially impacted by one-time financial income booked in the first half of last year. As highlighted on the previous slide, free cash flow reflected our cash payments for TAK-279 and fruquintinib, but there is no change to our full-year forecast of JPY400 billion to JPY500 billion. On slide 19, I would like to highlight the performance of our growth and launch products, which are the key drivers of top line growth.

These products generated 42% of total revenue in the first-half with 13% growth at constant exchange rate. Within our five key business areas, GI grew plus 3% at constant exchange rate, a slowdown versus last year impacted by generic entry of DEXILANT in the U.S. in January this year. Our largest product, ENTYVIO, continues to perform well, with growth of 6%, but remains a little behind where our expectations had been. As Christophe explained, there continues to be softness in the U.S. IBD market, and we are also being impacted by pricing headwinds in Europe. That said, we maintain the leading market share in the U.S. both in overall IBD prescriptions and in IBD bio-naïve new patient starts. And with approval last month of the subcutaneous device, and ongoing investment in both marketing and life cycle management, we remain fully confident in the continued growth outlook for the product.

In rare diseases, TAKHZYRO continues its strong momentum with growth of 13% having successfully launched in 50 countries and with sustained demand in the U.S. This has actually led us to raising our full-year forecast for TAKHZYRO. We also see continued launch successful LIVTENCITY up for83% with strong market penetration in the U.S. and rapid geographical expansion within Europe. PDT Immunology continues to deliver outstanding growth of 17%, including 19% growth of immunoglobulin and 11% growth of albumin. Both our IG and albumin products continue to see strong demand. We have continued to expand our plasma donation center network adding 10 more centers in the first-half of the year with the intent to increase by more than 20 new centers by the end of the fiscal year.

And we have seen donor compensation on a downward trend since fiscal year 2022 after significant increases during the pandemic. We now modulate compensation in a highly segmented way, while achieving the volumes to deliver on our commitments to our patients. Together with initiatives to improve efficiency across the PDT value chain, this has enabled us to improve PDT margins year-on-year for the first time since the pandemic. Next is oncology, which continues to decline as a result of VELCADE generics. However, the timing of loss of exclusivity made 2022 means that the impact should wash out in the coming quarters. Excluding VELCADE, the rest of the portfolio grew 6%, driven by products such as a ALUNBRIG, Adcetris and Iclusig. EXKIVITY remains on this page for now, with H1 revenues of JPY3.5 billion, or approximately $25 million.

We’ll revisit our growth and launch categorization at the end of the fiscal year, taking into consideration their withdrawal of EXKIVITY, as well as potential new product launches we expect in the second-half of the fiscal year. Neuroscience grew at 3% in the first-half of the year. We saw strong performance for VYVANSE in the first quarter, but as expected, we have seen several generic launch since the patent expired in August. To-date, the generic erosion curve has been generally aligned with our initial estimates. We’ll continue to monitor the erosion trend, and we’ll communicate in future quarters if anything changes our outlook. Finally, the other segment is declining in H1 mainly due to lower revenue from COVID-19 vaccines in Japan. However, this other segment now includes our dengue vaccine QDENGA.

Our newest growth in launch product, which is seeing strong initial demand in both endemic and travel markets. Over the next three slides, I’ll walk you through some waterfalls to better explain the moving pieces in our first-half performance, versus prior year. Starting with revenue on slide 20, you can see that versus prior year, our growth and launch products were the main driver of our 1.4% growth at constant exchange rate. More than offsetting the headwinds from loss of exclusivity and lower coronavirus vaccine revenue. On top of this, we had an FX tailwind due to the depreciation of the yen, taking our top line growth on an actual FX basis to 6.4%. Moving to the year-on-year core operating profit bridge on slide 21. Here you can see how loss of exclusivity and Coronavirus vaccines are having a larger impact on profit, compared to revenue, due to their higher margins impacting our product mix.

This mix was also impacted by some cost of goods expenses booked in H1 related to EXKIVITY inventory write-offs and manufacturing write-offs for ALOFISEL, both of which are treated as core expenses. 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. R&D spend in the first-half increased almost 10% on a constant exchange rate basis, but this reflects phasing as expected. And for the full-year, we anticipate a mid-single-digit increase versus prior year. We also continue to make 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’re applying strict cost discipline to reduce other OpEx versus prior year. I also want to draw your attention to FX, which is less favorable than the FX to revenue. And this is due to much of our expenses being in euros for cost of goods and in U.S. dollars for R&D and other investments. All these factors combined resulted in a first-half core operating profit decline of 9.5% on a constant exchange rate basis or 5.8% decline when factoring the FX. Next is slide 22, which explains the major items impacting our reported operating profit versus previous year. Here, you can see the sizable increase in impairment of intangible assets, which totaled JPY115.8 billion in the first-half, mainly due to the negative Phase 3 study readout of ALOFISEL and the voluntary global withdrawal of EXKIVITY.

In addition to that, we had an increase in other operating expenses. This included higher restructuring cost valid to exiting AAV gene therapy and consolidating our office footprint. It also includes an additional legal provision book this year. All these items combined led to the reported operating profit decline of 53.2%. Moving to slide 23 and our outlook for full-year fiscal 2023. Based on the first-half results, we do not see the need to make any changes for our management guidance at this stage. To-date, the generic erosion of VYVANSE and AZILVA has been in line with our original expectations, and therefore, we are keeping our management guidance unchanged. Low-single-digit percentage decline in revenue low 10 percentage decline in core operating profit and low-20s percentage decline in core EPS or on a constant exchange rate basis.

With regards to the reported and core forecast on an actual FX basis, we have updated our FX assumptions resulting in a JPY140 billion increase in our revenue forecast to JPY3.98 trillion. Reported operating profit and reported EPS forecast have been revised to incorporate the large non-core items that we booked in the first-half. On a core basis, our core operating profit forecast is unchanged at JPY1.015 trillion with very small upside from FX being offset by product mix including the cost of goods impact from EXKIVITY and ALOFISEL that I mentioned earlier. Core EPS is now projected to be JPY447, an increase from our prior forecast due to a lower assumed core tax rate. Our free cash flow forecast is unchanged at JPY400 to JPY500 billion, and we remain committed to paying an annual dividend of JPY188.

To close out the presentation on slide 24, I’d like to reemphasize that total company performance on a core basis is in line with expectations, and we are making steady progress towards our management guidance. There were some large non-core items impacting our reported operating profit in the first-half, but these do not derail our strategy. The loss of exclusivity headwinds we face in 2023 are as expected, and we have been preparing for this for many years. We have confidence in our portfolio and pipeline to deliver a return to growth in the near-term, and we will continue to allocate capital with discipline as we focus on delivering sustainable growth and competitive shareholder returns. Finally, on slide 25, I would like to highlight our upcoming IR events, including a plasma drive therapies meeting in early December.

I hope that many of you are able to participate for a deeper dive into this important business unit for Takeda. Thank you for your attention, and we can now open up for Q&A.

Operator: Now until 7:15 p.m. Japan time, we would like to entertain your question. Christophe, Costa and Andy will answer, additionally Ramona Sequeira, President of Global Portfolio Division; Julie Kim, President of U.S. Business Unit; and Furuta Milano, President of Japan Pharma Business Unit. [Operator Instructions] Thank you. First question from Citi Yamaguchi-san. Please go ahead.

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Q&A Session

Hidemaru Yamaguchi: Hi, can you hear me?

Christophe Weber: Yes, great. Thank you.

Hidemaru Yamaguchi: Thank you. So this is Yamaguchi from Citi. I’d like to have two questions. The first question is that regarding a margin for the Q2. I understand there are lots of exclusivities happening, but the currency is positive. The PDT is doing good, and — but R&D goes up, so margin of the Q3 is around 25%. So which sounds below compared to Q1. So do you think this is the lower than your expectation as far the Q3 is concerned? Why not? So that’s the fast question. My second question you mentioned about the PDT margin is getting better. First time after COVID. What do you think? What do you mean by the PDT margin? This is operating margin, talking about or Q1 or Q2 or first-half, compared to last year. Can you elaborate what is doing better on your PDT margin? Which one will be crucial vector for next fiscal year? Thank you.

Christophe Weber: Okay. Thank you, Yamaguchi-san. So a question on the margins and also on PDT margins specifically. So I’d like to ask Costa to respond to those questions.

Costa Saroukos: Right. Thank you. Yamaguchi-san, thank you for your question. You specifically ask for Q2 itself. So let me just walk you through the changes to the margin question for Q2. So Q2 core gross margin had declined for the quarter, mainly because of two reasons. One, as you highlighted already, the product mix, so we saw loss of exclusivity of high margin products, such as DEXILANT, VELCADE, AZILVA, coupled with lower COVID vaccine revenue versus last Q2 fiscal year 2022. In addition to that, we saw cost of goods impact of ALOFISEL and EXKIVITY write-offs due to the setbacks that we had. So that put pressure on our margin for quarter two, our gross profit margin. On our core operating profit margin. On top of the product mix, COVID vaccine and COGS impact, we had R&D phasing, so we had a ramp-up of R&D expenses, but this is phasing, and it’s aligned to our forecast.

And in addition to that, we did see some wind-down costs due to EXKIVITY. But nevertheless, on a year-to-date basis, we’re tracking aligned to our plan, which is 28% core operating profit. As a total full year perspective, we’re targeting JPY1,015 billion. Again, second year in a row that we exceed JPY1 trillion for Takeda on a core operating profit and year-to-date on a run rate, we’re very much on track to delivering that full-year target. So thank you very much on that question. On the PBT margin, what’s improving, it’s gross profit margin is improving, as well as core operating profit is improving. So we’re seeing the gross profit margin improving mainly because of product mix within the portfolio. But on the core operating profit margin, we’re seeing significant improvements overall, driven by a really efficient end-to-end process, whether it’s leveraging data digital technology throughout the PDT daily chain or manufacturing capacity.

So overall, we’re very pleased with the performance, not only on the top line growth for PDT, but also on its profitability. And this is something that we expect to continue for many years to come.

Hidemaru Yamaguchi: Sorry, quick – one quick update on PDT. Talk about half of Q2 or Q1?

Costa Saroukos: This is year-to-date. Yes, year-to-date, first six months.

Hidemaru Yamaguchi: Okay, thank you.

Christopher O’Reilly: [Foreign Language] [Interpreted] Next question, Muraoka-san from Morgan Stanley.

Shinichiro Muraoka: Hello. This is Muraoka from Morgan Stanley. I hope you can hear me. So recovery to growth from next fiscal year, I think this message was repeated several times today. And this year, VYVANSE was maybe a little bit too good. So for the next fiscal year, I cannot really imagine you growing the revenues in the next fiscal year. But are you confident? It looks like you’re very confident that you can go back to growth in terms of revenues. Is that the correct understanding?

Christopher O’Reilly: Okay, thank you. Answer a question about our return to growth. So I’d like to ask Christophe to answer this one.

Christophe Weber: Thank you, Muraoka-san This return to growth will happen in 2024 or 2025. That’s why we are seeing in the net ’24, ’25. We might be able to return to growth in ’24, but in any case, it will be very, very tight. It’s very clear in ’25, but in ’24, it will depend on how the ’23 happen fully with the VYVANSE especially generic erosion. So far, it’s happening as planned, but things can fluctuate quite a bit. So in the near-term, we are very clear that we will return to growth. Will it happen in ’24 or ’25, we’ll have to see. If it happens in ’24, it’s possible, but it will be very tight.

Shinichiro Muraoka: I forgot to mention my second question. Is it okay to ask it now?

Christophe Weber: Yes, of course.

Shinichiro Muraoka: Sorry. Thank you. Slide 14. So this is the pipeline and proof-of-concept readout for FY ‘24. I can see four items listed here. And in the sequence of time, which one will be without first, which is second, so on and so forth?

Christopher O’Reilly: On this slide, the 2024 readouts, any more color on the timing within FY ’24 for these four important readouts.

Andy Plump: So Chris, it’s Andy. Muraoka-san, thank you. So the first readouts that will come from these data will be in our Orexin program for TAK-861 for both Type 1 narcolepsy and Type 2 narcolepsy. And those will have final data for both studies in early 2024. We’ve actually completed enrollment of the — both of those Phase IIb studies. It’s an eight-week primary endpoint for the study with the transition to an open label extension. I’ll say that we’re already planning for Phase III at risk. We’re planning for a successful data from those studies based on everything that we know. So those would be the first that will come. We also expect to see data later this fiscal year for mezagitamab in ITP, and then early in fiscal year 2024 for IgA nephropathy. And then the remaining read outs will come later in the year.

Unidentified Company Representative: [Foreign Language] [Interpreted] Thank you. Moving on to the next question. Next is Mr. Wakao from J.P. Morgan.

Seiji Wakao: [Foreign Language] [Interpreted] I’m Wakao from JPMorgan. I have two questions about ENTYVIO. The first one, ENTYVIO next fiscal year’s forecast, with regard to this fiscal year, the revenue plan was revised downward. But looking at the situation next fiscal year, are we supposed to be more cautious? Or from next fiscal year, SC contribution will be there, and you will be on the recovery trend. Is that how we look at it? And that’s the first question. And secondly, I would like to be informed of the most recent performance of ENTYVIO. You explained a lot, but what about the competitive landscape? You didn’t mention any competitors. So there is intense competition, and they are doing marketing proactively. So is there — has there been any change in the competitive landscape?

Christopher O’Reilly: So some questions on ENTYVIO, specifically the outlook for next year, expectations for subcutaneous and then some more detail on what we’re seeing on the ground, including competition. So I’d like to ask that Christophe to a couple of comments at the beginning, and then maybe hand over to Julie to give more detail, particularly on the U.S. market.