Sumitomo Pharma Co Ltd

TSE:4506

Earnings Call Analysis

Significant Revenue Decline Impacts Profit

The company saw a major dip in revenue to JPY 235 billion, down by JPY 225.2 billion from the prior year, affecting all geographical segments. Core operating profit plummeted by JPY 139.3 billion year-on-year, resulting in a JPY 96.4 billion loss. Including nonrecurring items like restructuring costs, the operating loss reached JPY 117.7 billion. Pre-tax loss stood at JPY 105.2 billion, with a net loss to owners at JPY 117.7 billion. In response to these trends, the full-year forecast has been adjusted, predicting lower revenues at JPY 317 billion, a JPY 45 billion drop from previous expectations, and a forecasted core operating loss of JPY 134 billion.

Revenue and Performance - A Tough Quarter Marked by Decline

Koji Ishida, the Vice President and Head of Global Finance, revealed that the company's revenue for Q3 of FY 2023 suffered a substantial decrease of JPY 225.2 billion compared to the previous year, amounting to JPY 235 billion. The decline was omnipresent across all segments, including Japan, North America, and Asia. Despite efforts to cut SG&A expenses and generate operating income from the transfer of shares in Sumitomo Pharma Animal Health, the reduction in gross profit due to the fall in revenue significantly impacted the company's profitability, resulting in a core operating loss of JPY 96.4 billion.

Additional Financial Strains and Profit Decline

The company also faced a nonrecurring expense of JPY 20.5 billion from retirement benefits linked to the North American group companies' restructuring. This, combined with the operating losses, intensified the total operating loss, leading to a negative total of JPY 117.7 billion. Moreover, a profit before taxes quarterly loss of JPY 105.2 billion was recorded, driven by significant operating profit reductions and a minor foreign exchange gain of JPY 12.4 billion. This loss transferred to a net loss attributable to owners of JPY 117.7 billion.

Product Performance and Revised Forecast

The situation in North America was particularly challenging due to the end of the exclusive sales period for LATUDA in the U.S. On the other hand, the revenue from the 3 key products, ORGOVYX, MYFEMBREE, and GEMTESA, increased but still fell short of expectations, leading to revisions in the financial forecast for these products. The revised FY 2023 forecast stands at $290 million, $70 million, and $260 million for ORGOVYX, MYFEMBREE, and GEMTESA, respectively, marking significant downgrades from their initial projections.

Downward Revisions and Impact on Profit

Revising the full-year financial forecast, management anticipates a revenue of JPY 317 billion, down JPY 45 billion from the prior forecast. Mainly affected by the North America segment's lower performance, this new outlook has led to forecasting a core operating loss of JPY 134 billion and an expected net loss attributable to owners of the parent at JPY 141 billion. These dire expectations are pivotal as they signal a future that may continue to grapple with declining profits and challenging market conditions.

Pipeline Developments and Clinical Studies

Despite the financial setbacks, the company shared positive clinical development updates. A potential treatment for Parkinson's disease is expected to be approved and launched in Japan in FY 2024 upon successful study results. Moreover, XENLETA, a treatment for pneumonia, received approval in China, and KSP-1007 is currently undergoing a Phase I study in Japan. The company is also nurturing prospects with TP-3654, designed for myelofibrosis, and DSP-5336, aimed at treating acute leukemia, with the latter expected to receive approval in Japan and the U.S. by FY 2026.

Investor Queries and Concerns

In light of recent reports and the revised forecast, investor concerns have emerged, particularly regarding the potential impairment of the three key products following the significant downward revisions. The company acknowledged the possibility but withheld specific comments as the long-term outlook is being reassessed. With respect to the business structure improvement expenses recorded in North America, they reflected the restructuring already implemented by consolidating companies to reduce costs. Lastly, the uncertainty in reaching sales milestones coupled with the sales decline has left profitability projections for the next fiscal year on tenuous grounds.

Earnings Call Transcript 2024-Q3

[Koji Ishida, executive]

I am Koji Ishida, Vice President, the Head of Global Finance. Based on the presentation materials, I will now report on our performance for Q3 of FY 2023. Please refer to Page 3. I will report on the Q3 financial results. These figures are presented on a core basis in accordance with IFRS.

Revenue was JPY 235 billion, a decrease by JPY 225.2 billion in the same period last year. There was a decline in revenue across all segments, including Japan, North America and Asia. Despite the decrease in SG&A expenses and the recording of other operating income due to the transfer of shares in Sumitomo Pharma Animal Health, the impact of the decline in gross profit due to reduced revenue was significant. As a result, core operating profit decreased by JPY 139.3 billion year-on-year, resulting in a core operating loss of JPY 96.4 billion.

As a nonrecurring item, we recorded JPY 20.5 billion in retirement benefits associated with the restructuring of our North American group companies. Consequently, operating profit decreased by JPY 100 billion from the same period last year, resulting in an operating loss of JPY 117.7 billion.

Profit before taxes for the quarter recorded a foreign exchange gain of JPY 12.4 billion due to the weaker yen at the end of the quarter. However, the substantial reduction in operating profit led to a decrease of JPY 107.4 billion year-on-year, resulting in a profit before taxes quarterly loss of JPY 105.2 billion. As a result, net profit attributable to owners of the parent also significantly decreased, resulting in a loss of JPY 117.7 billion.

In light of recent trends, we have revised our full year financial forecast. I will explain the details later on.

Page 4 presents a comparison of the third quarter financial results on a core basis against our internal budget. Revenue was JPY 235 billion, achieving 89.9% of the plan. The real achievement rate, excluding FX rate differences, was 85.4%. The performance in Japan and Asia were broadly in line with the plan, but North America fell short of expectations.

SG&A expenses amounted to JPY 176.6 million, reaching 105.4% of plan. The real achievement rate, excluding ForEx rate differences, was 98.2%.

R&D expenses were JPY 68 billion, reaching 107.7% of the plan. The real achievement rate, excluding FX rate differences, was 101.3%. Thus, both SG&A expenses as well as R&D expenses were broadly in line with the plan on a real basis excluding foreign exchange effects. Other operating income and expenses amounted to JPY 6.4 billion. As a result, the core operating line recorded a core operating loss of JPY 96.4 billion.

Page 5 covers the revenue performance of the North America segment. In the North America segment, although revenue of the 3 key products, ORGOVYX, MYFEMBREE and GEMTESA increased. The end of the exclusive sales period of LATUDA in the U.S. had a significant impact. As a result, revenue was JPY 115.4 billion, a decrease of JPY 164 billion compared to the same period last year. The achievement rate for the third quarter plan for 3 key products is provided, but all fell short of their plans. The slide lower part details the major items of onetime and milestone revenue.

Page 6 discusses the revenue performance of the Japan and Asia segments. The Japan segment saw a decrease in revenue compared to the same period last year by JPY 57.5 billion, amounting to JPY 89.2 billion. While sales of LATUDA, TWYMEEG and LONASEN Tape increased, the segment overall experienced a decrease in revenue due to factors such as the transfer of subsidiary shares in related businesses, determination of Trulicity sales collaboration in December 2022, and a onetime revenue of JPY 6.1 billion from the out-licensing of DSP-0187 in the same period last year.

The progress rate against the full year forecast is 78.1%, with the segment as a whole progressing almost as forecasted.

The Asia segment experienced a significant decrease in revenue due to the impact of MEROPEN in China, becoming subject to volume-based procurement from November 2022, resulting in a year-on-year decrease of JPY 3.7 billion for the segment. The progress rate against the full year forecast is 78.0%, progressing almost as expected.

Page 7 shows the financial performance by segment. In each segment, SG&A expenses decreased. However, due to the decline in gross profit from decreased revenue, each segment experienced a reduction in profits.

Please refer to Page 9. I will explain the revisions to the full year financial forecast. Revenue is forecast to be JPY 317 billion, a decrease of JPY 45 billion from the previous forecast. While there is an increase in revenue due to the revised ForEx rate assumptions from JPY 130 to JPY 145 per U.S. dollar and JPY 19.5 to JPY 20 per yuan. The main reason for the downward revision is based on the sales progress of the 3 key products and LATUDA in North America segment.

SG&A expenses as well as R&D expenses are expected to increase mainly due to the impact of the revised FX rates. Other operating income within the core has been reduced after incorporating the outlook as of the end of Q3.

As a result, core operating profit is expected to see a reduction of JPY 72 billion, forecasting a loss of JPY 134 billion.

Regarding nonrecurring items, due to higher-than-expected expenses for business structure improvement related to the restructuring of North America group companies, operating profit is expected to decrease by JPY 78 billion, forecasting a loss of JPY 156 billion.

Financial income mix is expected to include foreign exchange gains due to the weaker yen. However, profit attributable to owners of the parent is expected to decrease by JPY 61 billion, forecasting a loss of JPY 141 billion. Please note that this forecast do not include any impairment losses, although an impairment test will be conducted in the fourth quarter of FY 2023.

Please turn to Page 10. I will explain the revisions to the financial forecast for individual products in North America. The 3 key products will be discussed in the following slides. But in total, for the 3 key products, we have reduced the forecast by $330 million. For LATUDA, due to faster-than-expected penetration of generics, we have revised the forecast down by $114 million, considering the progress to date.

Page 11 discusses the marketing status of ORGOVYX. Against the Q3 plan of $265 million, the actual performance was $215 million, achieving 81%. The impact of volume and price on the Q3 performance is as detailed, with the impact mainly due to volume.

We have revised the FY 2023 forecast from $396 million to $290 million. The main reason is that, in large university hospitals and hospital groups, which make up about 50% of the market share for androgen deprivation therapy where ORGOVYX is administered, the acquisition of market share has been less than planned, leading to a reduction in expected volume.

Regarding future marketing strategies, in addition to the activities listed, we will strengthen our efforts by promoting adoption activities through dedicated teams established in July 2023 in university hospitals and hospital groups, which has been a challenge.

Page 12 discusses the marketing situation for MYFEMBREE. Against the Q3 plan of $160 million, the actual performance was $49 million, achieving 43%. The impact on the Q3 performance is mainly due to volume as detailed.

The FY 2023 forecast has been revised from $192 million to $70 million. The primary reasons are the significant impact of the volume, the slow expansion of the GnRH market for uterine fibrosis and insufficient market share expansion in endometriosis. For future marketing strategies, we will improve our appeal messages to position MYFEMBREE as the first treatment option for cases where oral contraceptives are ineffective for uterine fibrosis and endometriosis. We will utilize DTC, including social media, to raise awareness among patients who are potential candidates for MYFEMBREE.

Page 13 discusses the marketing situation for GEMTESA. Against the Q3 plan of $246 million, the actual performance was $174 million, achieving 71%. The impact of the Q3 performance is mainly due to price as detailed.

The FY 2023 forecast has been revised from $362 million to $260 million. The main reasons are the worsening price situation due to an increased proportion of prescriptions under Medicare Part B and the reduction in volume due to insufficient market share acquisition.

For future marketing strategies, we will optimize our sales teams and activities, including increasing representatives focused on the primary care market to promote prescriptions efforts in this area. Additionally, we will strengthen the provision of information to health care professionals about GEMTESA's product characteristics, including its safety for patients with overactive bladder who have hypertension as GEMTESA has minimum impact on blood pressure.

Page 14 presents the financial forecast by segment. In the Japan segment, due to the upward revision in revenue, core segment profit is expected to increase by JPY 1 billion compared to the previous forecast. In the North America segment, the significant impact of the downward revision in revenue on gross profit is expected to lead to a decrease in core segment profit of JPY 58.6 billion, compared to the previous forecast. In the Asia segment, excluding the impact of FX rates, revenue is revised downward. This is mainly due to the low performance of LATUDA in China. And as a result, core segment profit is expected to decrease by JPY 0.4 billion compared to the previous forecast.

Please turn to Page 16. From here, I will explain the development status. This table is an overview of development stages of our pipeline compounds. Changes since October last year will be explained on the next page.

Please look at Page 17. Here we summarize the progress in clinical development. In the psychiatry and neurology area, the Phase I/II study conducted by the University of California San Diego School of Medicine using allogeneic iPS cell-derived dopaminergic neuro progenitor cells has begun in the U.S. We are funding this investigator-initiated study and providing the cells for transplantation. The study data will be used for future development in the U.S.

In Japan, an investigator-initiated study is also being conducted at Kyoto University, and the 2-year observation period ended at the end of 2023. Using the results of this study, we aim to obtain an approval and launch the product in Japan in FY 2024. We expect that transplantation of this product will improve motor functions in patients with Parkinson's disease, contributing to the extension of healthy life expectancy. It offers a completely new treatment mechanism different from existing medications to patients with Parkinson's disease. We aim for it to become a blockbuster in the 2030s.

Regarding ulotaront, we are continuing to discuss future development strategies for schizophrenia with Otsuka Pharmaceutical. In other areas, XENLETA was approved in China for community-acquired pneumonia in November last year. For KSP-1007, we have initiated a Phase I study in Japan.

Now please turn to Page 18. Here, we show an overview of the investigator-initiated study in the U.S. for allogeneic iPS cell-derived dopaminergic neural progenitor cells. This study started in November 2023. The raw iPS cells were provided by the CIRA Foundation. We differentiate these cells into dopaminergic progenitor cells and then transport them to the U.S.

Page 19 provides an overview of TP-3654, which is under development for myelofibrosis. There is a demand for new treatments in myelofibrosis that can reduce splenomegaly and alleviate systemic symptoms with fewer hematological adverse events.

Please turn to Page 20. Here we show an interim result of the monotherapy Phase I/II study of TP-3654 for myelofibrosis. Regarding efficacy, reduction in spleen volume and improvement in symptom scores were observed even in patients who did not respond to JAK inhibitors as well as in patients known to have a poor prognosis, with hemoglobin levels of less than 10 grams per deciliter and platelet counts of less than 100,000 per microliter.

In terms of safety, platelet counts remained stable during treatment. No dose-limiting toxicities were observed and tolerability was good. The most common adverse events were diarrhea, nausea and vomiting.

Please look at Page 21. This page shows the development status and future plans for TP-3654. We are considering initiating a combination study with JAK inhibitors and aim to obtain topline results of the pivotal study for myelofibrosis in FY 2027.

Please turn to Page 22. Here we provide an overview of DSP-5336, which is under development for acute leukemia. In acute myeloid leukemia, cases with MLL rearrangements have a poor prognosis and those with NPM1 mutations are difficult to cure without bone marrow transplantation, underscoring the need for new treatment options.

Please refer to Page 23. This page presents the interim results of the monotherapy Phase I/II study of DSP-5336 for acute leukemia. Regarding safety, no dose-limiting toxicities were observed. Tolerability was good. And the most common adverse events were nausea, vomiting and fatigue. No QTc prolongation or other cardiotoxicity associated with the DSP-5336 and no differentiation syndrome in patient positive for DSP-5336 target mutations were observed.

In terms of efficacy, a significant decrease in bone marrow blasts was observed in many evaluatable patients with DSP-5336 target mutations, and cases of remissions have already been observed.

Please turn to Page 24. Here we present the development status and future plans for DSP-5336. Therapeutic options for difficult to treat refractory relapsed acute myeloid leukemia cases are extremely limited. We aim to obtain an approval in a single-arm Phase II part without the controlled treatment. After discussions with regulatory authorities, we plan to start the Phase II part in the first half of FY 2024. We are targeting the indication of acute myeloid leukemia for approval in Japan, in the U.S. in FY 2026.

This concludes my presentation.

[Seiji Wakao, analyst]

Wakao from JPMorgan. I have 3 main points. First, could you elaborate the potential for impairment of these 3 key products? You mentioned conducting impairment tests in Q4 of FY 2023. Given MYFEMBREE's particular challenging situation and the significant downward revision of its outlook, I believe the likelihood of impairment is quite high. Additionally, based on today's presentation, ORGOVYX and GEMTESA seem to be in a tougher situation than I thought. Should I also consider heightened risk of impairment for these products?

[Unknown Executive]

Thank you for your question. Regarding impairment, we are currently reviewing it. So at this stage, I cannot comment specifically on it. It will take some time as we are revising our long-term performance outlook. Based on that, we will properly evaluate and proceed with the process. So I would like you to understand it that way.

[Seiji Wakao, analyst]

Understood. Considering the current situation, should I assume that the long-term outlook for each product has declined? It seems very challenging for them to suddenly achieve a significant upturn and reach the original expectations set by your company.

[Unknown Executive]

Yes. Regarding the sales forecast, for instance, even for FY 2024, the level has already decreased compared to what we envisioned for FY 2023. In other words, the achievement of sales target will be delayed. That's how I see it.

[Seiji Wakao, analyst]

I understand. Another point, regarding the expenses for business structure improvement recorded in North America. Is my understanding correct that these are new restructuring? If these are indeed new, what level of SG&A expenses can we expect in North America for the coming fiscal year?

[Unknown Executive]

The business structure improvement in question has already been implemented. As of July 1, 2023, we consolidated about seven companies in North America into one, reducing the number of employees and associated costs in the process. This is what is now reflected as business structure improvement expenses.

From that perspective, as Mr. Ishida explained earlier, well, there was a significant increase in SG&A expenses due to FX rate differences, the actual impact wasn't as substantial. In that sense, I believe we have achieved the original plan. However, given the downside in topline sales in North America, we will need to continue examining and implementing specific measures for efficient operations in the region.

[Seiji Wakao, analyst]

Understood. Finally, considering what you've shared, I believe the goal was to return to profitability next fiscal year. What are your thoughts on this now?

[Unknown Executive]

Initially, there were discussions of increased profits and aiming for profitability, possibly through sales milestones like with ORGOVYX or gains from the sales of LATUDA rights. However, considering the current situation with ORGOVYX, it's unclear whether sales milestones will be achieved. And the topline seems uncertain. Could you clarify whether profitability is still expected?

[Seiji Wakao, analyst]

Yes, we are currently discussing the budget, and it's not yet fully fleshed out. As you pointed out, it's certain that we are facing a downside compared to when we set the midterm business plan 2027. However, we still have a target for core operating profit to be in the black, although the extent of profitability may vary. We remain committed to achieving this target as we work towards the FY 2024 budget.

Regarding the sales milestones for ORGOVYX, do you foresee any issues? Are you expecting to receive it even at the current sales level?

[Unknown Executive]

As for that, it's still a matter under review, so I cannot say anything definitive at this stage. Regardless of the milestone achievement, we are committed to reaching profitability.

[Seiji Wakao, analyst]

Understood. In terms of further reductions in North America, are there plans to implement additional cost-cutting measures in the short term to achieve profitability next fiscal year?

[Unknown Executive]

Yes. Regarding cost reductions, let's say, for example, if investing an additional $1 in marketing brings a return of $1.5, in such a case, rather than cutting costs, we might increase marketing expenses to boost revenue. We will analyze the relationship between costs, revenue and profitability before deciding how to allocate resources. However, our policy of using costs efficiently remains unchanged.

[Seiji Wakao, analyst]

I see. So are you suggesting that no major structural restructurings are expected?

[Unknown Executive]

Not necessarily on a large scale, but as I mentioned earlier, our aim is to implement measures that will ensure our core operating profit is in the black regardless of its magnitude.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citigroup. I apologize if I missed this, but I have a question about the Kyoto University iPS cells investigator-initiated study that concluded at the end of 2023. Could you tell us about the outcome of that?

[Unknown Executive]

Thank you for your question. The observation period of the study ended in December last year, was announced by Kyoto University. We understand that they are currently working on data looking, so the results will be announced afterward.

[Hidemaru Yamaguchi, analyst]

I see. So we should wait for a press release from Kyoto University and then you will introduce the results based on that?

[Unknown Executive]

Well, since it is an investigator initiated study by Kyoto University, the results of the study will be announced by them. We plan to use these results for future applications. The results will be shared with us shortly, and then we plan to concurrently discuss the next steps with PMDA.

[Hidemaru Yamaguchi, analyst]

I understand. Do you know if it will be in the first half or the second half of this year? Or is it still uncertain and dependent on Kyoto University?

[Unknown Executive]

Yes, it will be best to ask Kyoto University directly. But as far as we can say, it should be within this year.

[Hidemaru Yamaguchi, analyst]

I have another question about the North American business. There were already several questions about it, but I have a simple one to ask. Forecasts for these key 3 products were originally made by Myovant Sciences, and after your acquisition of Myovant, it's evident that there were shortfalls this fiscal year, leading to the revisions made now.

When making forecast for the next fiscal year and beyond to maintain investor confidence, it seems necessary for your company to critically evaluate plans and projections made by Myovant. Considering the significant discrepancies this year, what measures are you taking to ensure more accurate forecast for the future? Are there plans to integrate your personnel with the Myovant team or any other steps to verify the realism of these projections?

[Unknown Executive]

Thank you for your question. Just to clarify the Myovant organization, as it was, you known, no longer exists, and the marketing leadership has changed. So it's a bit different from before.

Regarding ORGOVYX, it has significant advantages as an oral GnRH antagonist agent, especially in terms of superiority over injectables, and in aspects like testosterone recovery after stopping treatment. MYFEMBREE too has its advantages, particularly in mitigating the negative impact on bone density by adding female hormones to the tablet. Therefore, we had very high expectations for the potential of these 2 products, which might have led to our sales outlook.

However, since taking over from Myovant and examining various data, we have gained a clearer view of reality while operating these products since July 2023. For example, in case of ORGOVYX, indeed, slightly over 60% of prostate cancer patients prefer oral administration. However, economically, leuprolide has almost no financial burden, whereas ORGOVYX does have some, presenting a bit of advantage there. However, we are trying to overcome this barrier by emphasizing the benefits of oral administration like with ORGOVYX, and its differentiation compared to other injectable drugs. Still this remains a significant barrier in increasing sales and it's becoming increasing apparent that it's quite challenging.

Nonetheless, we are shifting our strategy to make these barriers more manageable and to make the product more user-friendly.

Regarding MYFEMBREE as well, most patients initially opt for low-dose pill likely due to economic burdens. Given this reality, our strategy is to position MYFEMBREE as the next choice for those who do not respond well to the low-dose pill. We aim to adopt a more realistic marketing strategy, focusing on grounded forecasting rather than just relying on the potential and the expected sales of the drug. This approach should prevent significant discrepancies like the ones we are currently seeing.

As a task, we have instructed the marketing heads in North America to make their forecasting method more sophisticated. We are also revising and revisiting the -- and advancing our forecasting mechanism to ensure more refined and effective planning.

[Hidemaru Yamaguchi, analyst]

I understand. So one of the challenges for both products has been balancing their benefits against the economic burden for patients, and this has contributed to the discrepancy. Is that the case?

[Unknown Executive]

Yes, that's correct. At present, this is one of the issues we face. Another challenge is the lack of penetration of the drug's visibility. For MYFEMBREE, even after our sales and marketing team in the U.S. conducted extensive interviews, we found that many doctors and patients are still unaware of it. Therefore, we need to ensure and enhance awareness through various forms of DTC beyond just television commercials.

For ORGOVYX, even though doctors may want to prescribe it, the slight economic burden on patients often leads to a preference for injectables. We are working on providing more information to doctors to make it easier for them to prescribe ORGOVYX, emphasizing that many patients prefer oral medication, more than 60%, and informing them about the economic aspects. These efforts aims to increase the adoption of ORGOVYX.

As I mentioned in Q2 of FY 2023, we haven't fully penetrated major hospitals and joint purchasing medical institutions. But we are addressing this separately. We have appointed what we call strategic account managers and have been some -- have seen some promising results. The growth in these areas, especially in terms of deliveries, have been significantly better compared to others. So we are starting to feel the effectiveness of these strategies.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley. I would like to return to the topic of impairment. Regarding the impairment of Q4 of FY 2023, I would appreciate it if you could inform us about the timing. Is the impairment decision made in March or April 2024, or do we have to wait until the May financial results briefing for FY '23? Or will there be an announcement before that, indicating that you're adjusting the numbers for this period due to the impairment?

Also in the event that there is no impairment, I would like to know if you plan to issue a press release or some update. How should we think about the time line and approach for this? Could you give us some advice?

[Unknown Executive]

Yes. For example, regarding the impairments in FY 2022, like for KYNMOBI, where we decided to stop its commercial activities. There was a case of 100% impairment, making it relatively straightforward to announce immediately.

However, the current situation is different. First, we need to assess whether our forecasts are appropriate. This requires consideration, including the costs involved and the development of solid business plan, which means this discussion will take some time. We might not have the results of this evaluation in month of March or April 2024.

As for whether there will be a press release if there turns out to be no impairment, I'm not quite sure at this moment. That's something we'll try to think about when the time comes. For now, it's difficult for me to provide a definitive answer.

[Shinichiro Muraoka, analyst]

I see. So should we expect that if there is any announcement to be made, it will be before the next financial briefing for FY 2023, in May?

[Unknown Executive]

I believe that has been the process in the past. If there is something significant regarding impairment, we have typically made it public. But as of now, it's still under consideration, so I cannot confirm whether there will definitely be an announcement.

[Shinichiro Muraoka, analyst]

Earlier in Mr. Wakao's questions, you mentioned that you are revising the long-term outlook. Does this mean that you're considering revising the midterm business plan 2027 as well? And might this be announced simultaneously when you announced the financial results for FY 2023 in May '24?

[Unknown Executive]

As of now, as you know, even our estimate for FY 2023 is already off by about $300 million for the 3 key products. As Mr. Wakao asked earlier, will there be a sudden upside in sales that brings us back to the original track. It seems unlikely. If the start is low, the growth trajectory will be delayed in achieving the targets. Therefore, revision is inevitable.

As for when we would announce such a revision, that's a separate matter. We need to internally determine whether -- and what our long-term business plan will be. Once we have a clear plan that we can communicate with stakeholders externally, we will make an announcement. At this time, I cannot specify when exactly that will be.

[Shinichiro Muraoka, analyst]

I have a question about the development pipeline, particularly DSP-0187 that was licensed to Jazz Pharmaceuticals. I believe it was in November 2023, during Jazz earnings call, that they mentioned pausing the compound development due to concerns about safety, especially related to eyes and heart, despite its effectiveness. Notice that this compound seems to be less highlighted in Jazz materials lately, can you share any direction or update within the scope of what's possible?

[Unknown Executive]

Since we've out-licensed this compound to Jazz, it's difficult for us to speak in detail about it. However, we frequently hold joint steering committees with Jazz and are kept informed about their review status. They are currently examining the potential risks related to cardiovascular issues and visual impairments. But their intention is to resume and move forward the development of the compound as soon as possible.

[Shinichiro Muraoka, analyst]

I see. So is it reasonable to expect that discussions are taking place, perhaps about lowering the dosage to address these adverse events then?

[Unknown Executive]

Without being able to share specific numbers, we understand that they are considerably refining the balance between the adverse events and effective dosage. Phase I study typically involve increasing the dose to observe responses and tolerability. However, given the potential cardiovascular risks and visual abnormalities, it's important to thoroughly understand these aspects and proceed with the studies at an effective dosage. We believe that Jazz is considering these factors as they plan to resume studies.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. I have a question about ulotaront. In the conference call on second quarter FY 2023 financial results, there was a mention that policy agreement was expected in Q4 of FY 2023. However, I didn't see any mention of the time line in today's explanation. What is your current outlook on this?

[Unknown Executive]

Regarding the next steps for ulotaront in schizophrenia, based on the results for the DIAMOND 1 and DIAMOND 2 studies, we continue to discuss with Otsuka Pharmaceuticals. Our goal is to determine the direction by the end of FY 2023, which is by the end of March '24 for us, and then make an announcement.

[Kazuaki Hashiguchi, analyst]

Okay. In the Q2 financial briefing, someone from your company suggested possible reasons for the high placebo response. Has there been any further insight or confirmation about these reasons that you can share with us?

[Unknown Executive]

We have conducted various analysis, including machine learning, regarding the placebo response. As a result, we have identified certain parameters that could provide hints for planning future development. Therefore, we are considering these factors in our next protocol, though the details are still under discussion.

In addition to high placebo response, and apart from biomarkers and parameters, the clinical studies' locations had to be changed due to the conflict between Russia and Ukraine. The replacement sites in Serbia and Bulgaria experienced a significantly strong placebo response, contributing to the inability to achieve significant differences overall.

Therefore, we acknowledge that Serbia and Bulgaria, having shown a notably strong placebo response, will be considered for exclusion in any future studies.

[Kazuaki Hashiguchi, analyst]

I see. Based on these analysis results, is there a possibility of revising the development plans for other indications?

[Unknown Executive]

Regarding other indications, Otsuka Pharmaceuticals is primarily responsible for the adjunctive MDD studies. For GAD, we are the main party conducting the study. In the case of Otsuka Pharmaceutical, they have not included Russia and Ukraine from the beginning. Additionally, GAD studies differ somewhat from schizophrenia, so we also have not included these countries in our study.

Furthermore, we do not plan to include countries like Serbia or Bulgaria in our future studies. So we do not anticipate major revisions regarding the countries involved in our future studies.

[Unknown Analyst]

Sakai from UBS. Given the current financial results and the responses in this Q&A session, we cannot help but express concern. If I were a stakeholder in your company, I will be worried, especially considering that Sumitomo Chemical, your major shareholder, is also facing challenges -- challenging times. How do you, Mr. Nomura, as CEO of the company, personally perceive this situation?

In the conference on Q2 FY 2023 financial results, when asked if you were considering a plan B, you said you weren't at that time. Today; however, it seems you are heading in the direction of revising the medium- to long-term outlook. To be clear, when do you foresee a scenario of recovery? You said the timing of announcing changes to the midterm outlook is uncertain, but without clarity on this, stakeholders might find it difficult. What are your thoughts?

[Hiroshi Nomura, executive]

Regarding whether everything is okay, these 3 key products fell short by about $100 million each FY 2023. They are products that are supposed to grow year-by-year. We benefited greatly from LATUDA, which had sales of $2 billion. But that is now gone. We had hoped these 3 key products would drive our growth in the interim, but their growth hasn't met our expectations. As I mentioned earlier, our sales forecasts may have overly relied on their potential.

However, if the 3 key products grow steady to a certain level, which will be defined by our future midterm business planning, I believe they will eventually reach a stable phase. So I'm not too pessimistic.

Nevertheless, the current core operating loss does raise financial concerns. We have various steps, and we are in discussions with our main bank about these issues.

[Unknown Analyst]

Hashimoto from SMBC Nikko Securities. As a credit analyst, I'm particularly interested in the company's debt situation, as addressed just now in Mr. Sakai's question. There are 2 parts to my question. First, could you provide an overview of the funding outlook for FY 2024 and 2025? Especially regarding the JPY 90 billion permanent debt and the potential sale of Roivant Sciences' shares.

Also, the current price of hybrid bonds have declined quite a bit about JPY 70 or JPY 60, falling to levels that suggest concerns about bankruptcy. How do you view the funding outlook given these factors and the attitudes of financial institutions?

[Unknown Executive]

Regarding Roivant shares, we plan to sell all of them and use the proceeds to repay our debt. As for our various debts, as I mentioned earlier, we are in discussion with our main bank regarding these matters.

[Unknown Analyst]

I see. I wanted to ask about the current decrease in the unit price of hybrid bonds. I believe this reflects a significant distortion in the corporate bond market. I don't think your company is going bankrupt, so I see this more as a distortion caused by there being more sellers than buyers. Do you think it's necessary for your company to implement measures to support this? If so, what measures are you considering?

For example, I believe Sumitomo Chemical is currently considering structural reforms. And since your company is core, could you announce a commitment that you will not be included in those reforms? Or considering our group company is your main bank, it's difficult to say, but perhaps securing something like a hybrid loan from the main bank. Are you considering any measures to reassure corporate bond investors by increasing the unit price of hybrid bond, or do you think such measures are unnecessary? What are your thoughts on this?

[Unknown Executive]

Regarding the decline in the price of both bonds and stocks, we are very sorry for the inconvenience caused to our investors. However, at this stage, there is nothing specific we can announce as no decisions have been made in this regard.

[Unknown Attendee]

[ Ishii ] from [ Yakuzushin ]. I would like to ask Mr. Nomura about the expectations for the anticancer compounds which are currently in development for myelofibrosis and acute leukemia, respectively?

[Hiroshi Nomura, executive]

We have been working on oncology treatment since around 2011. So it's been about 12 to 13 years. During this time, we have faced challenges and not everything has gone smoothly. However, we now have these 2 compounds, DP-3654 and DSP-5336 which are showing strong evidence at this stage. We are committed to bringing these to market within the midterm business plan 2027 period by FY 2027.

For DSP-5336 specifically, we are aiming for approval in Japan and the U.S. in FY 2026. Especially with DSP-5336, as it targets a disease with fewer treatment options, we hope to make a significant contribution. Successful development of these compounds could be a major milestone for our oncology business and give momentum to our subsequent programs. We are very eager to make a meaningful contribution, particularly to patients with hematological malignancies.

[Unknown Analyst]

I see. Also, the R&D expenses have increased from JPY 84 billion to JPY 92 billion. Is there a particular reason for this increase?

[Unknown Attendee]

The increase in R&D expenses is mainly due to the impact of foreign exchange rates. We have revised our assumed exchange rates. And that is the primary factor for this increase.

[Ando Kiyoshi]

Ando from Nikkei. First, regarding the investigator-initiated study using iPS cells for Parkinson's disease that has started in the U.S. I understand it's an investigator-initiated study. Could you explain why you chose this approach?

Also as these cells are currently being brought from Japan and considering the completion of your cell processing center in the U.S., which I believe will also produce iPS cell-derived products, do you have plans to use the cell processing center in the future?

[Unknown Executive]

Regarding your first question about why we chose this investigator-initiated study, as you know, regenerative medicine requires quite a different setup from typical clinical studies, including how to transplant the cells. Therefore, we chose this format prioritizing the transfer of the established system at Kyoto University to the U.S. This allows for direct communication between academia with University of California San Diego School of Medicine and Kyoto University having a close collaboration agreement.

Regarding the actual cost of the study and the provision of cells, we are providing all of these. We are also supporting the IND application.

As for the production of the cells, we plan to manufacture them at our plant in Osaka and airlift them to UCSD for this study. In the future, we might use the new cell processing center in North Carolina, which is currently being constructed for the cell processing center for iPS cells, depending on the product and circumstances.

[Ando Kiyoshi]

Okay. So by conducting an investigator-initiated study, the process can actually be expedited. Is that correct?

[Unknown Executive]

Exactly. If it were a corporate study, we would need to explain the administration method, which, in this case, involves drilling into the skull to transplant the cells. Having the doctors from Kyoto University, both from surgeons and physicians, actively discussing and sharing information directly with UCSD, has been very beneficial. We believe this has been the right choice as the collaboration has been progressing smoothly.

[Ando Kiyoshi]

Okay. Regarding the North Carolina cell processing center, the iPS cells part is currently under construction, right? So it's not yet completed.

[Unknown Executive]

The [indiscernible] part of the cell processing center has completed in August 2023 and the iPS cells part is currently under construction. It's not a separate building, but more like an extension under the same roof.

[Ando Kiyoshi]

When is it expected to be completed?

[Unknown Executive]

This should be completed soon, but it's a bit difficult to specify an exact date. However, it won't be too far in the future.

[Ando Kiyoshi]

So it will be completed before the next season?

[Unknown Executive]

Yes, that's right.

[Ando Kiyoshi]

If I may, about the RPE cells, for retinal pigment epithelial tear, you mentioned it was about to start. What is the progress on that?

[Unknown Executive]

The preparation for the clinical study is progressing smoothly. The first surgical site will soon be open, possibly in February 2024. Once the site is open, we will start calling in patients or rather begin patient enrollment. That will be the initial site. And from there, we plan to gradually expand in parallel.

[Ando Kiyoshi]

So the enrollment of the first patient at this surgical site could begin as early as February 2024?

[Unknown Executive]

To be precise, we will be ready to start enrolling patients in February 2024. However, as it's a rare disease, the exact timing of patient arrival is not within our control.

[Ando Kiyoshi]

Okay. Once you find a patient, you are ready to set up to start immediately at the specific site?

[Unknown Executive]

Yes, that's correct. We have already opened hospitals, mainly university hospitals, around the surgical site where patients can be examined and referred for surgery. We will proceed with a hub-and-spoke model.

[Ando Kiyoshi]

Will you disclose where this site is, the time enrollment begins?

[Unknown Executive]

Yes, that's right.

[Unknown Attendee]

[ Gume ] from Yomiuri Shimbun. I would like to revisit the topic of the substantial downward revision of JPY 61 billion. What led to such a significant revision in Q3 of FY 2023? Was it an overly optimistic outlook? Stronger-than-expected competition from generic drugs? Or was the underperformance of the 3 key products more severe than anticipated? Could you elaborate on the factors behind this revision?

[Unknown Executive]

First of all, regarding the 3 key products, our sales forecast was indeed very optimistic, largely based on the expected potential of these products. In the actual marketing phase, we encountered various barriers related to prescribing and patient access, which need to be addressed one by one. This process takes time.

Regarding LATUDA, forecasting sales after the loss of exclusivity is a bit unusual, but we had some expectations based on its scale. There are also adjustments like settlements and rebates of FY 2022 that contributed to the downward revision.

We have had many products in the past that faced generic competition after LOE, but none with the scale of sales like LATUDA, where more than 20 generic companies entered the market. Perhaps we were not able to fully assess the impact of this competition.

[Unknown Attendee]

As discussed by the analyst earlier, you mentioned that you are revising the long-term sales outlook. Is it still possible to aim for profitability in the long run? If so, what are the key factors that will drive such a turnaround?

[Unknown Executive]

The issue with the 3 key products is that their growth is lower than expected. These products are not going to remain at their current levels, but are expected to grow. Once these key products reach a certain level, they should contribute to turning our bottom line into a profit. However, the exact timing of achieving this scenario will require us to redraw our business plans and reassess our cost structures. So that's what we are currently working on.

I want to reiterate that I'm not saying these 3 key products are failures. They are just growing slower than we had anticipated. Once we reach a certain level, our business should be able to become profitable.

Additionally, with promising evidence in the regenerative medicine cell therapy business and the oncology area, if these areas perform well, their sales revenue could supplement the 3 key products, further enhancing our financial position.

[Unknown Attendee]

[ Misumi ] from Nikkei. It seems that the available cash is becoming a concern. Looking at the borrowings, there seems to be a significant increase. So I'm wondering if you have managed to stop the bleeding for now. Considering the current financial results, how do you plan to manage future cash flows, especially regarding the attitude of financial institutions and the planned sale of stocks, which might not necessarily be sold at book value? Could you please elaborate on your strategy for managing cash flow?

[Hiroshi Nomura, executive]

We plan to sell our Roivant shares. Given that these shares are not frequently traded, the sale will likely be spread over a certain period. We don't intend to sell these shares at a low price. Our aim is to sell them as high as possible.

Regarding other borrowings, as I said earlier, we are in discussion with our main bank, and that is all I can say at this moment.

[Unknown Attendee]

Okay. Earlier, you mentioned that the 3 key products are expected to grow in the future. However, I might think that if a product is truly effective, it should naturally sell well without needing too many interventions. Could you explain why you believe the 3 key products will grow and what your strategy is for this growth?

[Unknown Executive]

Yes. Even if it's a good product, its growth isn't always immediate. There are challenges. For instance, with ORGOVYX, we are talking about the area of injectable treatment for prostate cancer. The introduction of an oral medication in this field is a first. So in the minds of most treating doctors, injectables are the default options.

However, as I mentioned earlier, more than 60% of the patients prefer oral medications over injections. So there is a gap between what doctors prescribe and what patients prefer. So it's necessary to bridge this gap. And if doctors are hesitant to prescribe oral medications fearing they might be imposed imposing financial burdens on patients, we can provide information to alleviate these concerns. Therefore, changing prescribing habits will take time.

Regarding MYFEMBREE, whether for uterine fibrosis or endometriosis, most gynecologists in the U.S. are surgeons, so their inclination is towards surgery. However, many patients may still want children and, in such cases, a less invasive treatment like this medication will be preferable. Thus, there's a need for a shift in the approach to treatment from the doctor's side.

And on the other hand, as I mentioned in response to the analyst question earlier, patients are first introduced to low-dose pills, but there isn't necessarily strong evidence for this -- for their effectiveness. Our role then is to diligently inform both doctors and patients about the treatment options available with MYFEMBREE, aiming to improve patient QOL through prescriptions. The fact is, even if a product is good, there is no guarantee that it will sell well. This is the reality in medical practice. So we are committed to working on this.

As for GEMTESA, given the mirabegron is very dominant, we are focusing on enhancing our primary care market and increasing the number of sales reps to promote it more effectively. This grassroots effort is essential for the growth of our medication.

This is not unique to the U.S., the same applies in Japan. Regardless of how much the creators believe in their medication making it widely accepted is challenging. If it were the only treatment option available, it might be a different situation. However, when there are multiple options, raising awareness and other efforts are necessary.

[Unknown Attendee]

I see. Because these treatments are so innovative, do you think it's essential to change the mindset of doctors and overcome various procedural barriers?

[Unknown Executive]

Yes. It's about changing the doctor's perceptions and also procedural aspects. For example, ORGOVYX falls under Medicare Part D. To prescribe it in a hospital setting, you need to deal with insurance reimbursement under Part D, which can be a barrier as many practitioners might not be familiar with this process. So we need to provide the necessary information to facilitate this and remove various barriers to the prescription of ORGOVYX. This is the process I'm talking about.

[Unknown Executive]

We conclude Sumitomo Pharma's Q3 financial results briefing for FY 2023. Thank you all for participating today.

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