Sumitomo Pharma Co Ltd

TSE:4506

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for joining the earnings call for Sumitomo Dainippon Pharma. We will be presenting the financial results for the first quarter and development status update. Attendees from Sumitomo are Toru Kimura, Chief Scientific Officer; and Kashima-san from Finance and Accounting. Please refer to the slide deck on the corporate website. Please note that the conference call will be recorded and posted on the website.

Kashima-san will be giving the presentation first.

[Hisayoshi Kashima, executive]

I would like to explain the first quarter financial results and development pipeline updates. Please look at Slide 3. This shows financial results for the first quarter. The numbers are shown on IFRS core basis. The revenues were JPY 133.9 billion, up by JPY 16.4 billion from the same period last year. The China segment declined, while Japan and North America segment increased revenues. SG&A expenses exceeded last year due to increased costs from Sumitovant consolidation, while sales promotion expenses were down due to COVID-19. Likewise, R&D costs also increased.

As a result of these, core operating profit increased by JPY 2.1 billion from the same period last year to JPY 24.4 billion. Changes in fair value of contingent consideration were significant reasons for profit decline because of a reversal of expenses due to stopping Phase III trial for napabucasin in pancreatic cancer last year. This year, the spending is normal. As a result, operating profit decreased by JPY 17.2 to JPY 23.3 billion.

Meanwhile, net profit attributable to owners of the parent increased from last year. This was primarily due to tax increases after reversing deferred tax assets in the U.S. in the same period last year. Comparing to the previous forecast, the revenues are in line, while SG&A spending is lower. Because of this, both core operating profit and operating profit are better than the forecast. We have revised the full year outlook and included the nonimpact of COVID-19. I will show you later.

Slide 4 shows revenues of Japan segment. The revenues in Japan were JPY 39.7 billion, up from JPY 7.1 billion from the same period last year. We started promoting Equa/EquMet in November 2019, and they contributed to sales growth. Trulicity continued to grow as well. We launched LATUDA in Japan on June 11. It's reached JPY 500 million in revenues.

The spread of COVID-19 has affected new product promotions. LONASEN Tape is slowing down because of this. The long-listed products continue to decline. Others declined as well, such as LONASEN oral, because the generic was launched in June 2019. The progress to forecast is 25.7%. Japan segment overall is making progress according to forecast.

Slide 5 shows revenues in North America and China segment. The revenues in North America were JPY 74.1 billion, an increase by JPY 8.1 billion from the same period last year. LATUDA reached JPY 53 billion, up by 8.3%. APTIOM continued to remain strong at 27.8% growth. Myovant, which is one of the 5 companies of Sumitovant, recorded revenues for relugolix license in Europe. Overall, the progress to the forecast is almost in line.

The impact of COVID-19 has not been significant during the reporting period. However, we expect to see negative impact on revenues in the future. The revenues in China segment were JPY 5.1 billion, substantial decrease of 25%. MEROPEN prescription decreased a lot due to COVID-19. The progress to the outlook is low.

Please go to Slide 6. I will explain segment information for the quarter. The core segment profit in Japan was JPY 8 billion, up by JPY 800 million due to revenue increases and expense decreases. The North America segment increased core segment profit by JPY 6.4 billion to JPY 35.9 billion. The expenses increased significantly after consolidating Sumitovant, but the revenues increased and Sunovion decreased expenses. The China segment profit was down to JPY 1.1 billion because of revenues declines, although the expenses were down.

Please look at Slide 8. I will explain revised financial forecasts. The previous forecast did not include impact of COVID-19. We revised full year outlook this time around to capture some impact that we are assuming at this point in time. The revenues in the U.S. were strong in the first quarter. However, with the unemployment rate rising, we revised revenues downward because we think that some patients will no longer be covered by commercial insurance. We also revised China downward based on the first quarter results. Overall, the decrease in revenues will be JPY 15 billion.

As for SG&A expenses, we lowered the number by JPY 10 billion because of sales activities will be less. The core operating profit remains the same as the previous forecast. Operating profit is also the same as the previous forecast at JPY 24 billion. However, the income tax will be down, resulting in an increase in net profit attributable to owners of the parent by JPY 2 billion to JPY 9 billion.

Please look at Slide 9. I will explain financial forecasts for each segment. We revised revenues downward for LONASEN Tape in Japan. Overall, revenues in Japan will be down by JPY 1.3 billion. However, the core segment profit will increase because SG&A expenses are down due to lower promotional expenses.

Regarding North America segment, we expect that COVID-19 will affect LATUDA and other products, and revised revenue forecast by JPY 9.5 billion. SG&A expenses will also decrease. The core segment profit will be down because the decline in revenues will be higher. As for China segment, we revised both revenues and SG&A expenses downward due to COVID-19. Other regions downgraded revenues by JPY 1.9 billion due to decline in MEROPEN export.

Please go to Slide 10. Sumitomo Dainippon entered into strategic alliance with Roivant in October 2019. In December 2019, we executed JPY 270 billion bridge loan, and paid upfront $3 billion or approximately JPY 330 billion in total for the strategic alliance. To secure a permanent financing, while maintaining our long-term financial integrity, we decided to issue hybrid bonds today. The hybrid bonds will be issued to a maximum of JPY 120 billion, as outlined in this slide. The balance of the bridge loan will be refinanced by bank loan.

Please look at Slide 12. From here, I would like to explain development updates. This slide shows a list of development pipeline of Sumitomo and development phases. I will explain the changes from May this year.

Slide 13 summarizes updates from May. In CNS area, KYNMOBI was approved in May for the treatment of episodes associated with Parkinson's disease. We are scheduled to launch in September this year. We obtained results from global Phase II study for SEP-4199 for bipolar 1 depression. The primary end point did not reach statistical significance. However, SEP-4199 did result in clinically meaningful improvement. We think we were able to confirm proof-of-concept in this study, and we are considering to start Phase III studies.

In oncology area, FDA accepted relugolix' NDA submission for priority review in June. Expected PDUFA date is December 20, 2020. Our goal is to launch it in this fiscal year. In other therapeutic areas, we submitted NDA for relugolix for uterine fibroids in May. We also obtained positive results from the second global Phase III study called SPIRIT 1 for endometriosis. I will explain the results in the next slide.

Furthermore, we submitted NDA for Imeglimin for the treatment of type 2 diabetes in Japan today, which is July 30, 2020. With the spread of COVID-19, we are currently focusing on patient safety, while continuing clinical studies wherever possible by meeting the latest regulations and guidelines. Some of the clinical studies suspended enrolling new patients, but we are carefully resuming recruitment.

Regarding Phase III study of napabucasin for colorectal cancer, availability of results have been delayed due to limited access to study sites for data cleaning and verification. We expect to receive results in the fall or later.

Please look at Slide 14. This shows results of SPIRIT 1 and 2 for relugolix. In both studies, relugolix achieved co-primary end points with significant pain reduction. Relugolix also achieved all 7 key secondary end points in SPIRIT 1. We were able to demonstrate 2 consistent positive studies in SPIRIT programs. Safety was generally well tolerated, with minimum bone mineral density loss. 1-year extension study results will be available in the fourth quarter of FY 2020. Myovant will submit NDA with SPIRIT 1 and 2 and 1-year extension study results.

This is the end of my presentation. Thank you.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. My first question is regarding revenues in North America. The progress was in line with the plan in this reporting period. I want to know if you break down revenues in terms of unit price and volume. Do you think the revenues were in line with the plan? Do you think the distribution of products were the same as planned, and the gap between total volume shipped and prescription dispensed is minimum?

[Hisayoshi Kashima, executive]

Are you asking about actuals in the first quarter?

[Kazuaki Hashiguchi, analyst]

Yes. I just want to understand, you said that revenues in the first quarter were in line with the plan. However, you revised the full year forecasts. I just want to understand where you see the signs of changes? I understand the numbers here, but I just want to understand the breakdown?

[Hisayoshi Kashima, executive]

Yes. The actuals in the first quarter were the same as forecast. We incorporated the risks because we think the unit price revenues will decrease in the upcoming quarters and downgraded full year forecast.

[Kazuaki Hashiguchi, analyst]

So do you think the situation has changed since May? The last time we met in the fourth quarter financial briefing, you said the situation hasn't affected the business yet, but it's likely the business will be affected. Did you revise guidance because the revenues will be affected although the impact has not appeared in the numbers?

[Hisayoshi Kashima, executive]

Yes, you're right. Up until June, it hasn't changed since the last call in May.

[Kazuaki Hashiguchi, analyst]

Okay. I also have a question about Sumitovant SG&A expenses. In this reporting period, JPY 6.4 billion SG&A expenses were spent. In the beginning of the fiscal year, you budgeted JPY 46 billion for the full year. The percent of progress in spending SG&A seems to be very slow. Why? Also, for the whole year, you reduced SG&A in the U.S. segment. I want to understand the changes for Sumitovant and outside Sumitovant, please?

[Hisayoshi Kashima, executive]

Yes. So we advised SG&A downward in North America segment for the full year forecast, mostly for Sunovion outside Sumitovant. The reason for Sumitovant underspending is that they will start hiring sales reps in the second half. We expect spending to happen more in the third and the fourth quarters. And that is what we planned, and we are making progress according to the plan.

[Seiji Wakao, analyst]

Wakao from Mitsubishi UFJ Morgan Stanley. My first question is also about downgrading revenues in North America. You said commercial insurance coverage will decrease and, as a result, the unit price sales will decline.

In case of LATUDA, I think more patients are covered by Medicare, Medicaid and commercial insurance. I wonder why you think that impact is so high. What is the coverage ratio between commercial versus Medicare, Medicaid? And when do you expect to see the unit price revenues to decline? Is it in the third quarter, fourth quarter or even the second quarter, please?

[Hisayoshi Kashima, executive]

The ratio of coverage is approximately 30% commercial for LATUDA. This is an area where we think we'll be affected due to unemployment, and these patients will be covered by Medicaid or no insurance. When do we start to see the impact? Well, as more people start to lose their jobs, we think we start to see the revenues to decline in the second quarter. But at this point, the impact has not been apparent.

[Seiji Wakao, analyst]

I see. So you think the 30% commercial coverage will be affected, and you expect to see the impact in the second quarter?

[Hisayoshi Kashima, executive]

Yes, that is correct.

[Seiji Wakao, analyst]

That's clear. My second question is also about Roivant SG&A expenses. You budgeted substantial marketing expenses this fiscal year. Do you have confidence to spend according to the plan? I'm asking because I think it will be difficult to promote new product under COVID-19 situation, and I think you won't be able to spend expenses as much. I guess you didn't revise forecast because you think you will spend? But how likely is it that you might be underspent? What is the possibility?

[Hisayoshi Kashima, executive]

Well, possibilities are possibilities. At this point, we provided the best estimate numbers, and we will spend as planned. The change could happen if there are any changes in the third quarter.

[Seiji Wakao, analyst]

I see. My last question is about napabucasin. In the last financial briefing, you said the readout has been delayed and data will be available in the fall or later. This time, again, you said fall or later. I understand you have not been able to access data in study sites. When you say fall or later, are you thinking the new year timing as a possibility?

[Toru Kimura, executive]

Thank you. This is Toru Kimura. I will answer your question. The reason for the delay is data cleaning and verification process. The clinical trial itself is going well, and patients are dosed. As we gather data to prepare for NDA, we need to visit hospitals and go through each one of the medical chart and verify data. The process is called data cleaning. Before we start statistical analysis, we need to verify all the data, including typos and other errors. Now we cannot visit some hospitals, and we don't have access to data. It's taking time. That is where we see the challenge.

In the last financial briefing, we mentioned the full timing because COVID-19 situation will start to resolve, and we can start visiting the sites in the fall. However, we are seeing the second wave in Japan, and the pandemic is worse in the southern part of the U.S. The northern part is better, but we are not able to visit institutions in the south.

As for Europe, the situation continues to improve, but we just need to visit and access all the medical institutions to verify data. And we think it's difficult to start data cleaning in September. So when we say fall or later, we think it will take longer. Unfortunately, we don't know exactly when.

[Seiji Wakao, analyst]

I see. So if the pandemic continues, it will be difficult for you to gather data, and you might see the results in the new year then?

[Toru Kimura, executive]

We just don't know if it will be in the new year. We just don't know when.

[Shohei Oda, analyst]

Oda from Morgan Stanley MUFG Securities. I also have a question about downward revision of revenues. In your presentation, you said that China segment was affected by COVID-19 and sales were down. In North America, the revenues forecast was revised downward because unit-based revenues will decrease, although the impact was not seen in the first quarter. What about Japan? Do you think the expenses will decrease due to COVID-19 more than sales decline, therefore, the core operating profit in Japan will increase? Is this the correct understanding?

[Hisayoshi Kashima, executive]

Yes, that is correct.

[Shohei Oda, analyst]

My second question is regarding relugolix. You have 2 phase III data for endometriosis. You said NDA will be submitted with the extension study data. Correct me if I'm wrong, but the NDA was filed for uterine fibroids with 2 Phase III studies without extension study data. Why do you have to wait for the completion of extension study?

[Hisayoshi Kashima, executive]

I don't think NDA uterine fibroids was submitted without extension study. There is also a difference in how patients are treated in case of endometriosis. Patients receive treatment longer and long-term safety data is important to include in NDA package. We have completed 2 studies. We gather follow-up data for extension study per protocol. I just need to double check on the extension study data for uterine fibroids later. I'll get back to you.

[Shohei Oda, analyst]

The extension study for uterine fibroids will end in March next year according to clinicalstudy.gov (sic) [ clinicaltrials.gov ]. Separately from this, did you submit NDA with 2 Phase III trials and the extension study?

[Hisayoshi Kashima, executive]

We just need to get back to you on this later.

[Shohei Oda, analyst]

I have another question regarding relugolix. The first entrant, elagolix, is already approved and launched for endometriosis. The revenues, however, are not very high, partly because long-term prescription is not allowed due to PMD side effect. The PDUFA date for relugolix uterine fibroid is December of this year. I think it will be approved and launched. And in March next year, the results from extension study will be available. Should I be concerned about the slow launch uptake?

[Hisayoshi Kashima, executive]

We are preparing for the successful uptake. And the biggest difference from the competitor is relugolix is less likely to cause side effect. Safety is key promotional point, and we are confident that the patients can be treated safely.

[Fumiyoshi Sakai, analyst]

Sakai from Credit Suisse. I have product-specific questions, first is LONASEN Tape. The progress to the plan is not good, but you have not revised the forecast. Why are you not revising JPY 5.3 billion for LONASEN Tape? Before, you mentioned the use of digital retail calls and other activities. So you haven't given up hope on LONASEN Tape, no offense?

[Hisayoshi Kashima, executive]

We revised revenues in Japan downward by JPY 1.3 billion. If you go to the appendix slide, Slide 18, you see product breakdown. LONASEN Tape was revised down by JPY 2.8 billion.

[Fumiyoshi Sakai, analyst]

I see. That's significant downward revision.

[Hisayoshi Kashima, executive]

Yes. LONASEN Tape is the biggest downward revision in Japan.

[Fumiyoshi Sakai, analyst]

Thank you for clarification. My next question is about diabetes treatment. In Japan, the diabetes market is very activated. With the upcoming launch of Imeglimin, you are also promoting Equa/EquMet and Trulicity. And I think you have been selectively differentiating this product well. My question is, can you combine Imeglimin with oral and GLP injectables?

And my second question is, are you aware of Trulicity's use to control appetite, maybe off-label use? That is what I heard. Are you aware? And what measures are you taking to address the issues?

[Hisayoshi Kashima, executive]

Let me address Imeglimin question first. We have done combination studies with multiple products for Imeglimin. Imeglimin can be used concomitantly with any types of mechanism, and it's oral. With regard to off-label use of Trulicity, we are not aware of such use. We ensure proper use of the product by explaining proper information to doctors.

[Fumiyoshi Sakai, analyst]

Thank you. So there is no impact then?

[Toru Kimura, executive]

And this is Kimura -- Toru Kimura. By the way, regarding the uterine fibroid question that was raised earlier, NDA includes 1-year extension study data. Thank you.

[Motoya Kohtani, analyst]

Kohtani from Nomura Securities. I have a confirmation question about LATUDA. You said the revenues will be lower because the payer mix will change. When I listen to earnings call in American companies, I haven't seen those companies revising revenues because commercial insurance is decreasing. I'm looking at Johnson & Johnson right now, it says 50% commercial, no change in payer mix. I understand they are a big company and most American companies don't release item-by-item information. But I just want to confirm, are you already seeing a certain percent of current commercial coverage shifting to health care exchange and Medicaid? Is this already a reality? Or are you making conservative assumptions based on the economy?

[Hisayoshi Kashima, executive]

We are not seeing the shift at this point. It takes time to switch insurance, and we will eventually see the impact. I don't know if you call that conservative, but we are making assumptions.

[Motoya Kohtani, analyst]

Okay. And I don't know the extent of analysis you did, but did you estimate COBRA and health care exchange insurance?

[Hisayoshi Kashima, executive]

Sunovion conducted evaluation and estimated revenues.

[Motoya Kohtani, analyst]

I see. My second question is about SEP-4199. Was this a monotherapy study?

[Hisayoshi Kashima, executive]

Yes, it was.

[Motoya Kohtani, analyst]

And the primary end point was MADRS score after 6 weeks of treatment, and the mean reduction was approximately 19 in both 200 and 400-milligram versus 16 for placebo. When I look at LATUDA label, MADRS score at week 6 from all the studies reduced by 15 for LATUDA and 11 for placebo. And that is a surprise because the placebo arm demonstrated similar effect to LATUDA.

So one of the biggest issues in CNS today is increasing placebo effect over the years. Unless you come up with measures to control placebo effect, you won't be able to make progress in CNS' pipeline development, which is your biggest asset. Are you considering or taking any actions on this matter?

I saw in your press release, Dr. Maurizio Fava provided a comment. He is an extremely well-known M.D., and he is the one who developed what's called SPCD, sequential parallel comparison design, to control and exclude placebo effect. Have you considered such a trial design?

[Hisayoshi Kashima, executive]

You are right about placebo effect. The study results we obtained from SEP-4199 data only demonstrated improvement because placebo effect was much bigger than LATUDA studies. When we break down the analysis even more and look at Japan, Europe and U.S., the placebo effect is not high in the U.S.

We also know so-called professional patients. They are enrolled in a clinical trial. And in the future, we need to understand which institutions these patients are enrolled so that we can exclude them and come up with lead time and a protocol to minimize placebo effect. So we are making utmost efforts in this area. And another issue with SEP-4199 was trial size. As we design Phase III trial, we will design protocol carefully and choose the right study sites, including countries.

[Motoya Kohtani, analyst]

So when you say professional patients, are these patients are constantly enrolled in clinical trials?

[Hisayoshi Kashima, executive]

We are aware across the industry that there are certain patients who are like that. They know clinical trials, and the output has been affected. In clinical trials, more subjects receive active drugs and placebo. Some patients know expectations and respond that way.

[Motoya Kohtani, analyst]

My last question is SEP-363856 for breakthrough designation. The Phase III end point was PANSS and CGI, which is typical end points for schizophrenia. If I remember correctly, SEP-856 target indication is negative symptoms of schizophrenia. Why did you not choose BNSS as primary end point? In Phase II, you demonstrated BNSS end point. And your competitor, if you look at their Phase II primary end point, it's BNSS. Why are you taking a different strategy? What is the rationale for the end point?

[Hisayoshi Kashima, executive]

We believe that SEP-856 will be effective for negative symptoms as well. And the target indication is schizophrenia first. Then we would like to come up with the best promotional approach for negative symptoms based on secondary or sub analysis. Our understanding is that the regulatory pathway for negative symptom indication is not very clear. That is why we are taking the strategy that we are correctly taking.

[Motoya Kohtani, analyst]

In other words, PANSS scores include negative symptoms. As long as you demonstrate the effect on negative symptoms in PANSS, stratification analysis of the statistics will let you emphasize the negative symptoms part. Is this correct?

[Hisayoshi Kashima, executive]

That is what we hope.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citi. My first question is about MEROPEN in China. China's revenue were down due to COVID-19. I think China will recover quickly. It's my impression that, although the business has been affected, China will recover soon. Have you not seen positive signs of recovery, the situation has not changed?

[Hisayoshi Kashima, executive]

May and April were difficult months. The revenues were significantly down from the same period last year. Starting June, we have restored ex wholesaler sales and trend continues in July as well. For the full year, we will not be able to recoup the loss during the first quarter. That is our forecast.

[Hidemaru Yamaguchi, analyst]

So you're saying it will be difficult to offset Q1, April, May, but you're back to normal in June?

[Hisayoshi Kashima, executive]

Yes. Total shipped in June is still slow with inventory adjustment, but ex wholesaler numbers have restored.

[Hidemaru Yamaguchi, analyst]

I see. My second question is regarding the forecast revision on net profit. I could not hear your explanation on taxes. Please explain again.

[Hisayoshi Kashima, executive]

Yes. Income tax expenses are down by JPY 3 billion. We revised taxes for DSP in Japan. In the past, we recorded impairment loss of investment securities, and we could not do scheduling and did not record the tax effect. We sold unlisted stocks, and we learned that the tax exposure is less this year because of this, and we incorporate it in the forecast.

[Hidemaru Yamaguchi, analyst]

I see. So it's not something new. This is simply accounting matter that takes place this year.

[Hisayoshi Kashima, executive]

Yes, that is right.

[Hidemaru Yamaguchi, analyst]

My last question is relugolix. Who has the cancer indication in Japan? I don't think it's ASKA, it's not Myovant, maybe it's Takeda. Do you have any intention to obtain cancer indication for relugolix in Japan?

[Hisayoshi Kashima, executive]

We don't have the rights in Japan. I don't know which company.

[Hidemaru Yamaguchi, analyst]

I see. One more question, if you don't mind. Myovant received milestone payment for relugolix from Europe, JPY 3.4 billion. Was this budgeted from the beginning?

[Hisayoshi Kashima, executive]

Yes.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]