20FR12B/A 1 d608344d20fr12ba.htm 20FR12B/A NO.1 20FR12B/A No.1
Table of Contents

As filed with the Securities and Exchange Commission on December 17, 2018

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F/A

AMENDMENT NO. 1

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                     

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number:

 

 

Takeda Yakuhin Kogyo Kabushiki Kaisha

(Exact name of registrant as specified in its charter)

 

 

Takeda Pharmaceutical Company Limited

(Translation of registrant’s name into English)

 

 

 

Japan  

1-1, Nihonbashi-Honcho 2-Chome

Chuo-ku, Tokyo 103-8668, Japan

(Jurisdiction of incorporation or organization)   (Address of principal executive offices)

Costa Saroukos

1-1, Nihonbashi-Honcho 2-Chome

Chuo-ku, Tokyo 103-8668, Japan

Tel: +81 3 3278-2306

Fax: +81 3 3278-2268

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Copies to:

Keiji Hatano, Esq.,

Sullivan & Cromwell LLP,

Otemachi First Square, 5-1, Otemachi 1-Chome,

Chiyoda-ku, Tokyo 100-0004, Japan

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

American Depositary Shares Representing Common Stock
Common Stock, no par value*
  New York Stock Exchange

 

*

Listed not for trading, but only in connection with the registration of the American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

N.A.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes     ☒  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☐  No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐     No  ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

                             Accelerated filer

 

 

                         Non-accelerated filer

 

 

                                 Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

   International Financial Reporting Standards as issued
by the International Accounting Standards Board  ☒
   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐ Item 17    ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☐  No

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item 1. Identity of Directors, Senior Management and Advisers

     2  

Item 2. Offer Statistics and Expected Timetable

     3  

Item 3. Key Information

     3  

Item 4. Information on the Company

     27  

Item 4A. Unresolved Staff Comments

     69  

Item 5. Operating and Financial Review and Prospects

     70  

Item 6. Directors, Senior Management and Employees

     139  

Item 7. Major Shareholders and Related Party Transactions

     154  

Item 8. Financial Information

     155  

Item 9. The Offer and Listing

     158  

Item 10. Additional Information

     159  

Item 11. Quantitative and Qualitative Disclosures about Market Risk

     179  

Item 12. Description of Securities Other Than Equity Securities

     179  

Item 13. Defaults, Dividend Arrearages and Delinquencies.

     187  

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.

     187  

Item 15. Controls and Procedures.

     187  

Item 16A. Audit Committee Financial Expert.

     187  

Item 16B. Code of Ethics.

     187  

Item 16C. Principal Accountant Fees and Services.

     187  

Item 16D. Exemptions from the Listing Standards for Audit Committees.

     187  

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

     187  

Item 16F. Change in Registrant’s Certifying Accountant.

     187  

Item 16G. Corporate Governance.

     188  

Item 16H. Mine Safety Disclosure

     188  

Item 17. Financial Statements

     188  

Item 18. Financial Statements

     188  

Item 19. Exhibits

     188  

 

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As used in this registration statement, references to the “Company,” “Takeda,” “we,” “us” and “our” are to Takeda Pharmaceutical Company Limited and, except as the context otherwise requires, its consolidated subsidiaries. References to “Shire” are to Shire plc and, except as the context otherwise requires, its consolidated subsidiaries.

On May 8, 2018, we announced our offer to acquire all of the issued and to-be-issued share capital of Shire (the “Shire Acquisition”). See “Item 4. Information on the Company—A. History and Development of the Company—Shire Acquisition.” We and Shire operate as independent companies and will continue to do so until after the closing of the Shire Acquisition. For information on the business of Shire, see “Item 4. Information on the Company—Appendix: Business of Shire.” For information on the operating results and financial condition of Shire, see “Item 5. Operating Review and Financial Review and Prospects—Appendix: Operating and Financial Review and Prospects of Shire.” To the extent referring to periods following the completion of the Shire Acquisition, references in this registration statement to “Takeda,” “we,” “us” and “our” and to the “combined company” are to Takeda following its acquisition of Shire.

In this registration statement, we present our audited consolidated financial statements as of March 31, 2017 and 2018 and for the fiscal years ended March 31, 2016, 2017 and 2018. Pursuant to Article 3-05 of Regulation S-X, we separately present the audited consolidated financial statements of Shire as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017. Pursuant to Article 11 of Regulation S-X, we also present an unaudited pro forma condensed combined balance sheet and statement of income as of and for the fiscal year ended March 31, 2018. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The term IFRS also includes International Accounting Standards (“IAS”) and the related interpretations of the committees (Standard Interpretations Committee and International Financial Reporting Interpretations Committee). The consolidated financial statements of Shire are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Therefore, our results of operations are not directly comparable with those of Shire.

On November 8, 2018, we published our unaudited interim condensed consolidated financial statements as of September 30, 2018 and for the six months ended September 30, 2017 and 2018, which were prepared in accordance with IAS 34 and the Financial Instruments Exchange Act of Japan. An English translation of such unaudited interim condensed consolidated financial statements is included as an exhibit to this registration statement.

As used in this registration statement, “yen” or “¥” means the lawful currency of Japan, “U.S. dollar” or “$” means the lawful currency of the United States of America (“U.S.”), “pound sterling” or “£” means the lawful currency of the United Kingdom and “euro,” “€,” or “EUR” means the lawful currency of the member states of the European Monetary Union.

As used in this registration statement, “ADS” means an American Depositary Share, representing 0.5 shares of the Company’s common stock, and “ADR” means an American Depositary Receipt evidencing one or more ADSs. See “Item 12. Description of Securities Other Than Equity Securities—D. American Depositary Shares.”

As used in this registration statement, except as the context otherwise requires, the “Companies Act” means the Companies Act of Japan.

In this registration statement, we present “EBITDA” and “Adjusted EBITDA,” which are not measures presented in accordance with IFRS. For more information, see “Item 5. Operating and Financial Review and Prospects—Results of Operations—Certain Non-IFRS Performance Measures.”

 

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Amounts shown in this registration statement have been rounded to the nearest indicated digit unless otherwise specified. In tables and graphs with rounded figures, sums may not add up due to rounding.

Special Note Regarding Forward-Looking Statements

This registration statement contains forward-looking statements. These statements appear in a number of places in this registration statement and include statements regarding the intent, belief, or current and future expectations of our management with respect to our business, financial condition and results of operations. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “intend,” “project,” “plan,” “aim,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or the negative of these terms or other similar terminology. These statements are not guarantees of future performance and are subject to various risks and uncertainties. Actual results, performance or achievements, or those of our industry, may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, these forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown risks and uncertainties. These forward-looking statements involve statements regarding:

 

   

the Shire Acquisition, our ability to complete it or our ability to achieve its expected benefits;

 

   

our goals and strategies;

 

   

our ability to develop and bring to market new products;

 

   

expected changes in our revenue, costs, expenditures, operating income or other components of our results;

 

   

expected changes in the pharmaceutical industry or in government policies and regulations relating to it;

 

   

developments regarding or the outcome of any litigation or other legal, administrative, regulatory or governmental proceedings;

 

   

information regarding competition within our industry; or

 

   

the effect of economic, political, legislative or other developments on our business or results of operations.

Forward-looking statements regarding operating income and operating results are particularly subject to a variety of assumptions, some or all of which may not be realized. Accordingly, the forward-looking statements included in this registration statement should not be interpreted as predictions or representations of future events or circumstances.

Potential risks and uncertainties include those identified and discussed in “Item 3. Key Information—D. Risk Factors,” “Item 5. Operating and Financial Review and Prospects,” “Item 4. Information on the Company” and elsewhere in this registration statement. Given these risks and uncertainties, undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this registration statement. Except as required by law, we disclaim any obligation to update or review any forward-looking statements contained in this registration statement, whether as a result of new information, future events or otherwise.

Item 1. Identity of Directors, Senior Management and Advisers

 

  A.

Directors and senior management.

Information about Takeda’s directors and executive officers as of the date of this registration statement is provided in Item 6. A of this registration statement. Their business address is: 1-1 Nihonbashi-honcho 2-Chome, Chuo-ku, Tokyo, 103-8668, Japan.

 

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  B.

Advisers.

Not applicable.

 

  C.

Auditors.

For the three years ended March 31, 2018, KPMG AZSA LLC, an independent registered public accounting firm, has acted as our auditor. The address of KPMG AZSA LLC is Otemachi Financial City South Tower, 9-7 Otemachi 1-Chome, Chiyoda-ku, Tokyo, 100-8172, Japan. KPMG AZSA LLC is a member of the Japanese Institute of Certified Public Accountants.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

  A.

Selected Financial Data

The following table presents selected financial information as of and for the years ended March 31, 2014, 2015, 2016, 2017 and 2018, which is derived from our consolidated financial statements. These financial statements are prepared in accordance with IFRS.

The selected consolidated financial information set forth below should be read in conjunction with Item 5. “Operating and Financial Review and Prospects” in this registration statement and our consolidated financial statements and notes thereto included in this registration statement.

 

     As of and for the fiscal year ended March 31,  
     2014      2015     2016     2017     2018  
     (billions of yen and thousands of shares, except
for per share data)
 

Selected Statements of Operations Data:

           

Revenue

   ¥ 1,691.7      ¥ 1,777.8     ¥ 1,807.4     ¥ 1,732.1     ¥ 1,770.5  

Operating profit (loss)

     139.3        (129.3     130.8       155.9       241.8  

Share of profit (loss) of investments accounted for using the equity method

     1.0        1.3       (0.0     (1.5     (32.2

Profit (loss) before tax

     158.9        (145.4     120.5       143.3       217.2  

Net profit (loss) for the year

     109.6        (143.0     83.5       115.5       186.7  

Net profit (loss) attributable to owners of the Company

     106.7        (145.8     80.2       114.9       186.9  

Per share amounts

           

Basic earnings (losses)

   ¥ 135.10      ¥ (185.37   ¥ 102.26     ¥ 147.15     ¥ 239.35  

Diluted earnings (losses)

     134.95        (185.37     101.71       146.26       237.56  

Cash dividends

     180.00        180.00       180.00       180.00       180.00  

Cash dividends in U.S. dollars(1)

   $ 1.75      $ 1.50     $ 1.60     $ 1.62     $ 1.69  

Selected Statements of Financial Position Data:

           

Total assets

   ¥ 4,569.1      ¥ 4,296.2     ¥ 3,824.1     ¥ 4,346.8     ¥ 4,106.5  

Total equity

     2,540.6        2,206.2       2,011.2       1,949.0       2,017.4  

Share capital

     63.6        64.0       64.8       65.2       77.9  

Other Data:

           

Number of shares outstanding at end of period

     789,681        789,924       790,284       790,521       794,688  

 

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Note:

(1)

Calculated using the Japanese yen—U.S. dollar exchange rate as of March 31 of each year, based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.

 

  B.

Capitalization and Indebtedness.

The following table shows our capitalization and indebtedness as of March 31, 2018.

The following capitalization table should be read in conjunction with Item 5 of this registration statement and our audited consolidated financial statements included in this registration statement.

 

     As of March 31,
2018
 
     (billions of yen)  

Debt:

  

Bonds

   ¥ 172.9  

Loans

     812.8  
  

 

 

 

Total debt

   ¥ 985.7  

Equity:

  

Share capital

   ¥ 77.9  
  

 

 

 

Authorized—3,500,000,000 shares

  

Issued—794,688,295 shares

  

Share premium

     90.7  

Treasury shares

     (74.4

Retained earnings

     1,557.3  

Other components of equity

     350.6  

Other comprehensive income related to assets held for sale

     (4.8
  

 

 

 

Equity attributable to owners of the Company

     1,997.4  

Non-controlling interests

     20.0  

Total equity

   ¥ 2,017.4  
  

 

 

 

Total capitalization and indebtedness

   ¥ 3,003.1  
  

 

 

 

 

  C.

Reasons for the Offer and Use of Proceeds.

Not applicable.

 

  D.

Risk Factors.

Any investment in our ADSs involves risk. Prospective investors should carefully consider, in light of their own financial circumstances and investment objectives, the following risks before making an investment decision with respect to our ADSs. If any of the following risks actually occurs, it could have a material adverse effect on our business, financial condition, results of operations and future prospects, and the market value of our ADSs may be adversely affected.

The risks discussed below are those that we believe are material, but these risks and uncertainties may not be the only risks that we face. Additional risks that are not known to us at this time, or that are currently believed to be not material, could also have a material adverse effect on our business, financial condition, results of operations, future prospects and the value of our ADSs.

 

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Risks Relating to the Shire Acquisition

 

The Shire Acquisition will be effected pursuant to a Scheme of Arrangement (the “Scheme”) under Article 125 of the Jersey Companies Law. As of the date of this registration statement, substantially all of the conditions to the completion of the Shire Acquisition have been fulfilled, including the respective relevant approvals of our and Shire’s shareholders at our respective shareholders’ meetings on December 5, 2018, and the receipt of relevant antitrust clearances. Pending the sanction of the Royal Court of Jersey, and conditional upon our submission of an application for listing of the new shares of our common stock to be issued as consideration for the Shire Acquisition by no later than three weeks before the effective date of the Scheme to the Tokyo Stock Exchange and other local Japanese stock exchanges, with no objection having been received, and the approval by the New York Stock Exchange (the “NYSE”) of our ADRs for listing, subject to official notice of issuance, we intend that completion of the Shire Acquisition will take place on or around January 8, 2019. For more information on the Shire Acquisition, see “Item 4. Information on the Company—A. History and Development of the Company—Shire Acquisition.” The Shire Acquisition and its pending completion subject us to the following risks.

The consideration payable by us for the Shire Acquisition is not subject to adjustment due to changes in the relative prices of our and Shire’s common shares.

Under the terms of the Shire Acquisition, each Shire shareholder is entitled to receive $30.33 in cash and either 0.839 New Takeda shares or 1.678 Takeda ADSs for each share of Shire. The amount of consideration to which each Shire shareholder is entitled is not subject to adjustment based on fluctuations in the market price for our common stock relative to the market price for Shire’s ordinary shares. If the price of the shares of our common stock increases relative to Shire’s, the aggregate value of the consideration payable by us may be more than expected. The amount of consideration to be paid by us is also not subject to adjustments for fluctuations in foreign exchange rates.

We will be required to commit substantial time and resources to successfully complete the Shire Acquisition.

The process of and preparations for the closing of the Shire Acquisition will require a significant commitment of time and resources, including the involvement of senior members of our management team and key employees from across our corporate structure and various business units worldwide and the retainer of a number of financial, accounting, legal and other advisors. We have incurred and expect to continue to incur substantial transaction costs, such as fees paid to legal, financial, accounting and other advisors and other fees paid in connection with the acquisition, in the current fiscal year and in future fiscal years. In the six months ended September 30, 2018, we recorded ¥7.9 billion of acquisition-related costs, such as advisory fees, as a component of selling, general and administrative expenses, ¥3.2 billion of restructuring expense in other expenses and ¥8.8 billion of finance expense relating to the arrangement of commitments to finance the Shire Acquisition, and we expect to incur further costs in future periods. We expect that the costs related to the Shire Acquisition to be incurred in the fiscal year ending March 31, 2019 will be between ¥40.0 billion and ¥60.0 billion. This estimate does not include integration costs, interest on indebtedness and other financial expenses, as the amount of those expenses is dependent on the timing of the completion of the Shire Acquisition. The preparations required to achieve the closing may divert management’s attention from other strategic opportunities and from the day-to-day operation of our business.

We may fail to realize the anticipated benefits of the Shire Acquisition.

The ultimate success of the Shire Acquisition depends on our ability to realize the anticipated growth opportunities and synergies leading to cost savings we expect from combining the businesses. Even following the completion of the Shire Acquisition, it will be necessary for us to continue to devote significant time and resources to the reorganization of our personnel structure, enhancement of cost-efficiency and the strengthening of management and operational functions in order to realize the anticipated synergies from the integration of

 

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Takeda’s and Shire’s businesses. We expect to incur non-recurring cash costs totaling approximately $2.4 billion in connection with the integration of Shire in the first three fiscal years following the completion of the Shire Acquisition. The expected synergies and the projected cash costs necessary to achieve them may be affected by changes in the overall economic, political and regulatory environment, including applicable tax regimes and fluctuations in foreign exchange rates, and the realization of the other risks relating to our business described herein. Furthermore, the integration process may divert management’s attention from other strategic opportunities and the day-to-day operation of our business. If we are not able to successfully manage the integration process and create a unified business culture, the anticipated benefits of the acquisition and subsequent integration may not be realized fully or at all or may take longer or prove more costly to realize than expected.

We may face significant challenges in integrating the organizations, business cultures, procedures and operations of Takeda and Shire, including:

 

   

integrating personnel, operations and systems, such as research and development, manufacturing, distribution, marketing and promotional activities and information technology systems, while maintaining focus on selling and promoting existing and newly acquired or produced products;

 

   

inability to realize expected benefits from newly acquired or produced products, including pipeline products under development;

 

   

coordinating and integrating geographically dispersed organizations;

 

   

changes or conflicts in the standards, controls, procedures and accounting and other policies, as well as business cultures and compensation structures;

 

   

the need to manage, train and integrate Shire’s personnel, who may have limited experience with the respective companies’ business lines and products, and to retain existing employees, particularly high-skilled or other key employees and senior members of the management team;

 

   

maintaining and growing Shire’s customer base;

 

   

incremental tax exposure based on the differences in our corporate structure and Shire’s;

 

   

maintaining business relationships with suppliers, third-party alliance partners and other key counterparties; and

 

   

inefficiencies associated with the integration and management of the operations of the two companies.

Furthermore, in connection with the Shire Acquisition, we expect to record significant amounts of goodwill and intangible assets. If we are unable to achieve the anticipated benefits of this acquisition, we could be required to recognize significant impairment losses related to such goodwill and intangible assets, potentially up to their full value. Additionally, because we intend to issue a significant number of additional shares of our common stock as part of the consideration for the Shire Acquisition, a failure to achieve the anticipated benefits of the Shire Acquisition could negatively affect our earnings per share.

We have substantial debt, and expect to incur significant additional debt in connection with the Shire Acquisition, which may limit our ability to execute our business strategy, refinance existing debt or incur new debt, and if we are unable to meet our goals for deleveraging after the Shire Acquisition, we could be at a greater risk of a downgrade of our credit ratings.

Our consolidated bonds and loans were ¥985.7 billion as of March 31, 2018. In connection with the Shire Acquisition, on May 8, 2018, we entered into a dollar-denominated 364-Day Bridge Credit Agreement (the “Bridge Credit Agreement”), with aggregate commitments of $30.85 billion, to finance a portion of the funds required for the Shire Acquisition. Subsequently, on June 8, 2018, we entered into a Term Loan Credit

 

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Agreement (the “Term Loan Credit Agreement”) with an aggregate commitment of $7.5 billion, and reduced commitments under the Bridge Credit Agreement by the same amount. On October 26, 2018, we entered into a Senior Short Term Loan Facility Agreement (the “SSTL”), with aggregate commitments of ¥500.0 billion, and reduced the commitments under the Bridge Credit Agreement by $4.5 billion. On November 21, 2018, we issued a total aggregate principal amount of €7.5 billion of senior notes, followed by an aggregate principal amount of $5.5 billion of senior notes on November 26, 2018 (the offering of the euro-denominated notes and the dollar-denominated notes together, the “2018 Notes”). We subsequently reduced the commitments under the Bridge Credit Agreement in reference to the net aggregate principal amount of the 2018 Notes. On December 3, 2018, we entered into a loan agreement with the Japan Bank for International Cooperation (the “JBIC Loan”) for an aggregate principal amount of up to $3.7 billion, and subsequently reduced the commitments under the Bridge Credit Agreement by the same amount. We expect to draw down on the commitments to the Term Loan Credit Agreement, the SSTL and the JBIC Loan at the time of the closing of the Shire Acquisition. Furthermore, following the completion of the Shire Acquisition, we may refinance all or a portion of the amounts borrowed under the SSTL pursuant to a Subordinated Syndicated Loan Agreement (the “Subordinated Loan Agreement”) entered into on October 26, 2018, with aggregate commitments of ¥500.0 billion, subject to our ability to obtain alternative financing.

Moreover, subject to any potential refinancing, or repurchases completed prior to the closing (if any), following the Shire Acquisition, Shire’s consolidated borrowings and capital leases, which totaled $15.3 billion as of September 30, 2018, would be included in our consolidated balance sheet. This significant amount of aggregate debt and the substantial amount of cash required for payments of interest and principal could adversely affect our liquidity. Furthermore, we are required to comply with certain covenants within various financing arrangements and violations of such covenants may require the acceleration and immediate repayment of the indebtedness, which may in turn have a material adverse effect on our financial condition.

We may desire to or be required from time to time to incur additional borrowings, including refinancing any of the Term Loan Credit Agreement, the SSTL or any other indebtedness to be incurred in connection with the Shire Acquisition and settlement of Shire’s existing indebtedness. In particular, any amounts borrowed under the Bridge Credit Agreement will mature 90 days from the date, following the day after completion of the Shire Acquisition, when all conditions precedent to drawing under the Bridge Credit Agreement are satisfied or waived in accordance with the terms of the Bridge Credit Agreement, requiring us to repay, whether by cash on hand or from other sources, such as dispositions, or to refinance such borrowings soon after they are incurred. We may also be unsuccessful in pursuing a refinancing alternative to the SSTL other than the Subordinated Loan Agreement. Our ability to arrange a re-financing will depend on our financial position and performance, prevailing market conditions and other factors beyond our control.

We aim to decrease our leverage following the Shire Acquisition, with a target ratio of net debt to Adjusted EBITDA of 2.0x or less within three to five years following completion of the Shire Acquisition, and are considering selected disposals of non-core assets to increase the pace of deleveraging. However, we may not be able to meet these goals if we are unable to sufficiently decrease our overall indebtedness, or if we are unable to achieve sufficient increases in earnings to offset our increased levels of debt. We may also not be successful in selecting non-core assets for disposal, and disposals may affect our business, financial condition or results of operations adversely, leading to larger-than-expected decreases in earnings. We may also not be able to dispose of such assets successfully in a manner that allows us to meet our goals or at all.

If we are unable to decrease our leverage, we may be subject to additional ratings actions by third-party ratings agencies. For example, in May 2018, Moody’s (Japan) K.K. lowered our credit rating to A2 from A1, reflecting its expectations for our overall levels of leverage in the future, even in the absence of the Shire Acquisition. In addition, in May 2018, S&P Global Ratings announced that it was reviewing our credit ratings with a view to a potential downgrade due to our decision to acquire Shire. Any future downgrades may negatively influence the terms for the refinancing of our existing debt or new borrowings on terms that we would consider to be commercially reasonable.

 

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The unaudited pro forma condensed combined financial data presented herein is not necessarily representative of our actual or future financial performance.

The unaudited pro forma condensed combined balance sheet and statement of income as of and for the fiscal year ended March 31, 2018 included in this registration statement have been prepared in accordance with the relevant requirements of Article 11 of Regulation S-X and Form 20-F for illustrative purposes only, and show the effect of:

 

   

the Shire Acquisition;

 

   

the financing obtained by us to fund the cash portion of the acquisition consideration, reflecting the drawdown of commitments under the Term Loan Credit Agreement, the SSTL and the JBIC Loan and the issuance of the 2018 Notes; and

 

   

the issuance of shares of our common stock to shareholders of Shire, including shares represented by ADSs.

The unaudited pro forma condensed combined balance sheet gives effect to these transactions as if they had occurred on March 31, 2018, while the unaudited pro forma condensed combined statement of income gives effect to these transactions as if they had occurred on April 1, 2017.

The unaudited pro forma condensed combined financial information has been derived from the audited historical financial statements of Takeda and Shire, and certain adjustments and assumptions have been made regarding the combined company after giving effect to the Shire Acquisition. The amount of consideration to be recorded on our financial statements will vary based on the exchange rate at the date of the closing of the Shire Acquisition and the value of our and Shire’s respective shares. The terms and conditions of the financing that will be used to fund the Shire Acquisition, including the amount of debt we actually incur, have not been finally determined and are subject to change. The unaudited pro forma condensed combined financial information does not include, among other things, adjustments relating to costs expected to be incurred in relation to restructuring or integration activities, estimated synergies, the effect of any refinancing of borrowings incurred in connection with the Shire Acquisition (including any drawdowns of the Subordinated Loan Agreement) or existing indebtedness of either of Takeda or Shire or other potential items that are currently not factually supportable and, in the case of the unaudited pro forma condensed combined statement of income, expected to have a continued impact on our results following the completion of the Shire Acquisition. Certain assets and liabilities of Shire have been measured at fair value based on preliminary estimates using assumptions that we believe are reasonable, utilizing information currently available. The process for estimating the fair value of acquired assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates may be revised and may include additional assets acquired or liabilities assumed as additional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the unaudited pro forma condensed combined financial information and the final acquisition accounting may occur and could be material.

In addition, the assumptions used in preparing the unaudited pro forma condensed combined financial information may not prove to be accurate. Such assumptions can be adversely affected by known or unknown facts, risks and uncertainties, many of which are beyond our or Shire’s control. Other factors may also affect the combined company’s financial condition or results of operations following the closing of the Shire Acquisition. In addition, following the closing of the Shire Acquisition, the financial position and results of operations of Shire, which are reported under U.S. GAAP, will be converted to IFRS for inclusion in our consolidated financial position and results of operations, which are reported under IFRS. The unaudited pro forma condensed combined financial information presents the effect of such conversion based on the information available to us as of the date hereof. We expect further information to become available to us after the completion of the Shire Acquisition, and the adjustments actually made to convert Shire’s financial information to IFRS may vary in material ways from the assumptions made in the unaudited pro forma condensed combined financial information contained in this registration statement.

 

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We will be subject to additional risks arising from the acquired businesses of Shire and from the legal, regulatory and tax regimes that Shire operates under.

Following the completion of the Shire Acquisition, we will assume the risks related to Shire’s businesses, which differ from, or will amplify, certain risks we currently face. For example, markets outside Japan, particularly the United States, represent a larger portion of Shire’s business than ours, and we therefore expect our overall exposure to these markets to increase following the completion of the Shire Acquisition. As with our products, Shire’s products are subject to competition from generic or other competing products, and the successful introduction of such competitors or the invalidation of patent protections over Shire’s products could materially and adversely affect the products acquired. Additionally, Shire operates in certain businesses that we currently do not, including rare diseases and plasma-derived therapies. These businesses will present new or unfamiliar challenges to us. Shire’s plasma-derived therapies in particular present significant challenges relating to the sourcing, production and transportation of plasma, all of which are complex and subject to extensive regulation, in addition to being capital intensive. If we are unable to manage this new business effectively, we may lose market share or customer confidence, be required to pursue additional manufacturing capability or sourcing (or, in the case of an oversupply, lower prices charged, record impairment charges on facilities or inventory or close certain facilities) or take other actions which could materially and adversely affect the plasma-derived therapies business.

Furthermore, we will be subject to additional legal, regulatory and tax regimes that Shire operates under, many of which are complex and could subject us to additional risks or liabilities. For example, Shire is subject to evolving and complex tax laws in various jurisdictions and routinely obtains advice on tax matters, including the tax treatment of the break fee of $1.635 billion it received in connection with the terminated offer to acquire Shire made by AbbVie, Inc. in 2014. In this respect, the Irish Revenue issued an assessment received by Shire on December 4, 2018 for €398 million on the basis that the break fee was a taxable capital gain. Based on continued advice that no tax liability should arise from the break fee, Shire intends to appeal this assessment. In addition, in connection with its 2016 acquisition of Baxalta Inc. (“Baxalta”), Shire has agreed to indemnify Baxter International Inc., its affiliates and each of their respective officers, directors and employees against certain tax-related losses if the merger of Baxalta and Shire causes the prior spin-off of Baxalta by Baxter and related transactions to fail to qualify as tax-free. Although Shire received an opinion of tax counsel that the merger will not cause such prior transactions to fail to qualify as tax-free, such opinion is not binding on the tax authorities and the potential tax indemnification obligations are not limited in amount.

If we are unable to effectively manage these additional risks, our business, results of operations or financial conditions following the completion of the Shire Acquisition could be materially and adversely affected.

Risks Relating to Our Business

Research and development of pharmaceutical products are expensive and subject to significant uncertainties, and we may be unsuccessful in bringing commercially successful products to market or recouping development costs.

Our ability to continue to grow our business depends significantly on the success of our research and development activities in identifying, developing and successfully commercializing new products in a timely and cost-effective manner. To accomplish this, we commit substantial efforts, funds and other resources to research and development, both through our in-house resources and through collaborations with third parties. However, research and development programs for new products by pharmaceutical companies are expensive and involve intensive preclinical evaluation and clinical trials in connection with a highly complex and lengthy regulatory approval process. See “—If we fail to comply with government regulations, regulatory approvals and reimbursement requirements, our business could be adversely affected.” The research and development process for a new pharmaceutical product also requires us to attract and retain sufficient numbers of highly-skilled employees and can take up to 10 years to 15 years or longer from discovery to commercial launch. Moreover, even if we successfully develop and bring to market new products, there is only a limited available patent life in which to recoup these development costs.

 

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During each stage of the approval process and post-approval life cycle of our products, there is a substantial risk that we will encounter serious obstacles including the following:

 

   

unfavorable results from preclinical testing of a new compound;

 

   

difficulty in enrolling patients in clinical trials, or delays or clinical trial holds at clinical trial sites;

 

   

delays in completing formulation and other testing and work necessary to support an application for regulatory approval;

 

   

adverse reactions to the product candidate or indications of other safety concerns;

 

   

insufficient clinical trial data to support the safety or efficacy of the product candidate;

 

   

difficulty or delays in obtaining all necessary regulatory approvals in each jurisdiction where we propose to market such products;

 

   

failure to bring a product to market prior to a competitor, or to develop a product sufficiently differentiated from a competing product to achieve significant market share;

 

   

difficulty in obtaining reimbursement at satisfactory rates for our approved products from governments and insurers;

 

   

difficulty in obtaining regulatory approval for additional indications;

 

   

failure to enter into or implement successful alliances for the development and/or commercialization of products;

 

   

inability to manufacture sufficient quantities of a product candidate for development or commercialization activities in a timely or cost-efficient manner;

 

   

even after we obtain regulatory approval for and commercialize a product, such product and its manufacturer are subject to continual regulatory review, and any discovery of previously unknown problems with the product or the manufacturer may result in imposition of restrictions or recalls, including withdrawal of the product from the market; and

 

   

the degree of market acceptance of any approved product candidate by the medical community, including physicians, healthcare professionals and patients, will depend on a number of factors, including relative convenience and ease of administration, the prevalence and severity of any adverse reactions, availability of alternative treatments, pricing and our sales and marketing strategy.

In addition, to the extent that new regulations raise the costs of obtaining and maintaining product authorizations, or limit the economic value of a new product to its originator, our profitability and growth prospects could be diminished. Development of new and innovative products can also require the use of emerging platforms and technologies for which regulations either do not yet exist or are under development or modification. This may lead to greater uncertainty and risk in establishing the necessary data for approvals to conduct clinical trials and/or receiving marketing approvals.

As a result of the foregoing or other factors, we may decide to abandon the development of potential pipeline products in which we have invested significant resources, even where the product is in the late stages of development. Moreover, there can also be no assurance that we will be successful in bringing new products to market, marketing them, achieving sufficient acceptance thereof and recouping our investments in their development. For example, our pipeline compounds may not receive regulatory approval, become commercially successful or achieve satisfactory rates of reimbursement. Additionally, products approved for use and successfully marketed in one market may be unable to obtain regulatory approval, become commercially successful or achieve satisfactory rates of reimbursement in other markets. As a result, we may be unable to earn returns on investments that we originally anticipated or at all, or may be forced to revise our research and development strategy, and our business, financial condition and results of operations could be materially and adversely affected.

 

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If we fail to comply with government regulations, regulatory approvals and reimbursement requirements, our business could be adversely affected.

Obtaining marketing approval for pharmaceutical products is a lengthy, complex and highly regulated process that requires intensive preclinical and clinical data, and the approval process can vary significantly depending on the regulatory authority. Relevant health authorities may, at the time of the filing of the application for a marketing authorization, or later during their review, impose requirements that can evolve over time, including requiring additional clinical trials, and such authorities may delay or refuse to grant approval. Even where we have obtained marketing approval for a product in one or more major markets, we may need to invest significant time and resources in applying for approval in other markets, and there is no assurance that we will be able to obtain such approval. In recent years, health authorities have become increasingly focused on product safety and on the risk/benefit profile of pharmaceutical products, which could lead to more burdensome and costly approval processes and negatively affect our ability to obtain regulatory approval for products under development. For example, the U.S. Food and Drug Administration (the “FDA”), the European Medicines Agency (the “EMA”), and the Pharmaceuticals and Medical Devices Agency (the “PMDA”), have been implementing strict requirements for approval, particularly in terms of the volume of data needed to demonstrate a product’s efficacy and safety.

Even after regulatory approval is obtained, marketed products are subject to various post-approval requirements, including continual review, risk evaluations, comparative effectiveness studies and, in some cases, requirements to conduct post-approval clinical trials to gather additional safety and other data. Regulatory authorities in many countries have worked to enhance post-approval monitoring in recent years, which has increased post-approval regulatory burdens. Post-regulatory approval reviews and data analyses can lead to the issuance of recommendations by government agencies, health professional and patients or other specialized organizations regarding the use of products; for example, a recommendation to limit the patient population of a drug’s indication, the imposition of marketing restrictions, including changes in product labeling, or the suspension or withdrawal of the product. Any such action can result in reductions in sales volume and/or new or increased concerns about the adverse reactions or efficacy of a product. These substantial regulatory requirements have, over time, increased the costs associated with maintaining regulatory approvals and achieving reimbursement for our products.

If the regulatory approval process or post-approval, reimbursement or other requirements become significantly more burdensome in any of our major markets, we could become subject to increased costs and may be unable to obtain or maintain approval to market our products. Any such adverse changes could materially and adversely affect our business, results of operations or financial condition.

The expiration or loss of patent or regulatory data protection over our products or patent infringement by generic manufacturers could lead to significant competition from generic versions of the relevant product and lead to declines in market share and price levels of our products.

Our pharmaceutical products are generally protected for a defined period by various patents (including those covering drug substance, drug product, approved indications, methods of administration, methods of manufacturing, formulations and dosages) and/or regulatory exclusivity, which are intended to provide us with exclusive rights to market the products for the life of the patent or duration of the regulatory data protection period. The loss of market exclusivity for pharmaceutical products opens such products to competition from generic substitutes that are typically priced significantly lower than the original products, which typically adversely affects the market share and prices of the original products.

Generic substitutes have high market shares in a number of key markets, including the United States, Europe and many emerging countries, and the adverse effects of the launch of generic products are particularly significant in such markets. The introduction of generic versions of a pharmaceutical product typically leads to a swift and substantial decline in the sales of the original product. Our active life cycle management efforts cannot

 

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fully mitigate the impact of competition from generics. In the United States and the EU, for example, political pressure to reduce spending on prescription drugs has led to legislation and other measures that encourage the use of generic products. In Japan, the government is implementing various measures to control drug costs, including by encouraging medical practitioners to use and prescribe generic drugs, and in June 2017 announced its intention to raise generic drug penetration with respect to products for which market exclusivity has expired to 80% by volume by September 2020. Legislation has also been passed in the United States and Europe encouraging the use of biosimilar products. Similar to generics, biosimilars aim to provide less expensive versions of innovative biologic products. New legislation has provided abbreviated pathways for the approval and marketing of biosimilar products, which may affect the profitability and commercial viability of our biologic products.

Certain of our products have begun to, or are expected over the next several years to, face declining sales due to the loss of market exclusivity. For example, following the expiration of patent protection over bortezomib, the active ingredient in VELCADE, one of our largest selling products in the United States, a competing bortezomib-containing product has been introduced. This has led to a decrease in sales of VELCADE, and further entry of competing products could result in substantial additional declines. Such decreases may accelerate following the scheduled expiration of patent protection over the formulation of VELCADE in 2022, or earlier if a competitor is able to develop a way to formulate VELCADE in a manner that does not infringe the relevant patent or succeed in getting the formulation patent invalidated. In addition, as patent protection has expired for PANTOPRAZOLE in many major markets including the United States and the EU, sales of PANTOPRAZOLE have continued to decline in those markets.

We may also be subject to competition from generic drug manufacturers prior to the expiration of patents if a manufacturer successfully challenges the validity of our patents, or if the manufacturer believes that the benefits of launching the generic drug “at risk” (prior to the expiration of our patent) outweigh the costs of defending infringement litigation. If such a competitor launches a generic product “at risk” before the initiation or completion of court proceedings, a court may decline to grant us a preliminary injunction to halt further “at risk” sales and remove the infringing product from the market. While we may be entitled to obtain damages subsequently, the amount we may ultimately be awarded and able to collect may be insufficient to compensate for the loss of sales and other harm caused to us. Furthermore, if we lose patent protection as a result of an adverse court decision or a settlement, in certain jurisdictions, we may face the risk that government and private third party payers and purchasers of pharmaceutical products may claim damages alleging they have over-reimbursed or overpaid for a drug.

If our patent and other intellectual property rights are infringed by generic drug manufacturers or other third parties, we may not be able to take full advantage of the potential or existing demand for our products. The protection that we are able to obtain for our prescription drugs varies from product to product and country to country and may not always be sufficient because of local variations in issued patents, or differences in national law or legal systems, including inconsistency in the enforcement or application of law and limitations on the availability of meaningful legal remedies. In particular, patent protection in emerging markets is often less certain than in developed markets. Certain countries may also engage in compulsory licensing of pharmaceutical intellectual property to other manufacturers as a result of local political pressure. Furthermore, the attention of our management and other personnel could be diverted from their normal business activities if we decide to litigate against such infringement. The realization of any such risks could adversely and materially affect our business, financial condition and results of operations.

We are subject to the risk of intellectual property infringement claims directed to us by third parties.

We are also subject to the risk of infringement claims directed at us by third parties. Although we monitor our operations to prevent infringement on the intellectual property rights of third parties, if we are found to have infringed the intellectual property rights of others or if we agree to settle infringement claims, we may be required to recall the relevant products, terminate manufacturing and sales of such products, pay significant damages or pay significant royalties.

 

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We evaluate any such infringement claims to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, and in keeping with applicable accounting and disclosure standards, we establish reserves and/or disclose the relevant litigation claims or decide not to establish reserves or disclose. These assessments and estimates are based on the information available to our management at such time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Although the parties to such patent and intellectual property disputes in the pharmaceutical industry have often settled through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include the payment of ongoing royalties. Furthermore, the necessary licenses may not be available on acceptable terms or at all. Therefore, if we are unable to successfully defend against infringement claims by third parties, our financial results could be materially and adversely affected.

We face risks from the pursuit of acquisitions, and the anticipated benefits and synergies resulting from acquisitions may not be realized.

We regularly pursue acquisitions for a number of reasons, including strengthening our pipeline, complementing existing lines of business, adding research and development capabilities or pursuing other synergies. The pursuit of these acquisitions requires the commitment of significant management and capital resources in various stages, from the exploration of potential acquisition targets to the negotiation and execution of an acquisition to the integration of an acquired business into our own. The required commitment of time and resources may divert the attention of management or capital or other resources away from our day-to-day business. Moreover, we may not be able to recoup the investment of capital or other resources through the successful integration of acquired businesses, including the realization of any expected cost or other synergies. Specifically, we may encounter the following difficulties:

 

   

We may face significant challenges in combining the infrastructure, management and information systems of acquired companies with ours, including integrating research and development, manufacturing, distribution, marketing and promotion activities and information technology systems.

 

   

There may be difficulties in conforming standards, controls, procedures and accounting and other policies, as well as business cultures and compensation structures.

 

   

We may not be able to retain key personnel at acquired companies, or our own employees may be motivated to leave due to acquisitions.

 

   

We may not be successful in identifying and eliminating redundancies and achieving other cost savings as expected.

 

   

We may not be able to successfully realize benefits from acquired products, including pipeline products under development.

Integrating the operations of multiple new businesses with that of our own is a complex process that requires significant management attention and resources. The integration process may disrupt our existing and other newly acquired businesses and, if implemented ineffectively, could have an adverse impact not only on our ability to realize the benefits of a given acquisition but also on the results of our existing operations. Integration-related risks may be heightened in cases where acquired businesses’ operations, employees or customers are located outside our major markets and we incur higher costs than anticipated due to regulatory changes, environmental factors or foreign exchange fluctuations. We continue to pursue strategic business acquisitions globally as a key part of our continuous growth strategy. If we are not able to achieve the anticipated benefits of any future acquisitions in full or in a timely manner, we could be required to recognize impairment losses, we may not be able to recoup our investment, and our business, financial position and results of operations could be materially and adversely affected. Particularly, we may be unable to achieve the expected revenues pursuant to licensing, co-promotion or co-development agreements or collaborations. We may also assume unexpected

 

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contingent or other liabilities, or be required to mark up the fair value of liabilities (or mark down the fair value of assets) acquired upon the close of an acquisition.

Our operating results and financial condition may fluctuate due to a number of factors and may not be comparable across periods.

Our operating results and financial condition may fluctuate from quarter to quarter and year to year for a number of reasons, including acquisitions, divestitures, major product launches, patent expiration or expiration of regulatory data protection for key products and other reasons. In particular, as part of our efforts to refocus our business portfolio, we have recently entered into a number of significant transactions that are expected to affect our results of operations, including:

 

   

the Shire Acquisition, if closed successfully;

 

   

the acquisition of TiGenix NV in July 2018;

 

   

the divestment of Wako Pure Chemical Industries, Ltd. (“Wako Pure Chemical”), one of our consolidated subsidiaries, to FUJIFILM Corporation in April 2017;

 

   

the acquisition of ARIAD Pharmaceuticals, Inc. (“ARIAD”) in February 2017;

 

   

the sale of our respiratory business to AstraZeneca plc (“AstraZeneca”) in April 2016; and

 

   

the transfer of certain long-listed products, consisting of products for which patent protection and regulatory data protection have expired, to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture we formed with Teva Pharmaceutical Industries Ltd., in April 2016, and the subsequent sale of seven additional long-listed products in May 2017.

We intend to continue to pursue both acquisitions of new businesses and dispositions of existing businesses in the future. As a result, period-to-period comparisons of our results of operations may not always be directly comparable, and these comparisons should not be relied upon as an indication of future performance. Our operating results and financial condition are also subject to fluctuations from the risks described throughout this section.

We have significant global operations, which expose us to additional risks.

Our global operations, which encompass more than 70 countries in diverse regions across the world, are subject to a number of risks, including the following:

 

   

difficulties in monitoring and coordinating research and development, marketing, supply-chain and other operations in a large number of jurisdictions;

 

   

risks related to various laws, regulations and policies, including those implemented following changes in political leadership and trade, capital and exchange controls;

 

   

changes with respect to taxation, including impositions or increases of withholding and other taxes on remittances and other payments by our overseas subsidiaries;

 

   

varying standards and practices in the legal, regulatory and business cultures in which we operate, including potential inability to enforce contracts or intellectual property rights;

 

   

trade restrictions and changes in tariffs;

 

   

complex sanctions regimes in various countries such as the United States, the EU and other jurisdictions, violations of which could lead to fines or other penalties;

 

   

risks related to political instability and uncertain business environments;

 

   

changes in the political or economic relationship between Japan and the other countries and regions in which we operate;

 

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acts of terrorism, war, epidemics and other sources of social disruption; and

 

   

difficulties associated with managing local personnel and preventing misconduct by local third-party alliance partners.

Any one or more of these or other factors could increase our costs, reduce our revenues, or disrupt our operations, with possible material adverse effects on our business, financial condition and results of operations. Even prior to the announcement of the Shire Acquisition, further expansion overseas has been one of our key strategies, and, in the fiscal year ended March 31, 2018, regions outside of Japan accounted for 67.2% of our consolidated revenue, with the United States in particular contributing 33.8% of consolidated revenue. We expect that markets outside Japan, particularly the United States and also Europe, Canada and emerging markets, will continue to be increasingly important to our business and results of operations, increasing the likelihood that any of these risks is realized.

We may not be able to realize the expected benefits of our investments in emerging markets.

We have been taking steps to grow our business in emerging markets, which we define to include Russia/Commonwealth of Independent States (“CIS”), Latin America, Asia (excluding Japan) and Other (including the Middle East, Oceania and Africa). Our revenue from emerging markets was ¥278.1 billion (or 15.7% of our total revenue) for the fiscal year ended March 31, 2018, and we intend to pursue further growth in such emerging markets.

However, there is no guarantee that our efforts to expand sales in emerging markets will succeed. Some countries may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on healthcare. In order to successfully implement our emerging markets strategy, we must attract and retain qualified personnel, despite the possibility that some emerging markets may have a relatively limited number of persons with the required skills and training. We may also be required to increase our reliance on third-party agents within less-developed markets, which may put us at increased risk of liability. In addition, many emerging markets have currencies that fluctuate substantially, and if such currencies are devalued and we cannot offset the devaluations, our financial performance in such countries may be adversely affected. Further, many emerging markets have relatively weak intellectual property protection and inadequate protection against crime, including counterfeiting, corruption and fraud. Operations in certain emerging countries, where corruption may be more prevalent than in more developed countries and where internal compliance practices may not be well established, may also pose challenges from a legal and regulatory compliance perspective.

For reasons including but not limited to the above, sales within emerging markets carry significant risks, and the realization of such risks could have a material adverse effect on our business, financial condition and results of operations.

We depend on our “growth driver” products to support out future growth, and any events that adversely affect the markets for these products may adversely affect our business, financial condition and results of operations.

Our future growth depends largely on our “growth drivers,” which we define as products in our core therapeutic areas of gastroenterology (“GI”), oncology and neuroscience, as well as emerging markets. As a result of our focus on these therapeutic areas and markets, any event that adversely affects products aimed at these therapeutic areas or markets could have a material and adverse effect on our business, financial condition and results of operations. These events could include discovery of previously unknown adverse reactions, loss of intellectual property protection, increased costs associated with manufacturing, supply chain issues or product shortages, regulatory proceedings, changes in labeling, publicity affecting doctor or patient confidence in the product, material product liability litigation and introduction of new, more effective treatments.

 

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Our results of operations and financial condition may be adversely affected by foreign currency exchange rate fluctuations.

We manufacture and sell products to customers in numerous countries, and we have entered and will enter into acquisition, licensing, borrowings or other financial transactions that give rise to translation and transaction risks related to foreign currency exposure. Fluctuations in currency exchange rates in the markets where we are active could negatively affect our results of operations, financial position and cash flows. For the fiscal year ended March 31, 2018, 67.2% of our sales were in markets outside Japan, and we expect this proportion to be even higher for subsequent fiscal periods, due to anticipated increases in overseas sales of growth driver products and the contribution of Shire’s results to our results of operations, particularly in the U.S. market. Our consolidated financial statements are presented in Japanese yen, and by translating the foreign currency financial statements of our foreign subsidiaries into yen, the amounts of our revenue, operating profit, assets and equity, on a consolidated basis, are affected by prevailing rates of exchange. For example, an increase in the value of Japanese yen relative to the other currencies that we operate in, particularly the U.S. dollar and the euro, during the fiscal year ended March 31, 2017 was a significant downward factor that contributed to a decrease in consolidated revenue, presented in Japanese yen, from the fiscal year ended March 31, 2016. In the fiscal year ended March 31, 2018, this trend reversed, but increases in the strength of the yen in future years may similarly negatively affect our results of operations.

We utilize certain hedging measures with respect to some of our foreign currency transactions. However, such hedging measures do not cover all of our exposures and, even to the extent they do, they may only delay, or may otherwise be unable to completely eliminate, the impact of fluctuations in foreign currency exchange rates.

We may not be able to adequately expand our product portfolio through third-party alliance arrangements.

We expect that we will continue to rely on third parties for key aspects of our business, including the discovery and development of new products, in-licensing products and the marketing and distribution of approved products. A major part of our research and development strategy is to enhance collaborations with third parties in the biotechnology industry, academia and the public sector, and we believe that the overall strength of our research and development program and product pipeline depends on our ability to identify and initiate partnerships, acquisitions, in-licensing arrangements and other collaborations with third parties. For example, a number of our key products, including ADCETRIS, TRINTELLIX and AMITIZA, are in-licensed products developed through alliances with third parties. However, there can be no assurance that any of our third-party alliances will lead to the successful development and marketing of new products. Moreover, reliance on third-party alliances subjects us to a number of risks, including:

 

   

We may be unable to identify suitable opportunities at a reasonable cost and on terms that are acceptable to us due to active and intense competition among pharmaceutical groups for alliance opportunities or other factors.

 

   

Entering into in-licensing or partnership agreements may require the payment of significant “milestones” well before the relevant products are placed in the market, without any assurance that such investments will ultimately become profitable in the long term.

 

   

When we research and market our products through collaboration arrangements, the performance of certain key tasks or functions are the responsibility of our collaboration partners, who may not perform effectively or otherwise meet our expectations.

 

   

Decisions may be under the control of or subject to the approval of our collaboration partners, and we may have differing views or be unable to agree upon an appropriate course of action. Any conflicts or difficulties that we may have with our partners during the course of these agreements or at the time of their renewal or renegotiation or any disruption in the relationships with our partners may affect the development, launch and/or marketing of certain of our products or product candidates.

 

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In addition, a licensor may attempt to terminate its license agreement with us or elect not to renew it to pursue other marketing opportunities. Our licensors could also merge with or be acquired by another company, or experience financial or other setbacks unrelated to our licensing arrangements. Any of these events may force us to abandon a development project and adversely affect our ability to adequately expand or maintain our product portfolio.

Our reliance on third parties for the performance of key business functions, particularly research and development and product commercialization, heightens the risks faced by our business.

We rely on suppliers, vendors and partners, including alliances with other pharmaceutical companies, for key aspects of our business, including research and development, manufacture and commercialization of products, support for information technology systems and certain human resource functions. We do not control these partners, but we depend on them in ways that may be significant to us. If these parties fail to meet our expectations or fulfill their obligations to us, we may fail to receive the expected benefits. In addition, if any of these third parties fails to comply with applicable laws and regulations in the course of its performance of services for us, there is a risk that we may be held responsible for such violations as well. This risk is particularly serious in emerging markets, where corruption is often prevalent and where many of the third parties on which we rely do not have internal compliance resources comparable to our own. Any such failures by third parties, in emerging markets or elsewhere, could adversely affect our business, reputation, financial condition or results of operations.

We are involved in litigation relating to our operations on an ongoing basis, and such litigation could result in financial losses or harm our business.

We are involved in various litigation relating to our operations on an ongoing basis, including claims related to product liability and intellectual property as well as to antitrust, sales and marketing and other regulatory regimes. Given the inherent unpredictability of litigation, it is possible that an adverse outcome in one or more pending or future litigation matters could have a material adverse effect on our operating results or cash flows. For a description of certain ongoing litigation, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

Economic and financial conditions may have a material adverse effect on our business, financial condition and results of operations.

Growth of the global pharmaceutical market has become increasingly tied to global economic growth. In this context, a substantial and lasting slowdown of the global economy or major national economies could negatively affect growth in the global pharmaceutical market and, as a result, adversely affect our business. In particular, weak economic conditions can have a particularly adverse impact on pharmaceutical demand in markets having significant co-pays or lacking a developed third-party payer system, as individual patients may delay or decrease out-of-pocket healthcare expenditures. Negative economic developments could also reduce the sources of funding for national social security systems, leading to heightened pressure on drug prices, increased substitution of generic drugs, and the exclusion of certain products from formularies.

Following the global financial crisis in 2008, economic growth continues to be stagnant in major developed countries while the pace of growth in many emerging economies has declined. The referendum vote in the U.K. to leave the EU, known as “Brexit,” the transition to a new presidential administration in 2017 and recent mid-term elections in 2018 in the United States and continued instability in the Middle East and North Korea have increased political and economic uncertainty. To the extent that economic or financial conditions weaken in any of our major operating markets, demand for our products or product pricing could be negatively affected. In addition, to the extent that economic and financial conditions negatively affect the global business environment, we could experience a disruption or delay in the performance of third parties on which we rely for parts of our business, including collaboration partners and suppliers. Such disruptions or delays could have a material and adverse effect on our business, financial condition and results of operations.

 

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Government policies and other pressures to reduce medical costs could have an adverse effect on sales of our pharmaceutical products.

We are subject to governmental regulations mandating price controls in various countries in which we operate. The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payers are under intense pressure to control spending even more tightly. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Our Results of Operations—Revenue—Pricing and Government Regulation.”

In the United States, the largest market for our products, there has been increasing pricing pressure from managed care groups and institutional and governmental purchasers. In particular, as managed care groups have grown in size due to market consolidation, pharmaceutical companies have faced increased pressure in pricing and usage negotiations, and there is fierce competition among pharmaceutical companies to have their products included in the care providers’ formularies. Moreover, as a result of the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010, as amended by the Health Care and Education Reconciliation Act (together, the “U.S. Healthcare Legislation”), we have experienced heightened pricing pressure on, and limitations on access to, our branded pharmaceutical products sold in the United States. In addition, there has been increasing attention paid to the level of pricing of pharmaceutical products, including from the Trump administration and other politicians, which could lead to political pressure or legislative, regulatory or other measures being introduced to lower prices. The future of the U.S. Healthcare Legislation, as well as the potential impact of any new legislation, is uncertain, but we expect the health care industry in the United States will continue to be subject to increasing regulation as well as political and legal action.

In Japan, manufacturers of pharmaceutical products must have new products listed on the National Health Insurance (the “NHI”), price list published by the Ministry of Health, Labour and Welfare of Japan (the “MHLW”). The NHI price list provides rates for calculating the price of pharmaceutical products used in medical services provided under various public medical care insurance systems. Prices on the NHI price list have been subject to revision generally once every two years on the basis of the actual prices at which the pharmaceutical products are purchased by medical institutions in Japan after discounts and rebates from listed price. The average price of products listed on the NHI price list has decreased as a result of each of the revisions in 2014, 2016 and 2018. The Japanese government is currently undertaking healthcare reform initiatives with a goal of sustaining the universal coverage of the NHI program, and is addressing the efficient use of drugs, including promotion of generic use with a target of 80% penetration by volume by September 2020 with respect to products for which market exclusivity has expired. As part of these initiatives, the NHI price list is expected to be revised annually beginning in the fiscal year ending March 31, 2022, which could lead to more frequent downward price revisions.

In Europe, as in the United States, drug prices have been subject to downward pressure due to measures implemented in each country to control drug costs, and prices continue to come under pressure due to parallel imports, generic competition, increasing use of health technology assessment based upon cost-effectiveness and other factors. We are also facing similar pricing pressures in various emerging countries.

We expect these efforts to control costs to continue as healthcare payers around the globe, in particular government-controlled health authorities, insurance companies and managed care organizations (“MCOs”), increasingly pursue initiatives to reduce the overall cost of healthcare, restrict access to higher-priced new medicines, increase the use of generics and impose overall price revisions. Such further implementation of these policies could have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty in maintaining the competitiveness of our products.

The pharmaceutical industry is highly competitive, and in order to maintain the competitiveness of our product portfolio, we are required to maintain ongoing, extensive research for technological innovations,

 

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including new compounds, to develop and commercialize existing pipeline products, to expand our product portfolio through acquisitions and in-licensing, and to market our products effectively, including by communicating the efficacy, safety and value of our products to healthcare professionals. However, healthcare professionals and consumers may choose competitors’ products over ours nonetheless, if they perceive these products to be safer, more reliable, more effective, easier to administer or less expensive. The success of any product depends on our ability to effectively communicate with and educate the healthcare professionals and patients and convince them of the advantage of our products over those of our competitors. We often carry out costly clinical trials even after our products have been launched to produce data to be utilized for these purposes, but such trials do not always produce the desired outcomes. Furthermore, many of our competitors have greater financial and other resources to conduct such trials in more detail and with larger patient populations, which may ultimately enable them to promote their products more effectively than we do.

In Japan, reduced approval times for drugs already marketed outside Japan have led to increased competition through the introduction of such drugs into the Japanese market by foreign competitors. In addition, new competing products or the development of superior medical technologies and other treatment options could make our products or technologies lose their competitiveness or become obsolete. As discussed above, our products are also subject to competition from inexpensive generic versions of our products, as well as generic versions of our competitors’ products, upon the expiration or loss of related patent protection and regulatory data protection, which may result in loss of market share. If we are unable to maintain the competitiveness of our products, our business, financial position and results of operations could be materially and adversely affected.

Our products may have unanticipated adverse effects or possible adverse effects, which may restrict use of the product or give rise to product liability claims.

As a pharmaceutical company, we are subject to significant risks related to product liability. Unanticipated adverse reactions or unfavorable publicity from complaints concerning any of our products, or those of our competitors, could have an adverse effect on our ability to obtain or maintain regulatory approvals or successfully market our products, and may even result in recalls, withdrawal of regulatory approval or adverse labeling of the product.

While our products are subject to comprehensive clinical trials and rigorous statistical analysis during the development process prior to approval, there are inherent limitations with regard to the design of such trials, including the limited number of patients enrolled in such trials, the limited time used to measure the efficacy of the product and the limited ability to perform long-term monitoring. In the event that such unanticipated adverse reactions are discovered, we may be required to add descriptions of the adverse reactions as “precautions” to the packaging of our products, recall and terminate sales of products or conduct costly post-launch clinical trials. Furthermore, concerns relating to potential adverse reactions could arise among consumers or medical professionals, and such concerns, whether justified or not, could have an adverse effect on sales of our products and our reputation. We could also be subject to product liability litigation by patients who have suffered or claim to have suffered such adverse reactions resulting in harm to their health. For example, numerous claims for damages were brought against us in which plaintiffs alleged to have developed bladder cancer or other injuries as a result of taking products containing Type 2 diabetes treatment pioglitazone, marketed as ACTOS in the United States. We reached a settlement to resolve the vast majority of ACTOS product liability lawsuits pending against us in the United States, resulting in a charge of ¥274.1 billion in the fiscal year ended March 31, 2015. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for a description of these proceedings. We may also be subject to claims regarding manufacturing defects and labeling problems.

Although we maintain product liability insurance at coverage levels that we believe are appropriate, we could be subject to product liability that significantly exceeds such levels. Product liability coverage is also increasingly difficult and costly to obtain, and may not be available in the future on acceptable terms. Therefore, in the future, it is possible that we may need to rely increasingly on self-insurance for the management of product

 

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liability risk. In cases where we self-insure, the legal costs that we would bear for handling such claims and potential indemnifications to be paid to claimants could materially and adversely affect our financial condition. In addition, the negative publicity from product liability claims, whether or not justified, may damage our reputation and may negatively impact the number of prescriptions of the product in question or our other products. As a result, our business, financial condition and results of operations could be materially and adversely affected.

The manufacture of our products is technically complex and highly regulated, and supply interruptions, product recalls or other production problems caused by unforeseen events may reduce sales, adversely affect our operating results and financial condition and delay the launch of new products.

The manufacture of our products is technically complex and highly regulated, and as a result we may experience difficulties or delays including but not limited to the following:

 

   

seizure or recalls of products or shut-downs of manufacturing plants;

 

   

problems with business continuity, including as a result of a natural or man-made disaster, at one of our facilities or at a critical supplier or vendor;

 

   

failure by us or by any of our vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines, which could lead to manufacturing shutdowns, product shortages and delays in product manufacturing;

 

   

problems with manufacturing, quality assurance/quality control or supply, or governmental approval delays, due to our consolidation and rationalization of manufacturing facilities and the sale or closure of certain sites;

 

   

failure of a sole source or single source supplier to provide us with necessary raw materials, supplies or finished goods for an extended period of time, which could impact continuous supply;

 

   

failure of a third-party manufacturer to supply us with semi-finished or finished products on time;

 

   

construction or regulatory approval delays related to new facilities or the expansion of existing facilities;

 

   

additional costs related to deficiencies identified by regulatory agencies in connection with inspections of our facilities, and enforcement, remedial or punitive actions by regulatory authorities if we fail to remedy any deficiencies; and

 

   

other manufacturing or distribution problems including limits to manufacturing capacity due to regulatory requirements, changes in the types of products produced, physical limitations or other business interruptions that could impact continuous supply.

Any of the above may reduce sales, delay the launch of new products, and adversely affect our business, financial condition and results of operations.

In July 2018, we acquired Tigenix NV, which develops novel stem cell therapies for serious medical conditions. The development and manufacture of stem cell products and other biologics, including products we expect to add to our portfolio following the completion of the Shire Acquisition, present heightened or additional risks. The manufacture of biologics, including stem cell products, is highly complex and is characterized by inherent risks and challenges, such as raw material inconsistencies, logistical and sourcing challenges, significant quality control and assurance requirements, manufacturing complexity (including heightened regulatory requirements) and significant manual processing. Unlike products that rely on chemicals for efficacy, such as most pharmaceuticals, biologics are difficult to characterize due to the inherent variability of biological input materials. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Problems with the manufacturing process, even minor deviations from the normal

 

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process, could result in product defects or manufacturing failures that result in, among other things, lot failures, product recalls, product liability claims or insufficient inventory, which could be costly to us or result in reputational damage.

The illegal distribution and sale by third parties of counterfeit versions of our products or products stolen from us could have an adverse effect on our reputation and business.

Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards to which our products are subject. A patient who receives a counterfeit drug may be at risk for a number of dangerous health consequences. Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in our products, which could have a material adverse effect on our reputation and financial results. In addition, thefts at warehouses, at plants, or in transit of inventory that is not properly stored or that is sold through unauthorized channels could adversely affect patient safety, our reputation and our results of operations.

We are increasingly dependent on information technology systems and our systems and infrastructure face the risk of theft, exposure, tampering or other intrusions.

Certain important processes relating to the research and development, production and sales of our products depend heavily on our information systems, including cloud-based computing, or those of third party providers to whom we outsource certain business functions, including the storage and transfer of critical, confidential, sensitive or personal information regarding our patients, clinical trials, vendors, customers, employees and others. The size and complexity of these computer systems make them potentially vulnerable to service interruptions, malicious intrusions and random attacks. Cyber-attacks are increasing in frequency, sophistication and intensity. Such attacks are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups, “hacktivists,” nation-states and others. Cyber-attacks could include the deployment of harmful malware, denial of service attacks, worms, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. The development and maintenance of systems to safeguard against such attacks is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become increasingly more sophisticated. Despite our efforts, the possibility of a future data compromise cannot be eliminated entirely, and risks associated with intrusion, exposure, tampering, and theft remain.

If our data systems are compromised, our business operations may be impaired, we may lose profitable opportunities or the value of those opportunities may be diminished, and we may lose revenue because of unlicensed use of our intellectual property. If personal information of our customers or employees is misappropriated, our reputation with our customers and employees may be injured resulting in loss of business and/or morale, and we may incur costs to remediate possible injury to our customers and employees or be required to pay fines or take other action with respect to judicial or regulatory actions arising out of such incidents. Data privacy or security breaches by employees and others with permitted access to our systems, including in some cases third-party service providers to which we may outsource certain business functions, may also pose a risk that sensitive data, including intellectual property or personal information, will be exposed to unauthorized persons or to the public.

Changes in data privacy and protection laws and regulations, particularly in Europe, or any failure to comply with such laws and regulations, could adversely affect our business and financial results.

We are subject to laws and regulations globally regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. For example, the EU’s General Data

 

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Protection Regulation (the “GDPR”), which imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored, became effective on May 25, 2018. Furthermore, legislators and regulators in the United States are proposing new and more robust cybersecurity rules in light of the recent broad-based cyberattacks at a number of companies. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental entities or others or damage to our reputation and credibility and could also have a negative impact on revenues and profits.

Social media platforms and new technologies present risks and challenges for our reputation and business.

Consumers, the media, pharmaceutical companies and other parties increasingly use social media and other new technologies to communicate about pharmaceutical products and the diseases they are intended to treat. For pharmaceutical companies, the use of these technologies requires specific attention, monitoring programs and moderation of comments. For example, negative or inaccurate posts or comments about us or our products on any social media networking platforms could damage our reputation and business. Social media could also be used to bring negative attention to us or to the pharmaceutical industry as a whole, which could in turn cause reputational harm to us and negatively impact our business. The nature of evidence-based health care, however, may prevent us from rapidly and adequately defending our interests against such comments. In addition, our employees and partners may use social media and mobile technologies inappropriately, which may expose us to liability, or which could lead to breaches of data security, loss of trade secrets or other intellectual property or public disclosure of sensitive information, including information about our employees, clinical trials or customers.

Our dependence on third parties for the inputs for our products subjects us to various risks, and changes in the costs of materials may adversely affect our profitability.

Although we develop and manufacture the active ingredients used in some of our products at our own facilities, we are dependent on third-party suppliers for a substantial portion of the raw materials and compounds used in the products we produce. The price and availability of the raw materials for our products, including chemical compounds and biologics, are subject to the effects of weather, natural disasters, market forces, the economic environment, fuel costs and foreign exchange rates. If our cost for such materials increases, we may not be able to make corresponding increases in the prices of our products due to market conditions or our relationships with our customers, and as a result, our profitability could be materially and adversely affected. Sources of some materials may be limited to a single supplier, and if such supplier faces any difficulty in supplying the materials, we may not be able to find an alternative supplier in a timely manner or at all. If materials become unavailable or if quality problems related to the materials arise, we may be forced to halt production and sales of products that use them. In the event that any of our third-party suppliers is delayed in its delivery of such raw materials or compounds, is unable to deliver the full quantity ordered by us at the appropriate level of quality, or is unable to deliver any raw materials or compounds at all, our ability to sell our products in the quantities demanded by the market may be impaired, which could damage our reputation and relationships with customers. In such a case, our business and results of operations could be adversely affected.

Sales to wholesalers are concentrated, which exposes us to credit risks and pricing pressures.

A significant portion of our global sales are made to a relatively small number of wholesale distributors, retail chains and other purchasing groups. In the fiscal year ended March 31, 2018, our largest wholesale distributor accounted for 12.4% of our total revenue. If one of our significant wholesale distributors encounters financial or other difficulties, such distributor may decrease the amount of business that it does with us, and we may be unable to collect the amounts that the distributor owes us on a timely basis or at all. Furthermore, the concentration of wholesale distributors has been increasing through mergers and acquisitions. In addition to

 

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increased credit risks, this has resulted in such distributors gaining additional purchasing leverage, which may increase pricing pressure on our products. Such credit concentration risks and pricing pressure could adversely affect our business, financial condition and results of operations.

We may incur substantial costs due to our environmental compliance efforts or claims relating to our use, manufacture, handling, storage or disposal of hazardous materials.

Our research and development and manufacturing processes use hazardous materials, including chemicals and radioactive and biological materials, and produce hazardous waste. National and local laws and regulations in many of the jurisdictions in which we operate impose substantial potential liability for the improper use, manufacture, handling, storage and disposal of hazardous materials as well as for land contamination, and, in some cases, this liability may continue over long periods of time. Despite our compliance efforts, we cannot completely eliminate the risk of accidental contamination and any resultant injury from these materials. For example, real properties that we owned or used in the past or that we own or use now or in the future may contain undetected contamination resulting from our manufacturing operations at those sites or the activities of prior owners or occupants. While we have not experienced any material expenses or liability in connection with hazardous materials, we may suffer from expenses, claims or liability in the future which may fall outside of or exceed our insurance coverage. Furthermore, changes to current environmental laws and regulations may impose further compliance requirements on us that may impair our research, development and production efforts as well as our other business activities.

We may suffer large losses in the event of a natural or other disaster, such as an earthquake, terrorist attack or other catastrophic event, in any of the markets in which we operate.

Japan and other regions in the world in which we operate are subject to the risk of earthquakes and other natural disasters, including volcanic eruptions, tidal waves, typhoons, floods and hurricanes. For example, the Great East Japan Earthquake and subsequent tsunami that occurred in March 2011 caused unprecedented property and other damage, although we did not incur any significant damage to our facilities. In addition, other events outside our control, such as war, civil or political unrest, deliberate acts of sabotage, or industrial accidents such as fire and explosion, whether due to human or equipment error, could damage, cause operational interruptions, or otherwise adversely affect certain of our manufacturing or other facilities as well as potentially cause injury or death to our personnel. In the event of a major natural disaster or other uncontrollable event or accident, our facilities, particularly our production plants, may experience catastrophic loss, operations at such facilities may be halted, shipments of products may be suspended or delayed and large losses and expenses to repair or replace facilities may be incurred. Such negative consequences could cause product shortages, significant losses of sales or require significant unexpected expenditures, and materially adversely affect our business, financial condition and results of operations.

We regularly conduct inspections of all of our facilities for maintenance purposes and to prevent potential damage from disaster, and we have global group insurance to cover property damage and business interruption for certain potential losses at our production facilities, although we do not maintain earthquake insurance in Japan. These insurance policies may not be adequate to cover all possible losses and expenses. In addition, our business may also be adversely affected if our suppliers or business partners were to experience a catastrophic loss due to natural disasters, accidents or other uncontrollable events.

We may have to recognize additional charges on our statements of income due to impairment of goodwill and other intangible assets.

We carry significant amounts of goodwill and intangible assets on our balance sheet as a result of past acquisitions. If completed as expected, we also expect to record significant additional goodwill and intangible assets in connection with the Shire Acquisition. As of March 31, 2018, we had goodwill of ¥1,029.2 billion and intangible assets of ¥1,014.3 billion. Goodwill and intangible assets recorded in relation to acquisitions are

 

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recognized on our balance sheet on the acquisition date. Under IFRS, we are required to examine such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Impairment of Goodwill and Intangible Assets.” The recognition of such impairment charges may adversely affect our business, financial condition and results of operations.

We may not be able to attract and retain key management and other personnel.

In order to produce, develop, support and market our products, we depend on the expertise and leadership of our senior management team and other key members of our organization. The loss of key members of our organization, including senior members of our scientific and management teams, high-quality researchers and development specialists, could delay or prevent the achievement of major business objectives. The market for such talents has become increasingly competitive, including in specific geographic regions and in specialized fields such as clinical development and biosciences, and we are required to invest heavily in the recruitment, training and retention of qualified individuals, including salary and other compensation to reward performance and incentivize employees. Despite our efforts to retain them, key employees could terminate their employment with us for any reason or for no reason, and there can be no assurance that we will be able to attract or retain key employees and successfully manage them. Our inability to attract, integrate and retain highly skilled personnel, particularly those in leadership positions, may weaken our succession plans and may materially adversely affect our ability to implement our strategy and meet our strategic objectives, which could ultimately adversely affect our business and results of operations.

If we fail to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected, which could cause investors to lose confidence in our reported financial information and may lead to a decline in the trading price of our ADSs.

Our common stock is currently listed only on the Tokyo Stock Exchange and other local Japanese stock exchanges, and we have established internal control over financial reporting pursuant to the requirements applicable to companies listed only in Japan. Following the effectiveness of this registration statement, our common stock and ADSs will be registered under the Securities Exchange Act of 1934 (the “Exchange Act”), and we will become subject to, among other things, the requirements under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The standards for internal control over financial reporting under the Sarbanes-Oxley Act are significantly more extensive than those applicable to companies listed only in Japan. For example, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. Pursuant to the instructions to Form 20-F, we expect to include this report in our second annual report filed with the Securities and Exchange Commission (the “SEC”) following the effectiveness of this registration statement, which we currently expect will be filed by no later than July 31, 2020. We are still in the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404.

Neither our management nor independent registered public accounting firm has ever performed a comprehensive evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required, and we cannot be certain that material weaknesses in our internal control over financial reporting will not develop or be identified. Any failure to achieve and maintain adequate internal control over financial reporting or to implement required, new or improved controls, or difficulties encountered in their implementation could cause material weaknesses or other deficiencies in our internal control over financial reporting in the future. If we are unable to successfully remediate any material weaknesses or other deficiencies in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected and investors may lose confidence in

 

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our financial reporting, and the price of our ADSs may decline as a result. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

Risks Relating to the ADSs

A holder of ADSs will have fewer rights than a shareholder has and such holder will have to act through the depositary to exercise those rights.

The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. Pursuant to the deposit agreement, the depositary will endeavor, to the extent practicable, to make efforts to vote or cause to be voted the shares underlying the ADSs as instructed by the holders and will pay to the holders the dividends and distributions collected from the Company. The depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote. Moreover, in the capacity as an ADS holder, such holder will not be able to bring a derivative action, examine the Company’s accounting books or records or exercise appraisal rights except through the depositary.

Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions.

Our Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Audit and Supervisory Committee and the Companies Act govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties, and shareholders’ rights may be different from those that would apply to a non-Japanese company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other jurisdictions. ADS holders may have more difficulty in asserting their rights as a shareholder than such holders would as shareholders of a corporation organized in another jurisdiction. In addition, Japanese courts may not be willing to enforce liabilities against the Company in actions brought in Japan that are based upon the securities laws of other jurisdictions.

Because of daily price range limitations under Japanese stock exchange rules, a holder of ADSs who has surrendered his or her ADSs in favor of shares of our common stock may not be able to sell his/her shares of our common stock at a particular price on any particular trading day, or at all.

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, a holder of ADSs who has surrendered his or her ADSs in favor of shares of our common stock wishing to sell on a Japanese stock exchange at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

U.S. investors may have difficulty in serving process or enforcing a judgment against us or our directors or executive officers.

We are a limited liability, joint stock corporation incorporated under the laws of Japan. Many of our directors and executive officers reside in Japan, Europe or elsewhere outside of the United States, and a large portion of our assets and the assets of these persons are located in Japan and elsewhere outside the United States.

 

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It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

Investors holding less than a full unit of shares will have limited rights as shareholders.

Our Articles of Incorporation provide that 100 shares of our common stock constitute one unit. Although holders of ADSs may withdraw shares of our common stock constituting less than one unit, in connection with the direct holding of the shares of our common stock, the Companies Act imposes significant restrictions and limitations on holders of shares of our common stock that do not constitute a full unit. In general, holders of shares of our common stock constituting less than one unit do not have the right to vote with respect to those shares.

Dividend payments and the amount you may realize upon a sale of our ADSs will be affected by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen.

Cash dividends, if any, in respect of the shares of our common stock represented by our ADSs will be paid to the depositary in Japanese yen and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect, among other things, the U.S. dollar amounts a holder of ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Japan of the shares of our common stock obtained upon surrender of ADSs and the secondary market price of ADSs.

Our shareholders of record on a given record date may not receive the dividend they anticipate.

The customary dividend payout practice of publicly listed companies in Japan may significantly differ from that widely followed or otherwise deemed necessary or fair in foreign markets. We ultimately have a discretion to determine any dividend payment amount to our shareholders of record as of a record date, including whether we will make any dividend payment to such shareholders at all, only after such record date. For that reason, our shareholders of record on a given record date may not receive the dividends they anticipate.

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, which may include any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that prospective investors consult legal counsel regarding the jury waiver provision before investing in the ADSs.

 

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As a result, if a holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, such holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not enforced under applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

Item 4. Information on the Company

 

  A.

History and Development of the Company.

We are a global, research and development-driven pharmaceutical company with a presence in more than 70 countries. We bring highly-innovative, life-changing medicines to patients across the globe, with prescription drugs marketed directly or through our partners in approximately 100 countries worldwide. Our global workforce of more than 27,000 employees is committed to bringing better health and a brighter future to patients. We develop and market pharmaceutical products to treat a broad range of medical conditions including GI diseases, cancer, neurological and psychiatric diseases and other medical conditions, including diabetes and hypertension, as well as vaccines. We are also committed to our corporate social responsibility program, which is dedicated to global health, and our access to medicine strategy, which aims to increase access to innovative and potentially life-saving medicines for patients with some of the highest unmet medical needs across the world.

We have a focused, agile and innovative research and development organization whose goal is to impact patients’ lives by translating science into transformative medicines. We focus on highly innovative medicine, with 41 clinical stage assets with active development programs as of October 31, 2018, more than one-third of which have orphan drug designation. We focus our research and development efforts on our three key therapeutic areas: GI, oncology and neuroscience, plus vaccines. We have successfully built a distinct research and development strategy based on therapeutic area focus, a robust research engine and a comprehensive, differentiated partnership model of collaborations with academia, biotech firms and startups. Our research and development program aims to leverage a combination of internal and external expertise to deliver a sustainable pipeline, and we currently have approximately 180 active partnerships, helping us actively pursue additional innovation.

We are focusing on three key priorities in the mid-term: growing our portfolio, strengthening our pipeline and boosting our profitability. Pursuing portfolio growth involves a focus on our expected key growth drivers, namely the three key therapeutic areas of GI, oncology and neuroscience, as well as emerging markets. This also includes further strengthening our specialty capabilities, while at the same time working to optimize our portfolio through targeted acquisitions and selected disposals of non-core assets.

Our 237-year history started in 1781, when Chobei Takeda I began selling traditional Japanese and Chinese medicines in Doshomachi, Osaka. After Japan’s Meiji Restoration opened the country to increased overseas trade in the late 1860s, we were one of the first companies to begin importing western medicines into Japan. In 1895, we began our pharmaceutical manufacturing business, and our research division was formed in 1914, allowing us to begin to introduce our own pharmaceutical products. In 1925, we were incorporated as Chobei Takeda & Co., Ltd. and our name was later changed to Takeda Pharmaceutical Company Limited. In 1949, our shares were listed on the Tokyo and Osaka stock exchanges. We began expanding into overseas

 

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markets in the 1960s, first in Asia and, subsequently, other markets around the world. We began enhancing our overseas business infrastructure in the late 1990s, with the formation of new subsidiaries in the United States and Europe.

Since 2014, Takeda has been focused on becoming an agile, research and development driven, global pharmaceutical company that is well positioned to deliver highly innovative medicines and transformative care to patients around the world. We believe that we have successfully strengthened our reputation by our world-class products and innovation, while remaining true to our values. In addition to our efforts to enhance our research and development capabilities, we have a strong track record of successful cross-border merger and acquisition activities and post-acquisition integration, including our acquisition of ARIAD in 2017, Nycomed A/S in 2011 and Millennium Pharmaceuticals, Inc. (“Millennium”) in 2008. In July 2018, we acquired TiGenix NV, an advanced biopharmaceutical company developing novel stem cell therapies for serious medical conditions, with the aim to bring new treatment options to patients with gastrointestinal disorders. We also entered into more than 50 collaborations with third parties during the fiscal year ended March 31, 2018 to help strengthen our pipeline. With the Shire Acquisition, we are pursuing the next major step in our development into a global pharmaceuticals company. See “—Shire Acquisition.”

Our principal capital expenditures during the three fiscal years ended March 31, 2018 consisted of additions to property, plant and equipment and additions to intangible assets. In the fiscal years ended March 31, 2016, 2017 and 2018, excluding acquisitions, we made capital expenditures (consisting of the additions to property, plant and equipment and intangible assets recorded on our consolidated balance sheet) of ¥125.8 billion, ¥148.1 billion and ¥124.1 billion, respectively, including the following highlights:

 

   

In the fiscal year ended March 31, 2016, we invested $30 million to acquire a biologics manufacturing facility located in Brooklyn Park, Minnesota, United States from Baxalta US Inc.;

 

   

In the fiscal year ended March 31, 2017, we invested ¥8.3 billion to prepare the manufacturing facility in Brooklyn Park, Minnesota acquired from Baxalta US. Inc. for the production of ENTYVIO; and

 

   

In the fiscal year ended March 31, 2018, we invested ¥17.9 billion to construct our new global headquarters in Tokyo. We also invested ¥11.4 billion to purchase manufacturing equipment at our German subsidiary, Takeda GmbH, including ¥4.9 billion in equipment for manufacturing of vaccines for dengue fever.

During the same period, our main acquisitions and divestitures included:

 

   

In the fiscal year ended March 31, 2016, the transfer of all the shares we owned in Mizusawa Industrial Chemicals, Ltd. to Osaka Gas Chemicals Co., Ltd. and sale of our respiratory portfolio to AstraZeneca;

 

   

In the fiscal year ended March 31, 2017, the acquisition of ARIAD and the transfer of certain of our long-listed products in Japan to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture we formed with Teva Pharmaceutical Industries Ltd., in which we hold a 49% interest;

 

   

In the fiscal year ended March 31, 2018, the sale of our shares in Wako Pure Chemical to FUJIFILM Corporation, and the sale of seven additional long-listed products to Teva Takeda Yakuhin Ltd.

In December 2017, we entered into an agreement with Takashimaya Company Limited to sell our Tokyo Takeda building and the Takeda Shin-Edobashi building. In July 2018, we completed our acquisition of TiGenix NV, as discussed above, and we sold and divested all our shares and assets in Multilab Indústria e Comércio de Produtos Farmacêuticos Ltda. to Novamed Fabricação de Produtos Farmacêuticos Ltda. In August 2018, we sold and divested all our shares and assets in Guangdong Techpool Bio-Pharma Co., Ltd. to Shanghai Pharmaceutical Holding Co. Ltd., pursuant to the agreement we signed in May 2018.

 

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The address of our registered head office is 1-1, Doshomachi 4-Chome, Chuo-ku, Osaka, 540-8645, Japan, and the address of our global head office is 1-1, Nihonbashi-Honcho 2-Chome, Chuo-ku, Tokyo, 103-8668, Japan; telephone number: 81-3-3278-2306. Takeda’s agent in the United States in connection with this registration statement is Takeda Pharmaceuticals U.S.A., Inc., 1 Takeda Parkway, Deerfield, IL 60015 U.S.A., telephone number: 1-224-554-6500.

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. Our corporate website is www.takeda.com.

Shire Acquisition

Overview

On May 8, 2018, the boards of Takeda and Shire reached agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire, which we refer to as the “Shire Acquisition.” The Shire Acquisition is expected to close on or around January 8, 2019. Under the terms of the Shire Acquisition, each Shire shareholder is entitled to receive $30.33 in cash and either 0.839 New Takeda shares or 1.678 Takeda ADSs for each share of Shire. The expected aggregate consideration is approximately £46 billion (approximately ¥6.96 trillion). This estimate is based on the following assumptions:

 

   

the closing price of our shares on the Tokyo Stock Exchange of ¥4,923 per share; and

 

   

exchange rates of £1.00 to ¥151.51 and £1.00 to $1.3945.

In each case, such assumptions are as of April 23, 2018, being the day prior to the announcement that the Shire board would, in principle, be willing to recommend the Shire Acquisition at such consideration. The estimated aggregate consideration is further based on a total issued and to-be-issued share capital of Shire totaling 937,925,528 shares as of May 4, 2018, the last practicable date prior to the announcement of the Shire Acquisition.

Immediately following completion of the Shire Acquisition, we expect that Shire shareholders will own approximately 50% of the combined group. We believe the Shire Acquisition will create a global, values-based and research and development-driven biopharmaceutical company incorporated and headquartered in Japan, with an attractive geographic footprint and the scale to drive future development. Specifically, we expect that the Shire Acquisition will strengthen Takeda’s core therapeutic areas, bringing together Takeda and Shire’s complementary positions in GI and neuroscience and provide leading positions in rare diseases and plasma-derived therapies to complement our existing strength in oncology and focused efforts in vaccines.

Takeda Following the Shire Acquisition

We believe that there is a compelling strategic and financial rational for undertaking the Shire Acquisition, and that the Shire Acquisition will allow us to create a global, values-based, research and development-driven biopharmaceutical company incorporated and headquartered in Japan, with an attractive geographic footprint and the scale to drive future development. In particular, we expect that the combined group will have attractive positions in Japan and the United States, with the United States in particular accounting for nearly half of consolidated revenues, while also maintaining a strong presence in other international markets.

We expect that the combined company will have leading positions in four main therapeutic areas: GI, oncology, neuroscience and rare diseases, with additional strength in plasma-derived therapies and vaccines. Moreover, we and Shire have complementary product development pipelines, with our strength in early stage development, research-oriented development and small molecules being complemented by Shire’s expertise in rare diseases, its modality-diverse mid- and late-stage pipeline enriched with large molecule programs and innovative gene therapy and recombinant protein technologies.

 

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Following the completion of the Shire Acquisition and the following integration of Shire’s business into ours, we expect to be able to achieve significant, recurring pre-tax synergies of at least $1.4 billion annually by the end of the third fiscal year after the completion of the Shire Acquisition, originating from efficiencies in the combined company’s sales, marketing and administrative functions, research and development efforts and product manufacturing and supply. We believe that the realization of these synergies will require non-recurring costs of approximately $2.4 billion in the first three fiscal years following the completion of the Shire Acquisition. We believe that the substantial cash flow generation expected to result from the Shire Acquisition will enable us to maintain our well-established dividend policy, and de-lever following completion. We intend to maintain our investment grade credit rating, with a target net debt to Adjusted EBITDA ratio of 2.0x or less within three to five years following completion of the Shire Acquisition, and are considering disposals of non-core assets to increase the pace of deleveraging.

We also believe that the combined company will be able to realize additional revenue synergies, arising from leveraging the combined strengthened global infrastructure of Takeda and Shire and through greater market presence in our key therapeutic areas, particularly GI and neuroscience.

Following the Shire Acquisition, we intend to maintain our global headquarters in Japan, to expand our research and development presence in the Boston area and to have major regional locations in Japan, Singapore, Switzerland and the United States. We plan to commence a review of the functions to be undertaken at Shire’s current headquarters in Dublin within the first year following completion of the Shire Acquisition. Takeda’s shareholders approved the election of three Shire directors to join Takeda’s board of directors at the extraordinary general meeting of shareholders on December 5, 2018. See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Directors.” The election of these new directors is conditional upon the Scheme taking effect as planned and will become effective upon the date of completion of the Shire Acquisition, which we intend to be on or around January 8, 2019.

 

  B.

Business Overview.

We are a global pharmaceutical company with an innovative portfolio, engaged primarily in the research, development, production and marketing of pharmaceutical products. We have a diversified global business base operating in more than 70 countries and our prescription drugs are marketed in approximately 100 countries. We develop and market pharmaceutical products to treat a broad range of medical conditions including GI diseases, cancer, neurological and psychiatric diseases, and other medical conditions, including diabetes and hypertension, as well as vaccines.

We are focusing on the three key priorities in the mid-term: growing our portfolio, strengthening our pipeline and boosting our profitability. Pursuing portfolio growth involves a focus on our expected key growth drivers, particularly in our three key therapeutic areas of GI, oncology and neuroscience, as well as emerging markets. We are also pursuing further improvements in specialty capabilities, particularly for unmet treatment needs, while making targeted acquisitions and divestitures to further increase our level of focus on our key growth drivers.

Our three core therapeutic areas are GI, oncology and neuroscience. Our key growth driver products in these core therapeutic areas include ENTYVIO, TAKECAB, NINLARO, ADCETRIS, ICLUSIG, ALUNBRIG and TRINTELLIX. We also focus on developing vaccines to address global health needs.

In GI, our principal products include:

 

   

ENTYVIO, a treatment for moderate to severe ulcerative colitis and Crohn’s disease, and a product we expect to be a driver for growth in the future. Sales of ENTYVIO have grown strongly since its launch in 2014 to become our top selling product in the fiscal year ended March 31, 2018. In July 2018, we obtained a New Drug Application (“NDA”) approval for ENTYVIO for the treatment of patients with moderately to severely active ulcerative colitis in Japan. ENTYVIO is now approved in more than 50 countries worldwide, and we continue to seek approval for ENTYVIO in additional countries. In the fiscal year ended March 31, 2018, our revenue from ENTYVIO was ¥201.4 billion.

 

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PANTOPRAZOLE, a proton-pump inhibitor used to treat gastroesophageal reflux disease. We obtained this product in our acquisition of Nycomed A/S in 2011. PANTOPRAZOLE is sold worldwide in a number of countries and regions, and while our substance patents have expired in several key markets, including the United States and the EU, it continues to generate strong sales in emerging markets. In the fiscal year ended March 31, 2018, our revenue from PANTOPRAZOLE was ¥65.8 billion.

 

   

DEXILANT, a treatment for erosive gastroesophageal reflux disease that was launched in the United States in 2009. DEXILANT has also been approved in Europe and in a number of emerging markets. In the fiscal year ended March 31, 2018, our revenue from DEXILANT was ¥65.7 billion.

 

   

TAKECAB, a treatment for acid-related diseases, and a product we expect to be a driver for growth in the future. TAKECAB was launched in Japan in 2015 and has achieved significant growth following the expiration of the prescription limitation period in March 2016. In the fiscal year ended March 31, 2018, our revenue from TAKECAB was ¥48.5 billion.

 

   

AMITIZA, a treatment for constipation that was launched in the United States in 2006. AMITIZA is in-licensed from Sucampo Pharmaceuticals, Inc., which became a wholly-owned subsidiary of Mallinckrodt plc in February 2018, and we have the exclusive rights to further develop and commercialize AMITIZA in all global markets, except Japan and the People’s Republic of China. In the fiscal year ended March 31, 2018, our revenue from AMITIZA was ¥33.8 billion.

In oncology, our principal products include:

 

   

LEUPRORELIN, a treatment for prostate cancer, breast cancer and endometriosis, is marketed in approximately 100 countries worldwide. In the fiscal year ended March 31, 2018, our revenue from LEUPRORELIN was ¥108.1 billion.

 

   

VELCADE, a treatment for multiple myeloma (“MM”) and relapsed mantle cell lymphoma that is approved in more than 90 countries worldwide. VELCADE is indicated in the United States, Europe, and Japan as a first-line treatment for MM patients. Janssen Pharmaceutical Companies have commercialization rights outside the United States and pay royalties to us on VELCADE sales in their territories. In the fiscal year ended March 31, 2018, our revenue from VELCADE was ¥113.7 billion in the United States, and we recognized ¥23.6 billion from sales outside the United States. Following the expiration of patent protection over its active ingredient in 2017, generic versions of VELCADE have been introduced.

 

   

NINLARO, the first oral proteasome inhibitor for the treatment of MM, and a product we expect to be a driver for growth in the future. NINLARO has experienced a strong uptake in sales since launching in the United States in 2015. Due to its efficacy and safety profile and convenient orally administered dosing of one capsule per week, we believe NINLARO has significant potential to improve treatment outcomes in MM by extending therapy duration. We believe NINLARO has the potential to become a broadly-used treatment for MM. NINLARO was approved in the EU in 2016 and in Japan in 2017, and we are seeking marketing authorization in a number of additional countries. In the fiscal year ended March 31, 2018, revenue from NINLARO was ¥46.4 billion.

 

   

ADCETRIS, an anti-cancer agent used to treat Hodgkin lymphoma (“HL”) and systemic anaplastic large cell lymphoma (“sALCL”), and a product we expect to be a driver for growth in the future. ADCETRIS was launched in the United States, the EU and Japan in 2011, 2012 and 2014, respectively. ADCETRIS has received marketing authorization by regulatory authorities in more than 60 countries worldwide. We jointly develop ADCETRIS with Seattle Genetics, Inc. and have commercialization rights in countries outside the United States and Canada. We believe that ADCETRIS has the potential to become a cornerstone in the treatment of malignancies with the presence of CD30, a key driver of classical HL tumor pathogenesis, and we are working to expand the target patient population with new indications. In the fiscal year ended March 31, 2018, our revenue from ADCETRIS was ¥38.5 billion.

 

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ICLUSIG, a treatment for chronic myeloid leukemia and Philadelphia chromosome positive acute lymphoblastic leukemia, and a product we expect to be a driver for growth in the future. ICLUSIG was developed by ARIAD and is approved in the United States, the EU, Australia, Switzerland, Israel, Canada and Japan. In the fiscal year ended March 31, 2018, our revenue from ICLUSIG was ¥23.1 billion.

 

   

ALUNBRIG, an orally administered small molecule anaplastic lymphoma kinase (“ALK”) inhibitor used to treat non-small cell lung cancer (“NSCLC”), and a product we expect to be a driver for growth in the future. ALUNBRIG was developed by ARIAD. ALUNBRIG was granted accelerated approval in the United States in April 2017, and is currently under regulatory review in the EU. We believe ALUNBRIG has the potential to be the best-in-class ALK inhibitor, and we are conducting studies that aim to broaden its approved indications. In the fiscal year ended March 31, 2018, our revenue from ALUNBRIG was ¥2.8 billion.

In neuroscience, our principal product is:

 

   

TRINTELLIX, an antidepressant indicated for the treatment of major depressive disorder in adults, and a product we expect to be a driver for growth in the future. TRINTELLIX was co-developed with H. Lundbeck A/S, and was launched in 2014 in the United States. We have commercialization rights in the United States and Japan (although TRINTELLIX has not yet been launched in Japan). In 2016, the drug was renamed from BRINTELLIX to TRINTELLIX in the United States to avoid name confusion with another unrelated treatment. In the fiscal year ended March 31, 2018, our revenue from TRINTELLIX was ¥48.4 billion in the United States.

Clinical Development Activities

The following table shows a summary of the status of our clinical-stage pipeline as of October 31, 2018, including approved products in life cycle management. “Approved with Life Cycle Management” refers to those products which have been approved for any indication and for which we are pursuing regional expansions, additional indications or new formulations.

 

Category

   Phase I      Phase II      Phase III /
Filed
     Approved
with Life
Cycle
Management
 

GI

     4        2        —          3  

Oncology

     6        3        2        6  

Neuroscience

     7        2        —          1  

Vaccine

     2        2        1        —    

Total

     19        9        3        10  

 

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The following table lists the compounds that we are developing as of October 31, 2018. The compounds in our pipeline are in various stages of development, and the contents of the pipeline may change as compounds currently under development drop out and new compounds are introduced. Whether the compounds listed below are ever successfully released as products depends on various factors, including the results of pre-clinical and clinical trials, market conditions for various drugs and regulatory approvals.

GI Pipeline

 

Development code
<generic name>
Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

  Stage(2)  

In-house/

In-license

MLN0002 <vedolizumab> ENTYVIO (U.S., EU, Japan)

 

Humanized monoclonal antibody against α4ß7 integrin (injection)

  Crohn’s disease   Japan
China
 

Filed (July 2018)

P-III

  In-house
  Ulcerative colitis   China   P-III  
  Subcutaneous formulation (for Ulcerative colitis, Crohn’s disease)   U.S.

EU

Japan

 

P-III

P-III

P-III

 
    Adalimumab head-to-head in patients with ulcerative colitis   Global   P-III  
    Graft-versus-host disease prophylaxis in patients undergoing allogeneic hematopoietic stem cell transplantation   —     P-II(a)  
Cx601 <darvadstrocel> ALOFISEL (EU)   A suspension of allogeneic expanded adipose-derived stem cells (injection)   Refractory complex perianal fistulas in patients with Crohn’s disease   U.S.   P-III   In-house
TAK-438 <vonoprazan> TAKECAB (Japan)   Potassium-competitive acid blocker (oral)   Acid-related diseases   China   Filed (February 2018)   In-house
    Non-erosive reflux disease in patients with Gastro-esophageal Reflux Disease   Japan   P-III  
  Gastro-esophageal reflux disease in patients who have a partial response following treatment with a proton pump inhibitor   EU   P-II(b)  
TAK-954   5-HT4 receptor agonist (injection)   Enteral feeding intolerance   —     P-II(b)  

In-license

(Theravance Biopharma, Inc.)

TAK-906(3)   Dopamine D2/D3 receptor antagonist (oral)   Gastroparesis   —     P-II(a)   In-house

 

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Development code
<generic name>
Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

  Stage(2)  

In-house/

In-license

TIMP-GLIA(4)   Tolerizing Immune Modifying nanoParticle (TIMP) (injection)   Celiac Disease   —     P-I   In-license (Cour Pharmaceutical Development Company, Inc.)
Kuma-062(5)   Glutenase (oral)   Celiac Disease   —     P-I   In-license (PvP Biologics, Inc.)
TAK-671   Protease inhibitor (injection)   Acute pancreatitis   —     P-I   In-house
TAK-018   FimH antagonist (oral)   Crohn’s disease   —     P-I   In-license (Enterome Bioscience SA)

 

Notes:

(1)

Brand name and country/region indicate the brand name and country in which the specific asset has already been approved for any indication in any of the U.S., EU, Japan or China and Takeda has commercialization rights for such asset.

(2)

Country/region in this column denote where a clinical study is ongoing or a filing has been made with our specific intention to pursue approval in any of the U.S., EU, Japan or China.

(3)

TAK-906 was previously known as ATC 1906. In March 2017, Takeda executed its option right to acquire Altos Therapeutics.

(4)

Cour Pharmaceutical Development Company, Inc. led Phase I development.

(5)

PvP Biologics, Inc. led Phase I development.

Oncology Pipeline

 

Development code
<generic name>
Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

 

Stage(2)

 

In-house/

In-license

<brigatinib>

ALUNBRIG (U.S.)

 

ALK inhibitor (oral)

  2L ALK-positive metastatic Non-Small Cell Lung Cancer in patients previously treated with crizotinib  

EU

 

China

 

Filed (February 2017)

P-1

  In-house
       
       
    1L ALK-positive Non-Small Cell Lung Cancer  

U.S. EU

China

 

P-III

P-III

P-I

 
    2L ALK-positive Non-Small Cell Lung Cancer in Japanese patients previously treated with ALK inhibitors   Japan   P-II(a)  

 

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Development code
<generic name>
Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

 

Stage(2)

 

In-house/

In-license

SGN-35

<brentuximab vedotin>

ADCETRIS
(EU, Japan)

  CD30 monoclonal antibody-drug conjugate (injection)   Front line Hodgkin Lymphoma  

EU

 

Filed (November 2017)

  In-license (Seattle Genetics, Inc.)
  Front line Peripheral T-cell Lymphoma  

EU

Japan

 

P-III

P-III

  Relapsed/refractory Hodgkin Lymphoma   China   P-II
    Relapsed/refractory systemic Anaplastic large-cell lymphoma   China   P-II

MLN9708

<ixazomib>

NINLARO (Global)

  Proteasome inhibitor (oral)   Newly diagnosed multiple myeloma  

U.S.

EU

Japan

China

 

P-III

P-III

P-III

P-I

  In-house
    Maintenance therapy in patients with newly diagnosed MM following autologous stem cell transplant  

U.S.

EU

Japan

China

 

P-III

P-III

P-III

P-I

 
    Maintenance therapy in patients with newly diagnosed MM not treated with stem cell transplant   Global   P-III  
    Relapsed/refractory primary amyloidosis  

U.S.

EU

China

 

P-III

P-III

P-III

 
  Relapsed/refractory MM (doublet regimen with dexamethasone)  

U.S.

EU

Japan

 

P-III

P-III

P-III

  Relapsed/refractory MM (triplet regimen with daratumumab and dexamethasone)   Global  

P-II

 

<ponatinib>

ICLUSIG (U.S.)

  BCR-ABL inhibitor (oral)   Front line Philadelphia chromosome-positive acute lymphoblastic leukemia  

U.S.

 

P-III

  In-house
  Dose ranging study for second-line patients with chronic-phase chronic myeloid leukemia   U.S.   P-II(b)

TAK-924

<pevonedistat>

  NEDD 8 activating enzyme inhibitor (injection)   High risk myelodysplastic syndromes, chronic myelomonocytic leukemia, low-blast acute myelogenous leukemia  

U.S.

EU

 

P-III

P-III

  In-house

TAK-385

<relugolix>

  LH-RH antagonist (oral)   Prostate cancer  

Japan

China

 

P-III

P-I

  In-house

 

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Development code
<generic name>
Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

 

Stage(2)

 

In-house/

In-license

TAK-228

<sapanisertib>

  mTORC1/2 inhibitor (oral)   Endometrial cancer   U.S.   P-II(b)   In-house

TAK-659

  SYK/FLT3 kinase inhibitor (oral)   Diffuse large B-cell lymphoma   —     P-II(a)   In-house
  Solid tumors, Hematologic malignancies   P-I

TAK-931

  CDC7 inhibitor (oral)   Metastatic colorectal cancer, Squamous esophageal cancer, Squamous Non-Small Cell Lung Cancer   —     P-II(a)   In-house

<cabozantinib>

  Multi-targeted kinase inhibitor (oral)   2L Renal cell carcinoma   Japan   P-II(a)   In-license (Exelixis, Inc.)
  2L Hepatocellular carcinoma   Japan   P-II(a)  

TAK-079

  Anti-CD38 monoclonal antibody (injection)   Relapsed/refractory multiple myeloma   —     P-I   In-house
  Systemic lupus erythematosus   —     P-I  

TAK-164

  Anti-guanylyl cyclase C antibody drug conjugate (injection)   GI Malignancies   —     P-I   In-house

TAK-573

  CD38-targeted lgG4 genetically fused with an attenuated IFNα (injection)   Relapsed/refractory MM   —     P-I  

In-license

(Teva Pharmaceutical Industries Ltd.)

TAK-788(3)

  EGFR/HER2 inhibitor (oral)   Non-Small Cell Lung Cancer   —     P-I   In-house

TAK-522 / XMT-
1522(4)

  HER2 dolaflexin antibody-drug conjugate (injection)   HER2 positive solid tumors   —     P-I   In-license (Mersana Therapeutics, Inc.)

TAK-981

  SUMO inhibitor (injection)   Multiple cancers   —     P-I   In-house

<niraparib>

  PARP1/2 inhibitor (oral)   Multiple cancer   Japan   P-I   In-license (Tesaro, Inc.)

 

Notes:

(1)

Brand name and country/region indicate the brand name and country in which the specific asset has already been approved for any indication in any of the U.S., EU, Japan or China and Takeda has commercialization rights for such asset.

(2)

Country/region in this column denote where a clinical study is ongoing or a filing has been made with our specific intention to pursue approval in any of the U.S., EU, Japan or China.

(3)

TAK-788 was previously known as AP32788.

(4)

Takeda and Mersana Therapeutics, Inc. (“Mersana”) will co-develop XMT-1522, and Mersana will lead execution of the Phase I trial.

 

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Neuroscience Pipeline

 

Development code
<generic name>

Brand name
(country/region)(1)

 

Drug Class
(administration
route)

 

Indications /

additional formulations

 

Stage(2)

 

In-house/

In-license

Lu AA21004

<vortioxetine>

TRINTELLIX (U.S.)

  Multimodal anti-depressant (oral)   Major depressive disorder  

Japan

 

Filed (September 2018)

  In-license (H. Lundbeck A/S)

TAK-935(3)

  CH24H inhibitor (oral)   Rare pediatric epilepsies   —     P-II(a)   In-house

TAK-831

 

D-amino acid oxidase (DAAO) inhibitor (oral)

  Friedreich’s ataxia   —     P-II(a)   In-house
  Negative symptoms and/or cognitive impairment associated with schizophrenia   —     P-II(a)

WVE-120101(4)

  mHTT SNP1 antisense oligonucleotide (injection)   Huntington’s disease   —     P-I/II   In-license (Wave Life Sciences Ltd.)

WVE-120102(4)

  mHTT SNP2 antisense oligonucleotide (injection)   Huntington’s disease   —     P-I/II   In-license (Wave Life Sciences Ltd.)

TAK-041

  GPR139 agonist (oral)   Negative symptoms and/or cognitive impairment associated with schizophrenia   —     P-I   In-house

TAK-418

  LSD1 inhibitor (oral)   Kabuki syndrome   —     P-I   In-house

TAK-653

  AMPA receptor potentiator (oral)   Treatment Resistant Depression   —     P-I   In-house

TAK-925

  Orexin 2R agonist (injection)   Narcolepsy   —     P-I   In-house

TAK-341 / MEDI-1341(5)

  Alpha-synuclein antibody (injection)   Parkinson’s Disease   —     P-I   In-license (AstraZeneca)

 

Notes:

(1)

Brand name and country/region indicate the brand name and country in which the specific asset has already been approved for any indication in any of the U.S., EU, Japan or China and Takeda has commercialization rights for such asset.

(2)

Country/region in this column denote where a clinical study is ongoing or a filing has been made with our specific intention to pursue approval in any of the U.S., EU, Japan or China.

(3)

Co-development with Ovid Therapeutics Inc.

(4)

50:50 co-development and co-commercialization with Wave Life Sciences Ltd.

(5)

Partnership with AstraZeneca. AstraZeneca leads Phase I development.

 

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Vaccine Pipeline

 

Development code
<generic name>

Brand name
(country/region)(1)

 

Type of vaccine
(administration
route)

 

Indications /

additional formulations

 

Stage(2)

 

In-house/
In-license

TAK-003

  Tetravalent dengue vaccine (injection)   Prevention of dengue fever caused by dengue virus   —     P-III   In-house

TAK-214

  Norovirus vaccine (injection)   Prevention of acute gastroenteritis caused by norovirus   —     P-II(b)   In-house

TAK-195

  Sabin inactivated polio vaccine (injection)   Prevention of poliomyelitis   —     P-I/II   In-house

TAK-021

  EV71 vaccine (injection)   Prevention of hand, foot and mouth disease caused by enterovirus 71   —     P-I   In-house

TAK-426

 

Zika vaccine

(injection)

  Prevention of the Zika virus infection   —     P-I   In-house

 

Notes:

(1)

Brand name and country/region indicate the brand name and country in which the specific asset has already been approved for any indication in any of the U.S., EU, Japan or China and Takeda has commercialization rights for such asset.

(2)

Country/region in this column denote where a clinical study is ongoing or a filing has been made with our specific intention to pursue approval in any of the U.S., EU, Japan or China.

Recent Progress in Clinical Trials

The chart below shows recent progress in clinical trial stages since May 14, 2018, when the results for the fiscal year ended March 31, 2018 were announced.

 

Development code

  <generic name>

  

Indications /

additional formulations

   Country/Region(1)  

Progress in stage

MLN0002

<vedolizumab>

   Ulcerative colitis    Japan   Approved (July 2018)

MLN0002

<vedolizumab>

   Crohn’s disease    Japan   Filed (July 2018)

MLN9708

<ixazomib>

   Relapsed/refractory MM (triplet regimen with daratumumab and dexamethasone)    Global   P-II

MLN0002

<vedolizumab>

   Graft-versus-Host Disease prophylaxis in patients undergoing allogeneic hematopoietic stem cell transplantation    —     P-II(a)

Kuma062

   Celiac disease    —     P-I

TAK-164

   GI malignancies    —     P-I

 

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Development code

  <generic name>

  

Indications /

additional formulations

   Country/Region(1)  

Progress in stage

SGN-35

<brentuximab vedotin>

   Front line Hodgkin Lymphoma    Japan   Approved (September 2018)

Lu AA21004

<vortioxetine>

   Data added to labeling that demonstrated superiority over escitalopram in improving SSRI-induced sexual dysfunction in patients with Major Depressive Disorder    U.S.   Approved (October 2018)

Lu AA21004

<vortioxetine>

   Major depressive disorder    Japan   Filed (September 2018)

<ponatinib>

  

Front line Philadelphia chromosome-positive acute lymphoblastic leukemia

   U.S.
  P-III

<cabozantinib>

   2L hepatocellular carcinoma    Japan   P-II(a)

WVE-120101

< - >

   Huntington’s disease    —     P-I/II

WVE-120102

< - >

   Huntington’s disease    —     P-I/II

TAK-671

< - >

   Acute pancreatitis    —     P-I

TAK-981

< - >

   Multiple cancers    —     P-I

TAK-018

< - >

   Crohn’s disease    —     P-I

 

Note:

(1)

Country/region in this column denotes where a clinical study is ongoing or a filing has been made with our specific intention to pursue approval in any of the U.S., EU, Japan or China.

Breakdown of Revenues by Category of Activity and Geographic Market

See “Item 5. Operating and Financial Review and Prospects—A. Operating Results” of this registration statement.

Availability of Raw Materials

Although we develop and manufacture the active ingredients used in some of our products at our own facilities, we are dependent on third-party suppliers for a portion of the raw materials and compounds used in some of the other products we produce. Although we believe that, in the event we are unable to source any products or ingredients from any of our major suppliers, we could replace those products or substitute ingredients from other suppliers, we may not be able to do so without significant difficulty or significant increases in our cost of goods sold.

We closely monitor, continuously review and revise the supply sourcing strategy for our products to identify in a timely manner any risks in our supply chain, including risks arising from our dependency on outsourced manufacturing relationships with third party suppliers. Where necessary, inventory levels of either key materials and finished products are managed strategically to address potential risks relating to operational and quality issues, production capacity and single sourcing among others. For critical and new technology

 

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products, we have decided to make significant long-term capital investments to build internal manufacturing capacity and secure dual sources to reduce the current dependency on outsourced manufacturing relationship with third-party suppliers.

Sales and Marketing

We organize our sales channels under five regional business units, United States, Japan Pharma, Emerging Markets, Europe-Canada (“EUCAN”) and Japan Consumer Healthcare, and two global specialty business units, Oncology and Vaccines.

Our regional business units, United States, Japan Pharma, Emerging Markets and EUCAN, are focusing on investments that support growth potential in the market and enhance efficiency. Our primary sales and marketing activities are organized around these four business units.

The U.S. business unit focuses on recently approved products in the United States, the largest pharmaceutical market in the world. It has a specialized sales force to support ENTYVIO to better meet the needs of those who treat and manage IBD, as well as a general medicine sales force, and added a dedicated neuroscience sales team to support TRINTELLIX to reach psychiatrists who treat major depressive disorder (“MDD”).

The Japan Pharma business unit focuses on retaining our position as one of the leading pharmaceutical companies in our home market of Japan, where the government is driving stricter control of drug prices and promoting the penetration of generics.

The Emerging Markets business unit makes focused investments in order to maximize growth potential in areas across Asia Pacific, Greater China, Latin America, Near East, Middle East & Africa and Russia/CIS. Established Products, or branded generics (also referred to as Value Brands in the Emerging Markets), are valued by our customers as quality medicine, and innovative products such as ENTYVIO, NINLARO and ADCETRIS are also crucial for Emerging Markets, as we expect these key growth drivers to exhibit strong growth in the coming years.

The EUCAN business unit continues to grow the business with a more specialized approach in the European and Canadian markets, where public insurance has set a higher bar for the reimbursement of medicines, requiring innovation and differentiation for the products to be reimbursed. As Canada’s health insurance system is very similar to that of Europe, the Canadian market is managed by the EUCAN business unit.

Intellectual Property

Due to the lengthy development periods for new drugs, the high costs of research and development and the small percentage of researched compounds that reach the market, intellectual property considerations play an important role in the return of investments for research and development of a new drug.

We seek intellectual property protection under applicable laws for significant product developments in major markets. Patents are our primary means of protecting the technologies we use in relation to prescription drugs. Patents provide the holder with the right to exclude others from using an invention related to the drug. We use various types of patents to protect our pharmaceutical products, including substance patents, which cover active ingredients, as well as patents covering usage, manufacturing processes and formulation of drugs. The substance patent is a drug’s primary form of intellectual property protection, and its status can impact the commercial viability of the drug.

In the U.S., patents generally expire twenty years after the filing date of the application, subject to potential patent term adjustments for delays in patent issuance based upon certain delays in prosecution by the United States Patent and Trademark Office. A U.S. pharmaceutical patent that claims a product, method of treatment using a product or method of manufacturing a product may also be eligible for a patent term extension

 

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based on the time the FDA took to approve the product. This type of extension may only extend the patent term for a maximum of five years, and may not extend the patent term beyond fourteen years from regulatory approval. Only one patent may be extended for any product based on FDA delay. In addition to patent exclusivities, the FDA may provide data or market exclusivity for a new chemical entity or an “orphan drug,” each of which run in parallel to any patent protection. Regulatory data protection or exclusivity prevents a potential generic competitor from relying on clinical trial data that were generated by the sponsor when establishing the safety and efficacy of its competing product. Market exclusivity prohibits any marketing of the same drug for the same indication.

Similarly, in Japan, a patent can be issued for active pharmaceutical ingredients. Although methods of treatment, such as dosage and administration, are not patentable in Japan, pharmaceutical compositions for a specific dosage or administration method as well as processes to make a pharmaceutical composition are patentable. Patents in Japan generally expire 20 years after the filing date of the patent application. Patents for pharmaceuticals may be extended for up to five years, depending on the amount of time spent for the drug approval process. Japan also has a regulatory data protection system called a “re-examination period” of eight years for pharmaceuticals that contain new active pharmaceutical ingredients and four years to six years for new indications and formulations and a ten year orphan drug exclusivity system.

Patent applications in Europe may be filed in the European Patent Office (“EPO”) or in a particular country in Europe. The EPO system permits a single application to be granted for the EU, plus certain other non-EU countries, such as Switzerland and Turkey. When the EPO grants a patent, it is then validated in the countries that the patent owner designates. The term of a patent granted by the EPO or a European country office is generally 20 years from the filing date of the patent application, subject to potential patent term extensions and adjustments. Pharmaceutical patents can be granted a further period of exclusivity under the Supplementary Protection Certificate (“SPC”) system. SPCs are designed to compensate the owner of the patent for the time it took to receive marketing authorization by the European Health Authorities. An SPC may be granted to provide, in combination with the patent, up to 15 years of exclusivity from the date of the first European marketing authorization. However, an SPC cannot last longer than five years. The SPC duration can additionally be extended by a further Pediatric Extension of six months if the product is the subject of an agreed pediatric investigation plan. The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws that are intended to but do not always have the same effect. The EU also provides a system of regulatory data exclusivity for authorized human medicines, which runs in parallel to any patent protection. The system for drugs being approved today is usually referred to as “8+2+1” because it provides an initial period of eight years of data exclusivity, during which a competitor cannot rely on the relevant data, a further period of two years of market exclusivity, during which the data can be used to support applications for marketing authorization but the competitive product cannot be launched and a possible one-year extension of the market exclusivity period if, during the initial eight-year data exclusivity period, the sponsor registered a new therapeutic indication with “significant clinical benefit.” This system applies both to national and centralized authorizations. The EU also has an orphan drug exclusivity system for medicines similar to the U.S system. If a medicine is designated as an orphan drug, it benefits from ten years of market exclusivity, during which time a similar medicine for the same indication will not receive marketing authorization. Under certain circumstances, this exclusivity can be extended with a two-year Pediatric Extension.

Worldwide, we experience challenges in the area of intellectual property from factors such as the penetration of generic versions of our products following the expiry of the relevant patents and the launch by competitors of over-the-counter versions of our products. We work to secure extended patent rights by adding new indications and changing formulations. Our Global General Counsel is responsible for the oversight of our Intellectual Property operations, as well as our legal and compliance operations. Our Intellectual Property Department supports our overall corporate strategy by focusing efforts on three main themes:

 

   

maximization of the value of our products and research pipeline and protection of related rights aligned to the strategies of our therapeutic area units;

 

   

facilitation of more dynamic harnessing of external innovation through partner alliance support; and

 

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securing and protection of intellectual property rights around the world, including in emerging markets.

As infringement of our intellectual property rights poses a risk of loss of expected earnings derived from those rights, we have internal processes in place to manage patents and other intellectual property. This program includes both remaining vigilant against patent infringement by others as well as exercising caution, starting at the research and development stage, to ensure that our products and activities do not violate intellectual property rights held by others. As part of our strategy to manage intellectual property rights worldwide, we have overseas intellectual property operations in the United States, based in Chicago, San Diego and Cambridge; and in Switzerland, based in Zurich.

The following table shows a summary of the current substance patents (where applicable and unless otherwise noted) and trademarks covering each of our main pharmaceutical products in Japan, the United States and the EU. The “Expiry Date” means an original patent expiry date which may be extended by a patent term extension or supplementary protection certificate (“SPC”). The “Extended Expiry” means an extended patent expiry date. Information is not listed for markets over which we do not have commercialization rights. For certain of these products, there are other patents related to, for example, methods of manufacturing or use of the products in the treatment of particular diseases or conditions, which may protect them even following the expiration of the relevant substance patent. We may also protect our products using other forms of intellectual property, such as trade secrets and proprietary know-how. In addition, expiration dates set forth below do not necessarily reflect possible changes to the patent term caused by patent term extensions, the outcome of litigation or other proceedings or other reasons.

 

Our product

 

Japan

 

United States

 

EU

GI:

     

ENTYVIO

  Substance Patent    
  (1)  

PAT# 7147851 (biologics, no orange-book listed patent)

Expiry Date: 7/24/2017

Extended Expiry Date: 9/27/2021

 

PAT# 0918797

Expiry Date: 8/6/2017

Extended Expiry: 8/6/2022 in AT, BE, GR, LU, PT, SI, RO, LT and LV

  Trademark    
  Reg. No. 5600446   Reg. No. 4580498   Reg. No. 10493369

PANTOPRAZOLE

  Substance Patent    
  (1)   (1)   (1)
  Trademark
  Reg. No. 1004803   Reg. No. 2207706  

Reg. No. 1481985

Reg. No. 3175783

DEXILANT

  Substance Patent    
 

N/A

Crystal form patent

 

N/A

Crystal form patent

 

N/A

Crystal form patent

  Trademark    
    Reg. No. 3887989  

Reg. No. 9680745

Reg. No. 9680596

TAKECAB

  Substance Patent    
 

PAT# 4035559

Expiry Date: 8/29/2026

Extended Expiry Date:

8/29/2031

 

PAT# 7977488

Expiry Date: 8/11/2028

 

PAT# 1919865

Expiry Date: 8/29/2026

  Trademark    
  Reg. No. 5579687   Reg. No. 4988099   Reg. No. 9608613

 

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Our product

 

Japan

 

United States

 

EU

AMITIZA

  Substance Patent    
 

N/A(2)

Bicyclic Tautomer of AMITIZA

 

N/A

Bicyclic Tautomer of AMITIZA

 

N/A

Bicyclic Tautomer of AMITIZA

Oncology:

 

LEUPROLIN

  Substance Patent    
  (1)   (1)   (1)
  Trademark
  Reg. No. 2426577     Reg. No. IR258104

VELCADE

  Substance Patent
 

PAT# 04162491

Expiry Date: 1/25/2022

 

PAT# 6713446

Expiry Date: 7/25/2022

 

PAT# 6958319

Expiry Date: 7/25/2022 (including pediatric exclusivity)

 

PAT# 788360

Expiry Date: 4/28/2019

  Trademark
  Reg. No. 4643739   Reg. No. 2795745   Reg. No. 2727287

NINLARO

  Substance Patent
 

PAT# 5261488

Expiry Date: 8/6/2027

Extended Expiry Date:

July 2031

 

PAT# 7442830

Expiry Date: 8/6/2027

Extended Expiry Date:

not yet granted but expected to be Nov 2029.

 

PAT# 2178888

Expiry Date: 2027/8/6

Extended Expiry Date: 11/23/2031

 

PAT# 5566380

Expiry Date: 6/16/2029

 

PAT# 7687662

Expiry Date: 8/6/2027

 

PAT# 2318419

Expiry Date: 6/16/2029

 

PAT# 6010066

Expiry Date: 6/16/2029

 

PAT# 8003819

Expiry Date: 8/6/2027

 
  Trademark
  Reg. No. 2426577     Reg. No. IR258104

ADCETRIS(3)

  Substance Patent
 

PAT# 4095444

Expiry Date: 2022/4/30

 

PAT# 4303964(4)

Expiry Date: 11/28/2021

Extended Expiry Date:

8/12/2026

 

PAT# 4741838

Expiry Date: 7/31/2023

Extended Expiry Date: 4/3/2026

  N/A  

PAT#1545613

Expiry Date: 7/31/2023

Extended Expiry Date:

10/24-30/2027(5)

  Trademark
  Reg. No. 5366258   N/A   Reg. No. 9271453

 

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Our product

 

Japan

 

United States

 

EU

ALUNBRIG

  Substance Patent
 

PAT# 6190415

Expiry Date: 5/21/2029

 

PAT# 6271064

Expiry: 5/21/2029

 

PAT# 9012462

Expiry Date: 7/31/2020

Extended Expiry Date:

not yet granted but expected to be April 28, 2031.

 

PAT# 2300013

Expiry Date: 5/21/2029

  Trademark
  Reg. No. 1303378   Reg. No. 5251769   Reg. No. 015091317

ICLUSIG

  Substance Patent    
 

PAT# 5200939(6)

Expiry Date: 7/27/2030(7)

 

PAT# 8114874

Expiry Date: 12/22/2026(8)

 

PAT# 1973545(9)

Expiry Date: 7/3/2028(10)

  Trademark    
  Reg. No. 5473841   Reg. No. 4324899   Reg. No. 010087633

Neuroscience:

     

TRINTELLIX

  Substance Patent
 

PAT# 3896116

Expiry Date: 10/2/2022

 

PAT# 7144884

Expiry Date: 10/2/2022

Extended Expiry Date: 6/17/2026 (to be issued soon)

  N/A
  Trademark
  Reg. No. 5904166   Reg. No. 5023071   N/A

 

Notes:

(1)

The substance patent has expired.

(2)

Takeda has the exclusive rights to commercialize AMITIZA in all global markets, except Japan and the People’s Republic of China.

(3)

Takeda has commercialization rights for ADCETRIS outside the United States and Canada.

(4)

This patent is granted for the scope of use.

(5)

Current SPC ranges from Oct 24-30, 2027 for the expiry dates.

(6)

Out-licensed to Otsuka Pharmaceutical Co., Ltd.

(7)

Includes patent term extension.

(8)

Excludes additional 33 days of patent term adjustment awarded by the United States District Court for the Eastern District of Virginia, but not recognized by the Patent and Trademark Office. Excludes possible pediatric exclusivity.

(9)

Out-licensed to Incyte Corporation.

(10)

Includes SPC. Excludes possible pediatric exclusivity.

Licensing and Collaboration Agreements

In the ordinary course of our business, we enter into agreements for licensing or collaboration in the development and commercialization of products. Our business does not materially depend on any one of these agreements. Instead, they overall form a portion of Takeda’s strategy to leverage a mix of internal and external resources to develop and commercialize new products. Certain of the agreements which have led to successful commercialization to date are summarized below:

 

   

ADCETRIS: We entered into a Collaboration Agreement with Seattle Genetics in 2009 for the global co-development of ADCETRIS and its the commercialization around the world (other than the United States and Canada, where ADCETRIS is commercialized by Seattle Genetics). We may be required to pay milestone payments related to regulatory and commercial progress by us under the collaboration. We also pay tiered royalties with percentages ranging from the mid-teens and to the mid-twenties based on net sales of ADCETRIS within our licensed territories. We and Seattle Genetics equally co-fund the cost of selected development activities conducted under the

 

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collaboration. Either party may terminate the collaboration for cause, or by mutual consent. We may terminate the collaboration at will, and Seattle Genetics may terminate the collaboration in certain circumstances. If neither party terminates the collaboration agreement, then the agreement automatically terminates on the expiration of all payment obligations. As of September 30, 2018, our aggregate potential development and commercial milestone payments under the ADCETRIS collaboration were approximately $155 million.

 

   

TRINTELLIX: We entered into a License, Development, Supply and Commercialization Agreement with H. Lundbeck A/S in September 2007 for the exclusive co-development and co-commercialization in the United States and Japan of several compounds in Lundbeck’s pipeline for the treatment of mood and anxiety disorders, under which agreement we commercialize TRINTELLIX in the United States (TRINTELLIX has not yet been launched in Japan). Under the agreement, we and Lundbeck have agreed to jointly develop the relevant compounds, with the majority of development funding from us. Revenues for TRINTELLIX are booked by us, and we pay to Lundbeck a portion of our sales, as well as tiered royalties ranging from the mid-teens to twenties on the portion of sales retained by us. We have also agreed to pay to Lundbeck certain development and commercialization milestone payments relating to regulatory and commercial progress under the collaboration. The term of the agreement is indefinite, but agreement may be terminated by mutual decision of the parties or for cause. As of September 30, 2018, our aggregate potential development and commercial milestone payments under the TRINTELLIX collaboration were approximately $145 million.

 

   

AMITIZA: In October 2004, we entered into an agreement with Sucampo Pharmaceuticals (subsequently acquired by Mallinckrodt) to purchase, develop and commercialize AMITIZA for gastrointestinal indications in the U.S. and Canada. The initial term of the agreement is through December 31, 2020, after which the agreement continues automatically until terminated by us. We purchase AMITIZA from Mallinckrodt under the agreement at an agreed-upon price, and pay tiered royalties on sales in North America ranging from the high teens to mid-twenties, resetting each year. Beginning on January 1, 2021, we will share equally with Mallinckrodt in the net annual sales revenue from branded AMITIZA sales. We have agreed to fund development costs, including regulatory-required studies, subject to agreed-upon caps, with excess costs being shared equally, with certain exceptions. We have a similar agreement with Mallinckrodt covering the rest of the world, except for Japan and the People’s Republic of China. We have agreed to additional commercial milestone payments contingent on the achievement of certain net sales revenue targets, and to provide a minimum annual commercial investment during the term of the agreement, which we may reduce when a generic equivalent enters the market. As of September 30, 2018, our total potential commercial milestone payments under the AMITIZA collaboration were approximately $85 million.

Competition

Competitors in the prescription drug industry include large international companies whose capabilities cover the entire drug creation process from research and development to production and marketing. Competitors also include smaller companies that focus on selling generic versions of drugs for which patent protection and regulatory data protection have lapsed.

The competition we face often differs by product and geographic market, and companies emerge and fall away as competitors over time due to innovations, merger activity and other business and market changes.

 

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The following table shows the current principal competing products for our main pharmaceutical products:

 

Our product

 

Principal competing product

 

Primary manufacturer or distributor

GI:

   

DEXILANT, PANTOPRAZOLE (Protonix)

  generic lansoprazole, esomeprazole  

ENTYVIO

 

Remicade

Humira

Simponi

Stelara

Cimzia
generic infliximab

 

Janssen Biotech

Abbvie

Janssen Biotech

Janssen Biotech

UCB

TAKECAB

 

Nexium

generic lansoprazole, omeprazole

 

AstraZeneca

Oncology:

   

ADCETRIS

  chemotherapy regimens  

ALUNBRIG

 

Xalkori

Zykadia

Alecensa

 

Pfizer

Novartis

Roche

ICLUSIG

 

Gleevec

Tasigna

Sprycel

Bosulif

 

Novartis

Novartis

Bristol-Myers Squibb

Pfizer

Leuprorelin (Leuplin)

  Zoladex
generic leuprorelin
  AstraZeneca

NINLARO, VELCADE

 

Revlimid

Pomalyst/Imnovid

Kyprolis

Darzalex

Empliciti

 

Celgene

Celgene

Amgen

Janssen Biotech

Bristol-Myers Squibb

Neuroscience:

   

TRINTELLIX

 

Viibryd

Fetzima

generic duloxetine, escitalopram

 

Allergan

Allergan

Other:

   

AZILVA

  generic candesartan, olmesartan  

NESINA

 

Januvia

generic pioglitazone

 

Merck Co., Inc.

Regulation

The pharmaceutical industry is subject to extensive global regulation by regional, national, state and local agencies. The FDA and other federal statutes and regulations in the United States, MHLW in Japan and laws and regulations of foreign governments govern the testing, approval, production, labeling, distribution, post-market surveillance, advertising, dissemination of information and promotion of our products.

The introduction of new pharmaceutical products generally entails a lengthy approval process. Products must be authorized or registered prior to marketing, and such authorization or registration must subsequently be maintained. In recent years, the registration process has required increased testing and documentation for the approval of new drugs, with a corresponding increase in the expense of product introduction. To register a pharmaceutical product, a registration dossier containing evidence establishing the safety, efficacy and quality of

 

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the product must be submitted to regulatory authorities. Generally, a therapeutic product must be registered in each country in which it will be sold. It is possible that a drug can be registered and marketed in one country while the registration authority in another country may, prior to registration, request additional information from the pharmaceutical company or even reject the product. It is also possible that a drug may be approved for different indications in different countries. The registration process generally takes between six months and several years, depending on the country, the quality of the data submitted, the efficiency of the registration authority’s procedures and the nature of the product. Many countries provide for accelerated processing of registration applications for innovative products of particular therapeutic interest. In recent years, efforts have been made among the US, the EU and Japan to harmonize registration requirements in order to achieve shorter development and registration times for medical products.

Regulations in the United States

All pharmaceutical manufacturers selling products in the United States are subject to extensive regulation by the U.S. federal government, principally by FDA, the Drug Enforcement Administration, and, to a lesser extent, by state and local governments. Applications for drug registration are submitted to and reviewed by the FDA, which regulates the testing, manufacturing, labeling and approval for marketing of pharmaceutical products intended for commercialization. The FDA continues to monitor the safety of pharmaceutical products after they have been approved for sale in the US market. When a pharmaceutical company has gathered data to demonstrate a drug’s safety, efficacy and quality, it may file for the drug a NDA or Biologics License Application (“BLA”), along with information regarding the clinical experiences of patients tested in the drug’s clinical trials. A Supplemental New Drug Application (“sNDA”) or BLA amendment must be filed for new indications for a previously approved drug.

Once an application is submitted, the FDA assigns reviewers from its staff, including experts in biopharmaceutics, chemistry, clinical microbiology, pharmacology/toxicology, and statistics. After a complete review, these content experts then provide written evaluations of the NDA or BLA. These recommendations are consolidated and are used by senior FDA staff in its final evaluation of the NDA or BLA. Based on that final evaluation, the FDA then provides to the NDA or BLA’s sponsor an approval, or a “complete response” letter if the NDA or BLA application is not approved. If not approved, the letter will state the specific deficiencies in the NDA or BLA which need to be addressed. The sponsor must then submit an adequate response to the deficiencies in order to restart the review procedure. Once the FDA has approved an NDA, BLA, sNDA or BLA amendment, the company can make the new drug available for physicians to prescribe. The drug owner must submit periodic reports to the FDA, including any cases of adverse reactions. For some medications, the FDA requires additional post-approval studies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under specified conditions. Throughout the life cycle of a product, the FDA requires compliance with standards relating to good laboratory, clinical and manufacturing practices. The FDA also requires compliance with rules pertaining to the manner in which we may promote our products.

The Drug Price Competition and Patent Restoration Term Act of 1954, known as the Hatch-Waxman Act, established the application procedures for obtaining FDA approval for generic forms of brand-name drugs. This act also provides market exclusivity provisions for brand-name drugs that can delay the submission and/or the approval of abbreviated new drug applications (“ANDAs”). Under this procedure, instead of conducting full-scale pre-clinical and clinical trials, the FDA can accept data establishing that the drug formulation, which is the subject of an abbreviated application, is bio-equivalent and has the same therapeutic effect as the previously approved drug, among other requirements. The Orphan Drug Act of 1983 grants seven years of exclusive marketing rights to a specific drug for a specific orphan indication. The term “orphan drug” refers, generally, to a drug that treats a rare disease affecting fewer than 200,000 Americans. Market exclusivity provisions are distinct from patent protections and apply equally to patented and non-patented drug products. Another provision of the Hatch-Waxman Act extends certain patents for up to five years as compensation for the reduction of effective life of the patent which resulted from time spent in clinical trials and time spent by the FDA reviewing a drug application.

 

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Under the Hatch-Waxman Act, any company submitting an ANDA or an NDA under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (i.e., an NDA that, similar to an ANDA, relies, in whole or in part, on the FDA’s prior approval of another company’s drug product; also known as a “505(b)(2) application”) must make certain certifications with respect to the patent status of the drug for which it is seeking approval. In the event that such applicant plans to challenge the validity or enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent, it files a “Paragraph IV” certification. In the case of ANDAs, the Hatch-Waxman Act provides for a potential 180-day period of generic exclusivity for the first company to submit an ANDA with a Paragraph IV certification. This filing triggers a regulatory process in which the FDA is required to delay the final approval of subsequently filed ANDAs containing Paragraph IV certifications until 180 days after the first commercial marketing. For both ANDAs and 505(b)(2) applications, when litigation is brought by the patent holder, in response to this Paragraph IV certification, the FDA generally may not approve the ANDA or 505(b)(2) application until the earlier of 30 months or a court decision finding the patent invalid, not infringed or unenforceable. Submission of an ANDA or a 505(b)(2) application with a Paragraph IV certification can result in protracted and expensive patent litigation.

As a result of factors such as the adoption of the ACA, the recurring political focus on deficit reduction and public pressure on elected officials in reaction to price increases by certain pharmaceutical manufacturers, there is a significant likelihood of continued actions to control prices. The ACA mandated the creation of a new entity, the Independent Payment Advisory Board (the “IPAB”), which was granted unprecedented authority to implement broad actions to reduce future costs of the Medicare program. As part of its 2018 spending bill, Congress repealed the IPAB in February 2018. However, price reduction remains a major priority, and there is a strong possibility that government officials will continue to search for additional ways to reduce or control prices, including new federal or state legislation mandating drug price controls, which could include limits on annual price increases or maximum price levels. In 2017, several states passed legislation impacting pricing or requiring price transparency reporting, including California, Louisiana, Nevada and Maryland. The California law will require 60 day advance notification of price increases for products exceeding a specific threshold over the past two years, as well as additional quarterly reporting requirements.

Regulations in Japan

The Pharmaceutical Act

Manufacturers and sellers of drugs, quasi-drugs, cosmetics, medical devices and regenerative medical products in Japan are subject to the supervision of the Minister of Health, Labour and Welfare (the “Minister”) primarily under the Act on Securing Quality, Efficacy and Safety of Pharmaceuticals, Medical Devices, Regenerative and Cellular Therapy Products, Gene Therapy Products, and Cosmetics of Japan (the “Pharmaceutical Act”). Part of the work performed under the authority of the Minister may be undertaken by prefectural governors.

Under the Pharmaceutical Act, a person is required to obtain from the Minister a renewable, generally five-year manufacturing and marketing license in order to conduct the business of marketing, leasing or providing drugs, quasi-drugs, cosmetics, medical devices or regenerative medical products (“Designated Products”), as the case may be, that are manufactured (or outsourced to a third party for manufacturing) or imported by such person. The Minister has the power not to grant the license if (i) the methods of quality control for Designated Products are not in conformity with the standards known as the Good Quality Practice or the Quality Management System (“QMS”), each of which is stipulated by the ministerial ordinance of the MHLW, (ii) the methods of post-marketing safety management (collection and analysis of information and data necessary for proper use, including those related to quality, efficacy and safety, and necessary measures to be taken based on the results thereof) of the Designated Products are not in conformity with the standards known as the Good Vigilance Practice (“GVP”), stipulated by the ministerial ordinance of the MHLW or (iii) an applicant falls under certain disqualifying provisions of the Pharmaceutical Act. A manufacturer and seller that have obtained a manufacturing and marketing license must appoint a qualified general manufacturing and marketing supervisor in order to supervise product quality control and post-marketing safety management. The manufacturing and

 

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marketing license holder must also comply with various other items stipulated by the ministerial ordinances of the MHLW conducting the licensed business.

In order to conduct the business of manufacturing drugs, quasi-drugs, cosmetics or regenerative medical products, as the case may be, a person is also required to obtain from the Minister a renewable, generally five-year manufacturing license for each manufacturing site, which is classified in accordance with the ministerial ordinance of the MHLW. The Minister has the power not to grant a license if (i) the facilities and equipment of the manufacturing site for drugs, quasi-drugs, cosmetics or regenerative medical products, as the case may be, are not in conformity with the standards stipulated by the ministerial ordinance of the MHLW or (ii) an applicant falls under certain disqualifying provisions of the Pharmaceutical Act. In order to engage in manufacturing of medical devices, a manufacturer is required to undertake a renewable registration, generally having a five-year term, for each manufacturing site.

In addition, in order to conduct the business of marketing, leasing or providing Designated Products, it is necessary under the Pharmaceutical Act to obtain product approval from the Minister for manufacturing and marketing for each kind of product (other than those specified by the Minister). An approval shall not be granted if (i) an applicant has not obtained the manufacturing and marketing license as set out above, (ii) a manufacturing site for the product has not obtained a manufacturing license to manufacture the relevant type of Designated Product, or has not undertaken a registration to manufacture the relevant type of medical devices, as the case may be, as set out above, (iii) as a result of a review of, among other things, the trade name, ingredients, quantities, manufacturing method, dosage and administration, method of use, indications, performance, side effects and other characteristics (in the case of regenerative medical products, cellular components and introduced genes will also be subject to review), (a) the relevant Designated Product are not recognized to have the indications or performance specified in the application, (b) the relevant Designated Product are found to have no value as drugs, quasi-drugs, medical devices or regenerative medical products since they have harmful side effects outweighing their indications or performance, or (c) the relevant Designated Product fall under the cases prescribed by the ministerial ordinances of the MHLW as not being appropriate as the relevant category of Designated Product or (iv) the methods of manufacturing control or quality control used in the manufacturing site for the relevant Designated Product, is not in conformity with Good Manufacturing Practices, QMS and the Good Gene, Cellular, and Tissue-based Products Manufacturing Practice stipulated by the ministerial ordinances of the MHLW.

The data of results of clinical trials and other pertinent data must be attached for an application for approval. If the drugs, medical devices or regenerative medical products under application are of types designated by ministerial ordinance of the MHLW, the attached data mentioned above must be obtained in compliance with the standards established by the Minister, such as the Good Laboratory Practice (“GLP”) and the Good Clinical Practice (“GCP”) stipulated by the ministerial ordinances of the MHLW. GLP is the standard for non-clinical safety studies on drugs, medical devices and regenerative medical products which provide the standards for personnel and organization for the tests, testing facilities and equipment, operation of testing, as well as for handling of certain substances/materials. GCP is the standard for clinical studies on drugs, medical devices and regenerative medical products for preparing, management and conducting of clinical trials. An application for the approval must be made through the PMDA, an independent administrative agency, which actually implements an approval review as set out above.

Any manufacturing and marketing license holder that obtained product approval for manufacturing and marketing of a new kind of drug or regenerative medical product as described above must have that drug or regenerative medical product re-examined by the Minister or the PMDA after a period ranging from four to ten years (depending on each type of product) from the date of the product approval if the drug or regenerative medical product is a new kind of product designated by the Minister. The re-examination is made by reconfirming whether the drug or regenerative product falls under any of the conditions for denying product approval which are described in (iii) above. Results of usage and other pertinent data must be attached for an application for a re-examination. In addition, if the product in question is a type of drug or regenerative medical product designated by ministerial ordinance of the MHLW, the attached data mentioned above must be obtained

 

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pursuant to GLP, GCP and standards known as Good Post-marketing Study Practice. The manufacturing and marketing license holder that obtained the product approval is also required to investigate, among other things, the results of usage and to periodically report to the Minister pursuant to the Pharmaceutical Act and the ministerial ordinances of the MHLW.

In addition, drug and regenerative medical product will be subject to re-evaluation by the Minister if the Minister so designates in consultation with the Pharmaceutical Affairs and Food Sanitation Council and releases a public notice about the re-evaluation. In that event, the re-evaluation is made by reconfirming whether the drug or regenerative medical product falls under any of the conditions for denying product approval in the same way as the re-examination described above.

If any manufacturer and seller that obtained a manufacturing and marketing license as mentioned above becomes aware of an alleged serious side effect or infection from its products of a type prescribed by ministerial ordinance of the MHLW, the manufacturing and marketing license holder must report to the Minister in accordance with the ministerial ordinance of the MHLW generally within 15 or 30 days depending on the seriousness of the side effect or infection. In addition, generally, under the GVP, any manufacturer and seller who obtained a manufacturing and marketing license as mentioned above must intensively examine the post-marketing safety of the products for a six-month period from their release in order to promptly detect any harmful side effect or infection.

The Pharmaceutical Act also provides for special regulations applicable to drugs, quasi-drugs, cosmetics and medical devices made of biological raw materials. These regulations impose various obligations on manufacturers and other persons in relation to manufacturing facilities, explanation to patients, labeling on products, record-keeping and reporting to the Minister.

Furthermore, under the Pharmaceutical Act, the Minister or a prefectural governor may take various measures to supervise manufacturing and marketing license holders of Designated Products. For example, the Minister or a prefectural governor may require manufacturing and marketing license holders of Designated Products to submit reports, and carry out inspections at their offices, if deemed necessary to monitor their compliance with the laws and regulations. The Minister has authority to order manufacturing and marketing license holders to temporarily suspend the marketing, leasing or providing of the Designated Products in order to prevent risks, or increases in risks, to the public health. Also, the Minister may revoke a license or approval granted to a manufacturing and marketing license holders, or order a temporary business suspension under certain limited circumstances such as violation of laws relating to drugs.

Price Regulation

In Japan, public medical insurance systems cover virtually the entire Japanese population. The public medical insurance system, however, is not applicable to any pharmaceutical product which is not listed on the NHI price list published by the Minister. To sell a pharmaceutical product in Japan, a manufacturer or a seller of pharmaceutical products must first have a new pharmaceutical product listed on the NHI price list for coverage under the public medical care insurance systems. Most prescription pharmaceutical products are used in medical services under the public medical insurance systems. The NHI price list provides rates for calculating the costs of pharmaceutical products used in medical services which may be charged to insurers, such as the national government, local government and health insurance societies, under the public medical insurance systems.

When a new pharmaceutical product is listed on the NHI price list, the price of the pharmaceutical product is determined either by daily price comparison of comparable pharmaceutical products with necessary adjustments for, such as, innovativeness, usefulness or size of the market, or, in the absence of comparable pharmaceutical products, by the cost calculation method, after consideration of the opinion of the manufacturer. Prices on the NHI price list are subject to revision, generally once every two years, on the basis of the actual prices at which the pharmaceutical products are purchased by medical institutions. To date, various methods, including a formula intended to accurately reflect the actual market prices, have been used.

 

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In December 2016, the Japanese government announced basic reform principles for fundamental reforms of the drug pricing system, including an increase in the frequency of price revisions from every other year to annually. Annual price revisions are scheduled to become applicable from the fiscal year ending March 31, 2022.

In addition to the foregoing, we are subject to other laws and regulations in Japan applicable to pharmaceutical companies, including with respect to the possession and handling of regulated pharmaceutical substances.

Regulations in the EU

In the EU, there are three main procedures for application for authorization to market pharmaceutical products in the EU Member States: the Centralized Procedure, the Mutual Recognition Procedure and the Decentralized Procedure. It is also possible to obtain a pure national authorization for products intended for commercialization in a single EU Member State only, or for additional indications for licensed products.

Under the Centralized Procedure, applications are made to the EMA for an authorization which is valid throughout the EU. The Centralized Procedure is mandatory for all biotechnology products and for new chemical entities in cancer, neurodegenerative disorders, diabetes and AIDS, autoimmune diseases or other immune dysfunctions and optional for other new chemical entities or innovative medicinal products or in the interest of public health. When a pharmaceutical company has gathered data which it believes sufficiently demonstrates a drug’s safety, efficacy and quality, then the company may submit an application to the EMA. The EMA then receives and validates the application and the Committee for Medicinal Products for Human Use (the “CHMP”) appoints a Rapporteur and Co-Rapporteur to lead review of the dossier. The entire review cycle must be completed within 210 days, although there is a “clock stop” at day 120, which allows the company to respond to questions set forth in the Rapporteur and Co-Rapporteur’s Assessment Report. After the company’s complete response is submitted to the EMA, the clock restarts on day 121. If there are further aspects of the dossier requiring clarification, the EMA will then request an Oral Explanation on day 180, in which case the sponsor must appear before the CHMP to provide the requested additional information. On day 210, the CHMP will then take a vote to recommend the approval or non-approval of the application. The final decision under this Centralized Procedure is a European Community decision which is binding in its entirety on all EU Member States. This decision occurs on average 60 days after a positive CHMP recommendation. In the case of a negative opinion, a written request for re-examination of the opinion can be made by the applicant within a time limit of 15 days from the date of the opinion. The detailed grounds for re-examination must be submitted to the EMA within 60 days from the date of the opinion.

Under the Mutual Recognition Procedure (the “MRP”), the company first obtains a marketing authorization from a single EU Member State, called the Reference Member State (the “RMS”), which will act for the marketing authorization holder to progressively gain national approval in the other EU Member States on the basis of the RMS’s assessment. In the Decentralized Procedure (the “DCP”), the application is done simultaneously in selected or all Member States if a medicinal product has not yet been authorized in a Member State. During the DCP, the RMS drafts a Preliminary Assessment Report within 70 days, which is sent to the Concerned Member States (the “CMS”) for comments by day 100. On day 105, if no consensus is reached on approval, there is a “clock stop.” The clock is restarted on day 106 after the applicant’s responses are received by the RMS and CMSs. Between day 106 and day 120, the RMS updates the preliminary assessment report for consideration by CMSs. If consensus is reached on day 120, then the procedure is closed. This will then proceed to the 30 days national procedure for implementing the decision if the product is considered approvable. Otherwise, the procedure will continue until day 210 or until consensus is reached. If consensus is not reached on day 210, the matter is referred to the Co-ordination Group for Mutual Recognition and Decentralized Procedures – Human and eventually to the CHMP for arbitration.

After the Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMA, if approval was granted under the Centralized Procedure, or to the National Health Authorities, if approval was granted under the DCP or the MRP. In addition, several pharmacovigilance measures must be

 

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implemented and monitored including Adverse Event collection, evaluation and expedited reporting and implementation, as well as update Risk Management Plans. For some medications, post approval studies (Phase IV) may be required to complement available data with additional data to evaluate long term effects (called a Post Approval Safety Study) or to gather additional efficacy data (called a Post Approval Efficacy Study).

European Marketing Authorizations have an initial duration of five years. After this first five year period, the holder of the marketing authorization must apply for its renewal, which may be granted based on the competent authority’s full benefit-risk review of the product. Once renewed, the marketing authorization is generally valid for an unlimited period. Any Marketing Authorization which is not followed within three years of its granting by the actual placing on the market in any EU member state of the corresponding medicinal product ceases to be valid.

In addition, our operations are subject to significant price and marketing regulations. Many governments in the EU are introducing healthcare reforms in an attempt to curb increasing healthcare costs. The governments in the EU influence the price of pharmaceutical products through their control of national healthcare systems that fund a large part of the cost of such products to patients. The general downward pressure on healthcare costs, particularly with regard to prescription drugs, has been increasing. In addition, prices for marketed products are referenced within and amongst the EU Member States, which further affect pricing in each EU Member State. As an additional control for healthcare budgets, some EU Member States have passed legislation to impose further mandatory rebates for pharmaceutical products and financial claw-backs on the pharmaceutical industry. The impact of these rebates and claw-backs on pricing of pharmaceutical products can be difficult to predict.

Others

Many other countries around the world are also taking steps to control prescription drug prices. For example, in 2017, China organized national price negotiations for certain products directly linked to national drug reimbursement, which will apply nationwide both in public and military hospitals, with drug price reductions of more than 60% in some cases. Drug prices in China may further decline due to a stated national policy of reducing healthcare costs, including continued strategic initiatives specifically designed to reduce drug prices. Canada has proposed amendments to its Patented Medicines Regulations in 2017 that could reduce prices for specialty medicines, such as biologics and medicines for rare diseases, by as much as 30% to 40%.

 

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  C.

Organizational Structure.

The following table lists the Company’s consolidated subsidiaries (including those organized as partnerships) as of March 31, 2018 and their respective countries of incorporation.

 

Name

  

Country

   Ownership
Interest
 
          (%)  

Takeda Pharmaceuticals International, Inc.

  

United States

     100.0  

Takeda Pharmaceuticals U.S.A., Inc.

  

United States

     100.0  

Millennium Pharmaceuticals, Inc.

  

United States

     100.0  

ARIAD Pharmaceuticals, Inc.

  

United States

     100.0  

Takeda California, Inc.

  

United States

     100.0  

Takeda Vaccines, Inc.

  

United States

     100.0  

Takeda Development Center Americas, Inc.

  

United States

     100.0  

Takeda Ventures, Inc.

  

United States

     100.0  

Takeda Europe Holdings B.V.

   Netherlands      100.0  

Takeda A/S

   Denmark      100.0  

Takeda Pharmaceuticals International AG.

   Switzerland      100.0  

Takeda GmbH

   Germany      100.0  

Takeda Pharma Vertrieb GmbH & Co.KG.

   Germany      100.0  

Takeda Italia S.p.A.

   Italy      100.0  

Takeda Austria GmbH

   Austria      100.0  

Takeda Pharma Ges.m.b.H

   Austria      100.0  

Takeda France S.A.S.

   France      100.0  

Takeda Pharma A/S

   Denmark      100.0  

Takeda AS

   Norway      100.0  

Takeda Belgium SCA/CVA

   Belgium      100.0  

Takeda UK Limited

   U.K.      100.0  

Takeda Oy

   Finland      100.0  

Takeda Pharma AG

   Switzerland      100.0  

Takeda Farmaceutica Espana S.A.

   Spain      100.0  

Takeda Nederland B.V.

   Netherlands      100.0  

Takeda Pharma AB

   Sweden      100.0  

Takeda Pharma Sp.z o.o.

   Poland      100.0  

Takeda Hellas S.A.

   Greece      100.0  

Takeda Ireland Limited

   Ireland      100.0  

Takeda Development Centre Europe Ltd.

   U.K.      100.0  

Takeda Canada Inc.

   Canada      100.0  

Takeda Pharmaceuticals Limited Liability Company

   Russia      100.0  

Takeda Yaroslavl Limited Liability Company

   Russia      100.0  

Takeda Ukraine LLC

   Ukraine      100.0  

Takeda Kazakhstan LLP

   Kazakhstan      100.0  

Takeda Distribuidora Ltda.

   Brazil      100.0  

Multilab Indústria e Comércio de Produtos Farmacêuticos Ltda.(1)

   Brazil      100.0  

Takeda Pharma Ltda.

   Brazil      100.0  

Takeda Mexico S.A. de C.V.

   Mexico      100.0  

Takeda Pharma, S.A.

   Argentina      100.0  

Takeda (China) Holdings Co., Ltd.

   China      100.0  

Takeda Pharmaceuticals (Asia Pacific) Pte. Ltd.

   Singapore      100.0  

Guangdong Techpool Bio-Pharma Co., Ltd(2).

   China      51.3  

Takeda Pharmaceutical (China) Company Limited

   China      100.0  

Tianjin Takeda Pharmaceuticals Co., Ltd.

   China      100.0  

Takeda Pharmaceuticals Korea Co., Ltd.

   Korea      100.0  

Takeda (Thailand), Ltd.(3)

   Thailand      52.0  

 

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Name

  

Country

   Ownership
Interest
 
          (%)  

Takeda Pharmaceuticals Taiwan, Ltd.

   Taiwan      100.0  

P.T. Takeda Indonesia

   Indonesia      70.0  

Takeda Healthcare Philippines, Inc.

   Philippines      100.0  

Takeda Development Center Asia, Pte. Ltd.

   Singapore      100.0  

Takeda Vaccines Pte. Ltd.

   Singapore      100.0  

Takeda (Pty.) Ltd.

   South Africa      100.0  

Takeda Pharmaceuticals Australia Pty. Ltd.

   Australia      100.0  

Takeda İlaç Sağlık Sanayi Ticaret Limited Şirketi

   Turkey      100.0  

Takeda Consumer Healthcare Company Limited

   Japan      100.0  

Nihon Pharmaceutical Co., Ltd.

   Japan      87.3  

Takeda Healthcare Products Co., Ltd.

   Japan      100.0  

Axcelead Drug Discovery Partners, Inc.(4)

   Japan      100.0  

71 additional immaterial subsidiaries

     

 

Notes:

(1)

In July 2018, we sold and divested all our shares and assets in Multilab Indústria e Comércio de Produtos Farmacêuticos Ltda. to Novamed Fabricação de Produtos Farmacêuticos Ltda.

(2)

In August 2018, we sold and divested all our shares and assets in Guangdong Techpool Bio-Pharma Co., Ltd. to Shanghai Pharmaceutical Holding Co. Ltd., pursuant to the agreement we signed in May 2018.

(3)

In April 2018, we purchased additional shares of Takeda (Thailand), Ltd. and we own 100.0% of its ownership interests as of September 30, 2018.

(4)

In August 2018, we entered into an agreement with Whiz Partners, Inc. to create a joint investment fund, Drug Discovery Gateway Investment Limited Partnership, for which we will make an in-kind investment of Axcelead Drug Discovery Partners Inc. After we make such in-kind investment, Axcelead Drug Discovery Partners Inc. will no longer be our wholly-owned subsidiary.

(5)

We completed the acquisition of TiGenix NV on July 31, 2018.

 

  D.

Property, Plants and Equipment.

Our head offices are located in Osaka, Japan and Tokyo, Japan. We generally own our facilities, or have entered into long-term lease arrangements for them.

As of March 31, 2018, the net book values of the buildings and structures, land, machinery and vehicles and tools, furniture and fixtures we owned were ¥293.6 billion, ¥69.7 billion, ¥99.0 billion and ¥19.6 billion, respectively. We own the substantial majority of our facilities, none of which are subject to any material encumbrances. The following table describes our major facilities as of March 31, 2018:

 

Group Company

  

Name of facility (location)

  

Type of facility

Takeda Pharmaceutical Company Limited

   Head Office (Chuo-ku, Osaka and other)    Administrative and sales

Takeda Pharmaceutical Company Limited

   Global Head Office (Chuo-ku, Tokyo)    Administrative and sales

Takeda Pharmaceutical Company Limited

   Osaka Plant (Yodogawa-ku, Osaka)    Manufacturing, Research and Development

Takeda Pharmaceutical Company Limited

   Hikari Plant (Hikari, Yamaguchi)    Manufacturing, Research and Development

Takeda Pharmaceutical Company Limited

   Shonan Research Center (Fujisawa, Kanagawa)    Research

Takeda Real Estate Co, Ltd.

   Takeda Midosuji Building and others (Chuo-ku, Osaka)    Lease facilities

Nihon Pharmaceutical Co. Ltd.

   Osaka Plant and other (Izumisano, Osaka)    Manufacturing, Research and Development

 

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Group Company

  

Name of facility (location)

  

Type of facility

Takeda Healthcare Products Co., Ltd.

   Head Office Plant (Fukuchiyama, Kyoto)    Manufacturing

Millennium Pharmaceuticals, Inc.

   Head Office Plant and other properties (Cambridge, Massachusetts, U.S.)    Research and Development

Takeda Ireland Limited

   Head Office Plant and other properties (Kilruddery and Dublin, Ireland)    Manufacturing

Takeda Pharmaceuticals U.S.A., Inc.

   Head Office (Deerfield, Illinois, U.S.)    Administrative and sales

Environmental Matters

We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, we are exposed to risks relating to possible releases of hazardous substances into the environment, which could cause environmental or property damage or personal injuries, and which could require remediation of contaminated soil and groundwater, in some cases over many years, regardless of whether the contamination was caused by us, or by previous occupants of the property. See “Item 3. Key Information—D. Risk Factors—We may incur substantial costs due to our environmental compliance efforts or claims relating to our use, manufacture, handling, storage or disposal of hazardous materials.”

Glossary of Technical Terminology

By its nature, any description of the pharmaceuticals business requires the use of certain technical terminology. The following glossary of technical terminology is intended to assist investors in understanding our business.

 

Term

  

Description

Anaplastic lymphoma kinase (ALK)

  

An enzyme with chromosomal rearrangements that are key drivers in a subset of NSCLC patients.

Antibody-drug conjugate (ADC)

  

An important pharmaceutical class of drugs designed as a targeted therapy for the treatment of cancer.

Ataxia

  

An inability to coordinate voluntary muscular movements that is symptomatic of some disorders of the central nervous system.

Chronic myeloid leukemia

  

A form of leukemia affecting predominantly blood-forming cells (called myeloid cells) in the bone marrow and leading to the accumulation of these leukemia cells in the blood.

Crohn’s disease

  

An inflammatory bowel disease (IBD) that causes inflammation of the digestive tract lining, which can lead to abdominal pain, severe diarrhea, fatigue, weight loss and malnutrition.

Endometriosis

  

The presence and growth of functioning endometrial tissue in places other than the uterus that often results in severe pain and infertility.

 

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Term

  

Description

Epidermal growth factor receptor (EGFR)

  

The protein found on the surface of some cells to which epidermal growth factor binds, causing the cells to divide. It is found at abnormally high levels on the surface of many types of cancer cells, so these cells may divide excessively in the presence of epidermal growth factors. Also called ErbB1 and HER1.

Epilepsy

  

Any of various disorders marked by abnormal electrical discharges in the brain and typically manifested by sudden brief episodes of altered or diminished consciousness, involuntary movements, or convulsions.

Gastroenterology (GI)

  

The branch of medicine concerned with the structure, functions, diseases, and pathology of the stomach and intestines.

Gastroesophageal reflux disease (GERD)

  

A more serious form of gastroesophageal reflux (GER). GER occurs when the lower esophageal sphincter opens spontaneously, for varying periods of time, or does not close properly, causing stomach contents rise up into the esophagus.

Generic drug

  

A pharmaceutical product, usually intended to be interchangeable with an innovator product, which is manufactured without a license from the innovator company and marketed after the expiry date or invalidation of the patent or other exclusive rights.

Good Clinical Practice (GCP)

  

A set of standards for the design, conduct, performance, monitoring, auditing, recording, analysis and reporting of clinical trials that provides assurance that the data and reported results are credible and accurate, and that the rights, integrity and confidentiality of trial subjects are protected.

Good Laboratory Practice (GLP)

  

A set of rules and criteria that provides a framework within which laboratory studies are planned, performed, monitored, recorded, reported and archived.

Hodgkin lymphoma (HL)

  

Hodgkin’s disease is a type of lymphoma. Lymphoma is cancer of lymph tissue found in the lymph nodes, spleen, liver, and bone marrow.

Human monoclonal antibody

  

An antibody, which is used to identify, quantify, isolate or remove the target molecule in complex biological mixtures or in tissues and injected into patients for the treatment of a wide range of diseases including infections, cancer, cardiovascular diseases and autoimmune diseases.

Hypertension

  

1: Abnormally high arterial blood pressure that is usually indicated by an adult systolic blood pressure of 140 mm Hg or greater or a diastolic blood pressure of 90 mm Hg or greater that is chiefly of unknown cause but may be attributable to a preexisting condition (such as a renal or endocrine disorder), that typically results in a thickening and inelasticity of arterial walls and hypertrophy of the left heart

 

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Term

  

Description

  

ventricle and that is a risk factor for various pathological conditions or events (such as heart attack, heart failure, stroke, end-stage renal disease or retinal hemorrhage).

 

2: A systemic condition resulting from hypertension that is either symptomless or is accompanied especially by dizziness, palpitations, fainting, or headache.

Indication

  

A symptom or particular circumstance that justifies a specific medical treatment or procedure.

Lead compound

  

A chemical compound that has pharmacological or biological activity and whose chemical structure is used as a starting point for chemical modifications in order to improve potency, selectivity, or pharmacokinetic parameters.

LH-RH agonist

  

A compound that is similar to luteinizing hormone-releasing hormone (LH-RH) in structure and can act like LH-RH.

Major depressive disorder (MDD)

  

A medical illness that causes a persistent feeling of sadness and loss of interest. MDD can cause physical symptoms as well.

Multiple myeloma (MM)

  

A type of cancer affecting plasma cells, a type of white blood cell that produces antibodies and is located in the bone marrow, that is characterized by the presence of numerous myelomas in various bones of the body.

Neuroscience

  

The study of the central nervous system (i.e., the brain and the spinal cord) and the therapeutic area relating to disorders thereof.

Non-small cell lung cancer (NSCLC)

  

A group of lung cancers excluding small cell lung cancer that affects various types of lung cells and together constitute the most common types of lung cancer. The most common types of NSCLC are adenocarcinoma, squamous cell carcinoma and large cell carcinoma.

Oncology

  

The branch of medicine dealing with the physical, chemical, and biological properties of tumors and cancers, including study of their development, diagnosis, treatment and prevention.

Parkinson’s disease

  

A chronic progressive neurological disease chiefly affecting people in later life that is linked to decreased dopamine production in the substantia nigra. Parkinson’s disease is of unknown cause, and is marked especially by tremor of resting muscles, rigidity, slowness of movement, impaired balance, and shuffling gait. Also referred to as paralysis agitans, parkinsonian syndrome, parkinsonism or Parkinson’s syndrome.

Philadelphia chromosome positive acute lymphoblastic leukemia

  

A form of leukemia affecting immature white blood cells called lymphocytes in the bone marrow and characterized by the presence of the Philadelphia chromosome, which refers to a specific genetic abnormality in the leukemia cells.

 

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Term

  

Description

Prescription drug

  

A drug that is regulated by legislation to require a medical prescription from a doctor, dentist or other healthcare professional before it can be obtained.

Proteasome

  

A protein degradation “machine” within the cell that can digest a variety of proteins into short polypeptides and amino acids.

Proteasome inhibitor

  

A drug that blocks the action of proteasomes, which are cellular complexes that break down proteins such as the p53 protein. Proteasome inhibitors are being studied in the treatment of cancer, especially MM.

Proton pump

  

An enzyme that functions in the final stages of acid secretion in gastric parietal cells.

Proton pump inhibitor

  

A drug whose main action is to reduce the production of acid by the stomach and works to help symptoms of GERD.

Quasi-drugs

  

A category of products found in the Pharmaceutical Act. Quasi-drugs are products that have a mild effect on the human body, used to treat conditions such as the following: nausea, halitosis (bad breath), body odor, heat rash, skin inflammation, hair loss and unwanted hair growth. Quasi-drugs also include certain health drinks that contain vitamins and/or calcium and digestive or gastric remedies.

Relapsed mantle cell lymphoma

  

A late form of non-HL, which is a cancer of the white blood cells.

Schizophrenia

  

Schizophrenia is a severe, lifelong brain disorder. Persons suffering from schizophrenia may hear voices, experience hallucinations or believe that others are reading or controlling their minds.

Substance patent

  

The patent covering a drug’s active ingredient.

Systemic anaplastic large cell lymphoma (sALCL)

  

Anaplastic large cell lymphoma (ALCL) is a distinct form of non-Hodgkin lymphoma. Systemic ALCL is more common than the cutaneous form and most frequently occurs in the first three decades of life. Clinically, systemic ALCL is characterized by advanced disease at presentation (75% of pediatric ALCL) with a high incidence of nodal involvement (>90%), frequent association with B symptoms (75%), and frequent extra-nodal involvement including skin (25%), lung (10%), bone (17%) and liver (8%).

Ulcerative colitis

  

A form of inflammatory bowel disease (IBD). Ulcerative colitis is a form of colitis, a disease of the intestine, specifically the large intestine or colon, which causes ulcers, or open sores, in the colon. The main symptom of active disease is usually constant diarrhea mixed with blood, of gradual onset. Ulcerative colitis has similarities to Crohn’s disease, another form of IBD.

 

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Appendix: Business of Shire

Shire and its subsidiaries is the leading global biotechnology company focused on serving people with rare diseases and other highly specialized conditions. Shire has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic and pipeline growth and diversification.

Currently marketed products

The table below lists Shire’s main marketed products as of September 30, 2018, indicating the disease area and the key territories in which Shire markets the product.

 

Products

 

Disease area

 

Key territories

Hematology

   

ADVATE (Antihemophilic Factor (Recombinant))

  Hemophilia A   Global

ADYNOVATE/ADYNOVI (Antihemophilic Factor (Recombinant), PEGylated)

  Hemophilia A   U.S., Europe, Canada and Japan

RIXUBIS (Coagulation Factor IX (Recombinant))

  Hemophilia B   U.S., Japan, Europe, Australia and Canada

VONVENDI/VEYVONDI (von Willebrand Factor (Recombinant))

  Von Willebrand Disease   U.S. and EU

FEIBA (Anti-Inhibitor Coagulant Complex)

  Hemophilia A and B patients with inhibitors   Global

OBIZUR (Factor VIII)

  Hemophilia A   Global

MyPKFiT

 

Hemophilia A

 

U.S. (amendment to Drug BLA) and EU (CE marked Class I medical device)

Genetic Diseases

   

ELAPRASE (idursulfase)

  Hunter Syndrome (Mucopolysaccharidosis Type II, MPS II)   Global(1)

REPLAGAL (agalsidase alfa)

  Fabry Disease  

 

Europe, Latin America and Asia Pacific(2)

VPRIV (velaglucerase alfa)

  Gaucher disease, Type I   Global

Neuroscience

   

VYVANSE/VENVANSE/ELVANSE/TYVENSE/VUXEN/ ADUVANZ (lisdexamfetamine dimesylate)

 

 

 

 

Attention Deficit Hyperactivity Disorder (“ADHD”) and binge eating disorder (“BED”)

ADHD only

 

U.S., Canada,                 

Europe and Brazil(3)

ADDERALL XR (mixed salts of a single-entity amphetamine)

  ADHD   U.S. and Canada

MYDAYIS (mixed salts of a single-entity amphetamine)

  ADHD   U.S.

Immunology

   

GAMMAGARD LIQUID/KIOVIG (Immune globulin intravenous (Human))

  Primary immunodeficiency   Global(4)

GAMMAGARD S/D (Immune globulin intravenous (Human))

  Primary immunodeficiency   U.S., Europe, Canada and Japan

 

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Products

 

Disease area

 

Key territories

HYQVIA (Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase)

  Primary immunodeficiency   U.S., Europe, Canada and Australia

CUVITRU (Immune Globulin Subcutaneous (Human))

  Primary immunodeficiency   U.S., Europe and Canada

FLEXBUMIN (Human Albumin)

 

 

Hypovolemia, hypoalbuminemia

  Global

CINRYZE (C1 esterase inhibitor (human))

  HAE   U.S., Canada, Europe and Latin America(5)

FIRAZYR (icatibant)

  HAE   Global

Internal Medicine

   

FOSRENOL (lanthanum carbonate)

  Hyperphosphatemia in CKD-5D   Global(6), (7), (8)

LIALDA (mesalamine)/MEZAVANT (mesalamine)

 

 

Ulcerative Colitis

 

 

U.S., Canada, Europe and Japan(8), (9), (10)

PENTASA (mesalamine)

  Ulcerative Colitis   U.S.

GATTEX/REVESTIVE (teduglutide (rDNA origin))

 

 

Short Bowel Syndrome (SBS)

 

 

U.S., Europe, Canada and Australia(11)

 

NATPAR/A (parathyroid hormone)

 

 

Control of hypocalcemia in patients with hypoparathyroidism

 

 

Global(12)

Ophthalmic

   

XIIDRA (lifitegrast ophthalmic solution) 5%

  Dry eye disease   Global

 

Notes:

(1)

Marketed by Genzyme in Asia Pacific, Japan and South Africa under license.

(2)

Marketed in Japan under license by Sumitomo Dainippon Pharma Co., Ltd., and distributed in Taiwan by Excelsior Company Ltd.

(3)

Marketed in Brazil as VENVANSE and in the EU as ELVANSE or TYVANSE.

(4)

Marketed in the U.S. as GAMMAGARD LIQUID and in the EU as KIOVIG.

(5)

Shire owns European rights, except in Belgium, Finland, Luxembourg and the Netherlands, which are owned by Sanquin.

(6)

Marketed in Japan by Bayer under license.

(7)

Depending on the market, available as chewable tablet and/or oral powder.

(8)

Marketed by distributors in certain other markets.

(9)

Marketed in Japan by Mochida under license.

(10)

Marketed in the U.S. as LIALDA and in Europe as MEZAVANT XL or MEZAVANT.

(11)

Marketed in the U.S. as GATTEX and in Europe and Canada as REVESTIVE.

(12)

Global rights, with the exception of Israel.

In hematology, Shire’s principal products include:

 

   

ADVATE (Antihemophilic Factor (Recombinant)), a recombinant Factor VIII (rFVIII) therapy. ADVATE is a recombinant antihemophilic factor indicated for use in adults and children with hemophilia A (congenital Factor VIII deficiency) for control and prevention of bleeding episodes, perioperative management and routine prophylaxis to prevent or reduce the frequency of bleeding episodes. It was approved in the U.S. in 2003 and the EU in 2004. As of September 30, 2018, it was approved in 70 countries worldwide.

 

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ADYNOVATE/ADYNOVI, an extended halflife rFVIII treatment for hemophilia A based on ADVATE. ADYNOVATE/ADYNOVI uses the same manufacturing process as ADVATE and adds a proven technology, PEGylation (a chemical process that prolongs the amount of time a compound remains in circulation, potentially allowing for fewer injections), which Shire has exclusively licensed from Nektar Therapeutics. ADYNOVATE was approved in the U.S. in November 2015 and in Japan in March 2016. It was approved under the name ADYNOVI in the EU in January 2018 and in Switzerland in September 2016.

 

   

RIXUBIS (Coagulation Factor IX (Recombinant)) was launched in the U.S. in 2013 for the treatment of hemophilia B. RIXUBIS is an injectable medicine used to replace clotting Factor IX that is missing in people with hemophilia B. RIXUBIS was approved in the EU in December 2014 and Japan in December 2014. As of September 30, 2018, RIXUBIS was approved in 46 countries.

 

   

FEIBA (Activated Prothrombin Complex Concentrate—aPCC), a plasma based inhibitor bypass therapy. Currently, FEIBA is the only agent indicated for use in all three settings; on demand, prophylaxis and surgery. FEIBA can be used in both hemophilia A and hemophilia B patients with inhibitors for control of spontaneous bleeding episodes, to cover surgical interventions and routine prophylaxis to prevent or reduce the frequency of bleeding episodes. FEIBA was first approved in the U.S. in 1986, and as of September 30, 2018 was approved in 74 countries. In a number of markets (not the U.S.), FEIBA is also approved for acquired hemophilia.

 

   

VONVENDI/VEYVONDI, a recombinant von Willebrand factor (VWF) used to replace the VWF the body is missing in von Willebrand disease. VONVENDI is a first in class recombinant factor and was approved by the FDA in December 2015, for on-demand treatment and control of bleeding episodes in adults 18 years and above with VWD. VONVENDI/VEYVONDI can also be given independent of recombinant Factor VIII (rFVIII), based on patient need. This attribute allows for tailored treatment for patients who may not require additional FVIII. VONVENDI/VEYVONDI was approved in the EU in August 2018.

 

   

myPKFiT is Shire’s latest development in the personalization of hemophilia care, building on Shire’s strong commitment to continued innovation in hematology. Patients have complex needs and treatment goals that cannot be met with a one-size-fits-all approach. myPKFiT offers a personalized approach to hemophilia care that allows healthcare professionals to consider their patients’ individual needs and to educate them on their personal pharmacokinetic (PK) profiles. Healthcare professionals can estimate a full PK curve with as few as two measurable blood samples, compared to 9 to 11 as recommended by international guidelines. Using the patient’s individualized PK curve and additional patient information, healthcare professionals can develop a personalized, PK-guided prophylactic ADVATE or ADYNOVATE treatment regimen tailored to the individual patient’s needs and treatment plan. The myPKFiT software is accompanied by a mobile application for patients that allows users to view estimated FVIII levels, track their treatment, and export data. myPKFiT is only approved in the U.S. for use with ADVATE.

In genetic diseases, Shire’s principal products include:

 

   

REPLAGAL, an enzyme replacement marketed for the treatment of Fabry disease outside of the U.S. Fabry disease is a rare, inherited genetic disorder resulting from a deficiency in the activity of the lysosomal enzyme alpha-galactosidase A, which is involved in the breakdown of fats. REPLAGAL is a fully human alpha-galactosidase A protein made in a human cell line which is designed to replace the deficient alpha-galactosidase A with an active enzyme to ameliorate certain clinical manifestations of Fabry disease. In August 2001, REPLAGAL was granted marketing authorization in the EU. As of September 30, 2018, REPLAGAL was approved in 61 countries, excluding the U.S.

 

   

VPRIV, an enzyme replacement treatment for type 1 Gaucher disease. Gaucher disease is a rare, inherited genetic disorder which results in a deficiency of the lysosomal enzyme beta-

 

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glucocerebrosidase. VPRIV was approved by the FDA in February 2010, for long term enzyme replacement therapy for patients with type 1 Gaucher disease. The EMA approved the marketing authorization for the use of VPRIV in August 2010. VPRIV has been granted orphan drug status in the EU with up to 12 years of market exclusivity from August 2010. As of September 30, 2018, VPRIV was approved in 54 countries.

 

   

ELAPRASE, an enzyme replacement treatment for Hunter syndrome (also known as Mucopolysaccharidosis Type II or MPS II). Hunter syndrome is a rare, inherited genetic disorder, mainly affecting males that interferes with the body’s ability to break down and recycle waste substances. ELAPRASE was approved by the FDA in July 2006 and granted marketing authorization by the EMA in January 2007 for the long term treatment of patients with Hunter syndrome. ELAPRASE benefits from the 12 years of data exclusivity from the date of grant of registration given to innovator biologics in the U.S. under the ACA. ELAPRASE received approval from the MHLW in October 2007. As part of an agreement with Genzyme, Genzyme manages the sales and distribution of ELAPRASE in Japan as well as certain other countries in the Asia Pacific region. As of September 30, 2018, ELAPRASE was approved in 71 countries.

In neuroscience, Shire’s principal products include:

 

   

VYVANSE, a stimulant for the treatment of ADHD, where the amino acid l-lysine is linked to d-amphetamine. VYVANSE is therapeutically inactive until metabolized in the body. The FDA approved VYVANSE as a once-daily treatment for children aged 6 to 12 with ADHD in February 2007, for adults in April 2008 and for adolescents aged 13 to 17 in November 2010. In addition, VYVANSE became the first drug in its class to be approved by the FDA for maintenance treatment, having been approved both as a maintenance treatment in adults with ADHD in January 2012, and for maintenance treatment in pediatrics and adolescents aged 6 to 17 in April 2013. VYVANSE is available in the U.S. in seven dosage strengths and in two different formulations capsules and chewable. The product is approved and marketed in selected European countries, Australia, Canada and Latin America under a variety of trade names VYVANSE/VENVANSE/ELVANSE/TYVENSE/VUXEN/ADUVANZ. VYVANSE was also approved in the U.S. in January 2015 as the first and only treatment of moderate to severe BED in adults. VYVANSE was approved for the treatment of BED in Canada on September 30, 2018.

 

   

ADDERALL XR, an extended release treatment for ADHD designed to provide once-daily dosing. The FDA approved ADDERALL XR as a once-daily treatment for children aged 6 to 12 with ADHD in October 2001, for adults in August 2004 and for adolescents aged 13 to 17 in July 2005.

 

   

MYDAYIS (mixed salts of a single-entity amphetamine product), a once-daily, extended-release treatment composed of three types of drug-releasing beads now available for prescription in the United States. The FDA approved MYDAYIS on June 20, 2017 for patients 13 years and older with ADHD. MYDAYIS is not for use in children 12 years and younger.

In immunology, Shire’s principal products include:

 

   

GAMMAGARD LIQUID (Immune Globulin Intravenous (Human) 10%), a liquid formulation of the antibodyreplacement therapy immunoglobulin product. It was originally approved by the FDA in April 2005. GAMMAGARD LIQUID is used to treat adult and pediatric patients two years of age or older with primary immunodeficiencies (“PID”) and can be administered either intravenously or subcutaneously. GAMMAGARD LIQUID is also used to treat adult patients with multifocal motor neuropathy (MMN) administered intravenously. It can be administered either intravenously or subcutaneously. KIOVIG is the brand name used for GAMMAGARD LIQUID in many countries outside of the U.S. KIOVIG is approved in Europe for use by patients with PID and certain secondary immunodeficiencies, and for adults with MMN. As of September 30, 2018, GAMMAGARD LIQUID/KIOVIG was approved in 72 countries.

 

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GAMMAGARD S/D (Immune Globulin Intravenous (Human)) IgA less than 1 µg/mL in a 5% solution is indicated for the treatment of PID in patients two years old and older. GAMMAGARD S/D is also indicated for prevention of bacterial infections in hypogammaglobulinemia and/or recurrent bacterial infections associated with Bcell chronic lymphocytic leukemia (CLL), treatment of adult patients with chronic idiopathic thrombocytopenic purpura (ITP) to increase platelet count and to prevent and/or control bleeding, and prevention of coronary artery aneurysms associated with Kawasaki Syndrome in pediatric patients. GAMMAGARD S/D is provided for patients who require a low IgA content in their IV treatment (IgA less than 1 µg/mL in a 5% solution). GAMMAGARD S/D was initially approved in the U.S. in 1994. As of September 30, 2018, GAMMAGARD S/D was approved in 21 countries.

 

   

HYQVIA (Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase), a product consisting of human normal immunoglobulin (IG) and recombinant human hyaluronidase (licensed from Halozyme). The IG provides the therapeutic effect and the recombinant human hyaluronidase facilitates the dispersion and absorption of the IG administered subcutaneously, increasing its bioavailability. The IG is a 10% solution that is prepared from human plasma consisting of at least 98% immunoglobulin G, which contains a broad spectrum of antibodies. HYQVIA is the only subcutaneous IG treatment for PID patients with a dosing regimen requiring only one infusion up to once per month and one injection site per infusion to deliver a full therapeutic dose of IG. HYQVIA is approved in Europe for use by patients with PID syndromes and myeloma or CLL with severe secondary hypogammaglobulinemia and recurrent infections, and in the United States for adults with PID. HYQVIA was approved in Europe in May 2013 and the U.S. in September 2014. As of September 30, 2018, HYQVIA was approved in 36 countries.

 

   

CUVITRU, an Immune Globulin Subcutaneous (Human) (IGSC) 20% Solution indicated as replacement therapy for primary humoral immunodeficiency in adult and pediatric patients two years of age and older. CUVITRU is also indicated in the EU for the treatment of certain secondary immunodeficiencies. CUVITRU is the only 20% subcutaneous IG treatment option without proline and with the ability to infuse up to 60 mL (12 grams) per site and 60 mL per hour, per site as tolerated, resulting in fewer infusion sites and shorter infusion durations compared to other conventional subcutaneous IG treatments. CUVITRU was approved in the U.S. in September 2016. As of September 30, 2018, CUVITRU was approved in 21 countries.

In bio therapeutics, Shire’s principal products include:

 

   

FLEXBUMIN (Human Albumin in a bag) and Human Albumin (glass) are available as 5% and 25% solutions. Both products are indicated for hypovolemia, hypoalbuminemia due to general causes and burns, and for use during cardiopulmonary bypass surgery as a component of the pump prime. FLEXBUMIN 25% is also indicated for hypoalbuminemia associated with adult respiratory distress syndrome and nephrosis, and hemolytic disease of the newborn. FLEXBUMIN was first approved in the U.S. in 2005. As of September 30, 2018, FLEXBUMIN was approved in 49 countries.

In Hereditary Angioedema (HAE), Shire’s principal products include:

 

   

TAKHZYRO (SHP643), a fully human monoclonal antibody that specifically binds and decreases plasma kallikrein. TAKHZYRO is the only monoclonal antibody (mAb) that provides targeted inhibition of plasma kallikrein, an enzyme which is chronically uncontrolled in people with hereditary angioedema (HAE), to help prevent attacks. Shire added TAKHZYRO to its HAE portfolio with the acquisition of Dyax Corp., which was completed in January 2016. On August 23, 2018, the FDA approved TAKHZYRO injection for prophylaxis to prevent attacks of HAE in patients 12 years of age and older. On November 30, 2018, the European Commission granted marketing authorization for TAKHZYRO for the prevention of HAE attacks.

 

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CINRYZE (C1 esterase inhibitor (human)), a C1 esterase inhibitor therapy for routine prophylaxis against HAE attacks. CINRYZE is marketed and sold in the U.S. for routine prophylaxis against HAE attacks in adolescent and adult patients with HAE. CINRYZE enjoys U.S. biological data exclusivity until October 2020. CINRYZE includes a self-administration option for appropriately trained patients. In June 2011, marketing authorization in the EU was granted for CINRYZE in adults and adolescents with HAE for routine prevention, pre-procedure prevention and acute treatment of angioedema attacks. In March 2017, the European Commission approved a label extension for routine prevention of angioedema attacks in children (ages six years and above) with severe and recurrent attacks of HAE who are intolerant to or insufficiently protected by oral preventions treatments, or patients who are inadequately managed with repeated acute treatment. The EC also approved CINRYZE for the treatment and pre-procedure prevention of angioedema attacks in children (ages two years and above) with HAE. As of September 30, 2018, CINRYZE was approved in 36 countries.

 

   

FIRAZYR (icatibant injection), a bradykinin B2 receptor antagonist developed for the treatment of acute attacks of HAE. In July 2008, the EC granted marketing authorization throughout the EU for the use of FIRAZYR for the symptomatic treatment of acute attacks of HAE in adults, and in March 2011 approved FIRAZYR for self-administration after training in subcutaneous injection technique by a healthcare professional. In August 2011, the FDA granted marketing approval for FIRAZYR in the U.S. for treatment of acute attacks of HAE in adults aged 18 and older and, after injection training, patients may self-administer FIRAZYR. FIRAZYR has been granted orphan drug exclusivity by both the FDA and the EMA, providing it with up to seven and ten years market exclusivity in the U.S. and EU, respectively, from the date of the grant of the relevant marketing authorization. On October 26, 2017, Shire announced that the EC approved a label extension for FIRAZYR (icatibant injection), broadening its use to adolescents and children aged 2 years and older, with HAE caused by C1-esterase-inhibitor (C1-INH) deficiency. As of September 30, 2018, FIRAZYR was approved in 46 countries.

In internal medicine, Shire’s principal products include:

 

   

GATTEX/REVESTIVE (teduglutide rDNA origin) for injection is the first prescription medicine for the long-term treatment of adults with SBS who are dependent on parenteral support. SBS is an ultra rare condition in which a large portion of the intestine has been removed by surgery. As a result, people cannot absorb enough nutrients or fluids from food and liquids to maintain good health. GATTEX/REVESTIVE may help the remaining intestine absorb more fluids and reduce the need for parenteral support. GATTEX was approved by the FDA in December 2012. REVESTIVE was approved in the EU in August 2012. As of September 30, 2018, GATTEX/REVESTIVE was approved in the U.S., Canada, EU, Australia, Israel, South Korea and Switzerland.

 

   

NATPARA (parathyroid hormone) for injection is indicated as an adjunct to calcium and vitamin D to control hypocalcemia in patients with hypoparathyroidism (HPT). HPT is a rare condition in which the parathyroid glands fail to produce sufficient amounts of parathyroid hormone (PTH) or where the PTH lacks biologic activity. NATPARA was approved by the FDA in January 2015. NATPARA has been granted orphan drug exclusivity by the FDA. NATPARA also benefits from the 12 years of data exclusivity from the date of registration given to innovator biologics in the U.S. under the ACA. NATPAR was granted conditional marketing authorization in Europe by CHMP in April 2017. As of September 30, 2018, NATPAR/A was approved in the U.S., EU and Israel.

 

   

LIALDA/MEZAVANT is approved for the induction of remission in patients with active mild to moderate UC and for the maintenance of remission of UC. LIALDA is marketed in certain territories outside the U.S. by Shire under the trade name MEZAVANT and MEZAVANT XL. As of September 30, 2018, LIALDA/MEZAVANT was approved in 32 countries and made available either directly or through distributor arrangements. Generic versions of LIALDA are now available in the U.S.

 

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In oncology, Shire’s principal products previously included:

 

   

ONCASPAR is approved in the U.S., Canada and EU as a component of a multi-agent chemotherapeutic regimen for the first-line treatment of patients with ALL. As of August 31, 2018, ONCASPAR was approved in 46 countries.

 

   

ONIVYDE (pegylated liposomal formulation of irinotecan) is approved in the U.S. and EU in combination with fluorouracil (5-FU) and leucovorin (LV), for the treatment of patients with metastatic adenocarcinoma of the pancreas after disease progression following gemcitabine based therapy. As of August 31, 2018, ONIVYDE was approved in 38 countries.

On August 31, 2018, Shire sold its oncology franchise, including the above products, to Servier for $2.4 billion. As a result of this transaction, ONCASPAR, ONIVYDE and other oncology-related products marketed by Shire no longer comprise part of its business.

In ophthalmics, Shire’s principal product is:

 

   

XIIDRA (Lifitegrast ophthalmic solution 5%), an integrin antagonist that reduces chronic inflammation associated with dry eye disease. It was approved by the FDA in July 2016 as the first and only prescription eye drop indicated for the treatment of the signs and symptoms of dry eye disease. XIIDRA is currently approved and marketed in the U.S. XIIDRA was approved in Canada in December 2017 and further expansion plans are underway, with filings submitted in international markets.

Shire also receives royalties from the following products:

 

   

Shire receives royalties arising from collaborations with Amgen. Amgen markets Cinacalcet HCI, a treatment for secondary hyperparathyroidismas, as Sensipar in the U.S. and as Mimpara in the EU. Shire is entitled to royalties from the relevant net sales of these in or through 2018 for all other territories.

 

   

Shire receives royalties on antiviral products licensed to GlaxoSmithKline; 3TC for HIV and Zeffix Hepatitis B virus. Royalty terms expired in most territories outside of the U.S. during 2012. In the U.S., remaining royalty terms expire in 2018.

 

   

Shire licensed the rights to FOSRENOL in Japan to Bayer in December 2003. Bayer launched FOSRENOL in Japan in March 2009. Shire receives royalties from Bayer’s sales of FOSRENOL in Japan. Shire has also received milestone payments from Bayer based on the achievement of certain sales thresholds and may receive further milestone payments in the future if certain sales thresholds are achieved.

 

   

Shire currently receives royalties from the sales of the generic version of ADDERALL XR (“AXR”) from Impax Laboratories, Inc. and Teva Pharmaceuticals Industries, Ltd. Shire also receives royalties from Prasco, LLC (Prasco) and Sandoz Inc. from sales of the authorized generic version of AXR supplied by Shire. Royalty amounts for authorized generic sales are reported as part of Shire’s net product sales. In 2016, Teva Pharmaceuticals Industries, Ltd. began selling a generic version of AXR under an ANDA acquired from Allergan plc.

 

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The table below lists Shire’s products in clinical development and registration as of September 30, 2018, by stage of development indicating the most advanced development status reached in major markets and Shire’s territorial rights in respect of each product candidate. If these product candidates are ultimately approved and marketed, they may benefit from patent and/or other forms of exclusivity. However, as these product candidates remain in development and are subject to change as development progresses, the patents listed may not necessarily be representative of the scope of patent protection that may ultimately be available if each product candidate is approved and marketed.

 

Product

  

Disease area

 

Development status
as of September 30,
2018

 

Shire’s
territorial
rights

 

Modality

SHP489 (VYVANSE)

   ADHD in children and adolescents   Registration in Japan   Global(1)   Small Molecule

SHP606 (XIIDRA)

   Dry Eye Disease   Registration in EU   Global   Small Molecule
        

SHP643 (TAKHZYRO)

   HAE prophylaxis   Registration(2)   Global   Antibody

SHP555

   Chronic idiopathic constipation in adults   Registration(2)   U.S. and EU   Small Molecule

SHP616 (CINRYZE)

   Prophylaxis and acute treatment of angioedema   Phase 3 in Japan   Global   Protein Replacement Therapy

SHP616 (CINRYZE)

   Antibody Mediated Rejection   Phase 3   Global   Protein Replacement Therapy

SHP616 (CINRYZE)

   Subcutaneous formulation for HAE prophylaxis   Phase 3   Global   Protein Replacement Therapy

SHP620*

   Treatment of cytomegalovirus infection in transplant patients   Phase 3   Global(3)   Antiviral

SHP621

   Treatment of adolescents and adults with Eosinophilic Esophagitis (EoE)   Phase 3   U.S.   Small Molecule

SHP633 (REVESTIVE)

   Treatment of adults with SBS   Phase 3 in Japan   Global   Peptide

SHP633 (GATTEX/REVESTIVE)

   Treatment of pediatric patients with SBS   Phase 3   Global   Peptide

SHP640*

   Treatment of infectious conjunctivitis   Phase 3   Global   Small Molecule

SHP647*

   Ulcerative Colitis   Phase 3   Global(4)   Monoclonal Antibody

SHP647*

   Crohn’s Disease   Phase 3   Global(4)   Monoclonal Antibody

SHP609*

   Neurocognitive Decline Associated with Hunter Syndrome   Phase 2/3   Global(5)   Enzyme Replacement Therapy

SHP655*

   Congenital Thrombotic Thrombocytopenic Purpura   Phase 3   Global(6)   Protein

SHP671 (HYQVIA)

   Chronic Inflammatory Demyelinating Polyradiculoneuropathy (CIDP)   Phase 3   Global   Antibody

 

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Product

  

Disease area

 

Development status
as of September 30,
2018

 

Shire’s
territorial
rights

 

Modality

SHP671 (HYQVIA)

   Primary Immunodeficiency in pediatric patients   Phase 3   Global   Antibody

SHP607*

   Chronic Lung Disease   Phase 2   Global   Enzyme Replacement Therapy

SHP615 (BUCCOLAM)

   Convulsive Seizures   Phase 3 in Japan   Global   Small Molecule

SHP615 (BUCCOLAM)

   Convulsive Seizures   Phase 2 in U.S.   Global   Small Molecule

SHP672 (OBIZUR)

   Congenital Hemophilia A with Inhibitors (CHAWI) surgery   Phase 3   Global   Biologic

SHP625*(7)

   Alagille Syndrome   Phase 2   Global   Small Molecule

SHP625*(7)

   Progressive Familial Intrahepatic Cholestasis   Phase 2  

Global

  Small Molecule

SHP652

   Systemic Lupus Erythematosus   Phase 2 (on clinical hold)   U.S., EU, JP, select APAC and LATAM countries   Protein

SHP659*

   Dry Eye Disease   Phase 2   Global   Small Molecule

SHP611*

   Metachromatic Leukodystrophy   Phase 1   Global   Enzyme Replacement Therapy

SHP631*

   Treatment of both the Central nervous system and somatic manifestations in patients with MPS II   Phase 1   Global  

Enzyme Replacement Therapy/Fusion

Protein

SHP634 (NATPARA)

   Hypoparathyroidism   Phase 1 in Japan   Global(8)  

Peptide

SHP639*

   Glaucoma   Phase 1   Global  

Peptide

SHP654*

   Hemophilia A   Phase 1   Global   Gene Therapy

SHP680*

   Neurological Conditions   Phase 1   Global   Small Molecule

 

*

Denotes NME

Notes:

(1)

Under co-development with Shionogi in Japan under a license and collaboration agreement.

(2)

Marketed in the EU.

(3)

Global Rights, with the exception of Japan.

(4)

On October 26, 2018, Takeda announced that it was in discussions with the European Commission, the EU antitrust regulator, in relation to the future potential overlap in the area of IBD between its marketed product ENTYVIO and Shire’s pipeline compound SHP647, which is currently in Phase III clinical trials, and that it had proposed an antitrust remedy of a potential divestment of SHP647 and certain associated rights. On November 20, 2018, the European Commission granted a Phase I conditional clearance for the Shire Acquisition, subject to Takeda and Shire entering into commitments to divest SHP647 and certain other associated rights.

(5)

Under license, Genzyme has rights to manage marketing and distribution in Asia Pacific, Japan and South Africa.

(6)

Global rights, with the exception of Japan (where the licensor, Kaketsuken, has retained rights).

(7)

Divested as of November 7, 2018.

(8)

Global rights, with the exception of Israel.

 

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Availability of Raw Materials

Shire purchases, in the ordinary course of business, raw materials and supplies essential to its operations from numerous suppliers around the world, including in the U.S. While efforts are made to diversify Shire’s sources of components and materials, in certain instances Shire acquires components and materials from a sole supplier. Human plasma is a critical raw material in Shire’s business. Shire believes that its ability to internally and externally source plasma represents a distinctive and flexible infrastructure, which provides Shire a unique capability with respect to the consistent delivery of high quality plasma-based products. Shire owns and operates plasma collection facilities in the U.S. and Austria through its wholly owned subsidiary BioLife Plasma Services L.P. (“BioLife”). BioLife operates and maintains more than 90 plasma collection facilities in 24 states throughout the U.S. and at seven locations in Austria. Shire also maintains relationships with other plasma suppliers to ensure that it retains the flexibility to meet market demand for its plasma based therapies.

Material Customers

Shire’s three largest trade customers are AmerisourceBergen Corporation, McKesson Corp and Cardinal Health, Inc., which are based in the U.S. In 2017, these wholesale customers accounted for approximately 10%, 9% and 7% of product sales, respectively.

Intellectual Property

The following table shows the patent numbers that are listed in the Patent and Exclusivity Information Addendum of the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”), for some of Shire’s more significant, revenue-generating products approved via an NDA or an NDA under Section 505(b)(2) under the U.S. Federal Food, Drug, and Cosmetic Act that references a previously approved drug, which are owned by or licensed to Shire and relevant to an understanding of Shire’s business taken as a whole. There may be other patents related to these products, methods of manufacturing, or use of the products in the treatment of particular diseases or conditions that are not listed in the Orange Book. Some of Shire’s other products are biologics which are protected by patents and forms of unpatented confidential information, including manufacturing trade secrets and proprietary know-how, that are not listed in the Orange Book. In addition, expiration dates set forth below do not necessarily reflect possible changes to the patent term afforded by, among other things, patent term extensions in the U.S. or other territories or changes that may result as a consequence of the outcome of litigation or other proceedings. Shire also holds patents in other jurisdictions, such as the EU, Canada and Japan, and has patent applications pending in such jurisdictions, as well as in the U.S.

 

Product

  

Orange Book listed U.S. patent

  

Expiration date

ADDERALL XR

  

US 6322819

US RE41148

US 6605300

US RE42096

  

April 21, 2019

April 21, 2019

April 21, 2019

April 21, 2019

FIRAZYR

  

US 5648333

  

July 15, 2019

LIALDA/MEZAVANT

  

US 6773720

  

June 8, 2020

VYVANSE

  

US 7105486

US 7223735

US 7655630

US 7659253

US 7659254

US 7662787

US 7662788

US 7671030

US 7671031

  

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

 

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Product

  

Orange Book listed U.S. patent

  

Expiration date

  

US 7674774

US 7678770

US 7678771

US 7687466

US 7687467

US 7700561

US 7713936

US 7718619

US 7723305

  

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

February 24, 2023

GATTEX/REVESTIVE

  

US 5789379

US 7056886

US 7847061

  

April 14, 2020

September 18, 2022

November 1, 2025

  

US 9060992

US 9539310

US 9545434

US 9545435

US 9555079

US 9572867

US 9592273

US 9592274

US 9968655

US 9968656

US 9968658

US 9974835

US 9974837

US 9981014

US 9981016

US 9987334

US 9987335

US 9993528

  

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

November 1, 2025

XIIDRA

  

US 7314938

US 7745460

US 7790743

US 7928122

US 8084047

US 8168655

US 8367701

US 8592450

US 8927574

US 9085553

US 9216174

US 9353088

US 9447077

US 9890141

  

March 10, 2025

November 5, 2024

November 5, 2024

November 5, 2024

May 17, 2026

May 9, 2029

April 15, 2029

May 17, 2026

November 12, 2030

July 25, 2033

November 5, 2024

October 21, 2030

April 15, 2029

October 21, 2030

MYDAYIS

  

US 6913768

US 8846100

US 9173857

  

May 24, 2023

August 24, 2029

May 12, 2026

Item 4A. Unresolved Staff Comments

Not applicable.

 

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Item 5. Operating and Financial Review and Prospects

 

  A.

Operating Results.

You should read the following discussion of our operating and financial review and prospects together with our consolidated financial statements included elsewhere in this registration statement. Our consolidated financial statements are prepared in accordance with IFRS, as issued by the IASB. The term IFRS also includes International Accounting Standards (“IASs”) and the related interpretations of the committees (SIC and IFRIC). For more information on the basis of presentation, see Note 2 to our audited consolidated financial statements included in this registration statement.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors, including, but not limited to, those under Item 3. D “Risk Factors” and elsewhere in this registration statement.

Overview

We are a global pharmaceutical company with an innovative portfolio, engaged primarily in the research, development, production and marketing of prescription drugs. We have a geographically diversified global business base operating in more than 70 countries, and our prescription drugs are marketed in approximately 100 countries and are recognized brands in major countries worldwide. We develop and market pharmaceutical products including prescription drug products to treat a broad range of medical conditions including GI diseases, cancer, neurological and psychiatric diseases and other medical conditions, including diabetes and hypertension, as well as vaccines. We also produce and sell vaccines as well as consumer healthcare products.

We have recently taken significant steps to refocus and enhance our business. For example:

 

   

In July 2016, we announced a fundamental reorganization of our research and development activities to focus on our three core therapeutic areas, GI, oncology and neuroscience, plus vaccines, to optimize our pipeline and enhance operational efficiency;

 

   

In February 2017, we acquired ARIAD, a commercial-stage biotechnology company headquartered in Cambridge, Massachusetts to enhance our global oncology portfolio by expanding our prescription drug portfolio and research and development pipeline for the treatment of solid tumors and acquiring its capabilities in hematological oncology; and

 

   

In the fiscal year ended March 31, 2018, we entered into more than 50 collaborations with third parties to help strengthen our pipeline; and

 

   

In July 2018, we acquired TiGenix NV, an advanced biopharmaceutical company developing novel stem cell therapies for serious medical conditions, with the aim to bring new treatment options to patients with gastrointestinal disorders.

We have also divested a number of businesses in non-core areas. For example:

 

   

In April 2016, we completed the sale of our respiratory business to AstraZeneca;

 

   

In April 2016, we transferred certain long-listed products in Japan to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture we formed with Teva Pharmaceutical Industries Ltd. in which we hold a 49% interest, and subsequently sold seven additional long-listed products to Teva Takeda Yakuhin Ltd. in May 2017; and

 

   

In April 2017, we completed the sale of our shares in Wako Pure Chemical to FUJIFILM Corporation;

 

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In August 2018, we sold and divested all our shares and assets in Guangdong Techpool Bio-Pharma Co., Ltd. to Shanghai Pharmaceutical Holding Co. Ltd.; and

 

   

For the six months ended September 30, 2018, we recorded ¥38.2 billion in proceeds from sales of other shareholdings.

As the next step in our ongoing process to strengthen our business, we are pursuing the Shire Acquisition, which we expect will help us become a global leader in the pharmaceutical industry, reinforcing our strengths in GI and neuroscience, while adding new capabilities in rare diseases and plasma-derived therapies that complement our capabilities in oncology and vaccines. See “—Financial Impact of the Shire Acquisition.”

Operating Segments and Geographic Information

We organize our business as a single operating segment, reflecting the presentation of information to our management for the purposes of allocating resources, measuring performance and forecasting future periods.

Our operations are global in scope, and we generate revenue from selling our products across various regions. While our operations in Japan have historically contributed the largest portion of our revenues, we have continued to expand our operations in the United States, Europe, Canada and Emerging Markets (which consists of Russia/CIS, Latin America, Asia excluding Japan and others). Reflecting this expansion, the United States accounted for more revenue than Japan for the first time in the fiscal year ended March 31, 2018.

Our total revenue by geographic region for the fiscal years ended March 31, 2016, 2017 and 2018 is set forth in the following table:

 

     For the fiscal year ended March 31,  
     2016     2017     2018  
     (billions of yen, except for percentages)  

Revenue:

  

Japan

   ¥ 688.1        38.1   ¥ 655.3        37.8   ¥ 580.3        32.8

United States

     514.4        28.5       520.2        30.0       598.3        33.8  

Europe and Canada

     309.3        17.1       279.7        16.1       313.7        17.7  

Russia/CIS

     61.8        3.4       57.5        3.3       68.2        3.9  

Latin America

     68.4        3.8       72.5        4.2       75.7        4.3  

Asia (excluding Japan)

     126.0        7.0       112.8        6.5       104.0        5.9  

Other(1)

     39.4        2.2       34.0        2.0       30.2        1.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 1,807.4        100.0   ¥ 1,732.1        100.0   ¥ 1,770.5        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Note:

(1)

Other region includes Middle East, Oceania and Africa.

We refer to Russia/CIS, Latin America, Asia (excluding Japan) and Other collectively as “Emerging Markets”.

Operating Environment

We believe that global demand for healthcare continues to increase across markets, driven by increased access to healthcare, particularly in low-income and middle-income countries. The global pharmaceutical industry also faces a number of challenges, such as stagnation in creating breakthrough novel drugs due to the difficulties of translating new innovations into products in the marketplace, as well as increasingly stringent criteria for the approval of new drugs in many countries. Drastic changes in the healthcare and reimbursement systems in many countries have also impacted the pharmaceutical industry.

 

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In particular, global efforts toward health care cost containment continue to exert pressure on product pricing and market access. Given the growth of overall healthcare costs as a percentage of gross domestic product in many countries, some governments and payers including the U.S., Japanese, European, Canadian and other governments, have introduced price reductions and/or rebate increases for patented and generic medicines, as well as other healthcare products and services. For further discussion of government policies on price reductions and impact on our revenue, see “—Factors Affecting Our Results of Operations—Revenue—Pricing and Government Regulation” and “Item 4. Information on the Company—B. Business Overview—Regulation.”

We also continue to be affected by overall economic conditions and financial markets. Economic growth continues to be stagnant in many major developed countries, while the pace of growth in many emerging economies has declined. Recently, developments such as Brexit, the transition to a new presidential administration in 2017 and uncertainty around upcoming mid-term elections in 2018 in the United States, continued instability in the Middle East and North Korea and tensions over trade, including tariff regimes, have increased political and economic uncertainty. Moreover, the volatility of the Japanese yen against the U.S. dollar and the euro in recent years has impacted our consolidated results, as sales in such currencies are translated into Japanese yen.

Financial Impact of the Shire Acquisition

On May 8, 2018, the boards of Takeda and Shire reached agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire, which we refer to as the Shire Acquisition. See “Item 4. Information on the Company—A. History and Development of the Company—Shire Acquisition.” Under the proposed terms of the Shire Acquisition, each Shire shareholder will be entitled to receive $30.33 in cash and either 0.839 newly issued shares of our common stock or 1.678 of our ADSs, each representing 0.5 shares of our common stock. This offer represents an estimated aggregate consideration of approximately £46 billion, or approximately ¥6.96 trillion. The final aggregate value of the consideration to be reflected in our consolidated financial statements for the fiscal year in which the Shire Acquisition is completed will depend on the closing price of our shares, the last trading price of Shire shares and number of issued shares of Shire and the exchange rates between the pound sterling and Japanese yen and between the U.S. dollar and the Japanese yen at the time of the closing of the acquisition. We expect to incur significant indebtedness to finance the cash portion of the consideration, which will result in a significant increase in interest costs in future periods. See “—B. Liquidity and Capital Resources—Financing Arrangements for the Shire Acquisition.”

We will account for the Shire Acquisition as a business combination and will record the net assets acquired at fair value. We expect to record a significant amount of inventory, intangible assets, primarily intellectual property and other proprietary rights of Shire related to its products, in connection with the Shire Acquisition, which will result in significant amortization expense in future periods. We also expect to record a significant amount of goodwill in connection with the acquisition reflecting the sum, by which the aggregate fair value of consideration for the Shire Acquisition exceeds the fair value of the identifiable assets acquired and liabilities assumed as of the Shire Acquisition date. Such intangible assets and goodwill will be presented on our balance sheet as of the end of the fiscal period in which the Shire Acquisition is completed.

As described under “—Critical Accounting Policies—Impairment of Goodwill and Intangible Assets,” goodwill and other intangible assets recorded in connection with the Shire Acquisition will be held on our consolidated balance sheet at the recorded value (or amortized value, in the case of intangible assets other than goodwill), less any accumulated impairment losses. If circumstances arise indicating that goodwill or intangible assets recorded in connection with the acquisition may be impaired, such as if we are unable to successfully realize the expected benefits of the acquisition and the carrying amount of goodwill or other intangible assets therefore exceeds their recoverable amount, we may be required to record an impairment loss up to the full value of such goodwill or other intangible assets shown on our consolidated balance sheet.

 

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Following the completion of the Shire Acquisition and the integration of Shire’s business into ours, we expect to be able to achieve significant, recurring pre-tax synergies of at least $1.4 billion annually by the end of the third fiscal year following the completion of the Shire Acquisition, originating from efficiencies in the combined company’s sales, marketing and administrative functions, research and development efforts and product manufacturing and supply. We believe that the realization of these synergies will require an aggregate of approximately $2.4 billion, of non-recurring cash costs relating to the integration of Shire into our business during the first three fiscal years following the completion of the Shire Acquisition. This amount does not include costs relating to the completion of the acquisition, such as advisory, legal or other fees. In the six months ended September 30, 2018, we recorded ¥7.9 billion of acquisition-related costs, such as advisory fees, as a component of selling, general and administrative expenses, ¥3.2 billion of restructuring expense in other expenses and ¥8.8 billion of finance expense relating to the arrangement of commitments to finance the Shire Acquisition, and we expect to incur further costs in future periods. We expect that the costs related to the Shire Acquisition to be incurred in the fiscal year ending March 31, 2019 will be between ¥40.0 billion and ¥60.0 billion. This estimate does not include integration costs, interest on indebtedness and other financial expenses, as the amount of those expenses is dependent on the timing of the completion of the Shire Acquisition. Costs related to the Shire Acquisition, including execution, integration and other costs, will be expensed when they are incurred.

Our unaudited pro forma condensed combined balance sheet and statement of income as of and for the fiscal year ended March 31, 2018, presented in accordance with the requirements of Article 11 of Regulation S-X and Form 20-F, are included in this registration statement.

Financial Impact of the ARIAD Acquisition

On February 16, 2017, we acquired ARIAD Pharmaceuticals, Inc. for a net consideration of ¥583.1 billion. Headquartered in Cambridge, Massachusetts in the United States, ARIAD is a commercial-stage biotechnology company focusing on discovering, developing and commercializing precision therapies for patients with rare forms of chronic and acute leukemia, lung cancer and other rare cancers.

We believe that the acquisition of ARIAD has strengthened and will continue to significantly strengthen our global oncology platform by expanding our solid tumors portfolio and pipeline and reinforcing our existing strength in hematology treatments. In particular, ARIAD has developed ALUNBRIG (brigatinib), a small molecule ALK inhibitor for NSCLC, which was granted accelerated approval in the United States in April 2017. We believe that ALUNBRIG has the potential to be a leading ALK inhibitor due to its manageable safety profile, its potential ability to address mutations of ALK resistant to crizotinib, another ALK inhibitor anti-cancer treatment, and its activity in patients with brain metastases. As a result, we believe that ALUNBRIG has the potential to develop into a significant revenue driver in the future. In addition, ARIAD has developed and commercialized ICLUSIG, a treatment for chronic myeloid leukemia and Philadelphia chromosome positive acute lymphoblastic leukemia. Due to the contribution of these two innovative therapies, we believe that our acquisition of ARIAD will have a significant impact on revenue and will support our growth over the longer term. The expected contribution of these two therapies to revenues is described under “—Factors Affecting Our Results of Operations—Revenue—Principal Products.”

As a result of the acquisition of ARIAD, we recorded ¥273.6 billion in goodwill and ¥433.0 billion in intangible assets. The remaining estimated useful life for products, based on the remaining exclusivity period, acquired as part of the acquisition of ARIAD ranges from 9 to 13 years as of March 31, 2018. Our consolidated results for the fiscal year ended March 31, 2018 included the results of ARIAD for the full fiscal year for the first time, which contributed to increases in revenue and operating profit, as well as the increased importance of the U.S. market to our overall results. We also expensed ¥3.2 billion of costs related to the acquisition of ARIAD, including agency and legal fees, in selling, general and administrative expenses for the fiscal year ended March 31, 2017.

 

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Factors Affecting Our Results of Operations

Revenue

Principal products

We rely on our principal products to generate a significant portion of our revenue. In particular, our ability to maintain and grow our revenue is dependent in part on our ability to generate additional revenue from our “growth drivers,” which we define as the core therapeutic areas of GI, oncology and neuroscience, as well as emerging markets. For descriptions of our principal products, see “Item 4. Information on the Company—B. Business Overview.”

Specifically, we currently depend on NINLARO as a key growth driver in oncology, and expect ICLUSIG and ALUNBRIG, both of which were added to our product portfolio when we acquired ARIAD, to be growth drivers in the future. In GI, ENTYVIO, our overall highest selling product, and TAKECAB are our main growth drivers. In neuroscience, TRINTELLIX is our key growth driver, and we expect future contributions from AZILECT, which we in-licensed from Teva Pharmaceutical Industries Ltd. and which received approval for use in Japan in March 2018. In emerging markets, ADCETRIS and ENTYVIO are our key growth drivers.

In particular, revenue from ENTYVIO, which is currently approved in more than 60 countries, grew from ¥86.2 billion in the fiscal year ended March 31, 2016 to ¥201.4 billion in the fiscal year ended March 31, 2018, and ENTYVIO has been our highest selling product since the fiscal year ended March 31, 2017. Revenue from TAKECAB sold in Japan grew from ¥8.4 billion on a gross basis in the fiscal year ended March 31, 2016 to ¥48.5 billion on a net basis (or ¥55.1 billion on a gross basis) in the fiscal year ended March 31, 2018. NINLARO, which had a strong launch in the United States and was newly approved in countries including the EU in the last quarter in 2016 and Japan in 2017, demonstrated a revenue growth from ¥4.1 billion in the fiscal year ended March 31, 2016 to ¥46.4 billion in the fiscal year ended March 31, 2018. ICLUSIG recorded ¥2.9 billion and ¥23.1 billion in revenue, respectively, for the period from February 16, 2017 (the date of the ARIAD acquisition) to March 31, 2017, and for the fiscal year ended March 31, 2018. ALUNBRIG, which was also obtained through the acquisition of ARIAD, was launched in the United States in May 2017, and recorded ¥2.8 billion of sales in the fiscal year ended March 31, 2018.

One significant factor affecting revenue of our principal products is the timing of the expiration of the exclusivity period for such products, as well as the timing and success of the sale of newly launched products. For example, following the expiration of patent protection over bortezomib, the active ingredient in VELCADE, one of our largest selling products in the United States, a competing bortezomib-containing product has been introduced. This has led to a decrease in sales of VELCADE, and further entry of competing products could result in substantial additional declines. Such decreases may accelerate following the scheduled expiration of patent protection over the formulation of VELCADE in 2022, or earlier if a competitor is able to develop a way to formulate VELCADE in a manner that does not infringe on the relevant patent or by succeeding in having the formulation patent invalidated. In addition, as patent protection has expired for PANTOPRAZOLE in many major markets including the United States and the EU, sales of PANTOPRAZOLE have continued to decline in those markets. The following table shows revenue, including royalty income and service income, for our key prescription drug products by geographic region for the three most recent fiscal years:

 

     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

ENTYVIO

        

United States

   ¥ 63.1      ¥ 99.6      ¥ 133.6  

Europe and Canada

     21.9        39.5        60.2  

Emerging Markets

     1.3        4.0        7.5  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 86.2      ¥ 143.2      ¥ 201.4  

 

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     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

NINLARO

        

Japan

                 ¥ 2.5  

United States

   ¥ 4.0      ¥ 29.1        39.4  

Europe and Canada

            0.2        4.0  

Emerging Markets

     0.0        0.1        0.6  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 4.1      ¥ 29.4      ¥ 46.4  

VELCADE

        

United States

   ¥ 131.6      ¥ 112.9      ¥ 113.7  

Other than United States

     30.4        24.7        23.6  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 162.0      ¥ 137.6      ¥ 137.3  

ADCETRIS

        

Japan

   ¥ 3.1      ¥ 3.3      ¥ 3.8  

Europe

     17.4        17.5        20.1  

Emerging Markets

     7.2        9.3        14.3  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 27.6      ¥ 30.1      ¥ 38.5  

TAKECAB

        

Japan(1)

   ¥ 8.4      ¥ 34.1      ¥ 48.5  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 8.4      ¥ 34.1      ¥ 48.5  

TRINTELLIX(2)

        

United States

   ¥ 24.5      ¥ 31.9      ¥ 48.4  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 24.5      ¥ 31.9      ¥ 48.4  

LEUPRORELIN

        

Japan (product name: LEUPLIN)(1)

   ¥ 53.8      ¥ 48.6      ¥ 41.2  

United States

     17.3        18.3        19.7  

Europe and Canada

     35.3        31.1        34.5  

Emerging Markets

     18.0        16.3        12.7  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 124.4      ¥ 114.2      ¥ 108.1  

DEXILANT

        

United States

   ¥ 64.0      ¥ 49.7      ¥ 49.5  

Europe and Canada

     5.4        5.7        6.4  

Emerging Markets

     5.7        7.3        9.9  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 75.1      ¥ 62.6      ¥ 65.7  

AZILVA

        

Japan(1)

   ¥ 59.0      ¥ 66.9      ¥ 64.0  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 59.0      ¥ 66.9      ¥ 64.0  

ALOGLIPTIN

        

Japan (product name: NESINA)(1)

   ¥ 36.9      ¥ 32.9      ¥ 26.6  

United States

     5.3        5.2        6.0  

Europe and Canada

     3.5        6.1        9.0  

Emerging Markets

     3.3        4.9        8.6  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 48.9      ¥ 49.1      ¥ 50.2  

ULORIC

        

United States

   ¥ 41.8      ¥ 41.4      ¥ 45.8  

Europe and Canada

     0.7        0.7        0.8  

Emerging Markets

            0.1        0.3  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 42.5      ¥ 42.2      ¥ 46.8  

 

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     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

COLCRYS

        

United States

   ¥ 46.5      ¥ 38.9      ¥ 40.3  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 46.5      ¥ 38.9      ¥ 40.3  

AMITIZA

        

United States

   ¥ 37.2      ¥ 33.7      ¥ 33.7  

Europe and Canada

     0.1        0.1        0.1  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 37.3      ¥ 33.8      ¥ 33.8  

PANTOPRAZOLE

        

United States

   ¥ 13.6      ¥ 10.1      ¥ 7.2  

Europe and Canada

     43.4        30.5        30.6  

Emerging Markets

     43.7        33.7        28.0  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 100.8      ¥ 74.2      ¥ 65.8  

LANSOPRAZOLE

        

Japan(1)(3)

   ¥ 41.3      ¥ 8.1      ¥ 4.6  

United States

     27.5        20.0        15.2  

Europe and Canada

     10.5        7.1        7.2  

Emerging Markets

     10.2        9.2        9.7  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 89.5      ¥ 44.4      ¥ 36.8  

CANDESARTAN

        

Japan(2)

   ¥ 58.5      ¥ 14.8      ¥ 2.6  

United States

     1.3        0.6        0.7  

Europe and Canada

     12.5        9.3        9.5  

Emerging Markets

     12.4        9.5        9.2  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 84.8      ¥ 34.2      ¥ 22.0  

 

Notes:

(1)

Beginning from the fiscal year ending March 31, 2019, sales of certain products in Japan are disclosed on a net basis, deducting items such as discounts and rebates, in alignment with the global managerial approach applied to individual product sales for the fiscal year ended March 31, 2018. Sales of individual products have been revised retroactively on a net basis to enable year-on-year comparisons. This reclassification has no impact on Takeda’s financial statements and does not represent a correction of figures from the prior fiscal periods. Figures for the fiscal years ended March 31, 2016 and 2017 have not been reclassified retroactively.

(2)

TRINTELLIX is the brand name used since June 2016 for the product previously marketed as BRINTELLIX in the United States. The formulations, indication and dosages of TRINTELLIX remain the same as that of BRINTELLIX.

(3)

Products excluding fixed dose combinations were transferred to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture in Japan we formed with Teva Pharmaceutical Industries Ltd., in April 2016. Fixed dose combinations were sold to Teva Takeda Yakuhin Ltd. in May 2017. Amounts presented above represent supply sales to Teva Takeda Yakuhin Ltd., following such transfers.

For a discussion of our principal products and the conditions they treat, see “Item 4. Information on the Company—B. Business Overview.”

 

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Pricing and government regulation

Although we consider domestic and international competitive conditions, such as the price of competing products, in setting and revising the price of our pharmaceutical products, government regulation also has a significant effect in determining the price of pharmaceutical products in many of the countries in which we operate. Government policy in many countries has emphasized, and large customers continue to seek, discounts on pharmaceutical products.

The U.S. Healthcare Legislation, enacted in March 2010, has increased the amount of rebates paid by pharmaceutical companies and has negatively impacted operating income of pharmaceutical companies, although these effects may be offset in part in the medium to long term by the effects of an increase in individuals covered by health care programs. While there are currently legislative proposals in the United States to amend or repeal the U.S. Healthcare Legislation or to introduce other regulatory changes, the potential impact of any new legislation is uncertain. Regulatory and legislative debates are particularly driven by public concern over access to and affordability of pharmaceuticals. These policy and political issues increase the risk that taxes, fees, rebates or other federal and state measures that could affect the pricing of pharmaceuticals may be enacted. These may include a reduction in biologic data exclusivity, modifications to Medicare Parts B and D, language that would allow the Department of Health and Human Services to negotiate prices for biologics and drugs in Medicare, proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing information and state-level proposals related to prescription drug prices and reducing the cost of pharmaceuticals purchased by government health care programs. The Bipartisan Budget Act, enacted in February 2018 and scheduled to take effect in 2019, will require manufacturers of brand-name drugs, biologics and biosimilars to pay a 70 percent discount in the Medicare Part D Coverage Gap, up from the current 50 percent discount.

In Japan, the government has the authority to set retail prices for prescription drugs, especially in the context of sales reimbursed by national health insurance programs. Pharmaceutical companies in Japan, including us, are required to list new pharmaceutical products on the NHI price list published by the MHLW in connection with public medical insurance programs. Prices of pharmaceutical products so listed are determined by comparison to comparable products, with necessary adjustments for innovativeness, usefulness and/or size of the markets, or in the absence of comparable products, by the cost calculation method. Prior to 2018, prices on the NHI price list were subject to revision, generally once every two years, on the basis of the actual prices at which the pharmaceutical products are purchased by medical institutions after discounts and rebates off the listed price. Prices on the NHI price list declined by an average of 5.64%, or 2.65% after excluding the 3% consumption tax increase, in 2014, 5.57% in 2016, and 7.48% in 2018, in each case taking into account price revisions on long-listed products. As part of health reform initiatives by the Japanese government aimed at sustaining the universal coverage of the National Health Insurance program, in December 2016, the Japanese government announced its basic reform principles for fundamental reforms of the drug pricing system in 2018. These include an increase in the frequency of price revisions from every other year to annually, with annual price revisions scheduled to begin with the fiscal year ending March 31, 2022.

Governments in Europe and many emerging countries also have national health programs with similar price control systems. In Europe, drug prices continue to be subject to downward pressure due to measures implemented in many countries to control drug costs, and prices continue to experience pressure due to parallel imports, generic competition, increasing use of health technology assessment based upon cost-effectiveness and other factors. While the United States does not have a general national health insurance system, there has been increasing pricing pressure from managed care groups and institutional and governmental purchasers. The pharmaceutical industry has also experienced significant pricing pressures in certain emerging countries.

Patent protection and generic competition

Legal protections and remedies for intellectual property are significant factors in determining the competitiveness of and demand for, as well as the prices of, our pharmaceutical products. Many of our products

 

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are protected by substance patents and may also have secondary patents. Secondary patents can include additional patents, such as patents for the processes for making the compound or additional indications or uses. During the patent period, we benefit from the restrictions on competition afforded by the patent. Once patent protection and regulatory data protection expires, however, other pharmaceutical manufacturers may produce generic versions of the products and sell them at lower prices.

In the United States, as well as in many other countries, including in Europe, the introduction of a generic or biosimilar version of a pharmaceutical product often leads to a swift and substantial decline in the sales of the original. Increased pricing pressure, both from governmental regulation and from the healthcare providers in the private sector, means that the market participants with the decision-making authority over pharmaceutical products are quick to adopt generic or biosimilar products once they become available. We may also be subject to competition from generic drug manufacturers prior to the expiration of such patents if the manufacturer successfully challenges the validity of the patents, or if the manufacturer decides that the benefits of prematurely launching “at risk” the generic drug outweigh the costs of defending infringement litigation. Moreover, even our products that still enjoy the benefit of patent exclusivity must compete with the products of other pharmaceutical manufacturers based not only on efficacy or lack of adverse reactions, but also potentially on price, especially where the parties paying for the treatment, which may be health plans, pharmaceutical benefit managers, wholesalers or other parties, maintain formularies or otherwise choose the pharmaceutical products that will be available to patients.

In Japan, the government is implementing various measures to restrain drug costs, including by encouraging medical practitioners to use and prescribe generic drugs, and has recently announced its intention to raise generic drug penetration to 80% by volume by September 2020 with respect to products for which market exclusivity has expired. Market penetration for such products was 65.8% as of September 2017. We are not currently able to quantify the impact that these measures will have on our products. However, we attempt to limit the impact of generic competition by highlighting the proven track record and credibility of our products, as well as making certain price revisions as appropriate. We also try to gain further patent protection through incremental improvements and the addition of new indications related to our products. In addition, in order to mitigate our exposure to the increased use of generics, in April 2016, we transferred certain long-listed products, consisting of products for which patent protection and regulatory data protection have expired, to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture we formed with Teva Pharmaceutical Industries Ltd. of Israel. In May 2017, we sold additional long-listed products to Teva Takeda Yakuhin Ltd. The objective of the joint venture is to mitigate the competition in Japan from generics while allowing us to generate revenue from providing distribution services and contract manufacturing services to the joint venture. See “—Other Factors Affecting Our Results of Operations—(a) Acquisitions and Divestures.”

Introduction of new products

While prescription drugs are generally protected by substance patents and regulatory data protection periods, patents are typically limited to a certain number of years depending on the jurisdiction and the type of patents. Notwithstanding such protection, new therapeutic drugs with potentially higher efficacy, a more favorable side-effect profile or a more convenient mechanism of delivery are constantly being developed and introduced by our competitors even during the patent protected period. Therefore, sales of a given product typically decrease upon the expiration of patent protection and the regulatory data protection period and in some cases earlier if superior products have been introduced to the market. In order to ensure sustained revenue growth, pharmaceutical companies must be able to develop or otherwise acquire the rights to develop or market innovative new products. See “Item 4. Information on the Company—B. Business Overview” for information regarding our research and development activities, including our clinical development pipeline.

 

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Costs and Expenses

 

  (a)

Cost of sales

Cost of sales consists primarily of the cost of raw materials and active ingredients, labor and other overhead costs relating to our manufacturing activities as well as sales-based royalty payments to third parties, if any. We believe the ratio of cost of sales to revenue is low in the pharmaceutical industry compared to many other industries due to pricing policies that reflect the need to recoup significant research and development costs necessary to develop and market new pharmaceutical products.

Cost of sales were ¥535.2 billion, ¥558.8 billion and ¥495.9 billion, or 29.6%, 32.3% and 28.0%, respectively, of consolidated revenues, in the fiscal years ended March 31, 2016, 2017 and 2018. The relative proportion of cost of sales to revenue is affected significantly by our product mix, as certain products are comparatively less expensive to produce. For example, products with specialty capabilities developed and manufactured in-house, such as ENTYVIO and NINLARO, tend to have lower cost of sales than other products which are sourced from or manufactured with third party partners. In addition, we have implemented measures to optimize our source network and achieve procurement savings. Whether we achieve our objective of increasing our profitability will depend in part on our ability to decrease the relative proportion of cost of sales to revenue through such initiatives.

 

  (b)

Selling, general and administrative expenses

Our selling, general and administrative costs include advertising and sales promotion expenses, salaries, long-term incentive payments, bonuses and post-employment benefit costs, among others. Beginning in 2016, we have implemented a global operational expenditure initiative to further rationalize expenditures and enhance our profitability and sustainability. Such initiatives include rolling out a new procurement policy, applying discipline to spending, benchmarking general and administrative functions to drive effectiveness and efficiency and reducing our salesforce in the United States to align our sales capabilities with our core therapeutic areas. Our selling, general and administrative expenses were ¥650.8 billion, ¥619.1 billion and ¥628.1 billion in the fiscal years ended March 31, 2016, 2017 and 2018, or 36.0%, 35.7% and 35.5%, respectively, of consolidated revenue.

 

  (c)

Research and development expenses

Research and development of new pharmaceutical products is essential to continued positive operating results. Our research and development efforts are centralized, with the allocation of resources made on a global basis. See “—C. Research and Development, Patents, Licenses, etc.” for a description of our key research and development policies. Our research and development expenses, which include expenses related to basic research as well as pre-clinical and clinical development, have been significant historically and will continue to be significant. While we expect to achieve greater cost efficiency as a result of our efforts to fundamentally reorganize our research and development activities, we plan to reinvest cost savings attributable to such efficiency improvements in additional research and development in our core therapeutic areas. Research and development expenses are recorded as expenses as they are incurred, and are generally not capitalized until the criteria for recognizing an asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable for a given product. In the fiscal years ended March 31, 2016, 2017 and 2018, research and development expenses were ¥335.8 billion, ¥312.3 billion and ¥325.4 billion, or 18.6%, 18.0% and 18.4% of total revenue, respectively. Research and development expenses could increase due to anticipated clinical trials for existing and new late stage pipeline products, including in-licensed products.

 

  (d)

Amortization and impairment losses on intangible assets associated with products

Intangible assets associated with products primarily include intangible assets associated with specific products acquired through acquisitions. We amortize intangible assets associated with products over their estimated useful life ranging from 3 to 20 years (generally reflecting the expected length of patent or regulatory

 

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data protection for such product) using the straight-line method. Intangible assets associated with products are also subject to impairment, and are held net of accumulated impairment losses and any reversals thereof. Amortization and impairment losses on intangible assets associated with products therefore tend to increase as the total balance of intangible assets associated with products increases, subject to any impairment losses or reversals thereof. In the fiscal year ended March 31, 2016, amortization, impairment and reversal of impairment were ¥121.8 billion, ¥18.6 billion and ¥8.6 billion, respectively. In the fiscal year ended March 31, 2017, amortization, and impairment were ¥112.5 billion and ¥44.6 billion (which includes ¥0.4 billion of impairment included in restructuring expense, which is a component of other operating expenses), respectively. In the fiscal year ended March 31, 2018, amortization, impairment and reversal of impairment were ¥126.1 billion, ¥19.1 billion and ¥23.1 billion, respectively. As of March 31, 2018, intangible assets associated with specific products totaled ¥970.0 billion.

Other Factors Affecting Our Results of Operations

 

  (a)

Acquisitions and Divestitures

As part of our business strategy, we regularly engage in acquisitions and divestitures. We may acquire new businesses to expand our research and development capabilities (including expanding into new methodologies) and to acquire new products (whether in the development pipeline or at the marketing stage) or other strategic regions. Similarly, we regularly divest businesses and product lines to maintain our focus on our key growth drivers and to manage our portfolio. As a result of these acquisitions and divestitures, our product portfolio, particularly outside of our key growth drivers, fluctuates from year to year, and our results of operations for a given fiscal year may not be directly comparable to results from prior or future fiscal years. For a description of the expected effect of the Shire Acquisition on our financial condition and results of operations, see “—Financial Impact of the Shire Acquisition.” For a description of the effect of the acquisition of ARIAD in 2017 on our financial condition and results of operations, see “—Financial Impact of the ARIAD Acquisition.”

We also have recorded substantial goodwill and intangible assets in connection with past acquisitions and had a total goodwill of ¥1,029.2 billion and intangible assets of ¥1,014.3 billion as of March 31, 2018. Intangible assets associated with products are amortized over their estimated useful life over a period of 3 to 20 years. Goodwill and indefinite-lived intangible assets are subject to impairment under certain conditions, as discussed under “—Critical Accounting Policies—Impairment of Goodwill and Intangible Assets.”

In April 2016, we transferred certain long-listed products in Japan to Teva Takeda Yakuhin Ltd., a wholly-owned subsidiary of Teva Takeda Pharma Ltd., a joint venture we formed with Teva Pharmaceutical Industries Ltd. in which we hold a 49% interest, representing shares of Teva Takeda Pharma Ltd. received as consideration for the transfer. At the time of the transfer, we recognized a gain for the difference between the fair value consideration received (shares of Teva Takeda Pharma Ltd.) and the carrying value of the business to the extent we disposed of the business. The remainder of the gain was deferred and will be amortized over a period of 15 years from the date of the transfer, representing the estimated useful life of the intangible assets associated with the products transferred. In the fiscal year ended March 31, 2017, we recognized a gain related to this transfer of ¥115.4 billion. ¥102.9 billion of such amount was the amount of the gain recognized at the time of disposal. The remainder represents the amount of the deferred gain amortized during such fiscal year. We receive income from the joint venture in the form of a supply and distribution fee, in addition to a 49% share of the joint venture’s income or losses. See Note 14 to our audited consolidated financial statements included in this registration statement for a detailed discussion of the results of Teva Takeda Pharma Ltd.

In April 2017, we completed the sale of our shares in Wako Pure Chemical to FUJIFILM Corporation for a sale price of ¥198.5 billion, for which we recognized a gain of ¥106.3 billion in the fiscal year ended March 31, 2018. Wako Pure Chemical generated revenue of ¥76.6 billion and ¥79.1 billion for the fiscal years ended March 31, 2016 and 2017, respectively.

 

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  (b)

Foreign exchange fluctuations

In the fiscal year ended March 31, 2018, 67.2% of our revenue was from outside of Japan, and we expect that in the future an even more significant portion of our revenue will be generated in foreign currencies from sources outside of Japan due to the expansion of sales outside Japan. Changes in foreign exchange rates, particularly for the U.S. dollar and the euro, relative to the yen, which is our reporting currency, will impact our revenues and expenses. When the yen weakens against other currencies, our revenues attributable to such other currencies increase, having a positive impact on our results of operations, which may be offset by increased expenses denominated in such currencies. Conversely, when the yen strengthens against other currencies, our revenues attributable to such currencies decrease, having a negative impact on our results of operations, which may be offset by decreased expenses denominated in such currencies. We utilize certain hedging measures with respect to some of our significant foreign currency transactions, primarily forward exchange contracts, currency swaps and currency options for individually significant foreign currency transactions. See Note 27 to our consolidated financial statements included in this registration statement.

 

  (c)

Periodic trends

Our revenues, operating profit and net income were lower in the fourth quarter of each of the fiscal years ended March 31, 2016, 2017 and 2018, due mainly to fluctuations in sales in Japan. As pricing revisions in Japan generally take effect as of April 1 of the relevant year, Japanese pharmaceutical product wholesalers postpone purchases during the quarter prior to such pricing revisions, causing decreased revenue. Furthermore, Japanese pharmaceutical product wholesalers generally control their inventory more tightly towards their fiscal year ends, typically March 31, which also causes decreased revenue in the fourth fiscal quarter. Japanese pharmaceutical product wholesalers also tend to increase purchases ahead of the New Year holidays, causing a concentration of sales in our third fiscal quarter, from October 1 to December 31. Moreover, the commencement of clinical trials and other research and development activities increases in our fourth fiscal quarter, leading to increased research and development expense compared to other quarters.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with IFRS. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable at the time the estimates and assumptions are made. Actual outcomes may differ from those estimates and assumptions.

We believe the following critical accounting policies are affected by management’s estimates and assumptions, changes to which could have a significant impact on our consolidated financial statements.

Revenue Recognition

Our revenue is primarily related to the sale of pharmaceutical products and is generally recognized at the time product is shipped to the customer. Our gross sales are subject to various deductions, which are primarily composed of rebates and discounts to retail customers, government agencies, wholesalers, health insurance companies and managed healthcare organizations. These deductions represent estimates of the related obligations, requiring the use of judgement when estimating the effect of these sales deductions on gross sales for a reporting period. These adjustments are deducted from gross sales to arrive at net sales. The U.S. market has the most complex arrangements related to revenue deductions.

The following summarizes the nature of the most significant adjustments to revenue:

 

   

U.S. Medicare and Medicaid: The U.S. Medicaid Drug Rebate Program is administered by state governments using state and federal funds to provide assistance to certain vulnerable and needy

 

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individuals and families. Calculating the rebates to be paid related to this program involves interpreting relevant regulations, which are subject to challenge or change in interpretative guidance by government authorities. Provisions for Medicaid rebates are calculated using a combination of historical experience, product and population growth, product pricing and the mix of contracts and specific terms in the individual state agreements. The U.S. Federal Medicare Program, which funds healthcare benefits to individuals age 65 or older and certain disabilities, provides prescription drug benefits under Part D section of the program. This benefit is provided and administrated through private prescription drug plans. Provisions for Medicare Part D rebates are calculated based on the terms of individual plan agreements, product sales and population growth, product pricing and the mix of contracts. There is often a time lag of several months between us recording the revenue deductions and our final accounting for Medicare and Medicaid rebates.

 

   

Customer rebates: Offer rebates to purchasing organizations and other direct and indirect customers to sustain and increase market share, and to ensure patient access to our products. Since rebates are contractually agreed upon, the related provisions are estimated based on the terms of the individual agreements, historical experience, and projected product growth rates.

 

   

Wholesaler chargebacks: We have arrangements with certain indirect customers whereby the customer is able to buy products from wholesalers at reduced prices. A chargeback represents the difference between the invoice price to the wholesaler and the indirect customer’s contractual discounted price. Provisions for estimating chargebacks are calculated based on the terms of each agreement, historical experience and product growth rates

 

   

Return reserves: When we sell a product providing a customer the right to return it, we record a provision for estimated sales returns based on our sales return policy and historical return rates.

Because the amounts are estimated, they may not fully reflect the final outcome, and the amounts are subject to change dependent upon, amongst other things, the type of purchasing organization, end consumer, and product sales mix.

Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location.

Impairment of Goodwill and Intangible Assets

We review long-lived intangible assets for impairment whenever events or changes in circumstance indicate that the asset’s balance sheet carrying amount may not be recoverable. Goodwill and other currently not amortized intangible assets are reviewed for impairment at least annually.

Assets are generally considered impaired when their balance sheet carrying amount exceeds their estimated recoverable amount. The recoverable amount is estimated for each individual asset or at the larger cash-generating unit level when cash is generated in combination with other assets. Goodwill is allocated to cash-generating units based on expected synergies as determined and the recoverable amount is estimated at the cash-generating unit level. Our cash generating units are identified base on the smallest identifiable group of assets that generate independent cash inflows and are represented by the regions where we sell our products. The estimation of recoverable value requires us to make a number of assumptions including:

 

   

amount and timing of projected future cash flows;

 

   

behavior of competitors (launch of competing products, marketing initiatives, etc.);

 

   

probability of obtaining regulatory approvals;

 

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future tax rates;

 

   

terminal growth rate; and

 

   

discount rate.

Due to changes in these assumptions in subsequent periods we have recognized impairments and reversal of impairments during the periods presented. See Notes 11 and 12 to our consolidated financial statements.

As of March 31, 2018 we have ¥1,029.2 billion of goodwill and ¥1,014.3 billion of intangible assets which in aggregate represent 49.8% of our total assets. A change in the estimates used to calculate recoverable value could have a material impact on our consolidated financial statements.

Retirement and Other Post-employment Benefit Plans

We sponsor pension and other post-employment benefit plans that cover a significant portion of our employees. We are required to make significant assumptions and estimates about future events in calculating the expense and the present value of the liability related to these plans. These include assumptions about the interest rates we apply to estimate future defined benefit obligations and net periodic pension expense, as well as rates of future pension increases. In addition, our actuarial consultants provide our management with historical statistical information such as withdrawal and mortality rates in connection with these estimates.

Assumptions and estimates used by us may differ materially from the actual results we experience due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants among other factors. See Note 22 to our consolidated financial statements for sensitivity information related to the most significant assumptions.

A significant change in the assumption in future periods could have a material impact on our consolidated financial statements.

Contingent Liabilities

We are involved in various legal proceedings primarily related to product liability and commercial liability arising in the normal course of our business. These contingencies are described in detail in Note 32 to our consolidated financial statements.

These and other contingencies are, by their nature, uncertain and based upon complex judgments and probabilities. The factors we consider in developing our provision for litigation and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we record a provision for product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage. We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Any provision and the related estimated insurance recoverable have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.

At March 31, 2018, we have a provision of ¥23.2 billion for outstanding legal cases and other disputes. A change in our assessment related to the factors used to estimate the provision (as described above) could have a material impact on our financial statements in future periods.

 

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Income Taxes

We prepare and file our tax returns based on an interpretation of tax laws and regulations, and we record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in additional tax, interest or penalty assessment by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ tax court systems. When we conclude that it is not probable that a taxing authority will accept an uncertain tax position, we recognize the best estimate of the expenditure required to settle a tax uncertainty. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law, the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of a tax examination. We believe our estimates for uncertain tax positions are appropriate and sufficient based on currently known facts and circumstances.

We also assess our deferred tax assets to determine the realizable amount at the end of each period. In assessing the recoverability of deferred tax assets, we consider the scheduled reversal of taxable temporary differences, projected future taxable profits, and tax planning strategies. Based on the level of historical taxable profits and projected future taxable profits during the periods in which the temporary differences become deductible, we determine the amount the tax benefits we believe are realizable. At March 31, 2018, we had unrecognized deferred tax benefits of ¥19.7 billion. A change in our assumptions in future periods could have a significant impact on our income tax provision.

Our income tax expense is also impacted by any change in the tax rate applied to our deferred tax assets and liabilities. During the year ended March 31, 2018, our effective tax rate was reduced by 12.6% due to change in tax rates including the impact of the tax reform in the United States.

Business Combination

Accounting for a business combination requires us to estimate the fair value of the assets and liabilities acquired and the value of any contingent consideration. The estimate of fair value requires us to make a number of assumptions including estimated future cash flows, discount rates, development and approval milestones, expected market performance and for contingent consideration the likelihood of payment.

Contingent consideration is recorded at fair value at the end of each period. The changes in the fair value based on time value of money are recognized in “Finance expenses” while other changes are recognized in “Other operating income” or “Other operating expenses” on the consolidated statement of income. During the year ended March 31, 2018, the change in fair value of contingent consideration resulted in the recording of an additional ¥12.8 billion to be paid by us.

 

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Results of Operations

The following table provides selected consolidated statements of income information for the years ended March 31, 2016, 2017 and 2018.

 

     For the fiscal year ended March 31,  
     2016      2017      2018  
     (Billions of yen)  

Revenue

   ¥ 1,807.4      ¥ 1,732.1      ¥ 1,770.5  

Cost of Sales

     (535.2      (558.8      (495.9

Selling, general and administrative expenses

     (650.8      (619.1      (628.1

Research and development expenses

     (335.8      (312.3      (325.4

Amortization and impairment losses on intangible assets associated with products

     (131.8      (156.7      (122.1

Other operating income

     21.3        143.5        169.4  

Other operating expenses

     (44.4      (72.9      (126.6
  

 

 

    

 

 

    

 

 

 

Operating profit

     130.8        155.9        241.8  

Finance income

     21.6        12.3        39.5  

Finance expenses

     (31.9      (23.2      (31.9

Share of profit (loss) of investments accounted for using the equity method

     (0.0      (1.5      (32.2
  

 

 

    

 

 

    

 

 

 

Profit before tax

     120.5        143.3        217.2  

Income tax expenses

     (37.1      (27.8      (30.5
  

 

 

    

 

 

    

 

 

 

Net profit for the year

     83.5        115.5        186.7  
  

 

 

    

 

 

    

 

 

 

Fiscal Year Ended March 31, 2018 compared with the Fiscal Year Ended March 31, 2017

Revenue. Revenue increased ¥38.5 billion, or 2.2%, from ¥1,732.1 billion for the fiscal year ended March 31, 2017 to ¥1,770.5 billion for the fiscal year ended March 31, 2018. During the fiscal year ended March 31, 2018, our revenue decreased by ¥94.3 billion as a result of divestitures, which primarily consisted of ¥79.1 billion attributable to the divestiture of Wako Pure Chemical in April 2017 and ¥11.1 billion attributable to the termination of the commercialization agreement for CONTRAVE in the U.S. in August 2016. Excluding the impact of divestitures, our revenues increased by ¥132.8 billion primarily due to growth in our core therapeutic areas of GI, oncology and neuroscience, which includes the favorable impact of the strengthening of the U.S. dollar and Euro against the yen as compared to the prior year.

Change in revenue in our three key therapeutic areas of GI, oncology and neuroscience was primarily attributable to the following products:

 

   

GI. In the therapeutic area of GI, revenue grew 23.5% compared to the previous fiscal year. Revenue attributable to ENTYVIO was ¥201.4 billion in the fiscal year ended March 31, 2018, an increase of ¥58.2 billion, or 40.6%, compared to the previous fiscal year as a result of increase in sales volume, making ENTYVIO our top-selling product. Revenue attributable to TAKECAB was ¥48.5 billion (or ¥55.1 billion on a gross basis) in the fiscal year ended March 31, 2018, compared to ¥34.1 billion on a gross basis in the previous fiscal year, with prescriptions in Japan as a result of a higher overall volume due to TAKECAB’s efficacy in reflux esophagitis and the prevention of recurrence of gastric ulcers during low-dose aspirin administration.

 

   

Oncology. In the therapeutic area of oncology, revenue grew 14.6% compared to the previous fiscal year. Revenue attributable to NINLARO was ¥46.4 billion, an increase of ¥17.1 billion, or 58.1% compared to the previous fiscal year, reflecting market penetration across several regions, particularly in the United States. Revenue attributable to ICLUSIG, which was obtained through the

 

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acquisition of ARIAD in February 2017, was ¥23.1 billion, its first full-year contribution to our revenue growth in this key therapeutic area. ALUNBRIG, also obtained through the acquisition of ARIAD, was launched in the United States in May 2017, and revenue attributable to it in the fiscal year ended March 31, 2018 was ¥2.8 billion. Revenue attributable to VELCADE decreased slightly to ¥137.3 billion in the fiscal year ended March 31, 2018 from ¥137.6 billion in the previous fiscal year.

 

   

Neuroscience. In the therapeutic area of neuroscience, revenue grew 24.5% compared to the previous fiscal year. Revenue attributable to TRINTELLIX was ¥48.4 billion, an increase of ¥16.5 billion, or 51.6%, versus the previous year, reflecting higher volumes as a result of expansion of market share in the U.S. branded antidepressant market, driven by our patient engagement initiatives.

Cost of sales. Cost of sales decreased ¥62.8 billion, or 11.2%, from ¥558.8 billion for the fiscal year ended March 31, 2017 to ¥495.9 billion for the fiscal year ended March 31, 2018. Cost of sales as a percentage of revenue decreased from 32.3% in the fiscal year ended March 31, 2017 to 28.0% in the fiscal year ended March 31, 2018. The decreases in cost of sales, both overall and relative to revenues, was primarily due to the disposition of Wako Pure Chemical in April 2017, which generally had lower-margin products, as well as the effect of other changes to our product mix due to the faster growth of higher margin products, such as ENTYVIO and NINLARO, relative to other products.

Selling, general and administrative expenses. Selling, general and administrative expenses increased ¥9.0 billion, or 1.5%, from ¥619.1 billion for the fiscal year ended March 31, 2017 to ¥628.1 billion for the fiscal year ended March 31, 2018, mainly due to increased long-term incentive payments to management, higher co-promotion expenses related to increased sales of TAKECAB in Japan and higher compensation costs, which contributed ¥2.6 billion, ¥4.8 billion and ¥3.8 billion, respectively. However, selling, general and administrative expenses increased at a lower rate than revenue, reflecting our overall cost reduction efforts.

Research and development expenses. Research and development expenses increased ¥13.1 billion, or 4.2%, from ¥312.3 billion for the fiscal year ended March 31, 2017 to ¥325.4 billion for the fiscal year ended March 31, 2018, mainly due to our pursuit of increased research and development projects and the effect of a weaker Japanese yen.

Amortization and impairment losses on intangible assets associated with products. Amortization and impairment losses on intangible assets associated with products decreased ¥34.6 billion, or 22.1%, from ¥156.7 billion for the fiscal year ended March 31, 2017 to ¥122.1 billion for the fiscal year ended March 31, 2018. This was primarily driven by a decrease of impairment losses on intangible assets of ¥48.2 billion, including a ¥22.6 billion reversal of the previous impairment related to COLCRYS, reflecting updated estimates about the amount of impairment due to better-than-expected sales performance. This was offset in part by increased amortization of intangible assets of ¥13.6 billion, resulting from the inclusion of amortization of intangible assets acquired in the ARIAD acquisition.

Other operating income. Other operating income increased by ¥25.9 billion, or 18.0%, from ¥143.5 billion for the fiscal year ended March 31, 2017 to ¥169.4 billion for the fiscal year ended March 31, 2018, driven mainly by ¥106.3 billion representing a gain on the sale of Wako Pure Chemical in April 2017, ¥27.5 billion representing a gain on divestments to Teva Takeda Yakuhin Ltd. and ¥18.8 billion representing a gain on sales of property, plant and equipment and investment property. Other operating income in the previous fiscal year was primarily driven by a ¥115.4 billion gain on divestments to Teva Takeda Yakuhin Ltd and a ¥12.0 billion gain from the reversal of contingent consideration liability reflecting decreased expected sales of COLCRYS.

Other operating expenses. Other operating expenses increased ¥53.7 billion, or 73.6%, to ¥126.6 billion for the fiscal year ended March 31, 2018, as compared to ¥72.9 billion for the fiscal year ended March 31, 2017.

 

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This was driven by a loss on liquidation of a foreign subsidiary of ¥41.5 billion primarily reflecting the recognition of cumulative translation losses and an increase in fair value of contingent consideration of ¥10.5 billion driven by an increase in projected sales primarily for COLCRYS.

Operating profit. As a result of the above factors, operating profit increased ¥85.9 billion, or 55.1%, from ¥155.9 billion for the fiscal year ended March 31, 2017 to ¥241.8 billion for the fiscal year ended March 31, 2018.

Profit before tax. As a result of the above factors, profit before tax increased ¥73.9 billion, or 51.5%, from ¥143.3 billion for the fiscal year ended March 31, 2017 to ¥217.2 billion for the fiscal year ended March 31, 2018.

Income tax (expenses). Income tax expenses increased ¥2.7 billion, or 9.6%, from ¥27.8 billion for the fiscal year ended March 31, 2017 to ¥30.5 billion for the fiscal year ended March 31, 2018. This increase was mainly due to the tax impact of ¥22.8 billion resulting from the increase in profit before tax compared to the previous fiscal year, as well as the effect of additional tax benefits recognized for the year ended March 31, 2017, resulting from reduction of share capital of a subsidiary, which was responsible for an increase of ¥8.9 billion. These increases were offset in part by the positive impact of the enactment of U.S. tax reforms, principally related to the revaluation of net deferred tax liability at a lower enacted tax rate and improved recoverability of deferred tax assets, which resulted in a decrease of ¥27.5 billion.

Net profit for the year. As a result of the above factors, net profit for the year increased ¥71.2 billion, or 61.6%, from ¥115.5 billion for the fiscal year ended March 31, 2017 to ¥186.7 billion for the fiscal year ended March 31, 2018.

Fiscal Year Ended March 31, 2017 compared with the Fiscal Year Ended March 31, 2016

Revenue decreased ¥75.3 billion, or 4.2%, from ¥1,807.4 billion for the fiscal year ended March 31, 2016 to ¥1,732.1 billion for the fiscal year ended March 31, 2017. ¥69.3 billion of this decrease in revenue resulted from divestitures, including the sale of our respiratory portfolio to AstraZeneca and the transfer of long-listed products in Japan to Teva Takeda Yakuhin Ltd. The unfavorable impact of changes in foreign exchange rates, primarily a 10% strengthening of Japanese yen compared to U.S. dollar, contributed an additional ¥125.4 billion to the decrease in revenue. These decreases were partially offset by sales growth in our product portfolio, excluding the effect of foreign exchange rates and divestures, of ¥119.4 billion, which was concentrated in our core therapeutic areas of GI, oncology and neuroscience.

The main drivers for the increase in revenue in our three key therapeutic areas of GI, oncology and neuroscience (including the effect of foreign exchange rate fluctuations) were as follows:

 

   

GI. In the therapeutic area of GI, revenue attributable to ENTYVIO was ¥143.2 billion in the fiscal year ended March 31, 2017, an increase of ¥57.0 billion, or 66.2%, compared to the previous fiscal year, making ENTYVIO our top-selling product. Revenue attributable to TAKECAB was ¥34.1 billion in the fiscal year ended March 31, 2017, an increase of ¥25.7 billion, reflecting its rapid penetration into the Japanese market following the expiration of regulatory limitations on continued use in Japan. This increase was partially offset by a decline in sales of ¥12.5 billion for DEXILANT.

 

   

Oncology. In the therapeutic area of oncology, revenue attributable to NINLARO was ¥29.4 billion, an increase of ¥25.3 billion, reflecting strong adoption in the United States. Revenue attributable to ICLUSIG, which was obtained through the acquisition of ARIAD in February 2017, was ¥2.9 billion. Revenue attributable to VELCADE decreased by ¥24.5 billion, or 15.1%, to ¥137.6 billion in the fiscal year ended March 31, 2017, reflecting the negative effect of foreign exchange rate fluctuation and decrease in sales volume during the fiscal year ended March 31, 2017.

 

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Neuroscience. In the therapeutic area of neuroscience, revenue attributable to TRINTELLIX was ¥31.9 billion, an increase of ¥7.4 billion, or 30.1%, versus the previous year, reflecting expanded share of the U.S. branded antidepressant market.

Cost of sales. Cost of sales increased ¥23.6 billion, or 4.4%, from ¥535.2 billion for the fiscal year ended March 31, 2016 to ¥558.8 billion for the fiscal year ended March 31, 2017. Cost of sales as a percentage of revenue increased from 29.6% in the fiscal year ended March 31, 2016 to 32.3% in the fiscal year ended March 31, 2017. The increase in cost of sales was primarily driven by changes in our product mix reflecting the sale of certain long-listed high-margin products to Teva Takeda Yakuhin Ltd.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased ¥31.7 billion, or 4.9%, from ¥650.8 billion for the fiscal year ended March 31, 2016 to ¥619.1 billion for the fiscal year ended March 31, 2017. However, selling, general and administrative expenses as a percentage of sales remained consistent during the fiscal year ended March 31, 2018 compared to the fiscal year ended March 31, 2017.

Research and development expenses. Research and development expenses decreased ¥23.5 billion, or 7.0%, from ¥335.8 billion for the fiscal year ended March 31, 2016 to ¥312.3 billion for the fiscal year ended March 31, 2017, due mainly to the favorable impact of a stronger yen.

Amortization and impairment losses on intangible assets associated with products. Amortization and impairment losses on intangible assets associated with products increased ¥24.9 billion, or 18.9%, from ¥131.8 billion for the fiscal year ended March 31, 2016 to ¥156.7 billion for the fiscal year ended March 31, 2017, mainly due to a ¥16.0 billion impairment loss related to COLCRYS recognized due to a decline in sales and a ¥7.9 billion impairment loss related to TAK-117 due to the project’s termination.

Other operating income. Other operating income increased by ¥122.2 billion from ¥21.3 billion for the fiscal year ended March 31, 2016 to ¥143.5 billion for the fiscal year ended March 31, 2017, mainly due to a ¥102.9 billion gain relating to the transfer of certain long-listed products in Japan to Teva Takeda Yakuhin Ltd. and a ¥12.0 billion gain from the reversal of contingent consideration liability reflecting decreased expected sales of COLCRYS.

Other operating expenses. Other operating expenses increased ¥28.5 billion, or 64.2%, to ¥72.9 billion for the fiscal year ended March 31, 2017, as compared to ¥44.4 billion for the fiscal year ended March 31, 2016, mainly due to an increase of ¥28.8 billion in restructuring expenses, including expenses incurred as a result of our research and development transformation initiative described under “—C. Research and Development, Patents and Licenses, etc.”

Operating profit. As a result of the above factors, operating profit increased ¥25.0 billion, or 19.1%, from ¥130.8 billion for the fiscal year ended March 31, 2016 to ¥155.9 billion for the fiscal year ended March 31, 2017.

Profit before tax. As a result of the above factors, profit before tax increased ¥22.8 billion, or 18.9%, from ¥120.5 billion for the fiscal year ended March 31, 2016 to ¥143.3 billion for the fiscal year ended March 31, 2017.

Income tax (expenses). Income tax expenses decreased ¥9.2 billion, or 24.9%, from ¥37.1 billion for the fiscal year ended March 31, 2016 to ¥27.8 billion for the fiscal year ended March 31, 2017. The decrease was mainly due to a lower Japanese statutory tax rate and favorable geographical mix of earnings as well as a tax provision during the previous fiscal year related to the revaluation of net deferred tax assets in Japan at a lower enacted rate. These decreases, which totaled ¥29 billion, were partially offset by an increase of ¥13.7 billion due to lower tax credits and ¥5.6 billion due to lower tax benefits from deduction of share capital basis in the current fiscal year.

 

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Net profit for the year. As a result of the above factors, net profit for the year increased ¥32.0 billion, or 38.4%, from ¥83.5 billion for the fiscal year ended March 31, 2016 to ¥115.5 billion for the fiscal year ended March 31, 2017.

Certain Non-IFRS Performance Measures

In addition to our reported financial results prepared under IFRS, we also prepare and disclose EBITDA and Adjusted EBITDA, which are measures not prepared in accordance with IFRS. We present EBITDA and Adjusted EBITDA because we believe that these measures are useful to investors as they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We further believe that Adjusted EBITDA is helpful to investors in identifying trends in our business that could otherwise be obscured by certain items unrelated to ongoing operations because they are highly variable, difficult to predict, may substantially impact our results of operations and may limit the ability to evaluate our performance from one period to another on a consistent basis.

The usefulness of EBITDA and Adjusted EBITDA to investors has limitations including, but not limited to, (i) they may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) they exclude financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) they exclude items or types of items that may continue to occur from period to period in the future and (iv) they may not exclude all items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as the results of businesses divested during a period. These non-IFRS measures should not be considered in isolation and are not, and should not be viewed as, substitutes for income, net profit for the year or any other measure of performances presented in accordance with IFRS. We encourage investors to review our historical financial statements in their entirety and caution investors to use IFRS measures as the primary means of evaluating our performance, value and prospects for the future, and EBITDA and Adjusted EBITDA as supplemental measures.

EBITDA and Adjusted EBITDA

We define EBITDA as net profit before income tax expenses, depreciation and amortization and net interest expense. We define Adjusted EBITDA as EBITDA further adjusted to exclude impairment losses, other operating expenses and income (excluding depreciation and amortization), finance expenses and income (excluding net interest expense), our share of loss from investments accounted for under the equity method and other items that management believes are unrelated to our core operations such as purchase accounting effects and transaction related costs.

The following table provides a reconciliation from net profit to EBITDA and Adjusted EBITDA for the fiscal years ended March 31, 2016, 2017 and 2018.

 

     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

Net profit for the year

   ¥ 83.5      ¥ 115.5      ¥ 186.7  

Income tax expenses

     37.1        27.8        30.5  

Depreciation and amortization

     182.2        171.4        182.1  

Interest expense, net

     3.0        5.5        6.8  
  

 

 

    

 

 

    

 

 

 

EBITDA

   ¥ 305.8      ¥ 320.2      ¥ 406.1  

Impairment losses

     15.2        51.4        13.5  

Other operating expense (income), net, excluding depreciation and amortization

     17.0        (78.3      (61.1

Finance expense (income), net, excluding interest income and expense, net

     7.3        5.4        (14.4

 

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     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

Share of loss on investments accounted for under the equity method

     0.0        1.5        32.2  

Other adjustments:

        —          —    

Loss on deconsolidation

     6.3        —          —    

Transaction costs related to the acquisition of ARIAD

     —          3.2        —    

Impact on profit related to fair value step up of inventory in ARIAD acquisition

     —          —          1.4  

Adjusted EBITDA

   ¥ 351.6      ¥ 303.4      ¥ 377.7  
  

 

 

    

 

 

    

 

 

 

 

  B.

Liquidity and Capital Resources.

Cash Requirements

Our cash and capital requirements are related mainly to our operating cash requirements, capital expenditures, contractual obligations, repayment of indebtedness and payment of interest and dividends.

We intend to fund the cash portion of the consideration for the Shire Acquisition through the incurrence of new indebtedness. See “—Financing Arrangements for the Shire Acquisition.”

Operating Cash Requirements

We require cash on an ongoing basis to finance our regular operations. Our cash outlays mainly include research and development expenses, milestone payments, sales and marketing expenses, personnel and other general and administrative costs and raw material costs. Income tax payments also require significant cash outlays as well as working capital financing.

Capital Expenditures

Our capital expenditures for tangible assets meeting new regulatory requirements consist primarily of enhancing and streamlining our production facilities, replacing fully depreciated items, and promoting efficiency of our operations. Our capital expenditures for intangible assets represent mainly licensed products, where such assets have been acquired from third-party partners, as well as software development expenditures. Our capital expenditures (consisting of the additions to property, plant and equipment and intangible assets recorded on our consolidated balance sheet) for the fiscal years ended March 31, 2016, 2017 and 2018 were ¥125.8 billion, ¥148.1 billion and ¥124.1 billion, respectively.

 

     For the fiscal year ended
March 31,
 
     2016      2017      2018  
     (billions of yen)  

Tangible assets(1)

   ¥ 94.0      ¥ 72.4      ¥ 74.5  

Intangible assets(1)

     31.8        75.7        49.5  
  

 

 

    

 

 

    

 

 

 

Total(1)

   ¥ 125.8      ¥ 148.1      ¥ 124.1  
  

 

 

    

 

 

    

 

 

 

 

Note:

  (1)

Excludes acquisitions through business combinations.

As of March 31, 2018, we had contractual commitments for the acquisition of property, plant and equipment of ¥14.1 billion. We intend to fund such commitments with cash on hand.

 

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Financing Obligations

We have outstanding indebtedness of ¥1,038.8 billion as of March 31, 2018 and our total interest expense for the fiscal years ended March 31, 2016, 2017 and 2018 was ¥5.3 billion, ¥7.6 billion and ¥10.0 billion, respectively.

Our long-term loans included above include the following covenants:

 

   

Our profit before tax must not be a negative number for two consecutive years; and

 

   

Our total equity (excluding foreign currency translation adjustments) on a quarterly basis must be at least 75% of our total equity (excluding foreign currency translation adjustments) reflected in our balance sheet for two consecutive quarters.

Other than as described above or under “—Financing Arrangements for the Shire Acquisition” below, our outstanding loans, bonds and finance lease obligations do not contain any financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness (other than limited negative pledges), or the issuance or repurchase of our securities. As of March 31, 2018, none of our outstanding indebtedness is secured by any of our property.

If the Shire Acquisition is completed successfully, we expect the balance of our debt to increase significantly due to the effect of both of our financing arrangements for the Shire Acquisition and the inclusion of the indebtedness of Shire into our consolidated balance sheet. We plan to de-lever following the Shire Acquisition, with a target rate of net debt to Adjusted EBITDA of 2.0x or less within three to five years following completion of the Shire Acquisition, and are considering selected disposals of non-core assets to increase the pace of deleveraging. We expect that interest expense would increase significantly in future fiscal years until we achieve this deleveraging.

Financing Arrangements for the Shire Acquisition

Bridge Credit Agreement

On May 8, 2018, we entered into the Bridge Credit Agreement, with aggregate commitments of $30.85 billion with, among others, JPMorgan Chase Bank N.A., Sumitomo Mitsui Banking Corporation and MUFG Bank, Ltd. The commitments under the Bridge Credit Agreement were reduced by the amount of commitments under the Term Loan Credit Agreement described below of $7.5 billion, further reduced by $4.5 billion upon the signing of the ¥500.0 billion SSTL, further reduced in reference to the net aggregate principal amount of the 2018 Notes and further reduced by $3.7 billion following the signing of the JBIC Loan. We do not expect to further refinance the commitments under the Bridge Credit Agreement prior to the completion of the Shire Acquisition, and do not currently intend to draw upon the Bridge Credit Agreement, although we retain the ability to do so.

The Bridge Credit Agreement includes mandatory prepayment and cancellation provisions, which would be triggered by such financing options, as well as by asset sales and equity issuances (in each case subject to customary exceptions). The proceeds of the Bridge Credit Agreement, if drawn upon, will be used primarily to fund the cash portion of the consideration payable to Shire shareholders in connection with the Shire Acquisition, as well as to pay a portion of related expenses and to refinance a portion of the existing indebtedness of Shire and its subsidiaries. The Bridge Credit Agreement is unsecured. The remaining commitments under the Bridge Credit Agreement, if drawn upon, have a maturity of 90 days from the date, following the day after completion of the Shire Acquisition, when all conditions precedent to drawing under the Bridge Credit Agreement are satisfied or waived in accordance with the terms of the Bridge Credit Agreement. The Bridge Credit Agreement is filed as an exhibit to this registration statement.

As long as any loans are drawn or commitments are outstanding under the Bridge Credit Agreement, we will be subject to certain covenants, including customary covenants regarding compliance with law, payment of

 

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taxes, bookkeeping and reporting, as well as covenants to complete the Shire Acquisition as planned. We will also be subject to the following covenants:

 

   

a “negative pledge,” under which we and our consolidated subsidiaries (including, after the completion of the Shire Acquisition, Shire), will not incur or suffer to be incurred liens over our properties to secure any indebtedness, subject to certain exceptions, such that the total amount of indebtedness secured by such liens exceeds $2.5 billion at the time of incurrence; and

 

   

as of March 31 and September 30 of each year (or June 30 and December 31 of each year, if we change our fiscal year end to December 31), beginning on September 30, 2019 at the earliest (or June 30, 2019 at the earliest, in the case of a December 31 fiscal year end) to not allow our ratio of Consolidated Net Debt (as defined in the Bridge Credit Agreement) to Consolidated EBITDA (as defined in the Bridge Credit Agreement) for the previous twelve-month period to surpass the following levels:

 

   

September 30, 2019 (or June 30, 2019 and December 31, 2019, in the case of a December 31 fiscal year end): 5.95 to 1.00; and

 

   

March 31, 2020 (or June 30, 2020, in the case of a December 31 fiscal year end) and thereafter: 5.35 to 1.00.

Term Loan Credit Agreement

On June 8, 2018, we entered into the Term Loan Credit Agreement for an aggregate principal amount of $7.5 billion with, among others, JPMorgan Chase Bank N.A., Sumitomo Mitsui Banking Corporation, MUFG Bank, Ltd. and Mizuho Bank, Ltd. The commitments under the Bridge Credit Agreement were reduced by the $7.5 billion amount of commitments under the Term Loan Credit Agreement. The proceeds of the Term Loan Credit Agreement will be used to fund a portion of the cash consideration payable to Shire shareholders in connection with the Shire Acquisition. The Term Loan Credit Agreement is unsecured and will have a maturity of five years from the date following the day after completion of the Shire Acquisition, when all conditions precedent to drawing under the Term Loan Credit Agreement are satisfied or waived in accordance with its terms. Upon the signing of the Term Loan Credit Agreement, we also entered into Amendment No. 1 to the Bridge Credit Agreement, described above, to make certain technical and conforming changes thereto. The Term Loan Credit Agreement and Amendment No. 1 to the Bridge Credit Agreement are filed as an exhibit to this registration statement.

For as long as any loans are drawn or commitments are outstanding under the Term Loan Credit Agreement, we will be subject to certain covenants, including customary covenants regarding compliance with law, payment of taxes, bookkeeping and reporting, as well as covenants to complete the Shire Acquisition as planned. We will also be subject to the following financial covenants:

 

   

a “negative pledge,” substantially similar to that under the Bridge Credit Agreement; and

 

   

as of March 31 and September 30 of each year (or June 30 and December 31 of each year, if we change our fiscal year end to December 31), beginning on September 30, 2019 at the earliest (or June 30, 2019 at the earliest, in the case of a December 31 fiscal year end), to not allow our ratio of Consolidated Net Debt (as defined in the Term Loan Credit Agreement) to Consolidated EBITDA (as defined in the Term Loan Credit Agreement) for the previous twelve-month period to surpass the following levels:

 

   

September 30, 2019 (or June 30, 2019 and December 31, 2019, in the case of a December 31 fiscal year end): 5.95 to 1.00;

 

   

March 31, 2020 and September 30, 2020 (or June 30, 2020 and December 31, 2020, in the case of a December 31 fiscal year end): 5.35 to 1.00;

 

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March 31, 2021 and September 30, 2021 (or June 30, 2021 and December 31, 2021, in the case of a December 31 fiscal year end): 4.30 to 1.00; and

 

   

March 31, 2022 (or June 30, 2022, in the case of a December 31 fiscal year end) and thereafter: 4.00 to 1.00.

Senior Short Term Facility Agreement

On October 26, 2018, we entered into the SSTL, with an aggregate commitment of ¥500.0 billion, with Sumitomo Mitsui Banking Corporation, MUFG Bank, Ltd., Mizuho Bank, Ltd., The Norinchukin Bank and Sumitomo Mitsui Trust Bank, Limited. The commitments under the Bridge Credit Agreement were reduced by $4.5 billion. The proceeds of the loan under the SSTL will be used to fund a portion of the cash consideration payable to Shire shareholders in connection with the Shire Acquisition. The SSTL is unsecured and will mature one month, two months, three months or six months from the date of drawdown (at our option). Upon the signing of the SSTL, we also entered into Amendment No. 2 to the Bridge Credit Agreement, described above, to make certain technical changes thereto. The SSTL and Amendment No. 2 to the Bridge Credit Agreement have been filed as an exhibit to this registration statement.

For as long as any loans are drawn or commitments are outstanding under the SSTL, we will be subject to certain covenants, including customary covenants regarding compliance with law, payment of taxes, bookkeeping and reporting, as well as covenants to complete the Shire Acquisition as planned. We will also be subject to a “negative pledge,” substantially similar to that under the Bridge Credit Agreement.

Subordinated Loan Agreement

On October 26, 2018, we entered into the Subordinated Loan Agreement, with aggregate commitments of ¥500.0 billion, with Sumitomo Mitsui Banking Corporation, MUFG Bank, Ltd., Mizuho Bank, Ltd., The Norinchukin Bank and Sumitomo Mitsui Trust Bank, Limited. The proceeds of the loan under the Subordinated Loan Agreement (the “Subordinated Loan”), if drawn upon, will be used to refinance all or a part of any indebtedness incurred pursuant to the SSTL described above. We may choose not to drawdown all or a part of the Subordinated Loan if we obtain alternative financing. The Subordinated Loan is unsecured and will have a maturity of 60 years from its drawdown date (the “Subordinated Closing Date”). Under the Subordinated Loan Agreement, we may make an early repayment of all or part of the principal of the Subordinated Loan on any interest payment date on or after the sixth anniversary of the Subordinated Closing Date.

Under the Subordinated Loan Agreement, interest is payable at the end of each six-month interest period at a rate per annum equal to the sum of:

 

   

the published Japanese Yen TIBOR rate for a period equal in length to such interest period (or, if such rate cannot be ascertained, certain customary fallback rates), plus

 

   

a percentage per annum determined by reference to periods from the Subordinated Closing Date as set out below:

 

   

From the Subordinated Closing Date to the 10th anniversary of the Subordinated Closing Date, 2.00%;

 

   

From the 10th anniversary of the Subordinated Closing Date to the 26th anniversary of the Subordinated Closing Date, 2.25%; and

 

   

After the 26th anniversary of the Subordinated Closing Date, 3.00%.

Under the Subordinated Loan Agreement, we may, at our discretion, defer all or a part of the payment of interest on the Subordinated Loan, subject to certain mandatory payment clauses. As long as the Subordinated Loan or commitments under the Subordinated Loan Agreement are outstanding, we will be subject to certain

 

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covenants, including customary covenants regarding compliance with law, payment of taxes, bookkeeping and reporting. The Subordinated Loan is unsecured and we have agreed not to provide any liens over our properties (including providing options to set any liens over their properties) to secure any indebtedness under the Subordinated Loan Agreement.

2018 Notes

On November 21, 2018, we issued Euro-denominated senior notes in the following series:

 

   

€1,250,000,000 aggregate principal amount of 0.375% Senior Notes due November 21, 2020,

 

   

€1,000,000,000 aggregate principal amount of the Senior Floating Rate Notes due November 21, 2020,

 

   

€1,500,000,000 aggregate principal amount of 1.125% Senior Notes due November 21, 2022,

 

   

€750,000,000 aggregate principal amount of the Senior Floating Rate Notes due November 21, 2022,

 

   

€1,500,000,000 aggregate principal amount of 2.250% Senior Notes due November 21, 2026, and

 

   

€1,500,000,000 aggregate principal amount of 3.000% Senior Notes due November 21, 2030.

Subsequently, on November 26, 2018, we issued dollar-denominated senior notes in the following series:

 

   

$1,000,000,000 aggregate principal amount of 3.800% Senior Notes due November 26, 2020,

 

   

$1,250,000,000 aggregate principal amount of 4.000% Senior Notes due November 26, 2021,

 

   

$1,500,000,000 aggregate principal amount of 4.400% Senior Notes due November 26, 2023, and

 

   

$1,750,000,000 aggregate principal amount of 5.000% Senior Notes due November 26, 2028.

The 2018 Notes were issued in private placements in reliance on exemptions from registration under the U.S. Securities Act of 1933 (the “Securities Act”). Interest on the series of 2018 Notes which are subject to fixed rates is payable annually (in the case of the Euro-denominated 2018 Notes) or semi-annually (in the case of the dollar-denominated 2018 Notes) in arrears. Interest on the series of 2018 Notes which are subject to floating rates is determined by reference to three-month EURIBOR plus an applicable spread, reset quarterly, and is payable quarterly in arrears. The proceeds of the 2018 Notes offerings will be used to fund part of the cash portion of the consideration payable to Shire shareholders in connection with the Shire Acquisition. The commitments under the Bridge Credit Agreement were reduced by reference to the amount of the proceeds of the Notes offerings. The Euro-denominated 2018 Notes were issued pursuant to a Fiscal Agency Agreement, dated as of November 21, 2018, which is included as an exhibit hereto. The dollar-denominated 2018 Notes were issued pursuant to an Indenture, dated as of November 26, 2018, which is included as an exhibit hereto.

Furthermore, the dollar-denominated 2018 Notes (but not the Euro-denominated 2018 Notes) are subject to a Registration Rights Agreement, dated as of November 26, 2018, which is included as an exhibit hereto, and under which we have agreed to file with the SEC and use commercially reasonable efforts to cause to become effective a registration statement with respect to an offer to exchange the dollar-denominated 2018 Notes for substantially identical notes (other than with respect to restrictions on transfer) that are registered under the Securities Act pursuant to the terms of the Registration Rights Agreement. Under specified circumstances, we have also agreed to use commercially reasonable efforts to cause to become effective a shelf registration statement relating to resales of the dollar-denominated 2018 Notes. We will be obligated to pay additional interest if we fail to comply with our obligations to register the dollar-denominated 2018 Notes within the specified time periods.

 

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The 2018 Notes are subject to special mandatory redemption at a redemption price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest, if any, to, but excluding, the special mandatory redemption date if: (i) the Shire Acquisition has not been consummated on or prior to the Long Stop Date (as defined in the terms of the 2018 Notes); or (ii) if we otherwise publicly announce that the Shire Acquisition will not be consummated.

Certain series of the fixed-rate 2018 Notes include our option to redeem them, in whole or in part, by a make-whole call at the treasury rate plus a spread, up to a specified par call date, after which such notes may be called at par. Notes which do not include such optional redemption feature will not be callable prior to the specified par call date.

No security was offered in favor of the 2018 Notes. The 2018 Notes are subject to a “negative pledge” under which we may not offer security over certain capital markets indebtedness of us or our principal subsidiaries, as defined in the terms of the 2018 Notes.

JBIC Loan

On December 3, 2018, we entered into the JBIC Loan with the Japan Bank for International Cooperation for an aggregate principal amount of up to $3.7 billion. The commitments under the Bridge Credit Agreement were reduced by the $3.7 billion amount of commitments under the JBIC Loan. The proceeds of the JBIC Loan will be used to fund a portion of the cash consideration payable to Shire shareholders in connection with the Shire Acquisition and related fees, costs and expenses incurred by us. The JBIC Loan is unsecured and will mature on December 11, 2025. The JBIC Loan is filed as an exhibit to this registration statement.

For as long as any loans are drawn or commitments are outstanding under the JBIC Loan, we will be subject to certain covenants, including customary covenants regarding compliance with law, payment of taxes, bookkeeping and reporting, as well as covenants to complete the Shire Acquisition as planned. We will also be subject to the following financial covenants:

 

   

a “negative pledge,” substantially similar to that under the Bridge Credit Agreement;

 

   

as of March 31 and September 30 of each year (or June 30 and December 31 of each year, if we change our fiscal year end to December 31), beginning on September 30, 2019 at the earliest (or June 30, 2019 at the earliest, in the case of a December 31 fiscal year end), to not allow our ratio of Consolidated Net Debt (as defined in the JBIC Loan) to Consolidated EBITDA (as defined in the JBIC Loan) for the previous twelve-month period to surpass the following levels:

 

   

September 30, 2019: 5.95 to 1.00;

 

   

March 31, 2020 and September 30, 2020: 5.35 to 1.00;

 

   

March 31, 2021 and September 30, 2021: 4.30 to 1.00;

 

   

March 31, 2022, September 30, 2022, March 31, 2023 and September 30, 2023: 4.00 to 1.00;

 

   

March 31, 2024 and September 30, 2024: 3.75 to 1.00 (if the Term Loan Credit Agreement has not matured, 4.00 to 1.00); and

 

   

March 31, 2025 and thereafter: 3.50 to 1.00 (if the Term Loan Credit Agreement has not matured, 4.00 to 1.00);

 

   

our total equity (excluding foreign currency translation adjustments) reflected on our balance sheet as of the last day of our most recent fiscal year must be at least 75% of our total equity (excluding foreign currency translation adjustments) reflected on our balance sheet as of the last day of the second quarter of such fiscal year;

 

   

our total equity (excluding foreign currency translation adjustments) reflected on our balance sheet as of the last day of the second quarter of our most recent fiscal year must be at least 75% of our

 

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total equity (excluding foreign currency translation adjustments) reflected on our balance sheet as of the last day of the preceding fiscal year; and

 

   

our profit before tax must not be negative for two consecutive years.

Capital Resources

In each of the fiscal years ended March 31, 2016, 2017 and 2018, cash flow generated by our operating activities was sufficient to supply our working capital. We may also utilize the incurrence of short-term or long-term indebtedness or sales of assets to generate capital.

Cash and cash equivalents was ¥319.5 billion as of March 31, 2017 and ¥294.5 billion as of March 31, 2018.

We believe that our sources of liquidity and capital resources are adequate for our present requirements and business operations. We are seeking to ensure that our level of liquidity and access to capital resources continue to be maintained in order for us to successfully conduct our future operations.

Dividend Policy

Our capital resource management is based on the four following focus areas:

 

   

investments in our internal research and development pipeline, foundational technology and ability to develop and bring to market new products;

 

   

dividends as an important tool for returning capital to shareholders, while emphasizing capital gains for shareholders through increased corporate value;

 

   

the maintenance of an investment-grade credit rating; and

 

   

disciplined alliances and acquisitions in order to strengthen our business around our key therapeutic areas.

As noted above, the return of capital to shareholders is one focus area for our management, and we believe our dividend policy is an important tool for accomplishing our goals. We have declared dividends of ¥180 per share, consisting of interim and fiscal year-end dividends of ¥90 per share each, in respect of each of the fiscal years ended March 31, 2016, 2017 and 2018. Dividends are generally paid semi-annually, in the fiscal quarter following the date on which they are declared. Dividends paid in the fiscal years ended March 31, 2016, 2017 and 2018 were ¥141.5 billion, ¥141.7 billion and ¥141.9 billion, respectively.

Consolidated Cash Flows

The following table shows information about our cash flows during the fiscal years ended March 31, 2016, 2017 and 2018:

 

     For the fiscal year ended March 31,  
     2016      2017      2018  
     (billions of yen)  

Net cash from (used in) operating activities

   ¥ 25.5      ¥ 261.4      ¥ 377.9  

Net cash from (used in) investing activities

     (71.2      (655.7      (93.3

Net cash from (used in) financing activities

     (124.8      289.9        (326.2
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   ¥ (170.6    ¥ (104.4    ¥ (41.7

Cash and cash equivalents at the beginning of the year

     652.1        451.4        319.5  

Effects of exchange rate changes on cash and cash equivalents

     (33.3      (5.7      (4.6

Net increase (decrease) in cash and cash equivalents resulting from a transfer to assets held for sale

     3.1        (21.8      21.3  

Cash and cash equivalents at the end of the year

     451.4        319.5        294.5  
  

 

 

    

 

 

    

 

 

 

 

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Fiscal Year Ended March 31, 2018 compared with the Fiscal Year Ended March 31, 2017

Net cash from operating activities increased by ¥116.5 billion from ¥261.4 billion in the fiscal year ended March 31, 2017 to &y