Sumitomo Pharma Co Ltd

TSE:4506

Earnings Call Transcript 2019-Q2

[Unknown Executive]

Thank you very much for coming today despite your busy schedule. Yesterday, we announced our financial results for our Q2 fiscal year 2018. Today, we would like to give you the contents of the results and also our view on our outlook until the end of the year. That we will also like to share with you the latest development of major topics.

Let me introduce the participants from our company: Mr. Nomura, our CEO; Mr. Hara, in charge of R&D; Mr. Koshiya is in charge of oncology; Mr. David Frawley is in charge of the sales of Sunovion.

First, our CEO, Mr. Nomura will deliver his presentation based on the distributed document. After his speech, you are welcome to post questions to our executives.

[Hiroshi Nomura, executive]

Ladies and gentlemen, I would like to start with thanking you for coming to this early investors meeting. I know how busy all of you are. Taking this opportunity, I would like to state my heartfelt gratitude for your continuous interest in our business and for kind guidance. Now I would like to start with a presentation. Let me be rather brief for the interest of the time. I would like to leave as much time as possible for Q&A session.

The financial results for quarter 2 of the current year included the revenue JPY 226.2 billion. The core operating profit, which is a main yardstick of our performance, JPY 37.2 billion. Operating profit JPY 29.6 billion and net profit attributable to the owners of the patent, JPY 27.9 billion.

As you can see, the revenue has declined from the previous year by JPY 5.2 billion. Impact of NHI price revision contributed JPY 4.5 billion for this decline. The sales performance of the U.S. region increased. Some slight changes to the accounting process took away JPY 3.2 billion from the revenue, which does not affect the profit and loss statement. I will come back to this later.

SG&A increased because LONHALA MAGNAIR and LATUDA's DTC and APL marketing costs increased compared with the SG&A of the previous year. R&D expenses increased because Imeglimin's clinical test cost increased. Other operating income and expenses slightly declined by JPY 9 billion.

As you may all remember, that we sowed the division of the ciclesonide last year, which is reflected on this item.

Changes in fair value of the contingent consideration is down by, again, significant amount over the JPY 10.9 billion, the same amount item of the same quarter of the last year was plus JPY 4.1 billion. We opened the key of the blind test of napabucasin, an antistomach cancer drug in last June. We reduced the cumulative amount of the charge -- changes in fair value of the contingent consideration in the past, which resulted into profit. Thanks to such unusual event, we registered quite a large sum of loss this year. The operating profit declined by about JPY 30 billion.

The bottom line was also lowered by JPY 17.5 billion. Changes in fair value of the contingents consideration incurred in a loss of about JPY 10 billion sales of the ciclesonide in last year, resulted in the decline of the operating profit by about JPY 30 billion. So if you look at the real-time statistics of this year, the gross profit is declined by JPY 3.8 billion, SG&A increased, and these are the major impact on the bottom line.

Compared with the forecast of the second quarter, revenues fell short slightly and the cost of sales outnumbered the forecast mainly because of the changes in foreign exchange rates.

Turning our eyes on the revenue of domestic market. The total revenue declined from the same period of last year. Impact of the NHI price region was a JPY 4.5 billion. Trulicity grew significantly, meanwhile that AIMIX and AVAPRO declined JPY 3.5 billion, respectively. Generics took over about 65% of the market of both drugs. The replacement has been progressing very rapidly, much faster than we expected.

These are the revenues in North America and China. Number-wise, LATUDA increased by $35 million year-on-year, APTIOM increased by $22 million. You can find the triangle mark next to ciclesonide. Ciclesonide contributed to some amount of the sales before we sold the division, which is registered as an increase of the $47 million or JPY 4.3 billion.

Now China. MEROPEN declined slightly based on the local currency and also declined in terms of yen.

This is the performance by segments. The top matrix explains the Q2 results. Q2 2017 in the middle and the difference at the bottom. Please see the bottom of the matrix. Revenues declined by JPY 6.5 billion mainly because of the NHI price revision and attack by the generics in Japan. North America increased the revenue, but, as I have already said, marketing cost of the LONHALA MAGNAIR and APL and LATUDA's DTC had negative impact on profit. As a core segment profit, it is JPY 2 billion in minus.

As I have mentioned, some special events account for JPY 3.2 billion out of the core loss of the JPY 5.2 billion. Accounting process of our subsidiaries changed and they are operating almost like trading companies. Instead of our conventional revenue and cost, they just report net amount. Such practice appears that we suffer a loss, but this operation hardly affects profit and loss. This is a full base financial result of the Q2.

Earlier I explained to you the operating profit and the quarterly profit, but here you also see financial income and costs. You see that they increased by JPY 6.5 billion year-on-year, which is a significant sum. Yen was cheap in late September, so our dollar-based financial assets became more valuable, which was reflected on this positive income.

This is purely generated by the exchange rate fluctuation and nothing to do with our cost to operation -- core operations. On the year-on-year base, we consider this account item neutral or 0.

Next, financial forecast for fiscal 2018. The new revised forecasts are shown in the column highlighted in green. Revenue and operating profit will stay the same. Net profit is expected to be at JPY 35 billion and unchanged.

This is a comparison with the previous forecasts. Revenue, without the impact of the changes in ForEx, declined by JPY 12 billion in the real term. I will tell you the breakdown later. At the bottom of the page, in small letters, you see the previous forecast, assumed that the ForEx as JPY 105 to $1, revised forecast meanwhile assumed JPY 110. ForEx is one of the building blocks of the forecasts but fluctuates from time to time. In the current term, the change in the ForEx earned us JPY 12 billion and neatly filled up the decline of the revenue by JPY 12 billion. SG&A, excluding the ForEx rate impact, is an improvement by JPY 9.8 billion. I would like to attract your attention to here.

Now originally, we were planning to invest in CODP (sic) [ COPD ] handheld equipment for administering benztropine. As you know, this drug has complete response letter and for the handheld COPD drug, we have to fight and survive in the red ocean. Such market reality encourages us to revisit the marketing strategy and reduce some cost. On the other hand, by aggressive DTC of LATUDA, we expect to cut the total SG&A but -- however, only JPY 4.5 billion instead of JPY 9.8 billion. The balance is, again, is because of the fluctuation of the ForEx rate.

R&D expenses will increase by the ForEx rate change, responsible for most of them. Considering many pluses and minuses, the core operating profit is expected to stay at the same level. Changes in fair value of the contingent consideration changed slightly. The other nonrecurring items, including the improvement in operational structures, have been revised.

All in all, revenue, core operating profit, operating profit and net profit are all expected to be at par with those of the last year.

This is a revenue of the major products in Japan. The forecast says that the domestic revenue will probably decline by [JPY 1.8 billion]. TRERIEF, however, will overperform our previous forecast by JPY 1.5 billion. AIMIX and AVAPRO, as I have mentioned before, were revised downward due to stronger impact of generics eroding than expected. TRERIEF sales are expected to offset impact of the NHI price revision and revised upward to the level for the fiscal year 2017, thanks to the new indication for dementia and Parkinsonism.

Now North America. LATUDA sales are unchanged from previous forecast because of taking measures, including DTC TV. We have increased the budget for the TV commercial by $30 million. BROVANA changed from the previous forecast by minus JPY 1.1 billion. APTIOM was down by JPY 2.6 billion. Its original forecast was too ambitious. LONHALA MAGNAIR regrettably down by JPY 3.7 billion. COPD, the handheld COPD will take some more time to enter the market. It is a new type of nebulizer.

Performance of the COPD drug is far from satisfactory and I would like to come back to this later. The performance is not very bright, but the total was down by JPY 10.9 billion but including the favorable impact of the yen rate, LATUDA overperformed the budget by JPY 8.8 billion, APTIOM underperformed by JPY 1.9 billion, LONHALA MAGNAIR was down JPY by 3.8 billion. All in all, we generated JPY 500 million profit. China sales are expected to remain steady and earn the profit of JPY 1.3 billion.

The 3 major Cs are from the top to bottom: Revised forecast in 2018, the previous forecast and change, respectively. In Japan segment, the revenue and the profit were revised downwards due to impact of the generics of AIMIX and AVAPRO. In North America segment, the sales will grow but the SG&A is down by only JPY 4.9 billion. But they do enjoy the profit of JPY 2.1 billion in addition. In China segment, revenue and profit were revised upward by JPY 500 million. Total core operating profit is unchanged from previous forecast.

I have just finished the sales performance of my presentation, and I would like to move on to the next section of the major topics. I would like to touch upon the status of the litigation filed in February of this year, which all of you are interested in. We are proceeding with the litigation focusing efforts concerning that, the method of the use patent that, while reserving the right to dispute the court's construction of the claim and assert infringement regarding the formulation patent in an appeal.

Recent development include the claim construction ruling or Markman ruling, was issued by the court. We are preparing for the trial. We anticipate that the trial will be conducted between late November and early December. In parallel with the preparation for the trial, the court has proposed us to engage in separate settlement negotiations with each defendant. Though it is written here that the number of the defendants was reduced from the original 16 to 10, this was not necessarily requested by the court. Having said so, I do not mean to say that we will settle the matter with all of them.

In addition, there are litigations newly filed after May of this year. The trial schedule of the February litigation is not affected by this new litigation as these litigations proceed independently of the above February litigation.

This page discuss -- discusses a number of the prescription of the LATUDA, some say that the growth of the demand has been slowing down. But we conducted various DTC. Please look at the number. We invested into TV commercials in 3 consecutive quarters before December 2017, indicated by the red line. After January of this year, we are beginning to see the growth trend of the TRx. It takes time for the TV commercials to generate effects.

During the quarter between April and June of this year, we aired the TV commercials again, thus we are trying to increase the demand of LATUDA. However, increasing number of the prescriptions would not be translated into higher sales automatically. Each wholesaler has his or her own inventory management plans. Balance of the inventory goes up and down, depending on the status of each participant of supply chains. The long-term trend shows that the increase of the prescription lead us to greater shipment so we have to focus on the TRx growth.

In April of this year, that we launched the activities of the Japan business unit. As I have mentioned, our domestic sales have been declining somewhat. So we are unifying the power of R&D, sales, production, quality assurance as well as the headquarters to boost up the performance of Japan. They are virtually compiled into one organization.

Against this backdrop that has, that we share the same purpose and proceed in a unified manner. It is sometimes rather difficult to precisely explain how much the progress has already been made towards such goal by Japan unit, but under the leadership of the Japan business unit, I see many people trying to find our future vision.

As a cross-section project team, they operate launch readiness team for LONASEN, that was launched in fiscal 2019. In addition, they are preparing the plans to maximize the value of Imeglimin after its launch. Imeglimin is undergoing 1, 2, 3 pivotal tests, but it is never too early to think beyond the launch. For example, that the team is considering how to modify the new drug so that the patient with kidney disorders can use them.

For strengthening the psychiatric and neurology area, we increased approximately 40 MRs from last month, 350 MRs are exclusively exchanged in this area. As you can read, the reason for the increase in -- is more focused on the psychiatric and neurology area in anticipation of the launch of lurasidone and LONASEN. We are planning to file for the launching of the lurasidone in 2019 and actually launch it in the following year. We will continue to enhance the training camp program of MRs in psychiatry and neurology area. And we also plan to implement the MR camp to general MRs so that they can strengthen the communication skills with doctors.

TRERIEF is selling well, thanks to effective promotion by CNS MRs. New indication is also functioning as a tailwind in December 2016, when we started to dispatch the CNS MRs to the expert doctors in this field. The promotion has been extremely successful and contributing greatly to boost the retail sales.

In the area of psychiatry and neurology area, our dasotraline received the complete response letter for ADHD in the U.S. We met with FDA officials on October 30. We cannot disclose the contents of our discussion before we align our appeals internally.

Also, in U.S., that we aim to submit the NDA for BED, binge-eating disorder, in fiscal 2018. We are making good progress. I have already explained about the status quo of LONASEN.

In oncology area, that we are permitted and implemented the regime of the first study protocol. We added the overall survival of the high p-STAT3 expression patient as a primary endpoint. TP-1287 is an oral inhibitor of the cyclin-dependent kinase 9. And as you can read here, it yields the alvocidib in body.

In the area of regenerative medicine and cell therapy field, the doctor initiated clinical study of Allo iPS cell-derived dopamine neural progenitor already started in August. In addition, Dainippon and Healios K.K. started preparing for the clinical study by the end of the fiscal 2018.

In the Frontier area, as we have released to reporters recently, we are going to invest JPY 700 million in MELTIN MMI and signed a joint research and development agreement in October. MELTIN MMI is loaded for the robot technology. We are not getting into the robot business, but our intention is to jointly conduct the research and development of the medical devices after utilizing our many years of the knowledge in the pharmaceutical business and the MELTIN's bio-signal processing and robotic technology. This is our R&D summary. Unfortunately, we could not submit the NDA to accelerated approval of the alvocidib in the oncology area.

This is a matrix to summarize the products in development pipeline. Revisions since the announcement of the July are shown in red, please confirm them later. The products launch targets include those whose expected peak annual sales are to be JPY 50 billion or more. Please understand that the products without the green highlight may exceed JPY 50 billion in its peak year. We did not highlight them because their NHI prices are not fixed yet, and therefore, we cannot actually accurately predict their market performance.

Thank you very much. That is all for me and I would like to entertain your questions now.

[Unknown Executive]

[Operator Instructions]

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. I have 3 questions. First is that the -- concerning the litigation filed over LATUDA. You mentioned that the company is willing to concentrate on the method of the use patent, which is the change of the expression. So that after many processes, considering this compared with the February, that do you have the change in the probability of the winning of the litigation?

[Hiroshi Nomura, executive]

I cannot comment on our possibility to win or otherwise the legal case. But at least I can say that we will continue doing our best, we have been till now and will be from now. As for your question related to the method of the use patent and the formulation patent, as we have mentioned, there are 2 types of the defendants. Some are concerning the possible violation of the method of the use patent and violation of the formulation patent. So in this sense, that we have to defend our technology first in the area of the method of the use patent.

[Kazuaki Hashiguchi, analyst]

Next question is on the future prospect of LONHALA MAGNAIR. Do you think that it will be a JPY 50 billion player?

[Hiroshi Nomura, executive]

Yes, we still think that this is a very potential drug. There is no change in our opinion. I believe that the drug can make it -- make at least the JPY 50 billion. Having said so, that we have to use the nebulizer quite unique and unconventional. We have to work extra hard to disseminate the product widely among patients and medical experts. We distributed free of charge trial kits and asked the opinions of patients already. Those who use them responded very positively. David Frawley will give you more specific information.

[David Frawley, executive]

Yes, thank you, Nomura-san, and it's a great question. It is taking longer in the U.S. for this product to be positioned because not only the reimbursement is different for Part D, you have an 18-month window where you have to negotiate now. You're not just added immediately to formularies. And since 65% of the channel of the over 65 patient population who suffer with COPD goes through Medicare Part D, we have to negotiate over a period of time. So we're still waiting on the outcome of these bids for these products and certainly, for LONHALA MAGNAIR. And we believe though that the product itself is actually very differentiated and it can actually be very effectively positioned for more agile patients, patients who want to have a more active lifestyle and who are coming off of a handheld device that don't want to go to a jet nebulized product.

[Kazuaki Hashiguchi, analyst]

My last question is about napabucasin, the drug to treat the colon cancer. You changed the protocol of Phase III study. Judging from the data gathered until Phase II, the number of the enrolled patients will inevitably decline. Are you confident that you can maintain the power of the test, which can produce the statistically significant results?

[Hiroshi Nomura, executive]

Mr. Koshiya, our Managing Director, will answer to that question.

[Kazuo Koshiya, executive]

Yes, let me look back on the history. The Phase III study protocol of the colorectal cancer was conducted in 2015 as a CO.23, which was the last line test using this drug alone, single use. Unfortunately, that we had to terminate this test later, but the data gathered at the time has been extremely useful for us. Among the Stat3 positive patients, efficacy was quite high. The Stat3 positive patients account for about 30% of the population. The second line of the colon cancer, the population may be slightly bigger. We are expecting quite clear efficacy among the Stat3 patients, whether the subject is from the overall population or only Stat3 positive patients, revised protocol include cancer evaluation items. Therefore, we believe that the past data will be instrumental in conducting the successful study even if the number of enrolled patients may decline.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citi. Allow me to ask you a very general question. You're quite active in the U.S. market. I heard from the country new stories on drug prices or the lift of the reimbursements. Could you briefly tell us about the changes in the U.S. market in the past one year? Also, please tell me about the competition of the LATUDA just briefly. This is my question number one.

[Hiroshi Nomura, executive]

Mr. David Frawley will be happy to share the information with you later. President Trump has kept saying since he was the candidate Trump that the prescription drugs are too expensive. In May, a blueprint document arguing for lowering the prices of the prescription drugs was issued. And recently, some started considering the reference price system. So far, however, whatever you've heard as proposals has never been implemented as policies. Having said so, my observation of the big pharmaceutical companies tells me that they are very nervous about raising drug prices. So we have not yet seen any specifically written policies. American major pharmaceutical companies are beginning to change their attitude, especially towards raising the drug prices. Mr. Frawley, he is the right person to answer your question because he has been exposed to the market. David?

[David Frawley, executive]

Yes, thank you, Nomura-san. Yes, it's a great question. We're all equally monitoring the situation in the United States. We're working with [ Pharmer ] on understanding the best way forward. I do think price increases are something that are poorly understood in terms of the gross to net discussion. And it's very complicated to explain how that translates into what actually happens in terms of the actual benefit to manufacturers. So I think this debate will continue for some time, but yes, we're actively monitoring and waiting for guidance from the government in terms of how we move forward. But we're very sensitive to making sure that we make sure that our medications are available to as many patients as possible at the appropriate prices. Sorry, yes. The other question was related to LATUDA's competitive situation. Yes, we have competitors. We have other products that are pursuing the same indication that we have for bipolar depression. We're very confident and as you saw with the slides that Nomura-san presented, LATUDA is highly promotionally sensitive. So when we put our foot on the gas in terms of promotional effort, LATUDA responds. And as you know, at the end of fiscal year '17, we pulled back our investments because we thought our runway was shorter. Now we've invested to plan for the future and you can see that LATUDA responds. LATUDA is by far and away, the most differentiated product for bipolar depression and we're very comfortable with the investments we're making to differentiate versus other companies.

[Hidemaru Yamaguchi, analyst]

Next question of mine is about a piece of news on your R&D activities. You mentioned that you discussed with the FDA of -- over the dasotraline, though you cannot disclose the contents of the discussion. How long do we have to wait till you know when you take the next step for ADHD?

[Hiroshi Nomura, executive]

We attached the addendum documents to quarterly reports, which discuss the most up-to-date information of all the clinical tests that we engage in. So allow me to suggest you refer to this source.

[Hidemaru Yamaguchi, analyst]

As for the alvocidib, you said that the previous target was delayed. Are you trying to submit an application to NDA for an accelerated approval but you failed? Is this a fair interpretation?

[Hiroshi Nomura, executive]

Let me supplement. We are not saying that whether we succeeded or failed to be granted the accelerated approval. Originally, we felt that it was a C2 submission assuming that it will be qualified for accelerated approval by the end of this fiscal year. Then we had a talk with the FDA in April and reported to them that the clinical test will be behind schedule. So we are unable to submit for the accelerated approval by the end of this fiscal year, that we will submit again next year.

[Hidemaru Yamaguchi, analyst]

So are you saying that the timing of submission was pushed back and the term accelerated is still viable?

[Hiroshi Nomura, executive]

Correct. The delay is already reflected on the first quarter.

[Seiji Wakao, analyst]

Wakao from Mitsubishi UFJ Morgan Stanley Securities. My question is related with the LATUDA's patent litigation. I know you cannot disclose all the information but please share with us that the fact-based information as much as you can. You mentioned that Markman ruling was issued, but could you share with you (sic) [ us ] what was written in the ruling?

[Hiroshi Nomura, executive]

We are not the party to disclose the contents of Markman ruling. But Markman ruling is open to third parties. Please refer to it and make judgment on your own. If we try to explain to you, that such explanation may include our interpretations and biases.

[Seiji Wakao, analyst]

Understood. You said that you will focus on the method of the use patent and the formulation patent was added. But you said that you're going to consider more on the method of the use patent, which covers you 2024, but it was difficult to acquire and therefore that you switched the formulation patent over to 2026.

[Hiroshi Nomura, executive]

As I have already said, some defendants are trying to defend themselves from the infringement claim of the method of the use patent alone or both the method of the use of the patent and formulation patent. So in that sense, we wrote in that way that we have to be -- make a robust statement of -- over the method of the use patent.

[Seiji Wakao, analyst]

You also mentioned that the number of the defendants has been reduced from the original 16 defendants to 10 defendants. Did you already settle with 6? Or why did they agree with a settlement earlier than others and what was the term of the settlement?

[Hiroshi Nomura, executive]

Some of them moved from the paragraph IV to III and stopped being the disputing parties. I cannot disclose the contents of the individual settlement agreements. But all I can say is that 6 defendants concluded based on their own situation.

[Seiji Wakao, analyst]

I also would like to know more about the COPD product group. This is the Novartis originated product. You will try to be on the reimbursement list of the Medicare -- Medicaid in January and you will regain the momentum to advance into the market again. Was there any changes to this scenario? Or that the enough time -- is enough time a sufficient solution LONHALA to make up for the lost time? Or taking into consideration of the situation in the early part of this year and assume that the LONHALA starts selling well only after it is allowed through the government health insurance system. I have a difficulty understanding why that you created this schedule for LONHALA.

[Hiroshi Nomura, executive]

David will give you his information later, but if I may go ahead, it is a challenge for the COPD handheld type to claim that it can competitive -- it has a competitive edge against other products. In this sense, it is different from the LONHALA. The LONHALA MAGNAIR cannot be easily mounted on the formula, but LONHALA has its intrinsic edge, as David earlier said. LONHALA can differentiate it from others and we are all convinced that this drug is a valuable asset for us because it brings a lot of benefits to the patients in the course of the time, therefore that the people were convinced of the benefits.

[David Frawley, executive]

Thank you and again, another good question. The main issue with LONHALA MAGNAIR is the review cycle. So it takes 18 months to get a designation on Medicare Part D. And you have to make a bid and you have to go through the bid cycle. We're halfway through that cycle right now. So we're waiting to see the outcome and then as of January, obviously, the over 65 patient population is very, very important to us for nebulized therapy. And so unlike BROVANA, which is where we would have been successful previously, that was a Part B medication, and this is a Part D medication, so we're much more closely aligned to the handheld formulations. And so we're competing in that space, which is actually very unique for a nebulized therapy. So we need to get the access that we desperately need to make sure that the product can be successful. So more to come. We are waiting the outcomes for these bids.

[Seiji Wakao, analyst]

The third question is my last question. I know LATUDA litigation -- litigations have a decisive impact of the future outlook of the U.S. market. I understand this, however, studying your progress report of other products, many of them are facing challenges, obstacles and delays. Other than LATUDA, [indiscernible] may or may not be on the list. Am sure that you expect the dasotraline to sell more than the $50 billion. Looking at the status quo of these products, that I must say that the U.S. market is getting murkier than before for you. How do you evaluate your progress? Do you think that this is a time for you to change your policies? Or do you think that you can stay on the course and can recover? Also, when are you going to disclose your midterm plan? LATUDA litigation could be easily the obstacle, but I think that the midterm plan will be announced when the LATUDA case is decided in December or January. Or will you announce the midterm plan according to the original schedule?

[Hiroshi Nomura, executive]

So far, that we hope to brief on our midterm plan to you, reporters, around March next year. But we are not sitting on the plan since this March. We are constantly updating it. As for the U.S. operations, that we have to carefully observe the market conditions in order to decide how our U.S. business should be positioned in the midterm plan. We are constantly brushing up our midterm plan and may decide to revise it to include new strategies.

[Fumiyoshi Sakai, analyst]

Sakai from Crédit Suisse. I have 2 questions. Napabucasin, I heard that you will complete the enrollment of the patients for the trial of napabucasin for colorectal cancer by the fiscal year 2018 -- by fiscal 2018, right, so next March, then you will move on to the stage of data analysis and [ leading ] out. Could you tell me in a mild sense?

[Hiroshi Nomura, executive]

For both colorectal cancer and pancreatic cancer, we will conduct midway analysis. But as you know, however, that the midterm analysis should be triggered by an event. It is hard for us to predict when an event or events will take place. Mr. Koshiya, our Managing Director, will supplement my information.

[Kazuo Koshiya, executive]

Yes, I would like to give you some supplementary information of midterm analysis of the both studies, 303C test of the colorectal study and 111P test about pancreatic cancer study, 50% of the required event will trigger the midterm analysis. Mainly, we have to check the futility. Namely, this is a factor to judge if it is okay to continue with the clinical test. However, as you asked earlier, 303C test is to determine if Stat3 be adopted as an endpoint or not. In other words, this is for adaptive design. An independent data monitoring committee members are entrusted to decide if investigators should concentrate on Stat3 patients. Consequently, termination of the study is not decided during the midterm analysis. Ultimately, we will continue until the final analysis and result will be produced. It is designed in this way.

[Fumiyoshi Sakai, analyst]

In short, therefore, the final analysis predicates on events, right?

[Kazuo Koshiya, executive]

Yes.

[Fumiyoshi Sakai, analyst]

I have another question on dasotraline. A CRL for ADHD was granted for BED, I trust that the planned research will go on without any hitch, but dose differs between ADHD and BED. Your report in July explains that you will apply for 6 milligram if the 4 milligram is declined. You propose the 8 milligram for ADHD. I guess you have to increase the dose, although that you have to discuss with the FDA, but could you explain the relationship between dosage?

[Hiroshi Nomura, executive]

Mr. Hara, our Director of the Board, will respond.

[Nobuyuki Hara, executive]

There are 2 sets of the test to determine the dose administered for BED. One is a flexible dose between 4 and 8. Another is, as you have mentioned, 6 or 8, and 8 presented significant difference. The dose is a factor to be determined as a part of our application strategy that we are not that concerned about the difference of the dose between ADHD and BED. It may be the same depending on our research in the future.

[Fumiyoshi Sakai, analyst]

The slide says TP-1287 happens to reappear on the slide, is this a prodrug of alvocidib?

[Hiroshi Nomura, executive]

Correct.

[Unknown Analyst]

My name is [ Kao Mori ] with [ Tokai ]. My question may overlap with others, but in the area of psychiatry and neurology, you referred to impact enhancement. Products without specific applications planned and the target launch dates including the product in Phase II or III are included in the developmental plan matrix in your appendices. Have you -- some of them represented the specific results? That's my question. Their aimed launch dates after 2021 and 2022 are not specified. If you have already decided on some of them, please let us know.

[Hiroshi Nomura, executive]

It is difficult to decide that the desirable launch date when a product is still in an early stage of study. We do not have very much to share at this stage, but Mr. Hara will explain to you what are in our pipeline.

[Nobuyuki Hara, executive]

Could you specify the name?

[Unknown Analyst]

Products in Phase II and III in the area of psychiatry and neurology, especially those that nobody asked about yet. For example, other than lurasidone and dasotraline.

[Nobuyuki Hara, executive]

You would like to know that the promising products, which may be included in the pipeline.

[Unknown Analyst]

Yes, I would like to know that the products that you are hoping to grow big, EPI-589 maybe? That also SEP-363856 or SEP 4199 appear to be promising.

[Hiroshi Nomura, executive]

743 is a candidate but will not generate too much revenue. This is an orphan drug for Leigh syndrome and be welcomed by the patients but 856 and 4199 are powerful candidates for us because they would save significant number of the patients and possibly create reasonably big markets to serve as the successor drugs of LATUDA. So these are 2 hopefuls.

[Unknown Analyst]

Are they promising future candidates but they are still remaining in Phase II and you have no plan to promote them into the Phase III, right?

[Hiroshi Nomura, executive]

Whenever they produce a good result, we analyze data and we -- if we judge favorably, that we will let them proceed to Phase III. And this has always been our process. Some of you asked about the composition of the products in the pipeline. But whenever that we observed the favorable progress that we will make decision during the following quarter. Of course, we will report to you at proper time.

[Motoya Kohtani, analyst]

Kohtani from Nomura Securities. I have three primitive questions, sorry. If you can lose the case of LATUDA patent violation suit, can you appeal? And if you do, how long does that legal process take?

[Hiroshi Nomura, executive]

Generally speaking, yes, we have all the right in the world to appeal to higher courts. But the lengths of the time between the appealing and the hearing the ruling is unknown. Even if you appeal that there are some -- the companies -- the generic companies dare to launch products at their own risk, that's the decision of each generic company. Some companies may exist -- such companies may exist, yes.

[Motoya Kohtani, analyst]

Dasotraline is my next subject. You fell short of the efficacy for adults. ADHD-RS4 scale itself is mainly used for children. Adult prompt is attached if you try to administer for adults. I may be wrong but [ the sento nakajin ], given by old pharmaceutical company for ADHD adopts AISRS as the main test item. Were there any changes in the guidelines for adult application? Were there any shift if policy oriented changes a view?

[Hiroshi Nomura, executive]

That's a very technical question. Can any of us reply now? Sorry. That question is beyond us right at this precise moment. IR will confirm.

[Motoya Kohtani, analyst]

And the last question is for David, can you comment on because VRAYLAR, cariprazine, has filed for bipolar depression? I don't know if guys have seen the data. If you've seen the data, I don't know whether you can comment on how effective they were in bipolar depression and how you're going to -- how you guys are thinking of countering Allergan's?

[David Frawley, executive]

Yes, we have seen the data, some of it. They haven't published all of those studies. The thing to remember is that all of those studies are in monotherapy. And 80% of patients who are treated with bipolar depression are treated with adjunctive therapy. And so we have a study that separates an adjunctive therapy with mood stabilizers, which is what happens in clinical practice. And so that's a very important point to make to prescribers that this drug works effectively in combination with mood stabilizers, which is the standard of care when you're treating bipolar depression. And also, its effect size is actually very impressive, even bigger than what we've seen with the early cariprazine studies. So we're very confident that our position as very differentiated in bipolar depression will continue.

[Motoya Kohtani, analyst]

Have you -- is the safety data, did you see any weight gain?

[David Frawley, executive]

The weight gain profile for lurasidone or for cariprazine?

[Yasuhiro Nakazawa, analyst]

Nakazawa from the SMBC Nikko Securities. First, I would like to know more about your Frontier area on Page 19. Are you interested in developing the AI system for early diagnosis of integration dysfunction syndrome or depression in the area of psychiatry and neurology area?

[Hiroshi Nomura, executive]

We have just started the project and do not know specifically what we are going to develop. Sorry for a vague answer, but I can tell you we will not venture into area radically different from what we are engaging in now. We will stay in the domain of our capacity, but if we can help patients with any means other than drugs, we would like to consider with [ Medley ].

[Yasuhiro Nakazawa, analyst]

Is it possible to apply such device, not only to the diagnosis but to treatment?

[Hiroshi Nomura, executive]

Correct, we're not limiting the Frontier area to the therapy only. We are more than willing to expand our horizon to other fields as much as possible.

[Yasuhiro Nakazawa, analyst]

Next question, LATUDA litigation in U.S. moved forward that the former deadline was January 2 next year. But will you move the deadline up as well? And can we expect the decision by the court by the end of this year?

[Hiroshi Nomura, executive]

Even if the trial started in early December, that we did not expect any core decision toward the very end of the year. Everybody will be busy out of the office for Christmas. So we sort of expected the early trial.

[Yasuhiro Nakazawa, analyst]

In that sense, can we expect the final decision being issued in 1 to 2 weeks after hearing?

[Hiroshi Nomura, executive]

I cannot commit to 1 or 2 weeks but it won't take so much time, probably that you do not wait until January 2.

[Yasuhiro Nakazawa, analyst]

I see. Finally, I would like to check some specific numbers of your financial statements. Your CEO said that the changes of the accounting procedure resulted in an adjustment of JPY 3.5 billion -- JPY 3.2 billion.

[Hiroshi Nomura, executive]

Our subsidiaries used to sell products and kept inventory at their risk. Such business deals changed as if they are functioning as trading firms or distributors. In the past, they are capitalized in their revenue and costs but now they only gain distribution fee as the only source of income. Consequently, that revenue appears to drop significantly, but such alterations has very little impact on P&L.

[Yasuhiro Nakazawa, analyst]

Lastly, on Page 9, SG&A is expected to cut by JPY 9.8 billion, including ForEx adjustment. It is a huge cut. Please break down the total number. I remember that you are going to allocate more cost for marketing LATUDA.

[Hiroshi Nomura, executive]

LATUDA's DTC or, I should say, TV commercial budget for LATUDA will increase by $30 million. On the other hand, dasotraline, which received the complete response letter and the COPD handheld and the APL because of the delay of the launch can all spare some of their resources to allocate to LATUDA. The cumulative number comes up to JPY 9.8 billion.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley. In the additional comments, commercial fee of the $30 million caught my attention. You have not changed your annual budget this time. If $30 million will help you maintain the budget, why not invest more to improve your bottom line? Do you have any plan to increase the DTC budget for LATUDA?

[Hiroshi Nomura, executive]

We are going to add $30 million on top of already earmarked $35 million. We have to proceed with your eyes on ROI. On the other hand, we have to accomplish our mission to keep our profit and loss, P&L healthy. We have to keep a good balance between the 2 in order to decide the proper level of the marketing investment for LATUDA.

[Shinichiro Muraoka, analyst]

My last question. Did 6 companies either withdrew their lawsuits or agreed with settlement before or after the Markman ruling? I do not know whether this is a proper question or not.

[Hiroshi Nomura, executive]

Markman ruling is an event, quite irrelevant to settlements, I believe.