Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2018-Q1

[Yuko Makino, executive]

This is Makino. I will explain FY 2018 First Quarter Results of Otsuka Holdings.

Page 2, please. I will cover these 5 topics. For your information, foreign exchange impacts and other supplemental information is summarized in the Appendix Pages 12 and 13.

Page 3, please. From FY 2018, implementation of IFRS 15 started. I will explain the impact of this change on sales and other accounting items by applying IFRS 15 new standard, sales revenue recognition timing and amounts changed, which impacted our numbers in 2 fronts. The first is the change in the timing of recognition of upfront and milestone revenues. For this fiscal year, annual impact is expected to be an increase of about JPY 4.5 billion, both in sales and operating profit. The second is allocation of costs related to vending machines, which were included in SG&A in the past. They are now labeled as deduction from sales. Annual impact of this would be about JPY 6 billion decrease, both in sales and SG&A.

This does not impact operating profit. The change is purely reclassification of expenses. The table summarizes the impact of IFRS 15 on the first quarter, and these changes were already included in the consolidated forecast plan announced on February 2018.

Page 4, please. I will explain first quarter consolidated results in FY 2018. We achieved an increase in sales and profit from last year, which is in line with the first half plan. As explained in February this year, we intend to pursue active R&D investment to realize sustainable growth. Recent progress of clinical trials is in line with the plan. As a result, operating profit before R&D expenses increased, confirming that we are back on the growth trajectory.

This shows sales and operating profit by business segment. Core business of pharmaceutical and nutraceuticals achieved an increase in sales and profit, driving good performance on consolidated results. Especially in NC business, during the second midterm plan, we reviewed management assets, and that has positive impact on the performance.

I will explain details of pharmaceutical business and nutraceutical business. First, sales in pharmaceutical business. Sales growth of 3 global products offset sales decrease of long-listed items to achieve overall sales increase of JPY 9.1 billion. I will explain factors impacting these increased items. First, about the 3 global products. ABILIFY MAINTENA was approved for bipolar disorder in the U.S. July last year, and its share increased in the U.S. Global sales growth was 26.5% higher from last year. REXULTI in the U.S., we continued DTC, or direct-to-consumer, promotion to appeal its efficacy in major depressive order to result in sales increase of 43.5%.

Samsca and JINARC steadily gained awareness as a -- on the oral diuretic and ADPKD therapy, or autosomal dominant polycystic kidney disease. Our market global sales grew 30.8%. For domestic new drugs, E Keppra and TAKECAB achieved steady growth of 13.4% in sales. As for long-listed products, sales in Japan decreased due to generic product promotion policy by the Japanese government that caused the Pletaal and TS-1 together decrease by 35.4%. As a result of these factors, overall sales increased 5% from last year to JPY 189.5 billion.

Next is operating profit of pharmaceutical business. Global products grew well to boost gross margin. In spite of active R&D investment for sustainable growth, overall operating profit increased.

Let me explain factors impacting operating profit. Sales increased, as I explained, by JPY 9.1 billion from last year. Cost of sales ratio improved, thanks to increase of in-house developed products and upfront and milestone revenues. R&D expenses increased by JPY 5.7 billion due to progress in clinical trials, including vadadustat Phase III study for renal anemia. Promotional expenses increased by JPY 1.9 billion, partly because of higher co-promotion fee to Lundbeck due to increased sales of REXULTI and ABILIFY MAINTENA. Other expenses decreased by JPY 1.4 billion, thanks to ongoing efficiency effort to reduce indirect costs. As a result of all of these, operating profit increased by 6.2% to reach JPY 30.4 billion.

I will now explain efforts to accelerate growth of new products. New products are making steady progress. We reached 48% of the first half plan of JPY 189.0 billion. We continue to appeal usefulness of ABILIFY MAINTENA in bipolar disorder in the U.S. to expand the LAI market, or long-acting injections. On April 23, JYNARQUE was approved in the U.S. to treat ADPKD. Preparation is ongoing to bring this product quickly to the patient who wait for a therapy in this disease. REXULTI was launched in Japan on April 18. We hope to make further contribution to the patient by answering high expectation on this product as a new option in treating schizophrenia.

LONSURF is codeveloped with Servier Laboratories. We announced on May 9 that we achieved the primary end point of Phase III study for gastric cancer. Preparation is ongoing for early filing and approval. We will continue to make steady progress to achieve the full year target of JPY 405.0 billion and to maximize product value.

Page 9, please. I will explain NC business. First, sales of NC business. Among functional beverages, POCARI SWEAT sales volumes increased in Japan and overseas. Oronamin C sales decreased by JPY 1.1 billion due to lower overseas sales and impact of IFRS 15 application. Functional foods increased JPY 500 million, partly because Calorie Mate earned good reputation of well-balanced food as more people tried the product and consumption opportunities expanded. Growth of sugar-free products by Nutrition & Santé also helped. For the supplement category, growth of Nature Made product in the U.S. outperformed the market growth to give an increase of JPY 1.9 billion. Others increased JPY 4 billion, thanks to the addition of Daiya Foods, which was newly consolidated in September last year. This company develops and markets plant-based foods. As a result of all of these, NC business sales were up JPY 5.2 billion to JPY 73.3 billion.

This shows factors impacting operating profit in NC business. Sales were up, as I explained, by JPY 5.2 billion from last year. Cost of sales were also up JPY 4.2 billion because of sales increase and product mix change. Promotion expenses were down JPY 1.4 billion, mainly due to IFRS 15. As a result of these, operating profit went up 31.9% to JPY 8.2 billion. During the midterm plan, we continue to review management assets to support value chain. We feel this has helped us to enhance earning capability.

Q2 and Q3 periods are going to be very important for this business segment. We are determined to make further efforts to advance business. This is the last slide showing FY 2018 forecast. On consolidated basis, there's no change in our plan for the first half and the full year. That's all from the finance for the first quarter results.

Thank you very much.

[Kuniaki Natsume, executive]

This is Kuniaki Natsume from business planning and development. I will explain R&D updates in the pharmaceutical business.

Page 15, please. I will cover these 3 topics.

Page 16, please. These show major progress in the first quarter. REXULTI was approved and launched in Japan. Then after the first quarter, JYNARQUE was approved in the U.S., which I will explain as one of the topics. tolvaptan, product name JINARC, was approved in March in Taiwan for the indication of ADPKD, or autosomal dominant polycystic kidney disease. delamanid, brand name Deltyba, was approved in March in China for the treatment of multidrug-resistant tuberculosis, or MDR-TB. It is estimated that globally there are about 10 million TB patients, of which about 0.5 million are said to be multidrug resistant. Like in India and Russia, multidrug-resistant TB is widespread in China, where about 60,000 patients report they suffer from this disease. We hope this approval will help many people with MDR-TB.

December last year, we signed a co-promotion agreement of the guselkumab, brand name TREMFYA, with Janssen Pharmaceuticals and obtained the right to market this product in Japan. This product was approved in Japan in March this year.

Page 17, please. ASTX727 advanced to Phase III as planned, which I will explain later. AVP-786 moved to Phase II in February this year in the U.S. for the treatment of IED, or intermittent exclusive disorder. IED develops idiopathic attacks of verbal aggression or disruptive behavior, which gets very difficult to control. The study evaluates efficacy to control aggression.

TAS0313 is a novel cancer peptide vaccine. In March this year, we started Phase I for solid cancer in Japan. In April, co-development of gene therapies with TBI-1301 and TBI-1501 study based on the joint development and exclusive marketing agreement with Takara Bio Company. Last year, we also had joint research and development agreement with Takara on HF10, an oncolytic virus for gene and cell therapies. We continue to address unmet medical needs in this field.

Development of AVP-786 to treat disinhibition syndrome in neurodegenerative disorder was discontinued for a strategic reason.

Page 18, please. REXULTI was approved in January in Japan for schizophrenia. NHI price was set, and it was launched on April 18. REXULTI is classified as SDAM, or serotonin-dopamine activity modulator, with a new mechanism of action. On the right bottom of the slide, you can see binding affinity for receptors compared to aripiprazole. REXULTI is unique that it has similar affinity to D2 serotonin 5-HT1A and 5-HT2A receptors. Currently, our widely used ABILIFY can gradually stabilize dopaminergic system to the normal level, and it has less side effects compared to conventional antipsychotics, but there are specific extra-parameter side effects such as akathisia, restlessness and jitteriness and other activation system side effects such as agitation and insomnia. REXULTI was developed to address this issue. Incidences of REXULTI for akathisia, agitation and insomnia are comparable to those of placebo group data. Thus, REXULTI can be used with a better safety profile. We plan to start Phase III studies in Japan for major depressive disorder and agitation associated with Alzheimer-type dementia.

Page 19, please. ASTX727 is a combination of DNA methylation inhibitor decitabine and E7727, an inhibitor of cytidine deaminase. In the GI track, decitabine degradation is inhibited by E7727, which enables overall administration of decitabine. In February this year, Phase III study started in the U.S. for the indication of treatment-naïve, high-risk MDS, or myelodysplastic syndromes. The study uses decitabine as a comparator. The 2 drugs will be crossed over to major decitabine AUC to confirm equivalents of the 2.

Page 20, please. tolvaptan, U.S. brand name JYNARQUE, is the first drug to slow down decline of renal function in adults at risk of rapidly progressing ADPKD. For the use in ADPKD, the product is available only through FDA-approved Risk Evaluation and Mitigation Strategy, or REMS program, to support hepatic function monitoring. Physicians, pharmacists and patients need to be registered to use this program. By making sure of good implementation of brands and utmost focus on safety, we want to help ADPKD patients in the U.S., where about 140,000 patients are said to suffer from this disease.

Page 21, please. ASTX727 progressed as planned.

Page 22, please. The slide shows completion timing of key Phase III projects in the plan. TAS 102 is for the third-line therapy of unresectable gastric cancer. Phase III was conducted in Japan, U.S. and Europe. The top line data of this study was released May 9. Primary end point of OS, overall survival, was significantly improved compared to the placebo. The outcome will be presented at ESMO GI in June.

Pages 24 to 26 show major project by therapeutic area for your reference. Psychiatry and neurology, oncology, cardiovascular and renal and others are shown.

That's the end of my presentation for R&D update. Thank you.