Earnings Call: Q3 2018

Jan 31, 2018

This is Hiroka speaking. Thank you for accessing Daiichi Sankyo's Financial Results Conference Call. I'd like to start a presentation regarding the third quarter financial result, which was announced at 01:00 in the afternoon on January 31. Please turn to Slide Page three. Today's agenda include FY twenty seventeen Q3 financial results, FY twenty seventeen revised consolidated forecast, Edoki Suban update and R and D update. After the presentation, we will have a question and answer session. First, I'll go over the FY twenty seventeen third quarter financial results. Please take a look at Slide Page five, which shows an overview of the FY twenty seventeen third quarter results. Consolidated revenue was JPY $741,000,000,000, up by JPY 6,600,000,000.0. It means 0.9% increase year on year. Cost of sales made JPY 13,700,000,000.0, increase year on year. SG and A expense decreased by JPY 3,700,000,000.0 and R and D expenses increased by JPY 32,100,000,000.0. As a result, operating profit JPY 93,200,000,000.0, down by JPY 35,500,000,000.0, which is 27.6% decrease year on year. Profit before tax is JPY 97,700,000,000.0, down by JPY 34,700,000,000.0. Profit attributable to owners of the company is JPY 72,600,000,000.0 with JPY15.6 billion decrease, which is 17.7% decline year on year. Actual currency rate was JPY111.71 to $1 which is weaker yen by JPY 5.03 compared to the previous term. Euro rate was JPY 128.53 to a euro and yen is weaker by JPY 10.44 compared to the previous term. Now moving on to Slide six. I will use three slides from here to explain reasons for year on year increases and decreases. Revenue increased by JPY 6,600,000,000.0 and I would like to give you a breakdown by major business units. Japanese business include domestic pharmaceutical products, vaccine and OTC drugs. Japanese business grew because anticoagulant agent Ulriksiana grew significantly. In addition to that, there are other drugs which are center of the cells expansion such as Pralia for osteoporosis treatment, Nexium, an anti ulcer drug, antiplatelet drug Effient and DaiSanKyo eSwage product like authorized genetics of Effient, atomosartan, omosartan and rosuvastatin. On the other hand, some drugs such as antihypertensive drug OmedTech revenue were decreased. Daiichi Sankyo Healthcare sales is growing. In summary, Japan business as a whole made JPY 32,600,000,000.0 increase in revenue. Now I will explain about overseas business. These numbers exclude the influence of foreign currency exchange fluctuation. U. S. Daichi Sankyo Inc. Made JPY 54,700,000,000.0 decrease in revenue because of decrease in sales of antihypertensive drug, Omesartan, antiplatelet effluent and Welchol, which is hypercholesterolemia and Type two diabetes treatment drug. However, U. S. LUITPOS revenue grew by JPY 12,100,000,000.0 because of positive contribution by INFECTAFAR, which is iron deficiency anemia treatment drug and generic injectables. Although LUXIANA contributed to Daitesankyo Europe's revenue, 900,000,000 revenue decrease was made because of decline of all mesalton sales. ASCA business, which covers Asia and Central And South America, made 3,200,000,000.0 revenue increase. ForEx impact made by weaker yen was plus JPY 14,300,000,000.0 in total. Please turn to Slide seven, which talks about increase and decrease factors for operating profit. As I mentioned earlier, revenue increased by JPY 6,600,000,000.0, including JPY 14,300,000,000.0 positive contribution by ForEx impact. Next, I'd like to explain about cost excluding ForEx impact and special items. Cost of goods increased by JPY 16,100,000,000.0, impacted by changes of product mix caused by the patent expiration of almost out in. SG and A increased by JPY 1,500,000,000.0 and R and D expenses decreased by JPY 1,300,000,000.0. Cost increase by ForEx impact was JPY 12,400,000,000.0 in total. The breakdown is JPY 3,700,000,000.0 for cost of sales, JPY 5,400,000,000.0 for SG and A and JPY 3,300,000,000.0 for R and D expenses. Regarding special items, in the previous term, we booked JPY 10,600,000,000.0 for reorganization cost in Europe. For this term, 6,100,000,000.0 cost reduction was made by a gain of sales of fixed assets. However, we also booked intangible asset impairment loss of JPY 27,800,000,000.0 because of returning the light of CL-one 108. Therefore, cost increased by JPY 13,500,000,000.0 from the previous term. As a result, operating profit is JPY 93,200,000,000.0, which is minus JPY 35,500,000,000.0 from the previous year. When we exclude ForEx impact and special items, a substantial amount of operating profit decreased becomes JPY 23,900,000,000.0. Now I would like to use Slide eight to talk about profit attributable to owners of the company. Operating profit decreased by JPY 35,500,000,000.0, but with the corporate tax rate reduction because of lowered U. S. Tax rate, profit attributable to owners of the company became JPY72.6 billion, which is decrease of JPY15.6 billion compared to the same term in the previous year. Please take a look at Slide nine. The slide shows revenue increase and decrease for the major business unit. Slide six shows revenue situation of each unit excluding ForEx impact, but this slide shows actual number including ForEx impact. Because of patent cliff on OMS Alton, U. S. Daisankyo Inc. Revenue was significantly decreased, but domestic pharmaceutical business in Japan made steady sales growth compared to the previous term. Daisankyo Healthcare is also doing well. In overseas market, Leutepold in The U. S. Is making a big sales growth. Please turn to Slide 10, which shows revenue increase and decrease of major products in Japan. Major products such as Luxyana, Pralia and Ixium, sales are on track. However, more number of long listed products are having difficult time compared to the previous time because of expanded generic products impact. Next is about FY twenty seventeen revised consolidated forecast. Slide 12, please. Revenue is revised up to JPY $950,000,000,000. Although there is a decrease of revenue of ASKA business, we expect JPY 20,000,000,000 increase in revenue coming from Daiichi Sankyo Healthcare, Daishisankyo Inc. With currency exchange impact, Ruytopold and Daishisankyo Europe. Sales increase is accompanied by the cost of sales increase. Therefore, we expect JPY 10,000,000,000 cost increase, including JPY 5,000,000,000 onetime cost, which we are not able to talk about details. R and D expenses are revised with the addition of JPY 10,000,000,000 because we are accelerating research and development center in oncology. We would like to maintain JPY 75,000,000,000 of operating profit and JPY 50,000,000,000 of profit attributable to owners of the company. Next, I am going to present edoxaban update. Since the launch of Lixiana, efforts have been made to maximize its value. In November 2017, in Japan, we launched OD orally disintegrating tablet of Lixiana. And OD tablets were designed for easy administration, and easy administration is highly evaluated by doctors as convenient, especially for elderly patients. In December 2017, Lixiana demonstrated non inferiority in primary endpoint against dalteparin in HOXSY BTE cancer study. Dalteparin is a standard of care in US and EU for VTE associated with cancer. In the late breaking session of USH two thousand seventeen, Lixiana was presented as the first drug to achieve no inferiority against dalteparib, which is injected. MoVD patients with cancer may be assured to use a drug without any worries. Next is the status of R and D. Please look at Slide 16. As we presented in December on R and D Day, this is our development program for DS-eight 201. Gastric case is ongoing Phase I study, and this was presented in ASCO GI in San Francisco. I would like to share that data with you today. Please turn to page 17. Here is phase one study design. At ASCO GI, gastric cancer cases from part one, which is dose escalation part, we also have data from Part IIb. And this was presented at the meeting. Slide 18. This shows a patient's background. Total of forty five cases, and forty four had prior treatment with trastuzumab, which is a standard of care. And twenty four cases had prior treatment with CPT eleven, Irinotecan. Please look at slide 19. This table shows response rate. Out of forty four evaluable cases, response rate was forty five point five percent. And payload for DS eight thousand two hundred one is modified compound of CPT eleven urinotica. Patients with prior treatment with CPT eleven also showed response rate, which was forty three point five percent. Estimated median for PFS is five point eight months. PFS in general for this line of treatment is considered to be around two months. So five point eight months is very good result. Please turn to Slide 20. This shows tumor shrinkage of DS-eight 20 as a treatment duration. Vertical axis shows tumor shrinkage at each bar represents a patient. The lower the bar, there is more tumor shrinkage. Pink bar is patient with prior treatment of Irinotecan. Yellow with no Irinotecan treatment. All cases show similar efficacy. Blue bars show treatment duration. And the arrows on the tip are patients continuing with the treatment. As you can see, seventeen patients continue to be treated. Slide 21, please. Vertical axis show tumor shrinkage and horizontal axis is treatment duration. You can see the chronological changes in tumor shrinkage of each patient. Tumor shrinkage was observed from early period, and it was continued. It may be difficult to see, but the yellow line indicates cases with low HER two expression. One case showed same efficacy as HER two positive case. Slide 22, please. Here are CT images of patient who responded to the treatment. This is a case of sex 76 year old gastric cancer, a man with liver metastasis. He had prior treatment with other drugs, and the red arrows shows the metastasis from gastric cancer to liver cancer. And lower images shows tumor shrinkage one year after 13 cycles of treatment with DS-eight thousand two hundred one administered once every three weeks. This table shows adverse events rated from grade one to five, five being the most serious AE. Irinotecan has serious AEs of digestive organs, but forty five cases presented this time had no AE of over grade four or five. There were two cases of suspected interstitial pneumonia, a grade one and grade three among gastric cancer cases. And these cases will be evaluated further by adjudication committee of the interstitial pneumonia. Slide 24, please. Here is a summary of presentation at ASCO GI. DES eight two zero one has shown manageable safety and promising antitumor activity in heavily pretreated subjects with HER two positive cancer who have been receiving trastuzumab regardless of prior CPT eleven treatment. Currently, pivotal phase two studies ongoing with HER two positive unresectable cases, metastasis gastric cancer cases also to confirm the efficacy and safety of DS-eight thousand two hundred one. Slide 25, please. In December, we reported research collaboration with U. S. Memorial Sloan Caterings Cancer Center to conduct preclinical study to evaluate combination of TS-eight two zero one and neratinib developed by Puma with patients of solid tumor and HER two mutation. Significance of neratinib in combination with d s eight two zero one was previously reported on r and d a day, but I will use slides today for further explanation. Neratinib is tyrosine kinase inhibitor targeting HER two and is already launched and available in the market. Neratinib blocks HER two signal and suppresses cell proliferation and survival. HER two dual blockage by combination with DS eight thousand two hundred one is expected, and this will be evaluated in the trial. Neratinib is also considered to increase internalization rate and may increase uptake of DS-eight thousand two hundred and one into tumor and show synergistic effect. This hypothesis will also be explored further in the preclinical trials. As appendix, following items can be found. R and D milestone events, major R and D pipeline, out licensing projects, roxadustat injector for update and abbreviations. Please check later. That is all from me. And now we would like to take questions from you. Thank you very much. We have many people from our company, so we look forward to Q and A session. Now we'd like to start a question and answer session. The first question is from Mr. Yamaguchi of Citigroup. Mr. Hirokawa, I understood the sales information regarding FY twenty seventeen revised consolidated forecast. But would you please give me some image including guidance about the cost of goods, which included special items? With the increase of sales, cost of sales increase and there is onetime cost in relation to the cost of sales. Right now at this point, I am not able to share the details, but including the onetime cost, cost of sales will increase by JPY 10,000,000,000. Does that mean you include that amount because the cost will be incurred in the future almost for sure. Yes, we included the cost thinking it will be incurred by the end of this fiscal year. Understand. But this is one times, therefore, will be gone next year. Yes, after we book the amount this term, this will be gone. Understand. About R and D expenses, I understand you are standing in the phase of increasing the R and D expenses, but there might had been a way to fill the gap to JPY 100,000,000,000 caused by asset impairment. Have you thought about that? With special items, R and D expenses will increase. At the end of the second quarter, we are still hoping to reduce the R and D expenses, but especially for oncology area, R and D activities were reaching a quite advanced stage. Because of that reason, we decided to be on a conservative side to increase JPY 10,000,000,000 without changing initial OP target. Understood. My last question is about interstitial pneumonia of eight thousand two hundred and one. I may be confused. Are these mentioned two cases different from the cases which was mentioned at the previous R and D meeting? Yes, I talked about gastric cancer cases and the previous cases were for breast cancer. There are one Grade one and one Grade two cases for gastric cancer trial. Investigators reported interstitial pneumonia and pneumonitis and of course these two cases will be adjudicated by the adjudication committee. I understand. Has the adjudication committee reached any conclusion about the previous cases for breast cancer? We'll be able to make a report when we have organized information. As clinical trial proceeds, we receive more information. But an important point is regarding adverse drug reaction, the adjudication committee adjudicate and we respond appropriately based on that, I understand. One last question, allow me to ask you a basic question about neratinib. I understand the point of double inhibition of HER2. My question is if there's any risk of too much inhibition? It is true that generally inhibition causes an increase of gene expression. But different from lapatinib, there's a report that leratinib promotes internalization of HER2. Yes, you mentioned that. This is a hypothesis we'd like to confirm by doing the preclinical trial to see if there's a synergy effect created by AT-two zero one and hard to conjugate when it is internalized. Right. I understand. Thank you very much. Next question is from Mr. Seki of UBS Security. This is Seki. I have three questions. The first question is about the R and D expenses. It has increased by 10,000,000,000 this term and it is bottomed up by JPY 30,000,000,000. Therefore, real amount is JPY 200,000,000,000. Should we expect this level to continue into the future? At the R and D meeting, a pie chart was distributed, and I'm talking about the dotted line portion. I'd like to understand how that portion should be interpreted. One of the management issues could be P and L management of R and D expenses. Can JPY 200,000,000,000 one of the guide? Or should we prepare ourselves for the future increase? This is my first question. Glenn Gormley talked about that at December R and D Day. Daiichi Sankyo is going through a transformation. Especially R and D's shifting focus to oncology, it means that the resources shifted to that area. That is currently going on and asset impairment took place while we are going through this transition. We would like to focus our resources so that we can make progress in oncology as much as possible. Also, Nakayama mentioned that we have a quite good pipeline. For business development, there are JPY 500,000,000,000 planned for the midterm business plan. It could be spent if necessary. But there is a ceiling of R and D expenses that is our discipline. Therefore, we'd like to do a close examination so that expense will not increase very much. For this year, please understand that transition period of shifting focus and asset impairment overlapped to shape this number. Thank you very much. The amount is not going to increase in the future, isn't it? That's what we like to do. Thank you. The second question is about eight thousand two hundred one gastric cancer. There's one LOHA-two patient and showed a very encouraging response. Generally speaking, most people would want to see more response of LOHA-two patient because people could intellectually curious. At the point of ASCO meeting, there's one LOHA-two patient, but there's no new LOHA-two patient being registered after that. Are there any reasons for that? Is it just because there's no more registration or is there any other reasons? That is about Part 2b on Slide 17. For Part 2b, there is trastuzumab pretreated gastric cancer and HER2 positive. For Phase I Part IIb, patients already received Herceptin pretreatment that means all patients are HER2 positive otherwise the treatment had not been indicated. There is one subject with low HER2 because for dose escalation period of Part one, the subject did not have to be HER2 positive. This subject enrolled the study from that phase and the study drug was very efficacious. Phase II pivotal study, which is currently going on, we will include a low heart subject for the exploratory purposes. There is one subject, the study drug is working very well, therefore we'd like to review this case also. To answer your question, please understand that the reason why we have a small number of LOHA-two is because of inclusion criteria. Thank you very much. That means until Phase II data becomes available, we will not see any data on gastric cancer patient data with LOHA-two. You're right. There's only one subject right now who enrolled when PROD1 trial was going on. The drug is efficacious to the patient just like it is to other subject. We think there's a potential like breast cancer. I understand. The last and the third question, there will be AACR held in April. Do you have any plan to announce some basic data or any kind of data? I will have Akahane answer this question because AACR is a research area. Thank you for your question, Mr. Seki. This is Sakaane. We are currently planning to present some of our pipelines, but there is no information we can discuss as of today. Thank you very much. It is fine. We move on to the next question from Daiwa Securities, Hashiguchi. Mr. Hashiguchi, please. You. I am Hashiguchi. I have several questions. First question is concerning the situation of Lexiana. Sales in Japan compared to the past quarters seem to be quite favorable. What is the background against this? In the appendix, you have the share indicating smooth growth. But the trend, I don't think, remains the same for second quarter. There is a new launch of OD tablet. So maybe there were some factors in the distribution or shipment. And there may be some strength of the product and other factors. Can you comment on the background, please? Thank you for your question. As for Lixiana, this was developed in Japan. And low body weight, the patients can also be administered adjusting the dosage, and we have a lot of data. And this may represent as comfortable and convenient to the doctors. And OD tablet. The elderly patients have several medications to take every time, and Japanese patients say it is difficult to swallow the tablets and even capsules. Even without dysphagia, people say that it's difficult to take the medication. And orally disintegrating tablet, the bitterness of the medication is covered. And once it is administered immediately, it disintegrates inside as a mouse. There are many elderlies being treated, and the doctors highly evaluate this formulation. And it consists of a big portion of the sales, and this is another factor for increasing the sales. As for other companies, they are overseas companies, and I have no news or information of any company developing orally disintegrating tablet. So we think this is a very good situation for us. So that means the sales of March, there is not much basis for evaluating or preparing for the demand. But we are growing smoothly. And personally, we will be having drug price revision. But as for OD tablets, I don't think there will be any problem concerning the purchase. Second question, I want to know the situation about VELCO. Until the third quarter, there was not much change in the trend of the sales. But the assumption is that you will have lower sales in the future. I don't think there is generic product yet. What is the situation that you foresee, please? As for Velco, the patent, we already have no patent. But if you follow FDA guidance, it is quite difficult to launch generic product. And when generic is going to come into the market, we try to get that information, but not for the time being. There's a similar drug, and it is also off patent. And because of that, there are changes in the sales figures. But how it goes down? The sales decreased during the plan for annual figures. The estimate was quite low, but actually it is not so low. Therefore, we revised the figure upward. However, every year, if you look back, there is a tendency of decreasing. That is not changed. So third quarter and fourth quarter, you are not expecting major change. Is that correct understanding? Yes. We have no assumption like that. Thank you very much. Next question from Credit Suisse, Mr. Sakai, please. Thank you. I am Sakai. First, the questions that I always ask, if you allow me. Fourth quarter, there's a tendency that you say that the figures are in deficit and this time as well, third quarter and fourth quarter and the year, the assumption is deficit in the fourth quarter and this structure is not going to change. I just want to confirm that with you. Yes, every year it's like that. Until the third quarter, the operating profit tend to go up. But looking at fourth quarter itself, the figures are in red. There's a delay in the implementation of expenses, and we wonder how we can change this. And we had different plans. But, again, we have the same tendency this year. Understood. Two other questions regarding r and d. Gatrial cancer data. It's early stage patient, but efficacy has been confirmed. On page 20, there's a table. Seventeen cases are continuing with the treatment. This seventeen patients. They decided to continue the treatment, and what are the factors for them to continue? What is the selection criteria? Were there any requests from the patients? If you had any criteria, I would like to know that. Yes. Now the patient. If you look at page 21, tumor shrinkage rate. There is a case where there was no shrinkage and the tumor got bigger. In that case, the treatment will be stopped, and the patient will be treated. But if there is no worsening and PFS seem to be good, then we would also like to continue with the treatment, which means seventy cases continue with the treatment, and PFS median was preferred too earlier, but the possibility is that this may be further extended. So if the tumor doesn't grow anymore and can continue with the treatment, then we can do so without any adverse reaction. So on Page 19, amongst the evaluable cases, twenty cases, PFS five point eight is a figure that is shown, and this is what you are referring to. So those who have been treated up to now and PFS survival may be short, but for these patients, they continue to survive. And at the cutoff point, median five of PFS, and there's a possibility that this may be further extended. The tumor is controlled, and it is not growing. And the treatment can be given to the patient, so that is why they are being treated. Thank you. One more question. Concerning the follow-up of R and D, was it during R and D meeting? DS-ten sixty two, non small cell lung cancer. Current laser stage is advanced, progressed as shown in red, but still it's in phase one stage. What is the schedule from now on? And can you give me some information concerning this, please? So we started phase one. And what is important ADC? For example, we have ten sixty two and U31402. Breast cancer here in Japan is being investigated. So ADC pipeline, we have one after the other, and we have large amount of data first for 08/02/2001. And then after that, one four zero two and 1062. And if we are able to get similar results, we will be convinced with the value of technology, and we will be more confident. We want to wait for the data to come out. And as for the progress, it may depend on the cancer type and also antigen, and the speed of development may be different, and we are now looking forward to the data to be generated. Thank you very much. If you have any questions, please use the phone. There's no further questions, so this is the end of QA