Earnings Call: Q3 2019

Jan 31, 2019

This is Sai. Thank you very much for joining Daiji Sankyo's Financial Results Conference Call despite your busy schedule. I'm going to present FY twenty eighteen Q3 financial results announced at one p. M. Today by following the document. Please look at Slide three. I'm going to cover the topics in the following order: FY twenty eighteen Q3 financial results, important business update and R and D update. I'll take your questions after my presentation. First, I'm going to explain the content of our FY twenty eighteen Q3 financial results. Please look at Slide five. This is an overview of FY twenty eighteen Q3 results. The revenue was 703,100,000,000.0 yen which was minus 38,000,000,000 yen or minus 5.1% of the revenue year on year. The cost of sales increased by 9,500,000,000.0 yen year on year. SG and A expenses decreased by 18,200,000,000.0 yen and R and D expenses decreased by 33,000,000,000 yen As a result, the operating profit turned out to be JPY97.1 billion, which was an increase by JPY3.9 billion or plus 4.1% in the operating profit year on year. The profit before tax was JPY98 billion, which showed an increase by JPY200 million year on year. And the profit attributable to the owners of the company was 78,800,000,000.0 yen which was an increase of 6,200,000,000.0 yen or plus 8.5 year on year. As for the actual currency exchange rates, dollars 1 became 111.15 yen which was 0.56 yen higher than the previous year. €1 became 129.49 yen which was 0.96 lower than the previous year. Please move to Slide six. I'm going to use four slides to explain the factors involved in the increase and the decrease from the previous year. The revenue decreased by 38,000,000,000 yen year on year. I'll explain the breakdown by major business unit. In the Japan business, including domestic pharmaceutical products and vaccine health care, in addition to the direct oral coagulant LUXIANA and the osteoporosis treatment agent PRALIA, we expanded the sales of the Daiichi Sankyo ESFA products, including authorized generic products. On the other hand, the hypertension therapeutic agent Almetek was impacted by the expansion of generics. And the anticoagulant Nexium and the anti inflammatory analgesic loxonin were impacted by the drug price reduction. And the anti influenza virus agent Inovir was impacted by other competitive products, which altogether resulted in a decrease of the revenue. Furthermore, although Daiichi Sankyo Healthcare's skincare products were performing well previously, the sales decrease due to the change in the accounting treatment led to the decrease in the revenue. It's a 24,900,000,000.0 yen reduction in the revenue of the entire Japan business. Next, I'd like to explain about our overseas business. The ForEx impact is excluded in this list. As for Daiichi Sankyo Inc. In The U. S, the hypercholesterolemia and type-two diabetes therapeutic agent Welco, with its generic drug, entered into the market in May as well as olmesartan, an antiplatelet agent, Effient, suffered from the reduction of their revenues, which resulted in minus 35,300,000,000.0 yen in its revenue. On the other hand, the former LUIPOLD, which is currently American Reagent Inc. In The U. S, benefited from the growth of the iron deficiency anemia therapeutic agent InjectaFur and increased the revenue by 10,700,000,000.0 yen Daijisankyo Europe increased the revenue by 7,300,000,000.0 yen due to the sales expansion of LUXIANA. The ASKA business, which covers Asia, South And Central America, increased its revenue by 5,800,000,000.0 yen in South Korea and China. The revenue decrease by the ForEx impact was 1,500,000,000.0 yen in overall. Next, please look at Slide seven. The operating profit was increased by 3,900,000,000.0 yen I'll explain this by item. As I mentioned before, the revenue decreased by 38,000,000,000 yen which included the 1,500,000,000.0 yen reduction due to the ForEx impact. Next, if the ForEx impact and the special items from the expenses are excluded, the cost of sales increases by 3,800,000,000.0 yen due to the change of the product mix caused by the patent expiration of omosartan and SG and A decreases by 14,200,000,000.0 yen due to the cost cutting effect in The U. S. The cost reduction impacted by ForEx was 1,300,000,000.0 yen in total. As for the special items, the cost decreased by 27,600,000,000.0 yen this year compared to the previous year. When the ForEx and special item impact are excluded, the revenue decreased by 23,400,000,000.0 yen in real terms. Slide eight shows the breakdown of the special items. Although there was a cost reduction of 6,100,000,000.0 yen by the sales of the tangible fixed assets last year, we booked the impairment loss of the intangible assets related to CL-one 108, which resulted in a cost increase by 24,100,000,000.0 yen There was 3,500,000,000.0 yen of the gain on the sales of the tangible fixed assets this year. As a result, the cost this year turned out to be 27,600,000,000.0 yen lower than last year. These special items have been booked by Q2, and there was no new item booked during Q3. Next, using Page nine, let me explain the situation of a profit. Operating profit increased by JPY 3,900,000,000.0. Income taxes, etcetera, declined by JPY 6,500,000,000.0 due to the impact of the tax rate reduction in The United States, etcetera. As a result, profit attributable to owners of the company reached JPY78.8 billion, up JPY6.2 billion year on year. Page ten and eleven show revenues of major business units and revenues of major products in Japan in Japanese yen. Earlier on Page six, I explained the revenue situation of each business unit excluding ForEx impact. But here are the results including ForEx impact. From here on, I'm going to give you our business updates. Please turn to Page 13. First of all, I'd like to talk about our direct oral anticoagulant, Lixiana. It has continued to grow its share steadily in the Japanese market and has become number one in terms of sales share as of the 2018. Over 40% new patient share has been maintained. We are expecting further expansion of its share in the entire market. Page 14 shows the trend of its volume based share in other countries in addition to Japan. Redoxaban has been growing steadily in each country. Also in China, we obtained approval in December. Starting from Page 15, I would like to talk about regional value products. As we are showing in our 2025 Vision, we are aiming to have enriched regional value products aligned with regional business strategies in addition to global products such as edoxaban, our new oncology product. Page 17 is demonstrating further enrichment of our regional value products in each region. To align with our regional business strategies, in Europe, we licensed in bempeidoric acid for hypercholesterolemia, where we can expect synergies with Lixiana. In Japan, we'd like to leverage our high quality sales and marketing capabilities, obtain in licensing products of good quality in addition to our own in house products, further enrich our product portfolio and grow as one company in Japan. Slide 18 lists the products approved in Japan this month. The new products of the peripheral neuropathic pain therapeutic agent, Tarlyje and hypertension therapeutic agent, MINNEBRO, were approved. Also, the antiepileptic drug VIMPAT received an additional approval for pediatric indications. The new dosage forms of dry syrup and the IV infusion were approved as well. Please look at Slide 19. In Europe, we incorporated the hypercholesterolemia therapeutic agent of vampanoic acid in its combination tablet from Asperion. This allows Daiichi Sankyo Europe to leverage its sales platform established in the cardiovascular area as well as that the synergistic effect with LUXIANA will accelerate the sales expansion of the both products, leading to the increased regional value of Daiji Sankyo in Europe. The filing of this product in Europe is scheduled to be in the 2019, followed by the market launch in 2020. A large scale global trial to evaluate the reduction of cardiovascular event risks is currently going on, and it is scheduled to end in 2022. I'm going to explain the optimization of the production system from Slide 20. Please go to Slide 21. While we are shifting toward cancer business declared in our twentytwenty five vision, we have been aiming to transform and restructure the supply chain into a multiple smaller volume production, large molecular compounds and injectable formulations to optimize the production system. In 2015, we transferred Daiichi Sankyo Pro Pharma's Akita plant. In 2016, we sold the Bethlehem plant in The U. S. In 2017, we closed the Hiratsuka plant of Daiichi Sankyo Chemical Pharma. We also released the news today that we have decided to transfer Daiji Sankyo Pro Pharma's Takatsuki plant. Please go to Slide 22. This is a summary of the Takatsuki plant transfer. The transferee has been confirmed to be Taiyo Holdings Company Limited. Their employees will continue to be employed by the transferee. And our products will continue to be produced at the Takatsuki plant with a stable supply. The transfer is scheduled to happen on 10/01/2019. Slide 23 shows the production sites after the transfer for your reference. From Slide 24, I'll discuss the R and D update. Page 25 shows our R and D investment focus and efficiency. We are investing selectively in three areas: ADC and AML, hematology franchises and breakthrough science. By focusing our investments, particularly in ADC franchise, we are expanding the number of clinical studies. The number of ongoing clinical studies for DS-eight thousand two hundred and one was three as of January, but has increased rapidly to nine as of now. We will continue our investments with focus on efficiency and selectively invest in clinical studies in oncology, which are expected to increase continuously also in the future. We will actively out license compounds, which do not fall into the categories of ADC and AML hematology franchises or breakthrough science, even if they are still in the field of oncology. On the other hand, we will make continuous investment into next generation modality for the future beyond 2025. Page 26 is a list of compounds for out licensing. We licensed out DS-five thousand ten in 2017 and 6051 in December. Also, we added five projects shown in red in the table below as new candidates for out licensing. In order to invest limited resources efficiently, we will continue to make selective investments with focus on efficiency. Page 27 shows our activities in regenerative medicine and cell therapy. We have established cell therapy lab by now in order to strengthen our DS R and D structure. We have also explored seed compounds through in licensing and alliances. We are starting new open innovation research with Tokyo Institute of Technology to manufacture iPS cell derived beta cells for the treatment of type one diabetes. Page 28 shows the details of the new open innovation research. So far, main treatments for type one diabetes have been insulin injection and pancreatic islet transplantation. Insulin injection has been a huge psychological and physical burden for patients. As for islet transplant, due to few donors, many patients are on the waiting list. IPS derived beta cells are expected to replace these as alternative treatment options. We are aiming for a practical application as an innovative treatment for severe Type one diabetes through fusion of technologies between Tokyo Institute of Technology and Aiichi Sankyo. Page 29 shows the upcoming data points until ASCO twenty nineteen to start at the May in Chicago, U. S. A. Regarding DS-eight 201, we have been targeting BLA submission in the fiscal year 2020 so far. We will confirm our manufacturing related data we will obtain in the 2018 and beyond and decide whether or not we can file our submission in fiscal twenty nineteen. We are hoping to talk about the results at an earnings announcement meeting scheduled at the April. We disclosed the plan for Congress presentations during R and D Day. We are planning to present for the first time U3-fourteen oh two and ES1062 NSCLC dose escalation part of Phase I studies at ASCO. As for crizotinib, we completed the submission in The United States and were told that U. S. PDUFA date is twenty five May twenty nineteen. You can find appendix on Page 30 and beyond. We said during R and D Day that we decided to select five point four milligram per kilo as dose for DS-eight thousand two hundred and one Phase III studies in breast cancer considering its risk benefits. We received a lot of inquiries on whether five point four milligram per kilo efficacy is sufficient. So we attached on Page 35 an excerpt of the poster presented at an academic society meeting in December. Please refer to it at your leisure. That's all for my presentation. We are now going to answer your questions from now on. My colleagues, including Koga, Head of R and D Division, are also attending with me. Thank you very much. This is Seki. Hello, everyone. Yes, hello. I have three questions. Are you going to get rights in Japan and Asia? I'm sure you are very strong in sales in Japan. I'm sorry, but the first part of your question didn't come through, and I couldn't hear you very well. Can you hear me okay? Yes, I can. Okay. Sorry about that. About bempedoic acid you got from Asperion, are you not going to get the rights for Japan and Asia? I'm sure you are very strong in sales in Japan and Asia. I have a feeling that you don't really have a choice but getting the rights there. What do you think? Since we're mainly focusing on the European market in this negotiation, we haven't acquired the rights in Japan and Asia yet. But you're not denying the possibility in the future, correct? UNIDENTIFIED I'm not able to comment one way or the other on that point. Excuse me for that question. My second question is that last year in December, you had a partnership with Royvant for out licensing the pipelines. I read the press release, but the description was not very much in detail. For example, as for what you indicated with red fonts on Slide 26, can we correctly assume that you are going to keep transferring your assets to the company similar to the ones on the page? As for the option agreement we made with Royvant, well, roughly speaking, this option agreement is for them to evaluate some of our development projects, which were terminated for strategic reasons. I'd like to courteously decline any further explanation about this matter. Understood. Also, when I looked at your R and D expenses, you have $210,000,000,000 yen this year, and it looks like you're going to have some leftover. Am I correct to say that this will be deferred for this time being? We will examine carefully about this matter by March, and we'd like to make a good use of the R and D expenses. Understood. Lastly, on Slide 29, are you not going to make any announcement on DS-eight201 during ASCO? We're not planning to make any announcement on the data related to ASCO. Why is that? Can't we expect to have the top line from the current DESTINY one study, for example? Well, we'll not make any announcement, and I appreciate your understanding. This is Hachiguchi. I have two questions. My first question is that, well, I'm sorry to raise this question since it's been only one point five months since the last R and D Day, but about the development policy of ADCs, including DSA-two zero one. I'm sure you have been considering many different options such as partnering with another company or continuing the development by yourself. Can you give us an update on what you have been considering lately? Yes. Thank you for your question. As for partnering, we recognize that it is the most important measure for us, and we have been negotiating with multiple candidates to this date. If I may tell you my impression in one word, I just would like to say that the negotiations have been going very well. The nuance of your current response is that, well, in the previous R and D Day, you seemed to give us an impression that you were struggling on both ways. But are you saying that you are rather beginning to lean toward partnering nowadays? Well, our assumption is that the criteria for final judgment will be based on the fact that the partnering will maximize the value of DS-eight thousand 201. So as a possibility, we may potentially decide not to partner with anyone. Our most significant objective is to maximize the value. The partnering negotiations have been going very well, but I'd like to stop here with my response. Okay. My second question is about your approach to the return to the shareholders. Three months ago, I think it was mentioned that 100% or higher payout ratio will be maintained until 2022. If I consider the history in the past, I believe that an acquisition of your company's shares will be one of the keys to achieve that goal. If you are currently undergoing with those partnership negotiations, I assume that you are not able to move around that easily. Including this time around, I know you are not making any changes, but can you tell me the reason why you are not doing it now? And what situation will make you decide to increase the return to the shareholders, including the acquisition of your own shares? Can you explain your thoughts on that? Yes. For the returns to the shareholders, there are things such as dividends and the acquisition of our company's shares. However, as for the long term payout ratio, instead of the three year policy, it is currently a policy until 2022. So under such circumstances, when an appropriate timing arrives, we'd like to provide the best handling of the situation. We want to maintain the current return to the shareholders. What factors will be considered to decide your appropriate timing? In other words, any timing other than the time when we are not able to do so will be an appropriate timing. Understood. That's it for my questions. Thank you very much. UNIDENTIFIED This is Yamaguchi. Can you hear me? First question is about your new product in Japan, which is Tarlyje or myrgabalin. The positioning of this product in Japan is that considering the characteristics of the product, I suppose you are going to battle against a product such as Lyrica head to head and try to make it become a blockbuster product. Am I correct? We understand that the biggest competitor is Lyrica. I can't tell you the detailed figures offhand right now, but I understand that Lyrica is a product of a 100,000,000,000 yen scale. Our product will compete against Lyrica, but we will examine carefully about the positioning. But I believe that the dose dependent side effects are also a differentiating point for our product. Understood. And did you say JPY100 billion? I couldn't hear you very well. Yes. My understanding is 100,000,000,000 yen but that's a statistical figure. Please check the accuracy. Yes, that's a rough image. I understand. Lastly, this is related to DSA-two zero one, and this has been discussed since before. But about the first line where it says decision for early BLA submission, you mentioned that you will provide an explanation during the financial results presentation in the April. But I just want to ascertain that, well, how should I put it? Are you able to disclose a little more about what is required at what timing? Well, basically, they will require the confirmation that we have a stable supply system in place. They need to confirm that we are capable of manufacturing by using our commercial manufacturing facility. And from that point of view, we must demonstrate the data generated from our manufacturing facility. And the batches manufactured in this way can be used both in a commercial production and in a clinical trial setting later. We will use the manufacturing facility for actual manufacturing, but three badges or more in a row must satisfy a certain level of criteria. So if that process is taken into consideration, the time line will be something like what I just mentioned. Yes, I understand. Since I don't have any information, I can't really say anything about this, I'd rather want to ask you. There is a small venture company called Immunomedics, which is involved with Trop-two. Their manufacturing had a problem, and they received a CRL. Are there any manufacturing overlaps between Immunomedics and Daiichi Sankyo? For example, any sourcing or outsourcing overlaps? If you have nothing to do with them, I feel relieved, but what do you think? Murouka from Morgan Stanley. Many of the questions I wanted to ask you were answered, thanks to the earlier question by Mr. Yamaguchi. But the competitor couldn't get manufacturing certification by FDA as it received a complete response letter the other day. This happened to your competitor. Based on your communication with FDA, did you assume this could also happen as a possibility? We are preparing by making sure that we can ensure data integrity to address any concern from the regulatory authorities. We can just comment to this extent. Inspections were completed already. I beg your pardon? Were inspections already conducted? We conducted a mock inspection to make sure that there is no problem. Understood. Thank you. Another minor question. You said that Innavio was affected by competition. Its sales budget is 19,000,000,000 yen per year. Is it getting more difficult? Or still, it should be fine as influenza is getting prevalent these days? I cannot give you the exact amount, but the government's stockpiling is included in the 19,000,000,000 yen figure. Excluding that factor, currently, the situation is tough right now due to severe competition. We will monitor changes in the competitive environment and the trends of flu incidents. We believe we can regain some business. Understood. That's all from me. Thank you very much. I'm Sakai from Credit Suisse. Thank you. I have a simple question. I'm asking this question as this is a conference call on the third quarter results. You didn't change your full year forecast. Profits may fall due to expenses being booked more in the fourth quarter as usual. Sorry, I might have missed your explanation, but are there any special items this fiscal year? Could you please explain? Our understanding is the same as you just pointed out. Looking back on the past two years, the trend of the fourth quarter results was similar. Regarding this fourth quarter, the tendency is the same as usual years. If I may, we have a slightly conservative outlook for this fourth quarter. That's my own impression. Okay, understood. And the expenditure was reduced on a full year basis and the progress seems slow. You will spend more in the fourth quarter? Correct? Yes, that's our plan. Okay, one more question. This was explained when you announced your midterm business plan. It's not as much as your competitors, but you said you will sell noncore assets and make steady progress. At that time, you mentioned healthcare and vaccines and real estate. What is your outlook? As for vaccines, you announced the other day the dissolution of Japan vaccine. Is that the end of the story? Do you have something else for the future? Is there anything specific you can make further comments on this, if any? In particular, cash in or something with an impact on profit? We cannot comment specifically. But as a policy, as you pointed out, noncore assets and noncore pipelines will be actively separated from our company and brought outside. So there is no change in that policy. We will just have to consider timing and other issues. Understood. My last question for confirmation. You have a process to strengthen and expand your oncology unit in The United States from now on. On the other hand, you have a business unit for existing products such as Welchol and Omesartan. Do you have a process to reduce or revisit this one? Whether we have such a process or not depends on the results of our discussions. Going forward, we will shift a lot towards oncology, and The United States is the main battlefield in oncology. There is no change in that. So other business we are implementing in The United States is also a target for us to discuss