Takeda Pharmaceutical Co Ltd

TSE:4502

Earnings Call Transcript 2021-Q2

[Operator]

Good day, everyone, and welcome to the conference call of Takeda Pharmaceutical Company Limited. [Operator Instructions]

Now we start the conference. Mr. O'Reilly, please go ahead.

[Christopher David O'Reilly, executive]

[Interpreted] Thank you very much for your participation in the conference call for the financial results of FY '20 second quarter of Takeda Pharmaceutical Company Limited. I'm Christopher O'Reilly, Global Head of Investor Relations.

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 the most recent Form 20-F and our other SEC filings. Please also refer to the important notice on Page 2 of the presentation.

Now please let me introduce today's presenters and panel. Christophe Weber, President and CEO; Costa Saroukos, Chief Financial Officer; Andrew Plump, President of R&D; Masato Iwasaki, President of the Japan Pharma business unit; and Julie Kim, President of the PDT Business unit.

First, we would like to start with a presentation by Christophe, followed by Andy and Costa. After that, we'll have a question-and-answer session.

Now we'll start the presentation. Please have the presentation materials to hand.

[Christophe Weber, executive]

Thank you very much, Chris, and hello, everyone. Thank you for taking the time to review our first semester result and outlook for the year.

I have to say, I'm missing the face-to-face interaction with all of you, and I hope we will be able to resume that sooner or later.

I'll go over on the Slide #4 to -- just to say that overall, we are managing the present. We are managing the exceptional circumstances of this year. We are managing it well. Our organization is resilient. We -- our portfolio is resilient. And so we are able to commit to our full year management guidance. We are raising our forecast, profit, EPS and free cash flow. We have strong financial position. So we are managing well the present, and I'm sure we'll come back to that.

At the same times, we don't forget the future, and the future is our pipeline, the progression of our pipeline, because that will drive our long-term revenue growth. And we have a very exciting pipeline, the Wave 1 assets -- with 12 Wave 1 assets in our pipeline. The 30 in Wave 2, we are planning to file 7 new molecular entity in the next 12 months. So we are very much focusing on that as well.

So overall, the year is progressing well. It's not without challenge, of course. Every week is a new week. You have seen, for example, how the pandemic is evolving in Europe. So we are adapting to that. We have been very agile to adapt to the situation. But so far, so good. We have been able to really maintain our operation and manage our business well.

If I go to the next slide which give a little bit more granularity about the situation, Slide #5. I'll start with the bottom to say first that the remediation of our Hikari situation is progressing well. We do intend to be inspection-ready by end of this year, which means that we believe that our remediation will have been sufficiently progressed to be inspection-ready by end of this year. We don't know if there will be an inspection because we don't know if the FDA will do inspection at that time, but we will be ready.

We have minimized the supply disruption of proline as much as possible. There is a supply disruption, but we were able to resume the manufacturing for Japan in July, for other countries in August. So we are catching up, but there is supply disruption in some region. It's not financially impactful, but our goal here is to really make sure that the patient have a solution and alternatives, and this is very much our focus.

We -- you will have seen that we have signed a partnership with Amazon Web Services and Accenture to move -- accelerate our transformation towards data and digital. We will move 80% of our application to the cloud. It will really unlock our ability to leverage data, digital, AI, and so this is a very exciting time. And we are very pleased that we were able to do this quite unique partnership because it's not -- it's really a strategic partnership and not many companies have done that. But this is, we believe, the way to go in order to accelerate our digital transformation.

You will see later in Costa's presentation that our first semester performance is good. We have a 15% revenue growth of our 15 global brand. Our overall underlying revenue growth is plus 0.5%. It's enough to maintain our management guidance of low single-digit growth because we expect an acceleration of that growth in the second semester. We are increasing our profit and cash flow forecast. Costa will explain that.

On the R&D side, we have made good progress. We have added one, we believe, very exciting compound in our pipeline TAK-999, and he will cover that. And we are progressing our cell therapy pipeline, and we have now the cell therapy manufacturing facility, which is very important for the future. So again, we are confirming our full year management guidance, and we are raising our forecast for cash flow and EPS.

I'll spend the next 2 slides to zoom on COVID, the way we are managing COVID. On -- we have been very proactive to keep our employees safe, but at the same time, maintaining our operation. And this is still what we do in many part of the world. We are working in a remote way, like these evening meetings. We have defined that our future -- in the future, in a post-COVID environment, we will work at Takeda in an hybrid way, in person, so on-site, and virtual. We believe that this is the best way forward for us for what we have to do and for probably the type of problems we have to solve. So Takeda will embrace an hybrid working model in personal and virtual. And we are now really working the detail of what it will look like because we want to be a very attractive company as well for people to join Takeda for our employees.

We have maintained our business, as I explained. At the same times, we are developing solutions, again to COVID-19. So if you go on the next slide, Slide 7, we have -- we are working on -- in 3 areas: vaccines, and we have partnered now with Novavax and Moderna, 2 promising vaccines, 2 different scientific platform, and we believe that these are promising vaccines, and we are very pleased to be a partner with these 2 companies to bring this vaccine to Japan.

We are working on the hyperimmune globulin product, and the trial now is ongoing. And hopefully, we'll get the result by end of this year. And we are developing -- this trial is happening in 16 countries, including Japan.

And we are testing existing therapies for the potential impact on COVID-19. And we are part of different R&D coalition. And we believe that these 2, FIRAZYR and TAKHZYRO, could have potential positive impact against the COVID-19. So we are testing these 2 product in clinical trials.

That's what I wanted to share with you in the introduction, and I'm now very happy to pass the floor to Andy to update us on our R&D situation. Thank you very much.

[Andrew Plump, executive]

Thank you very much, Christophe, and it's a pleasure to have a chance to update everybody on our R&D progress. For those of you who have been following us over the last 5 years, I'd like to think that we've made huge progress in our R&D transformation, and we're really stepping into that next phase, which is quite exciting with data rollouts frequently, and it's a phase where we expect to be delivering at an accelerated pace.

We have great momentum in our pipeline. We actually just filed, last week, completed the filing of our first Wave 1 program, TAK-721. And I have a chance here to spend some time walking you through some highlights on 6 of our key programs.

Before we jump into this slide, just quickly with respect to COVID effect on R&D, a few, just brief updates, research, CMC and our pipeline. For research and our CMC organizations, really minimal, if any, disruptions. We've really prioritized, for example, in CMC, drug supply and we've been quite successful in ensuring that we've maintained drug supply for all of our clinical trials.

With respect to our clinical trials, we're now pretty much back on track at a pace where we were before COVID. Three buckets of activities. The first is that trials that were completed enrollment before COVID, we don't expect to lose time. Trials that hadn't started, we expect about a 1- to 2-quarter delay in our projected time lines. And then those trials that were ongoing, it will be variable. The delays could be nothing to somewhere on the order of 1 to 2 quarters. And we're really focusing on prioritizing the most important studies in ensuring that we lose as little time as any, if at all.

So really exciting year ahead. As Christophe mentioned, we have 7 potential submissions over the next year and 5 potential submissions in this fiscal year. In addition to the submissions, as you can see in the time line, we also have critical data readouts, a pivotal data readouts for novozertinib, from Maribavir, for pevonedistat and then an inflection for our Orexin franchise. We expect to see proof-of-concept data for our oral TAK-994 Orexin 2 receptor agonist program. And then significant momentum for TAK-007, our CAR-NK or CD19 CAR-NK that I'll explain in just a second.

As you look in the lower left, it's not just our Wave 1 pipeline, but we've made progress over the past quarter with our Wave 2 pipeline. We've had 4 oncology first in humans. We've also begun the cohort expansion for our sumo inhibitor TAK-981. And then we've made some strategic decisions. As you can see on the right, we had a refocusing of our rare genetic and hematology area, really redefining those specific diseases that we want to focus in. Our focus long term will be on genetic therapies. With that said, we made the decision to suspend enrollment in 2 of our lead AAV gene therapy programs for Hem a and Hem b given where they sat relative to the competitive landscape. And we're considering what to do with these assets presently. I mean as I said, we'll have a chance to dive into several of these programs over the course of the next 10 minutes.

If we go to the next slide, please. Again, our dynamic pipeline visualization, we no longer look at our pipeline in a static way by phase, but we've taken the bold move to project, as best as we can, to our best approximation, where programs will land in terms of their filing time lines. You can see some of the movement over the past quarter in the dotted boxes here.

As Christophe mentioned, we added TAK-999 to our pipeline, and I'll have the chance to dive into that in a bit more detail. The one minor change that I'll point out is we've adjusted our approval time line for TAK-007 from FY '23 to FY '24. This program, unfortunately, did take a hit in its time lines because of the COVID pandemic. Why? Because it was moving in a single-site study at MD Anderson, and we had very aggressive enrollment targets for that study that we just weren't able to hit. So we pushed that time line back.

Actually, on the flip side, we've had quite some progress with the program. We've identified a formulation that will allow for cryopreservation. So we now have an off-the-shelf supply capability, and we expect to use that in a trial that will run at Takeda, a multisite Phase II study that we hope to submit that IND in 4Q of 2020 and initiate that study at the end of this fiscal year or early next fiscal year. So good progress there as well.

So if we go to the next slide, please. Yes. So just reminding you of what we listed as some of our major milestones for our new molecular entity pipeline for this fiscal year. And you can see by the green arrows, we've been quite successful in hitting really all of the milestones that we set out. The one milestone that we're not providing detail with this the TAK-935 proof-of-concept study in complex regional pain syndrome. We actually have completed the interim analysis and we have a decision for this program. But unfortunately, we still have patients that are enrolled, and so we're waiting to disclose those results. It's a very difficult indication that has really no existing standard of care in line with that difficulty.

So next slide, please. We've also been focused on advancing our Fortune global growth brands and our marketed portfolio. And again, we've made great progress. You can see, in particular, at the bottom of this slide, we continue to advance our China ambition with approvals. And as you know, we expect over 15 approvals in our Wave 1 time frame in China. And as we catch up in China, our intent is to, in parallel with our global submissions, to have submissions of our new molecular entity pipeline concurrently in China.

The one call out I'll make on this slide, and I wish I could be providing a slightly different update here, is the ENTYVIO subcu. We were hopeful that we would be able to resubmit in this fiscal year, and that's not going to happen. We have -- had really strong discussions with the FDA. We have a clear understanding of what our path forward looks like. We believe that we have a high probability of bringing this forward. And our expectation is that we'll submit that dossier in fiscal year '21. And at latest, we expect an approval and launch in FY '22.

So next slide, please. So let's just spend a few minutes diving into 6 of our ongoing programs and activities. And I'll start with soticlestat. So soticlestat is a molecule that inhibits an enzyme, Cholesterol 24-hydroxylase, that's present only in the brain. And for a multitude of mechanistic reasons, soticlestat reduces some of the excitatory activity in our CNS. And so we had a hypothesis that we've now tested that this medicine would be effective in patients with seizure disorders.

With our partners at Ovid, where we have a co-development relationship, we presented a couple of months ago flash results from our Phase II study in Dravet and Lennox-Gastaut Syndrome. And as you can see on the right, we were quite excited by the results of this study, and we intend to start a Phase III study in the next 6 months in both Dravet and Lennox-Gastaut. The data in Dravet were more robust than Lennox-Gastaut, but we believe for a number of reasons, including the fact that Lennox-Gastaut is just a more difficult condition to treat, that we have the high likelihood of a drug in both indications. I'll remind you these developmental seizure disorders are highly refractory, most patients on multiple different medications. So although it's an area with many existing therapies, there's still a very significant unmet medical need.

So next slide, please. As Christophe had alluded to, we're very excited to have signed a co-development partnership with Arrowhead, TAK-999. This is a GalNAc-conjugated interfering RNA that targets alpha-1 antitrypsin and will be developed for alpha-1 antitrypsin-associated liver disease. Incredibly strong strategic fit for us. We're a leading GI company. We're highly interested in moving into liver, and this will be our most advanced liver program. It's a highly validated genetic target and it's a modality that is becoming more and more established, low cost of goods. We anticipate once-a-quarter dosing. I think this is a really great way for us to step into liver disease with a program that's targeting a massive unmet medical need. It's a rare disease, but it's a more common rare disease. What the specific addressable population will look like, we'll work through as we build through the development program.

But there's a second element, which is the synergy with our plasma-derived therapy unit, where we have an alpha-1 antitrypsin fraction that we use as a replacement therapy. In fact, we have 2, GLASSIA and ARALAST. And so one can imagine very significant synergies between those programs.

On the right, you can see some data from a Phase Ib study in patients with alpha-1 antitrypsin liver disease, and the data are quite profound. We see greater than 90% target knockdown. We see not only target knockdown, but reduction of the pathogenic aggregated polymer that forms in these individuals, which is believed to be the toxic entity. And we're even seeing signals of reversal, some of the liver function abnormality. So we're really excited about this program, and we immediately put it on an accelerated track to filing.

Next slide, please. As Christophe mentioned earlier, we announced just a couple of months ago the opening of our GMP manufacturing facility for cell in Boston. This facility is in our Cambridge location, co-located with our research, translational and development group. It's a really great example of our ambition in cell to really create a nimble, co-localized scientific organization that cuts across the various disciplines, and we're quite excited about the possibility of this group. We now have 3 cell therapy programs in the clinic, all next generation and all moving more and more towards building next-generation cell therapies with a focus on allogeneic and off the shelf.

Next slide, please. Cannot stand in front of you and avoid our Orexin 2 receptor program. It's so exciting, and we have great momentum. Two updates for you. The first is that we had a chance in September at the European Sleep Research Society to present additional data on TAK-925.

It's our proof of principle molecules, an IV-only molecule, and you can see data on the right. We continue to see with multiple repeat doses of profound effects on sleep indices. You can see the maintenance of wakefulness test, again functionally curing these individuals, not presented our data from our sleep index, the Epworth Sleepiness Scale, which is the common measure that's used. We completely normalized this scale at the 44-milligram dose. And then for the first time, we get a signal around cataplexy, as you can see in the upper right, where patients that are taking the Orexin 2 receptor agonist had no cataplectic episodes in the 7-day period that they were treated. So really exciting, and we'll have data emerging from our oral program over the next several months.

Next slide, please. I won't say a lot here. Just to remind you that a very exciting program, a first-in-class and an only-in-class TAK-981 assimilation activating enzyme inhibitor that affects the immune system in multiple ways, both innate and adaptive. And we've seen quite compelling immune modulatory function, both preclinically and now clinically. We started to see in our early dose escalations responses, and we're now in the process of cohort expansion, as you can see on the right.

And then the last slide before I hand it over to Costa, I wanted to provide -- if you advance to the next slide, please. I wanted to provide a vignette that's meaningful in multiple different ways. This is TAK-755. It's our ADAMTS13 enzyme replacement program for the treatment of both congenital and immune TTP. Congenital TTP is a deficiency of this enzyme. We have an ongoing Phase III study that's just about to complete enrollment. We actually received a phone call for a compassionate use request for a baby that was born in the U.K., as you can see in the upper right. With exception for programs that are in development, do we grant compassionate use for a number of different reasons. We much prefer these patients enroll in our clinical trials. Sometimes, there's just no way to make that happen. And where there are acute, life-threatening potential, we try the best we can to meet the needs of patients.

This patient was the third baby born to a couple. The first 2 died perinatally of congenital TTP. This baby clearly had congenital TTP and was not doing well. We were able to get the baby overnight, the therapy. And you could see in the bottom right that we were able to correct the major defect that we see in these patients, and that's their platelet levels. The baby survived, left the hospital and is now 3 months old and surviving. And I tell you this story not out of human interest but because even though it's an n of 1 and it's an anecdote, it's a story that, for us, is highly suggestive of the efficacy of this enzyme replacement therapy.

So with that, Costa, I will hand it over to you.

[Costa Saroukos, executive]

Thank you, Andy, and hello, everyone. This is Costa Saroukos speaking.

Let me start with a summary of the key financial highlights on Slide 20. As Christophe emphasized earlier, Takeda's portfolio has been resilient in the first half of the year despite the challenges of COVID-19. Underlying revenue growth was 0.5%, driven by our 14 global brands growing very well at 15%. Our underlying core operating profit margin was 31.6%, benefiting from continued synergies and OpEx efficiencies. And reported operating profit was up 98%, reflecting lower acquisition-related costs. Operating cash flow grew by approximately 15% versus prior year and free cash flow was JPY 425 billion or approximately USD 4 billion.

Based on this resilient performance, we are confident to confirm our full year management guidance for fiscal year 2020. Furthermore, we are increasing our reported operating profit and reported EPS forecast and also upgrading our free cash flow outlook to reflect the positive impact of additional noncore asset sales.

Finally, in the first half of the year, we continue to make great progress towards our midterm financial commitments, including exceeding our USD 10 billion noncore asset divestiture target. We remain solidly on track to reach our targets of mid-30s margins and 2x net debt to adjusted EBITDA within fiscal years 2021 to 2023.

Slide 21 is a summary of the fiscal 2020 first half results. Reported revenue was JPY 1.59 trillion, down 4.2% versus prior year, mainly due to foreign exchange and also impacted by divestitures. Underlying revenue growth, which adjusts for the foreign exchange and divestitures, was plus 0.5%. This growth was despite loss of exclusivity headwinds from ULORIC and FIRAZYR, which went generic in July 2019, and the NATPARA recall in the U.S. in September last year. Reported operating profit was JPY 215.6 billion, a significant improvement of 98% versus prior year. This was mainly due to lower purchase accounting and integration expenses related to the Shire acquisition.

Core operating profit, which adjust for purchase accounting and nonrecurring items, was JPY 507.6 billion. This was a decline of 6.3% versus prior year due to foreign exchange and divestitures. However, if we adjust for those, our underlying core operating profit grew at 1.9%. Our H1 growth rates were impacted by the timing of certain events, such as loss of exclusivity and the NATPARA recall. And we are confident that underlying core operating profit growth will accelerate in the second half of the year, aligned to our full year guidance of high single digit. Our core and underlying core operating profit margins were both strong at almost 32%. Reported EPS was JPY 55, and core EPS was JPY 221.

Underlying core EPS growth was minus 0.4%, and we're confident that this will recover in the second half to reach our full year guidance of low-teen growth, also benefiting in the second half from the phasing of tax expenses. Finally, cash flow for the quarter was robust with operating cash flow growing at 14.9%. Free cash flow was an impressive JPY 425.5 billion or approximately USD 4 billion. However, the year-on-year growth rate is impacted by the $3.4 billion received for Xiidra in the same period last year.

Slide 22 gives more insight into the magnitude of the foreign exchange and divestitures impact on our first half revenue and core operating profit. As you can see, appreciation of the yen had a negative impact of 3.1 percentage points on revenue with divestitures impacting by 1.6 percentage points.

From Slide 23, I'll discuss the revenue drivers for the period. Our 5 key business areas continue to grow steadily at 4% on an underlying basis, representing 82% of total revenue. GI, which accounts for approximately 1/4 of revenue, is growing exceptionally well at 14%, and it's spearheaded by ENTYVIO and with solid growth of Gattex and Takecab. Rare diseases declined by 5%, impacted by the NATPARA recall in the U.S. in rare metabolic, and competition and phasing in rare hematology. However, our HAE franchise is expanding very well with growth of 24%, driven by the continued excellent performance of TAKHZYRO.

PDT Immunology grew 9% with solid growth of IG, offset by a decline in albumin due to supply timing in China. However, we expect this to recover in the second half with an outlook for double-digit growth for both IG and albumin for the full year.

Oncology was flat, with growth brands NINLARO, ALUNBRIG, ICLUSIG and ADCETRIS absorbing the declines of VELCADE and leuprorelin.

Neuroscience was also flat. In quarter 1, both VYVANSE and Trintellix were impacted by COVID-19 stay-at-home restrictions. But we were encouraged to see these both recover towards the end of quarter 2.

Finally, the all other category, the noncore products, they declined by 13% and with the decline less steep than it was in quarter 1. I'll skip over the next few slides, but please refer to them for more details on each of our key business areas.

Please turn to Slide 30. So Slide 30 shows the revenue of our main products within our key business areas. In particular, we are focused on maximizing our 14 global brands indicated here by the red globe symbol. In total, these products generated JPY 596 billion in the first half or approximately $5.6 billion with growth of 15% on an underlying basis. In particular, ENTYVIO, TAKHZYRO, Immunoglobulin and NINLARO performed very well.

Moving now to Slide 31, which shows the bridge from reported to core operating profit. You can see on the left, reported operating profit was JPY 215.6 billion. From this, we adjust out approximately JPY 255 billion of noncash items related to purchase accounting, such as unwind of inventory step-up and amortization and impairment costs. We also adjust out the JPY 39.8 billion of one-time Shire integration-related costs, which are enabling us to realize our synergy targets. Adjusting for these and other one-time or noncash items, we arrive at core operating profit for the 6 months period of JPY 507.6 billion.

Slide 32 provides an update on how we're driving cost synergies and OpEx efficiencies across the organization. We are tracking very well to meet our synergy target of $2.3 billion by the end of fiscal 2021. One element that I'd like to highlight is our digital transformation, which will enable us to drive SG&A efficiencies across multiple business units.

Firstly, we have entered into a collaboration with Accenture and AWS to move 80% of Takeda applications to the cloud. By leveraging data-driven insights, we will accelerate drug development, increase operational agility and reduce technology costs. The digital transformation is also being supported by Takeda Business Solutions as we roll out robotic process automation, allowing us to reduce employee time spent on manual tasks to focus on activities that will drive value for the company.

Please turn to Slide 33, where we'll show our underlying core operating profit margin evolution. As you can see, we continue to make great progress towards our medium-term target of top-tier margins in the mid-30s. In the first half of fiscal 2020, we achieved a margin of 31.6%, which positions us well towards a full year target of low 30s.

Switching now to cash flow on Slide 34. This shows the evolution of our cash balance over the first 6 months of the fiscal year. Operating cash flow was JPY 392 billion, up by 15% versus the prior year. Free cash flow, which also takes into consideration CapEx and income from noncore asset sales, was JPY 425.5 billion. This includes JPY 44.4 billion net cash from the acquisition and sale of marketable securities and JPY 69.9 billion from the sale of real estate. This robust free cash flow comfortably covered the half year dividend that was paid in June as well as debt repayment and interest paid. Subsequently, we ended September maintaining our strong liquidity of approximately USD 12.6 billion.

Slide 35 shows the net debt evolution over the period with an improvement of JPY 187 billion between March and September. That means we have now reduced our net debt by JPY 1 trillion or approximately USD 10 billion since the close of the Shire acquisition. Although the net debt improved between quarter 1 and quarter 2 when rounding to the nearest decimal, our leverage remains at 3.7x due to lower trailing 12-month EBITDA as a result of foreign exchange. In the second half of the fiscal year, we anticipate cash from several announced divestitures, and that will help us continue to drive towards our 2x net debt to adjusted EBITDA target in the medium term.

On Slide 36, we provide a summary of progress towards our $10 billion noncore asset divestiture target. I'm pleased to announce that in recent months, we exceeded our target with announced divestitures currently worth up to $11.3 billion. This is representing approximately 14x EV-to-EBITDA ratio. Since closing the Shire acquisition in January 2019, we have announced 10 deals and 4 have closed to date. Please note that the revenue contribution of these assets in fiscal year 2020 is forecasted at approximately $1.3 billion and that this revenue is not expected to be booked in fiscal year 2021. I also want to emphasize that we are unlocking cash from the balance sheet through the sale of real estate and marketable securities. In H1, we sold approximately $470 million of securities and about $650 million in real estate. This includes the iPark facility in Japan and the Dunboyne manufacturing plant in Ireland.

Moving now to Slide 37 and our updated forecast for full year fiscal 2020. So we expect reported revenue will continue to be impacted by the appreciation of the yen, particularly versus the U.S. dollar and Brazilian real. Mainly due to this FX headwind, we are lowering the full year reported revenue forecast by JPY 50 billion to JPY 3.2 trillion. However, despite these FX challenges, we are increasing our reported operating profit forecast for the year by JPY 39 billion or approximately 10% from JPY 395 billion to JPY 434 billion. This increase is driven by the underlying performance of the business, supplemented by gains from additional divestitures. I'd like to clarify that while we still aim to complete the sale of Takeda Consumer Healthcare Company by the end of March, we have not included the potential gain in this revised forecast. We expect to book a pretax gain of approximately JPY 140 billion when the transfer of shares is executed and completed, and we'll update this forecast when we have more certainty on the exact timing of the deal close.

Slide 38. Slide 38 shows our full year core operating profit forecast, which we have maintained at JPY 984 billion. It's important here to highlight that we expect our strong business momentum, combined with synergies and OpEx efficiencies, to absorb the additional foreign exchange and divestiture headwinds for the full fiscal year.

Turning to Slide 39 and the updated cash flow forecast. In our previous forecast, we had anticipated free cash flow for the full year to be JPY 600 billion to JPY 700 billion. However, with the incremental sale of real estate and marketable securities in the first half of the year, an additional divestment expected to close in H2, we are now confident to raise this forecast to JPY 700 billion to JPY 800 billion. This includes operating cash flow of JPY 650 billion to JPY 700 billion with integration costs of approximately JPY 90 billion included. Again, this is not including the sale of Takeda Consumer Healthcare Company, which if completed in fiscal year 2020, would result in an additional JPY 230 billion in pretax cash income.

In line with our capital allocation strategy, we'll continue to pay down scheduled debt maturities and maintain the dividend while also investing in our growth drivers, such as plasma collection centers, China launches and R&D collaboration, such as the recent deal with Arrowhead for TAK-999. We still expect to finish the year with ample liquidity of approximately USD 11 billion.

Next to Slide 40, which summarizes our revised outlook for the full fiscal year. Reported revenues reduced by JPY 50 billion, mainly due to foreign exchange, but we are raising our forecast -- full reported operating profit and reported EPS by 10% and 35%, respectively. And this is reflecting our underlying business momentum and gains on additional divestitures. Our solid progress on unlocking cash from noncore assets has also given us confidence to increase the free cash flow forecast by JPY 100 billion. The core operating profit forecast is unchanged at JPY 984 billion, and core EPS remains at JPY 420.

Finally, we are pleased to confirm the management guidance given at the beginning of the year. We expect underlying revenue growth to be low single digit, underlying core operating profit growth to be high single-digit with margin in the low 30s and underlying core EPS growth to be in the low teens. We believe this is a strong testament to the resilience of the Takeda portfolio and the focus of our employees despite the challenges we have all faced during the pandemic.

Slide 41 shows a detailed forecast for the full year. I will not spend too much time on this slide, but please refer to it later for variances between the previous and revised forecast.

Now turning to Slide 42 and a summary of Takeda's steady progress towards our financial targets. Firstly, we are pleased to confirm full year management guidance, as mentioned. We're also generating robust cash flow and are upgrading our free cash flow forecast for the year to JPY 700 billion to JPY 800 billion. We've continued to make great progress against our divestiture target and have exceeded our goal of USD 10 billion with 10 deals announced to date worth up to $11.3 billion. And finally, we continue to prioritize deleveraging with ongoing contributions from our strong operating cash flow, plus additional cash from divestitures expected in the second half, we remain confident that we will achieve our target 2x leverage within the fiscal years 2021 to 2023.

Finally, I want to leave you with a list of upcoming events on Slide 44. I'm truly excited to announce that we have an event in early December where we plan to do a deep dive into some of our Wave 1 pipeline opportunities. Then in the new year, we are planning an investor event focused on our growth and emerging market strategy. We hope that you can all join us for these calls.

Thank you for your time today, and I'll hand it back to Christophe to close. Thank you.

[Christophe Weber, executive]

Thank you, Costa.

Well, I guess you saw that in spite of the coronavirus crisis, we are executing our plan. We are delivering our commitment. Our financial position is strong and our pipeline is progressing. And we are more and more excited by our pipeline. And I'm pretty sure that more and more investors would be also invested -- excited by our pipeline. And this is why we are doing this event on December 8.

This pipeline, we disclosed it last year. The pipeline readout is coming, but it's a very new era for us at Takeda to launch 12 new products in the next 5 years. It's very exciting. And we'll be in a strong position to do that with our position in the marketplace now as a new Takeda in the U.S. market; in Japan, of course; in Europe; and in growth and emerging markets.

So I think we are a resilient organization. Our portfolio is resilient. So we are able to navigate the coronavirus crisis, but at the same times, preparing our long-term success. Thank you very much.

[Operator]

[Operator Instructions] [Interpreted] Mr. Sakai with Crédit Suisse.

[Fumiyoshi Sakai, analyst]

[Interpreted] Yes. This is Sakai with Crédit Suisse, and I'm joining from the Japanese line. I have 2 questions. I think Julie, Ms. Julie Kim is with us. So U.S. PDT, that's the first question.

I have information from your competitor. Payment to the donor is increasing, that's what they say. And the number of donors is decreasing and it's not really recovering. And including admin, in terms of long-term supply, there is a increasing concern. Especially next year and beyond, the supply may suffer. This is something that I heard from your competition. And this is the view of the analyst that's covering the CSL and [ Grifols ].

Now you are increasing the number of collection centers at Takeda. And maybe you can somehow deal with the situation, but what is the view about the situation from Takeda?

[ Deliveries and C cell ], they have almost 100% PDT business. So maybe it's a little bit different for Takeda. So that's my first question.

My second question, in ENTYVIO SC, I think that was mentioned in the presentation. And the reapplication was scheduled for September, I think. I'm talking about the submission to FDA. This is once every 8 weeks, so maybe SC doesn't matter so much. That's one way of looking at this. But Stelara and Humira, the competitions providing SC. My question relates, why was it delayed? It was never really explained before. So can you please explain the reason for the delay and impact on ENTYVIO?

[Christopher David O'Reilly, executive]

[Interpreted] Thank you for your question. I think there was a problem with the translation. Shall I do that in English?

[Christophe Weber, executive]

I think it's okay. We've got the translation, Chris.

[Costa Saroukos, executive]

Okay. Christophe, you okay? Did you get enough of his question?

[Christophe Weber, executive]

Yes, yes, yes, I think so. Thank you very much, Sakai-san. I guess Julie can answer the first question and Andy the second one.

[Julie Kim, executive]

Thank you, Christophe, and thank you, Sakai-san, for the question. In terms of PDT and what is currently happening with collections, as you've noted from the industry perspective as well as competitor perspective, the plasma collections have been impacted by the pandemic. And we have seen that the collections have declined as the shelter-in-place orders went into effect in the spring.

Through the summer, we saw a very strong recovery. We continue to see some level of recovery, but what is very difficult to predict is the coming months. If you've noticed that in Europe, in particular, the cases have increased dramatically. In the U.S., the cases have not come under control at all and continue to rise. There's a concern about what might happen with the influenza in the U.S. as well. So the coming months are very difficult to predict, and that will have an impact on the longer-term supply situation that you have managed.

So from a Takeda perspective, what I would say is that we have seen a very strong recovery in Q2 over Q1. We are carefully monitoring what is happening in the coming months. We continue to work on all the different parameters that can influence plasma collection. The fee for donors is just one aspect. As I mentioned in the last quarter's call, we have also been working on a significant number of efficiency improvements, not just in terms of the operations in the center, but also in terms of how we do our marketing. And so all of this is coming to bear on the future supply situation.

The other 2 comments that I would make is that we are also in a much better inventory position today than we were a year ago. And so it's also due to the operational efficiencies that we have put in place. And so when you look at future supply, it is a combination of plasma collections, the work-in-process inventory and finished goods inventory. So we are managing all of those aspects to do what we can to provide supply continuity for our patients.

[Andrew Plump, executive]

Thanks, Sakai-san. This is Andy. So on your question on ENTYVIO subcutaneous, there are 2 parts: the reason for the delay in the subcutaneous and then its impact on the ENTYVIO brand.

So we received differential opinions from regulatory agencies in December, following the submission of our files for ulcerative colitis and Crohn's disease for the ENTYVIO subcutaneous. As you'll remember, the subcutaneous formulation was approved in Europe and Canada. It was not in the United States. We received a complete response letter. There were a few elements to that complete response letter that we haven't gone through in detail with you. Several of them are quite straightforward that we've resolved. The one element that is taking some time to resolve is with respect to the device itself. It's -- we now have a good sense for what we need to do. It's required a very modest change to the device. And that modest change has necessitated some stability testing. We're not going to have to go out greater than a year with that stability testing. But because we have to look that stability testing play out, we're not going to be able to resubmit this fiscal year. But our expectation is that we will be able to resubmit next year, and we believe that we have a high probability of success for that program.

With respect to your question on impact, ENTYVIO is an only-in-class integrated inhibitor. We've just seen now some competitive information from the only other competitive integrated inhibitor, and it doesn't look like it's going to be a significant influence in the -- for these patients. It is, however, a very crowded marketplace with many different options available to patients. But still, IBD, both ulcerative colitis and Crohn's, continues to be a very refractory disease with most patients cycling through various different therapies. And what we've seen with ENTYVIO and what we continue to expect is very strong growth given the efficacy, the GI's activity and the overall tolerability and safety. So while the fact that we've last 1 to 2 years in subcutaneous and does have some impact, it's quite modest relative to the growth projections of ENTYVIO.

[Operator]

The next question is from Mr. Yamaguchi from Citigroup.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. Can you hear me?

[Christophe Weber, executive]

Yes, we hear you.

[Hidemaru Yamaguchi, analyst]

Good. The first question is regarding the Q2-only margin, 3 months margin. I understand when you talk about full year, when you talk about 6 months, but I want to focus on the Q2 only. If you take a look at the Q2, gross margin on the core basis is 71%, which is decline year-on-year and quarter-on-quarter. And also, SG&A sales increased quarter-on-quarter and year-on-year. Can you explain this margin in SG&A what's happening on Q2? That was the first question.

Second question is follow-up on the PDT. You talk about the collection, you talk about cost, but I want to understand, once again, sorry for the quarter-based numbers, but as far the IgG is concerned, it started very strong at Q1. It's still positive, but Q2 seems to be slowing down. Is there any kind of one-off factor in Q1 and Q2 or is there anything also have an impact on the retail side of IgG business? Can you comment on this difference in the Q1 and Q2 trend and the potential impact on the full year number on IGG only?

[Christophe Weber, executive]

Thank you, Yamaguchi-san. Costa can take the first question and Julie, the second one.

[Costa Saroukos, executive]

Thanks, Christophe. Thanks Yamaguchi-san. It's Costa here.

If you look at the quarter 2, you're right, there was a decline in the gross margin mainly because of unfavorable product mix for high-margin products such as Uloric, NATPARA and leuprorelin. We'll start to see that phase out and improve in the second half. Remember, last year, we had NATPARA U.S. sales for the first 6 months. This year, we had no NATPARA U.S. sales. So NATPARA was a high gross margin product. So we saw that having a product mix impact.

With respect to SG&A, that's just a phasing -- mainly IT-related investment that more driven by activities as we start to accelerate even further remote and virtual working. But this is -- from a full year standpoint, our SG&A, we don't expect any incremental increase versus what we've forecasted for the full year.

[Julie Kim, executive]

And hi, Yamaguchi-san. This is Julie. For your second question in regards to the immunoglobulin portfolio, I think we need to take a look back at what happened in fiscal year 2019 for context. So we had a phasing challenge between Q1 and Q2 last year in FY '19. So Q1 was artificially low, and Q2 was artificially high. So this year, it results in difficult comparison. So we had a very high Q1 this year, and our Q2 looks low. But if you look at the first half, the combination, we have 14% growth for the IG portfolio, and we are very much on track to achieve the 10% to 20% range growth in terms of our full year commitment.

[Hidemaru Yamaguchi, analyst]

So just look at the full year, it is still like between 10% and 20% of growth rate, right?

[Julie Kim, executive]

Yes, yes.

[Operator]

Next question is from Hashiguchi, Daiwa Securities.

[Kazuaki Hashiguchi, analyst]

[Interpreted] This is Hashiguchi. I'd like to ask a question, 2 questions about R&D.

One is gene therapy. There are 2 programs suspended, what are the reasons? And FDA decided relating to competitors and is it the reason that the FDA thought it's also difficult for Takeda to reach to this readout? Or the differentiation of Takeda's profile -- product profile is difficult compared to the other ones. Which is the reason? And with these suspension of the programs, what is your future outlook of gene therapy?

And the second question is Orexin oral formulation. The second TAK-861 clinical trial will begin. But the first one, 994, what is the difference between these 2? And in the future, are you going to select the better one between these two? Or you are going to selectively utilizing both of 861 and 994? These are 2 questions.

[Andrew Plump, executive]

Thank you very much, Hashiguchi-san.

On the gene therapy question, we're deeply committed to rare hematology. The 2 programs, the 2 AAV gene therapy programs for Hem a and Hem b were quite distant in a very competitive marketplace and we didn't feel that either program had significant potential for differentiation. So we suspended those programs. We're looking at potential externalization and partnership opportunities.

But we really want to focus our own internal R&D resources on first- and best-in-class. We are very committed to gene therapy. And we've been gradually building a portfolio of both AAV and nonviral, in vivo gene therapy approaches as well as ex vivo gene therapy approaches in our rare genetic and hematology group. And we'll be speaking more about that over time.

With respect to your second question for Orexin, TAK-994 is our most advanced oral molecule. It looks quite good. We started our -- we have 2 studies that are ongoing that will be both proof-of-concept studies and also dose-ranging studies that will set us up for a Phase III program with TAK-994 in type 1 narcolepsy. The ongoing Phase II program is in type 1 and type 2 narcoleptic patients. That program is going well. It was slowed down by COVID. It was set to start in March, and we took a 3- to 6-month delay in getting that program off the ground. We're now back at full speed and accelerating that program, and we're quite pleased with the progress, and we'll be speaking about that program in more detail in 4Q.

We also have a program study ongoing in healthy sleep-deprived volunteers. That study will read out more soon and will give us a really strong indication as to whether 994 is a profile that looks like what we've seen with TAK-925.

TAK-861 is our next molecule that will come into the clinic, and we have additional molecules coming beyond that. Why is that? Well, we want to make sure that we take no risk with this program. We believe that this is a transformative therapy, and we want to make sure that Takeda is the one that drives us forward. We also are learning as we go. We want to make sure that we bring forward a molecule that has the best properties. One example is exposure. How long do you want to see activity over the course of the day? And can patients tolerate exposure of a compound at night or will that be disruptive to sleep?

And then lastly, we have ambitions that go beyond type 1 narcolepsy. We've seen benefits in patients with or without Orexin. This mechanism seems to enhance this sleep-wakefulness cycle in all patients, regardless of whether they're deficient in Orexin or not. This opens up a whole series of potential indication opportunities, and we want to make sure that we have the right molecules to pursue the full range of opportunity.

[Operator]

Morgan Stanley MUFG, Mr. Muraoka.

[Shinichiro Muraoka, analyst]

[Interpreted] I'm Muraoka with Morgan Stanley.

My first question is about free cash flow. So JPY 100 billion upward revision from JPY 700 billion to JPY 800 billion. Does this mean that Takeda can now take better care of shareholder return? The share price is under JPY 3,500, dividend yield is above 5%. And now you have an opportunity or room to play with. That's my first question.

And the second question is about COVID-19 vaccine with Moderna and Novavax. How will they impact the performance of the next fiscal year? What should we expect? Especially with the Moderna vaccine, 50 million doses, I think that is for 25 million people. So revenue of maybe JPY 100 billion more if it's about JPY 5,000. And can we expect the usual margin level of about 30%, similar to your other products? What is the framework? What is the thinking? Or what is your view?

[Christophe Weber, executive]

Thank you, Muraoka-san. I take the question on the vaccines, and Costa will answer the first question on the free cash flow.

On the vaccines, it will -- of course, it will impact our revenue, but don't expect a very high margin on this product. Not -- it will not be the typical margin that we have on in-licensing a product because we are really doing that to help the government of Japan. And so it's not -- it is a business opportunity. It is also a way to partner with these vaccines companies. And sometimes partnerships start small, and they become bigger. So we'll see. But this is -- the margin will be low in both vaccines.

[Costa Saroukos, executive]

Thanks. I'll take the first question. Thank you, Muraoka-san.

With regards to your question on free cash flow and capital allocation, so firstly, let me just reinforce the fact that we're very happy with the result of our free cash flow, our operating cash flow as well. You can -- we've mentioned that the full year operating cash flow is increasing to JPY 650 billion to JPY 700 billion, and that includes integration costs of JPY 90 billion. Having said that, we're still committed to our capital allocation policy, which is really continuing to focus on paying down our debt as fast as possible to ensure that we get to 2x net debt to adjusted EBITDA within the fiscal year 2021 to 2023. That -- our commitment there is still top priority.

Secondly is to continue to invest in our growth drivers, such as the R&D in-house investments on Wave 1 and partnerships as well, Wave 1 and Wave 2, and also external partnership. An example of that being the acquisition on TAK-999, which Andy just discussed a few moments ago, and again, focusing on investing in our product launches in China. And then to maintain the well-established dividend policy of JPY 180.

Having said that, of course, we continue to monitor the share price, and we'll continue to view that as the future quarters come about. But right now, we're sticking to our current capital allocation policy. Thank you.

[Operator]

Mr. Ueda from Goldman Sachs.

[Akinori Ueda, analyst]

[Interpreted] Ueda from Goldman Sachs Securities. I have 2 questions.

The first question, as you explained about the capital allocation policy, for OTC in Japan has been completed, and of course, a large-sized asset divestiture is now unwinding. So EBITDA against the net deficit, how would you be able to lead on the capital allocation policy going forward? Of course, how about a share buyback? Is that something that you're going to be more actively purchasing or are you going to come up with some other initiatives?

And the second question, Arrowhead, ARO-AAT. So this is second partnership of this kind, I believe. When it comes to platform technology, which is -- it is not, are you going to continue with partnership with a product basis? Is that something that you're going to pursue as a policy? And GalNAc, this is like a drug delivery system to the liver, and I believe that other companies are leading this area. So what do you see strength that Arrowhead is showing in this area when it comes to antitrypsin?

[Christophe Weber, executive]

Thank you, Ueda-san. We get Costa for the first question on capital allocation, and Andy on -- for the second one.

[Costa Saroukos, executive]

Yes. Thank you, Ueda-san. Just reinforcing my comment that I answered in the previous question. But first, I do want to highlight that the share buyback is a topic we discuss regularly in the leadership team and the Board. So we continue to monitor the share price and our capital allocation policy. But at this stage, we are still committed to the 3 criteria that I highlighted before. Firstly, deleveraging rapidly, getting down to 2x within the fiscal year 2021, 2022, investing in growth drivers in both R&D partnerships and in-house and also the shareholder return on the -- maintaining the well-established dividend policy of JPY 180. But just reinforcing that the topic does get discussed regularly, and we'll continue to monitor our share price accordingly. Thank you.

[Andrew Plump, executive]

And Ueda-san, on your Arrowhead question.

Firstly, yes, partnership is a core element of our strategy. We have a very strong internal laboratory. We innovate from within, and we also innovate through partnerships, and we will continue to do that. The Orexin program is an example of a Takeda innovation from in-house, fully owned. The Arrowhead is -- the partnership is on the other end of the spectrum where we work very closely and bring complementary expertise and skill sets to the table to create synergies.

And with respect to your question on differentiation, the GalNAc inhibitory RNA platform is becoming a more and more established and scalable platform. There isn't necessarily a technology differentiation. I think this is something that many different groups now can do.

The piece that's unique for Arrowhead is they're years ahead of competition. The molecule is an outstanding molecule on the profile, both in terms of efficacy and safety. It looks like it's not just first-in-class but also best-in-class.

[Christopher David O'Reilly, executive]

[Interpreted] Thank you. Now the time of closure has come. So we would like to close this question-and-answer session. Thank you very much for joining in this earnings announcement conference call.

[Operator]

Thank you for your taking time. And that concludes today's conference call. You may now disconnect your lines.

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