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Edited Transcript of 4502.T earnings conference call or presentation 31-Oct-19 8:45am GMT

Q2 2020 Takeda Pharmaceutical Co Ltd Earnings Presentation

Osaka Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Takeda Pharmaceutical Co Ltd earnings conference call or presentation Thursday, October 31, 2019 at 8:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew S. Plump

Takeda Pharmaceutical Company Limited - President of Research & Development and Director

* Christophe Weber

Takeda Pharmaceutical Company Limited - President, CEO & Representative Director

* Constantine Saroukos

Takeda Pharmaceutical Company Limited - CFO & Director

* Masato Iwasaki

Takeda Pharmaceutical Company Limited - President of Japan Pharma Business Unit & Director

* Takashi Okubo

Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance

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Conference Call Participants

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* Fumiyoshi Sakai

Crédit Suisse AG, Research Division - Research Analyst

* Hidemaru Yamaguchi

Citigroup Inc, Research Division - MD and Analyst

* Kazuaki Hashiguchi

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Shinichiro Muraoka

Morgan Stanley, Research Division - Research Analyst

* Stephen Barker

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [1]

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(foreign language) Good afternoon. Thank you very much for joining us this evening. It's getting late, so I really appreciate.

Of course, this is a very exciting moment for us. This is the second quarter of the new Takeda. And so we are very delighted to share our progress with you and how we are doing to reach this aspiration of becoming this very competitive global biopharmaceutical leader, R&D-driven value based.

Today, we'll not talk too much about R&D because, as you know, we have our 2 R&D days, first in November 14 and then November 21, to really share with you our progress regarding the pipeline. So we'll talk a little bit, but I think we are really looking forward to our November session.

So how are we progressing? So I will do a short introduction, talk about our business areas on how we are -- our business is doing by area. Then Andy will talk about the R&D, but it's more an update; again, the full R&D presentation will come later in November. Costa will go through more in details on our financial results. A quick remark closing, and then we'll have a Q&A session. And hopefully, we'll have enough time to answer your question.

So in summary, first, on the integration. We are on track. It's not finished, but we are very pleased with the progress. As of today, for example, 94% of our employees have been notified. That means that we are -- we have put the organization together in the vast majority of cases.

And let me remind you that this is not -- this is an integrated -- full integration. So we are combining the 2 companies into one -- into one Takeda and we are not letting the 2 companies separate. So we are really combining the 2 companies. This is what is driving also the synergies, but this is also, I think, relatively unusual in Japan to have such intent to combine the 2 companies into one. And I think we are doing it at -- in the right way, as quickly as possible, but we are doing it well as well, and we are very pleased with the way it's progressing.

We have not seen a loss of business momentum. And that's very important. And in fact, there's 2 products, and I will go through that, are benefiting already, we can see that in the way they are growing, benefiting from the combination of the 2 companies.

You will see that we believe that we have a very strong financial performance for this first semester. And it's driven by our 14 global brands, which are growing. So it's driven also by our synergies and our good OpEx management. So this financial performance allow us to raise our full year profit and margin guidance for the year.

R&D engine is key for the long term. Again, we'll discuss that in November. We have 2 goals for this R&D Day in November. One, is to convince you and others that we have a pipeline and that we have an R&D engine. And 2, to convince you that this pipeline will allow it to grow in the future in spite of the pattern flows, in spite of the headwinds that we are facing.

So we have our portfolio, we have our 14 growing brands, but we have a pipeline. And we have a pipeline which will fuel -- allow us to grow in the midterm and the long term. That's the goal that we have during this R&D Day in November.

But let's, for now, focus more on the second quarter and the first semester. Overall, our global brands have grown by 21%. And so -- and I will go into detail on that, but it's very important that. So we are pleased with that performance. It allow us to maintain our guidance of slightly growing our revenue for the year.

We have had this NATPARA situation that we are managing. We are working closely with the FDA. It's a U.S. specific recall for NATPARA, and we can discuss further, if you wish, about the situation, but we are really, of course, managing that as well as possible. We want to make sure that the patients can manage the situation as well. So that has been our key focus.

Again, on the R&D side, besides the pipeline, we had some very important readout. I will mention a few like the orexin agonist that we published for the first time, but more closely to our global brand that head towards to the ENTYVIO versus adalimumab, which really reinforce the profile of ENTYVIO. And we are just starting to promote the result of the study. So we'll see the benefit on ENTYVIO trajectory in the coming months and years.

On the financial strength, I will highlight here our core operating profit margin for the first semester, 32.2%. We have been able to deleverage to a level of 3.9%, net debt-to-EBITDA ratio. So starting at 4.7%. We are currently at the 3.9% level. And as you know, our target is to reach 2x level in the coming years. And we are raising again our full year profit on margin guidance because we are seeing our strong results. We have good level of OpEx control and management and our revenue, in spite of NATPARA for example, our revenue profile looks strong for the coming year.

So let's now focus on the business. A quick reminder about the scale of the company in terms of revenue, you can see JPY 1.6 trillion for the semester, and this is a contribution of the different regions. This is how we are organized operationally. We are organized according to these regions. Japan, where we are the leading pharmaceutical company, represents 18% of our business. U.S. 49%. Europe and Canada, 19%. And the growth in the emerging market region, 14% of our business.

You know that. But I think it's really a key to recognize that we are a company for different scales in many ways: revenue, profit margin, a number of employees. We have the global headquarter here. We have now a major hub in Boston, that we are in the process to build them. So we are -- we have many employees transferring to Boston as we speak.

So I will do the quick focus on these 5 business areas, which represents 79% of our business. Start with GI, very strong growth, 9% during the first semester. ENTYVIO is continuing to grow to gain market share, and we have not started the promotion of the head-to-head study. Gattex is actually benefiting from the combination of the 2 companies. So we are starting -- we have seen Gattex growing faster, and we are very pleased with that. So the GI represent 21% of our total business. So this is, by far, our biggest business area.

TAKHZYRO is having a fantastic launch. Frankly, we have more than 1,700 patients now treated by TAKHZYRO. Is -- at the present time, mainly in the U.S., but we are, of course, launching in many countries across the world. So we are very, very pleased with the TAKHZYRO launch. It is, by far, the fastest to take -- ever seen for a new product in the field of hereditary angioedema.

Interestingly, the overall franchise is not growing for different reasons. But in our mind, just a matter of time before it's growing. So at the moment, what we are seeing is that we are seeing some -- the decrease of FIRAZYR because of generic sunrise because some level of cannibalization with TAKHZYRO. But it's just, in our mind, it's just a matter of time before this business area grow again. Interestingly, 1/3 of the patient treated by TAKHZYRO are new to Takeda. And so it tells you about the innovativeness of the product.

Our rare metabolic area, if you will exclude NATPARA because, of course, we are not selling anymore NATPARA. We have recalled the product. We don't expect any sales revenue from NATPARA in fiscal year '19. But the other product are performing well at a steady rate.

In the hemophilia segment, we are declining as we had in mind, as expected. I mean we know about the competitive situation and the hemophilia overall franchise represents 11% of our total revenue. We knew -- we know and that we have always factored in that we will decline in this area. No surprise. We, on the other hand, see different reaction depending on the countries. And we still believe that Factor VIII products have a role to play in the management of hemophilia, but we are seeing this decline.

On the PDT immunology, which is -- represents 13% of our total business. We are starting to see an acceleration of the growth. And this is what we had in mind because we are investing in this business. We have created this specific business unit. So we saw in the quarter 2, 8% growth. So we end up the first semester at 4% growth level. Our goal is to grow in the future at high single-digit growth and meet the market growth, if you like. We think that we have everything in our hand to achieve that in the future.

Oncology business is growing 11%, driven by NINLARO, ADCETRIS, ALUNBRIG, and we are actually expecting key readout data on -- especially NINLARO and ALUNBRIG in the coming months.

And I will finish by the neuroscience business, which represents 13% of our total business. And here, it's growing 6%. Vyvanse is also a product which is benefiting from the combination of the 2 company. And we are seeing that it's growing 5% in the first semester. Trintellix is growing 28%, supported by new indications, the 2 new indications as well as the promotional activities that we are creating.

So that's an overall revenue picture. And again, our focus is on our 14 global brands, which are growing in the first semester. They grew at a level of 21%. And I think, considering the time we are in with a level of integration, we are very pleased with this business momentum.

So I'll stop there. Andy will present now an update on the R&D. And Costa will follow with a more deep dive on the financial result in H1. Thank you very much.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [2]

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[Interpreted] Thank you very much, Mr. Weber. Now, Andy, please.

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Andrew S. Plump, Takeda Pharmaceutical Company Limited - President of Research & Development and Director [3]

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Takashi. Thank you very much, Christophe. Good afternoon, everybody.

So as Christophe mentioned, just a very brief update on R&D. We'll take a deep dive with you on November 14 and November 21, and I'll give you a bit of a preview of what we plan to discuss during that R&D Day here.

Just to update you on some of the milestones from our next wave of innovation. I'll mention that -- I'll reiterate what Christophe said. We have 8 new molecular entities that are currently in pivotal studies. And we have an aspiration that is highly credible that we'll share with you on the R&D Day to have up to 15 new molecular entity approvals over the next 5 years. 15 potential new molecular entity approvals over the next 5 years. We'll go into that with you in great detail on November 21.

Briefly updating you on events recently. We continue to be very excited about TAK-788. We did not start our Phase III frontline study as we had anticipated in the first half, but we expect our first patient to be enrolled any day now.

Our Phase II study is going incredibly well and we anticipate that this will be a pivotal study. One point that I'll highlight is that we've brought China on board as part of this study. It's one of the first global studies that from the start has included China. The incidence of EGF receptor positive lung cancer in Asia is quite high, perhaps 3x to 5x higher than what we have in the west. And we saw just incredible rapid enrollment.

We had targeted 30 patients. We've expected it to take up to a year, and we were able to enroll in 4 months. So it might tell us something about the incidence of EGF receptor exon 20 mutations in Asia.

TAK-721, it's a new addition to this slide. We presented data from our Phase III induction study, very profound results on biopsy of the esophagus. We saw almost normalization on histology.

We've decided not to file off of that induction study. We have a maintenance study ongoing that will read out at the end of this fiscal year and the hope will be to file both together.

Dengue, you'll start to see over the next month’s data from the dengue trial. We expect the publication to come out from Part 1 in the not-too-distant future in a major medical journal. And then at the end of November, we'll be presenting data from both Part 1 and Part 2, very detailed data around activity across strains in 0 negative and 0 positive individuals. That will be at the end of November at the American -- at the American Society for Topical Medicine and Hygiene.

And then 2 last comments on this slide. TAK-573, which is our first immuno-oncology therapy. It's a targeting therapy to deliver a modified form of interferon alpha to CD38 positive cells. We've been testing this in patients with highly refractory multiple myeloma. We see responses, but we don't see responses at the level that will drive a go into, as a single agent, into this population. But we've been very encouraged by the immuno-phenotyping that we've seen. We've seen very strong expression of interferon-alpha biology. And we haven't actually seen the toxicities that one would anticipate from interferon-alpha. And so we're planning now to move this into combination settings and into other tumor types.

And then lastly, on the cell therapy front. We'll deep dive into cell therapy at the R&D Day. And actually, we've achieved the objective. We don't show that here, but we've achieved the objective. We have a clinical stage cell therapy program for which we have activity and clinical data. We haven't disclosed that program yet, but we will over the next couple of weeks. And it is a program that has really the potential for profound implications for patients, including off-the-shelf allogeneic potential.

Great progress, as Christophe has gone through, on our global brands. We're really tracking on the major milestones. I won't go through this really in any detail today, but certainly can answer questions as they come up.

So on our pipeline. Our pipeline is really interesting. It's highly innovative. It's modality diverse. And it's really focusing on the strategy that we began to articulate 4 years ago, highly targeted patient populations, rare diseases and mechanisms that have highly translational rationale.

We have 8 programs in our pipeline that have breakthrough designation today. And it's very exciting. In fact, we're recruiting extensively, in particular, in the Boston area. And when I ask new scientists and new clinicians why they joined Takeda, they always firstly point to the innovative potential of our pipeline.

At R&D Day, we'll provide a slightly different visualization of the pipeline, not just by phase, but by timing of anticipated approval. And you'll see we have 2 waves, one that I described earlier, which are the next 5 years. And then, as Christophe mentioned, we believe, we have a sustainable pipeline and in a sustainable set of platforms in our research organization and through our partnerships to really sustain us for many years to come.

The brief preview on R&D Day. Of course, there will be an overview, and then we'll dive strategically into 2 areas that are relatively new for us. One will be immuno-oncology; and the second will be rare diseases. And then we'll respond to the questions that you've been asking us about really helping you understand why we're so excited about this pipeline. And we'll do a deep dive into 4 programs that have the potential to be approved over the next 5 years and a shallow dive into 6 additional programs.

The deep dive will be TAK-788, pevonedistat, the clinical stage cell therapy program that I mentioned earlier. And of course, the orexin programs that we're very excited about. And then the shallow dives will be into TAK-721, as I just mentioned. And then our 2 celiac programs, TAK-101 and Kuma, for which we've recently reported very robust clinical proof-of-concept data, and we're very excited about. And then 3 rare diseases programs that have the potential to deliver over the next 5 years: TAK-755, which is already in a pivotal study in 2 additional indications in Phase II; our anti CMV agent for a transplant marivabir or TAK-620; and then finally, TAK-607.

I'll just make one last comment, which is that we continue to advance our marketed products. We have greater than 30 programs that are in pivotal studies. We have greater than 20 submissions right now, and we have aspirations in China as an example of our growth over the next 5 years to launch 5 of these programs. That's what we've said. Our aspirations are to potentially even double that over the next 5 years in China.

So it's all very, very exciting, and we look forward to seeing you in a couple of weeks at the R&D Day. And with that said, I'll hand it over to our CFO, Costa. Thank you.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [4]

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[Interpreted] Thank you very much. Next is the CFO, Costa.

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [5]

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Good afternoon, everyone. It's a pleasure to present Takeda's first half performance. In fact, if you go and see -- the business momentum gives us a lot of confidence. We started the year off very strong.

We're raising full-year profit and margin guidance despite the negative impact from foreign exchange and the NATPARA recall.

I'll talk more about guidance later. But first, let me touch upon some key financial highlights for the first half of the year.

Firstly, I'm pleased to report that our underlying core operating profit margin was an impressive 32.2%, driven by cost synergies, OpEx discipline and improved product mix.

Our abundant cash flow, coupled with proceeds from divestitures and the sale of marketable securities, enabled us to pay down JPY 584.5 billion or approximately USD 5.5 billion. We have made excellent progress towards our deleveraging target. And at the end of September, our net-debt-to-adjusted EBITDA ratio was 3.9x, a significant reduction from 4.7x at the end of March.

We are still actively pursuing further divestitures to focus the business and also to accelerate deleveraging. This year to date, we have announced 3 divestitures, totaling USD 4 billion in upfront payments and up to $1.9 billion in milestone -- in potential milestones.

Slide 23 is a summary of the fiscal year 2019 first half financial results, where we delivered strong margins and cash flow. Revenue was JPY 1.66 trillion, up 88.5% versus the prior year, with the addition of revenue of Shire. Compared to a pro forma baseline of Takeda plus Shire, underlying revenue growth would be minus 0.2%, improving from the minus 0.8% in quarter 1. Reported operating profit was JPY 50.3 billion, down 70.7%, impacted by significant onetime and noncash cost related to purchase price accounting. However, core operating profit, which adjust for these one-time recurring -- nonrecurring costs, was JPY 541.6 billion, growing at 155.5%.

Our core operating profit margin increased by 8.6% to 32.6%. Underlying core operating profit margin, which further adjusts for foreign exchange and divestitures and forms the basis of our margin targets, was strong at 32.2%.

Reported EPS was JPY 21, also impacted by large onetime and noncash items. And core EPS was JPY 244, an increase of JPY 33 versus the prior year. Underlying core EPS, which is part of our management guidance, was JPY 249.

Finally, free cash flow for the first half was a significant JPY 676.9 billion or approximately USD 6.2 billion, with strong operating cash flow supplemented by divestiture income.

On Slide 24, let me go into more detail on year-on-year revenue performance. On the left of this slide is reported revenue, which increased by 88.5% to JPY 1.66 trillion, mainly due to the addition of Shire.

On the right is underlying pro forma growth split out into 5 key business areas, which Christophe introduced earlier. GI, oncology and neuroscience all demonstrated very strong growth versus the previous year. PDT immunology increased by 4%, with recovery in quarter 2 after being impacted by the phasing of IVIG shipments in quarter 1.

Rare disease declined by minus 11%. Rare hematology continued to decline because of competition, and HAE growth was negatively affected by stocking in the prior year as well as generic entry for FIRAZYR.

Other products continued to decline, down minus 8% versus prior year. This noncore portfolio is largely made up of older regional brands and have been the subject of some of the recently announced divestitures. In total, pro forma underlying revenue declined by minus 0.2%, with total growth of the 5 key business areas offset by the decline of other products.

Slide 25 shows the reported P&L for the first half of the fiscal year, which was significantly impacted by onetime and noncash items.

Reported gross margin declined by 8.2 percentage points, impacted by JPY 137.8 billion of noncash cost of goods expenses mainly from the unwinding of inventory step-up as part of the purchase price accounting. Amortization and impairment increased significantly due to addition of JPY 211.3 billion of amortization costs related to the Shire acquisition. In addition to the noncash purchase accounting expenses, we also booked JPY 58.8 billion of integration costs related to the Shire -- related to Shire within other operating expenses.

Consequently, our reported operating profit for the period declined minus 70.7% year-on-year to JPY 50.3 billion. Reported net profit was JPY 33.2 billion. This reflects JPY 79.4 billion of interest expenses, but it also includes a onetime noncash tax benefit of JPY 56.3 billion as a result of the recently enacted Swiss tax reform.

Slide 26 shows our core P&L for the first half of fiscal year 2019, which excludes major onetime and noncash items. We believe the core P&L provides a better understanding of the earnings capability of Takeda.

These results are largely comparable to the non-GAAP results reported by our peers. Core operating profit was JPY 541.6 billion, an increase of 155.5% versus the prior year. The core operating profit margin of 32.6% is an improvement of 8.6 percentage points versus the prior year. It demonstrates the strong earnings capability of Takeda after the Shire acquisition. This margin improvement was overwhelmingly driven by OpEx.

The OpEx margin improved by 8.5 percentage points, benefiting from the consolidation of Shire as well as synergy savings and continued OpEx discipline. Core net profit was JPY 380.4 billion, and core EPS was JPY 244.

Moving next to Slide 27, which shows the bridge from reported to core operating profit. As you can see, we had JPY 137.8 billion impact to cost of goods, mainly from the purchase price accounting impact of the unwinding of the inventory step-up, and we had JPY 273.7 billion in total of amortization and impairment costs. Just reminding you, these are noncash expenses.

Furthermore, we booked JPY 65.3 billion of Shire integrated related costs, which will enable us to realize our synergy targets. Adjusting for these and other onetime items, we get from reported operating profit of JPY 50.3 billion to core operating profit of JPY 541.6 billion.

Next, I'm pleased to report that the Shire integration remains very much on track as highlighted on Slide 28. We are progressing well towards operational steady state. With talent selection now completed for 94% of all employees, with minimal turnover in those who were nominated. We were pleased to see a very strong participation rate in our second employee survey in July with 78% of responders saying that they believe the combined company will better serve patient needs. We will continue to engage with our employees, and we are planning additional surveys in the future. On divestitures, we are continuing to pursue opportunities to divest up to USD 10 billion of noncore assets. And this is to accelerate our deleveraging and focus on our 5 key business areas.

We have already completed the sale of Xiidra and have announced the sale of TACHOSIL and a portfolio of OTC and non-core assets in EMEA. Currently, negotiations are ongoing for further potential divestments.

We are also confirming the synergy target of USD 2 billion by the end of fiscal year 2021. While we still expect to achieve approximately 70% by the end of next fiscal year, we have actually seen some acceleration of synergy capture from next year into this year as we execute against the targets in our synergy and OpEx tracking platforms.

On Slide 29, I want to highlight some specific examples of where we are delivering synergies and OpEx savings. In facilities, we have now progressed having made 85% of commercial office location decisions across 67 countries. We are also making strong progress in technology with 19 cornerstone integration, IT programs identified to support global standard processes, such as consolidating into a single ERP system and one integrated human resource platform.

I also want to highlight Takeda Business Solutions, TBS, which is a fully functioning team supporting finance and HR. And its nature state, the leverage scale and deliver cost optimal services. We are progressing to consolidate TBS from both legacies, and we are looking at expanding the overall scope areas. TBS creates value through business insights and analytics, process optimization and automation and enabling working capital improvements.

Through initiatives driven by TBS, we have been able to roll out robotics that will deliver reduction in processing time and we have also improved working capital, in particular, days of payment outstanding.

TBS will continue to play a critical role as we manage our OpEx and strive towards our target of reaching top-tier margins.

Please turn to Slide 30, where we'll discuss margins further. With our robust platform in place to track cost synergies and OpEx savings, we are confident to achieve our mid-term target of mid-30s underlying core operating profit margin. We are off to a very strong start with underlying core operating profit margin of 32.2%. This improvement was driven by gross margin due to product mix and significantly better OpEx margin through the consolidation of Shire, synergy savings and continued OpEx discipline. In the first half, we did benefit from some phasing of costs and loss of exclusivity timing. So this margin is not indicative of the full fiscal year. However, I am encouraged by the excellent start we've had and confident that in the medium term, we will realize margins that are among the top-tier in the industry.

Switching to cash flow. So Slide 31 shows the evolution of our cash balance over the first 6 months of the fiscal year. Despite 2019 being a year with sizable integration costs, our first half operating cash flow is still comfortably covered: our CapEx, the half year dividend and the interest expenses.

Importantly, on this slide, I want to highlight the debt paydown of JPY 584.5 billion in the first half of this year. As well as paying off the debt that matured in quarter 2, we also prepaid JPY 153.1 billion of higher interest USD denominated debt, which had a longer maturity. This paydown was funded by abundant cash flow, coming from operations and also from proceeds of divestitures of noncore assets, such as Xiidra and marketable securities. We do not have any further debt maturities also within this fiscal year 2019.

Takeda remains committed to our target of reaching 2x net debt to adjusted EBITDA in the medium term. And we have made great progress over the last 6 months. Slide 32 shows the net debt waterfall from March end to September as we ended the first half with net debt to adjusted EBITDA at 3.9x, a significant improvement of 0.8x since March.

I do want to mention that we have not yet paid for the cash taxes on the Xiidra divestiture, which is expected in quarter 3, and that we will also have the next half year dividend payout in December, both of which may have temporary increase in our leverage ratio. However, with continued strong operating cash flow and further proceeds to come from divestitures such as TACHOSIL and noncore assets in EMEA, yes, we feel very confident in our ability to deliver on our deleveraging commitment in the midterm.

So next to Slide 33. As a result of the strong performance of our 14 global brands, accelerated synergies and continued OpEx discipline, we are confident to upgrade our margin and profit guidance for the full year. Pro forma underlying revenue guidance remains unchanged at flat to slightly increasing as top line momentum is expected to offset the impact of NATPARA recall. Our financial assumption is that we will not book any U.S. revenue from NATPARA in the second half. We also expect continued erosion of high-margin products, ULORIC and FIRAZYR, which faced lots of exclusivity in the U.S. in July, and VELCADE is facing generic pressure in non-U. S. markets. Despite this, underlying core operating profit margin is now projected to be in the high 20s, an upgrade from mid- to high 20s driven by synergies and OpEx. Underlying core EPS guidance is also upgraded to JPY 370 to JPY 390.

In the first half, we did have some benefit from OpEx phasing, which explains why we already have a strong achievement rate towards the guidance. We do expect OpEx to increase in the second half, but that is consistent with the phasing of expenses in prior years. Therefore, the slowdown in the second half is not indicative of our profitability going forward. Finally, we also remain committed to our dividend of JPY 180 per share for the fiscal year.

Slide 34 shows a revised reported revenue and core operating profit forecast. In addition to the recall of NATPARA, the reported numbers are also impacted by a revised foreign exchange assumption considering the recent appreciation of the yen. For reported revenue, business momentum cannot fully offset the sizable foreign exchange headwind, which, coupled with NATPARA recall, means that we will revise our forecast from JPY 3.3 trillion to JPY 3.26 trillion. However, with regards to core operating profit, the FX impact is smaller due to Takeda's sizable cost base outside of Japan.

Business momentum of the 14 global brands, continued OpEx efficiencies and an acceleration of cost synergies gives us the confidence to raise our full year forecast by JPY 20 billion or 2% from JPY 910 billion to JPY 930 billion. I'd like to remind you that in the reported forecast, our assumptions for Shire purchase accounting expenses are still preliminary. In accordance with accounting practices, the purchase price accounting will be finalized in quarter 4.

Slide 35 reiterates our capital allocation priorities, which remain unchanged since the beginning of the year. Firstly, we remain committed to deleveraging rapidly towards a net debt to adjusted EBITDA ratio of 2x in 3 to 5 years from deal close. Secondly, we will continue to support our growth drivers with strategic investment in R&D and product launches. And finally, we reiterate our well-established dividend policy of JPY 180 per share annually.

Before handing it back to Christophe for closing remarks, allow me to highlight some of the important investor events we have on the horizon. On November 14, we'll be hosting an R&D Day in New York. And November 15, we'll be holding a Plasma-Derived Therapies Day at our plant in Covington, Georgia. Then on November 21, we will hold a repeat of these events in 1 day at our Tokyo office. We are very excited about the content of these events. So if you have not already received an RSVP, please reach out to our IR team to secure a place. If you're unable to make it in person, there will be a webcast available.

Thank you again, and I will hand it back to Christophe to close. Thank you.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [6]

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[Interpreted] Thank you, Costa. Christophe?

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [7]

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Thank you, Andy and Costa. And as you can see, what we are focusing at the moment is executing the integration. We are on track. We are doing it. It's a lot of work. It's very intensive, but I'm very pleased to say that this is progressing as we planned. It's not finished. There are some areas like IT system, for example, which takes much longer, but we are becoming as one Takeda, as one company very rapidly without losing business momentum. So in the very short term, it's very important, and I hope that you appreciated that during our first semester results.

I think we are very pleased with this financial performance. I think it puts us in the right position to finish the year very well and also to start next year in a very good position, and we are very pleased to be able to raise further our guidance.

At the same times, we are paying back the debt. We are reducing our deleveraging. We are deleveraging, so we are reducing our leveraging, and I think we are doing it even at a very good speed. We are at 3.9 net debt to EBITDA. But we are not compromising on the long term. We are not compromising on the long term. So we are still investing significantly in R&D. We are doing the right investment to improve the performance of plasma-derived therapy business, which will continue to grow in the future. So that's very important. We are able to do that. And it's very key. And I'm sure you will get a better sense about that when we do our R&D Day about the pipeline. But it's very important for us to be able to focus on the integration, deliver the short-term deleverage, but also build the long-term future of the company. So I hope that we have updated you about where we are. We are very excited about where we are. We think that we couldn't be in a better place. And we are also very excited to share with you our pipeline in November. Thank you very much.

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Questions and Answers

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [1]

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[Interpreted] Now this is the time for question and answers. Please come up on the stage. Well, we'd like to entertain some questions from the audience and also for the audience at the end of the telephone line as well. Now I would like to start with the people in this room. Please raise your hand when you have questions, and please make sure that you use microphone when you speak, starting with your name and affiliation. Now go ahead. Any question? The one in the front row, please.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [2]

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Yamaguchi from Citigroup. I have 3 quick questions. The first question is that you changed the guidance for full year, and it does consist of business momentum, which is kind of vague things. But can you tell me what is inside of the business momentum? It's the sales change, the top line, what kind of product did you change mainly? On the annual side, which is -- what kind of business momentum is included in here? Can you give me some kind of examples? Otherwise, I don't know what has been changing for the full year guidance. That's the first question. Can we talk about questions one on one? Or...

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [3]

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Yes, one on one.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [4]

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One on one. That's the first question.

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [5]

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I think ask your 3 questions, so we can organize ourselves. It will be better.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [6]

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The second (inaudible) PDT. You mentioned briefly that the Q2 of IgG growing around 8%, which is kind of in line with the market. But at the same time, your competitors are not really clear whether they're all talking about double-digit growth on IgG on the second quarter or the market is hinting the market is still growing. So is that referring U.S. still a little bit lack on IgG growth because of other supply and material things or sourcing issue or you're already kind of done those things, and you are catching up with the market's growth? Everybody wants to know when you are catching up, coming back on the normal operations on IgG front, especially in the U.S. That's the second questions.

The third one is that regarding R&D, you're talking about the NINLARO and ALUNBRIG, there are some events coming very soon, which is in here. So ALUNBRIG is the data will be on ASH? Or NINLARO is the data will be ASH. And also data 3 is also coming in very, very soon. So can you make sure those -- what is the real recent -- aside from R&D events, those 3 events are coming very soon with some -- a clear time line and a clear topic. If you can make a brief comment on this one.

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [7]

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Great. Thank you. So I'll take the PDT. Costa will answer the reason why we are raising the guidance. Andy will comment on the R&D. I think the PDT, what we are doing with the PDT is that we are reinvesting into this business, and we are focusing strategically on this business. That's why we created this end-to-end business unit, which allow us to really synchronize plasma collection, manufacturing, supply. We have created a dedicated R&D organization to also innovate, develop new product, improve our product. So we will catch up, no doubt about that. And we are improving. We have increased our collection center. So we are improving double digit. We are improving our collection capability in liters. Our manufacturing capacity is increasing as well because the Covington site is becoming more and more effective. So it's a matter of time before we are able to grow at a competitive level.

Our products are quite competitive. If you look at our subcu product like HYQVIA, it's very competitive. The issue we have is that we are selling everything we are producing. So it will take some time to ramp up. And it will be even a bit more time to innovate in R&D, but just a matter of time in our mind that we are growing at least at market rate.

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [8]

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So let me address your question based on the future for the following year -- for the second half of what the business momentum, how we're going to offset the foreign exchange and the NATPARA impact. So firstly, let me talk about the revenue, so the products. So the 14 global brands are growing at 21% year-to-date. So we're very encouraged with the growth of these 14 global brands, in particular, the assets such as ENTYVIO, Gattex, Vyvanse, Trintellix. And we're seeing strong growth in TAKHZYRO. And then, of course, with the ramp-up of PDT, because we have the Covington plant as well starting to ramp up production, we're going to see an upswing there.

So we're very confident with the top line potential growth. At the same time, quarter 1, we were minus 0.8% underlying growth on the revenue. Quarter 2, we're catching up. So we're minus 0.2%, and you'll start to see that continue to grow every quarter because, as you may remember, in quarter 4 last year, we harmonized the inventory. So you'll see a kickup of top line revenue growth.

From an OpEx standpoint, we're very encouraged the way we are tracking and capturing our synergies. So the execution of our synergy plans, we track them, as I mentioned many times, every month, FTEs, headcount, 10 cost packages, whether you're a business unit in the U.S., Ukraine, China, we have full visibility of the cost packages and reporting. So I think this is -- the traction there is really -- the momentum is picking up there.

And we also mentioned in my presentation that the $2 billion synergy target still stays, but we're seeing -- we're bringing forward the synergy savings. So in the past, we said 70% in the first 2 years, we think more is coming faster there. So I think that in summary is what gives us the confidence to offset the foreign exchange impact at JPY 600 million and NATPARA impact of JPY 200 million. So that's the business momentum that absorbs those headwinds.

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Andrew S. Plump, Takeda Pharmaceutical Company Limited - President of Research & Development and Director [9]

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On (inaudible) studies that you mentioned. So for ALUNBRIG, the frontline study, the second interim analysis, we've database locked. We've received the data. We're in the process of analyzing the data. We don't yet have an abstract accepted. So I can't tell you exactly when that will be presented, but we expect in H2 of '19. For the NINLARO MM4 study, which is the maintenance study in patients who are transplant ineligible, we have database lock. We haven't seen the data yet, but we expect to see those data soon. And obviously, depending on what those data look like, we'll then have a communication strategy put in place, and we expect that, that communication will occur again sometime in the second half of this year.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [10]

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[Interpreted] Thank you very much. We'll next -- please, this gentleman here on the first row.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [11]

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[Interpreted] Hashiguchi from Daiwa Securities. I have a question about 2 products to see what they are doing. One is Vyvanse, and the other one is VELCADE. About Vyvanse, in Q1, there was 2-digit growth in the sales. But in Q2, there is a small negative growth. What was the reason for this negative growth in Q2? And in your presentation, optimization of the promotion was explained. But to raise top line, that is a change in your sales structure, or in order to improve the profit and loss, you focus more on the cost control rather than top line raising. And about VELCADE, this year's guidance -- normally, it has been flat. It has been flat, but this time, there is a 2-digit or more negative figure. What is the reason for that?

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [12]

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The variation between quarter, it's -- you need to really see as well as phasing. So -- because in Q4, we adjusted inventory. That mean that -- there was a sort of rebound in Q1, and then we also had decided price increase in Q1. So it's really some phasing between quarter last year, Q1. So what is important is to look at the H1 as -- to set the trend.

Regarding VELCADE, there is a quite significant impact of generic -- of VELCADE outside of the U.S. So our revenue is -- we get some direct revenue in the U.S., but we get some royalties stream from the European sales because the product is commercialized by J&J, and it's heavily impacted by the -- outside of the U.S. market. There is also -- the market is changing as well, so -- and it's driven by the competition. And it is slightly also impacting VELCADE. And so that's important to have in mind.

We are focusing -- I mean we are focusing very much on the top line because we know that -- I mean you all know, we all know that the long-term success depend on our ability to grow our top line. And that's why we have our growth drivers, our global portfolio, our global brand, and they will fuel our growth in the midterm. And then the pipeline will allow us to offset the headwinds of exclusivity, especially Vyvanse in '23 and ENTYVIO in '25, '26. So -- and that we are very much focusing on the top line, of course. We are focusing on the top line, but by integrating the 2 company, we are leveraging as well our scale, and that allow us to gain on the margin and also managing our profit margin, which is important, too. But we don't -- we are not sacrificing anything on the top line, and let's be very clear.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [13]

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[Interpreted] Thank you. Thank you very much. Any other questions? Please. Could you show me by hand? Thank you.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [14]

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This is Sakai from Crédit Suisse. One English and one Japanese probably. English first. Costa San and [Bram San], you said -- Costa San, you said $2 billion synergy is getting closer within 2 years or getting realized sooner than you expected. But if I recall and if I recall it right, about 50% of this $2 billion synergy would come from R&D side. Does that still stand? And we're going to have R&D Day, right, in November. So you're going to be present or these new activities, cost synergies, everything from pipeline? That's my first question.

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [15]

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Okay. Tell us the second question as well and then we'll answer them.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [16]

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[Interpreted] Yes. The second question, since Mr. Iwasaki is here, I ask this question. ENTYVIO or ENTYVIO, as this is called in Japan, after the launch, there was the head-to-head comparison study done against Humira. So how is it going in the market versus Humira? And about the listing, not -- in terms of life cycle management, after the Humira patent expiration, you can use it as the defense, the varsity study, varsity study. Am I understanding it correct?

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [17]

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So maybe I'll start with the synergies. So thank you for the questions, Sakai San. Firstly, the percentage you quoted was not correct. That 50% was not for the R&D synergy. It was SG&A synergy was over 50%. The R&D synergy is more like 33%. So that's #1. And I think what we're doing, the $2 billion -- so your question was the $2 billion is coming faster than what you anticipated. We're very encouraged. It's 6 months since we consolidated. It's the 2 quarters of a combined company. And so we've done a few things that I think has helped accelerate the synergies. One, in June, we had a global partner summit, you may recall, in Boston, where we brought in 40 of our top vendors. And in 1 week, we were able to deliver USD 200 million of synergies by negotiating with these vendors. So these are -- and those savings span from different types of functions. It could be in R&D based on different types of negotiations, in SG&A, et cetera. So this is one example.

Secondly, other integrations that we're seeing -- that we're accelerating is really the IT, so the IT integration. And thirdly, something that I raised today is we're accelerating the Takeda business solutions. So we're looking at really driving SG&A, in particular, finance, HR activity and to really optimize that service. So we're consolidating. So legacy Shire had their own TBS model. Legacy Takeda had their own. Now we're consolidating. That's a consolidation of sites, location, but also we're expanding that area as well. So I look forward to continuing to share the upsides there as we progress with the implementation of that.

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Andrew S. Plump, Takeda Pharmaceutical Company Limited - President of Research & Development and Director [18]

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On -- Sakai San, on R&D Day, our intent is not to do a deep dive into the integration. The integration is going extremely well. And we've really maintained great momentum in the pipeline. We'll focus entirely on the pipeline, as I mentioned earlier, and really singling out individual programs that we'll be doing deep dives into.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [19]

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What I meant by that is when you integrate several organizations, the productivity is the one issue, I think, and Takeda productivity for us, 10, 20 years has been deteriorating, right? So is there any measurement that you took to improve, step forward? That was kind of my intent.

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Andrew S. Plump, Takeda Pharmaceutical Company Limited - President of Research & Development and Director [20]

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Okay. Understood. So our productivity has increased over the course of integration, partly a function of the number of programs and the quality of programs that we've brought in from Shire. And partly, we're at a point in our journey, into our transformation, where we're now starting to see data reading out from our program. So our confidence level in starting to map approval dates for our new programs is increasing. And I'll just restate 8 programs that are currently in pivotal studies and an additional 7 that we think will start pivotal studies in a time line that will drive towards approval in the next 5 years. We have 15 programs in our pipeline that could be potentially approved in the next 5 years. That is the measure of productivity.

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [21]

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Also, one of the criteria when we assess the Shire was the ability to integrate the R&D organization without major disruption. Why? Because of the complementarity of the therapy area, because of the complementarity of the location, for example. So there is integration. Clearly, there are some synergies but with minimum disruption on programs. Many of the team which we're driving these pipeline programs in Shire were based in Boston, and it was a plug-and-play for them to continue to drive these programs, for example. And Masato, do you want to comment on the ENTYVIO?

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Masato Iwasaki, Takeda Pharmaceutical Company Limited - President of Japan Pharma Business Unit & Director [22]

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[Interpreted] Thank you very much for the question. For us, well, information provision guideline is now being discussed. So we are very much careful about the provision of information. As for the studies done outside of Japan, yes, the doctors have access to the information about that on the professional society meetings. So the feature of this product, which is the -- it has got specific treatment, which is well established in the minds of the doctors in Japan. So with this in background, the use of biologics in Japan, well, I think there is a big room for increase in Japan as understood by the doctors. So we now have clear idea about its positioning. And therefore, we just follow what we have planned to do. That's what I say in my response to your question. There is a lot of room for further expansion.

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [23]

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First, with ENTYVIO because at the same times, we have this superiority, the result, which has never been done before. We will launch a subcutaneous formulation. And it happens that adalimumab is a subcutaneous product. So we have everything coming at the right time to be able to access to patients that we didn't have access to in the past. And so I think it will really increase the potential of the product.

I think, long term, when there will be some biosimilars, I think it could change the way payers are responding to that because when there's a product that have seen equivalent, then you can have a step where the biosimilar will be preferred before using ENTYVIO. But when you have a superiority, what do you do? Another thing that could change the way ENTYVIO is positioned compared to biosimilars, we'll see. We have 5 years to prepare that.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [24]

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[Interpreted] Thank you very much. Any other questions or comments? Yes, please.

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Stephen Barker, Jefferies LLC, Research Division - Equity Analyst [25]

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Jefferies -- it's Steve Barker from Jefferies Securities. First question is -- it's a very general one. Since closing or -- it's almost a year ago, have you found any nasty surprises or any happy surprises, things that didn't show up in due diligence that you are honestly surprised to find out about in the subsequent 9 to 10 months?

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [26]

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Yes, you get some surprise. I give you 2 situations that we have to manage. One is NATPARA. I mean that was not really our plan to do this recall. I think -- I don't know if you know the details, but this is linked to when we use a product, it's a vial with a septum that you give 14x dose. And when we were doing that, there were a risk of particles. So we need to change the septum and in order to guarantee that there is no particles. So that's why we are in dialogue with the FDA. We have recall. That was not really on our radar screen. We are managing that. Eventually, we'll reintroduce the product to the market in the U.S., but that's the situation we are managing.

Another area that we are managing is that our supply chain can be more [performant] in terms of reliability to supply, and not only in PDT but in biologicals as well. And I think that's something we'll be able to improve quite rapidly. And so we'll be able to supply the market with more reliability on PDT, we will be able to supply the market. Also, not only with more reliability, with much more volume. And so I think that's something we identify that was not totally on our radar screen, for example.

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Stephen Barker, Jefferies LLC, Research Division - Equity Analyst [27]

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Okay. The second question, second question is about R&D. So Andy, I was wondering if you could speak a little bit more about how you work with your partner companies. I understand you have relationships with 200 or something like that venture companies and other organizations. So presumably, that would be a source of new pipeline. But are there other ways that you -- other things you want to get from these relationships? And with regards to the pipeline, when do you decide to take a product and make it part of your pipeline?

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Andrew S. Plump, Takeda Pharmaceutical Company Limited - President of Research & Development and Director [28]

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Steve, I'll just make a few brief comments, and then we can talk more about it on the 14th and the 21st when we have all day. So firstly, what's been critical, I think we have a truly unique partnership model at Takeda. There's no company that partners like we do. Of course, there are elements of our model that are shared in other companies, and there are elements of models that exist at other companies that were quite -- worked quite well that we stole and brought in.

But I think what's really unique about our partner model is that we have a laboratory that is as strong as any in the industry, but it's really inverted, not just focusing internally on itself but really inverted and focusing outwardly. So of course, we do have internal projects that are fully proprietary. The orexin program, for example, is a program that's come out of our internal laboratories.

But the majority of what we do is living within this interface of our partnerships. Some of the partnerships are quite small and enabling our own internal programs. Some of the partnerships are unique partnerships that are almost fully independent and then the range of everything in between. And what's unique about our model is that we really do put the right structure in place to fit the needs of the innovation that we're going after. And we really do think about our partnerships as win-win partnerships. We go out of our way to make our partners better. And that's really important because our partners are typically smaller. And the partnership with us is -- it means success or failure for those companies.

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Stephen Barker, Jefferies LLC, Research Division - Equity Analyst [29]

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The last question is related to accounting on Page 12 of the data book. I see you've got impairment losses associated with products of JPY 17.3 billion. Is that -- I understand that in your forecast, you've got JPY 120 billion of potential impairment losses. So this is part of that?

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [30]

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Yes. So yes, so year-to-date, you're right, we have JPY 17.3 billion. The -- just to remind everyone why we had JPY 121 billion in the forecast is it's linked to IFRS accounting standards. So it's based on historical impairments as a percentage of intangibles. So the impairment in the forecast is strictly IFRS based on historical percentages. That being said, we -- there could be -- we don't envisage having impairments to that level, to be frank. But we need the whole year to go by.

And of course, the last thing to note, and we're pretty confident about it, but I just want to refresh everyone's memory that the purchase price accounting, as I mentioned, doesn't get completed until quarter 4. So there's still moving parts around intangibles, goodwill. So we close that out after the 2 audit firms, Deloitte and KPMG, finalize the audit in quarter 4. So there may be some movements. But hopefully, I answered your question, Steve, and thanks for the question.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [31]

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[Interpreted] Thank you very much. Any other question? If not -- okay, we take this question as the last question.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [32]

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Shinichiro Muraoka of Morgan Stanley. I'd like to ask about the quarterly basis SG&A cost spending, and especially in terms of the outlook towards third quarter and fourth quarter. When I -- it's core basis in your data books. The core basis, your SG&A -- page -- sorry, Page 52, the second quarter SG&A, what, around JPY 220 billion. And the past quarter -- first quarter were around JPY 230 billion as far as I remember. So JPY 230 billion to JPY 220 billion per 3 months. So toward third quarter, can we expect -- of course, there should have been some cost of phasing, but can we expect the same level in the third quarter SG&A as well? And towards first quarter, historically, your first quarter SG&A had been quite high. And can we expect the same trend as well following this good cost control in the past 6 months?

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [33]

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Thank you for your question. Firstly, let me just say we don't give guidance on a quarterly basis, okay? So let's look at it on a full year basis. So the target we have factored in is assuming the acceleration that we talked about on the synergies. So we're seeing -- that's why we're increasing the core operating profit, all right? So it's a combination of OpEx as well as synergies and the growth of the business momentum. So I think that being said, however, typically, we do see historical trends of about 10% higher in the second half in OpEx, mainly because of seasonality. And also, this year, we have identified further investments in our key business areas that haven't happened yet, and we know they're happening in the second half of the year. So in those 5 business areas, there's specific investments that we're going to accelerate in the second half of the year. So you'll see the phasing happen then.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [34]

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Could you give us the -- so how much the cost of phasing were pushed back to the second half, especially in terms of the (inaudible)?

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Constantine Saroukos, Takeda Pharmaceutical Company Limited - CFO & Director [35]

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So I'm -- we don't give guidance by line. So you should just factor in that, on average, second half is 10% more on OpEx than the first half.

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Christophe Weber, Takeda Pharmaceutical Company Limited - President, CEO & Representative Director [36]

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But it's not a pushback from H1 to H2. It's just that in term of phasing, we are incurring more expenses -- in the U.S. market, for example, our Q4 is Q1 of calendar year in the U.S. There are a lot of investment, promotional investment because start of the year, calendar year. So for our customer, it's the start of the fiscal year. But it's not -- you see there is no synchronization. We have more OpEx, R&D spend typically in Q4. So it's not a sort of -- we are not playing with phasing. It's just the occurrence of OpEx happening like that. Yes.

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Takashi Okubo, Takeda Pharmaceutical Company Limited - Global Head of IR, Global Finance [37]

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[Interpreted] Thank you very much to you all. With this, we would like to close the meeting. Please leave simultaneous interpretation, communication device in this room on the table when you leave. Thank you very much again.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]