Earnings Call: Q3 2020

Jan 31, 2020

Thank you very much. My name is Sai. Thank you very much for attending Daiichi Sankyo's Financial Results Conference Call despite your busy schedule. With respect to the financial results for the 2019, we will go through the presentation material. Please see slide page two. This is today's agenda item. We will cover FY twenty nineteen Q3 financial results, FY twenty nineteen forecast and business update in that order. After that, Rumi Takahashi, Director of R and D Division will talk about the R and D update. We would like to have question and answer session after the presentation. Please see page three. First of all, this is the overview of financial results for the 2019. Consolidated revenue rose 7.7% to $757,000,000,000 yen or with 54,000,000,000 yen increase year on year. Cost of sales declined 8,600,000,000.0 yen year on year. S and G expenses increased 9,700,000,000.0 yen while R and D expenses declined 5,600,000,000.0 yen As a result, operating income increased by 60.3% or 58,500,000,000.0 yen to 155,600,000,000.0 yen Profit before taxes increased 62,000,000,000 yen year on year to 160,000,000,000 yen Profit attributable to owners of the company was 134,300,000,000.0 yen year on year increase of 70.4%, which is 55,000,000,000 yen In terms of actual exchange rate, it was 108.67 yen to $1 The yen appreciated by 2.48 yen from the previous fiscal year. €1 was 121.05 yen up 8.44 yen from the previous fiscal year. Please see Slide Page four. This section describes the factors behind the year on year change. Revenue from sales increased 54,000,000,000 yen from the same period last year. The breakdown for each of the main business unit is as follows. First, in the Japanese domestic business including Vaccines and Healthcare, we increased sales. This increase was contributed by direct oral anticoagulant Ulrikciana, anti influenza agent Inavil and the pain treatment agent Tarlysche, which was launched in April. Also sales of the Daiichi Sankyo S. A. Products including authorized generic increased also. Overall sales in Japan increased 29,300,000,000.0 yen Next we will explain our overseas businesses. This section excludes the ForEx impact. Daiichi Sankyo Inc. In The United States sales declined by 4,200,000,000 because of sales decrease of Velcol and Effient, a treatment for hypercholesterolemia and Type two diabetes and antiplatelet agent respectively. On the other hand, sales of American Region Inc. Increased by 11,900,000,000.0 yen because of the growth of iron deficiency anemia treatment agent, Injectafer and Generic Injections. Daiichi Sankyo Europe made 6,400,000,000.0 yen sales increase because of sales expansion of Lixiana despite declines in sales of Omesartan and Effient. Next is about the ASKA business, which is in charge of Asia and Central And South America. In China, sales rose 10,300,000,000 mainly with Kuravit and Alvetech and the ASKA business as a whole sales increased by 14,700,000,000.0 yen In March 2019, we signed contract with AstraZeneca for DS-eight thousand two hundred and one, Torastunivab Dulcetone, and we recognized 8,000,000,000 yen upfront payment and the development milestone associated with approval of The U. S. For the period up to the third quarter. ForEx impact was minus 12,200,000,000.0 yen in total. Next, please see slide Page five. This section presents the factors behind the increase and decrease in operating income. We will explain item by item of the increase in profit of 58,500,000,000.0 yen As explained earlier, sales increased 54,000,000,000 yen including minus 12,200,000,000.0 yen due to the impact of foreign exchange. Next, I'd like to explain expenses excluding the impact of foreign exchange rate and special factors. Cost of sales increased as a result of higher sales revenue, but the cost ratio improved dramatically through the product mix, resulting in 7,700,000.0 yen increase. SG and A expenses increased by 21,400,000,000.0 yen due to the establishment of a cancer business structure in The U. S. Despite the impact of trastuzumab deruxtecan cost sharing with AstraZeneca, R and D expenditure decreased just by 3,700,000,000.0 yen due to cost increase by the enhancement of our oncology project development structure. Cost decreased by a total of 9,100,000,000.0 yen due to the ForEx impact. Special items decreased the cost by 20,800,000,000.0 yen compared to the previous year. Operating profit increased by 40,800,000,000.0 yen excluding the ForEx impact on special items. Page six is a breakdown of special items. For FY twenty nineteen third quarter year to date, we booked 1,300,000,000.0 yen restructuring costs in Supply Chain and 3,800,000,000.0 yen impairment loss for Morpho Bond and Roxibond related intangible assets. But we also had 18,800,000,000.0 yen gain on sales of subsidiary due to the transfer of Takasaki plant and cost decreased by 10,600,000,000.0 yen due to the gain on sales of tangible fixed assets. Therefore, costs fell by 24,300,000,000.0 yen As a result, costs declined by 20,800,000,000.0 yen year on year. Next, on Page seven, let me explain our profit attributable to the owners of the company. As I explained earlier, operating profit increased by 58,500,000,000.0 yen including ForEx impact and special items. Income tax, etcetera, increased just by 6,600,000,000.0 yen as the tax rate declined due to the introduction of the consolidation taxation system. So our quarterly profit attributable to owners of the company rose to 134,300,000,000.0 yen up 55,500,000,000.0 yen year on year. Page eight and nine show our yen based revenue for major business units and major products in Japan. On Page four, I explain the situation of each unit by excluding the ForEx impact, but Page eight and nine show the results including the ForEx impact. Next, I'm going to talk about the revision of our FY 2019 forecast. So please turn to Page 11. We are revising our FY 2019 revenue forecast upward by 15,000,000,000 yen to $970,000,000,000 yen as product sales are increasing steadily in Japan and The United States And also, the timing of The U. S. Approval and the launch for Enhert was earlier than initially expected. As we are expecting cost of sales to increase by 5,000,000,000 yen due to revenue increase, we are making an upward revision of our operating profit by 10,000,000,000 yen to 135,000,000,000 yen Due to the impact of the introduction of the consolidation taxation system, etcetera, we are expecting income taxes, etcetera, to decrease by 10,000,000,000 yen So we are making an upward revision of our full year forecast for profit attributable to owners of the company by 20,000,000,000 yen to 110,000,000,000 yen Next, I will give you a business update. Please turn to Page 13. DS-eight thousand two hundred one was approved in December 2019 at a record speed of first time to human to U. S. Approval just in four years and three months. It has been launched in January under the brand name Enhert. We are delivering this product to patients as a new option for third line settings and beyond. We'd like to accelerate our development not only in The United States but also in other countries and also for other indications as well so that we can deliver this drug to more patients as soon as possible. Page 14 shows a breakdown of DS-eight thousand two hundred one revenue. We had about 20,000,000 yen FY twenty nineteen Q3 year to date product sales in The United States, but is shown as zero due to the rounding of the numbers. Year to date sales totaled 8,100,000,000.0 yen after adding upfront payment and regulatory milestone payment. We are forecasting 12,700,000,000.0 yen revenue for FY 2019, including product sales of nHertz in The United States. For your reference, total consolidation received and receivable was 162,700,000,000.0 yen Next is our R and D update. I'd like to hand over to Head of R and D Division, Wataru Takasaki. This is Takasaki. Today, I'd like to talk about the update of R and D. Slide 16 shows today's content. The Slide 17 is about top line result in gastric cancer trials for DESTINY Gastric one, which had been implemented in Japan and South Korea for DS-eight thousand two hundred and one. This study was controlled double blind study and this is the first study to obtain comparable data with the control group for DS-eight thousand two hundred and one. The results are shown in Slide 18. As we have already issued the press release on January 27, ORR, objective response rate, which is the primary endpoint of the study and in the interim analysis of the secondary endpoint of OS overall survival, the DS8201 treatment group showed statistically significant and clinically meaningful improvements compared with the investigator selected treatment agent group. There are no new safety concerns in this study. For interstitial lung disease, ILD and pneumonitis, most drug related cases are Grade I or II. Grade III occurred in two subjects and Grade four occurred in one subject. No Grade five death was reported. Based on the result of this study, we plan to file for approval in Japan in the 2020. Details of the results are scheduled to be presented at ASCO. Slide 20 is a new R and D strategy introduced on R and D Day in December. Today, I'd like to focus on specialty medicine among alpha. Slide 21 is the medium to long term vision of specialty medicine. Our goal is to provide innovative pharmaceutical products in the Specialty Medicine field for patients suffering from diseases with no effective therapies or therapies which is not sufficient enough. And this is also our overall goal for R and D. I'd like to introduce to you later about the pipeline for rare disease, which has been expanding and from fiscal twenty twenty onward, this they will go into the clinical phases one after another. First of all, we aim to become a world class innovator in rare diseases after FY 2025. In the future, we aim to become the world class innovator in specialty medicine. Slide 22 describes the direction of specialty medicine. We target diseases with high unmet medical needs in the absence of effective therapies. Our policy is to apply various modalities we possess to various etiologies. The target diseases and the target areas are rare diseases with a single gene mutation, diseases with high unmet medical needs such as central nervous system. Today, I'd like to introduce to you a number of rare disease projects. In Slide 23, we're going to introduce project using ELA, which is modified nucleic acid using Daiichi Sankyo's original technology. Our eNA has a higher affinity for DNA and RNA than other nucleic acids. There are also excellent nucleate resistance. Because of these features, we expect strong efficacy. There are six projects using eNA technology including 5,141, which is currently undergoing Phase I and II trials. We expect this technology to become the next platform technology after DXD ADC. Slide 24 is a summary of Duchenne muscular dystrophy, which is a target disease of DS-five thousand one hundred forty one. To achieve the primary efficacy endpoint of DS-five thousand one hundred forty one, we are currently conducting forty eight week dosing study. Top line results are expected to be obtained by the 2020. We will not go into the details of the disease itself. Slide 25 shows the mechanism of action of DS-five thousand one hundred forty one. Patients with DMD have an exon forty four deficiency. DS-five thousand one hundred forty one skip exon 41 during splicing to correct the reading frame and induces production of incompletely functionalized dystrophin proteins. In the twelve week study, clear skipping activity was observed. As mentioned earlier, we are currently confirming whether the primary endpoint can be achieved in the forty eight week study. Slide 26 is an overview of the target disease of DS-four thousand one hundred and eight, glycogen straight disease 1A. We are conducting joint research of DS-four thousand one hundred eight with Kobe Gaku University, the National Center for Child Health and Development and Hiroshima University. Glycogen Stress Disease Type 1a causes fasting hypoglycemia and enlargement of the liver because of a congenital defect in gene function. There is no approved medication for this disease and strict diet is used. Although glycogen storage disease Type 1a is born in one out of one hundred thousand, the number of patients with mutations in the targeted gene of the DS-four thousand one hundred and eight is even more limited. Page 27 shows DS-four 108 mechanism of action. It corrects the aberrant splicing and induces production of normal protein. From Page 28, I'd like to talk about two rare disease projects and one non rare disease project. First on DS-twelve eleven, a tNAB inhibitor. Target disease is pseudoanthoma elasticum or PXC. Due to genetic mutation, this disease causes skin lesions, visual impairments and cardiovascular diseases. No approved medical therapy is currently available. The estimated number of patient is one hundred and sixty thousand in Japan, U. S. And EU5. Phase I study is now ongoing. Page 29 is about DS-six 16, an anti ALK2 antibody, a collaborative research with Saitama Medical University. When this project was adopted for support under cycle program of AIMED in August 2017, we issued a press release to explain. Target disease is Fibrodysplasia ossificans progressive, FOP. Due to mutation of genes responsible for osteogenesis, bones are formed in tissues where bones are not normally formed. Osteogenesis worsens with age and total mobility assistance is usually required in people aged 40 and above. No medical therapy is currently available. This is a very rare disease with the estimated number of about eighty patients in Japan and under three hundred in The United States. Preclinical study is ongoing right now. Page 30 is about DS-seven 11, an anti TLR7 antibody, a collaborative research with the Institute of Medical Science, the University of Tokyo. This is not a rare disease project, but I'd like to explain today as it was adopted for support under cycle program of AIMED in December 2019. Target disease is systemic lupus erythematosus. SLE is an autoimmune disease that causes systemic symptoms such as fever and malaise and inflammation of joints, kidneys and skin. Although an approved drug therapy is available, this is a disease still with high unmet medical needs. Preclinical study is ongoing right now. Page 32 shows upcoming news for three ADCs. The contents are not so different from what we presented during R and D Day in December, but we'd like to make just one correction. During R and D Day, we said that we are planning to make updated data presentation at ASCO this year regarding the progress of Phase I study in combination of DS-eight thousand two and one and evolvimab. But given the progress of the study and the data to be presented, we decided to look for different Congress to present at a more appropriate timing. For the rest, please refer to the details later at your leisure. Page 33 shows upcoming news for ALPHA. No change has been made from before, so please refer to this data. Page 34 and beyond are appended slides, including our R and D major milestones and major R and D pipeline, so please check later. That's all for me. Thank you very much. From now on, we'd like to entertain your questions. Thank you very much. The first question is from Mr. Hashiguchi of Daiwa Securities. Please start. There are three questions. First, you postponed the announcement at ASCO of the combination of eight thousand two hundred and one and nivolumab. Could you comment on that background of what kind of information do you have at this time? Is the information not at the level that anyone agrees it is a good information? The schedule was changed not because of the result, but the schedule itself was not sufficiently scrutinized at the planning stage. That means change of the schedule is not the sign that the result is not really good. You're right. I see. My second question concerns the project using ENA nucleic acid modification technology. I think there is a rather passionate comment that you're hoping this technology becomes the next platform after DXD. When you announced the progress of the Phase I and two studies of 5,141, the lead project in April 2018, I did not have a strong impression that data was so strong. But your response has changed considerably since then due to the consideration of increased dosing or extending the dosing period? REPRESENTATIVE:] Thank you very much for the question. As I explained in the presentation, we have seen good skipping action. It is a factor that has greatly increased our confidence. This is the result of a twelve week study. On the other hand, we are getting a certain level of expectations about the protein, which is the primary endpoint and nonclinical data shows that our DS-five thousand 141 is properly delivered to the heart. With these comprehensive information, we are convinced that this will become our next platform. I think the three points you just mentioned are also mentioned in 2019. The sign you're getting is not better than it was at that time, isn't it? Our data will be accumulated in the future and you will be able to obtain clear data from now on. However, the data for competitors keeping track are emerging and we are convinced that we can exceed them when compared. I see. Finally, the development strategy for October is as follows. I'm afraid I always ask the same question, but will you develop it on your own or collaborate with others? In my understanding both options are being considered as candidates. And when the most of result of Phase one will be available around the time of ASCO, you will think which way you're going. Is this understanding correct? Or have you decided the direction? I am Sai. Mr. Hashiguchi is right. Looking at the data we are seeing in the future, we would like to decide around the summer. That's what we've been thinking about and there is no change about that. Thank you very much. That's all from me. Then we'd like to take the next question. Mr. Sakai from Credit Suisse Securities. Thank you, Ms. Sakai. I have two simple questions. First, the consolidated taxation system was adopted this time. I think this is targeting 100 subsidiaries in Japan. How many companies are covered by this consolidated taxation system? I understand that tax rate became lower because of that, because somewhere you have recorded a deficit. Could you tell us more about the details? As a result of lower tax rate, I think that EPS will change slightly if we expect the tax rate to remain at the same level of 18% for the next fiscal year. First of all, let me confirm whether my understanding is correct. Thank you for your question. The number of domestic subsidiaries under consolidated taxation system is estimated to be nine. Since we can allocate this profit to the loss carryforwards that we had, we booked deferred tax asset this time. And as a result, the tax rate declined. In terms of next year, there is no effect for the next fiscal year. I see. So therefore, the deferred tax assets are being removed from the balance sheet. Deferred tax assets were booked for current fiscal year and included in negative tax expenses. That doesn't happen next year. So there is no tax revenue next year. So does that mean that the tax rate for the next fiscal year will return to about 20% like the rate in fiscal year twenty sixteen? Without special factors, the rate will return to some extent, but we cannot say at this point whether it is 20% or not. I see. It's only in Japan, but it cannot be targeted overseas subsidiaries, isn't it? Yes. It is only for domestic subsidiaries. I see. Another simple question is about eHeart, which made just about 1,800,000,000.0 yen or 2,000,000,000 yen I'm not sure. It was just launched. If but if the start is slow, your competitors are showing some defensive strategies against ENHEART franchise even today. It's like defensive barriers. Have you gotten any feedback from clinicians? REPRESENTATIVE:] I can only make qualitative comments. That is fine. We completed preparations for the full sales. Feedback has been obtained from clinicians and health care institutions and positive results have been received. Therefore, we determined that we had a good start and we want to look at future developments. How many specialized sales reps were employed by Daiichi Sankyo Inc? We refrain from disclosing the number of sales reps. So therefore AstraZeneca input of Manpa will not be disclosed for the time being such as Manpa per hour. We don't disclose such information. I understand. Thank you very much. UNIDENTIFIED Next, Mr. Wakao from Mitsubishi UFJ Morgan Stanley Securities. Thank you. Makao speaking. Thank you. My first question is about third quarter product sales results. I'd like to know more about Interview. Sales were larger compared to the previous year as you're gaining some market share from other companies as well. What was your market share in the third quarter? What's your situation vis a vis your competitors? I believe you're making good progress against FY 2019 plan. What about your outlook for the fourth quarter? REPRESENTATIVE:] As for Interview, between April and December, the market grew year on year. The market expanded more than 20% based on the latest NHI drug price. That's one of the reasons behind. Amid the overall market growth, Innerview, in particular, was doing well and increased its market share. Our market share almost doubled year on year to more than 40%. The market expansion and our market share increase have been the reasons for the good performance of Innerview. If I may add, we launched nebulizer formulation in December. We think this was also a contributing factor. Understood. Sales will be bigger in the January period due to seasonality, so the product is making good progress against the company forecast. Can I understand this way? Yes. Okay. Next on Enhert DS-eight 201 in Japan. You filed your submission for breast cancer in September. As for gastric cancer, you're going to file sNDA in the 2020 in Japan. Should I understand that the timing of approval is going to be earlier for breast cancer? Takasaki speaking. We cannot comment on the sequence or the timing of approval at this moment. DS-eight201 received Sakigake designation for gastric cancer. So I think there can be Sakigake premium. According to the current time line, I think you may be able to aim for it. Do you think that's also a possibility? UNIDENTIFIED Yes. We're negotiating and consulting with the regulatory authorities on gastric cancer under Sakigake review, so we expect some acceleration. But as I said before, we cannot comment on the sequence of approval right now. Okay. Thank you. Next on DS-five141. There were questions earlier, but it was not so clear to me. You have good expectations about 50 one against the two competitive products shown on Page 24. But actually there are other competitors as well such as Wave Life Sciences and Nippon Shinyaku. Nippon Shinyaku, in particular, has good data. Have you seen their data? Do you have good expectations against these competitors? Do you feel your compound is not so bad compared to these products? What you're comparing against was not so clear to me. Earlier, I was talking about the Exon skipping drugs as a comparison. Does that include NS-sixty five data from Nippon Shinnyak as well? As far as we have seen the publicly available information on dystrophin protein induction rate, we don't feel there are strong competitors for us. That's what we mean by our comments earlier. Next, Mr. Yamaguchi from Citigroup Securities. Yamaguchi from Citigroup speaking. Can you hear me? Yes. Thank you. I have two additional questions about 05/1941. According to announcements before, not from your company but from the industry, I heard that the manufacturing process is complicated because of the structure. Some time has passed since I heard this, but costs have come down as to be commercially acceptable. Is this still a challenge? I appreciate your comment on this first. As you said, we are fully aware of the cost challenge. We have been able to reduce our cost compared to before, but we don't think it's enough. We don't know the timing yet, but we are discussing a variety of things in the manufacturing field so that we can reduce our cost as much as possible. Understood. I think you said Phase onetwo data will be used to file by the end of this fiscal year. Are you going to file based on that data? Other companies are also filing based on Phase onetwo data in many cases these days. What's your planned time line? No decision has been made in consultation with the regulatory authorities. We think it's going to be data driven, but we also would like to consider a way to enable filing based on Phase onetwo data. Okay. There was no direct mention today, but what about the progress of oncolytic virus, DS-sixteen forty seven? REPRESENTATIVE:] you for your question. Clinical studies already completed by now. We are discussing the manufacturing time line and the timing of filing. Manufacturing has some difficulties. According to the current time line, it's going to be by the end of the current fiscal year. Understood. And also one confirmation about Enhert. Due to a black box warning, I think there is an ongoing program to prevent ILD. Are you doing this carefully? I think AstraZeneca has a certain program. Are you using it to check for marketing? Are you working on this carefully? This may also be a bit qualitative, but there's a mention of the feedback before. We are receiving very good feedback. On the other hand, we are also receiving questions about ILD. We are sharing data with the users or the medical institutions. Including this, we are making a good start.