Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Transcript 2018-Q3

[Kazunori Hirokawa, executive]

This is Hirokawa speaking. Thank you for accessing Daiichi Sankyo's financial result conference call.

I'd like to start our presentation regarding the third quarter financial result, which was announced at 1:00 in the afternoon on January 31.

Please turn to slide Page 3. Today's agenda include FY 2017 Q3 financial results, FY 2017 revised consolidated forecasts, edoxaban update and R&D update. After the presentation, we'll have a question-and-answer session.

First, I'll go over the FY 2017 third quarter financial results. Please take a look at slide Page 5, which shows an overview of the FY 2017 third quarter results. Consolidated revenue was JPY 741 billion, up by JPY 6.6 billion. It means 0.9% increase year-on-year. Cost of sales made JPY 13.7 billion increase year-on-year. SG&A expense decreased by JPY 3.7 billion, and R&D expenses increased by JPY 32.1 billion. As a result, operating profit, JPY 93.2 billion, down by JPY 35.5 billion, which is 27.6% decrease year-on-year. Profit before tax is JPY 97.7 billion, down by JPY 34.7 billion. Profit attributable to owners of the company is JPY 72.6 billion with JPY 15.6 billion decrease, which is 17.7% decline year-on-year. Actual currency rate was JPY 111.71 to $1, which is weaker yen by JPY 5.03 compared to the previous term. Euro rate was JPY 128.53 to EUR 1, and yen is weaker by JPY 10.44 compared to the previous term.

Now moving on to Slide #6. I will use 3 slides from here to explain reasons for year-on-year increases and decreases. Revenue increased by JPY 6.6 billion, and I'd like to give you a breakdown by major business units.

Japanese business includes domestic pharmaceutical products, vaccine and OTC drugs. Japanese business grew because anticoagulant agent, LIXIANA, grew significantly. In addition to that, there are other drugs which are central of the sales expansion such as PRALIA for osteoporosis treatment; NEXIUM, an anti-ulcer drug; antiplatelet drug, Efient; and Daiichi Sankyo's Espha product like authorized genetics of Efient, Telmisartan, Olmesartan and Rosuvastatin. On the other hand, some drugs such as antihypertensive drug, Olmetec, revenue were decreased. Daiichi Sankyo healthcare service is growing. In summary, Japan business as a whole made JPY 32.6 billion increase in revenue.

Now I will explain about overseas business. These numbers exclude the influence of foreign currency exchange fluctuation. U.S. Daiichi Sankyo, Inc. made JPY 54.7 billion decrease in revenue because of decrease in sales of antihypertensive drug, Olmesartan; antiplatelet, Efient; and Welchol, which is hypercholesterolemia and type 2 diabetes treatment drug. However, U.S. Luitpold's revenue grew by JPY 12.1 billion because of positive contribution by Injectafer, which is iron deficiency, anemia-treatment drug and generic injectables. Although LIXIANA contributed to Daiichi Sankyo Europe's revenue, JPY 900 million revenue decrease was made because of decline of Olmesartan's sales. ASCA business, which covers Asia and Central and South America, made JPY 3.2 billion revenue increase. Forex impact made by weaker yen was plus JPY 14.3 billion in total.

Please turn to Slide 7, which talks about increase and decrease factors for operating profit. As I mentioned earlier, revenue increased by JPY 6.6 billion, including JPY 14.3 billion, positive contribution by forex impact.

Next, I'd like to explain about cost, excluding forex impact and special items. Cost of goods increased by JPY 16.1 billion, impacted by changes of product mix caused by the patent expiration of Olmesartan. SG&A increased by JPY 1.5 billion, and R&D expenses decreased by JPY 1.3 billion. Cost increase by forex impact was JPY 12.4 billion in total. Their breakdown is JPY 3.7 billion for cost of sales, JPY 5.4 billion for SG&A, and JPY 3.3 billion for R&D expenses.

Regarding special items. In the previous term, we booked JPY 10.6 billion for reorganization cost in Europe. For this term, JPY 6.1 billion cost reduction was made by a gain of sales of fixed assets. However, we also booked intangible asset impairment loss of JPY 27.8 billion because of returning the right of CL-108, therefore, cost increased by JPY 13.5 billion from the previous term.

As a result, operating profit is JPY 93.2 billion, which is minus JPY 35.5 billion from the previous year. When you exclude the forex impact in special items, a substantial amount of operating profit decreased, becomes a JPY 23.9 billion.

Now I'd like to use Slide #8 to talk about profit attributable to owners of the company. Operating profit decreased by JPY 35.5 billion. But with the corporate tax rate reduction because of lowered U.S. tax rate, profit attributable to owners of the company became JPY 72.6 billion, which is decrease of JPY 15.6 billion compared to the same term in the previous year.

Please take a look at Slide 9. The slide shows revenue increase and decrease for the major business unit.

Slide 6 shows revenue situation of each unit, excluding forex impact, but this slide shows actual number including forex impact. Because of patent cliff from Olmesartan, U.S. Daiichi Sankyo, Inc.'s revenue was significantly decreased, but domestic pharmaceutical business in Japan made a steady sales growth compared to the previous term. Daiichi Sankyo Healthcare is also doing well. In overseas market, Luitpold in the U.S. is making a big sales growth.

Please turn to Slide 10, which shows revenue increase and decrease of major products in Japan. Major products, such as LIXIANA, PRALIA and NEXIUM, sales are on track. However, more number of long-listed products are having difficult time compared to the previous term because of expanded generic products impact.

Next is about FY 2017 revised consolidated forecast. Slide 12, please. Revenue is revised up to JPY 950 billion. Although there is a decrease of revenue of ASCA business, we expect a JPY 20 billion increase in revenue coming from Daiichi Sankyo Healthcare, Daiichi Sankyo, Inc. with currency exchange impact, Luitpold and Daiichi Sankyo Europe. Sales increase is accompanied by the cost of sales increase. Therefore, we expect JPY 10 billion cost increase, including JPY 5 billion onetime cost, which we're not able to talk about details.

R&D expenses are revised with addition of JPY 10 billion because we're accelerating research and development center in oncology. We'd like to maintain JPY 75 billion of operating profit and JPY 50 billion of profit attributable to owners of the company.

Next, I'm going to present edoxaban update. Since the launch of LIXIANA, efforts have been made to maximize its value. In November of 2017, in Japan, we launched OD, orally disintegrating tablet of LIXIANA. And OD tablets were designed for easy administration, and easy administration is highly evaluated by doctors as convenient, especially for elderly patients. In December of 2017, LIXIANA demonstrated noninferiority in primary endpoint against dalteparin in Hokusai-VTE cancer study. Dalteparin is a standard of care in U.S. and EU for VTE associated with cancer. In the late breaking session of ASH 2017, LIXIANA was presented as a first DOAC to achieve noninferiority against dalteparin which is injected. More VTE patients with cancer may be assured to use the drug without any worries.

Next is the status of R&D. Please look at Slide 16. As we presented in December last year on R&D Day, this is our development program for DS-8201. Gastric case is ongoing Phase I study, and this was presented in ASCO GI in San Francisco.

I would like to share that data with you today. Please turn to Page 17. Here is Phase I study design. At ASCO GI, gastric cancer cases from Part I, which is dose escalation part. We also have data from Part IIb, and this was presented at the meeting.

Slide 18. This shows a patient's background. Total of 45 cases and 44 had prior treatment with trastuzumab, which is a standard of care, and 24 cases had prior treatment with CPT-11 irinotecan.

Please look at Slide 19. This table shows response rate. Out of 44 evaluable cases, response rate was 45.5%. And payload for DS-8201 is modified compound of CPT-11 irinotecan. Patients with prior treatment with CPT-11 also showed response rate, which was 43.5%. Estimated median for PFS is 5.8 months. PFS in general for this line of treatment is considered to be around 2 months, so 5.8 months is very good result.

Please turn to Slide 20. This page shows tumor shrinkage with DS-820 (sic) [ DS-8201 ] and the treatment duration. Vertical axis shows tumor shrinkage and each bar represents a patient. The lower the bar, there is more tumor shrinkage. Pink bar is patients with prior treatment of irinotecan; yellow, with no irinotecan treatment. All cases show similar efficacy. Blue bars show treatment duration. And the arrows on the tip are patients continuing with the treatment. As you can see, 17 patients continued to be treated.

Slide 21, please. Vertical axis show tumor shrinkage, and horizontal axis is treatment duration. You can see the chronological changes in tumor shrinkage of each patient. Tumor shrinkage was observed from early period and it was continued. It may be difficult to see, but the yellow line indicates cases with low HER2 expression. One case showed same efficacy as HER2+ case.

Slide 22, please. Here are CT images of patients who responded to the treatment. This is a case of 76-year-old gastric cancer, a man with liver metastasis. He had prior treatment with other drugs. And the red arrows shows the metastasis from gastric cancer to liver cancer. And lower images shows tumor shrinkage 1 year after 13 cycles of treatment with DS-8201 administered once every 3 weeks. This table shows adverse events rated from grade 1 to 5, 5 being the most serious AE. Irinotecan has serious AEs of digestive organs. But 45 cases presented this time had no AE of over grade 4 or 5. There were 2 cases of suspected interstitial pneumonia grade 1 and grade 3 among gastric cancer cases. And these cases will be evaluated further by adjudication committee of the interstitial pneumonia.

Slide 24, please. Here is a summary of presentation at ASCO GI. DS-8201 has shown manageable safety and promising antitumor activity in heavily pretreated subjects with HER2+ cancer, who have been receiving trastuzumab regardless of prior CPT-11 treatment. Currently, pivotal Phase II studies ongoing with HER2+ and resectable cases, metastatic gastric cancer cases also to confirm the efficacy and safety of DS-8201.

Slide 25, please. In December last year, we reported research collaboration with U.S. Memorial Sloan Kettering Cancer Center to conduct preclinical study to evaluate combination of DS-8201 and neratinib developed by Puma with patients of solid tumor and HER2 mutation. Significance of neratinib in combination with a DS-8201 was favorably reported on R&D Day, but I will use slides today for further explanation.

Neratinib is tyrosine kinase inhibitor target in HER2 and is already launched and available in the market. Neratinib blocks HER2 signal and suppresses cell proliferation and survival. HER2 dual blockage by combination with DS-8201 is expected, and this will be evaluated in the trial. Neratinib is also considered to increase internalization rate and may increase uptake of DS-8201 into tumor and show synergistic effect. This hypothesis will also be explored further in the preclinical trials. At appendix, following items can be found: R&D milestone events, major R&D pipeline, out-licensing projects, edoxaban, Injectafer update and abbreviations. Please check later.

That is all from me. And now we will like to take questions from you. Thank you very much. We have many people from our company, so we look forward to Q&A session.

[Unknown Executive]

Now we'd like to start a question-and-answer session. The first question is from Mr. Yamaguchi of Citigroup.

[Hidemaru Yamaguchi, analyst]

Mr. Hirokawa, I understood the sales information regarding FY 2017 revised consolidated forecast, but would you please give me some image, including guidance about the cost of goods, which included special items?

[Kazunori Hirokawa, executive]

With the increase of sales, cost of sales increase, and there's onetime cost in relation to the cost of sales. Right now at this point, I am not able to share the details. But including the onetime cost, cost of sales will increase by JPY 10 billion.

[Hidemaru Yamaguchi, analyst]

Does that mean you include that amount because the cost will be incurred in the future?

[Kazunori Hirokawa, executive]

Almost for sure. Yes, we include that to the cost, thinking it will be incurred by the end of this fiscal year.

[Hidemaru Yamaguchi, analyst]

I understand. But this is onetime, therefore, it'll gone next year.

[Kazunori Hirokawa, executive]

Yes, after we book them on to this term, this will be gone.

[Hidemaru Yamaguchi, analyst]

Understand. About R&D expenses, I understand you're standing in the phase of increasing the R&D expenses. But there might had been a way to fill the gap to JPY 100 billion, of course, by asset impairment. Have you thought about that?

[Kazunori Hirokawa, executive]

With the special items, R&D expenses will increase. At the end of the second quarter, we are still hoping to reduce the R&D expenses. But especially for oncology area, R&D activities were reaching a quite advanced stage. Because of that reason, we decided to be on a conservative side to increase a JPY 10 billion without changing initial OP target.

[Hidemaru Yamaguchi, analyst]

Understood. My last question is about interstitial pneumonia of 8201. I may be confused. Are these mentioned 2 cases different from the cases which was mentioned at the previous R&D meeting?

[Kazunori Hirokawa, executive]

Yes, I talked about gastric cancer cases, and the previous cases were for breast cancer. There are 1 grade 1 and 1 grade 2 cases for gastric cancer trial. Investigators reported interstitial pneumonia and pneumonitis. And of course, these 2 cases will be adjudicated by the adjudication committee.

[Hidemaru Yamaguchi, analyst]

I understand. Has the adjudication committee reached any conclusion about the previous cases for breast cancer?

[Kazunori Hirokawa, executive]

We'll be able to make a report when we have organized information. As clinical trial proceeds, we receive more information. But the important point is regarding adverse drug reaction. The adjudication committee adjudicate and we respond appropriately based on that.

[Hidemaru Yamaguchi, analyst]

I understand. One last question. Allow me to ask you a basic question about neratinib. I understand the point of [ double of inhibition HER2 ]. My question is, if there's any risk of tumor to inhibition?

[Kazunori Hirokawa, executive]

It is true that generally, inhibition causes an increase of gene expression, but different from lapatinib, there's a report that neratinib promotes internalization of HER2. This is a hypothesis we'd like to confirm by doing the preclinical trial to see if there's a synergy effect created by 8201 and HER2 conjugate when it is internalized.

[Unknown Executive]

Next question is from Mr. Seki with UBS Security (sic) [ UBS Securities ].

[Atsushi Seki, analyst]

This is Seki. I have 3 questions. The first question is about the R&D expenses. It is increased by JPY 10 billion this term, and it is bottomed up by JPY 30 billion, therefore, real amount is JPY 200 billion. Should we expect this level to continue into the future? At the R&D meeting, a pie chart was distributed, and I'm talking about the dotted line portion. I'd like to understand how that portion should be interpreted? One of the management issues could be P&L management of R&D expenses. Can JPY 200 billion be one of the guide? Or should we prepare ourselves for the future increase? This is my first question.

[Kazunori Hirokawa, executive]

Glenn Gormley talked about that at December R&D Day. Daiichi Sankyo is going through a transformation, especially R&D is shifting focus to oncology. It means that the resources shifted to that area. That is currently going on. An asset impairment took place while we were going through this transition. We would like to focus our resources so that we can make progress in oncology as much as possible.

[Atsushi Seki, analyst]

Also, Nakayama mentioned that you have a quite good pipeline.

[Kazunori Hirokawa, executive]

For business development, there are JPY 500 billion planned for the mid-term business plan. It could be spent if necessary. But there's a ceiling of R&D expenses. That is our discipline. Therefore, we'd like to do a close examination so that expense will not increase very much. For this year, please understand that transition period of shifting focus and asset impairment overlapped to shape this number.

[Atsushi Seki, analyst]

The amount is not going to increase in the future, isn't it?

[Kazunori Hirokawa, executive]

That's what we like to do.

[Atsushi Seki, analyst]

The second question is about 8201 gastric cancer. There's 1 low HER2 patient and showed a very encouraging response. Generally speaking, most people would want to see more response of low HER2 patient because people could be intellectually curious. At the point of ASCO meeting, there's 1 low HER2 patient, but there's no new low HER2 patient being registered after that. Are there any reasons for that? Is it just because there's no more registration? Or is there any other reasons?

[Kazunori Hirokawa, executive]

That is about the Part IIb on Slide 17. For Part IIb, there's trastuzumab pretreated gastric cancer and HER+. For Phase I, Part IIb patients already received Herceptin treatment, that means all patients are HER2+, otherwise, the treatment had not been indicated. There is 1 subject with low HER2 because for those escalation period of Part I, the subject did not have to be HER2+. This subject enrolled a study from that phase, and the study drug was very efficacious. Phase II pivotal study, which is currently going on, we will include a low HER2 subject for the exploratory purposes. There's 1 subject at the study drug is working very well. Therefore, we'd like to review this case also. To answer your question, please understand that the reason why we have a small number of low HER2 is because of inclusion criteria.

[Atsushi Seki, analyst]

That means until Phase II data becomes available, we'll not see any data on gastric cancer patient data with low HER2.

[Kazunori Hirokawa, executive]

You're right. There's only 1 subject right now we enrolled when Part I trial was going on. The drug is efficacious to the patient just like it is to other subject. We think there's a potential like breast cancer.

[Atsushi Seki, analyst]

I understand. The last and the third question. That will be, AACR held in April of this year, do you have any plan to announce some basic data or any kind of data?

[Kazunori Hirokawa, executive]

I will have Akahane answer this question because AACR is a research area.

[Koichi Akahane, executive]

Thank you for your question, Mr. Seki. This is Akahane. We are currently planning to present some of our pipelines, but there's no information we can discuss as of today.

[Unknown Executive]

We move on to the next question from Daiwa Securities, Hashiguchi.

[Kazuaki Hashiguchi, analyst]

I'm Hashiguchi. I have several questions. First question is concerning the situation of LIXIANA. Sales in Japan compared to the past quarters seemed to be quite favorable. What is the background against this? In the appendix, you have the share indicating smooth growth. But the trend, I don't think, remains the same for second quarter. There is a new launch of OD tablet, so maybe there were some factors in the distribution or shipment and there may be some strength of the product and other factors. Can you comment on the background, please?

[Kazunori Hirokawa, executive]

Thank you for your question. As for LIXIANA, this was developed in Japan. And low body weight patients can also be administered, adjusting the doses, and we have a lot of data. And this may present as comfortable and convenient to the doctors, and OD tablet, the elderly patients have several medications to take every time, and Japanese patients say it is difficult to swallow the tablets and even capsules. Even without dysphagia, people say that it's difficult to take the medication. And orally disintegrating tablet, the bitterness of the medication is covered. And once it is administered, immediately it disintegrates inside the mouth. There are many elderlies being treated and the doctors highly evaluate this formulation. And it consists of a big portion of the sales. And this is another factor for increasing the sales. As for other companies, they are overseas companies, and I have no news or information of any company developing orally disintegrating tablet. So we think this is a very good situation for us.

[Kazuaki Hashiguchi, analyst]

So it means the sales was really -- third quarter, there is not much basis for evaluating or preparing for the demand?

[Kazunori Hirokawa, executive]

Well, we are growing smoothly. And personally, we will be having drug price revision. But as for OD tablets, I don't think there will be any problem concerning the purchase.

[Kazuaki Hashiguchi, analyst]

Second question. I want to know the situation about Welchol. Until the third quarter, there was not much changes at trend of the sales. But the assumption is that you will have lower sales in the future. I don't think there is generic product yet. What is the situation that you foresee, please?

[Kazunori Hirokawa, executive]

As for Welchol, the patent -- we already have no patent. But if you follow FDA guidance, it is quite difficult to launch generic product. And when generic is going to come into some market, we try to get information but not for the time being. There's a similar drug, and it is also off-patent. And because of that, there are changes in the sales figures. But how it goes down, the sales decrease. During the plan for annual figures, the estimate was quite low. But actually, it is not so low. Therefore, we revised the figure upward. However, every year, if you look back, there's a tendency of decreasing. That is not changed.

[Kazuaki Hashiguchi, analyst]

So third quarter and fourth quarter, you are not expecting major change? Is that correct understanding?

[Kazunori Hirokawa, executive]

Yes, we have no assumption like that.

[Unknown Executive]

If you have any questions, please use the phone. Next question from Crédit Suisse, Mr. Sakai, please.

[Fumiyoshi Sakai, analyst]

I am Sakai. First, it's a question that I always ask, if you allow me. Fourth quarter, there's a tendency that you say that the figures are in deficit and this time as well. Third quarter and fourth quarter and the year, the assumption is deficit in the fourth quarter, and this structure is not going to change. I just want to confirm that with you.

[Kazunori Hirokawa, executive]

Yes, every year, it's like that. Until the third quarter, the operating profits tend to go up. But looking at fourth quarter itself, the figures are in red, there is a delay in the implementation of expenses. And we wonder how we can change this, and we had different plans. But again, we have the same tendency this year.

[Fumiyoshi Sakai, analyst]

Understood. Two other questions regarding R&D. Gastric cancer data. It's early-stage patient, but efficacy has been confirmed. On Page 20, there's a table. 17 cases are continuing with the treatment. These 17 patients, they decided to continue the treatment. And what are the factors for them to continue? What is the selection criteria? Were there any requests from the patients? If you had any criteria, I would like to know that.

[Kazunori Hirokawa, executive]

Yes. Now the patients -- if you look at Page 21, tumor shrinkage rate, there's a case where there was no shrinkage and the tumor got bigger. In that case, the treatment will be stopped and the patient will be treated. But if there is no worsening and PFS seem to be good, then we will also like to continue with the treatment, which means 17 cases continue with the treatment. And PFS median, was referred to earlier, but the possibility is that this may be further extended. So if the tumor doesn't grow anymore and can continue with the treatment, then we can do so without any adversive reaction.

[Fumiyoshi Sakai, analyst]

So on Page 19, amongst the evaluable cases, 20 cases, PFS 5.8 is a figure that is shown. And this is what you are referring to?

[Kazunori Hirokawa, executive]

So those who have been treated up to now and PFS survival may be short. But for these patients, they continue to survive. And at the cutoff point, median 5 of PFS, and there's a possibility that this may be further extended. The tumor is controlled, and it is not growing. And the treatment can be given to the patient, so that is why they're being treated.

[Fumiyoshi Sakai, analyst]

One more question. I'll continue to follow up on R&D. Was it during R&D meeting, DS-1062 non-small cell lung cancer, currently the stage is advanced, progressed, as shown in red, but still it's in Phase I stage. What is the schedule from now on? And can you give me some information concerning this, please?

[Kazunori Hirokawa, executive]

So we started Phase I. And what is important ADC, for example, we have 1062 and U3-1402 breast cancer here in Japan that is being investigated. So ADC pipeline, we have one after the other. And we have large amount of data first for 8201, and then after that, 1402 and 1062. And if we are able to get similar results, we will be convinced with the value of technology, and we will be more confident. We want to wait for the data to come out. And as for the progress, it may depend on the cancer type and also antigen, and the speed of development may be different. And we're now looking forward to the data to be generated. Thank you very much.

[Unknown Executive]

If you have any questions, please use your phone. There's no further questions so this is the end of Q&A session.