Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2019-Q1

[Yuko Makino, executive]

I will now explain Otsuka Holdings consolidated results for the First Quarter FY 2019. Page 2, please. I will cover these 5 topics today.

Page 3, please. From this year, as an indicator of real earnings power from business, the term business profit is to be used in our financial statements. Along with that, impairment losses previously allocated in SG&A, as well as in R&D expenses, are now combined and reported as an independent item in the financial statements. Business profit is the operating profit minus impairment loss and other income and expenses.

Page 4, please. This is the summary of consolidated first quarter results in FY 2019. Strong growth of new products drove robust performance in the second midterm plan. This continued in this quarter to result in a significant sales increase. Business profit before R&D expenses also increased by about 10% from last year, in line with the plan. R&D expenses for sustainable growth also increased significantly. Clinical studies are progressing well on track.

Page 5. I will now explain sales revenue and business profit by segment. Pharma business sales went up by 10.5% and business profit by 7% from last year, respectively, to drive solid performance on consolidated basis. I will now explain Pharma business and NC business.

Page 6, please. Let me explain sales in Pharmaceutical business. Three global products, especially better-than-expected JYNARQUE sales in U.S. and new drugs in Japan highly contributed to revenue growth, an increase of JPY 19.9 billion was achieved year-on-year. ABILIFY MAINTENA increased market share in the U.S. by a peak in efficacy as an only 4-week LAI to treat bipolar disorder. REXULTI prescription grew in U.S., driven by DTC campaign for major depressive disorder and the launch in Japan in April 2018 pushed up sales. Samsca continued to grow in Japan as an [ diuretic ] and as an ADPKD treatment, generically achieved 62% of the first half plan in North America, much faster pace than our initial plan.

In particular, prescription rapidly grew in U.S. Through disease awareness activities, the growth is accelerating than last year. Sales of new drugs in Japan, including Bilanoa, E Keppra and Abraxane, increased from last year. They show steady growth. As a result of these contributions, sales revenue increased to JPY 209.4 billion.

Page 7, please. I will now explain Pharmaceutical business profit. As I explained, sales increased by JPY 19.9 billion, to push up business profit. On the other hand, along with sales growth of REXULTI and ABILIFY MAINTENA, co-promotion expenses increased. R&D expenses also grew because of progress in development of REXULTI AVP-786 centanafadine and Visterra's pipeline projects. As a result, business profit was up JPY 2.1 billion to JPY 32.8 billion.

Page 8, please. I will now explain NC business. From 2019, NC product categories have changed. I will explain those changes. OS-1, BODY MAINTÉ, Amino-Value were previously in others category and now they are in the functional beverages. Daiya Foods products are now in functional foods and Equelle, the wise man's dining and wise man's sleep solution, are in the supplement category.

Let me now explain sales in NC. Functional beverages sales increased by JPY 700 million by appealing usefulness of hydration and by promotional activities to enhance product understanding, based on specific local needs and characteristics, which supported overseas sales for Pocari Sweat. In the functional food category, sales decreased by JPY 1.8 billion. Plant-based products from Daiya was increased in sales, but nutrition and Sante sales decreased because of new competitors and we suffered from negative FX impact. For the supplement business, Equelle sales increased because of addition of new customers, but the sales of Nature Made decreased in the U.S. because of distribution constraints, mainly in the Midwest, due to severe winter weather and inventory adjustment, which pushed down sales by JPY 400 million, but now these one-off factors are gone and we are on track according to the plan. As a result, these factors, overall NC business sales went down by JPY 300 million from last year to JPY 72.9 billion.

Page 9, please. NC related factors impacting business profit are shown here. As I said, sales went down by JPY 300 million. Because of aggressive investment in new products such as BODY MAINTÉ, Equelle and Daiya Food products, which are our priorities, and advertising expenses and promotion expenses increased accordingly by JPY 700 million and JPY 500 million, respectively. From last year, Daiya Foods continue to expand product lineups and distribution channels and we enjoyed a good result from these efforts. Sales increased more than 10%. For other products, we also made good preparation in the first quarter to be ready for the summer demand and beyond for future growth. As a result, NC business profit went down by JPY 1.5 billion from last year to JPY 6.6 billion.

Page 10. This is our FY 2019 consolidated forecast, there is no change in the plan for the first half and for the year. This concludes first quarter financial report for FY 2019. Thank you very much.

[Tatsuo Higuchi, executive]

I will now give you an update on R&D in pharmaceutical business. Page 14, please.

I will cover these 4 topics. Page 15 please. Key achievements in the first quarter include approval of LONSURF for the treatment of unresectable advanced recurrent gastric cancer in February in U.S. Gastric cancer is categorized as rare cancer in the U.S., its onset concentrate among the elderly. LONSURF is expected to be a new option in the third line, which did not have established standard of care in the U.S. so far. Selincro was approved in January in Japan as a drug to reduce alcohol consumption in the alcohol dependent-patient. Selincro is the first drug in Japan for this indication. This therapy is provided in combination with psychosocial therapies by the specialist. The ultimate goal of treatment of alcohol dependency is to stop alcohol consumption entirely and maintain it, but depending on psychological and physical conditions of the patient, reduction of alcohol consumption may be a more appropriate treatment goal. We will promote appropriate use of the drug for the indicated patient. Canerpaturev, or C-REV, is an oncolytic virus and it was filed in March in Japan as a regenerative medicine. Submission was made by Takara Bio for the indication of unresectable metastatic malignant melanoma. The filing was based on Phase II study result, which was a combination regimen with a CTLA-4 inhibitor ipilimumab or Yervoy.

Page 16, please. The Phase III studies of centanafadine started in U.S. in February for adult attention-deficit/hyperactivity disorder or ADHD. Changes from baseline AISRS are the primary endpoint. There are two studies with three arms: centanafadine, low-dose centanafadine, high-dose and placebo-controlled. Each study has the total number of subjects of 450. The Phase III study of Pro-NETU started in Japan in February for the treatment of chemotherapy-induced nausea and vomiting. This is a Neurokinin 1 or NK1 receptor antagonist. Substance P is the neurotransmitter associated with nausea and vomiting. Pro-NETU competitively blocks substance P to bind to NK1 receptor to show efficacy in nausea and vomiting. The Phase III study of OPC-61815 started in Japan in January for cardiac edema. This is a tolvaptan prodrug injection which can offer a new option for those who cannot take oral medications.

Phase II/III study of AVP-786 started in the U.S. in March for the treatment of negative symptoms in schizophrenia. Details will be explained in the topic section.

Page 17, please. TAS0313 is a cancer peptide vaccine and its Phase II study started in Japan in January for urothelial cancer. Cancer peptide vaccine is a kind of immunotherapy. A cancer specific peptide is injected to enhance immune response of the patient.

Phase I study of ASTX727 started in Japan in March for low-risk myelodysplastic syndromes or MDS. The subjects were evaluated by low-risk MDS according to IPSS, or International Prognostic Scoring System, to be eligible for the study.

Lu AF20513 was discontinued during this quarter for strategic reasons. The development at Otsuka was discontinued.

Page 18, please. I will now explain Phase II/III study of AVP-786, which is a fixed-dose combination of deuterated dextromethorphan and low-dose quinidine. About 1 in 100 people suffers from schizophrenia. This is a prevalent disease. Symptoms include positive symptoms such as hallucination and delusion and negative symptoms such as lethargy, lack of feelings, apathy and social withdrawal. Even when positive symptoms improve after treatment, residual negative symptoms may persist. For social rehabilitation, improvement of these negative symptoms is important, but this is one of the unmet medical needs. Currently available therapies are not often effective enough to improve negative symptoms. This placebo-controlled study is for the treatment of negative symptoms of schizophrenia in which PANSS Marder Negative Factors Score is used for endpoint evaluation.

Page 19, please. Let me now explain projects in cardiovascular and renal therapeutic area. In addition to tolvaptan, we have 4 projects in development to address unmet medical needs. The VIS649 is an antibody developed by Visterra's unique in silico drug discovery technology. VIS649 suppresses production of a humoral factor APRIL. APRIL is involved in the differentiation process of antibody-producing cells, which produce abnormal IgA. Phase I study of this anti-APRIL antibody is ongoing to treat intractable disease of IgA nephropathy. We expect to see more stage-ups from renal pipeline assets.

Page 20, please. This shows estimated completion time line of Phase III studies. On the left, red boxes are expected to complete in 2019. AVP-786, the second Phase III study to treat agitation in Alzheimer's disease, should be giving report of top line results within this year.

Page 21, please. This shows progress of submission and Phase III stage-ups expected within FY 2019. The projects in red already achieved stage-ups this year. For your reference, major projects in development are shown in the appendix by therapeutic area. Thank you very much. That concludes update in R&D.