Sosei Group Corp

TSE:4565

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, thank you all very much for taking part in our teleconference call organized by Sosei Group Corporation today.

For today's presentation, Executive Chairman, Mr. Shinichi Tamura; the President and CEO, Peter Bains; CFO, Chris Cargill, are participating.

We now would like to invite Mr. Chris Cargill, Mr. Peter Bains and Mr. Shinichi Tamura. There will be a presentation by the company's officers, and there will be Q&A afterwards. Those of you who are joining in Japanese, please log on to Japanese. And for the English participants, there will English audio. [Operator Instructions] Explanation is based on the downloadable presentation, financial results for the 6-month period ended September 30, 2018, please download the material in advance from the URL that we communicated to you beforehand, and please prepare for yourself.

Now before starting the teleconference call, may I extend housekeeping announcement. During the presentation, the comments based on the forecast for the future will be mentioned. However, that will all subject to risks and uncertainties for the future. And for all of you, actual results, if that will be different than the forecast or announced today, that fact needs to be fully recognized.

Mr. Chris Cargill, CFO, please proceed.

[Peter Bains, executive]

Thank you very much, and before Mr. Cargill begins, could I say, good afternoon, everyone, and thank you for joining our call. As you've been advised today, we are going to present Sosei's financial results for the 6-month period ending the September 30, 2018. Today's speakers will be Mr. Shinichi Tamura, Executive Chairman; Mr. Chris Cargill, who I'm delighted to say joins us in his newly appointed capacity as Executive Vice President and CFO of Sosei Group; and myself, Peter Bains, President and CEO.

Turning to Slide 2. You'll see that today's agenda has 4 parts: an overview of the financial results, an operational update, review of our growth strategy and then a question-and-answer session.

Let me now hand over to Mr. Chris Cargill to begin with the financial results.

[Chris Cargill, executive]

Thank you very much, Peter. This is Chris Cargill, CFO of Sosei Group. I will begin with Slide 4. This slide shows the group's revenues for the 6-month period ended 30 September 2018. Total revenues were approximately JPY 1.8 billion, a decrease of about JPY 3.5 billion versus the prior period. The decrease was primarily due to the timing of major revenue milestones.

Revenue related to milestones, shaded in the dark blue color on the chart, totaled JPY 310 million, a decrease of about JPY 3.4 billion versus the prior corresponding period. The reason for this decline was due to the absence of major milestones in the 6-month period under review. The prior corresponding period was somewhat unusual, given it included major milestones from Allergan, USD 15 million, AstraZeneca, USD 12 million and Teva USD 5 million. This situation was previously guided to at the FY '18 results on May 10, 2018.

The group did, however, receive a small milestone from FUJIFILM Pharma in relation to the approval of Oravig, which was a wonderful achievement by our colleagues at Sosei K.K. in Japan.

Revenue related to royalties, shaded in the orange color on the chart, totaled JPY 1.2 billion, a slight decrease of JPY 65 million versus the prior corresponding period. The very slight decrease was due to the inclusion of contract-related deductions in the period despite the underlying sales of Novartis' COPD products having actually increased.

Other revenue, shaded in the light-to-blue color on the chart, came from Daiichi Sankyo and another undisclosed partner. These revenues demonstrate progress related to research partnerships in our platform technology business.

Turning now to Slide 5. This slide shows the group's cash operating expenditure for the 6-month period ended 30 September 2018. Cash operating expenditure totaled JPY 5 billion, an increase of JPY 1.5 billion versus the prior corresponding period. The increase reflects continued investment for future growth.

Cash R&D expenses, shaded in the blue color on the chart, totaled JPY 4.1 billion, an increase of about JPY 1.9 billion versus the prior corresponding period. The main reason for the increase was larger R&D spending to prepare for the start of our phase IIa DLB study in Japan. As investors are aware, this study entered a voluntary suspension on the 18th of September 2018, only a few days before it was due to begin. We also continue to invest in our platform technology, in-house drug discovery and development programs and expanded our translational science capabilities.

Cash G&A expenses, shaded in the orange color on the chart, totaled JPY 896 million, a decrease of JPY 475 million versus the prior corresponding period. The main reason for the decrease was nonrecurring adviser fees related to the investment in MiNA in the prior period. This was also supported by tight G&A expense management.

Turning now to Slide 6. This slide shows the group's noncash costs and financing costs for the 6 months ended 30 September 2018. Noncash costs totaled JPY 657 million, a decrease of about JPY 100 million versus the prior corresponding period, a slight decrease.

Finance costs totaled JPY 231 million, a decrease of JPY 1.5 billion versus the prior corresponding period, a significant reduction. The main reasons for the decrease were a large contingent consideration credit as well as lower FX costs from more stable yen, dollar and pound sterling rates in the period.

Finance costs also included a write-down of about JPY 1.1 billion related to the fair value of our exclusive option to further investment in MiNA, which was previously disclosed to the market.

Now the next few slides are quite important. And I would like to do these in Japanese.

Please turn to Slide 7. This slide shows the group's consolidated balance sheet as of 30th of September 2018. The balance sheet is very strong. We have cash on hand of over JPY 21 billion.

Goodwill and intangibles, there has been no impairment of intangible assets or goodwill related to HTL0018318, which we expected, however, the confirmation is a good news. Furthermore, with regards to equity accounted investments, there has also been no impairment to the carrying value of our investment in MiN, property, plant and equipment increase associated with capital investment in our new state-of-the-art R&D facility at Granta Park and interest-bearing debt decrease as a result of debt repayments.

Please turn to Slide 8. This slide shows the groups forecast for the shortened 9-month period to December 31, 2018. Following September's unexpected update on HTL0018318, it is important to make adjustments to our operating model, supported by financial management. To this end, you can see the groups forecast for 9-month period to December 31, 2018, has improved greatly. This is as a result of the action we have taken to deliver a more focused approach to delivery and development spending, in addition to decreased R&D spend related to the voluntary suspension of our phase IIa DLB study. The key to the business going forward is to maintain the spending at a sustainable level going forward.

Please turn to Slide 9. This slide shows the groups forecast for the 12 month period to December 31, 2019. We are very aware of our recent performance, and we are taking decisive action to both accelerate value creation and to target profitability.

First, we will rationalize our long list of drug discovery and development programs to focus only on the most high-value candidates. This will reduce our R&D spend to a more sustainable level. We will allocate capital in the most efficient way, prioritizing the highest potential projects. Secondly, having refilled our discovery pipeline, we will seek to increase the number of new partnerships with Big Pharma. This will accelerate value creation by putting high-value candidates in the hands of Big Pharma, who have the resources to advance programs rapidly into clinical development. We will look to retain excellent economics on every deal.

Lastly, we will aggressively manage our cost base, and we have already initiated multiple internal projects designed to cut unnecessary costs from the business. The combination of these 3 strategies will provide a more sustainable balance of resources and capital going forward, extending our cash runway and giving us the best chance to pursue profitability in 2019 and into the medium to long term. This concludes my update section.

[Peter Bains, executive]

Thank you, very much Chris. My name is Peter Bains, I'm the President and CEO, and I will now provide an operations update for the 6-month period ended the 30th of September.

Turning to Slide 11. This slide summarizes the key operational updates for the 6-month period. While it has been a challenging period, we have continued to make real and important progress in building a strong pipeline, and are now well positioned to capitalize on a range of strategic opportunities. Recently, we took 2 important decisions with regard to 18318 and MiNA, and we took these decisions in the best interests of stakeholders. Beyond this, we have made strong progress in R&D and have advanced both partnered programs, and in-house candidates.

Importantly, we have leveraged our world-leading StaR technology platform, and have refilled our discovery pipeline with 15 exciting new drug candidates, which, we believe, will attract strong partnership interest. Through our business development activities, we will look to extend our GPCR leadership with new collaborations, and we are in advanced discussions with multiple new partnership opportunities.

Finally, we completed our R&D relocation to Cambridge in the United Kingdom, a real U.K. biotech innovation hub and a catalyst for our business. This will drive improved science, enhance productivity and will lead to better dealmaking potential with Big Pharma. So all in all, a challenging 6-month period, but we have taken decisive actions, and we will emerge much stronger.

The following slides will elaborate on the summary points I've described.

Turning to Slide 12. We have faced 2 major challenges in the 6-month period under review and taken clear decisions made in the best interests of all stakeholders. On 18318, we took the correct decision, putting patient safety first to suspend clinical activity on an unexpected toxicology finding. Importantly, I can confirm today that following this decision, there has been no balance sheet impairment to the asset value. Furthermore, there is no impact or read-across on the ongoing M4 program.

Our partner Allergan remains fully committed to the M1 program and are funding the investigative work going on. We would like to reiterate that this program does not necessarily stop with 18318, we also have multiple backup compounds that can be advanced if required.

On MiNA, our decision was taken to maximize shareholder value and to reduce risk. Again, it is important to confirm that there has been no balance sheet impairment to the carrying value of our investment.

Our hurdle criteria was not met, and therefore, we did not make further investments on our option of at least $100 million. MiNA's new exploration of MTL-CEBPA as a combination therapy in immuno-oncology represents a promising clinical strategy for the company. And we are well positioned to access that potential value catalyst through our retained 25.6% shareholding.

These 2 events and decisions are now behind us. We have learned from them. We have taken appropriate actions, and we have adjusted our midterm planning accordingly. We will emerge stronger in 2019 and are ready to drive the next phase of growth.

Turning to Slide 13. As highlighted, we have continued to make very good progress with our partners. In Japan, we successfully completed the development of ORAVI and gained Japanese PMDA approval in September. We are now progressing toward a market launch with our partner FUJIFILM. In our leading immuno-oncology partnership with AstraZeneca, the progress of the clinical studies continues to build momentum. This next-generation immuno-oncology drug is in 2 major Phase Ib studies with publication momentum building.

Turning to Slide 14. In addition to our existing partnered programs, we continue to make good progress with our in-house pipeline. We are well positioned to advance into Phase I human studies, with 5 novel drug candidates, targeting rare and specialty indications. This is a strategically important phase of growth that can create significant value from both in-house progression and potential partnership opportunities.

Turning to Slide 15. Our proprietary StaR technology platform is opening up the huge untapped GPCR field. This slide demonstrates the early success that came from partnering most of the candidates that were developed in the early days of the company.

Multiple high-profile collaborations with world-leading partners were executed in 2 stages: between 2012 and '14, and 2015 to '17. And these partnerships clearly validated the application and value of our StaR technology and our approach to drug design.

After this early successful partnering out of our candidates, we have had to invest to refill our pipeline with new candidates in order to generate exciting new candidates that have the potential to attract Big Pharma partners. We have now done this and are well positioned for the next phase of partnering.

Turning to Slide 16, and to build on this. We are pleased to confirm today that in addition to the 5 in-house assets approaching Phase I starts, our investment in StaR has created 15 new high-value programs. We now have a stronger and better balanced pipeline, positioned for a new wave of value generation.

The 15 new early-stage candidates cover high-value therapeutic areas such as immuno-oncology, GI, inflammation and neurology, and we are very confident these assets will drive a new wave of partnerships and selective in-house progression. As already mentioned, we are already in advanced discussions with multiple potential partners for new deals.

Turning now to Slide 17. On the topic of extending our platform technology leadership, we are excited to announce a new technology collaboration with DyNAbind from Germany. This exciting collaboration offers an opportunity to enhance further our world-leading StaR technology and structure-based drug discovery platform. By working with DyNAbind to deploy the very latest advances in DNA-encoded library technologies with StaR proteins, we are adding a new approach to generate drug candidates to progress into our pipeline. This represents yet another example of how Sosei is seeking out cutting-edge technologies to strengthen our platform and discovery capabilities, and therefore, maximize long-term value that we can derive from StaR proteins. Ultimately, this is about exploring the faster discovery and delivery of high-quality new candidates to drive our pipeline.

Turning to Slide 18. We have now completed our move to our new R&D home in Cambridge. The value of this relocation cannot be underestimated. It is highly motivational to our talented scientific teams to work in an integrated, purpose-built, state-of-the-art facility. Cambridge is one of the top biotech innovation hubs with many of the world's leading Big Pharma companies also having their own R&D centers located there. We know this move will drive enhanced science, improve productivity and enhanced collaboration and partnership opportunities.

Finally, turning to Slide 19. As we highlighted at the Annual General Meeting in June, we are rebranding the company to Sosei Heptares. We are a highly unique biotech company, having the advantage of Sosei stable cash flows from our Novartis partnership and excellent Japanese development capabilities, combined with Heptares' world-leading StaR technology and discovery platform and development capabilities to drive productive R&D output. The time now is right to bring the whole organization together as a single brand as we move to our next phase of growth.

And I now hand over to Chairman Tamura to talk about our growth strategy.

[Shinichi Tamura, executive]

This is Tamura, Executive Chairman. Let me talk about the update of our growth strategy. Please turn to Page 21. We will form more partnerships and focus R&D expenditure to pursue profitability.

This slide shows the design of growth pillars for the future. At the foundation is our world-leading StaR platform technology, which supports a continuous supply of high-value programs for the company. We will exploit this platform technology in 3 ways. We advance candidates into drug discovery, targeting therapeutic areas with high unmet need that are not only attractive to us, but also be attractive to Big Pharma. And then, we keep some of the best drug candidates for ourselves, pushing them deeper into in-house development to drive growth -- greater value for the company. We manage to progress existing partnered programs, but we also look to execute new programs. We are in advance discussions to partner several new drug candidates.

Slide 22, please. To support our growth strategy, today we are announcing a new organizational structure, which will become effective December 1, 2018. We now have moved to a new state-of-the-art R&D facility that is greatly expanding our productivity. We have an in-house pipeline that will shortly enter clinical development, and 15 newly announced drug candidates targeting areas of high unmet medical need for patients worldwide. The new organizational structure will enhance corporate governance during this new growth phase and establish a management structure that will support the achievement of our corporate goals and future growth.

Slide 23, please. Now I will explain the evolution of the underlying platform technology that supports our business, but more importantly, our growth. There are 3 ways we will expand and monetize our StaR platform technology. First, we are always looking to extend our technology leadership in the GPCR field. Our acquisition of G7 Therapeutics enabled us to double the number of stabilized receptors we can generate on an annual basis. When we acquired Heptares in 2015, we were producing 4 structures per year. Now the number has more than doubled to 10. With our uniquely stabilized receptors, we can use high-powered tools like X-ray crystallography and cryogenic electron microscopy to build high-resolution atomic level structures of the target receptors. We are continuing to stabilize more receptors and solve more structures, and this output will drive increased productivity in our drug discovery capabilities.

The exciting collaboration with DyNAbind, which Peter talked about earlier, is another example of how we are enhancing StaR platform technology. By working with DyNAbind to deploy the latest advances in DNA-encoded library technologies with StaR proteins, we are adding a new effective approach to stabilizing GPCR. Secondly, we will expand the number of research-based collaborations we have with pharma partners. It is very important to note that in these research-based collaborations, we do not either transfer our unique StaR technology or provide our partners with direct access to it. We do this to protect the high value associated with StaR. This puts us in better position to generate better deals, collaboration with Pfizer is a good example.

Lastly, we will start to demonstrate the progress of existing platform deals we have executed in the past. In 2019, we expect to see concrete evidence of the progress.

Please turn to Slide 24. We are the world leader in stabilizing GPCRs and structure-based drug design, SBDD. GPCR take up about 30% of total human proteins. The number of viable drug targets are decreasing across the industry. However, we have a significant competitive advantage as we have the ability to stabilize GPCR to extract their microstructures suitable for drug discovery. This allows us to sustainably produce new targets.

Please turn to Slide 25. In Sosei's drug discovery, we look to add further value to our unique StaR and structure capabilities through the application of structure-based drug design or SBDD. SBDD applies a range of very sophisticated tools and techniques like biophysical mapping, binding kinetics with virtual screening and many more to enhance the process of designing drug candidates. Simply put, the better the structure used, meaning the better resolution and quality, the more effective these tools can be. In the field of GPCR, Sosei is the world leader in stabilizing target receptors and building structures and that gives us a valuable advantage. So to exploit this advantage, in our platform and discovery team, we look to identify and prioritize targets with high commercial potential from the start. We want to work on high-value opportunities. We will seek to leverage and monetize these advantages by increasing the number of drug candidates we target for new partnerships.

Please turn to Slide 26. Now we move into development stage where we begin to test our drug candidates in human volunteers and patients. As Peter mentioned earlier, we already have a wave of 5 novel candidates that we are bringing forward into human studies in specialty and rare indications in the near term. Beyond this, we will continue to look to bring new candidates into the clinic. We will be highly selective and look to advance candidates where we can create value inflections early in the clinical process where we want to achieve too increase the value of candidates, we are considering for licensing out and with candidates with high probability of success in demonstrating POC. We will also continue to leverage the excellent development capability we have here in Japan and will advance clinical candidates from our pipeline accordingly. And we have a goal to achieve at least 1 Phase II POC by 2021, which we would represent a major progression and step forward in Sosei's journey and evolution.

Please turn to Slide 27. We will steadily and strongly promote growth in our platform technology, discovery and development business, as mentioned on the previous slides. All of that progress will enable the real driver of growth for us in 2019, new and existing partnerships across the business. As a result of the investments that we have been making, we are now ready to drive the next wave of progress and new deals. We will look to execute across all 3 of our focused pillars. First, in the platform technology pillar, we will target at least 1 new technology deal and look to achieve at least 1 progression milestone from the existing technology partner. In our drug discovery pillar, we will target at least 1 milestone from new discovery and development deal and look to achieve at least 1 discovery deal from an undisclosed new discovery asset. In our business development pillar, we will target at least 1 milestone from the new discovery and development deal, I mentioned earlier, and look to achieve at least 1 milestone from an existing partner.

So we will secure these revenues and with our new CFO, we will do all this while strongly managing costs. We believe that creating a business with lean cost structure, even during a rapid growth period, is the best way to accelerate value creation and will enable us to prioritize the pursuit of profitability. To repeat myself, this management strategy will to accelerate the partnership and be selective in our product so that we can generate profit as early as possible.

This ends my presentation.

[Operator]

[Operator Instructions] So first, Mizuho Securities, Mr. Nomura.

[Hironoshin Nomura, analyst]

This is Nomura. So my first question is about the proprietary candidates' asset. So 18318 will be suspended. So this means this year 3 -- this year 2 and next year 3, so total 5 were being planned. Any change in the schedule with the result of the suspension of 18 -- 13813 (sic) [ 18318 ]?

[Peter Bains, executive]

Peter Bains. So 18318, as you stated, we had guided had gone into voluntary suspension. And we will be investigating the findings. We advised that would take at least 6 months, and I confirm that, that is the time line that we're working on. So toward the end of Q1 in 2019, we may be able to update. The 18318 suspension has implications to 2 studies, or the cognitive studies and the DLP study here in Japan. But it has no implication or read across to the M4 program or anything else that were conducted.

[Hironoshin Nomura, analyst]

For the proprietary asset, so 2 will come into phase I -- sorry, 3 next year. So no change in your plan over there?

[Peter Bains, executive]

No, we're still on track with 5 assets approaching Phase I starts and aiming for 2 this year and 3 in the second half of next year.

[Hironoshin Nomura, analyst]

My second question is the royalty from Novartis. You said the deduction, so the sales went up, but the royalty received was reduced. Is this just a one-off event, or is this something that may recur in the next year? So that's my second question.

[Chris Cargill, executive]

I will take that question. It can recur, it can happen. We're not at liberty to talk the specific details with regard to our agreement with Novartis, but it's fair to say that these agreements commonly have mechanisms in them that can account for deductions at certain points in time. I can't specify how they're calculated, but yes it could happen again in the future.

[Hironoshin Nomura, analyst]

So it's not a continuous event, but at one point in time, it may happen, but it may not happen in some years? It may in some, it may not in some?

[Chris Cargill, executive]

That is correct. It's continuously monitored and in some years, it may trigger slight deductions.

[Yen Ting Chen, analyst]

This is Yen Ting Chen from Crédit Suisse. So I have 2 questions. First is, so in your future strategy you've been talking a lot about partnerships and different ways and strategies on making partnerships. So over the past year, you have also been talking -- you were talking about commercializing your own assets. So does this mean that your plans for the commercialized pipeline, that is pretty much on hold until the next -- until there's more development?

[Peter Bains, executive]

No. Chen, it's Peter Bains. No, it doesn't mean that. We will continue on course to explore opportunities to take assets in-house deeper into the clinic and with selected assets, ultimately, potentially to the market. But what it does mean is having refilled our pipeline with these 15 assets that we've described that we're now in a position to resume business development and partnerships at a higher level. So our model is mixed, as we've said all along, that we will look to exploit the StaR technology to drive the pipeline that we can both take on an in-house basis and on a partnership basis. But as, I think, Chris and Chairman Tamura and I have described, we're now at a phase of opportunity having refilled our pipeline to really advance on the business development front and that is also aligned to desire to aim toward profitability in the near term.

[Yen Ting Chen, analyst]

Okay. So it means, you're a mixed model [ modest impact ]. So you can -- so this is my second question. So you're mentioning about the 15 new programs based on your R&D on to StaR. And so I just want to have a little bit of color about the programs. Are these -- you've already discovered compound -- the molecules for these to develop, and also -- and do these also include the partnerships you have with your collaborators like, for example, PeptiDream, Kymab and the other partners?

[Peter Bains, executive]

So these are all derived from our StaR and structure-based platform. And they are unpartnered opportunities. They are -- the other collaborations that we have are separate. So these are unpartnered new opportunities for partnerships. And for some on a selected basis to continue to advance on an in-house basis.

[Operator]

Thank you very much. So this concludes the Q&A session. With that, we will close this financial results' briefing. Thank you very much for taking time out of your busy schedule to attend this session. We ask you for your continuous support.