20-F 1 takeda20-f.htm 20-F Document

As filed with the Securities and Exchange Commission on June 27, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 20-F
___________________________________________________________
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
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: 001-38757
___________________________________________________________
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)
___________________________________________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbols
Name of Each Exchange On Which Registered 
American Depositary Shares Representing Common Stock
Common Stock, no par value*
TAK
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.
118,250,000 ADSs outstanding as of March 31, 2019
1,565,005,908 shares of common stock as of March 31, 2019

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☐      No ý
 
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 ý
 
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 ý     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 ý    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
ý
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  
ý
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 ý
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.       Yes ☐      No ☐


1




TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
 
 

2




 
 


3




As used in this annual report, 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.
In this annual report, we present our audited consolidated financial statements as of March 31, 2018 and 2019 and for the fiscal years ended March 31, 2017, 2018 and 2019. 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).
As used in this annual report, “yen,” “¥” or "JPY" means the lawful currency of Japan, “U.S. dollar,” “$” or "USD" 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 annual report, “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 annual report, except as the context otherwise requires, the “Companies Act” means the Companies Act of Japan.
Amounts shown in this annual report 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.

4




Special Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements. These statements appear in a number of places in this annual report 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:
our ability to achieve the expected benefits of our acquisition of Shire plc (including, except as the context otherwise requires, its consolidated subsidiaries "Shire");
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 annual report 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 annual report. 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 annual report. Except as required by law, we disclaim any obligation to update or review any forward-looking statements contained in this annual report, 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.
Not applicable.
B.
Advisers.
Not applicable.
C.
Auditors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable

A.
Offer Statistics.
Not applicable.
B.
Method and Expected Timetable.
Not applicable.


5




Item 3. Key Information
A.
Selected Financial Data.
The following table presents selected financial information as of and for the years ended March 31, 2015, 2016, 2017, 2018 and 2019, 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” and our consolidated financial statements and notes thereto included in this annual report.
 
For the fiscal year ended March 31,
 
2015
 
2016
 
2017
 
2018
 
2019
 
(billions of yen, except share and per share data and where designated as U.S. dollar)
Selected Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue
¥
1,777.8

 
¥
1,807.4

 
¥
1,732.1

 
¥
1,770.5

 
¥
2,097.2

Operating (loss) profit
(129.3
)
 
130.8

 
155.9

 
241.8

 
205.0

Share of profit (loss) of investments accounted for using the equity method
1.3

 
(0.0
)
 
(1.5
)
 
(32.2
)
 
(43.6
)
(Loss) profit before tax
(145.4
)
 
120.5

 
143.3

 
217.2

 
94.9

Net (loss) profit for the year
(143.0
)
 
83.5

 
115.5

 
186.7

 
109.0

Net (loss) profit attributable to owners of the Company
(145.8
)
 
80.2

 
114.9

 
186.9

 
109.1

Per share amounts
 
 
 
 
 
 
 
 
 
Basic (losses) earnings
¥
(185.37
)
 
¥
102.26

 
¥
147.15

 
¥
239.35

 
¥
113.50

Diluted (losses) earnings
(185.37
)
 
101.71

 
146.26

 
237.56

 
112.86

Annual cash dividends
180.00

 
180.00

 
180.00

 
180.00

 
180.00

Cash dividends in U.S. dollars(1)
$
1.50

 
$
1.60

 
$
1.62

 
$
1.69

 
$
1.63

 
 
 
 
 
 
 
 
 
 
Selected Statements of Financial Position Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
¥
652.1

 
¥
451.4

 
¥
319.5

 
¥
294.5

 
¥
702.1

Total assets
4,296.2

 
3,824.1

 
4,346.8

 
4,106.5

 
13,872.3

Total bonds and loans
729.4

 
768.2

 
1,144.9

 
985.7

 
5,751.0

Total liabilities
2,090.0

 
1,812.9

 
2,397.8

 
2,089.1

 
8,708.7

Total equity
2,206.2

 
2,011.2

 
1,949.0

 
2,017.4

 
5,163.6

 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
Number of shares outstanding at end of period (in thousands)
789,924

 
790,284

 
790,521

 
794,688

 
1,565,006

____________
Note:
(1)
Calculated using the Japanese yen—U.S. dollar exchange rate as of March 31 of each respective 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.
Not applicable.
C.
Reasons for the Offer and Use of Proceeds.
Not applicable.
D.
Risk Factors.
Any investment in our common stock or ADSs involves risk. 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 common stock or 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 common stock or ADSs may be adversely affected.

6




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 market value of our common stock or ADSs.
 
Risks Relating to the Shire Acquisition
We may fail to realize the anticipated benefits of the Shire Acquisition and expect to continue to record significant expenses related to it.
On January 8, 2019, we acquired the entire issued and to-be-issued share capital of Shire pursuant to a Scheme of Arrangement under the laws of Jersey (the “Shire Acquisition”). The 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 companies' businesses. We will need 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 of the Shire Acquisition. We expect to incur non-recurring cash costs totaling approximately $3.0 billion in connection with the integration of Shire in the first three fiscal years following the completion of the Shire Acquisition.
Furthermore, in connection with the Shire Acquisition and the application of our inventory policies to the acquired businesses, we recognized significant non-cash expenses relating to the unwinding of fair value adjustments to inventory as a component of cost of sales in the fiscal year ended March 31, 2019 and expect that such expenses will increase in future fiscal years. We also recorded significant intangible assets in connection with the Shire Acquisition and, as a result, amortization and impairment losses increased significantly in the fiscal year ended March 31, 2019, and are expected to continue to increase in the fiscal year ending March 31, 2020.
As a result of the non-recurring cash costs in connection with the integration of Shire, the continued expenses relating to the unwinding of fair value adjustments to inventory, the increase in amortization and impairment losses on certain intangible assets and ongoing financial expenses (such as interest expenses) related to the Shire Acquisition, we expect to record a net loss in the fiscal year ending March 31, 2020. We expect certain of these expenses to continue into the fiscal year ending March 31, 2021.
We recorded significant amounts of goodwill in connection with the Shire Acquisition, and, 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 to intangible assets recorded in connection with the acquisition, potentially up to their full value.
The expected synergies of the Shire Acquisition and the projected cash costs necessary to achieve the synergies 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.
Although integration activities are underway, 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, including the exposure of each of the legacy Takeda businesses and the legacy Shire businesses to new tax regimes, particularly, in the case of Shire, to Japanese tax rules;
maintaining business relationships with suppliers, third-party alliance partners and other key counterparties; and
inefficiencies associated with the integration of the operations of the two companies.
Additionally, because we issued 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.

7




We are subject to additional risks arising from the acquired businesses of Shire, particularly its plasma-derived and rare disease therapies, and from the legal, regulatory and tax regimes that Shire operated under.
We have assumed the risks related to Shire’s businesses, which differ from, or will amplify, certain risks we faced prior to the Shire Acquisition. For example, markets outside Japan, particularly the United States, represent a larger portion of the legacy Shire business than ours, and our overall exposure to these markets has increased following the completion of the Shire Acquisition. Additionally, the acquired Shire businesses include new areas for us, such as rare diseases and plasma-derived therapies. Plasma-derived therapies, in particular, present significant challenges relating to the sourcing and transportation of plasma, and production and distribution of plasma-derived products, 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 record charges related to idle capacity or impairment on facilities or take other actions which could materially and adversely affect the plasma-derived therapies business. Moreover, sales for the rare disease portfolio we acquired as part of the Shire Acquisition are particularly concentrated among small groups of customers, and we may be disproportionately affected by changes in their purchasing patterns, including if we are unable to appropriately manage this business.
Furthermore, we have become subject to additional legal, regulatory and tax regimes applicable to the acquired businesses of Shire, many of which are complex and could subject us to additional risks or liabilities. For example, the legacy Shire business is subject to evolving and complex tax laws in various jurisdictions and Shire routinely obtained 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 November 28, 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 has appealed this assessment and the appeals process is continuing. However, the appeal may not be successful and at this time the outcome is unknown. In addition, in connection with its acquisition of Baxalta Incorporated (“Baxalta”) in 2016, Shire 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 could be materially and adversely affected.
We have substantial debt, including a significant amount incurred 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, we could be at a greater risk of a downgrade of our credit ratings.
Our consolidated bonds and loans were ¥5,751.0 billion as of March 31, 2019, the majority of which was incurred in connection with the Shire Acquisition or represents indebtedness of Shire now included on 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. In particular, if we are unable to realize the anticipated benefits of the Shire Acquisition, we may not be able to service our indebtedness. We are also 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. In particular, under the Loan Agreement with Japan Bank for International Cooperation (“JBIC”) that we entered into in December 2018 (the "JBIC Loan") for an aggregate principal amount of $3.7 billion, our profit before tax must not be negative for two consecutive years. As discussed above, we expect to continue to record significant expenses related to the Shire Acquisition and we expect certain of these costs to continue in the fiscal years ending March 31, 2020 and 2021. We may fail to realize the anticipated benefits of the Shire Acquisition, and expect to continue to record significant expenses related to it. If we record a net loss before tax in both of the fiscal years ending March 31, 2020 and 2021, and are unable to negotiate a waiver or otherwise prevent the acceleration of amounts due under the JBIC Loan, the amounts due thereunder and under our other financing arrangements containing cross-default provisions may become immediately due and payable, thus requiring us to refinance such debt which may result in increased interest costs. Furthermore, we may desire to or be required from time to time to incur additional borrowings, including in relation to the repayment or refinancing any of the Term Loan Credit Agreement that we entered into on June 8, 2018 (the “Term Loan Credit Agreement”) for an aggregate principal amount of $7.5 billion, the JBIC Loan, or any other indebtedness incurred in connection with the Shire Acquisition, such as the U.S. dollar and Euro-denominated bonds issued in November 2018 or the subordinated hybrid bonds issued in June 2019, or Shire’s previously existing indebtedness. Our ability to arrange a re-financing will depend on our financial position and performance, prevailing market conditions and other factors beyond our control. Moreover, if we decide to refinance indebtedness as it comes due, our overall leverage may not necessarily decrease.
We aim to decrease our leverage, with a target ratio of net debt to Adjusted EBITDA(1) of 2x or less within three to five years following the January 2019 completion of the Shire Acquisition and we have begun the process of disposal of certain non-core assets to generate cash in order 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.
______________
(1) 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.

8




If we are unable to decrease our leverage, we may be unable to improve our credit ratings or be subject to ratings downgrades or other adverse actions by third-party ratings agencies. 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, and in December 2018 Moody’s (Japan) K.K. further lowered our credit rating to Baa2, reflecting the increase in our ratio of net debt to Adjusted EBITDA after giving effect to the Shire Acquisition. In February 2019, S&P Global Ratings downgraded our ratings to BBB+, also in light of our aggregate debt and earnings profile following the Shire Acquisition. If we are unable to improve our credit ratings or if our credit ratings are further downgraded, it 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.
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 in-house and through collaborations with third parties. However, these research and development programs 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 over product development, 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.
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; 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.

9




If we fail to comply with government regulations over product development, 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”) in Japan 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, monitoring 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.
If we fail to comply with laws and regulations governing the sales and marketing of our products, our business could be adversely affected.
We engage in various marketing, promotional and educational activities pertaining to, as well as the sale of, pharmaceutical products in a number of jurisdictions around the world. The promotion, marketing and sale of pharmaceutical products and medical devices is highly regulated and the sales and marketing practices of market participants such as us have been subject to increasing supervision by governmental authorities, and we believe that this trend will continue.
For example, in the United States, our sales and marketing activities are monitored by a number of regulatory authorities and law enforcement agencies, including the U.S. Department of Health and Human Services (the “HHS”), the FDA, the U.S. Department of Justice, the U.S. Securities and Exchange Commission (the "SEC") and the Drug Enforcement Administration (the “DEA”). These authorities and agencies and their equivalents in other countries have broad authority to investigate market participants for potential violations of laws relating to the sale, marketing and promotion of pharmaceutical products and medical devices, including the False Claims Act, the Anti-Kickback Statute, the United Kingdom (the “UK”) Bribery Act of 2010 and the Foreign Corrupt Practices Act, among others, for alleged improper conduct, including corrupt payments to government officials, improper payments to medical professionals, off-label marketing of pharmaceutical products and medical devices, and the submission of false claims for reimbursement by the federal government. Healthcare companies may also be subject to enforcement actions or prosecution for such improper conduct. Any inquiries or investigations into the operations of, or enforcement or other regulatory action against, us by such authorities could result in significant defense costs, fines, penalties and injunctive or administrative remedies, distract management to the detriment of the business, result in the exclusion of certain products, or us as a whole, from government reimbursement programs or subject us to regulatory controls or government monitoring of its activities in the future. We are also subject to certain ongoing investigations by governmental agencies.
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 4. Information on the Company—B. Business Overview—Third Party Reimbursement and Pricing.”
In the United States, 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 changing legislative and regulatory environment in the United States we have experienced heightened pricing pressure on, and limitations on access to, our branded pharmaceutical products sold in the United States. There has been increasing attention paid to the level of pricing of pharmaceutical products by policymakers and stakeholders, which could lead to political pressure or legislative, regulatory or other efforts to introduce lower prices, and change how the pharmaceutical supply chain could operate. In addition, there are efforts by the federal government to reduce spending on the Medicare and Medicaid programs, including proposals by the Congressional Budget Office to require pharmaceutical companies to pay a minimum rebate on drug products covered under Medicare Part D for low-income beneficiaries and to cap federal Medicaid payments to the states. Congressional proposals to convert the Medicare fee-for-service program into a premium support program could also lead to significant reductions

10




in Medicare spending. 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 pricing and spending pressure, including from regulation and 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”) for the coverage under the public medical care insurance systems. 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 are deducted from listed price. The average price of previously listed products generally decreases as a result of these price revisions. 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 from April 1, 2021, which could lead to more frequent downward price revisions. In addition, cost-effectiveness analysis was officially introduced by the MHLW in April 2019. Products on the NHI price list nominated based on pre-defined criteria, such as the innovativeness and the financial impact, will be subject to review, and subject to price adjustments depending on outcome of this review.
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. European pricing and reimbursement authorities have also intensified efforts to increase transparency of prices as well as exchange of information among the various European pricing authorities in order to raise pressure towards the industry. This pricing debate has impacted the overall political climate in Europe and has triggered a European policy initiative to review the pharmaceutical industry’s intellectual property incentives with a particular emphasis on orphan drugs. Any new legislation in this area would take at least two to three years to be adopted but could have significant impact on our business model. We are also facing similar pricing pressures in other regions, such as various emerging countries.
We expect these efforts to control costs to continue as healthcare payers around the globe, in particular government-controlled health authorities, publicly funded or subsidized health programs, insurance companies and managed care organizations (the “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.
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 fully mitigate the impact of competition from generics. In the United States and the European Union (“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. Patent protections over VYVANSE, which we acquired as part of the Shire Acquisition and which was Shire’s largest selling product, are scheduled to expire in 2023, which we anticipate will lead to declines in sales. 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

11




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 at us by third parties.
We are subject to the risk of infringement claims directed at us by third parties, even if we do not knowingly infringe on any valid third-party intellectual property rights. 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.
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 litigation claims. 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.
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 materially and adversely affect patient safety, our reputation and our results of operations.
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 initiate alliances 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, in-licensing arrangements and other collaborations 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. To the extent such milestone payments are recorded as assets on our balance sheet, any termination of the relevant partnership could require us to recognize an impairment loss up to the full value of such asset;
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; and
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.

12




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 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;
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; 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 approximately 80 countries and 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, economic or social climate, including inter-country relationships;
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. Further expansion overseas has been one of our key strategies, and, in the fiscal year ended March 31, 2019, regions outside of Japan accounted for 72.8% of our consolidated revenue, with the United States in particular contributing 39.5% of consolidated revenue, and we anticipate that these proportions will further increase once Shire’s businesses have been included in our consolidated results of operations for a full fiscal year. 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.


13




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 ¥291.6 billion (or 13.9% of our total revenue) for the fiscal year ended March 31, 2019, 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. Emerging markets present particular challenges in obtaining funding, achieving market access for our products and successfully ensuring that we receive appropriate levels of reimbursement. Emerging markets also tend to require substantial efforts in patient support and other programs. All of these factors may adversely affect the profitability of our businesses in these emerging markets.
In order to successfully implement our emerging markets strategy, we must also 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 face risks relating to the expected exit of the United Kingdom from the European Union.
On June 23, 2016, the United Kingdom held a remain-or-leave referendum on the United Kingdom’s membership within the European Union, the result of which favored the exit of the United Kingdom from the EU (commonly known as “Brexit”). A process of negotiation will likely determine the future terms of the United Kingdom’s relationship with the EU, as well as whether the United Kingdom will be able to continue to benefit from the EU’s free trade and similar agreements. Additionally, Brexit has impacted the EMA, which is the primary regulator of the pharmaceutical industry in the EU and which has stated that it expects to lose about 25% of its 900 staff members due to the EMA’s relocation from London to Amsterdam as a result of Brexit. The EMA has developed a business continuity plan that allows EMA to temporarily scale back or temporarily suspend lower priority activities during the relocation and as it prepares for Brexit. For example, the EMA noted in its annual report for 2018 that, in order to be able to concentrate on Brexit and the EMA’s relocation to Amsterdam, it had to delay updating its guidelines on the development of new medicines to treat hemophilia A and B. Delays in EMA processes such as this caused by Brexit may adversely affect or delay our business, including our ability to develop and market new or existing products in the EU.
The timing of Brexit and potential impact of Brexit on our market share, sales, profitability and results of operations is unclear. Depending on the terms of Brexit and any continuing impact on the EMA, economic conditions in the United Kingdom, the European Union and global markets may be adversely affected by reduced growth and volatility. The uncertainty before, during and after the period of negotiation is also expected to have a negative economic impact and increase volatility in the markets, particularly in the Eurozone. Such volatility and negative economic impact could, in turn, adversely affect our revenues, financial condition or results of operations.
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, 2019, 72.8% 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.
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.

14




Our reliance on third parties for the performance of certain key business functions, particularly product manufacture and commercialization, heightens the risks faced by our business.
We rely on suppliers, vendors and partners, including alliances with other pharmaceutical companies, for certain key aspects of our business, including 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.
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.
In particular, we rely on third-party suppliers of key manufacturing inputs of certain drug products, including, but not limited to, ADCETRIS, ADVATE, ADYNOVATE, ALUNBRIG, CINRYZE, CUVITRU, ENTYVIO, FEIBA, FIRAZYR, GATTEX/REVESTIVE, HYQVIA, LEUPRON, MEPACT, NINLARO, TAKHZYRO, and VELCADE. Furthermore, certain active ingredients for these products are sourced from a single supplier. We also rely in part on third-party sources to provide the donated plasma necessary for our plasma-derived therapies. In addition, although we dual-source certain key products and/or active ingredients, we currently rely on a single source for production of the final drug product for certain of our products, including, but not limited to, ADDERALL XR, ADYNOVATE, ALOFISEL, ALUNBRIG, CINRYZE, CUVITRU, FIRAZYR, HYQVIA, LIALDA, MEPACT, NINLARO, PENTASA and TAKHZYRO. 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 and patients. In such a case, our business and results of operations could be 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 Good Manufacturing Practice 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 (e.g. Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”) regulation in the EU), changes in the types of products produced, physical limitations or other business interruptions that could impact continuous supply.
The development and manufacture of biologics including products added to our portfolio following the completion of the Shire Acquisition and stem cell therapies resulting from our acquisition of Tigenix NV in July 2018, 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

15




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 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.
Any of the above may reduce sales, delay the launch of new products, and adversely affect our business, financial condition and 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 Note 32 to our audited consolidated financial statements included in this annual report.
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 Brexit referendum in the U.K, political volatility in the United States following recent mid-term elections, continued instability in the Middle East and North Korea and global developments in trade and security policy 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.
We may have difficulty 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, 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. Moreover, if relevant regulators increase their approvals of new therapies developed by competitors for the conditions treated by our products, such as in order to increase the number of treatment options available for rare or orphan diseases, our business and results of operations could be materially and adversely affected.
For example, in recent years, competitors have introduced additional plasma-based hemophilia products, or such products have been approved for additional uses, which may affect (and in certain cases has affected) sales of our plasma-based hemophilia products, such as FEIBA. Moreover, certain competitors are developing other hemophilia therapies, including gene-based therapies, which, if successfully introduced, could also harm sales of our plasma-based therapies. Increased competition from new products or therapies could similarly affect our other products.
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.

16




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.
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 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.
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 is 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.
We are increasingly dependent on information technology systems and our systems and infrastructure face the risk of theft, exposure, tampering or other intrusions.
A variety of important processes relating to the research and development, production and sale 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 trial subjects, 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. Moreover, the costs related to these security measures are expected to continue to increase. Despite our efforts, the possibility of a future data compromise cannot be eliminated entirely, and risks associated with intrusion, exposure, tampering, and theft remain. For “zero-day threats,” or new vectors of attack which are currently unknown, the risk that our defenses will be inadequate are particularly pronounced.
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 or confidential or proprietary information. Cyber-attacks could significantly impact the availability of data systems that are essential to conducting routine business operations across the company, including product manufacturing or clinical development, and the recovery efforts could be both time consuming and costly. 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.

17




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 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 processed, became effective on May 25, 2018. Moreover, significant regulatory fines may be imposed on us for violation of these requirements, particularly in the case of the GDPR, which are set at a maximum of the higher of €20 million or 4% of annual global turnover for the most serious breaches, or the higher of €10 million or 2% of annual global turnover for certain others. There is also significant uncertainty as to how the various EU member states or individual regulators will implement and interpret the GDPR, and we are still in the process of identifying and unifying differences between our and Shire’s historical GPDR compliance practices. 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 trial subjects or customers.
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, 2019, our largest wholesale distributor accounted for 10.8% 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 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 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; and
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

18




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 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.
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 detected or undetected contamination resulting from our manufacturing operations at those sites or the activities of prior owners or occupants. We may suffer from expenses, claims or liability 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. 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.
Although we purchase comprehensive global insurance to cover property damage and consequent business interruption for certain potential losses at sites owned by us and at certain critical supplier sites, we do not maintain earthquake insurance in Japan, and our insurance policies may not be adequate to cover all possible losses and expenses.
We may have to recognize additional charges on our statements of income due to impairment of goodwill, other intangible assets and equity method investments.
We carry significant amounts of goodwill and intangible assets on our balance sheet as a result of past acquisitions, including the Shire Acquisition. As of March 31, 2019, we had goodwill of ¥4,161.4 billion and intangible assets of ¥4,860.4 billion. Goodwill and intangible assets recorded in relation to acquisitions are 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.”
We occasionally enter into business ventures with third-party entities where we have significant influence over the decisions on financial and operating policies, but do not have control or joint control (referred to as “investments in associates”). We also enter into joint arrangements whereby we and the other parties that have joint control of the arrangement have rights to the net assets of the arrangement (referred to as “joint venture”). We account for these investments using the equity method of accounting. As of March 31, 2019, the carrying amount of investments accounted for using the equity method was ¥114.7 billion. Under IFRS, at each reporting period, we are required to determine whether there is objective evidence that the investment in each associate or joint venture is impaired.
The recognition of such impairment charges may adversely affect our business, financial condition 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 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. In addition, our ADSs are listed on the New York Stock Exchange (the “NYSE”), making us subject to, among other things, the requirements under the Sarbanes-Oxley Act of 2002 (the

19




“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 next annual report filed with the SEC, 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 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.
We are subject to additional risk due to uncertainty relating to the calculation of LIBOR, EURIBOR and other reference rates and their potential discontinuance.
The JBIC Loan and the Term Loan Credit Agreement are subject to a floating interest rate calculated in reference to LIBOR, while the floating rate Euro-denominated senior notes we issued in connection with the Shire Acquisition are subject to floating rate interest calculated in reference to EURIBOR. LIBOR, EURIBOR and other interest rate, equity, commodity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of ongoing national, international and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such “benchmarks” to perform differently than they have performed in the past or to be discontinued entirely or may have other consequences that cannot be predicted, which could have a material adverse effect on our financial condition or results of operations or require us to seek to amend the terms of the relevant indebtedness, which may require significant additional time, effort or money in the form of consent payments or otherwise, and may not be possible on cost-efficient terms or at all.
In particular, regulators and law enforcement agencies in the United Kingdom and elsewhere are conducting criminal and civil investigations into whether the banks that contribute information to the British Banker Association (the “BBA”) in connection with the daily calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA members banks have entered into settlements with their regulators and law enforcement agencies, as well as the ICE Benchmark Administration (the current administrator of LIBOR), which may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Notwithstanding the foregoing, it appears highly likely that LIBOR will be discontinued or modified by 2021. A number of alternatives to LIBOR have been proposed or are being developed, but it is not clear which, if any, will be adopted. Any of these alternative methods may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form. More generally, any of the foregoing changes, any other changes to LIBOR as a result of national, international and other regulatory guidance and proposals for reform or other initiatives or investigations, or any further uncertainty surrounding the implementation of such changes, could have a material adverse effect on affected indebtedness.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR, EURIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, EURIBOR, other benchmarks or floating rate indebtedness.
Risks Relating to the ADSs
A holder of ADSs has fewer rights than a holder of our common stock has, and a holder of ADSs has 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.

20




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. 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 the practices 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

21




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.
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, values-based, research and development driven biopharmaceutical company with operations in approximately 80 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 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 rare diseases including immunology and hematology, as well as plasma-derived therapies and 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 lifesaving medicines for patients with some of the highest unmet medical needs across the world.
Our 238-year history started in 1781, when Chobei Takeda began selling traditional Japanese and Chinese medicines in Doshomachi, Osaka. After Japan’s Meiji Restoration opened the country to increase 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 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, our efforts have been focused on enhancements to our research and development capabilities and successful cross-border merger and acquisition activities and post-acquisition integration. For example, in February 2017, we acquired ARIAD, a commercial-stage biotechnology company 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.
Most recently, in January 2019, we completed our acquisition of Shire. With the Shire Acquisition, we have taken the next major step in our development into a global pharmaceutical company. The Shire Acquisition allows us to create a global, values-based, research and development-driven biopharmaceutical company with an attractive geographic footprint with a significantly increased presence in the United States, an important and innovation-driven market. Specifically, the Shire Acquisition strengthens our core therapeutic areas, bringing together Takeda and Shire’s complementary positions in GI and neuroscience and providing leading positions in rare diseases and plasma-derived therapies to complement our existing strength in oncology and focused efforts in vaccines. It also creates a highly complementary, robust, modality-diverse pipeline and a strengthened research and development engine focused on innovation.
During the three fiscal years ended March 31, 2019, we have also divested a number of businesses and assets in non-core areas. For example, in April 2017, we completed the sale of our shares in Wako Pure Chemical to FUIJIFILM Corporation and in December 2017, we entered into an agreement with Takashimaya Company Limited to sell our Tokyo Takeda building and the Takeda Shin-Edobashi building. Further, 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 and 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. We will continue to divest certain businesses and assets as we integrate Shire and focus on our core business. For example, on May 9, 2019, we announced the sales of two of our non-core businesses, Xiidra® (lifitegrast ophthalmic solution) and TachoSil™ (Fibrin Sealant Patch). For additional details on these transactions, see Note 33 to our audited consolidated financial statements included in this annual report.
Our principal capital expenditures during the three fiscal years ended March 31, 2019 consisted of additions to property, plant and equipment and additions to intangible assets. In the fiscal years ended March 31, 2017, 2018 and 2019, 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 ¥148.1 billion, ¥124.1 billion and ¥244.6 billion, respectively, including the following highlights:
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;

22




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; and
In the fiscal year ended March 31, 2019, we received an additional 20-year extension agreement (from 2030 to 2050) for our two leased properties in Cambridge, Massachusetts. The total lease liability for these properties including this renewal option that we are reasonably certain to exercise is ¥88.8 billion as of March 31, 2019.
We currently have various capital expenditures projects in process, the most significant of which includes the construction of a biologics facility in Dunboyne, Ireland, which will be funded through internally generated cash flows.
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 annual report is Shire HGT, Inc., 300 Shire Way, Lexington, MA 02421 U.S.A., telephone number: 1-617-349-0200.
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 Securities Exchange Act of 1934 (the "Exchange Act") prescribing the furnishing and content of proxy statements to shareholders. Our corporate website is www.takeda.com.
B.
Business Overview.
We are a global, values-based, research and development-driven biopharmaceutical company with an innovative portfolio, engaged primarily in the research, development, production and marketing of pharmaceutical products. Our mission is to strive towards a better health and a brighter future for people worldwide through leading innovation in medicine. Our culture is based on the achievement of this mission by acting with integrity, fairness, honesty and perseverance and prioritizing the patient, trust, reputation and the business.
Our three strategic priorities to drive sustainable mid to long-term growth are business area focus, our research and development engine and financial strength.
We are focused on five key business areas of GI, rare diseases, plasma-derived therapies, oncology, and neuroscience. We believe these five business areas will drive our future growth. We have been making targeted acquisitions and divestitures to further increase our level of focus on these areas and plan to continue to refine our business portfolio going forward.
Our research and development engine is based on a therapeutic area focus, a leading partnership model and patient-centric, science-driven culture of innovation. Our strengthened and revitalized research and development engine is focused on the therapeutic areas of oncology, GI, rare diseases and neuroscience with targeted investments in plasma-derived therapies and vaccines. In order to deliver value in areas of high unmet medical needs, we strive to progress our pipelines by focusing on innovative medicines.
Our financial strength involves driving margin expansion and generating cash flows to invest in the business, to deleverage and to return cash to shareholders. We also are prioritizing selected disposal of non-core assets to generate cash in order to accelerate the pace of deleveraging.
We are also focused on successfully executing the integration of Shire while sustaining business momentum. The execution of our integration plan is underway and we believe that the integration will have relatively minimal disruption on the business and pipeline due to the strong strategic and geographic fit of the two companies. We also believe that we will experience minimal disruption to our research and development efforts as we are adding rare diseases to our already defined research and development model. We believe a smooth integration will result in a stronger and more innovative portfolio supported by a lean and focused organization.
Our key growth driver products will be derived from 14 global brands in five business areas and include: ENTYVIO, GATTEX/REVESTIVE, ALOFISEL, NATPARA, ADYNOVATE/ADYNOVI, TAKHZYRO, ELAPRASE, VPRIV, GAMMAGARD LIQUID, HYQVIA, CUVITRU, ALBUMIN/FLEXBUMIN, NINLARO, and ALUNBRIG.
The following is a summary of our principal products by key business area. Revenues attributable to products acquired as part of the Shire Acquisition for the year ended March 31, 2019 given in this section refer to revenues recorded on our consolidated statement of income following the completion of the Shire Acquisition on January 8, 2019.
In GI, our principal products include:
ENTYVIO (vedolizumab), a treatment for moderate to severe ulcerative colitis and Crohn’s disease. Sales of ENTYVIO have grown strongly since its launch in 2014 to become our top selling product in the fiscal year ended March 31, 2019. 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, 2019, our revenue from ENTYVIO was ¥269.2 billion.

23




TAKECAB (vonoprazan fumurate), a treatment for acid-related diseases. 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, 2019, our revenue from TAKECAB was ¥58.2 billion.
GATTEX/REVESTIVE (teduglutide [rDNA origin]) for injection is the first prescription medicine for the long-term treatment of adults with short bowel syndrome (“SBS”) who are dependent on parenteral support. We added GATTEX/REVESTIVE to our GI portfolio with the acquisition of Shire, which was completed in January 2019. In May 2019, the FDA approved extending the indication of GATTEX for children 1 year of age and older with SBS. In the fiscal year ended March 31, 2019, our revenue from GATTEX/REVESTIVE was ¥12.8 billion.
ALOFISEL (darvadstrocel), previously Cx601, a treatment for complex perianal fistulas in adult patients with nonactive/mildly active luminal Crohn’s disease, when fistulas have shown an inadequate response to at least one conventional or biologic therapy. ALOFISEL was approved in the EU in 2018 which marked the first allogenic stem cell therapy to receive central marketing authorization (“MA”) approval in Europe. In the fiscal year ended March 31, 2019, our revenue from ALOFISEL was ¥0.05 billion.
In rare diseases, our principal products are:
NATPARA/NATPAR (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. We added NATPARA/NATPAR to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from NATPARA/NATPAR was ¥7.1 billion.
ADYNOVATE/ADYNOVI (antihemophilic factor (recombinant) [PEGylated]) is an extended half-life recombinant factor VIII 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 we exclusively licensed from Nektar Therapeutics. We added ADYNOVATE/ADYNOVI to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from ADYNOVATE/ADYNOVI was ¥10.7 billion.
TAKHZYRO (lanadelumab-flyo) injection, 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. We added TAKHZYRO to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from TAKHZYRO was ¥9.7 billion.
ELAPRASE (idursulfase), an enzyme replacement treatment for Hunter syndrome (also known as Mucopolysaccharidosis Type II or MPS II). We added ELAPRASE to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from ELAPRASE was ¥15.1 billion.
REPLAGAL (agalsidase alfa for infusion), 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. We added REPLAGAL to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from REPLAGAL was ¥11.4 billion.
VPRIV (velaglucerase alfa for injection), an enzyme replacement treatment for type 1 Gaucher disease. We added VPRIV to our rare diseases portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from VPRIV was ¥8.7 billion.
In the fiscal year ended March 31, 2019, our revenue from plasma-derived therapy products was ¥111.7 billion. In plasma-derived therapies, our principal products are:
GAMMAGARD LIQUID (Immune Globulin Intravenous (Human) 10%), a liquid formulation of the antibody replacement therapy immunoglobulin ("IG") product. 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. 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. We added GAMMAGARD LIQUID to our plasma-derived therapies portfolio with the acquisition of Shire, which was completed in January 2019.
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). We added GAMMAGARD S/D to our plasma-derived therapies portfolio with the acquisition of Shire, which was completed in January 2019.
HYQVIA [Immune Globulin Infusion 10% (Human) with Recombinant Human Hyaluronidase] is a product consisting of human normal IG and recombinant human hyaluronidase (licensed from Halozyme). HYQVIA is the only subcutaneous IG treatment for PID patients

24




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. We added HYQVIA to our plasma-derived therapies portfolio with the acquisition of Shire, which was completed in January 2019. 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.
CUVITRU is 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. We added CUVITRU to our plasma-derived therapies portfolio with the acquisition of Shire, which was completed in January 2019.
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 (“ARDS”) and nephrosis, and hemolytic disease of the newborn (“HDN”). We added FLEXBUMIN to our plasma-derived therapies portfolio with the acquisition of Shire, which was completed in January 2019.
In oncology, our principal products include:
NINLARO (ixazomib), the first oral proteasome inhibitor for the treatment of multiple myeloma (“MM”). NINLARO has experienced a strong uptake in sales since launching in the United States in 2015. 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, 2019, revenue from NINLARO was ¥62.2 billion.
ADCETRIS (brentuximab vedotin), an anti-cancer agent used to treat Hodgkin lymphoma (“HL”) and systemic anaplastic large cell lymphoma (“sALCL”). 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. In the fiscal year ended March 31, 2019, our revenue from ADCETRIS was ¥42.9 billion.
ALUNBRIG (brigatinib), an orally administered small molecule anaplastic lymphoma kinase (“ALK”) inhibitor used to treat non-small cell lung cancer (“NSCLC”). ALUNBRIG was developed by ARIAD Pharmaceuticals. ALUNBRIG was granted accelerated approval in the United States in April 2017, and the European Commission granted the product marketing authorization in November 2018. In the fiscal year ended March 31, 2019, our revenue from ALUNBRIG was ¥5.2 billion.
In neuroscience, our principal products are:
VYVANSE (lisdexamfetamine dimesylate) is a stimulant medication indicated for the treatment of attention deficit hyperactivity disorder (“ADHD”) in patients ages six and above and for the treatment of moderate to severe binge eating disorder in adults. We added VYVANSE to our neuroscience portfolio with the acquisition of Shire, which was completed in January 2019. In the fiscal year ended March 31, 2019, our revenue from VYVANSE was ¥49.4 billion.
TRINTELLIX (vortioxetine), an antidepressant indicated for the treatment of major depressive disorder in adults. 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. In the fiscal year ended March 31, 2019, our revenue from TRINTELLIX was ¥57.6 billion in the United States.
For a breakdown of revenues by geographic region, see Note 4 to our audited consolidated financial statements included in this annual report.
Research and Development
Research and development of pharmaceutical products is a lengthy and expensive process that can span more than 10 years. The process includes evaluations of the product’s efficacy and safety, application for approval and investigation and approval by regulatory authorities. Only a small number of compounds pass such detailed investigation and are used in clinical treatments. Once approved, there is ongoing research and development support for marketed products, including medical affairs and other investments.
Clinical trials, which comply with regional and international regulatory guidelines, generally take five to seven years or longer and require substantial expenditures. As a result, only a small fraction of compounds that enter the clinical trials results in commercially viable products. In general, clinical trials are performed in accordance with the guidelines set by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use. The relevant regulatory authorities are the MHLW for Japan, the FDA for the United States and the EMA for the EU.

25




The three phases of human clinical trials, which may overlap with each other, are as follows:
Phase I (“P-I”) clinical trials
Conducted using a small group of healthy adult volunteers in order to evaluate safety and absorption, distribution, metabolism and excretion of the drug.
Phase II (“P-II”) clinical trials
Conducted using a small group of patient volunteers in order to evaluate safety, efficacy, dosage and administration methods. P-II clinical trials may be divided into two sub-categories, P-IIa and P-IIb. P-IIa are usually pilot studies designed to demonstrate clinical efficacy or biological activity. P-IIb studies look to find the optimum dose at which the drug shows biological activity with minimal side-effects.
Phase III (“P-III”) clinical trials
Conducted using a large number of patient volunteers in order to evaluate safety and efficacy in comparison to other medications already available or placebo.
Of these three phases, Phase III requires the largest expenditures and thus the decision to proceed with Phase III testing is a critical business decision in the drug development process. For those drug candidates that pass Phase III clinical trials, a New Drug Application ("NDA") or a Marketing Authorization Application (“MAA”) is submitted to the relevant governmental authorities for approval and subsequent launch of the drug. The preparation of an NDA or MAA involves considerable data collection, verification, analysis and expense. Even after the launch of the product, health authorities require post-marketing surveillance of adverse events, and they may request a post-marketing study to provide additional information regarding the risks and benefits of the product.
In July 2016, we initiated a five-year research and development transformation program to re-invigorate the pipeline and build an agile, global research and development organization driven by innovative science. A significant component of the program has been an intensive focus in the following three key areas:
Therapeutic area focus: Leveraging therapeutic area expertise to progress innovative assets.
Partnerships and capabilities: Enhancing capabilities internally and through external collaborations.
Innovative research engine: Developing new technologies and new modalities to treat disease.
Our research and development efforts are focused in four key therapeutic areas of oncology, GI, rare diseases and neuroscience, plus the plasma-derived therapies and vaccines business areas.
We have also concentrated our in-house research and development operations in Japan and the United States. We intend to integrate the legacy Shire research and development operations into ours.
Our key in-house research and development facilities include:
Shonan Heath Innovation Park: Located in Fujisawa and Kamakura in Kanagawa Prefecture in Japan, the Shonan Health Innovation Park ("Shonan iPark") was established in 2011 as the Shonan Research Center, and is our primary location for neuroscience research. In April 2018, we launched Shonan iPark by transforming the Shonan Research Center to enhance scientific innovation. Shonan iPark aims to gather 3,000 researchers by the year 2020 and become a place where experts from the pharmaceutical industry, including venture start-ups, government and academia, can gather and incubate and accelerate research initiatives to create health solutions.
Boston Research and Development Site: Our Boston research and development hub is located in Cambridge, Massachusetts in the United States. Our Boston site is the center of our global oncology and GI research and development and also supports research and development in other therapeutic areas including plasma-derived therapies and vaccines, and research in immunomodulation and biologics.
San Diego Research and Development Site: Our research and development site located in San Diego, California in the United States supports research and development of specialized technologies in the GI and neuroscience areas.
In addition to our concentrated efforts to increase our in-house research and development capabilities, external partnerships with third-party partners are a key component of our strategy for enhancing our research and development pipeline. In the fiscal year ended March 31, 2019, we entered into more than 40 such new partnerships. Our strategy to expand and diversify our external partnerships allows us to take part in research of a wide variety of new products and increases the chances that we will be able to take part in a major research-related breakthrough. See “–Licensing and Collaboration” for further information on our research and development collaborations.
The following summarizes our research and development activities within each of our therapeutic and business areas. The compounds in our pipeline disclosed within the key therapeutic and business areas below are in various stages of development, and the contents of the pipeline may change as compounds currently under development are removed 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. The listings in the tables below are limited to the U.S., EU, Japan, and China, but we are also conducting development activities in other regions. "Global" refers to U.S., EU, Japan, and China.
Oncology
In oncology, we endeavor to deliver novel medicines to patients with cancer worldwide through the commitment to breakthrough innovation and a passion for improving the lives of patients. This therapeutic area focuses on three key areas (1) building on our foundational expertise in hematologic

26




malignancies through continued investment in lifecycle management programs for marketed products NINLARO, ADCETRIS and ICLUSIG, as well as in pipeline assets in multiple myeloma, acute myeloid leukemia and myelodysplastic syndromes and other blood cancers, (2) further developing our portfolio in lung cancer and (3) pursuing novel immuno-oncology targets and next-generation platforms with external partners, as well as exploring innovative cell therapies.

Our oncology pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:
Development code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
SGN-35
<Brentuximab vedotin>
ADCETRIS (EU, Japan)
CD30 monoclonal antibody-drug
Conjugate
(injection)
Front line Peripheral T-cell Lymphoma (“PTCL”)
EU
Japan
P-III
Filed (March 2019)
In-license
(Seattle
Genetics, Inc.)
Relapsed/ refractory Hodgkin lymphoma
China
Filed (March 2019)
Relapsed/ refractory systemic anaplastic large-cell
lymphoma (“sALCL”)
China
Filed (March 2019)
<brigatinib>
ALUNBRIG (U.S., EU)

ALK inhibitor
(oral)
1L ALK-positive non-small cell lung cancer
U.S.
EU
China
P-III
P-III
P-I
In-house
2L ALK-positive non-small cell lung cancer in patients previously treated with ALK inhibitors
Japan
China
P-II(a)
P-II(a)
2L ALK-positive non-small cell lung cancer in patients progress on 2nd generation TKI (tyrosine kinase inhibitors)
Global
P-II
2L ALK-positive non-small cell lung cancer (head to head with alectinib)
Global
P-III

27




Development code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
MLN9708
<ixazomib>
NINLARO
Proteasome inhibitor (oral)
Newly diagnosed multiple myeloma
Global
P-III
In-house
Maintenance therapy in patients with newly diagnosed multiple myeloma following autologous stem cell transplant
Japan
U.S.
EU
China
Filed (April 2019)
P-III
P-III
P-III
Maintenance therapy in patients with newly diagnosed multiple myeloma not treated with stem cell transplant
Global
P-III
Relapsed/refractory primary amyloidosis
Global
P-III(3)
Relapsed/refractory multiple myeloma
(doublet regimen with dexamethasone)
U.S.
EU
Japan
P-III
P-III
P-III
Relapsed/refractory multiple myeloma (triplet regimen with daratumumab and dexamethasone)
Global
P-II
<ponatinib>
ICLUSIG
BCR-ABL inhibitor (oral)
Front line Philadelphia chromosome-positive acute lymphoblastic leukemia
U.S.
P-III
In-house
Dose ranging study for TKI resistant 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
Japan
P-III
P-III
P-III
In-house
TAK-385
<relugolix>
LH-RH antagonist (oral)
Prostate cancer
Japan
China
P-III
P-I
In-house
<cabozantinib>
Multi-targeted kinase inhibitor (oral)
1L renal cell carcinoma in combination with nivolumab
Japan
P-III
In-license
(Exelixis, Inc.)
2L renal cell carcinoma
Japan
Filed (April 2019)
2L hepatocellular carcinoma
Japan
P-II(a)

28




Development code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
<niraparib>
PARPl/2 inhibitor (oral)
Ovarian cancer - maintenance
Japan
P-II
In-license
(GlaxoSmithKline plc)
Ovarian cancer – salvage
Japan
P-II
TAK-228
<sapanisertib>
mTORCl/2 inhibitor (oral)
Endometrial cancer
U.S.

P-II(b)
In-house
TAK-659
<->

SYK/FLT3 kinase inhibitor
(oral)
Diffuse large 8-cell lymphoma
-
P-II(a)
In-house
Hematologic malignancies
-
P-I
TAK-931
< ->
CDC7 inhibitor
(oral)

Squamous esophageal cancer, squamous non-small cell lung cancer
-
P-II(a)
In-house
TAK-788
<->
EGFR/ HER2 exon 20 inhibitor
(oral)
Non-small cell lung cancer with Exon-20 insertion
Global
P-II
In-house
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 IFNa
(injection)
Relapsed/refractory Multiple myeloma
-
P-I
In-license
(Teva
Pharmaceutical
Industries Ltd.)
TAK-981
<- >
SUMO inhibitor (injection)
Multiple cancers
-
P-I
In-house
TAK-252/SL-279252
PD-1-Fc-OX40L (injection)
Solid tumors
-
P-I
In-license
(Shattuck Labs, 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)
On June 6, 2019, Takeda announced that this P-III trial did not meet the first of two primary endpoints and Takeda decided to discontinue this trial.

29




GI
In GI, we focus on delivering innovative, life-changing therapeutics for patients with GI and liver diseases. We are expanding our position in specialty GI with ENTYVIO and progressing a pipeline built through partnerships exploring opportunities in motility disorders, celiac disease, liver disease and the microbiome.
Our GI pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:
Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
MLN0002
<vedolizumab>
ENTYVIO
Humanized monoclonal antibody
against a47 integrin (injection)
Crohn's disease
Japan
China
Filed (July 2018)(3)
P-III
In-house
Ulcerative colitis
China
P-III
Subcutaneous formulation for ulcerative colitis
U.S.
EU
Japan
Filed (March 2019)
Filed (March 2019)
P-III
Subcutaneous formulation for Crohn's disease
U.S.
EU
Japan
P-III
Filed (March 2019)
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
Europe
P-III
Cx601
<darvadstrocel>
ALOFISEL (EU)
A suspension of allogeneic expanded adipose-derived stem cell (injection)
Refractory complex perianal fistulas in patients with Crohn’s disease
U.S.
Japan
P-III
P-III
In-house
TAK-438
<vonoprazan>
TAKECAB
Potassium-competitive acid
blocker
(oral)

Acid-related diseases
China
Filed (February 2018)
In-house
Gastro-esophageal reflux disease in patients who have a partial response following treatment with a proton pump inhibitor
EU
P-II(b)
TAK-633/SHP633
<teduglutide>
GATTEX (U.S.)/ REVESTIVE (EU)
GLP-2 analogue (injection)
Short bowel syndrome, pediatric indication
U.S.
Filed (September 2018)(4)
In-house
Japan
P-III
Short bowel syndrome, adult
Japan
P-III
TAK-721/SHP621
<Budesonide>
Glucocorti costeroid (oral)
Eosinophilic esophagitis
U.S.
P-III
In-house (Partnership with UCSD and Fortis Advisors)
TAK-906(5)
< ->
Dopamine D2/D3 receptor antagonist (oral)
Gastroparesis
-
P-II(b)
In-house

30




Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
TAK-954
<->
5-HT4- hydroxytryptamine receptor agonist (injection)
Post-operative gastrointestinal dysfunction
-
P-II(b)
In-license (Theravance Biopharma, Inc.)
TIMP-GLIA
<->
Tolerizing Immune Modifying nanoParticle (TIMP) (injection)
Celiac disease
-
P-II(a)
In-license (Cour Pharmaceutical Development Company, Inc.)
TAK-951
<->
Peptide agent
Nausea and vomiting
-
P-I
In-house
TAK-671
<->
Protease inhibitor (injection)
Acute pancreatitis
-
P-I
In-house (Co-development with Samsung Bioepis Co, Ltd)

TAK-018/EB8018
<->
FimH antagonist (oral)
Crohn's disease
-
P-I
In-license (Enterome Bioscience SA)
TAK-681
<->
GLP-2 long-acting analogue (injection)
Short bowel syndrome
-
P-I
In-house
Kuma062
<->
Glutenase
(oral)
Celiac disease
-
P-I
In-license (PvP Biologics, 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)
On May 22, 2019, Takeda announced that the MHLW approved an additional indication for the treatment of moderately to severely active Crohn's disease in Japan.
(4)
On May 17, 2019, Takeda announced that the FDA approved extending this indication to pediatric patients 1 year of age and older with short bowel syndrome who need additional nutrition or fluids from intravenous feeding (parenteral support).
(5)
TAK-906 was previously known as ATC 1906. In March 2017, Takeda executed its option right to acquire Altos Therapeutics, LLC.
Rare diseases
We acquired our rare disease business and pipeline through our acquisition of Shire. We focus on (1) rare immunology (e.g., Hereditary angioedema) including through recently launched TAKHZYRO to transform the treatment paradigm, (2) rare hematology with the broadest portfolio across our competitors in hematology and (3) rare metabolic diseases, focused on addressing with approved treatments for Fabry disease, Hunter syndrome and Gaucher disease.
Our rare disease pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:

Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
TAK-743/SHP643
<lanadelumab>
TAKHZYRO (U.S., EU)
Plasma kallikrein inhibitor (injection)
Hereditary angioedema
China
Filed (December 2018)
In-house
TAK-672/SHP672
<->
OBIZUR (U.S., EU)
Antihemophilic factor [recombinant], porcine sequence (injection)
Congenital hemophilia A with inhibitors
U.S.
EU
P-III
P-III
Purchased (IPSEN)

31




Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
TAK-577/SHP677
<->
VONVENDI U.S.),
VEYVONDI (EU)
von Willebrand factor [recombinant] (injection)
Prophylactic treatment of von Willebrand disease
Global
P-III
In-house
Pediatric on-demand treatment of von Willebrand disease
Global
P-III
In-house
TAK-660/SHP660
<->
ADYNOVATE (U.S.), ADYNOVI (EU)
Antihemophilic Factor (recombinant), PEGylated
(injection)
Pediatric hemophilia A
EU
P-III
In-house
TAK-755/SHP655
<->
Replacement of the deficient-ADAMTS13 enzyme (injection)
Congenital thrombotic thrombocytopenic purpura
U.S.
EU
P-III
P-III
In-license (KM Biologics, Co, Ltd.)
TAK-620/SHP620
<maribavir>
Benzimidazole riboside inhibitor (oral)
Cytomegalovirus infection in transplant patients
U.S.
EU
P-III
P-III
In-license (GlaxoSmithKline plc)
TAK-607 /SHP607
<->
Insulin- like Growth Factor / IGF
Binding Protein (injection)
Chronic lung disease
-
P-II
In-house
TAK-609/SHP609
<->
Recombinant human
iduronate-2 -sulfatase for intrathecal administration (injection)
Hunter syndrome central nervous system (“CNS”)
U.S.
EU
P-II
P-II
In-house
cTAK-611/SHP611
<->
Recombinant human
arylsulfatase A (injection)
Metachromatic leukodystrophy
-
P-I/II
In-house
TAK-754/SHP654
<->

Gene therapy to restore
endogenous FVIII expression
Hemophilia A
-
P-I/II
In-license
(Askepios Biopharmaceutical, Inc.)

TAK-531/SHP631
<->

Fusion protein of iduronate-2-sulfatase+antibody (injection)
Hunter syndrome CNS
-
P-I
In-license
 (ArmaGen, Inc.)

TAK-834/SHP634
<->
NATPARA (U.S.), NATPAR (EU)
Parathyroid hormone (injection)
Hypoparathyroidism
Japan
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.

32




Neuroscience
In neuroscience, we aim to bring innovative medicines to patients suffering from neurologic and psychiatric diseases for whom there are no treatments available. We are expanding our presence in psychiatric diseases through continued investment in TRINTELLIX for major depressive disorder and the ADHD portfolio acquired from Shire. We are also building our pipeline in neurology (e.g., Alzheimer's disease, Parkinson's disease) and selected rare CNS diseases through a combination of in-house expertise and collaboration with partners.
Our neuroscience pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:
Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
Lu AA21004
<vortioxetine>
TRINTELLIX
Multimodal anti-depressant
(oral)
Major depressive disorder
Japan
Filed (September 2018)
In-license
(H. Lundbeck
A/S)
TAK-815/SHP615
<midazolam>
BUCCOLAM (EU)
GABA Allosteric Modulator
(oral)
Status epilepticus (seizures)
Japan
P-III
In-house
TAK-831
<->
D-amino acid oxidase (“DAAO”)
inhibitor (oral)
Negative symptoms and/or cognitive impairment associated with schizophrenia
-
P-II(a)
In-house
TAK-935
<->
CH24H inhibitor
(oral)
Rare pediatric epilepsies
-
P-II(a)
In-house (Co-development with Ovid Therapeutics)
WVE-120101
<->
mHTT SNP1 antisense oligonucleotide
(injection)
Huntington's disease
-
P-I/II
In-license
(Wave Life
Sciences Ltd.)
WVE-120102
<->
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
 MEDI1341
<->
Alpha-synuclein antibody
(injection)
Parkinson's disease
-
P-I
In-license
(AstraZeneca plc)
TAK-418
<->
LSDl1 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
_____________
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.
Plasma-derived therapies
We acquired our plasma derived therapies business and pipeline through our acquisition of Shire. In plasma-derived therapies, we focus on developing products which are essential for effectively treating patients with a variety of rare, life-threatening, chronic and genetic diseases across the world.

33




Our plasma-derived therapies pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:
Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
TAK-616/SHP616
<->
CINRYZE
Cl INH inhibits the complement system (injection)
Hereditary angioedema
Japan
P-III
In-house
TAK-771/SHP671
<->
<IG Infusion 10% (Human)w/ Recombinant Human Hyaluronidase>
HYQVIA (U.S., EU)
Immunoglobulin
 (lgG) +
recombinant hyaluronidase replacement therapy (injection)
Pediatric indication for primary immunodeficiency
U.S.
P-III
In-house (Partnership with Halozyme Therapeutics, Inc.)
Chronic inflammatory demyelinating polyradiculoneuropathy
U.S.
EU
P-III
P-III
_____________
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.
Vaccines
In vaccines, we apply innovation to develop solutions to treat infectious diseases such as dengue, zika, norovirus, and polio. To support the expansion of our pipeline and the development of our programs, we entered in partnerships with government organizations (in Japan, the U.S., and Singapore) and leading global institutions. Such partnerships are essential to helping us build critical capabilities necessary to deliver on our programs and realize their full potential.
Our vaccines pipeline as of May 14, 2019 (the date of our annual earnings release), along with notes for major subsequent developments, is as follows:
Development Code
<generic name>
Brand name
(country/region)(1)
Drug class
(administration route)
Indications/additional formulations
Stage by country/region(2)
In-house/In-license
TAK-003
<->
Tetravalent dengue vaccine (injection)
Prevention of the dengue fever caused by dengue virus
-
P-III
In-house
TAK-214
<->

Norovirus vaccine (injection)
Prevention of the acute gastroenteritis caused by norovirus
-
P-II(b)
In-house
TAK-021
<->

EV71 vaccine (injection)
Prevention of hand, food, and mouth disease caused by enterovirus 71
-
P-I
In-house
TAK-426
<->
Zika vaccine (injection)
Prevention of zika virus infection
-
P-I
In-house (Partnership with the Biomedical Advanced Research and Development Authority – U.S. Government)
_____________
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.

34




Availability of Raw Materials
In the ordinary course of business, we purchase raw materials and supplies essential to our operations from suppliers around the world. While 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. 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, although we may not be able to do so without significant difficulty or significant increases in our cost of goods sold. While efforts are made to diversify our sources of components and materials, in certain instances we acquire components and materials from a sole supplier.
We are dependent on human donors for the supply of human plasma. Human plasma is a critical active ingredient in our plasma derived therapies. We source human plasma internally and externally through a distinctive and flexible infrastructure, which provides us an enhanced capability with respect to the consistent delivery of high-quality plasma-based products. We own and operate plasma collection facilities, principally the U.S., Austria, Hungary and Czech Republic, and we also maintain relationships with other plasma suppliers to ensure that we retain the flexibility to meet market demand for our plasma-based therapies.
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 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.
Manufacturing
Following the acquisition of Shire in January 2019, we will continue to operate locally with the ability to access global manufacturing and distribution networks as required.
The manufacture of our products is highly regulated by governmental health authorities around the world, including the FDA, EMA and PMDA. Furthermore, many of our products involve technically complex manufacturing processes or may require a supply of highly specialized raw materials.
We manufacture certain of our products in our own facilities worldwide. In addition, we source certain other of our products from third-party contract manufacturers. We have a network for over 300 contract manufacturers which support approximately 30% of our products in different capacities such as active pharmaceutical ingredients production and sourcing, bulk drug product, aseptic fill finish and final packaging. We manage the risks associated with reliance on single sources of production by carrying additional inventories.
Sales and Marketing
Our primary sales and marketing activities are organized around United States, Japan Pharma, Europe-Canada (“EUCAN”) and Emerging Markets. These business units make focused investments that support growth potential in the market and enhance efficiency.
The United States is the largest pharmaceutical market in the world. The United States business unit focuses on recently approved products such as ENTYVIO, TRINTELLIX, ADYNOVATE, and TAKHZYRO as well as continuing to grow more established products such as VYVANSE, ADVATE and GAMMAGARD LIQUID. These and other principal products are supported by significant marketing and sales force promotion.
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 EUCAN business unit focuses on a 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.
The Emerging Markets business unit focuses on maximizing growth potential in areas across Asia Pacific, Greater China, Latin America, Near East, Middle East and Africa and Russia/ CIS.
Intellectual Property
An important part of our business strategy is to protect our products and technologies using patents and trademarks, to the extent available. We rely on trade secrets, proprietary know-how, technological innovations and contractual arrangements with third parties to maintain and enhance our competitive position. Our commercial success depends, in part, upon our ability to obtain and enforce strong patents, to maintain trade secret protection, to operate without infringing the proprietary rights of others and to comply with the terms of licenses granted to it. 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, the protection of intellectual property plays an important role in the return of investments for research and development of a new drug.

35




We seek patent protection for proprietary technology whenever possible in the U.S., Japan and major European countries. Where practicable, we seek patent protection in other countries on a selective basis. In all cases, we endeavor to either obtain patent protection itself or support patent applications through licensors. Patents are our primary means of protecting the technologies we use. Patents provide the holder with the right to exclude others from using an invention related to a pharmaceutical product. 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.
Our low molecule products (small molecules) are mainly protected by substance patents. While the expiration of a substance patent usually results in a loss of market exclusivity for the protected pharmaceutical products, commercial benefits may continue to be protected by non-substance patents such as patents relating to the use of such substance, patents relating to the method of use of such substance, patents relating the manufacturing method of such substance, and patents relating to the new composition or formulation of such substance. The products can be also protected by regulatory data protection under relevant law in each country even if the substance patent expired. While our biologics products can and may be protected by one or more substance patents, certain products may be protected by non-substance patents and/or regulatory data protection. However, for biologics, patent protection may be less important than for traditional pharmaceutical products, as similar products for the same indication and/or biosimilars may be developed and marketed by competitors without infringing on our patents.
In the United States, 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 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 for a period of five years for a new chemical entity, or seven years for an orphan drug. Market exclusivity prohibits any marketing of the same drug for the same indication.
In Japan, a patent can be issued for active pharmaceutical ingredients by the Japan Patent Office (“JPO”). 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.
In the EU, patent applications may be filed in the European Patent Office (“EPO”) or in a 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. Pharmaceutical patents covering an approved medicinal product 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 Medicines Agency or the National 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 SPC relates to a medicinal product for children for which data has been submitted according to a Pediatric Investigation Plan ("PIP"). The post-grant phase of patents, including the SPC system, is currently administered on a country-by-country basis under national laws. Therefore, although regulations concerning patents and SPCs have been created at EPO and EU level, respectively, due to different national implementation they may not always lead to the same result, for example, if challenged at National Courts in the various EU countries. 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” rule 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 for the concerned drug. However, the additional one-year extension is only available if either no therapy exists for the new indication or if the concerned product provides for the new indication a "significant clinical benefit over existing therapies". 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 for completion of a PIP.
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. Our Global General Counsel is responsible for the oversight of our Intellectual Property operations, as well as our legal 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
securing and protection of intellectual property rights around the world, including in emerging markets.

36




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.
In the regular course of business, our patents may be challenged by third parties. We are party to litigation or other proceedings relating to intellectual property rights. Details of material ongoing litigation are provided in Note 32 to our audited consolidated financial statements included in this annual report.
The following table describes our outstanding substance patents and the regulatory data protection (“RDP”) (US and EU) or re-examination period (“RP”) (Japan) for the indicated product by territory and expiry date. The table includes RDP or RP information only if the protection provided by regulatory exclusivity exceeds the patent expiry. Patent term extensions (“PTE”), supplemental protection certificates (“SPC”), and pediatric exclusivity periods (“PEP”) are reflected in the expiry dates to the extent they have been granted by the issuing authority. For PTE’s, SPC’s, and PEP’s in which the application is in process but not yet granted, the extended expiry is separately provided.
Our biologic products may face or already face competition from companies who produce similar products for the same indications, and/or biosimilars, regardless of expiry dates below. Certain of the European patents are the subject of supplemental protection certificates that provide additional protection for the product in certain countries beyond the dates listed in the table.
Our product
Japan expiry dates(1)(2)
U.S. expiry dates(1)
 EU expiry dates(1)
GI:
 
 
 
ENTYVIO
Patent: —



RP: July 2026(2)
Patent: September 2021



RDP: May 2026
Patent: August 2017 (Extended expiry of August 2022 in certain countries)

RDP: May 2024
PANTOPRAZOLE
Patent: —
Patent: —
Patent: —
DEXILANT
Not commercialized
Patent: —
Patent: —
TAKECAB(3)
Patent: August 2031
Patent: —(3)
Patent: —(3)
AMITIZA(4)
Patent: —(4)
Patent: May 2021(5)
Not commercialized
GATTEX/REVESTIVE
Patent: —  
Patent: October 2020(6)

Patent: — 

RDP: September 2024
LIALDA/MEZAVANT(3)
Patent: — (3)

RP: September 2022(2)
Patent: —
Patent: —
Rare Diseases
 
 
 
VPRIV
Patent: —

RP: July 2024(2)
Patent: —
Patent: —

RDP: August 2022
ELAPRASE
Patent: —
Patent: September 2019
Patent: —
REPLAGAL
Patent: —
Not commercialized
Patent: —
NATPARA
Patent: —
Patent: —

RDP: January 2027
Patent: —

RDP: April 2029
FIRAZYR
Patent: —

RP: September 2028(2)
Patent: July 2019
Patent: —

RDP: July 2020
ADVATE
Patent: —
Patent: —
Patent: —
ADYNOVATE
Patent: January 2026
Patent: February 2026

RDP: November 2027
Patent: January 2028 if granted

RDP: January 2028
FEIBA(7)
Patent: —
Patent: —
Patent: —
HEMOFIL(7)
Not commercialized
Patent: —
Not commercialized
IMMUNATE(7)
Patent: —
Not commercialized
Patent: —
IMMUNINE(7)
Not commercialized
Not commercialized
Patent: —
TAKHZYRO
January 2031


Extended expiry of November 2034 if PTE granted
December 2031, February 2032, March 2032

Extended expiry of August 2032 if PTE granted
January 2031


Extended expiry of January 2036 if SPC granted

37




Our product
Japan expiry dates(1)(2)
U.S. expiry dates(1)
 EU expiry dates(1)
KALBITOR
Not commercialized
December 2023
Not commercialized
CINRYZE(7)
Patent: —
Patent: —

RDP: October 2020
Patent: —
GAMMAGARD LIQUID(7)
Not commercialized
Patent: —
Patent: —
ALBUMIN IN GLASS(7)
Not commercialized
Patent: —
Patent: —
HYQVIA(7)
Not commercialized
Patent: —

RDP: September 2026
Patent: —

RDP: May 2024
CUVITRU(7)
Not commercialized
Patent: —

RDP: September 2028
Patent: —

RDP: July 2027
FLEXBUMIN(7)
Not commercialized
Patent: —
Patent: —
Oncology:
 
 
 
LEUPLIN/ENANTONE
Patent: —

RP: September 2019(2)(8)
Patent: —
Patent: —
VELCADE(3)
Patent: —(3)
Patent: —
Patent: —(3)
NINLARO
Patent: July 2031
Patent: August 2027

Extended expiry of November 2029 if PTE granted
Patent: November 2031
ADCETRIS(4)

Patent: April 2022, April 2026 (9)
Patent: —(4)
Patent: October 2027
ALUNBRIG
Patent: May 2029

Extended expiry of February 2033 if PTE granted
Patent: July 2030

Extended expiry of April 2031 if PTE granted
Patent: May 2029

Extended expiry of November 2033 if SPC granted
ICLUSIG(3) 
Patent: —(3) 
Patent: January 2027
Patent: —(3)
VECTIBIX(4)
Patent: August 2022
Patent: —(4)
Patent: —(4)
Neuroscience:
 
 
 
TRINTELLIX (4)

Patent: October 2022

Extended expiry of October 2027 if PTE granted
Patent: June 2026

Extended expiry of December 2026 if PTE granted
Patent: —(4)
VYVANSE
Patent: June 2024

Extended expiry of June 2029 if PTE granted

RP: March 2027(2)
Patent: February 2023
Patent: June 2024 (Extended expiry of February 2028 or March 2029 in certain countries)
ADDERALL XR
Not commercialized
Patent: —
Not commercialized
ROZEREM
Patent: March 2022
Patent: July 2019
Not commercialized
REMINYL
Patent: —
Patent: —
Patent: —
INTUNIV
Patent: —

RP: March 2025(2)
Patent: —
Patent: —

RDP: September 2025
Other:
 
 
 
NESINA
Patent: April 2028
Patent: June 2028
Patent: September 2028
ULORIC(4)
Patent: —(4)
Patent: —
Patent: —(4)
COLCRYS
Not commercialized
Patent: —
Not commercialized
LOTRIGA(4)
Patent: —

RP: September 2020(2)
Patent: — (4)



Patent: — (4)



AZILVA
Patent: —

RP: October 2021(2)
Not commercialized
Not commercialized
_____________
Notes:

38




(1)
A “-” within the table indicates the substance patent is expired or not applicable.
(2)
In Japan, an application for a generic product is filed after the re-examination period ends, and the product is listed in the approval and drug price listing after a regulatory review. Therefore, the generic product would enter the market after a certain period of time from the expiry of the re-examination period.
(3)
This product is not sold by Takeda in all regions because of out-licensing agreements to third parties.
(4)
This product is not sold by Takeda in all regions because of in-licensing agreements from third parties exclusive to certain regions. See “-Business Overview” principal products descriptions and “-Licensing and Collaboration” for further information on the licensing agreements.
(5)
Generic may be introduced after January 2021 (or earlier under certain circumstances) based on a settlement with an ANDA filer.
(6)
Generic may be introduced after March 2023 based on a settlement with an ANDA filer.
(7)
Relates to plasma-derived therapies products.
(8)
LEUPLIN/ENANTONE has a re-examination period in Japan for formulation(6M) through September 2019.
(9)
Generic/biosimilar may be introduced after July 2026 dependent on when access to the U.S. or European market is available.


Licensing and Collaboration
In the ordinary course of business, we enter into arrangements for licensing and collaboration for the development and commercialization of products with third parties. Our business does not materially depend on any one of these arrangements. Instead they form a portion of our strategy and give us the ability to leverage a mix of internal and external resources to develop and commercialize new products. Certain of the agreements which that 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 commercialization around the world (other than the U.S. 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 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 March 31, 2019, our aggregate potential development and commercial milestone payments under the ADCETRIS collaboration were $47.5 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 U.S. TRINTELLIX has not yet been launched in Japan. Under the agreement, we and Lundbeck have agreed to jointly develop the relevant compounds, with most 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 the agreement may be terminated by mutual decision of the parties or for cause. As of March 31, 2019, our aggregate potential development and commercial milestone payments under the TRINTELLIX collaboration were $130.0 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 March 31, 2019, our aggregate potential commercial milestone payments under the AMITIZA collaboration were $50.0 million.
Our other research and development licensing and collaboration arrangements include, but are not limited to, the following:
Partner
Country
Description of collaboration
Oncology:
 
 
Adimab LLC
U.S.
Agreement for the discovery, development and commercialization of three monoclonal antibodies and three CD3 Bi-Specific antibodies for oncology indications.
Centre d’Immunologie de Marseille-Luminy
France
Collaboration agreement to bring together expertise of Bernard Malissen group in innate biology with our BacTrap capabilities to identify novel targets and pathways in myeloid cells.
ASKA Pharmaceutical Co.
Japan
Licensing agreement to grant exclusive commercialization rights for uterine fibroids and exclusive development and commercialization rights for endometriosis for Japan to maximize the product value of relugolix (TAK-385).

39




Partner
Country
Description of collaboration
Crescendo Biologics Ltd.
UK
Collaboration and licensing agreement for the discovery, development and commercialization of Humabody®-based therapeutics for cancer indications.
Exelixis, Inc.
U.S.
Exclusive licensing agreement to commercialize and further clinical development of cabozantinib in Japan. We receive exclusive commercial rights for all potential future cabozantinib indications in Japan, including advanced renal cell carcinoma, for which cabozantinib is marketed in the U.S. and EU as CABOMETYX™ tablets.
GammaDelta Therapeutics Ltd. ("GammaDelta Therapeutics")
UK
Collaboration agreement to develop GammaDelta Therapeutics' novel T cell platform based on the unique properties of gamma delta T cells derived from human tissues. The companies intend to use this novel platform to discover and develop new immunotherapies in oncology.
HaemaLogiX Pty. Ltd.
Australia
Research collaboration and licensing agreement for the development of new therapeutics to novel antigens in multiple myeloma.
Heidelberg Pharma GmbH
Germany
Antibody-drug-conjugate ("ADC") research collaboration on two targets and licensing agreement (α-amanitin payload and proprietary linker).
ImmunoGen, Inc. ("ImmunoGen")
U.S.

Licensing agreement for exclusive rights to use ImmunoGen's ADC technology to develop and commercialize targeted anticancer therapeutics for up to two undisclosed targets.
Maverick Therapeutics Inc. (“Maverick”)
U.S.
Collaboration agreement for the development of Maverick’s T cell engagement platform created specifically to improve the utility of T cell redirection therapy for the treatment of cancer. Under the agreement, we have the exclusive right to purchase Maverick after five years.
Myovant Sciences Ltd. (“Myovant”)
Switzerland
We granted Myovant an exclusive, worldwide license (excluding Japan and certain other Asian countries) to relugolix (TAK-385) and an exclusive, worldwide license to MVT-602 (TAK-448).
Memorial Sloan Kettering Cancer Center
U.S.
Alliance to discover and develop novel chimeric antigen receptor T (“CAR-T”) cell products for the potential treatment of hematological malignancies and solid tumors. This partnership pursues the development of therapies that redirect T cell immunity against liquid or solid tumors.
Molecular Templates, Inc. (“MTEM”)
U.S.
Collaboration agreement related to oncology drug discovery programs. The collaboration will apply MTEM’s engineered toxin bodies technology platform to potential therapeutic targets. In September 2018, this collaboration was expanded for the joint development and commercialization of CD38-targeted engineered toxin bodies for the treatment of patients with diseases such as multiple myeloma.
National Cancer Center of Japan
Japan
Partnership agreement with the National Cancer Center of Japan to develop basic research to clinical development by promoting exchanges among researchers, physicians, and others engaged in anti-cancer drug discovery and cancer biology research.
Nektar Therapeutics (“Nektar”)
U.S.
Collaboration agreement to explore the combination of Nektar’s lead immuno-oncology candidate, the CD122-biased agonist NKTR-214, with five oncology compounds from our cancer portfolio.
Noile-Immune Biotech Inc. ("Noile-Immune")
Japan
Collaboration agreement to develop next generation CAR-T cell therapy. We have exclusive options to obtain licensing rights for the development and commercialization of Noile-Immune’s pipeline and products resulting from this partnership.
Shattuck Labs Inc. ("Shattuck")
U.S.
Collaboration agreement to explore and develop checkpoint fusion proteins using Shattuck’s Agonist Redirected Checkpoint platform that have the potential to become highly differentiated, next-generation immunotherapies. We will hold options for exclusive global development and commercialization rights for up to four molecules resulting from the collaboration.
GlaxoSmithKline plc
UK
Exclusive licensing agreement to develop and commercialize novel cancer therapy niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea, Taiwan, Russia and Australia.
Teva Pharmaceutical Industries Ltd. ("Teva")
Israel
Multi-target discovery collaboration agreement for access to Teva’s attenukine platform including a license to TEV-48573, a CD38 targeted antibody fused with attenuated interferon alpha for the treatment of multiple myeloma.
GI:
 
 
Ambys Medicines (“Ambys”)
U.S.
Partnership to collaborate on transformative therapies for the treatment of serious liver diseases. Ambys is applying novel modalities, cell and gene therapy to restore liver function and prevent the progression to liver failure for diseases that are untreatable or poorly treated today. Under the terms of the agreement, we receive an option to ex-U.S. commercialization rights for the first four products that reach an investigational NDA.
Arcturus Therapeutics, Inc.
("Arcturus")
U.S.
Agreement to develop RNA-based therapeutics for the treatment of non-alcoholic steatohepatitis and other gastrointestinal related disorders using Arcturus' wholly-owned LUNA lipid-meditated delivery systems and UNA Oligomer chemistry.
Beacon Discovery (“Beacon”)
U.S.
Multi-year drug discovery collaboration on a few G-protein coupled receptors ("GPCRs") that play an important role in the pathology of gastrointestinal disorders. The agreement grants us worldwide rights to develop, manufacture and commercialize products resulting from the collaboration.

40




Partner
Country
Description of collaboration
Cour Pharmaceutical Development Company, Inc. (“Cour”)
U.S.
Agreement to research and develop novel immune modulating therapies for the potential treatment of celiac disease and other gastrointestinal disease using Cour's Tolerizing Immune Modifying nano Particle ("TIMP") platform to co-develop TIMP-Gliadin.
Enterome Bioscience SA
France
Agreement for a strategic drug discovery collaboration to research and develop potential new therapeutics directed at microbiome targets thought to play crucial roles in gastrointestinal disorders, including IBDs such as ulcerative colitis and motility disorders such as irritable bowel syndrome. The agreement includes a global license and co-development of EB8018/TAK-018 in Crohn's disease.
Finch Therapeutics Group, Inc. (“Finch”)
U.S.
Global collaboration agreement to jointly develop FIN-524, a live biotherapeutic product composed of cultured bacterial strains linked to favorable clinical outcomes in studies of microbiota transplantations in IBD. We obtain the exclusive worldwide rights to develop and commercialize FIN-524 and rights to follow-on products in IBD. We and Finch may elect to extend this collaboration to additional and related indications on similar terms.
Hemoshear Therapeutics, LLC ("Hemoshear")
U.S.
Collaboration agreement for novel target and therapeutic development for liver diseases, including nonalcoholic steatohepatitis. We will receive exclusive access to Hemoshear’s proprietary disease modeling platform to discover and develop best-in-class therapeutics for specific liver diseases.
Janssen Pharmaceuticals, Inc.
Belgium
Exclusive license agreement to develop and market prucalopride as a treatment for chronic constipation in the U.S. Motegrity, approved in December 2018.
NuBiyota LLC (“NuBiyota”)
Canada
Agreement for the development of Microbial Ecosystem Therapeutic products for GI indications with a high unmet medical need. We will collaborate with NuBiyota to advance oral microbial consortia products developed by using NuBiyota’s microbiome platform for GI indications.
PvP Biologics, Inc. (“PvP”)
U.S.
Global agreement for the development of KumaMax, a novel enzyme designed to break down the immune-reactive parts of gluten in the stomach. We will provide financing for PvP to conduct research and development through Phase I proof-of-principle studies and obtain an exclusive option to acquire PvP following receipt of a pre-defined data package.
Samsung Bioepis Co, Ltd
South Korea
Strategic collaboration agreement to jointly fund and co-develop multiple novel biologic therapies in unmet disease areas. The program’s first therapeutic candidate is TAK-671, which is intended to treat severe acute pancreatitis.
Theravance Biopharma Inc
Ireland
Global license, development and commercialization agreement for TD-8954, a selective 5-HT4 receptor agonist being investigated for potential use in the treatment of GI motility disorders, including enteral feeding intolerance (“EFI”). TD-8954 is being developed for the short-term use with EFI to achieve early nutritional adequacy in critically ill patients at high nutritional risk, an indication for which the compound received the FDA Fast Track Designation.
UCSD/Fortis Advisors LLC
U.S.
Technology license to develop oral budesonide formulation (TAK-721/SHP621) for treatment of eosinophilic esophagitis.
Rare diseases:
 
 
AB Biosciences, Inc.
U.S.
Research collaboration agreement to potentially develop assets for rare disease with pan-receptor interacting molecules targeted for specific immunological conditions with a focus on autoimmune modulated inflammatory diseases.
ArmaGen, Inc.
U.S.
Worldwide licensing and collaboration agreement to develop AGT-182 (TAK-531/SHP631), an investigational enzyme replacement therapy for potential treatment of both the central nervous system ("CNS") and somatic (body-related) manifestations of Hunter syndrome.
Asklepios Biopharmaceutical, Inc.
U.S.
Agreement for multiple research and development collaborations using FVIII gene therapy for the treatment of hemophilia A and B.
BioMarin Pharmaceutical Inc.
U.S.
Agreement for the in-license of enabling technology for the exogenous replacement of iduronate-2-sulfatase with Idursulfase-IT in patients via direct delivery to the CNS for the long-term treatment of Hunter syndrome in patients with cognitive impairment in order to slow progression of cognitive impairment (TAK-609/SHP609).
GlaxoSmithKline plc (“GSK”)
UK
In-license agreement between GSK and University of Michigan for TAK-620/SHP620 (marabivir) in the treatment of human cytomegalovirus.
Harrington Discovery Institute at University Hospitals in Cleveland, Ohio
U.S.
Collaboration agreement for the advancement of medicines for rare diseases.
IPSEN
France
Purchase agreement to develop Obizur for the treatment of Acquired Hemophilia A, including for patients with Congenital Hemophilia A with inhibitors indication in elective or emergency surgery.
KM Biologics Co., Ltd.
Japan
Collaboration agreement to jointly development TAK-755/SHP655 to overcome the ADAMTS13 deficiency.
NanoMedSyn
France
Pre-clinical research collaboration agreement to evaluate a potential enzyme replacement therapy using NanoMedSyn's proprietary synthetic derivatives named AMFA.

41




Partner
Country
Description of collaboration
Novimmune SA
Switzerland
Agreement for the exclusive worldwide rights to develop and commercialize an innovative, bi-specific antibody in pre-clinical development for the treatment of hemophilia A.
Rani Therapeutics
U.S.
Research collaboration agreement to evaluate a micro tablet pill technology for oral delivery of FVIII therapy in hemophilia.
Ultragenyx Pharmaceutical Inc.
U.S.
Collaboration agreement to develop and commercialize therapies for rare genetic diseases.
Xenetic Biosciences, Inc.
U.S.
Exclusive research and development license agreement for PolyXen delivery technology for hemophilia factors VII, VIII, IX, X.
Neuroscience:
 
 
AstraZeneca plc ("AstraZeneca")
UK
Collaboration agreement to jointly develop and commercialize MEDI1341, an alpha-synuclein antibody currently in development as a potential treatment for Parkinson’s disease. AstraZeneca will lead Phase I development while we will lead future clinical development activities. The companies will share equally future development and commercialization costs as well as any future revenues.
Denali Therapeutics Inc. ("Denali")
U.S.
Strategic option and collaboration agreement to develop and commercialize up to three specified therapeutic product candidates for neurodegenerative diseases incorporating Denali’s antibody transport vehicle platform for increased exposure of biotherapeutic products in the brain.
Mindstrong Health
U.S.
Collaboration to explore development of digital biomarkers for selected mental health conditions, in particular schizophrenia and treatment-resistant depression.
Ovid Therapeutics Inc. ("Ovid")
U.S.
Agreement to clinically develop and commercialize a novel, potent and highly selective CH24H inhibitor, in rare pediatric epilepsies (TAK-935). We received equity in Ovid and may be eligible to receive certain milestone payments based on the advancement of TAK-935. We will lead commercialization in Japan and have the option to lead commercialization in Asia and other selected geographies. Ovid will lead clinical development activities and commercialization of TAK-935 in the United States, Europe, Canada and Israel.
StrideBio Inc.
U.S.
Collaboration and license agreement to develop in vivo Adeno-Associated Virus (“AAV”) based therapies for Friedreich’s Ataxia and two additional undisclosed targets.
Wave Life Sciences Ltd.
Singapore
Research, development and commercial collaboration and multi-program option agreement to develop antisense oligonucleotides for genetically-defined neurological diseases. The first component of the collaboration will focus on programs targeting Huntington’s disease, amyotrophic lateral sclerosis, frontotemporal dementia and spinocerebellar ataxia type 3. The second component of the collaboration provides us with the rights to exclusively license multiple preclinical programs targeting other neurological disorders including Alzheimer’s disease and Parkinson’s disease.
Plasma derived therapies:
 
Halozyme Therapeutics, Inc. (“Halozyme”)
U.S.
In-license agreement for Halozyme’s proprietary ENHANZE™ platform technology to increase dispersion and absorption of HyQvia. On-going development work for a US pediatric indication to treat primary and secondary immunodeficiencies and a Phase 3 indication in Chronic Inflammatory Demyelinating Polyradiculoneuropathy.
Kamada Ltd.
Israel
In-license agreement to develop and commercialize Alpha-1 proteinase inhibitor (Glassia); Exclusive supply and distribution of Glassia in the US, Canada, Australia and New Zealand; Development of protocol for post market commitment trial ongoing.
Vaccines:
 
 
Biological E. Limited
India
We agreed to transfer existing measles and acellular pertussis vaccine bulk production technology to develop low-cost combination vaccines for India, China and low- and middle-income countries.

U.S. Government - The Biomedical Advanced Research and Development Authority ("BARDA")
U.S.
Partnership to develop a Zika vaccine (TAK-426, our Zika vaccination candidate) to support the Zika response in the U.S. and affected regions around the world. Selected by BARDA, a division of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”), within the U.S. Department of Health and Human Services.
Zydus Cadila
India
Partnership agreement to address the global threat of chikungunya and develop a chikungunya vaccine an emerging infectious disease in Africa, Asia and the Indian subcontinent.
Other / Multiple Therapeutic Areas:
 
 
Bridge Medicines
U.S.
Partnership with Tri-Institutional Therapeutics Discovery Institute, Bay City Capital and Deerfield Management in the establishment of Bridge Medicines. Research projects accepted into the Tri-Institutional Therapeutics Discovery Institute will be able to graduate to Bridge Medicines, where they will be given financial, operational and managerial support to move seamlessly from validating proof-of-concept studies to clinical trials.
Center for IPS Cell Research Application, Kyoto University
Japan
Ten-year collaboration and establishment of a joint research program to develop clinical applications of induced pluripotent stem cells in therapeutic areas including cancer, heart failure, diabetes mellitus, neuro-degenerative disorders and intractable muscle diseases.

42




Partner
Country
Description of collaboration
HiFiBiO Inc.
U.S.
Collaboration for functional therapeutics high-throughput antibody discovery platform that enables identification of antibodies for rare events, for discovery of therapeutic antibodies for GI and Oncology therapeutic areas.
HitGen Ltd.
("HitGen")
China
Agreement that HitGen will apply its advanced technology platform, based on DNA-encoded library design, synthesis and screening, to discover novel leads which will be licensed exclusively to us.
lsogenica Ltd.
("Isogenica")
UK
Agreement with Isogenica for access to a sdAb (single-domain antibody) platform to generate a toolbox of VHH (Variable domain of Heavy chain of Heavy chain antibody) for various immune cells, and we are targeting pathway validation and pipeline development across our GI and Oncology portfolio.
Numerate, Inc.
U.S.
Agreement for joint-discovery programs aimed at identifying clinical candidates for use in our core therapeutic areas, namely GI, oncology and neuroscience.
Portal Instruments, Inc.
("Portal")
U.S.
Collaboration with Portal to develop and commercialize Portal’s needle-free drug delivery device for potential use with our investigational or approved biologic medicines.
Recursion Pharmaceuticals
U.S.
Agreement to provide pre-clinical candidates for our TAK-celerator™ development pipeline.
Schrödinger, LLC ("Schrödinger")
U.S.
Multi-target research collaboration combining Schrödinger's in silico platform-driven drug discovery capabilities with our deep therapeutic area knowledge and expertise in structural biology.
Seattle Collaboration
U.S.
Research alliance, Seattle Partnership for Research on Innovative Therapies (“SPRInT”), aiming to accelerate the translation of Fred Hutchinson Cancer Research Center’s and University of Washington’s cutting-edge discoveries into treatments for human disease, with a focus on GI, oncology and neuroscience.
Stanford University
U.S.
Collaboration with Stanford University to form the Stanford Alliance for Innovative Medicines (“Stanford AIM”) to develop innovative treatments and therapies in a more effective manner.
Tri-Institutional Therapeutics Discovery Institute ("Tri-I TDI")
U.S.
Partnered with the Tri-I TDI, a collaboration of academia institution and industry to more effectively develop innovative treatments and therapies.
Competition
 Competition in our market is based on, among other things, product safety, efficacy, convenience of dosing, reliability, availability and prices. Competitors include large international companies whose capabilities cover the entire product creation process from research and development to production and marketing as well as smaller companies that focus on selling generic versions of products for which patent protection and regulatory data protection have lapsed.
We also face competition from generic drugs that enter the market when our patent protection or regulatory exclusivity expires. See “—Intellectual Property” for additional description of our patents. Additionally, we may face competition from our own introduction of new products with similar treatments as our older products.
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.
The following table shows the principal sources of competition for our main 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
GATTEX/REVESTIVE
 
Zorbtive
 
EMD/Serono
 
 
Nutrestore
 
Emmaus LifeSciences

43




Our product
 
Principal competing product
 
Primary manufacturer or distributor
ALOFISEL
 
Autologous tissue, chronic seton usage
Remicade
 
Johnson & Johnson's
Rare Diseases:
 
 
 
 
ADVATE and ADYNOVATE
 
Xyntha/Refacto AF
 
Pfizer and Sobi
 
 
Kogenate
 
Bayer
 
 
Helixate
 
CSL
 
 
Kovaltry
 
Bayer
 
 
Iblias
 
CSL
 
 
Eloctate/Elocta
 
Sanofi and Sobi
 
 
Novoeight
 
Novo Nordisk
 
 
Nuwiq
 
Octapharma
 
 
Afstyla
 
CSL
 
 
Hemlibra
 
Roche
TAKHZYRO
 
Haegarda
Berinert
 
CSL
CSL
REPLAGAL
 
Fabrazyme
Galafold
Fabagal
 
Genzyme
Amicus
Isu Abaxis
VPRIV
 
Cerezyme
Elelyso/uplyso
Zavesca
Cerdelga
Cerezyme
 
Genzyme
Pfizer/Protalix
Actelion
Genzyme
Isu Abxis
Plasma-derived therapies
 
 
 
 
GAMMAGARD LIQUID, KIOVIG
 
Privigen
 
CSL
 
 
Carimune
 
CSL
 
 
Gamunex-C
 
Grifols
 
 
Flebogamma
 
Grifols
 
 
Bivigam
 
Biotest
 
 
Gammaked
 
Kendrion
 
 
Gammaplex
 
BPL
 
 
Octagam
 
Octapharma
 
 
Panzya
 
Octapharma
GAMMAGARD LIQUID, GAMMAGARD SD, HYQVIA, CUVITRU
 
Hizentra
 
CSL
 
 
Gamunex-C
 
Grifols
 
 
Gammanorm
 
Octapharma
FLEXBUMIN and Human Albumin
 
Alburex/Alburx
 
CSL
 
Albumnar
 
CSL
 
 
Plasbumin
 
Grifols
 
 
Albutein
 
Grifols
 
 
Albunorm
 
Octapharma
 
 
Kedbumin
 
Kendrion
Oncology:
 
 
 
 
ADCETRIS
 
chemotherapy regimens
 
ALUNBRIG
 
Xalkori
Zykadia
Alecensa
 
Pfizer
Novartis
Roche

44




Our product
 
Principal competing product
 
Primary manufacturer or distributor
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
VYVANSE
 
generic mixed salts of a single-entity amphetamine product
 
 
generic mixed salts of a single-entity amphetamine product, extended release
 
 
generic methylphenidate, extended release
 
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 regulatory agencies and their regulations govern the testing, approval, production, labeling, distribution, post-market surveillance, advertising, dissemination of information and promotion of our products. The following is a description of the major regulations affecting our products in the United States, Japan and the EU, our largest markets.
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 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 therapeutic interest. In recent years, efforts have been made among the U.S., Japan and the EU to harmonize registration requirements to achieve shorter development and registration times for medical products.
United States
In the United States, 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 U.S. market. When a pharmaceutical company has gathered data to demonstrate a drug’s safety, efficacy and quality, it may file for the drug an 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 evaluations 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

45




response to the deficiencies 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 1984, known as the Hatch-Waxman Act, established the application procedures for obtaining FDA approval for generic forms of brand-name drugs. Under these procedures, 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. 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 (the “ANDAs”), which are the applications for generic drug registrations. 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 persons in the U.S. Market exclusivity provisions are distinct from patent protections and apply equally to patented and non-patented drug products.
While the Hatch-Waxman Act addresses the development and entrance of generic products, the Patent Protection and Affordable Care Act (the "ACA") amended the Public Health Service Act to create an abbreviated licensure pathway for biological products that are demonstrated to be “biosimilar” to or “interchangeable” with an FDA-licensed biological product. The Biologics Price Competition and Innovation Act of 2009 allows for approval of a biosimilar if data substantiates that the product is “highly similar” to an approved and existing biological product. Furthermore, as codified in the 2016 Physician Fee Schedule Final Rule, effective January 1, 2016, the physician reimbursement amount for a biosimilar is based on the average sales price (the “ASP”) of all National Drug Codes (the “NDCs”) assigned to the biosimilars included within the same billing and payment code. Similar to a non-biologic product, an interchangeable biological product may be substituted for the reference product by a pharmacist without the intervention of the health care provider who prescribed the reference product. Generally, there will be a common physician reimbursement limit and Healthcare Common Procedure Coding System (the “HCPCS”) code for those biosimilars referenced to the original product filed under the BLA.
Japan
Manufacturers and sellers of drugs, quasi-drugs, cosmetics, medical devices and regenerative medical products (collectively the “Designated 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”).
Under the Pharmaceutical Act, a person is required to obtain from the Minister the relevant licenses in order to conduct the business of manufacturing, marketing or selling Designated Products.
Applications for the approval of new products are made through the PMDA. 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 (the “GLP”) and the Good Clinical Practice (the “GCP”). Once an application for approval is submitted, a review team is formed, which consists of specialized officials of the PMDA, including chemistry/manufacturing, non-clinical, clinical, and biostatistics. Team evaluation results are passed to the PMDA’s external experts, who then report back to the PMDA. After a further team evaluation, a report is provided to the Minister; the Minister makes a final determination for approval and refers this to the Council on Drugs and Foods Sanitation, which then advises the MHLW on final approvability. Marketing and distribution approvals require a review to determine whether or not the product in the application is suitable as a drug to be manufactured and distributed by a person who has obtained a manufacturing and distribution business license for the type of drug concerned, and to confirm that the product has been manufactured in a plant compliant with Good Manufacturing Practice.
Once the MHLW has approved the application, the company can make the new drug available for physicians to prescribe. After that, the MHLW lists its NHI price within 60 days (or 90 days at the latest) from the approval, and physicians can obtain reimbursement. For some medications, the MHLW requires additional post‑marketing studies (Phase IV) to further evaluate safety and/or to gather information concerning the quality, efficacy, and safety of the product under specified conditions. The MHLW also requires the drug’s sponsor to submit periodic safety update reports. Within three months from the specified re‑examination period, which is designated at the time of the approval of the application for the new product, the company must submit a re‑examination application to enable the drug’s quality, efficacy, and safety to be reassessed against approved labeling by the PMDA.
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.
Under the Pharmaceutical Act, the Minister may take various measures to supervise manufacturing and marketing license holders of Designated Products. The Minister has authority to order manufacturing and marketing license holders to temporarily suspend the marketing, leasing or providing of the Designated Products 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.

46




European Union
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 (the “MRP”) and the Decentralized Procedure (“the DCP”). 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. In the EU, biosimilars are approved under a specialized pathway of the centralized procedure. Similar to the pathway in the U.S., applicants seek and obtain regulatory approval for a biosimilar once the data exclusivity period for the original reference product has expired relying in part on the data submitted for the original reference product together with data evidencing that the biosimilar is “highly similar” in terms of quality, safety and efficacy to the original reference product authorized in the European Economic Area.
Under both the MRP and DCP, the assessment is led by a single EU Member State, called the Reference Member State (the “RMS”), which then liaises with other EU Member States, known as the concerned member states (the “CMSs”). In the MRP, the company first obtains a marketing authorization in the RMS, which is then recognized by the CMSs in 90 days. In the DCP, the application is done simultaneously in the RMS and all CMSs. During the DCP, the RMS drafts an assessment report within 120 days. Within an additional 90 days, the CMSs review the application and can issue objections or requests for additional information. On day 90, each CMS must be assured that the product is safe and effective, and that it will cause no risks to the public health. Once an agreement has been reached, each member state grants national marketing authorizations for the product.
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 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.
Third Party Reimbursement and Pricing
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 due to the fact that government policy in many countries has emphasized and purchasers continue to seek large discounts on pharmaceutical products.
United States
In the United States our sales are subject to various rebate programs and government programs, which vary depending on the type and can have a significant impact on our results. The most significant of these include rebates associated with commercial managed care, Medicaid, Medicare and government programs.
Commercial Managed Care
Payers negotiate rebates to reduce the pricing of products, and use formularies to encourage members to utilize preferred products to manage their costs. Exclusion from a formulary, or a disfavored formulary position, can directly reduce product usage. Consolidation of payers, pharmacy benefit managers and pharmacies may result in increasing rebates and other discounts due to the purchasing power of the consolidated entities. Copay assistance to help patients afford their prescribed drugs may also affect product usage. In recent years, some states such as California and Massachusetts, have

47




passed legislation that limits the use of manufacturer sponsored copay assistance programs, and some payers have limited manufacturer copay assistance benefits to patients.
Medicaid
Medicaid is a state administered program adhering to federal requirements that provides healthcare coverage to eligible low-income adults, children, pregnant women, elderly adults and people with disabilities.
Takeda must pay rebates on purchases of our products under the Medicaid Drug Rebate Program. Takeda must also calculate and report to government agencies the amount of the rebate. The required calculations are complex, and a misrepresentation in the reported information may expose Takeda to penalties. We are required to report any revisions to prior calculations, which could affect the rebate liability for prior quarters.
Medicare
The Medicare Prescription Drug Program has two arms, Medicare Part D and Medicare Part B. Medicare Part D is a voluntary offering available to Medicare beneficiaries through private health insurance plans that contract with the government to deliver this benefit. Medicare Part B covers some drugs, under the medical benefit, that are among the most biologically complex; these medicines are generally administered in a doctor’s office or hospital outpatient setting.    
Takeda offers rebates on purchases of pharmaceutical products covered under Medicare Part D. In addition, Takeda and other pharmaceutical manufacturers are required to provide a discount of 70% on drugs used in the Medicare Part D coverage gap. Takeda must also calculate and report specific prices to government agencies, including Average Sales Price used by the Medicare Part B program. The required calculations are complex, and a misrepresentation in the reported pricing may expose Takeda to penalties.
340B and Federal Agency Discounted Pricing
Takeda must offer discounted pricing for purchases by certain designated health care entities and federal agencies under certain federal programs, including the Public Health Service (PHS) pharmaceutical pricing program (340B) and the Federal Supply Schedule (FSS.)
Health Care System Reform
Any sudden change to the current health care system runs the risk of restricting patient access and placing all parties at financial risk. Spurred by the Administration’s priority to bring down the cost of drug prices, a number of changes to the Medicare Part D and Part B programs are being proposed - these changes may impact patient access and affordability, and may adversely affect our business by impacting demand for, or pricing of, our products. The Trump Administration’s Blueprint to Lower Drug Prices and Reduce Out of Pocket Costs and the resulting regulatory activity has already changed the way companies behave with fewer and lower price increases in 2018 than 2017.
Japan
In Japan, manufacturers of pharmaceutical products must have new products listed on the National Health Insurance (the NHI), a 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 revisions generally once every two years based on 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 previously listed products generally decreases as a result of these price revisions. The Japanese government is currently undertaking healthcare reform initiatives with the 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 from April 1, 2021, which could lead to more frequent downward price revisions. In addition, cost-effectiveness analysis was officially introduced by the MHLW from April 2019. Products on the NHI price list nominated based on pre-defined criteria, such as the innovativeness and the financial impact, will be subject to review, and subject to price adjustments depending on outcome of this review.
European Union
In the EU, our operations are subject to significant price and marketing regulations. Many governments in the EU are introducing healthcare reforms 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 regarding prescription drugs, has been increasing. In addition, prices for marketed products are referenced within and amongst the EU Member States, which further affects 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. In this regard, many countries have health technology assessment organizations that use formal economic metrics such as cost-effectiveness to determine prices, coverage and reimbursement of new therapies, and these organizations are expanding in established and emerging markets. We expect that countries will continue to take aggressive actions to seek to reduce expenditures on drugs and biologics. Similarly, fiscal constraints may also affect the extent to which countries are willing to approve new and innovative therapies and/or allow access to new treatments.

48




Furthermore, the European Union is currently undergoing an analysis of the rewards extended for intellectual property of pharmaceutical products as well as the overall regulatory framework for the approval and commercialization of all medicinal products. This may lead to significant changes in the way drugs are approved and commercialized as well as the duration of exclusivity, in particular for orphan drugs. These changes are likely to affect the market within a 3-5-year timeframe.
Other
Many other countries around the world are also taking steps to control prescription drug prices. For example, in 2017, China - one of our most important Emerging Growth Markets - organized national price negotiations for certain products directly linked to national drug reimbursement, which will apply nationwide both in public and military hospitals. 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 that could reduce prices for specialty medicines, such as biologics and medicines for rare diseases.

C.
Organizational Structure.
We are a holding company and administer our business through a number of subsidiaries worldwide. Information about Takeda’s organizational structure, including a list of our subsidiaries, their country of incorporation and residence and our proportion of ownership interest, is included in Note 29 to the audited consolidated financial statements included in this annual report.
D.
Property, Plant and Equipment.
Our registered head office is located in Osaka, Japan and our global head office is located in Tokyo, Japan. We generally own our facilities or have entered into long-term lease arrangements for them.
As of March 31, 2019, the net book values of the buildings and structures, land, machinery and vehicles and tools, furniture and fixtures we owned were ¥692.5 billion, ¥101.4 billion, ¥335.8 billion and ¥47.1 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, 2019:
Group company
Name of facility (location)
Type of facility
Takeda Pharmaceutical Company Limited
Head Office (Chuo-ku, Osaka and others)
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 Health Innovation Park (Fujisawa, Kanagawa)
Research
Takeda Real Estate Co, Ltd.
Takeda Midosuji Building and others
(Chuo-ku, Tokyo)
Administrative and sales
Nihon Pharmaceutical Co. Ltd.
Osaka Plant and other
(Izumisano, Osaka)
Manufacturing, Research and development
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
Baxalta U.S. Inc
Head Office (Covington, Georgia, U.S.)
Manufacturing, Warehouse, Administrative and sales
Shire Human Genetic Therapies, Inc
Head Office (Lexington, Massachusetts, U.S.)
Manufacturing, Warehouse, Administrative and sales
Baxter AG
Production facility and other (Orth an der Donau, Austria and Vienna, Austria)
Manufacturing, Distribution, Warehouse, Plasma centers and Administrative and sales
Baxalta Bioscience Manufacturing S.a.r.l.
Head Office (Neuchatel, Switzerland)
Manufacturing, Administrative and sales
Shire Pharmaceuticals Ireland Ltd.
Production facility (Dunboyne, Ireland)
Manufacturing
Baxalta Belgium Manufacturing SA
Production facility (Lessines, Belgium)
Manufacturing

49




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.

Item 4A. Unresolved Staff Comments

Not applicable.
ltem 5. Operating and Financial Review and Prospects
You should read the following discussion of our operating and financial review and prospects together with our consolidated financial statements included in Item 18 in this annual report. Our consolidated financial statements are prepared in accordance with IFRS, as issued by the International Accounting Standard Boards (“IASB”). IFRS includes International Accounting Standard (“IAS”) and related interpretations of the committees (SIC and IFRIC).
The following 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 annual report.
A.
Operating Results.
Overview
We have grown both organically and through acquisitions, completing a series of major transactions that have resulted in growth in our areas of therapeutic, geographic and pipeline focus. In particular, our acquisition of Shire in January 2019 strengthened our presence in GI and neuroscience, while providing us with a leading position in rare disease and plasma driven therapies. It also enhanced our research and development pipeline and created a highly complementary, robust, modality-diverse pipeline. Commercially, the Shire Acquisition significantly strengthened our presence in the United States. As a result of the acquisition of Shire, we incurred significant indebtedness to finance the cash portion of the consideration. We plan to de-lever following the Shire Acquisition using cash flows from operations and we are initiating disposals of non-core assets to accelerate the pace of deleveraging and to refocus our business on our key business areas of GI, rare diseases, plasma-derived therapies, oncology, and neuroscience.
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. In the fiscal year ended March 31, 2019, our revenue was ¥2,097.2 billion, our operating profit was ¥205.0 billion.
Factors Affecting Our Results of Operations
Our results are affected by the global industry trends and operating environment as described in Item 4 of this annual report and other factors described below.
Acquisitions
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.
We account for these acquisitions as business combinations and record the assets and liabilities acquired at fair value. Our results are impacted due to the impacts of purchase accounting, which typically includes fair value step-ups of inventory and property, plant and equipment and recognized material intangible assets which result in costs related to unwind of the step up and amortization expense, respectively, in future periods. Our results are also impacted due to additional interest expenses when an acquisition is financed with incremental borrowings.
On January 8, 2019, we acquired Shire for an aggregate consideration of ¥6.21 trillion, of which ¥3,029.4 billion was paid in cash and the remainder mainly in shares of our common stock. We incurred ¥3,295.9 billion in indebtedness in order to finance the cash portion of the consideration, and as a result of the Shire Acquisition assumed ¥1,603.2 billion of indebtedness of Shire which is included in our consolidated statement of financial position. We recorded goodwill of ¥3,087.4 billion and intangible assets of ¥3,899.3 billion in relation to the Shire Acquisition. The acquisition of Shire has significantly changed our business through, among other things, the significant expansion of our product portfolio and geographic presence. Our results will be significantly impacted by the Shire Acquisition with an increase to our revenues, and associated costs, and the impact of the acquisition including incremental amortization expenses related to the acquired intangible assets, incremental cost of sales resulting from the unwinding of the inventory fair value step up, the interest expense associated with the borrowings used to fund the acquisition, and the costs incurred to integrate the

50




business. We are actively engaged in integrating Shire and expect to be able to achieve significant, recurring pre-tax synergies of approximately $2.0 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 rationalization efforts and product manufacturing and supply. We estimate that the realization of these synergies will require non-recurring costs of approximately $3.0 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 have begun initiating the disposal of certain non-core assets and businesses to increase the pace of de-leveraging our debt.
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 was 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.
As a result of our acquisitions, and the impacts described above, our results year over year may not be comparable.
Divestitures
In addition to acquisitions, we divest businesses and product lines to maintain our focus on our key growth drivers and to manage our portfolio and to provide additional cash flow to accelerate the repayment of long-term borrowings.
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. There was no revenue recognized related to Wako Pure Chemical for the fiscal year ended March 31, 2018.
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.
We have communicated our intention to continue to divest businesses that are not core to our operations and to reduce our borrowings with the proceeds. In May 2019, we announced the sale of Xiidra® (lifitegrast ophthalmic solution), which we obtained as part of the Shire Acquisition and the sale of Tachosil™, as described further in Note 33 to our audited consolidated financial statements included in this annual report.
Patent Protection and Generic Competition
For pharmaceutical products in particular, patent protection and/or regulatory exclusivity benefit our results of operations by restricting competition. Newly introduced products, particularly those which treat conditions for which alternative treatments may not be readily available, in particular may significantly contribute to sales. However, even protected products must compete with products of other manufacturers based on efficacy, lack of adverse reactions and price. On the other hand, the loss or expiration of patent protection or regulatory exclusivity with respect to any of our principal products could have a material adverse effect on our results of operations, as generic products, which tend to be quickly adopted once introduced, may enter the market. Some of our principal products face, or are expected to face, considerable competition due to the expiration of patent or other intellectual property protection. 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. In certain cases, generic competitors may successfully challenge the validity of patents, or the manufacturer may decide that the benefits of prematurely launching “at risk” the generic drug outweigh the costs of defending infringement litigation. In situations where the validity of patents or the value of the protection is challenged, we may record impairment losses with respect to the relevant intangible property.
Impact of the Availability of Raw Materials
Our results of operations may be impacted if we are not able to internally or externally source critical raw materials. For example, human plasma is a critical raw material in our plasma derived therapies. Efforts to increase the collection of plasma may include the contracting and regulatory approval of additional plasma collection facilities and plasma fractionation facilitates.  During the year ended March 31, 2019, our results of operations were impacted by the fact that the demand to produce plasma derived therapies was greater than the supply of critical raw material needed.
Foreign Exchange Fluctuations
In the fiscal year ended March 31, 2019, 72.8% of our revenue was from outside of Japan, and we expect this ratio to further increase when we consolidate a full year of Shire results. 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.

51




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. To mitigate the risk exposed by foreign exchange fluctuations, 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.
Periodic Trends
Our revenues, operating profit and net income were lower in the fourth quarter of each of the fiscal years ended March 31, 2017, 2018 and 2019, due mainly to fluctuations in sales in Japan. Japanese pharmaceutical product wholesalers generally control their inventory more tightly towards their fiscal year ends, typically March 31, which 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.
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 when control of the products is passed to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those products. 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. Medicaid and Medicare: 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 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: Customer rebates are offered to purchasing organizations, health insurance companies, managed healthcare 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. We estimate the proportion of recorded revenue that will result in a return by considering relevant factors, including past product returns activity, the estimated level of inventory in the distribution channel and the shelf life of products.
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,

52




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. As of March 31, 2019, we have ¥4,161.4 billion of goodwill and ¥4,860.4 billion of intangible assets which in aggregate represent 65.0% of our total assets.
Intangible assets related to commercially marketed products are amortized using the straight-line method over the estimated useful life, which is based on expected exclusivity period, ranging from three to 20 years. Intangible assets related to in-process research and development (“IPR&D”) product rights are not amortized until the product is approved for sale by regulatory authorities in specified markets. At that time, we will determine the useful life of the asset and begin amortization.
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, or groups of 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 countries 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;
future tax rates;
terminal growth rate; and
discount rate.
Events that may result in the change in cash flows include IPR&D projects which are not successfully developed, and/or commercially marketed products whose value becomes impaired, fail during development, are abandoned or subject to significant delay or do not receive the relevant regulatory approvals. If these events were to occur, we may not realize the future cash flows that we have estimated nor recover the value of the initial or subsequent R&D investments made subsequent to acquisition of the asset project.
Due to changes in these assumptions in subsequent periods, we have recognized impairments and reversal of impairments related to intangible assets during the periods presented. See Notes 11 and 12 to our audited 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 audited consolidated financial statements for sensitivity information related to the most significant assumptions. A significant change in the assumptions in future periods could have a material impact on our consolidated financial statements. As of March 31, 2019, we have net defined benefit liabilities of ¥156.5 billion.
Business Combination – Fair value
Accounting for a business combination requires us to estimate the fair value of the assets acquired and liabilities assumed 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, 2019, the change in fair value of contingent consideration reduced the amount to be paid to us by ¥2.2 billion.
Our estimates are based on our prior experiences and industry knowledge. We believe that our estimates are reasonable, but actual outcomes could differ significantly from our estimates. A significant change in our estimates used to value acquired asset groups or business combinations could result in future write-downs of tangible or intangible assets acquired by us and could, therefore, materially impact our financial position and profitability. If the value of the liabilities assumed by us, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in purchase accounting, we may need to record additional expenses, which could materially impact our financial position and profitability.

53




Legal Contingencies
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. As of March 31, 2019, we have a provision of ¥46.8 billion for outstanding legal cases and other disputes.
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. As of March 31, 2019, we had unrecognized deferred tax benefits of ¥259.4 billion. A change in our assumptions in future periods could have a significant impact on our income tax provision.
Restructuring Costs
We incur restructuring costs associated with planned initiatives to reduce our costs and in connection with the integration of our acquisitions. Our most significant restructuring costs are severance payments and lease termination costs. We establish a provision for restructuring costs when the plan has been approved, the cost can be estimated and the amount is probable of payment. The recognition of restructuring provision requires a number of estimates including timing of payments and the number of individuals that will ultimately remain with the company to receive severance. As a result of these estimates, the actual restructuring costs could differ from our estimates.
We expect to incur additional restructuring costs in the future related to the integration efforts associated with our acquisitions and divestitures. As of March 31, 2019, we have a provision of ¥49.7 billion for restructuring costs. See Note 23 to our audited consolidated financial statements included in this annual report for a further description of our restructuring provisions and the change between periods.




54




Results of Operations
The following table provides selected consolidated statements of income information for the years ended March 31, 2017, 2018 and 2019.
 
For the fiscal year ended March 31, 
 
2017
 
2018
 
2019
 
(billions of yen)
Revenue
¥
1,732.1

 
¥
1,770.5

 
¥
2,097.2

Cost of Sales
(558.8
)
 
(495.9
)
 
(659.7
)
Selling, general and administrative expenses
(619.1
)
 
(628.1
)
 
(717.6
)
Research and development expenses
(312.3
)
 
(325.4
)
 
(368.3
)
Amortization and impairment losses on intangible assets associated with products
(156.7
)
 
(122.1
)
 
(203.4
)
Other operating income
143.5

 
169.4

 
159.9

Other operating expenses
(72.9
)
 
(126.6
)
 
(103.2
)
Operating profit
155.9

 
241.8

 
205.0

Finance income
12.3

 
39.5

 
16.8

Finance expenses
(23.2
)
 
(31.9
)
 
(83.3
)