Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Transcript 2019-Q3

[Toshiaki Sai, executive]

This is Sai. Thank you very much for joining Daiichi Sankyo's Financial Results Conference Call despite your busy schedule. I'm going to present FY 2018 Q3 financial results announced at 1:00 p.m. today by following the document.

Please look at Slide 3. I'm going to cover the topics in the following order: FY 2018 Q3 financial results, important business update and R&D update. I will take your questions after my presentation. First, I'm going to explain the content of our FY 2018 Q3 financial results.

Please look at Slide 5. This is an overview of FY 2018 Q3 results. The revenue was JPY 703.1 billion, which was minus JPY 38 billion or minus 5.1% of the revenue year-on-year. The cost of sales increased by JPY 9.5 billion year-on-year, SG&A expenses decreased by JPY 18.2 billion, and R&D expenses decreased by JPY 33 billion. As a result, the operating profit turned out to be JPY 97.1 billion, which was an increase by JPY 3.9 billion or plus 4.1% in the operating profit year-on-year. The profit before tax was JPY 98 billion, which showed an increase by JPY 200 million year-on-year. And the profit attributable to the owners of the company was JPY 78.8 billion, which was an increase of JPY 6.2 billion or plus 8.5% year-on-year.

As for the actual currency exchange rates, $1 became JPY 111.15, which was JPY 0.56 higher than the previous year. EUR 1 became JPY 129.49, which was JPY 0.96 lower than the previous year.

Please move to Slide 6. I'm going to use 4 slides to explain the factors involved in the increase and the decrease from the previous year. The revenue decreased by JPY 38 billion year-on-year. I'll explain the breakdown by major business unit. In the Japan business, including domestic pharmaceutical products and vaccine healthcare, in addition to the direct oral coagulant, LIXIANA, and the osteoporosis treatment agent, PRALIA, we expanded the sales of the Daiichi Sankyo Espha products, including authorized generic products.

On the other hand, the hypertension therapeutic agent, Olmetec, was impacted by the expansion of generics. And the anticoagulant NEXIUM and anti-inflammatory analgesics, Loxonin, were impacted by the drug price reduction. And the anti-influenza virus agent, Inavir, was impacted by other competitive products, which altogether resulted in a decrease of the revenue.

Furthermore, although Daiichi Sankyo Healthcare's skin care products were performing well previously, the sales decreased due to the change in the accounting treatment led to the decrease in the revenue. It's JPY 24.9 billion reduction in revenue of the entire Japan business.

Next, I'd like to explain about our overseas business. The ForEx impact is excluded in this list. As for Daiichi Sankyo Inc. in the U.S., the hypercholesterolemia and type 2 diabetes therapeutic agent, Welchol, with its generic drug entered into the market in May as well as olmesartan and anti-platelet agent, Effient, suffered from the reduction of the revenues, which resulted in minus JPY 35.3 billion in its revenue.

On the other hand, the former Luitpold, which is currently American Regent, Inc., in the U.S., benefited from the growth of the iron deficiency anemia therapeutic agent, Injectafer, and increased the revenue by JPY 10.7 billion. Daiichi Sankyo Europe increased the revenue by JPY 7.3 billion due to the sales expansion of LIXIANA.

The ASCA business, which covers Asia, South and Central America, increased its revenue by JPY 5.8 billion in South Korea and China. The revenue decreased by the ForEx impact was JPY 1.5 billion in overall.

Next, please look at Slide 7. The operating profit was increased by JPY 3.9 billion. I'll explain this by item. As I mentioned before, the revenue decreased by JPY 38 billion, which included the JPY 1.5 billion reduction due to the ForEx impact.

Next, if the ForEx impact and the special items from the expenses are excluded, the cost of sales increases by JPY 3.8 billion due to the change of the product mix caused by the patent expiration of olmesartan, and SG&A decreases by JPY 14.2 billion due to the cost-cutting effect in the U.S. The cost reduction impacted by ForEx was JPY 1.3 billion in total. As for the special items, the cost decreased by JPY 27.6 billion this year compared to the previous year.

When the ForEx and special-item impacts are excluded, the revenue decreased by JPY 23.4 billion in real terms.

Slide 8 shows the breakdown of the special items. Although there was a cost reduction of JPY 6.1 billion by the sales of the tangible fixed assets last year, we booked the impairment loss of the intangible assets related to CL-108, which resulted in a cost increase by JPY 24.1 billion. There was JPY 3.5 billion of the gain on the sales on the tangible fixed assets this year. As a result, the cost this year turned out to be JPY 27.6 billion lower than last year. These special items have been booked by Q2, and there was no new item booked during Q3.

Next, using Page 9, let me explain the situation of the profit. Operating profit increased by JPY 3.9 billion. Income taxes, et cetera, declined by JPY 6.5 billion, due to the impact of the tax rate reduction in the United States, et cetera. As a result, profit attributable to owners of the company reached JPY 78.8 billion, up JPY 6.2 billion year-on-year.

Page 10 and 11 show revenues of major business units and revenues of major products in Japan, in Japanese Yen.

Earlier on Page 6, I explained the revenue situation of each business unit, excluding ForEx impact. But here are the results including ForEx impact. From here on, I'm going to give you our business update.

Please turn to Page 13. First of all, I'd like to talk about our direct oral anticoagulant, LIXIANA. It has continued to grow its shares steadily in the Japanese market and has become #1 in terms of sales share as of the third quarter of fiscal year 2018. Over 40% new patient share has been maintained. We're expecting further expansion of its share in the entire market.

Page 14 shows the trend of its volume-based share in other countries in addition to Japan. Edoxaban has been growing steadily in each country. Also in China, we obtained approval in December last year.

Starting from Page 15, I'd like to talk about regional value product. As we are showing in our 2025 Vision, we are aiming to have enriched regional value products, aligned with regional business strategies in addition to global products such as Edoxaban and new oncology products.

Page 17 is demonstrating further enrichment of our regional value products in each region. To align with our original business strategies, in Europe, we licensed in bempedoic acid for hypercholesterolemia, where we can expect synergies with LIXIANA. In Japan, we plan to leverage high-quality sales and marketing capabilities obtained in-licensing products of good quality in addition to our own in-house products, further enrich our product portfolio and grow as #1 company in Japan.

Slide 18 lists the products approved in Japan this month. The new products of the peripheral and neuropathic pain therapeutic agent, Tarlige, and hypertension therapeutic agent, MINNEBRO, were approved. Also, the antiepileptic drug, VIMPAT, received an additional approval for pediatric indications. The new dosage forms of dry syrup and the I.V. infusion were approved as well.

Please look at Slide 19. In Europe, we incorporated the hypercholesterolemia therapeutic agent of bempedoic acid and its combination tablet from Esperion. This allows Daiichi Sankyo Europe to leverage its sales platform established in the cardiovascular area as well as that the synergic effect with LIXIANA will accelerate the sales expansion of the both products, leading to the increased regional value of Daiichi Sankyo in Europe. The filing of this product in Europe is scheduled to be in the first half of 2019, followed by the market launch in 2020. A large scale global trial to evaluate the reduction of cardiovascular event risks is currently going on, and it is scheduled to end in 2022.

I'm going to explain the optimization, the production system from Slide 20.

Please go to Slide 21. While we are shifting toward cancer business that declared in our 2025 Vision, we have been aiming to transform and restructure the supply chain into a multiple, smaller-volume production, large molecular compounds and injectable formulations to optimize the production system.

In 2015, we transferred the Daiichi Sankyo Propharma's Akita plant. In 2016, we sold the Bethlehem plant in U.S. In 2017, we closed the Hiratsuka plant of Daiichi Sankyo Chemical Pharma. We also released a news today that we have decided to transfer Daiichi Sankyo Propharma's Takatsuki plant.

Please go to Slide 22. This is the summary of the Takatsuki plant transfer. The transferee has been confirmed to be Taiyo Holdings Company Limited. Their employees will continue to be employed by the transferee. And our products will continue to be produced at the Takatsuki plant with a stable supply. That transfer is scheduled to happen on October 1, 2019.

Slide 23 shows the production sites after the transfer for your reference.

From Slide 24, I'll discuss the R&D update.

Page 25 shows our R&D investment focus and efficiency. We are investing selectively in 3 areas: ADC and AML; hematology franchises, and Breakthrough Science. By focusing our investments, particularly in ADC franchise, we are expanding the number of clinical studies. The number of ongoing clinical studies for DS-8201 was 3 as of January last year but has increased rapidly to 9 as of now.

We will continue our investments with focus and efficiency and selectively invest in clinical studies on oncology, which are expected to increase continuously also in the future. We will actively out-license compounds, which do not fall into the categories of ADC and AML hematology franchises or Breakthrough Science, even if they are still in the field of oncology.

On the other hand, we will make continuous investment into next-generation modality for the future beyond 2025.

Page 26 is a list of compounds for out-licensing. We licensed out DS-5010 in 2017 and DS-6051 in December last year. Also, we added 5 projects shown in red in the table below as new candidates for out-licensing. In order to invest limited resources efficiently, we will continue to make selective investments with focus on efficiency.

Page 27 shows our activities in regenerative medicine and cell therapy. We have established cell therapy lab by now in order to strengthen our DS R&D structure. We have also explored seed compounds through in-licensing and alliances. We're starting new open-innovation research with Tokyo Institute of Technology to manufacture iPS cell-derived beta cells for the treatment of type 1 diabetes.

Page 28 shows the details of the new open-innovation research. So far, main treatments for type 1 diabetes have been insulin injection and pancreatic islet transplantation. Insulin injection has been a huge psychological and physical burden for patients. As for Islet transplant, due to few donors, many patients are on the waiting list. iPS-derived beta cells are expected to replace these as alternative treatment options. We are aiming for a practical application as an innovative treatment for severe type 1 diabetes through fusion of technologies between Tokyo Institute of Technology and Daiichi Sankyo.

Page 29 shows the upcoming data point until ASCO 2019 to start at the end of May in Chicago, USA. Regarding DS-8201, we have been targeting BLA submission in the fiscal year 2020 so far. We will confirm our manufacturing-related data we will obtain in the fourth quarter of fiscal 2018 and beyond and decide whether or not we can file our submission in fiscal 2019. We are hoping to talk about the results at an earnings announcement meeting scheduled at the end of the April.

We disclosed a plan for Congress presentations during R&D Day. We are planning to present for the first time U3-1402 and DS-1062 NSCLC's dose escalation part of Phase I studies at ASCO. As for quizartinib, we completed a submission in the United States and were told that U.S. PDUFA date is 25th of May, 2019.

You can find appendix on Page 30 and beyond. We said during R&D Day that we decided to select 5.4 milligram per kilo as dose for DS-8201 Phase III studies in breast cancer, considering its risk benefits.

We received a lot of inquiries on whether 5.4 milligram per kilo efficacy is efficient, so we attached on Page 35, an excerpt of the poster presented at an academic society meeting in December. Please refer to it at your leisure.

That's all for my presentation. We are now going to answer your questions from now on. My colleagues, including Koga, Head of R&D division also attending with me. Thank you very much.

[Atsushi Seki, analyst]

This is Seki. I have three questions. Are you going to get rights in Japan and Asia? I'm sure you are very strong in sales in Japan.

[Unknown Executive]

I'm sorry, but the first part of your question didn't come through, and I couldn't hear you very well.

[Atsushi Seki, analyst]

Hello, can you hear me okay?

[Unknown Executive]

Yes, I can.

[Atsushi Seki, analyst]

Okay, sorry about that. About bempedoic acid you got from Esperion, are you not going to get the rights for Japan and Asia? I'm sure you are very strong in sales in Japan and Asia. I have a feeling that you don't really have a choice but getting the rights there. What do you think?

[Unknown Executive]

Since we are mainly focusing on the European market in this negotiation, we haven't acquired the rights in Japan and Asia yet.

[Atsushi Seki, analyst]

But you're not denying the possibility in the future, correct?

[Unknown Executive]

I'm not able to comment one way or the other on that point.

[Atsushi Seki, analyst]

Excuse me for that question. My second question is that, last year in December, you had a partnership with Roivant for out-licensing the pipelines. I read the press release but the description was not very much in detail. For example, as for what you indicated with red fonts on Slide 26, can we currently assume that you are going to keep transferring your assets to the company similar to the ones on the page?

[Unknown Executive]

As for the option agreement we made with Roivant, well, roughly speaking, this option agreement is for them to evaluate some of our development projects, which were terminated for strategic reasons. I'd like to courteously decline any further explanation about this matter.

[Atsushi Seki, analyst]

Understood. Also, when I looked at your R&D expenses, you have JPY 210 billion this year, and it looks like you're going to have some left over. Am I correct to say that this will be deferred for this time being?

[Unknown Executive]

We are examining carefully about this matter by March and would like to make a good use of the R&D expenses.

[Atsushi Seki, analyst]

Understood. Lastly, on Slide 29, are you not going to make any announcement on DS-8201 during ASCO?

[Unknown Executive]

We are not planning to make any announcement on the data related to DS-8201 during ASCO.

[Atsushi Seki, analyst]

Why is that? Can't we expect to have the top line from the current DESTINY 01 study, for example?

[Unknown Executive]

Well, we'll not make any announcement, and I appreciate your understanding.

[Kazuaki Hashiguchi, analyst]

This is Hashiguchi. I have two questions. My first question is that, well, I'm sorry to raise this question since it's been only 1.5 months since the last R&D Day. But about the development policy of ADCs, including DS-8201. I'm sure you have been considering many different options, such as partnering with another company or continuing the development by yourself. Can you give us an update on what you have been considering lately?

[Unknown Executive]

Yes. Thank you for your question. As for partnering, we recognize that it is the most important measure for us, and we have been negotiating with multiple candidates to this date. If I may tell you my impression in one word, I just would like to say that the negotiations have been going very well.

[Kazuaki Hashiguchi, analyst]

The nuance of your current response is that, well, in the previous R&D Day, you seemed to give us an impression that you were struggling on both ways. But are you saying that you are rather beginning to lean toward partnering nowadays?

[Unknown Executive]

Well, our assumption is that the criteria for final judgment will be based on the fact that the partnering will maximize the value of DS-8201. So as a possibility, we may potentially decide not to partner with anyone. Our most significant objective is to maximize the value. The partnering negotiations have been going very well, but I'd like to stop here with my response.

[Kazuaki Hashiguchi, analyst]

Okay. My second question is about your approach to the return to the shareholders. 3 months ago, I think it was mentioned that 100% or higher payout ratio will be maintained until 2022. If I consider the history in the past, I believe that an acquisition of your company's shares would be one of the keys to achieve that goal. If you are currently undergoing with those partnership negotiations, I assume that you are not able to move around that easily. Including this time around, I know you are not making any changes, but can you tell me the reason why you are not doing it now? And what situation will make you decide to increase the return to the shareholders, including the acquisition of your own shares? Can you explain your thoughts on that?

[Unknown Executive]

Yes. For the returns to the shareholders, there are things such as dividends and the acquisition of our company's shares. However, as for the long-term payout ratio, instead of the 3-year policy, it is currently a policy until 2022. So under such circumstances, when an appropriate timing arrives, we'd like to provide the best handling of the situation. We want to maintain the current return to the shareholders.

[Kazuaki Hashiguchi, analyst]

What factors will be considered to decide your appropriate timing?

[Unknown Executive]

In other words, any timing other than the time when we are not able to do so will be an appropriate timing.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. Can you hear me?

[Unknown Executive]

Hello, I can hear you.

[Hidemaru Yamaguchi, analyst]

My first question is about your new product in Japan, which is Tarlige or mirogabalin. The positioning of this product in Japan is that considering the characteristics of the product, I suppose you are going to battle against the product, such as Lyrica, head-to-head, and try to make it become a blockbuster product. Am I correct?

[Unknown Executive]

We understand that the biggest competitor is Lyrica. I can't tell you the detailed figures offhand right now, but I understand that Lyrica is a product of JPY 100 billion scale. Our product will compete against Lyrica, but we will examine carefully about the positioning. But I believe that the dose-dependent side effects are also a differentiating point for our product.

[Hidemaru Yamaguchi, analyst]

Understood. And did you say JPY 100 billion? I couldn't hear you very well.

[Unknown Executive]

Yes. My understanding is JPY 100 billion, but that's a statistical figure. Please check the accuracy.

[Hidemaru Yamaguchi, analyst]

Yes, that's a rough image. I understand. Lastly, this is related to DS-8201, and this has been discussed since before. But about the first line where it says decision for early BLA submission, you mentioned that you will provide an explanation during the financial results presentation in the end of April, but I just want to ascertain that, well, how should I put it, are you able to disclose a little more about what is required at what timing?

[Unknown Executive]

Well, basically, they will require the confirmation that we have a stable supply system in place. They need to confirm that we are capable of manufacturing by using our commercial manufacturing facility. And from that point of view, we must demonstrate the data generated from our manufacturing facility. And the batches manufactured in this way can be used both in a commercial production and in a clinical trial setting later. We will use the manufacturing facility for actual manufacturing, but 3 batches or more in a row must satisfy a certain level of criteria. So if that process is taken into consideration, the timeline will be something like what I just mentioned.

[Hidemaru Yamaguchi, analyst]

Yes, yes, I understand. Since I don't have any information and I can't really say anything about this. So I -- rather want to ask you, there's a small venture company called Immunomedics, which is involved with TROP2. Their manufacturing had a problem and they received a CRL. Are there any manufacturing overlaps between Immunomedics and Daiichi Sankyo, for example, any sourcing or outsourcing overlaps? If you have nothing to do with them, I feel relieved, but what do you think?

[Unknown Executive]

I'd like to refrain from commenting on this matter.

[Shinichiro Muraoka, analyst]

I am Muraoka from Morgan Stanley. Many of the questions I wanted to ask you were answered. Thanks to the earlier question by Mr. Yamaguchi. But the competitor couldn't get manufacturing certification by FDA as it received a complete response letter the other day, this happened to your competitor. Based on your communication with FDA, did you assume this could also happen as a possibility?

[Unknown Executive]

We are preparing by making sure that we can ensure data integrity to address any concern from the regulatory authorities. We can just comment to this extent.

[Shinichiro Muraoka, analyst]

Inspections were completed already?

[Unknown Executive]

I beg your pardon.

[Shinichiro Muraoka, analyst]

Were inspections already conducted?

[Unknown Executive]

We conducted a mock inspection to make sure that there is no problem.

[Shinichiro Muraoka, analyst]

Okay. Understood. Another minor question. You said that Inavir was affected by competition. If sales budget is JPY 19 billion per year, is it getting more difficult? Or still, it should be fine as influenza is getting prevalent these days?

[Unknown Executive]

I cannot give you the exact amount, but the government stockpiling is included in the JPY 19 billion figure. Excluding that factor, currently, the situation is tough right now due to severe competition. We will monitor changes in the competitive environment and the trends of flu incidents. We believe we can regain some business.

[Fumiyoshi Sakai, analyst]

I'm Sakai from Crédit Suisse. I have a simple question. I am asking this question as this is a conference call on the third quarter results, you didn't change your full year forecast. Profits may fall due to expenses being booked more in the fourth quarter as usual? Sorry, I might have missed your explanation. But are there any special items this fiscal year? Could you please explain?

[Unknown Executive]

Our understanding is the same as you just pointed out. Looking back on the past 2 years, the trend of the fourth quarter results was similar. Regarding this fourth quarter, the tendency is the same as usual years. If I may, we have a slightly conservative outlook for this fourth quarter. That's my own impression.

[Fumiyoshi Sakai, analyst]

Okay. Understood. And the expenditure was reduced on a full-year basis, and the progress seems slow, you will spend more in the fourth quarter?

[Unknown Executive]

Correct. Yes. That's our plan.

[Fumiyoshi Sakai, analyst]

Okay. One more question. This was explained when you announced your midterm business plan. It's not as much as your competitors, but you said you will sell non-core assets and make steady progress. At that time, you mentioned healthcare, vaccines and real estate. What is your outlook? As for vaccines, you announced the other day the dissolution of Japan Vaccine, is that the end of the story? Do you have something else for the future? Is there anything specific you can make further comments on this, if any? In particular, cash in or something with an impact on profit?

[Unknown Executive]

We cannot comment specifically, but as a policy, as you pointed out, non-core assets and non-core pipelines will be actively separated from our company and brought outside. So there is no change in that policy. We will just have to consider timing and other issues.

[Fumiyoshi Sakai, analyst]

Understood. My last question for confirmation. You have a process to strengthen and expand your oncology unit in the United States from now on. On the other hand, you have a business unit for existing products such as Welchol and olmesartan, do you have a process to reduce or revisit this one?

[Unknown Executive]

Whether we have such a process or not depends on the results of the discussions. Going forward, we would shift a lot towards oncology, and United States is the main battlefield in oncology. There is no change in that. So other business, we are implementing in United States is also a target for us to discuss further.