Sumitomo Pharma Co Ltd

TSE:4506

Earnings Call Transcript 2018-Q3

[Hiroshi Nomura, executive]

My name is Hiroshi Nomura. I'm the Executive Vice President of Sumitomo Dainippon Pharma. I will be presenting the financial results and the clinical development updates for the third quarter FY 2017, the period ending December 31.

Please go to Slide 2. I would like to present the financial results for the third quarter. Both net sales and income in the third quarter increased from the same period last year. Net sales were JPY 364.1 billion, up by JPY 58.6 billion or 19.2% from prior year. The increase was driven by North America segment.

The percent of progress to the previously revised forecast was according to the plan. Cost of sales increased as a result of increase in sales. Although increase in LATUDA sales helped lower the cost as a percent of sales, the overall cost as a percent of sales increased by 1 point due to the exchange impact of the unrealized profit of inventory.

SG&A expenses less R&D costs increased by JPY 17.3 billion from the same period last year. Expenses decreased in Japan, while expenses related to new COPD products in North America increased, as well as increase in fair value of the contingent consideration after the approval of LONHALA MAGNAIR.

The expenses also increased because of foreign exchange impact. The R&D cost increased due to in-licensed diabetes treatment that was announced in October. As a result of this, the operating income was JPY 55.9 billion, up by JPY 11.7 billion from the same period last year or 26.5%. Net income attributable to owners of the parent increased by JPY 21 billion to JPY 50.6 billion because tax expenses decreased after the tax reform in the United States. The company revised the full year forecast slightly, which I will explain later.

Slide 3 shows sales of the Japan segment. Sales in Japan increased by JPY 4.4 billion from the same period last year to JPY 113 billion. Trulicity increased substantially. AIMIX and TRERIEF continue to grow as well. These promoted products offset the decrease in the long-listed products.

The full year outlook for AIMIX was revised by JPY 1 billion. Our subsidiary company, DS Pharma Biomedical, launched authorized generic of AVAPRO in December last year.

Please go to Slide 4. I will explain net sales in North America and China segments. Sales in North America were JPY 191.6 billion, up by JPY 47.9 billion or 33% from the same period last year. The growth was driven by LATUDA and APTIOM. Sales from new COPD products include SEEBRI, that was launched October last year, in addition to UTIBRON and ARCAPTA. Revenues from LONHALA MAGNAIR that was approved in December will be coming in starting the fiscal year 2018. Others include gain from divestiture from ciclesonide that was booked in the second quarter.

Sales in China segment were JPY 15.4 billion, an increase of JPY 2.5 billion. MEROPEN was the key driver for the increase. Sales outside Japan business, including export, now account for 59.8%.

Please go to Slide 5. This is the segment information for the quarter. Japan segment increased net sales, while gross profit decreased due to product mix. Meanwhile, SG&A decreased significantly due to savings from personnel cost and marketing expenses. Income of the segment increased by JPY 4 million from the same period last year.

As for North America segment, as I explained in Slide 2, the expenses associated with the new COPD product increased. This was offset by significant increase in net sales resulting in an increase in segment income by JPY 15.6 billion from prior year to JPY 77.8 billion.

China segment increased its sales due to MEROPEN, and increased its profit by JPY 1.1 billion from the same period last year.

Slide 6 shows operating income and below. Nonoperating income and expenses decreased due to a large amount of exchange gain occurred in the same period last year. Business structure improvement expenses under extraordinary loss are for the early retirement package now that the company closed the applications from the manufacturing division. For your information, the same business structure improvement expenses of the prior year were for the same early retirement program, but to those employees outside the manufacturing division.

Income tax decreased significantly. This is because tax-related expenses decreased due to the reversal of the deferred tax assets and liabilities associated with the tax reform in the United States.

As a result of this, net income attributable to owners of the parent increased by JPY 21 billion to JPY 50.6 billion.

Please go to Slide 8. I'll be presenting the financial forecast for the full year. As I said before, there are no changes in forecast for net sales, expenses down to the operating income. There are no changes in the ForEx rates. Net income attributable to owners of the parent was revised from JPY 47 billion to JPY 55 billion, an increase of -- by JPY 8 billion as a result of increased extraordinary loss by JPY 3.5 billion for business structure improvement expenses as well as income tax reduction after U.S. tax reform.

In Slide 9, I would like to explain revision of dividend forecast. As was described in the press release today, the company decided to increase the special dividend to JPY 10 per share considering earnings forecast for FY 2017, raising the year-end dividend per share to JPY 19, with ordinary dividend remaining unchanged at JPY 9 per share. This is an increase of JPY 8 from the previously forecast -- previously announced forecast and from prior year.

Please go to Slide 11. From this slide, I would like to give you clinical development updates. This table shows a list of development assets and phases of Sumitomo Dainippon Pharma. This slide shows psychiatry and neurology area. The change since last October is the initiation Phase I study for ADHD indication in Japan for dasotraline.

Next is Slide 12. This is oncology area for napabucasin and amcasertib. No updates since October.

Next is Slide 13. This is oncology and other areas. Phase I study for alvocidib began in Japan for newly diagnosed and refractory or relapsed patients with AML. DSP-0509 is a new compound Phase I study for solid cancer -- solid tumors began in the United States. Phase III study started for Imeglimin. This is an asset we in-licensed in October last year from POXEL. Two companies together started Phase III in Japan for the treatment of Type 2 diabetes.

Please look at Slide 14. This is a summary of changes since the last update in October. LONHALA MAGNAIR was approved in December 2017. Sunovion began market awareness activities this month. The full commercial launch will start in early fiscal year 2018. We issued a press release today on APL-130277. The Phase III study is now completed, and we are preparing for NDA submission in the United States. I already explained other changes.

For your reference on napabucasin, results from an investigator-initiated clinical study was presented at the ASCO-GI in January 2018. It was led by Dr. Yoshino at the National Cancer Center Hospital East and is a Phase I investigator-initiated study for colorectal cancer, in combination with napabucasin and pembrolizumab. The abstract can be found on the ASCO-GI website.

Please go to Slide 15. This is a summary of Phase III study results of APL-130277. The study assessed efficacy and safety tolerability in 109 Parkinson's disease patients with OFF episodes who didn't adequately respond to levodopa. APL-130277 demonstrated significant difference versus placebo in the efficacy primary and secondary endpoints. It is scheduled to be submitted in the United States in the spring of 2018.

Next is Slide 16. I would like to introduce to you a new compound called DSP-0509. DSP-0509 is an agonist for TLR 7 receptors expressed in dendritic cells. It is believed to have anti-tumor effect by inducing cytokines and activating CTL cytotoxic T lymphocytes. That is the end of my presentation. We would like to take your questions.

[Kazuaki Hashiguchi, analyst]

Hashiguchi, Daiwa Securities. I have a few questions, please. First is the third quarter financial results. You explained that there were some increases in cost of sales, R&D costs and SG&A expenses. When I look at the operating income for the third quarter, it seems the rate of progress for the quarter is slightly slow against the full year forecast. Do you think it will improve?

[Unknown Executive]

The financial results will be in line with the previously announced forecast up to the ordinary income line.

[Kazuaki Hashiguchi, analyst]

My second question is regarding the increased dividend forecast. If I remember correctly, Mr. Tada said before that the company would increase dividend, not just because the income increased. He said the company would increase dividend once the future outlook is stable. In light of this thinking, have you increased the dividend because the future outlook is now positive? Or have you changed your dividend policy? I just want to understand the basic policy of dividend payment -- payout.

[Unknown Executive]

Yes, it is the company policy to maintain a consistent payment, while also reflecting any improvement in the company's performance in the dividend payment to the shareholders. Mr. Tada previously said that if the company increased the dividend from JPY 18 to JPY 20 or JPY 25 per share, that would become the benchmark. So the decision cannot be made unless we have a clear future outlook, to a certain degree. The decision this time around is increase the special dividend, not the ordinary dividend. LATUDA is performing strong in the United States, and Japan is also doing well. So we decided to increase the special dividend to JPY 10 per share because of the strong performance in this fiscal year. So we wanted to reflect that in the dividend payment.

[Kazuaki Hashiguchi, analyst]

My last question is the toll-like 7 receptor agonist that you introduced to us at the very end. I'm aware of a few similar mechanism currently in Phase II, but these other companies are developing TLR 7 for anti-allergic or antiviral drugs. Your target indication is solid tumors. Is this because the profile of the compound is different and is more appropriate for cancer treatment? Or is the idea or the concept different?

[Kazuo Koshiya, executive]

This is Kazuo Koshiya from Global Oncology. I will take your question. DSP-0509 came from our research activities within the internal lab. Some promising data came up. The R&D strategy for this asset is in line with the immuno-oncology trend today.

[Yasuhiro Nakazawa, analyst]

Nakazawa, SMBC Nikko Securities. First, I want to confirm the revised forecast of the bottom line on Slide 8. The extraordinary loss increased by JPY 3.5 billion. The impact associated with the U.S. tax reform is JPY 11.5 billion, so the net increase in the bottom line is JPY 8 billion. Is that the correct understanding? That's my first question.

[Unknown Executive]

There are many ways of looking at this. The pretax income for the third quarter is approximately JPY 56.1 billion, and the full year forecast is JPY 66 billion. So the increase is about JPY 10 billion pretax. However, on an after-tax income level, the increase is JPY 5 billion. So the tax assumption seems high. We estimate it somewhat conservative in this area. The reason is this. Last year, the company acquired Tolero in February. The purchase price allocation has to be finalized within a year such as in-process R&D, goodwill and deferred tax liabilities. We are in the process of finalizing this. But the numbers could change from the initial assumptions. So for that fourth quarter -- for the fourth quarter, the tax is estimated rather conservatively. I hope it helps.

[Yasuhiro Nakazawa, analyst]

Okay. And the impact associated with the U.S. tax reform is about JPY 8 billion. Is that correct?

[Unknown Executive]

Yes, about JPY 8 billion.

[Yasuhiro Nakazawa, analyst]

And we saw the press release this morning regarding APL-130277. I believe there was an open label study with 220 subjects. Will you include it in the package to be submitted in the spring of 2018?

[Nobuyuki Hara, executive]

This is Nobuyuki Hara from Drug Development. You are right. The open label study is CTH-301, which will be included in the submission package.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citi. I think you already explained this, but please briefly summarize the reasons for tax reduction in the U.S. Will it be temporary or not?

[Unknown Executive]

The impact of the U.S. tax reform is temporary. The U.S. tax reform this time will affect the taxable income after January 1 of this year. The changes we made in this reporting period were deferred tax assets and liabilities with the new tax rate. So it's temporary.

[Hidemaru Yamaguchi, analyst]

My second question is APL apomorphine. The study met its primary endpoint, that is MDSU-UPDRS Part III scale. The change from baseline was 7.6 according to the press release. When I look at the dose titration study, the change from baseline was 22. Of course, the significant difference was demonstrated versus placebo, but it appears the scores have decreased. Am I correct?

[Unknown Executive]

Just to confirm your question. Are you asking whether the Phase III results were not as good as the titration study results?

[Hidemaru Yamaguchi, analyst]

Yes.

[Unknown Executive]

Well, we don't think so. The titration study did not compare the scale versus placebo. The scale improved about 20 points in absolute number in Phase III study.

[Hidemaru Yamaguchi, analyst]

So do you think the results are consistent with Phase II study?

[Unknown Executive]

We think the Phase III study was able to reproduce the results.

[Hidemaru Yamaguchi, analyst]

And the instance of nausea was high. Is it an acceptable level, clinically speaking?

[Unknown Executive]

Nausea is one of the common side effects of a dopamine agonist. We think that anti-emesis will help control nausea in clinical practice.

[Hidemaru Yamaguchi, analyst]

I also have a confirmation question. You will announce the midterm business plan in the near future. I just want to know the LATUDA loss of exclusivity assumption. Is it January 2019? I think you said January 2019 before. Am I correct?

[Unknown Executive]

We would like to refrain from commenting on this because there are many conditions for the midterm business plan.

[Motoya Kohtani, analyst]

Kohtani, Nomura Securities. My first question is increases in R&D cost and patent amortization that increased in this reporting period. Could you tell me what they are?

[Unknown Executive]

The R&D cost increased temporarily due to the in-licensed asset.

[Motoya Kohtani, analyst]

Are you referring to Imeglimin?

[Unknown Executive]

Well, one thing is more programs transitioning to a late phase, but Imeglimin was not included in the original budget, so that happened in the third quarter.

[Motoya Kohtani, analyst]

I'm looking at the press release by POXEL, which says EUR 36 million upfront payment received from Sumitomo Dainippon Pharma. It also says re-invoiced clinical trial fees. Did you disclose how much you paid?

[Unknown Executive]

We already disclosed the number, which is JPY 4.75 billion.

[Motoya Kohtani, analyst]

Okay. And you are also supposed to pay milestone for the approval of SUN-101. Is that included in perhaps patent amortization?

[Unknown Executive]

The fair value of the contingent consideration of SUN-101 is in the amortization of the patent rights and others section.

[Motoya Kohtani, analyst]

My second question is related to increase of extraordinary income and loss, from JPY 2.5 billion to JPY 6 billion. Could you explain what they are? Are you expanding early retirement program? What are the business structure improvement expenses?

[Unknown Executive]

At this point, we are trying to reduce fixed costs wherever we can. That is what we are doing. It could be fixed asset. It could be something else. We are taking measures to reduce the overall fixed cost as a part of business structure improvement. I won't be able to disclose the details now.

[Motoya Kohtani, analyst]

I see. My last question is DSP-0509. I am looking at the first quarter financial briefing released back in July 2014, which includes DSP-3025 for the indication of asthma. It's TLR 7 agonist. And it was discontinued. The same TLR 7 agonist, DSP-0509, was introduced this time. Was it developed with AstraZeneca also?

[Unknown Executive]

No, they are different.

[Motoya Kohtani, analyst]

Okay. I believe AstraZeneca or Sumitomo Dainippon developed TLR 7 for cancer.

[Unknown Executive]

The patent application was filed, but was not granted.

[Motoya Kohtani, analyst]

So you discontinued with DSP-3025 and decided to develop 0509 instead. Is that the case?

[Unknown Executive]

I think what you are referring to is the joint development with AstraZeneca for the indication of asthma. It was joint research. But the cancer indication is our initiative, and the patent of 0509 is assigned to us.

[Seiji Wakao, analyst]

Wakao, Mitsubishi UFJ Morgan Stanley. My first question is regarding U.S. tax reform. The company is currently using the Japanese accounting standard and is adapting IFRS at the end of this fiscal year. How is IFRS going to affect the impact of the U.S. tax reform, as far as you know at this point? That's my first question.

[Unknown Executive]

Currently, the company has more deferred tax liabilities than deferred tax assets. So there are tax benefits under the Japanese accounting standard today. With the introduction of IFRS, the situation will probably change. For example, we export LATUDA from Japan to the U.S. The tax applied to the unrealized profit of the inventory will be U.S. tax rate instead of the Japanese tax rate. So the position of deferred tax liabilities and assets will change. However, the exact amount of the impact is not known at this point. In the process of the transition, it will be clarified.

[Seiji Wakao, analyst]

My second question is regarding APL-130277. I just want to understand the clinical meaning of the improvement of scale by 7.6 versus placebo. You said earlier that the absolute number was similar to that of the Phase II study, so that's positive. But what is the full score of this scale? What is the baseline average? I just want to understand.

[Unknown Executive]

I don't know the baseline score, but the changes were clearly significantly different from placebo. Therefore, the efficacy is clinically meaningful.

[Seiji Wakao, analyst]

My third question is dasotraline development in Japan. So Phase I study started in Japan, while Phase III is already completed in the U.S. Do you think you will be able to reduce the development period for Japan by using the U.S. data?

[Unknown Executive]

The basic principle is that we will use U.S. data where possible for the development of dasotraline in Japan.

[Seiji Wakao, analyst]

And when is the target launch in Japan?

[Unknown Executive]

It's difficult to say when because we just started Phase I, but it will probably be around 2023.

[Seiji Wakao, analyst]

My last question is how the drug price scheme will affect your business.

[Unknown Executive]

The new scheme will take effect in April 2018, and the long-listed products will be affected a lot.

[Seiji Wakao, analyst]

How much of your current products in Japan fall under G1, G2 classification? Could you tell me the value? And how is that going to affect your mid- to long-term forecast of the Japan business? Will you accelerate streamlining Japan business? How are you -- your long-listed products affected by G1, G2 scheme?

[Unknown Executive]

The company doesn't have very many G1, G2 products, so the impact will be minimum. Our thinking for the mature products is that we will keep them and continue the business instead of out-licensing to other companies.

[Shinichiro Muraoka, analyst]

Muraoka, Morgan Stanley. I want to ask you about LATUDA. LATUDA continues to remain strong at 32% over the last 3 months. Did you increase the price? Are there any changes that happened in this period?

[Unknown Executive]

The price was raised in January, but not in this reporting period. The growth was due to favorable contracting for price and volume.

[Shinichiro Muraoka, analyst]

And what was the percent of price increase in January?

[Unknown Executive]

9.9%. For your information, the revenue increase in the third quarter came from both volume and price favorability at 35% and 65%, respectively.

[Shinichiro Muraoka, analyst]

Earlier, you didn't specify the timing of the loss of exclusivity. Are you working on extending the exclusivity period? Is that the [ nuance ] here?

[Unknown Executive]

Our efforts around patent are made on all products, not limited to LATUDA. We have the patent rights for LATUDA, and the information is available in the Orange Book. As we build the midterm business plan, we are considering many aspects. At this point, I won't be able to respond to you -- your question with clarity. The midterm business plan will be announced on March 8. We will be answering your questions then.

[Shinichiro Muraoka, analyst]

Speaking of the midterm business plan, as you transition to the IFRS standards, other companies give us a brief guidance about the changes before the transition takes place. Will you give us any updates before the March 8 presentation?

[Unknown Executive]

We haven't decided how we should present the midterm plan. We are not thinking of providing a guidance before announcing the midterm plan. We did some research on other companies, how they handle the disclosure at the time of IFRS transition. Not all companies provided the summary of the change points. Some companies probably did, but not the others. For Sumitomo Dainippon Pharma, we are not thinking of notifying you the IFRS disclosure before the midterm announcement or before the financial briefing in May.

[Shinichiro Muraoka, analyst]

I understand your situation. Lastly, I want to ask you about tax rate. Last week, at the -- the U.S. company announced the tax rate that was much lower than expected, which was a positive surprise. Do you anticipate such an extreme change as a result of tax reform or IFRS?

[Unknown Executive]

I'm not sure how you could define an extreme case here. When I was talking about IFRS earlier, I said the new tax rate was applied to the unrealized profit of the inventory. That's different from the Japanese standard. And it's such a fluid situation that it's hard to estimate the deferred tax assets and liabilities after IFRS is applied at this point. We will figure out as we process the financial results. There are so many assumptions that go into the estimation, and it's difficult for me to explain here. So I don't want to provide any misleading information here.

[Fumiyoshi Sakai, analyst]

Sakai from Credit Suisse. Just one question about impact of the U.S. tax reform. This time, the impact is on the deferred tax assets. This -- there was no impact on cash in, cash out. Am I correct? This is a confirmation question. So there was no cash in coming from the U.S. Is that correct?

[Unknown Executive]

You're right. No change in the cash position. The impact us on the balance sheet only after replacing with the new tax rate.

[Fumiyoshi Sakai, analyst]

And starting the next fiscal year, the income tax in the U.S. will simply be reduced to 21%. For a company like yours that is making profit in the U.S., there will be tax benefits. So that's at least how the stock market sees your company. Predicting ahead next year, the company will maintain a certain level of income in the U.S. Do you think you will keep the profit in the U.S.? And when the opportunity presents itself for merger and acquisition, for example, will you spend it there? That's -- is that the correct thinking?

[Unknown Executive]

The subsidiary in the U.S. is under the holding company. The holding company allocate the group financing from the company that's generating profit to other companies that need funding, such as Boston Biomedical and Tolero, so that they can conduct R&D activities. Furthermore, M&A will most likely to take place in North America, so keep the dollar there makes sense so that we can mobilize and deploy dollars when needed. Of course, we need funding for Japan, so we may have to convert the dollar to the yen as needed. But basically, we want to keep the U.S. dollars in the U.S.

There are no additional questions. This is the end of the earnings call. Thank you very much.