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Sumitomo Pharma Co Ltd
Earnings Call Analysis
Q1-2025 Analysis
Sumitomo Pharma Co Ltd
The company kicked off FY 2024 on a positive note, reporting revenues of ¥90.7 billion, which is a remarkable increase of ¥15 billion year-on-year. This growth is attributed primarily to the strong performance of three key products in the North American market, particularly ORGOVYX, MYFEMBREE, and GEMTESA. Notably, the revenue achievement rate reached an impressive 111.7%. The success in the North American segment alone saw sales reach ¥51.8 billion, marking a year-on-year rise of ¥16.4 billion.
ORGOVYX, a standout performer, reported sales of $108 million against a planned $86 million, achieving 125% of its target driven by both volume and price increases. MYFEMBREE fell short at $19 million versus a target of $22 million (88% achievement), while GEMTESA closely matched its goal, reporting $78 million versus $79 million (98%). Management indicated they are focusing on academic centers and integrated delivery networks to capture a larger market share for these products.
On the expense side, both SG&A and R&D expenses decreased significantly, down by ¥18 billion and ¥10 billion year-on-year, respectively. As a result, the company's core operating loss was narrowed to ¥900 million, an improvement of ¥32.6 billion from the previous year. Overall operating loss stood at ¥3.1 billion, showing a substantial year-over-year improvement of ¥48.5 billion. This positive trend indicates effective management strategies that are yielding significant cost reductions.
Net profit attributable to the owners of the parent company rose to ¥15.9 billion, bolstered by a foreign exchange gain of ¥21.5 billion due to yen depreciation. While the overall profitability picture looks promising, the company plans to maintain a conservative approach; management cited uncertainties surrounding foreign exchange rates and generic competition impacting future earnings. The annual forecast for FY 2024 remains unchanged, with anticipated revenue increases in the latter half of the year.
In response to market pressures, the company announced an early retirement program affecting 700 employees, aimed at reducing fixed costs and streamlining operations. The program is notable as it represents the largest scale of workforce reduction to date, excluding critical divisions like manufacturing and regenerative medicine. This decision reflects the company’s efforts to enhance profitability amid declining exclusivities for certain products.
The company remains focused on R&D efforts with promising pipeline developments in neurology and oncology. Noteworthy advancements include the fast track designation from the FDA for a treatment related to acute myeloid leukemia and progress in collaborative studies with GSK. Management expressed cautious optimism for future sales growth, primarily from a robust performance of core products, despite competitive pressures from generic alternatives entering the market.
Management maintained that they would not revise the full-year earnings forecast despite expected challenges posed by the entry of generics like Mirabegron. They foresee ongoing price increases mitigating potential volume declines in some products. The overall tracking of key performance metrics will be closely monitored as the company seeks to sustain this growth trajectory through continual adjustments and strategic market positioning.
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I'm Toru Kimura. I am here to present our financial results for Q1 of fiscal year 2024. Thank you for joining us today. I would like to express my sincere appreciation for your continued interest in our company's management. Based on the presentation materials, I will report on the financial performance and the current status of clinical development for Q1.
Please see Page 3. The following is the summary of our business operation policies and initiatives for regrowth, along with the progress made up to the end of first quarter. We consider turning core operating profit positive as a must-achieve goal in order for the group to initiate regrowth in this fiscal year.
And it is implementing various measures with the entire company united under the policies of, number one, expanding revenue; two, reducing costs; and three, securing seeds for future business growth. I am pleased to report that we have made progress during Q1 on the business initiatives based on our three policies, as indicated by the green arrows in the chart.
First of all, the expanding revenue is progressing strongly against the plan, especially in ORGOVYX. As for reducing costs, the group is making concerted efforts to accelerate streamlining by increasing efficiency in organizational operations and trimming cost to the minimum. As announced today, we have also decided to offer an early retirement program in Japan. I will explain about securing seeds for future business growth later in the R&D part.
Next, Page 4. We are pleased to report our financial results for the first quarter. This is shown on the IFRS core basis. First, revenue was JPY 90.7 billion, a year-on-year increase of JPY 15 billion. Revenue increased due to growth in sales of 3 key products in North America and the effect of foreign currency translation resulting from the yen's depreciation.
SG&A and R&D expenses decreased year-on-year by JPY 18 billion and JPY 10 billion, respectively. This is due to the impact of business structure improvement in North America and reduced R&D investment.
Core operating loss was JPY 900 million, a significant year-on-year decrease. This is due to increased revenues and decreased expenses. This figure improved year-on-year by JPY 32.6 billion.
Due to a decrease in business structure improvement expenses associated with the reorganization of group companies in North America, which were recorded as nonrecurring items in the previous fiscal year, operating loss improved significantly year-on-year, resulting in an operating loss of JPY 3.1 billion. This represents an improvement of JPY 48.5 billion.
Profit before taxes for the quarter was JPY 17.2 billion due to a foreign exchange gain of JPY 21.5 billion, resulting from the depreciation of the yen. As a result, quarterly net profit attributable to owners of the parent also improved significantly with a figure of JPY 15.9 billion.
Since these are the financial results as of the end of June 2024, please understand that the actual net profit may differ slightly from what was explained today due to the exchange rate fluctuation. As for the annual forecast, revenue is expected to increase in the second half of fiscal year, while SG&A and R&D expenses are expected to decrease from the previous fiscal year.
On the other hand, we are also moving forward with our early retirement program in Japan and are considering business transfers. In addition, due to uncertain factors such as foreign exchange rates, our current policy is to leave the earnings forecast announced at the beginning of the fiscal year unchanged and not to revise the full-year forecast.
Please continue to Page 5, which shows our performance against the plans for the current Q1 of fiscal year. Revenues were JPY 90.7 billion, representing an achievement rate of 111.7% or 106.2% in real terms, excluding exchange rate differences. All segments, including North America, Japan and Asia; attained the figures of the plan.
SG&A expenses amounted to JPY 43.8 billion, representing an achievement rate of 92.7% or 87.9% in real terms, excluding foreign exchange. R&D expenses were JPY 12.8 billion, 96.5% of the achievement rate, 93.7% in real terms and below the plan in both SG&A and R&D expenses. As a result, there was a core operating loss of JPY 900 million, a significant improvement over the plan.
Next, Page 6 shows revenue for the North America segment. In the North America segment, sales of 3 key products, ORGOVYX MYFEMBREE and GEMTESA, as well as APTIOM; increased. In yen terms, sales were JPY 51.8 billion, a year-on-year increase of JPY 16.4 billion.
For the 3 key products, the achievement rate for the current Q1 is shown in the upper right-hand corner. We can see that ORGOVYX is far ahead of plan. The main breakdown of upfront and milestone income is shown at the bottom of the slide. I will now give you a few details about the 3 key products.
Page 7 covers ORGOVYX. The actual results was $108 million compared to a plan of $86 million. The result is 125% of the figure of plan, with Q1 volume and price impacts as noted. The figures were strong, both on the volume and price basis. As shown in the figure on the bottom left of the slide, volumes continue to expand, mainly due to the impact of changes in the medication benefit designed for Medicare Part D.
Regarding the topics of sales and marketing, we are currently focusing on providing information on the revised NCCN guidelines. We are aiming to further increase the volume at academic centers and integrated delivery networks, which amount for 50% of the market share for androgen deprivation therapy.
Page 8 covers MYFEMBREE. We saw a result of $19 million against a plan of $22 million for Q1, 88% of the figure of plan. The figure in terms of volume and prices is as described here, the goal has not been achieved in volume terms. Regarding sales and marketing, we would like to focus on increasing our market share, especially for endometriosis. As you can see on a per quarter basis, the volume has continued to increase.
Page 9 covers GEMTESA. We saw a result of $78 million against a plan of $79 million for the first quarter. So the achievement rate is 98%. The figure in volume and price terms is as described here, and we have not obtained the plan in volume terms. Regarding the topic of marketing, as you know, a generic version of Mirabegron was launched in April 2024, but no significant impact on sales have been seen as of Q1, with GEMTESA recording record volume in May.
We have not revised our forecast for the current fiscal year because while we expect a decrease in volume due to generics of Mirabegron in the future, we expect an upside in price. We will continue to closely examine the impact of generics of Mirabegron. As we have shown in the lower left-hand corner, the increase in volume passed on to the patients has continued on a per quarter basis.
Page 10 shows revenue from sales in Japan and Asia segment. In the Japan segment, revenue decreased by JPY 3.4 billion year-on-year to JPY 27 billion. Sales of LATUDA, TWYMEEG and LONASEN Tape increased, but overall segment sales decreased due to the end of the exclusivity period for TRERIEF and the NHI price revision. Progress against the full-year forecast is 26.9%, which means that the segment as a whole is almost in line with expectations.
In the Asia segment, overall segment sales increased by JPY 2 billion year-on-year due to the impact of increased sales of MEROPEN in China. Progress against the full-year forecast as a percentage is high at 30.5%.
Page 11 summarizes financial results by segment. In the Japan segment, core segment profit increased by JPY 1.2 billion to JPY 4 billion as a decrease in SG&A expenses in personnel costs exceeded the decrease in gross profit due to lower sales.
In the North America segment, core segment profit increased by JPY 25.9 [ million ] to JPY 2.1 billion due to an increase in gross profit from increasing 3 key products and a decrease in SG&A expenses. In the Asia segment, core segment profit increased by JPY 1.4 billion to JPY 5.7 billion due to the significant impact of higher gross profit from increased sales. I would like to continue with an explanation of research and development.
Please see Page 13. This section provides an overview of development. This is a list of the development stages of our development programs. And the changes since May are explained on the next page.
Page 14 summarizes the progress of clinical development. In the area of psychiatry and neurology, we have obtained the data for the investigator-initiated study for Parkinson's disease, conducted by Kyoto University using dopaminergic neural progenitor cells and are currently preparing to submit an NDA. This program has been designated for SAKIGAKE rapid review, and we are aiming to obtain approval by the end of the fiscal year.
In the oncology area, we entered into a clinical collaboration agreement with GSK to evaluate TP-3654 in combination with momelotinib in Phase I/II study. New clinical data from the Phase I/II study of DSP-5336 was represented orally at the European Hematology Association 2024 Congress held in June this year. Details are explained on the next page.
In June 2024, we received fast track designation from the FDA for the treatment of relapsed or refractory AML with MLL rearrangement or NPM1 mutation. TP-3654 and DSP-5336 now have generic names and are introduced here. TP-3654 is nuvisertib, and DSP-5336 is enzomenib. They are a little hard to say, but I will get used to it.
Last but not least, please see Page 15. The interim results of the Phase I/II study of DSP-5336 as a single agent in the acute leukemia, which was presented orally at the European Hematology Association 2024 Congress, are as shown in the slide. The safety profile was well tolerated, with no dosing limiting toxicity observed. No treatment-related cardiotoxicity findings, discontinuations or deaths have been observed.
Nonclinical data do not indicate that prevention of differentiation syndrome is necessary. Differentiation syndrome was observed in 5.7% of patients. However, all of these cases are manageable and have not resulted in death or discontinuation of treatment.
As for efficacy, patients with the target mutation of DSP-5336 showed a consistent decrease in blasts, as you can see in the graph on the left side. We hope to commence a single-agent pivotal part by the end of the fiscal year.
This concludes my presentation. Thank you very much.
Thank you very much, Dr. Kimura. I would like to move on to the question-and-answer session.
Muraoka from Morgan Stanley. First, I would like to ask about the financial results. I think there was a comment about the upswing. But I think 3 months ago, you were talking about reducing the deficit with each passing quarter. And at the end of the quarter, the figure will be in the [ black ].
Since you're doing very well in reducing costs, does it seem likely there will be a core operating profit surplus in Q2 or could we see a rebound dip in Q2? It will be helpful if you could just sort out a few ideas in this area.
This is Toru Kimura. As you just mentioned, I would like to say that we are in the black. But one issue is the end-of-the-market exclusivity period for TRERIEF in June, we are not at a stage today where we can say for sure whether we will be able to turn core operating profit into the black or not since we are considering the impact of this change.
Even if it's unlikely in Q2, with overseas growth in play, how about Q3 or Q4? I assume there has been no change in your thinking there?
Yes. Sales of overseas products are expected to grow in the future. But on the other hand, I am sorry to say that APTIOM's loss of exclusivity coming up, so we are considering reducing our sales force a little. One of the key points in our North America business in the future will be how the area will be affected.
On the other hand, as I mentioned, the 3 key products are moving strongly, and we have high expectations for them. We are seeing very good results with GEMTESA, and we have seen -- we have not seen any impact. We are at this stage where we will be able to predict the future transitions in more detail when the data on the transition between drugs and other data become available around August.
I would like to ask about GEMTESA. I may be looking at the data in the wrong way, but if you could -- if you look at the sales per quarter in U.S. dollar terms, which I found at the back of the supplementary financial data, the January through March sales were $81 million, while the April to June sales were $78 million. And the volume you are showing in the chart now is a significant increase from January to March to April to June. This gives the impression that the unit price has fallen quite a bit.
I wonder first if this was due to Mirabegron. I thought that maybe there was a negative impact on the unit price due to generics. But I think I am probably mistaken. So if I am wrong about something, I would appreciate some clarification, please.
Thank you for your question. There is a coverage gap effect, which is why 1 quarter was a little higher than the other, well, Q1 of the calendar year. So it appears that there is a slight drop in Q1 of FY 2024 compared to Q1 of the calendar year. Gross to net is worsening slightly. However, we are not too worried about this because we believe that the price transition will be strong in the future.
When you say slightly worsening gross to net, is that due to the generic Mirabegron or some other factors?
We have been able to negotiate with the insurance company about the shipping price for this year and we think that the price will not go down that much. Perhaps Mr. Nakagawa, the President and CEO of Sumitomo Pharma America, could provide some information.
Yes. Nakagawa is here. Thank you. As Mr. Kimura just mentioned, we see an upward trend in prices for this fiscal year. And although we expect the impact of generic Mirabegron to be negative in terms of volume, we believe it will be positive in terms of price.
When will the price be decided for the next year? I guess, it will be around November or December?
It depends on the other parties. Some are currently under negotiation, and I expect that they will be decided gradually after this summer or in the fall.
Just one more thing. About the TP-3654 study that you are doing with GSK, I think this is like a research collaboration, but should I assume that you're not talking about giving a lump sum of money or anything like that?
Yes, this is not a licensing agreement, but rather a clinical study using the other party's drug and our compounding combination. So we are cooperating with each other. I'm not in a position to give details, but I can say that this is not an initiative that promises future licenses or other commitments.
Wakao from JPMorgan. There are several questions, the first of which is ORGOVYX. I think the Q1 numbers were very good, but I would like to know more about the factors behind this strong performance and whether the key point was the publication in the guidelines. And is it safe to assume that this strong trend in Q1 will continue in Q2 and beyond? That's my first question.
I have mentioned several times before about the NCCN guidelines. We believe that this will have an impact for the better, but the strong sales this time are due to IRAs and the fact that the burden on patients have been reduced this year, which has led to a very strong increase in administration. In this sense, we believe we have made a very good start in increasing future sales.
So you are saying that this trend will continue in Q2 and beyond?
Yes, that is what we are hoping for.
Understood. And will ORGOVYX be affected by the Medicare Part D reform, which starts in January 2025? I think I heard something about GEMTESA not being affected the other day. Could you comment on this?
The IRA will have a positive impact on us because the maximum amount of out-of-pocket patient will be lowered next year.
Wouldn't that be a deteriorating factor for your company's gross to net?
For our part, we do not envision that at this time. Although we will naturally have to negotiate with payers in this area, we believe that the appeal of our product prices is relatively strong. So we believe that this will have a positive effect on the total.
Okay. If so, does that mean that your company expects to see further volume growth starting next January? Or that trend will be even stronger?
Yes, we hope so.
Okay. Does this mean that sales, even if your company's burden increases slightly, will grow on a net basis? Or will the trend be even stronger in the next fiscal year?
That's right.
Okay. Understood. One more thing. Please tell me about your early retirement program. I understand that the number of present is 700. But is it correct to say that this is regardless of the department? How should we look at this impact on SG&A expenses for the next fiscal year, if 700 people decide to retire early?
Now, I think your company in Japan alone has about 2,900 employees. So if you had 700 retiring, you would lose about 25% of your staff. Is it correct to simply think that the fixed cost would fall by that amount as well?
First of all, the subject excludes the manufacturing division. As for the decrease in SG&A expenses, it depends on who leaves, but we expect SG&A expenses to decrease by about JPY 7 billion. However, this will also lead to a decrease in the number of sales reps. So we expect a slightly negative impact in terms of sales.
I see. If that's the case, I believe that the SG&A expenses in Japan for the current fiscal year is JPY 46.6 billion. So should we expect SG&A expenses of less than JPY 40 billion for the next fiscal year?
Yes, that will be the case under the current system. But as Sumitomo Chemical has announced, there will be externalization of regenerative medicine and joint ventures. So I hope you will consider that impact of this on the next fiscal year. However, the details have not been finalized yet. So we will report back with the details when the details are finalized.
In terms of scale, is the impact big or not that big? What kind of impact should we expect?
Yes, of course, we are [ not ] working on regenerative medicine as a whole company. So it is not that big of a thing. But I think it will be more than 100 people.
Okay. Incidentally, I think this 700 employees is the same level that you had in mind when you announced the revised plan in May, when you suggested that restructuring and business reorganization will be carried out in Japan. Well, is it even larger than the figure at the time?
No, it was only recently that we decided to do it, but we have been considering that scale, including the timing for several months now. So the scale is consistent with what we said at the press conference in May.
Okay. I apologize for the length of the question, but I was wondering if you could tell me a little bit more about borrowing? I think there is no more problem with the part where the parent company has guaranteed the debt. But I was thinking that the long-term debt will mature in the current and next fiscal years, JPY 60 billion and JPY 65 billion, respectively. What will happen with this?
I believe that the situation with regard to debt has improved or at least, that is how it is written in the summary of consolidated financial results. Could you comment on this point? What is the outlook for this?
Well, unfortunately, it has not gotten better but we are, of course, planning repayment. We are currently discussing a repayment plan with the bank, which will determine how the loan will be repaid.
And I'm sorry, in the additional explanation I gave earlier, I mentioned that the manufacturing division, but the department in charge of regenerative medicine is also excluded from the scope of early retirement program. We are also assuming that we will create a new company and have to strengthen the company in the near future. So we are excluding this department from the scope of early retainment program. I'm sorry for the additional explanation.
Yamaguchi from Citi. First, I would like to ask about your results exceeding the plan in Q1. This has just been Q1, but given that you have exceeded the plan, I would like to know if this access could continue over the full year. If there is an excess of JPY 10 billion per quarter, it will be a big change. Of course, JPY 10 billion for the full year would also be a big change. So since it is only the first quarter, it seems there are many potential scenarios here. So could you say a few words on this?
When we announced our forecast, analysts questioned whether we could reduce expenses this much. But both SG&A and R&D expenses have been reduced further than our plan. Since we can control these expenses, I believe this situation will continue throughout the fiscal year. On the other hand, as I mentioned earlier, there are uncertainties regarding sales. And while we expect sales to be strong, we would like to monitor the situation more carefully.
We have heard some things about a [ cliff ] for TRERIEF and a few other things about sales and also the past true-up of rebates of Medicare. But were these things already included in the forecast?
Yes, that was included. Regarding GEMTESA, our internal assumption was that generics of Mirabegron would be launched at the time at the beginning of the new year. So it came more than 6 months early.
Okay. Regarding Medicare Part D for ORGOVYX, you mentioned that the number of patients who use the drug has increased due to the reduced out-of-pocket of patient. What kind of segments are you getting new patients from? For example, are they switching from [indiscernible] or are they new patients?
Yes, it is true that we are getting a lot of new patients. But as you just mentioned, we would like to revise our forecast to include the switch from other competing drugs.
Lastly, regarding iPS, there seems to be no announcements from Kyoto University, but your company has obtained data from 7 people and is preparing to submit an NDA. I don't think I would prepare an application if the data is not good. So I was wondering if you can tell us anything about the top line?
Yes, Kyoto University is currently preparing the data itself, including the publication of the paper. So I would say Kyoto University will be responsible for the data. Sorry to be so vague, but the data is as expected.
Okay. Is this business separate from the regenerative medicines?
No, we are thinking of spinning off the regenerative medicine business, including this business. But in reality, it would be nearly impossible for the new company to take on this entire business. So we will cooperate with the new company, including in sales activities.
Sakai from UBS. I would like to ask you two questions. In the balance sheet section on Page 7 of the supplementary financial data, you always disclose the breakdown of patent rights. But I think that this time, there was an increase in those denominated in the U.S. dollars due to the impact of exchange rates and the depreciation of the yen.
If we separate goodwill and intangible assets, there is a huge amount of money on the balance sheet. And this part will be dealt with the so-called restructuring plan that you are working on now.
In the case of intangible assets, I think we are talking about amortizing them as soon as the products are sold. In case of goodwill, I'm not sure from the outside. So I was wondering what your thoughts are on that right now. Could you comment on this?
Regarding patent rights, as you mentioned, we are thinking of gradually amortizing them. And since there was a significant impairment last year, we think that an impairment like last fiscal year or rather FY 2023 is very unlikely to occur for some time to come. Goodwill was impaired last fiscal year. But as our sales continue to grow, we believe that future impairment of goodwill is highly unlikely.
In the case of impairment or goodwill, if the status quo is maintained, there is no impairment at all or the -- it is not really as an expense but it's recorded as is on the balance sheet. And that is the direction you're taking now. Is that correct?
Yes. There is no amortization, which means we keep it. As I said, we believe there is no more impairment.
Okay. Also, I would like to ask one more question to you personally. I have seen you being interviewed in various places by the media and talk about your future management policy. You mentioned that Q1 was good and exceeded expectations. But what do you think is necessary for the momentum to continue into Q2 and beyond?
If -- even if you achieve the guidance for this fiscal year, next fiscal year, you will lose exclusivity of some products, such as APTIOM in the U.S., but also Equa and EquMet in Japan. So I think the situation in Japan will become even more difficult. Could you say a few words on this?
Yes. First, I will answer based on North America and Japan separately. As you know, North America underwent two major restructurings last fiscal year and the number of employees in North America has been reduced from 2,200 to about 1,200. We have managed to achieve these results there in Q1 at this time, when there is a burden on staff.
We are also working to reduce costs. But I think one of the challenges is whether or not we can continue to build the momentum in the future. And I think there is an issue for management in North America. Fortunately, the product is performing well. So we need to continue to support that and get everyone working hard.
In Japan, as you mentioned, the product competition is a serious issue, unlike something -- a new product is introduced, sales will not increase that quickly, even with the launch of regenerative medicine products. That is why we are offering the early retirement program to employees in Japan this time. Because of that situation, it will be very large-scale early retirement program, which will be a blow to the organization.
In terms of solidly rebuilding and setting new goals, I would say that the situation in Japan is about a year behind of the -- in North America. And I think that is the biggest risk. Of course, our borrowings are significant, so we are immediately -- imperatively working on this issue.
I see. So I get the impression there are still areas where the company's cash flow cannot fully cover everything. Page 18 of the presentation materials shows the cash flow section.
Yes. With time, we will be able to address this. And the question at the moment is that to what extent we cover this through financial institutions.
Hashiguchi from Daiwa Securities. I have two questions. The first question is a continuation of the previous question. But I was wondering if you could tell us a little more about your vision of how Sumitomo Pharma aims to position itself as a pharmaceutical company among the many pharma companies in Japan.
3 months ago, I was told that it would take more time to formulate the midterm business plan. So perhaps it will take a little longer to develop our pharma vision. I suppose this was something you are considering when setting the numbers for the early retainment program. For example, your company maintained the #1 position in the area of diabetes. What are your current views on positioning in the future?
Yes. As you mentioned, we had a foundation for marketing products for lifestyle-related diseases such as diabetes and a little while ago, hypertension. On the other hand, we believe that it will be very difficult to cover the entire area if we implement this measure.
In terms of our future business in Japan, we must establish a sales structure that can deliver products with special characteristics to patients who need them, and we must change our business structure from the one that covers the entire country.
My second question is for Mr. Sakai. Since you recently moved from Sumitomo Chemical to Sumitomo Pharma, what role do you anticipate you can play in the future? What kind of challenges do you feel you are facing as a member of this group? Conversely, I would like to ask you, Mr. Sakai, to comment on what you feel the future growth potential of Sumitomo Pharma is.
Yes. Thank you for your question. This is a difficult question. I worked for Sumitomo Chemical. And my last job was a head of a business division. Originally, I had about 30 years of experience in management, finance and corporate planning at Sumitomo Chemical. As you know, we are in a difficult financial situation, and I think that my past experience at Sumitomo Chemical could help me to contribute to the company in this respect.
As you know, Sumitomo Chemical is in the equipment industry, so it is in business with large loans that operates in a certain way. And the type of business is quite different from that of the pharmaceutical industry or Sumitomo Pharma. I believe that the experience I gained during my time at Sumitomo Chemical helps supplement some aspects of the company's human resources because of our different background.
As you know, one of our immediate challenges is that we have not been able to adequately control costs in relation to revenue, for example. I have set cost reduction as a priority. And some of you have pointed out, we are committed to repaying our borrowings as a matter of -- of course. But we also believe that this is very important to do so properly.
I think that in the short term, it will be very difficult to balance these financial issues and our desire to do our best as a research and development-oriented pharmaceutical company. I feel that continuing to walk the line and deliver on both of these things is my #1 job right now.
And I'm sorry to be so long, but to be honest, I am not that knowledgeable about the pharmaceutical industry. So I'm still in the process of learning about what kind of products are being developed since I joined our company.
As you are probably more familiar with, we are proud to be at the forefront of the development of cancer drugs and the regenerative medicine of therapies. I think there's a lot of potential in these areas, and I want us to do more. It will be very sad if we are unable to get out of the current situation -- financial crisis and are then unable to do proper research because of the funding limitations. We will make every effort to prevent that from happening. I hope I answered your question.
[indiscernible] from the [indiscernible]. Regarding DSP-5336, I would like to know your future outlook due to the fast track designation by FDA. Could you tell me how development will be accelerated?
Yes, Mr. Ikeda will take your questions.
Thank you for your question. Since it has been designated as fast track, it will be very easy for us to discuss clinical studies that will go on to Phase II and beyond. In addition, we believe that it is very beneficial for the future development of the product that we can consult individually rather than submitting all the application materials as a package.
Wouldn't that make the application period much earlier?
This will not speed up the application process. But on the other hand, the FDA has designated the Syndax compound, which has the same mechanism of action, as fast track and is reviewing it. I think the Syndax's compound could receive approval this year. However, because our compound has the same mechanism of action and our compound is also fast tracked, the FDA has seen all the data, so I think we have a good chance to work hard to get approval as soon as possible, while receiving good suggestions from the FDA.
[ Kuriyama ] from Yakuji Nippo. I would like to ask about the number of early retirees. You mentioned 700 specifically. That is nor 300, nor 1,000, you gave us a figure of 700. Could you explain the rationale behind 700? Do you know how many of these will be sales reps?
As I mentioned earlier, we manage profit and loss by segment for each region, mainly North America and Japan. In this situation, we have set the number of applications [ sold ] at 700 based on the assumption that the Japan segment will be able to remain profitable only with its own product for sometime in the future and as a result of considering the reduction of labor costs in SG&A expenses.
On the other hand, it would be a big problem if we, as an organization and as a pharmaceutical company, could not sell our current products well. So we have decided to set the number at 700 to balance those issues.
As I mentioned earlier, we are currently accepting the early retirement applications for all divisions, except for the manufacturing division and the regenerative medicine cell therapy business unit. So we do not have the individual figures for what will happen to the sales and marketing division or the head office as a result. Therefore, I'm not able to give you an answer as to how many people will be in the sales division at this time.
Just one more question, please. You mentioned briefly in your talk that you are also considering business transfers. What kind of business transfers is envisioned? Would you be considering the transfer of a large part of Japan business itself? Or is that not what you meant? Can you tell us about that?
Yes, we are considering the transfer of various items, but the transfer of Japan business is not in our focus. As I have just mentioned, the Japan business, through this measure, will be firmly transformed into a profitable structure.
[ Su Yi ] from the Asahi Shimbun. I would like to ask you first about the early retirement program. I know that your company has offered the early retirement program 3 times in the past. But would it be correct to say that 700 employee is the largest number so far?
Yes, I think there has been three previous occasions, but this is the largest scale.
And the reason why you had to go to such a large scale was to achieve and maintain the profitability of the Japan business, as you mentioned earlier, is that correct?
Yes, the period during which we can sell products in Japan, which are products sold through sales tie-ups, is gradually disappearing. And in this sense, profitability has deteriorated greatly.
Am I correct in understanding that you needed to streamline the products in light of the exploration of some patent and so on?
Yes, you're right.
Okay. One more point. There was an additional policy rate hike today on the part of the Bank of Japan. The figure is 0.25% has been announced. And I would like to know your opinion on this and what impact it will have on your company.
My personal feeling is that what could happen just happened. But in terms of the impact on profit and loss, the yen-denominated loans to our overseas subsidiaries are very expensive. So if the yen appreciates against the U.S. dollars, we will lose JPY 2 billion in net profit for the fiscal year. Core operating profit is also slightly affected, but I think it is only JPY 100 million increase.
Okay. Regarding the loans, the ones you are borrowing now, is there any impact on the interest rate increase?
There's no impact on borrowings.
Is it your understanding that you have already borrowed at the stipulated interest rate and that it will never move?
I'm sorry, I was only thinking about the exchange rate. But in terms of interest rates going up, it means that borrowing rates will also go up. So there will be a negative impact in terms of interest going up and borrowing rates going up.
I see. Since you have a large -- a very large amount of debt in relation to the size of your business, should we consider this to be a negative factor for your business?
It is not a plus, but the interest rate is not that high. So I don't think the 0.25% interest rate will have a direct impact on our business strategy.
[indiscernible] from Nihon Keizai Shimbun. I would like to ask you about the early retirement program. I understand that you're excluding the manufacturing division and the regenerative medicine cell therapy business units. But may I ask what kind of people are in the manufacturing division and why were they excluded?
Yes. You can think of the manufacturing division as the factory that makes the products we sell. We have been extremely busy mainly with MEROPEN antibiotic preparation sold in China and TWYMEEG diabetic agent whose sales are increasing in Japan. Since there is absolutely no room for restructuring in manufacturing, they work in 3 shifts. We have decided to exclude them from this measure.
I'm sorry, this is a bit long, but I have three questions. The first one is regarding last year's workforce reduction in the U.S. Your company restructured in stages. Is there still a possibility of additional headcount reduction in Japan during FY 2024 other than the 700 employees in the current early retirement program? Or is the idea to do it all at once already this time?
In the case of the U.S., it is not that we divide it into two parts, but that we did the second part because an unexpected event occurred, the target departments were completely different. As I mentioned earlier, we are offering the early retirement program throughout the company in Japan and further reductions will not -- will affect our day-to-day business activities, [ including ] in terms of how we conduct our business. So we are not considering any further reductions.
Next, you mentioned business transfers. Is it correct that you're thinking about this during FY 2024?
Yes. We expect to have something to report on this business transfers by the end of 2024.
Last question. In the earlier question, you mentioned that personnel reductions have been made 3 times in the past. So is this the fourth time? How different is the background of the past 3 times from the current one?
The third one took place in 2017. So it was 7 years ago. The situation was quite different. We were Sumitomo Dainippon Pharma, the company resulting from the merger of Sumitomo Pharmaceuticals and Dainippon Pharmaceuticals.
Most mergers of pharmaceutical companies were followed by structural reforms with restructuring. In our case, we have been proceeding with natural reductions or attrition for a long time. So in 2016 and '17, we streamlined the structure a little bit. As I mentioned, the situation is slightly different this time as we are facing a very serious problem in the product competition and the profitability of the Japanese business itself.
[ Kamiya ] from [ Mix ]. I would like to ask you a few questions about the early retirement program as well and the sales and marketing in Japan.
First of all, the number of sales reps is on Page 9 of the supplemental financial data. The total number is 950. And excluding managers and others, the figure is 860. I think that the early retirement program is done in anticipation of the scale of the change here. What are your thoughts on the loan book reps that will remain after the early retirement program? For example, will it be in the 400 or 500, or something in this area?
Thank you for your question. As I mentioned earlier, we are offering the early retirement program throughout the company. So naturally, the sales and marketing division, which has the largest number of employees, who probably receive the most applications. However, as a result, we do not anticipate that we will be able to limit the target to any particular amount, and I'm not at liberty to discuss at this point.
Also, I think there was a question from an analyst earlier, you mentioned that you think reps will have to cover or switch or convert from -- covering the entire country.
If that is the case, could you please explain a little more about how you would market TWYMEEG, for example, using digital marketing or if you cannot cover the whole country? How you would market diabetes products, so that it is still available?
Yes, that is an issue for us as well. We are in the process of increasing sales of TWYMEEG, and we have many other diabetes products. I think that the number of reps will considerably reduce. So the reps will have to be very creative in their activities.
On the other hand, as I mentioned in my answer to another question, I believe that we must be prepared for a decline in sales to some extent due to the decrease in the number of employees.
Okay. Also one more thing. In the previous answer, you mentioned that you need to set new targets for Japan sales and move forward with them. Do you mean by the reduction in sales? Or are you referring to another action plan with some new, different KPI?
There are two ways. First, once we determine how the sales and marketing division will remain in the future, we will set new goals and have the sales and marketing division work accordingly.
Second, in order to minimize the impact of the reduction in the number of employees, we will have the sales and marketing division operate in a different way than before.
On the other hand, in the mid- to long term, SMP sales activity will focus on delivering products with more distinctive features and shifting to products that can generate sales without the 1,000-person workforce that we have had up to now. I'm sorry, it has -- this was a little difficult to follow, but I will provide more information on this.
[indiscernible] from the Chemical Daily. I think you mentioned earlier that for APTIOM, there is a possibility of reducing the sales force because the loss of exclusivity that is in sight. I would like to know a little bit about when this loss of exclusivity for APTIOM in North America will be and if there is a possibility of further reducing the headcount in North America.
I was a bit incorrect in saying that the loss of exclusivity is coming, but we already know when the generics are coming in, which is next May. We are planning to reduce the number of sales reps in the second half.
Okay. So in addition to the reduction of the North American workforce to date, there will also be a reduction in the number of sales reps to some extent?
The number of sales reps in charge of APTIOM will be reduced. This has already been announced internally, so it is planned.
[indiscernible] from NHK. I'm sorry, but I couldn't hear you during the session because of the weak signal. And I'm sorry if this is a duplicate question. In April of this year, President [ Ibotta ] of Sumitomo Chemical announced the optimization of 4,000 employees, and I understand that you are not planning to add to that number this time.
Yes. We don't mean to add. I believe that this figure of 4,000 people covers the Sumitomo Group as a whole.
I see. If so, do you think your company will outsource some of its sales activities in the future? Or do you think that you have no choice but to do sales activities with your limited staff?
Currently, many pharmaceutical companies are outsourcing a large portion of their reps or we call it using contracted [indiscernible]. And we are currently doing so and will continue to do so in the future, of course, as necessary.
I see. So I guess you have to be moderate there and you have to deal with the situation from time to time?
Yes, there are times when it is necessary to take a lot of work. So we are flexible in handling such cases.
[ Shiboshi ] from [ Jiho ]. Regarding the early retirement program of the 700 employees, I would like to ask for a message to the employees in the company about the situation that led to this decision.
I think it is a very important mission for management to protect the job security of our employees. We have been thinking about how we can do that. But as I mentioned earlier, we have had to ask nearly 700 employees to leave the company through the early retirement program.
However, as I mentioned earlier, we are very sorry that we are -- we have to do this, and we would like to do all we can under the current circumstances to help those employees who are leaving.
Thank you very much. This concludes the presentation of Sumitomo Pharma's financial results for Q1 of fiscal year 2024.