Sumitomo Pharma Co Ltd

TSE:4506

Earnings Call Transcript 2019-Q1

[Hisayoshi Kashima, executive]

I would like to present the financial results for the first quarter FY 2018 and clinical development updates. Please look at Slide 3... I would like to explain the financial results for the quarter on IFRS core basis.

Both revenue and profit decreased from the same period last year. Total revenue was JPY 115.9 billion, a slight decrease by JPY 300 million. North America segment increased sales while Japan segment decreased revenue.

Meanwhile, cost of sales increased as well as cost as a percent of sales. This was driven by NHI price revision in Japan. SG&A increased due to prelaunch activities in North America. R&D costs increased as we made progress in clinical development. As a result of these, core operating profit decreased by JPY 6.3 billion to JPY 18.4 billion.

As for changes in fair value of contingent consideration, the expenses decreased substantially in the same period last year due to changes in napabucasin development plan, whereas, this fiscal year, expenses are booked according to the progress over time, driving the decrease in profit by JPY 9.6 billion from the same period last year. The operating profit as a result decreased by half to JPY 15.8 billion. The progress of core operating profit was 44.9% versus second quarter forecast due to higher cost of sales and more operating expense spent. For your information, we have not revised financial forecast for the year.

Please go to Slide 4. This slide shows revenue of Japan segment. The revenue increased by JPY 1.8 billion from the same period last year to JPY 35.3 billion, of which the impact of national drug price changes was JPY 2.5 billion. If we exclude this, the revenue exceeded the prior year on volume basis. The loss in long-listed product was offset by Trulicity and other products. The progress versus the second quarter forecast is 51.9%. We are making progress almost according to the plan.

Please look at Slide 5. I would like to explain revenues in North America and China segment. The revenue in North America was JPY 60.6 billion, an increase by JPY 700 million from the same period last year. LATUDA sales reached JPY 43.8 billion, which is not as high growth as what we have seen before, probably because we reduced promotional spend last fiscal year. We already revised activity planned for LATUDA and have seen signs of improvement. APTIOM grew by about 30%. LONHALA MAGNAIR was launched in April, and the uptake is what we expected.

China revenue was JPY 5.4 billion, up by JPY 200 million. The progress was according to the plan. For your information, revenues outside Japan, including export business, now account for 61.3%.

Please go to Slide 6. I would like to explain financial results for the quarter by segment. Japan segment profit decreased by JPY 2.5 billion from the same period last year to JPY 9.4 billion due to impact of NHI price reduction on revenue and gross profit. North America segment increased its SG&A spending, resulting in decrease in segment profit by JPY 4.1 billion to JPY 25 billion. The increase in spending was due to increased marketing expense for LONHALA MAGNAIR.

Overseas others increased revenue due to positive trend in MEROPEN shipping to Southeast Asia. The profit of the segment also increased by JPY 1.2 billion from the same period last year. Other segment revenue decreased because revenue is now booked on a net basis instead of gross basis after sales agreement of domestic subsidiaries was amended. There is no impact on the profit.

The Slide 7 shows the financial results on IFRS full basis, but I will skip the explanation. Please look at Slide 9. As I said earlier, the financial forecast has not been updated. Although LATUDA marketing expenses increased by $20 million, the overall SG&A expenses will stay within the forecast.

The changes in fair value of contingent consideration decreased due to the revised NDA timing of alvocidib. However, the impact to the overall performance -- financial performance is not significant. Therefore, we did not change the forecast or the guideline. The timing of alvocidib NDA filing will be discussed later when I present R&D slides.

Please look at Slide 11. I will explain development pipeline status. This is a list of development compounds and development phases. Changes since May this year will be presented in the following slide.

Please go to Slide 12. This slide summarizes change points since May. In psychiatry and neurology area, additional indication was approved for TRERIEF in July. This is the first approval in the world for this indication.

Apomorphine NDA application was accepted in June, and the standard review began by FDA. The review is expected to complete on January 29, 2019, and the launch is scheduled in the first quarter of FY 2019. For your information, Phase III study data was presented in June at a conference. You will find the details in the appendix.

As for dasotraline, in the 2 pivotal studies for the indication of binge eating disorder, positive top line was achieved. I will explain in the next slide.

As for oncology, alvocidib Phase I/II study for MDS indication started in the United States. Phase I/II began for TP-0903 for the treatment of CLL. In Japan, thiotepa NDA was submitted.

Please go to Slide 13. This slide summarizes the results of 2 pivotal studies of dasotraline for the indication of adult binge eating disorder. The press release was issued yesterday, on July 26, with the top line results. The efficacy primary endpoint was met in 6-milligram treatment group. You see the summary of 2 pivotal study results, both of which demonstrated positive results. We will file NDA in the United States with this data during FY 2018.

Please go to Slide 14. I'll explain Phase II study for our alvocidib AML indication study. The NDA submission target was in FY 2018, but it's being behind. It's been changed to FY 2019 due to revised subject enrollment plan after competitor's development is increasing. Currently, stage 1 is complete and stage 2 started. With the interim analysis data, the NDA will be submitted in FY '19.

Please look at Slide 15. This is a summary of progress to the FY 2018 target.

This concludes the presentation.

[Kazuaki Hashiguchi, analyst]

Hashiguchi, Daiwa Securities. My first question is about LATUDA. Please tell me any changes in trend, both in volume and price. You said the reduction in promotion expenses affected the first quarter performance. When did you start reducing promotion spending? You also said that the spending will increase soon. When have you started -- or will you start increasing promotional expenses?

[Hisayoshi Kashima, executive]

The trend of LATUDA is flat, both in volume and price. We already increased DTC expenses. We don't know exactly when spending was reduced last year, but probably the second half.

[Kazuaki Hashiguchi, analyst]

Are you saying the price is flat from the same period last year? If I remember correctly, you increased the price in the mid last year.

[Hisayoshi Kashima, executive]

The WAC price was raised 9.9% in January this year. Since then, it has not been raised. Since January, it's been flat.

[Kazuaki Hashiguchi, analyst]

My second question is about alvocidib. You gave us updates on this asset. You are planning on accelerated approval in fiscal year 2018. My understanding was FDA will clarify the possibility during consultation process. So the timing of NDA has changed from FY '18 to '19, but the probability of an accelerated approval hasn't changed. Am I correct?

[Hisayoshi Kashima, executive]

You're right, the probability hasn't changed.

[Kazuaki Hashiguchi, analyst]

My last question is on Trulicity. I would like to understand the future outlook of Trulicity. A competitor's product called Ozempic will be launched soon. It is subcutaneous administration, which is not differentiated from Trulicity, but later, oral formulation will be available. What is your outlook of Trulicity in terms of how these formulations will affect its sales?

[Hisayoshi Kashima, executive]

You're right, a new GLP-1 product will be launched. We think that the GLP-1 market will be stimulated. We don't believe it will affect Trulicity directly. We are hoping that the market will grow.

[Kazuaki Hashiguchi, analyst]

Would you say the same when oral GLP-1 will become available?

[Hisayoshi Kashima, executive]

Yes.

[Hidemaru Yamaguchi, analyst]

Yamaguchi, Citi. You said in your presentation that the progress was slower for profit. Were you referring to the 44.9% of core operating profit?

[Hisayoshi Kashima, executive]

Yes. The percent of progress is 44.9%, and the forecast for the year is 23.9% on Slide 3. We have not changed our guidance at this point.

[Hidemaru Yamaguchi, analyst]

I guess the reason is because -- LATUDA's slow performance in the U.S. and SG&A and R&D costs are higher. Those affected core operating profit, am I correct?

[Hisayoshi Kashima, executive]

You're right. We are spending according to the plan. Revenues were lower due to the slow start of LATUDA, resulting in lower gross profit. We think we can catch up with the progress by the end of the year.

[Hidemaru Yamaguchi, analyst]

Okay. I understand it's difficult to predict changes in fair value of contingent consideration. The second quarter forecast was minus JPY 8.5 billion, and the first quarter was JPY 2.5 billion due to alvocidib. Including these factors, the operating profit will be almost in line, do you think?

[Hisayoshi Kashima, executive]

The operating income will be affected largely by the changes in fair value of contingent consideration. So towards the end of the fiscal year, we will be performing impairment test for intangible asset, and at the same time, we will reestimate fair value of contingent consideration. Depending on the circumstances, the fair value could change substantially. At this point, we are not changing operating income forecast.

[Hidemaru Yamaguchi, analyst]

I understand. My next question is North America. LONHALA MAGNAIR was just launched. Its uptake is not necessarily high, but it will probably catch up. Meanwhile, the 3 COPD handheld products are not doing well. Could you explain why?

[Hisayoshi Kashima, executive]

You're right, the uptake has been slow. Part of the reason is formulary listing. We will be part of the formulary cycle in the beginning of 2019, which will help improve the situation. However, at this point, the results have been slow.

[Hidemaru Yamaguchi, analyst]

What about LONHALA MAGNAIR, is the formulary an issue here?

[Hisayoshi Kashima, executive]

The situation surrounding formulary adoption is the same. Our goal is to be listed in the early 2019 cycle.

[Hidemaru Yamaguchi, analyst]

Lastly, if you could provide any updates on LATUDA litigation time line. You explained the legal schedule during the earnings call in May. Any update since then?

[Hisayoshi Kashima, executive]

No, no more updates since the last time.

[Shinichiro Muraoka, analyst]

Muraoka, Morgan Stanley. I have a question about expenses. Historically, Sumitomo has typically underspent. During this reporting period, however, you are spending more than the plan. Is this because of the IFRS impact? Or is this because the new CEO has a new thinking for spending policies?

[Hisayoshi Kashima, executive]

During the first quarter, SG&A was unfavorable because DTC spending for LATUDA was more than the budget. R&D spending was in line with the plan. The overall progress of spending was faster than usual.

[Shinichiro Muraoka, analyst]

And was this because of IFRS?

[Hisayoshi Kashima, executive]

No.

[Shinichiro Muraoka, analyst]

And speaking of LATUDA, you said that it's catching up in the second quarter. Could you tell us any specific episodes that prove that?

[Hisayoshi Kashima, executive]

We are reviewing TRx volume, and it's increasing.

[Shinichiro Muraoka, analyst]

My last question is regarding alvocidib. You said that the study is behind schedule due to increased competition. You provided the same explanation before. On Slide 18, where you're showing product launch target, alvocidib is expected to reach peak annual sales to JPY 50 billion or more. Although the competition is increasing, do you think you can still achieve peak year sales of JPY 50 billion or more? There's no change on this projection, am I correct?

[Hisayoshi Kashima, executive]

At this point, there is no change. When we said the competitive landscape, we were referring to the competition in clinical trials.

[Shinichiro Muraoka, analyst]

I understand, but still competition after the launch will also increase. Anyhow, I understand so that's all.

[Seiji Wakao, analyst]

Wakao, Mitsubishi UFJ Morgan Stanley. I also have questions about LATUDA. The expenses are increasing, but it's just because you're spending earlier than the plan. You are not going to exceed the expense budget, am I my correct?

[Hisayoshi Kashima, executive]

As I said in the forecast section, LATUDA television commercial and other expenses will increase by $20 million, but the increase will be offset by saving other expenses so that the overall SG&A will stay within the budget.

[Seiji Wakao, analyst]

You said the fair value of contingent consideration will be reviewed at the end of the fiscal year. Do you think alvocidib is the only influence that could change the contingent consideration?

[Hisayoshi Kashima, executive]

Assets that will affect contingent consideration include BBI and Tolero's programs. Alvocidib is one of the biggest variables.

[Seiji Wakao, analyst]

My next question is regarding dasotraline. The top line results of Phase III study was released for the treatment of BED. The 6-milligram arm achieved the primary endpoint while 4-milligram did not. Would you submit NDA just for 6-milligram? If I remember correctly, 4-milligram did not meet the endpoint for ADHD indication. Could you tell me which doses you will submit NDA for ADHD? Do you also have any comments about -- only the 6-milligram achieving the primary endpoint and how that's going to affect your commercial assessment for both ADHD and BED?

[Hisayoshi Kashima, executive]

It's true. The 4-milligram did not meet its primary endpoint in the Phase III study. We also completed the Phase II/III study. Doses will be decided based on these 2 studies. At this point, we refrain from commenting on specific doses for NDA submission.

[Seiji Wakao, analyst]

What about ADHD indication? 4-milligram did not demonstrate significant difference.

[Hisayoshi Kashima, executive]

Well, regarding ADHD, we are in the process of consulting with FDA about the benefit and risk of efficacy and side effects. We are not ready to make comments about doses at this point.

[Seiji Wakao, analyst]

Understood. My last question is the last slide of the appendix, which shows napabucasin pancreatic cancer study. It looks like the data is very positive. I just want to understand the historical data of the subjects treated with combination therapy. How long can you usually expect for OS and PFS from chemotherapy?

[Hisayoshi Kashima, executive]

It's tricky to compare historical data because it's difficult to compare the same population. Just to give you an idea, OS among the subjects meeting the Phase III study criteria is better than the historical data.

[Seiji Wakao, analyst]

Could you give me specific numbers? What is OS for historical data in pancreatic cancer?

[Hisayoshi Kashima, executive]

About 10 months.

[Fumiyoshi Sakai, analyst]

Sakai, Crédit Suisse. I have a question about Japan business. You implemented early voluntary retirement Program and restructured the sales team. At the same time, Mr. Tada, the previous CEO; and the new CEO, Mr. Nomura said that Japan business need revamping. Are you seeing any changes? Of course, during the first quarter, the national drug prices were revised, but could you share with us some success as a result of org change?

[Hisayoshi Kashima, executive]

We established Japan business unit in April 2018 as a virtual team. It's only been 3 months. We reduced the number of sales reps while maintaining top line. Maybe it's not because of the Japan business unit organization but the sales team has definitely improved its capabilities.

[Fumiyoshi Sakai, analyst]

What is a virtual organization?

[Hisayoshi Kashima, executive]

Well, sales and marketing division and pharmacovigilance and QA division still exists. The company heavily invested in North America business and not as much in Japan. To increase more focus on Japan business, we created a team to build strategy and improve cross-functional efforts, including and involving sales and marketing, corporate regulatory compliance and quality assurance division and drug development division. Just to add to that explanation. Sumitomo Dainippon has headquarter divisions such as sales and marketing, drug development division, production, manufacturing, et cetera. Each of these headquarter functions assigned a leader to work together in areas relative to Japan business. Specifically, it's a cross-functional leadership who will be responsible for investment decisions for Japan.

[Fumiyoshi Sakai, analyst]

Understood. One more question about dasotraline. You released the results for BED study, and ADHD study results are already available. Has the scheduling been decided? Is the discussion still ongoing?

[Hisayoshi Kashima, executive]

It's not been decided. The scheduling of the drug is not decided yet. It will be reviewed and decided after NDA is approved.

[Fumiyoshi Sakai, analyst]

As far as you're concerned, do you think dasotraline is a stimulant?

[Hisayoshi Kashima, executive]

No. We think it has a profile that is different from a stimulant, but we don't know how FDA will evaluate scheduling.

[Shinichiro Muraoka, analyst]

Muraoka, Morgan Stanley. I forgot to ask you this. I have a question about sales rep headcount. Looking at the table in the supplemental financial data, the number of reps increased by 20 from March last year. Is this because of just job assignment of new hires? Is this a meaningful change?

[Hisayoshi Kashima, executive]

The number of reps decreased from 1,300 in December 2016 to 1,130, which was a significant drop. As you pointed out, 20 people increased for no special reasons. We increased contracted reps slightly.

[Shinichiro Muraoka, analyst]

Are they contract reps?

[Hisayoshi Kashima, executive]

Yes.

[Yo Mizuno, analyst]

Mizuno, Tokio Marine Asset Management. I have a question on the last slide regarding napabucasin pancreatic study. Earlier, someone was already asking question on this slide. Could you explain how to read the data, particularly the difference in OS between all patients and subjects who met criteria in CanStem 111P Phase III study?

[Hisayoshi Kashima, executive]

As far as I can see, the biggest difference is seen in OS.

[Yo Mizuno, analyst]

Do you think OS improved because of the mechanism of napabucasin despite the fact that PFS is the same between all patients and eligible patients? Or is it because of the criteria?

[Hisayoshi Kashima, executive]

One cannot compare whether the OS has improved or not between all patients and patients eligible for the Phase III study. These patients met the criteria, they enroll the CanStem 111P study. The outcome of the Phase III is not predicted from this population. One cannot argue how efficacy of napabucasin was different between all patients on the left and the patients eligible for Phase III on the right.

[Yo Mizuno, analyst]

I see. The OS for all treated patient is 9.6 months. That is not the same as historical 10 months that you mentioned earlier?

[Hisayoshi Kashima, executive]

As I said before, there are different kinds of historical data and one cannot compare them. For example, in 2013, a relatively large Phase III study was conducted where gemcitabine and nab-paclitaxel were dosed. The median OS was 8.5 months. Compared to that study, the result this time is much better.