Earnings Call: Q1 2020

Jul 31, 2019

I'm Toshiya Kisai. Thank you very much for participating in Daiichi Sankyo's conference call despite your very busy schedule today. I'd like to explain our financial results for the 2019 we announced at one p. M. On July 31. Please turn to Page two. This is the agenda today. I will explain FY twenty nineteen Q1 financial results and give you a business update. Then Takasaki, who has become R and D Division Head since April, will give you our R and D update. After that, we will entertain your questions. Please turn to Page three. This is an overview of consolidated financial results for the 2019. Revenue increased to JPY249.2 billion, up JPY23.5 billion or 10.4% year on year. Cost of sales increased by JPY3.2 billion year on year. SG and A costs decreased by 2,500,000,000.0 yen R and D expenditure fell by 4,300,000,000.0 yen As a result, operating profit rose to 57,000,000,000 yen by 27,100,000,000.0 yen or 90.5% year on year. Profit attributable to owners of the company was JPY43.3 billion, up JPY19.4 billion or 81% from the same period last year. As for the currency rate, dollars 1 was JPY109.90. The yen depreciated by JPY0.83 from the previous year. Euros 1 was JPY123.49, the yen appreciated by JPY6.57 7 yen from the previous year. Please turn to Page four. I'd like to use four pages from here to explain positive and negative factors for the revenue on a year on year basis. Revenue increased by 23,500,000,000.0 yen year on year. Let me explain the breakdown by main business unit. First, for our Japan business, including domestic prescription drugs, vaccine and OTC business, revenue expanded mainly due to direct oral anticoagulant, Lixiana, anti ulcer agent Nexium, osteoporosis treatment, Prelia, anti epileptic drug, VIMPAT and Type two diabetes drug, CANARIA as well as Daichi Sankyo ESFA products, including authorized generics. As for Daichi Sankyo Healthcare, revenue declined by 3,000,000,000 yen as we changed the accounting treatment from the 2018 for sales incentives, which were previously accounted for as SG and A expenses. Revenue for Japan business as a whole increased by 12,200,000,000 Next, let me explain our overseas business. The description on this page is excluding the ForEx impact. For Daishankyo Inc. In The United States, revenue declined by 3,200,000,000.0 yen partly due to a decrease in sales of Welchol for hypercholesterolemia and Type two diabetes. As for American region in The United States, revenue rose by 7,100,000,000.0 yen due to the growth of generic injectables and injectafer treatment for iron deficiency anemia. Revenue was up 1,100,000,000.0 yen for Daiichi Sankyo Europe due to the expansion of Vixena sales. Next on ASKA business for Asia, South And Central America, revenue increased by 4,400,000,000.0 yen due to Omidech and Kravet, etcetera, in China. Revenue for ASKA business as a whole rose by 6,000,000,000 yen We booked 2,500,000,000.0 yen we recognized as the first quarter portion of the upfront payment for DS-eight thousand 201 as we signed a collaboration agreement with AstraZeneca in March 2019. The revenue decrease from the ForEx impact was 2,200,000,000.0 yen in total. Now please turn to Page five. Operating profit increased by JPY 27,100,000,000.0. Let me explain each item. As I explained earlier, revenue increased by JPY23.5 billion, including the JPY2.2 billion revenue decrease from the ForEx impact. Cost of sales was up just JPY2 billion due to the impact from the product mix, although revenue increased substantially. SG and A expenses increased by JPY9 billion, partly due to an increase in personnel costs in The United States. R and D expenditure was down JPY4.2 billion, partly due to the impact of the DS-eight thousand 201 related cost sharing with AstraZeneca. Cost decreased by JPY 1,100,000,000.0 in total from the ForEx impact. As for special items, cost decreased by JPY 9,300,000,000.0 compared to the previous year. I will explain the details on the next page. Operating profit increased by JPY19 billion excluding the ForEx impact and special items. Page six is the breakdown of special items. In the first quarter, we had JPY 1,300,000,000.0 restructuring cost in Supply Chain and JPY 10,600,000,000.0 gain on sales of fixed assets. As a result, expenses decreased by JPY9.3 billion compared to the previous year. In the next Slide seven, I'd like to explain the profit. Although the operating profit was increased by 27,100,000,000.0 yen due to the increase of the income taxes by 8,100,000,000.0 yen the profit attributable to the owners of the company was 43,300,000,000.0 yen which is an increase of 19,400,000,000.0 yen from the previous year. Slides eight and nine show the changes of the revenues of the major business units and major products in Japan. In the previous Slide four, I explained about the status of each unit, excluding the foreign exchange impact. These slides, on the other hand, show the results that include the foreign exchange impact. I'd like to discuss the major business update next. Slide 11 describes our new products in the Japanese business. As our new products, we launched Tarlyige for pain treatment in April and minabril for hypertension treatment in May. Also in June, we obtained approvals for an anticancer agent and a FLT3 inhibitor, VAMFRIDA, and a nebulizer formulation of an anti influenza agent, Inavir. Please look at Slide 12. As part of the optimization of our business portfolio, we decided to transfer our business of the diagnostic imaging agents, including Alkimpak, to GE Healthcare. The marketing authorization rights and commercialization will be transferred in March 2020. The sales through the wholesalers of GE Healthcare will start in March 2022. The slides after Slide 13 show the R and D update. Now I'd like to ask the Executive Vice President of the R and D Affairs, Mr. Takasaki, to take over the discussion. This is Takasaki. I'm going to discuss the update on our R and D today. Slide 14 lists the content of today's discussion. Slide 15 shows the data from the DS8201 Phase I breast and gastric cancer studies published on Lancet Oncology in the April 2019. In the Phase I study, the patients treated previously with many different agents were administered with DS-eight thousand two hundred one. We could confirm that it had very favorable efficacy in both breast cancer and gastric cancer. Although this is not on the slide, safety also concurs with the results we obtained in the past. Slide 16 shows our submission plans for HER2 positive metastatic breast cancer and gastric cancer. The submission preparation for the breast cancer in Japan, U. S. And Europe is right on track. As we mentioned during the corporate explanation meeting after ASCO, we are planning to submit for approval for gastric cancer in Japan in the 2020. From Slide 17, I'm going to introduce the data of U3-fourteenO2 presented in ASCO, the American Society of Clinical Oncology. This slide shows the study design of the Phase I study of NSCLC with an EGFR mutation. There was no preselection of the patients based on the HER3 expression. Instead, the patients were enrolled on the all comer basis. Page 18 shows patients' baseline characteristics. All patients were treated with tyrosine kinase inhibitor, TKI, as prior therapy. Ninety one point three percent of them received prior osimertinib. Page 19 is a safety summary. Despite platelet count decrease, etcetera, as dose limiting toxicity, DLT, we have been able to confirm that the compound is generally well tolerated to date. Page 20 is efficacy waterfall chart. Antitumor activity was confirmed in all patients. We were able to confirm the antitumor activity also in patients with various resistance, which could occur after administration with TKI such as osimertinib. Page 21 is efficacy spider plot. More than fifty percent of the patients continue study treatment with U3-fourteen oh two. From Page 22, let me explain DS1062 data we presented at ASCO. This page shows the relapsed NSCLC Phase I study design. We are enrolling all comer patients who didn't respond well to standard of care or relapsed without prior drop to selection. For an update since ASCO, we started the dose expansion cohort in July 2019. Page 23 shows study patients' baseline characteristics, which were well balanced. About ninety percent of the patients were treated with prior immune checkpoint inhibitors. Page 24 is a safety summary. TS1062 is generally well tolerated to date. Page 25 is efficacy spider plot by dose. We observed PR, partial response in patients from two milligram per kilo and above. We confirm PR in a dose dependent manner. We also explained at ASCO, three subjects were added to the Cohort seven with eight milligram per kilogram. PR was confirmed in all four cases. From Page 26, I'd like to share DS-one thousand and one we presented at ASCO. This compound is a mutant IDH1 inhibitor. Mutant IDH1 converts alpha ketoglutarate to two hydroxyglutarate 2Hg. 2Hg is an onco metabolite. Its accumulation would lead to oncogenesis and tumor progression. Therefore, inhibition of mutant IDH1 enzymes could lead to a novel antitumor therapy. We are now implementing Phase I study in glioma patients. According to the estimation, annually, there are about eleven thousand glioma patients with IDH1 mutation in Japan, The United States and Europe. Slide 27 shows the baseline characteristics of the patients. The patients were classified into two categories in this study. The first category of the patients were the ones with tumors detected using the contrast agent, and their lesions are found in the enhanced MRI. It is common among these patients to have high grade gliomas like glioblastoma. Another category was the patients with no tumors detected and there were no lesions found using the contrast agent. A distinctive feature of this category is that there are relatively many patients with low grade gliomas. Slide 28 is a safety summary. Although one dose limiting toxicity, DLT, was observed in the dose escalation phase, it didn't reach the maximum tolerated dose, MTD, even when the dose was increased to fourteen hundred milligrams BID. We have confirmed good tolerability up to this date. Slide 29 is a waterfall chart of efficacy. In DS-one thousand and one, the overall response rate, ORR, of the patients with tumors detected using the contrast agent was seventeen percent, and those with no tumors detected was thirty three percent. The antitumor effect was found in both groups. Slide 30 and after are about pexdartinib. The results from the Phase III ENLIVEN study was presented during ASCO last year. In ASCO this year, we presented the results of the long term efficacy and safety. This slide shows the results of efficacy. The ORR of pexidartinib presented at ASCO was thirty nine percent. The long term result of the ORR, on the other hand, was increased to fifty four percent. Slide 31 is the safety data. The adverse event to be cautioned with this drug is hepatotoxicity. There was no new serious hepatotoxicity occurred after the eighth week from the beginning of the dosage. The application of this drug has been received in The U. S. And Europe. The PDUFA date, which is the completion date of the FDA review, is scheduled to be on August 3. Slide 32 describes the upcoming milestones of the ADC franchise. The submission preparation for DS-eight thousand two hundred one for breast cancer is moving along well. As for gastric cancer, the submission is scheduled to be in the 2020 in Japan. As for U3-fourteen oh two and DS-ten 62, we are planning to present them during the World Conference on Lung Cancer, WCLC, held in Barcelona, Spain in September. Once our presentations are confirmed, we will hold an explanatory meeting sponsored by us. Slide 33 shows the upcoming milestones of the AML franchise and the breakthrough science. Quizartinib was approved in Japan on June 18. Unfortunately, we received a complete response letter, CRL, in The United States. We are currently carefully reviewing the content of the CRL and discussing the measures to take from now on. The results from the Phase III ENLIVENED study of pexidartinib was published on Lancet. The completion of the review in The United States is scheduled to be on August 3. Slide 34 is an announcement on the R and D Day of this year. We will hold a simultaneous R and D Day for the first time in two locations in Tokyo and New York this year. We will provide the same content on both days. We're currently working on the agenda. Please look forward to it. The slides after Slide 35 are the appendix. The list of our milestones and pipelines are presented there. Please take a look at them later. That is all for my presentation. Now we'd like to take questions from the listeners. Please go ahead. Q and A session. Mr. Yamaguchi from Citigroup Securities, please. Can you hear me? Yes, we can hear you. Thank you. First, you are making very good progress against your forecast, but there seems to be some difference among expense items. Overall, there are some items which may lead to an upward revision on a full year basis as well as others which are just seasonal. Could you explain those factors? First of all, revenue increased substantially by 23,500,000,000.0 yen Roughly speaking, there are four main factors as is written on Page four. Please refer to that page. Our Japan business, including Daisankyo ESFA, was performing well and making a good start. That's the first point. Secondly, Nixiana sales are increasing globally. Revenue was up JPY11.4 billion globally, including Japan. And at ARI, American Regent Inc, Injectafer is continuing to do well. Injectables had an upside, including what we couldn't fully assume in our budget. Revenue increased by 5,500,000,000.0 yen just from AI alone. Lastly, the fourth factor is ASKA business, particularly in China, due to the growth of KRAVIT, OMETEK, etcetera. As for KRAVIT, we couldn't ship smoothly previously. And finally, we were able to clear it all at once in the first quarter. That's why revenue increase is standing out. Operating profit increased by 27,100,000,000.0 yen We had 10,600,000,000 gain on sales of Nihonbasi building. Due to the collaboration agreement with AstraZeneca, we had booked 2,500,000,000.0 yen we recognized as the first quarter portion of the upfront payment from AstraZeneca. This is cost free and is directly booked into profit. There was also the impact of R and D cost sharing with AstraZeneca. AstraZeneca related factors increased our revenue by a few billion yen The rest is about 10,000,000,000 yen which were not special items. But as I said before, there were sales we could forecast as well as sales we couldn't fully assume like the sales for ASKA. Is this going to continue on a full year basis? It's difficult to say anything definitive right now. So we'd like to keep our current forecast for now. I see. One thing I'd like to confirm with regards to the R and D cost sharing. Currently, cost sharing is not included in your full year forecast, but cost sharing is recognized. So this kind of a gap or difference is going to continue. Is my understanding correct? Yes, you're right. We are discussing with AstraZeneca to reach agreement on the development plan targeting around the September. After that, we will make a decision on cost sharing. So it's not going to be necessarily the case where profit is regarded as positive and expenses as negative. If the number of R and D projects increases, the total R and D cost will also go up. Therefore, we cannot comment on this right now as we don't know yet. Okay, understood. I have two more questions. Could you share the actual results and outlook for Terizje and MINEVRO? We are not disclosing the actual results, but they made a good start. Understood. Lastly, regarding R and D, you received CRL, Complete Response Letter for cisotinib in The United States. You should know what is the factor for CRL. Could you please explain? We cannot comment in detail, but we will look at QUANTUM first study results to discuss how to respond COMPANY for relapsed and refractory AML. Think about your future action, Yes, understood. Thank you very much. Next, Mr. Muroka from Morgan Stanley MUFG Securities, please. Hello, Muroka from Morgan Stanley. Thank you. Regarding your presentation on ES1062, in particular, at WCLC, you will manage to include the data on the highest dose of ten milligram just in time, correct? This is my first question. Thank you for your question. As for WCLC, we submitted our abstract, but whether it's going to be accepted or not will be announced on August 2 or later. So you will know at that timing. For the time being, we are planning to give an update on the dose escalation part of the lung cancer study. In other words sorry, I didn't understand clearly. Do you mean ten milligram data will be available in time? And when did you or will you submit your abstract? Please wait. We are checking. Today, we don't have information at hand on the timing of abstract submission, but you can check the abstract title on August 2 or later. You can also check the contents to see whether ten milligram data is included or not. Thank you. As for one off items, you had gain on sales of Nihonbashi Building. You're also planning 19,000,000,000 yen gain on sales of Takatsuki plant. In the second quarter or the third quarter, could you say roughly when this will be incurred? I think this will be booked in the third quarter this fiscal year. Understood. Other than these two items, no more sales of your assets for the time being, Nothing in particular. Lastly, regarding credit in ASKA business. Mr. Sai, you said the issue was cleared all at once. There was a lot of stock, which was cleared in the April period. There can be some decrease in reaction in the July period. Is that what you mean? Sorry, my expression may not have been appropriate. There was no special meaning behind. I mean shipment was not very smooth before, but it's now going well. Is this going to continue from the second quarter and beyond? It's also related to supply demand situation, so it's difficult to tell. UNIDENTIFIED REPRESENTATIVE:] Let's move on to the questions from Credit Suisse Securities. Mr. Sakai, please go ahead. I'm Sakai. Yes, hello. I'm sorry that I might sound like I'm nitpicking, but it's about sharing the cost of the R and D expenses with AstraZeneca. In your comment, Mr. Sai, you mentioned that the amount of reimbursement will be determined around September followed by a formal decision on the exact amount of the burden to take. I'd like to ask you what the nature of this amount would be this time. That's the first question I have. It's purely for the purpose of calculation. Ultimately, the settlement will be made after everything is confirmed. So it's still preliminary. Is it correct to say that this will happen in the second quarter again if everything will be determined formally in September? I believe a certain amount will be in place. If that's the case, well, what I'm trying to ask you is that if there's the if that's the case, since the factors such as an annual forecast, the partnership with AstraZeneca and also perhaps the midterm business plan, which may lead to an anticipation of the recurrence are hardly taken into consideration. And you mentioned that you will review them and will consider if you want to make an announcement. You are not going to change this policy. Is my understanding correct? Only when we get an agreement for the development plan can we actually tell how much it will cost us and how much the settlement cost will be. At this point in time, we do have certain amount in place, including the preliminary one. The ultimate figure will be confirmed probably in the September, I assume. As for the figure that consists of many different factors, we hope that we will be able to provide an explanation on the entire picture in the October during the second quarter settlement. I have two more questions. Simply on the pipelines, About ten sixty two, about the expression of Truck two, this time it's all commerce. And I think these are also presented during ASCO. I believe these are the same data. If I remember correctly, you mentioned that the expression for TRK2 is quite high in NSCLC. Can you tell me and I'd like to confirm how high this expression would be. Yes. As you mentioned, the expression of TRP-two is found broadly. But if you just look at the lung cancer, TRP-two is expressed in seventy percent to ninety percent of the lung cancer in my understanding. Understood. So even if it is on an all comer basis this time, you're able to cover most of them, correct? Although your N is still small. Yes, that's what we expect. Okay. One more question. Sorry, I'd like to ask you about glioma. I apologize that I haven't studied enough about brain tumor, and I don't have good understanding of it yet. But is it correct to say that there's no treatment today? Correct. We don't believe there is any standard of care for it. Although, where we stand with our competitor is another story, but yes, there's no standard of care today. I'd like to move on to the next question. Thank you very much for your explanation. This is Sarai from Merrill Lynch Japan Securities. My first question is about the dose setting of DS-ten sixty two. You will start the dose escalation part from July 2019. Please let me know what your plan would be for the amount of dose you are going to apply in this study. I'm still not able to comment about the details of the dose today, but we will consider both the safety and the efficacy to determine the dose eventually. Understood. And is it correct to assume that your presentation in the WCLC was an extension of the presentation of ASCO, meaning that the period of observation was longer in this study. Yes. The data cutoff date for the one presented at the previous ASCO was May 2019. We are hoping to update the data from that period of time. Understood. And similarly, you are not going to disclose the details related to U3's dose setting or dose expansion at this time? Yes, that is correct. Understood. And as for this one as well, is it correct to assume that this has a longer observation period than the ones presented during ASCO? Yes. I don't see any problem with your understanding. That's all for my questions. Thank you very much. I'd like to move on to the next question. Mr. Wakao from Mitsubishi UFJ Morgan Stanley Securities. Hi. I'm Wakao from Mitsubishi UFJ Morgan Stanley Securities. Well, hello. My first question is about SG and A. The progress of your SG and A and what you planned for this year is JPY $285,000,000,000. I'd like to know what the result was from the first quarter. There were some special items included and you landed with JPY 63,200,000,000.0. When the special items are included excluded, it's JPY 73,800,000,000.0. If this 73,800,000,000.0 yen will be flat and continues into the second quarter and after, I believe it'll be roughly landing with $285,000,000,000 yen On the other hand, after the second quarter, according to what I have seen so far, you will be presumably on the increasing trend of the SG and A. If that will be the case, I was thinking that you might go beyond $285,000,000,000 yen Is there anything about suppressing the SG and A during the progress in the first quarter or in the upcoming second quarter and after? As for SG and A, we have a tendency. We have our timing for payment, and we did have an increasing trend in the fourth quarter in the past. And I believe we will probably follow the same trend this year. As for the SG and A this time, certain things have been coming in and going out. For example, the profit from Nihonbasu Building is included here. The taxes from the previous time didn't occur this time. And it's true that there are a variety of special items here, but I see them to be pretty much right on track as we planned. I don't believe there is anything I need to specifically comment here. Okay. I understand. Thank you for that. My second question is about U3. I guess, I just need to check the abstract. But in terms of what is most likely to come out in the future, since there was no presentation regarding the part of five point six milligrams during the previous ASCO, I assume that we might be able to see the cohort data in the future. Is my understanding correct? Also, as for HER3, it's all commerce, and I believe all the patients are accessible. Although it's on an all comer basis, you will analyze the HER3 expression in the end, and we might be able to see that HER3 data sooner or later. Are you analyzing the HER3 data? And are you planning to publish the data in the future? I'd like to respond to the second question first. We do have a research going on with respect to biomarkers, but I cannot comment as to if we are going to include the data in the presentation at this point in time. And about the possibility of five point six milligrams, we believe that it's very likely dosed in the dose expansion study. Okay. Understood. Also, as for the other ADC franchise pipeline products, including seven thousand three hundred and six thousand one hundred fifty seven, I think you have updated the information that these studies will start within this year. For six thousand one hundred fifty seven for GI, you will conduct what is listed here. But for 7,300, for example, can I expect the drug in the cancer type to be announced during your R and D Day? If you already know the timing of the announcement on the details of 7300 and 06/1957, please let us know. Yes. For the indications for DS-seven thousand three hundred, I'm not able to answer it now, but I believe that we will be able to give you some comments on the R and D Day, although it's not confirmed yet, but that's where we stand. Next, Mr. Yamaguchi from Citigroup Securities. Sorry, I forgot to ask this question earlier. May I? Yes, please. Thank you. According to Page 16, gastric cancer submission is planned in Japan for the 2020. It's underlined in red as an update. I think this information was already included in your presentation at ASCO. So no change since then, correct? Just for confirmation. Yes, your understanding is correct. Okay, understood. One more question. Sorry to ask again, but generic injectables are doing well at American region because of the very good market environment? The more you manufacture, the more you can sell. Is that the situation? Sales of an injectable launched in the second quarter of the previous fiscal year contributed. Also competitive products were out of stock. I see. This market is fluctuating a lot. ARI can address the situation very quickly, which is our strength. I see. So there can be ups and downs, but structure wise, you're ready to act quickly, correct? Yes. That's all. Thank you very much. I'd like to move on to the next questions. Mr. Nakazawa from SMBC Nikko Securities. This is Nakazawa. Thank you so much for your explanation, and it's nice talking to you. I'd like to confirm a few things about the amount of reversal from AstraZeneca. When I look at the figure, my impression is that it seems that you had approximately JPY 4,000,000,000 to 5,000,000,000 yen returned to you. And is it correct to say that the double of this amount is roughly equivalent to the R and D cost for DS-eight thousand 201? Or is it true that the amount of the reversal this time has not been paid in full yet? Please let me confirm my understanding if you don't mind. I'd like to refrain myself from disclosing the amount of any individual development cost. However, please note that most of the year on year decrease was increased from sharing the R and D cost. That's all I can comment now. Okay. Certainly, I understand. I'm sorry about that. Sure. Also about DS-sixteen 47 on Slide 33. A while ago in a trade magazine, if I remember correctly, there was a discussion about a little bottleneck in the production and the submission timing was going to be delayed as well. But do you already have a clear outlook of the issue? And is your current probability of submission considered to be high? Well, I think I can say that we are aiming this to happen in the second half of this fiscal year. And your understanding that we will take some time in the production is correct. And as for the probability, it is still too broad to mention at this time. I appreciate it if you can take it just as a target. Okay. I understand. That's all from me. Thank you. It seems that there are no further questions. So that ends the question and answer session. Thank you so much, everyone.