Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2018-Q2

[Unknown Executive]

Now Makino would like to explain the second quarter consolidated financial results.

[Yuko Makino, executive]

Please look at Page 2. I would like to explain 4 topics today. Please note that supplemental materials, including the foreign exchange impact, sales of major products, impact of IFRS 15 application as well the ReCor Medical consolidation are available as reference from Page 10 to Page 13.

Now I will explain the highlight of FY 2018 first half consolidated financial results. We achieved a growth, both in revenue and in profit, year-on-year. And operating profit substantially exceeded the first half forecast. We made active investment in R&D to realize sustainable growth according to the theme we set for FY 2018 and key products are progressing well.

President Higuchi will give you more details later on. As a result, operating profit before R&D investment increased steadily outperforming the plan.

Next, I'd like to explain revenue and operating profit by segment.

Our core business, pharmaceuticals and nutraceuticals achieved increased revenue. And operating profit of pharmaceutical business significantly grew from the previous year, driving the strong consolidated results.

Now I will explain the pharmaceuticals and nutraceuticals business segments. First, about the revenue of pharmaceuticals segment. The sales growth of the 3 global products offsetting the sales decline of a long list of products. We achieved JPY 15.4 billion increase in revenue. Let me explain the factors behind these sales. Three global products increased by JPY 27.6 billion from the last year. Domestic new products increased by JPY 9.1 billion, thanks to the steady performance of E Keppra, Bilanoa and TAKECAB concerning the main long-listed products. Drug price revision and generic promotion policy in Japan affected. The total sales of Mucosta, Pletaal and TS-1 decreased by JPY 11.1 billion. As a result, revenue increased by JPY 15.4 billion year-on-year to JPY 389.2 billion.

Next, I will explain the operating profit. As I explained in the last slide, revenue increased by JPY 15.4 billion and greatly contributed to profit growth. Concerning R&D expenses, a Phase III study of vadadustat for renal anemia and other clinical trials are smoothly progressing and centanafadine's launch timing is likely to be delayed. So we recorded impairment loss and R&D expenses increased by JPY 15.1 billion.

On the other hand, in this time, impairment loss decreased and against due to market to market of ReCor Medical, we acquired this [ time ] was recorded as other income, which added to the increase of operating profit. Overall, the operating profit was JPY 65.4 billion, JPY 28.4 billion up.

Next is nutraceuticals segment. First, about revenue. Functional beverages, et cetera. POCARI SWEAT increased in volume, both domestic and overseas. Overseas sales of Oronamin C decreased due to excise tax on carbonated drinks and energy drinks in the Middle East. Application of IFRS 15 affected, and a part of revenue was offset by sales promotion expenses.

Supplements, Nature Made in the U.S. grew more than the market performing smoothly. It increased by JPY 1.9 billion.

Other products. Daiya Foods, a company developing and selling plant-based foods was newly consolidated last September, and EQUELLE grew steadily as a product to support women's health. As a result, it increased by JPY 7.9 billion. Overall, nutraceuticals' revenue increased by JPY 8.4 billion year-on-year to JPY 162.7 billion.

Next, I will explain the main factors of increase and decrease of nutraceuticals business operating profit.

Revenue increased by JPY 8.4 billion year-on-year as I explained. Cost of sales increased by JPY 7 billion because of revenue increase and product mix change due to new consolidation.

Sales promotion expenses decreased by JPY 2.3 billion, mainly due to application of IFRS 15.

Other expenses increased by JPY 2.3 billion, as we posted the expense of recalling Oronamin C. As a result, operating profit is JPY 19.8 billion.

If we exclude the impact of Oronamin C recall, operating profit will be about JPY 21 billion, about 5% up, thus the business has been performing well.

Finally, I will explain the forecast of FY 2018 full year consolidated results.

Based on the results of the first half of FY 2018, we revised the full year plan. Revenue is unchanged from the initial plan. However, some of the product mix changed. Please see the details in the fact book.

Operating profit is planned to be JPY 145 billion, JPY 5 billion up from the original plan, as we incorporated advertisement and promotional expenses to further grow global products and the progress of sales promotion expenses and R&D expenses in the forecast of second half. That is all about FY 2018 first half consolidated financial results. Thank you very much.

[Tatsuo Higuchi, executive]

In 2014, we started the second 5-year midterm plan, and we have about 5 months left to complete the plan. Thanks to the growth drivers such as global products in pharmaceutical business and the achievement of more than 10% operating profit in nutraceutical business, we successfully diversified our profit structure, which was our biggest sin in the midterm plan. We are backing growth trajectory.

As a result, we now have good basis for midterm growth to enable further investment for innovation towards sustainable growth beyond 2030. Today, I will explain our efforts in this respect as well.

I have 3 topics -- items, to cover today. First, summary of FY 2018 guidance; second is progress and outlook in pharma business, acquisition of Visterra and investment cycle towards sustainable growth; then progress in products development and global business expansion in nutraceutical business, or NC business.

This slide shows in the beginning of the year, our summary of FY 2018 guidance in order to realize sustainable growth, which is our biggest theme, we have executed business in accordance with this plan. Various initiatives were implemented to ensure midterm growth and strengthened business space beyond 2030. We now enjoy great results, which I would like to share with you. First, in the pharma business. First, let me explain progress towards growth acceleration of the new product group. New products achieved 103.3% of the first half sales plan. Major factors are shown here.

Samsca/JINARC contributed in Japan as an ADPKD drug and its scientific value was recognized in the academic guideline as a directive for acute heart failure.

REXULTI has increased thanks to effective marketing. Domestic sales of new products are also very positive, including Abraxane, Bilanoa and E Keppra. Reflecting these factors, annual sales plan was revised upwards by JPY 10 billion to the guidance of JPY 415 billion.

Next, I will explain measures to accelerate growth in FY 2019 and beyond. We continue to appeal usefulness of ABILIFY MAINTENA for bipolar disorder in the U.S. to expand LAI market in bipolar area.

We are currently developing a 2-month formulation to enhance convenience to the patient. REXULTI was approved on July 26 this year in Europe. Going forward, together with Lundbeck, we will start negotiation with reimbursement health authorities to aim for launching within 2019. JYNARQUE in the U.S. is now prescribed since the end of May as an ADPKD drug. We will continue to promote optimal use of this product under strict safety measures to make sure of its contribution as an only available ADPKD drug.

As for LONSURF, its positive Phase III study results of third line therapy in gastric cancer and Phase II study results of treatment naïve and retractable metastatic colorectal cancer patients who are not eligible for intensive chemotherapy were reported at ESMO GI in June this year.

For gastric cancer indication, we are preparing the filing for approval in Japan, U.S. and Europe. You can see that the new products group to lead future growth is making steady progress. We will continue to implement priority measures to make sure of achieving goals and maximizing product value for this year and beyond.

Now on the theme of building basis for further sustainable growth, I will explain achievements in FY 2018. FY 2018 plan included active R&D investment and strengthening new pipeline assets in core therapeutic areas. As you can see in CNS oncology and renal cardiovascular areas, much was achieved. In particular, as one of the measures to strengthen early phase development in the renal cardiovascular area, we announced acquisition of U.S.-based Visterra located in Boston in July, which I will explain later. We will, of course, continue to maximize value of in-house developed products.

At the same time mainly in the core therapeutic areas, we will seek opportunities for active investment in promising compounds and new technologies, which can create synergetic effect when combined with our own know-how assets to make sure our sustainable growth.

The slide shows the planned time frame for completion of clinical studies of key pipeline assets to accelerate a mid- to long-term growth.

As you can see from 2018 to 2020, we expect many Phase III studies to be completed. In July, we announced the results of SGI-110 Phase III results for the treatment naïve AML, acute myeloid leukemia, did not show statistically significant difference, but we will continue to analyze studies for relapsed/refractory MDS, or myelodysplastic syndrome, and AML.

On the other hand, as shown in the previous slide, 2 clinical studies of LONSURF had positive results. ReCor Medical study was positive and JYNARQUE was approved. These projects and others did show some expected results and plans that are in progress. We will continue to pay careful attention in development as we advance clinical studies.

Now let me explain acquisition of Visterra, which is located in Boston. When we announced the second midterm management plan, we showed our basic investment policy. We explored various possible deals with long-term investment policy in which we should be able to share management philosophy, human resources, products and technologies, and create new value. Visterra is a venture company with a philosophy of challenging to the target that are not adequately addressed and explore causes of how to treat diseases. And this is exactly in line with Otsuka's policy, and we decided to acquire this company.

In this acquisition, there are 3 points of significance. First is cutting-edge technologies, Hierotope platform that is the platform of antibody drug discovery. With this drug discovery technology, we will possibly develop antibiotic drugs against the targets, which has been considered difficult to produce. Concerning this technology, Natsume will give you more explanation later.

Second point is early-stage program expansion. We think that it will be leading to the enrichment of RE stage program, which can make contribution to the growth after 2030. Especially, in renal system, there are 3 unique exploratory research. And VIS649, that Phase I will start this year. In total, 4 early-stage programs were acquired.

Following Samsca/JINARC and vadadustat we shall be able to commercialize those pipelines and we will actively proceed our R&D. The third is synergies with existing discovery technology. The technology can be applied in many different research areas. And therefore, we will be able to generate new possibility in existing research areas. Especially Astex, located in Cambridge in the U.K., having a fragment-based drug discovery technology, we have common in discovery strategy, they became a member of Otsuka Group. And we will strive to develop innovative new drug candidates with them.

Now I'd like to talk about our efforts in Otsuka's innovation generation. Otsuka Group, the traditionally run business with focus on innovation created by partnership and collaboration. And we provided innovative products and solutions. In this midterm plan -- time period, working together within the group, we also actively collaborated forming alliances and acquisitions. Our targets are diverse. Cardiovascular renal system, CNS, immunology regenerative medicine, digital solution and protein structure analytical technologies. Resources and [indiscernible] with care in a small field, so to speak.

With these new technologies, products and findings that we acquire through the collaboration with alliance partners, as a result, Otsuka group established research platform assets. They can be connected organically, which broaden ideas and we'll be able to make a leap and bear fruits through innovation in a big field.

Next, I'd like to talk about investment cycle towards sustainable growth. As we explained, we had been steadily maximizing the value of global products. As a result, we could establish midterm growth foundation. With this stable revenue foundation, we've been able to enrich the late-phase pipeline and expand them. And thus, we have built up a growth foundation beyond 2020. With this foundation building, we can look far into the future, with a view of the growth beyond 2030. We are investing in strengthening discovery platform to generate innovation for growth. Making use of in-house and outside network to grasp social issues and continue to create new category, we would like to review the opportunity to create synergies with Otsuka Group and when we would like to be prepared to make a steady movement forward.

Our ambition is to become an indispensable company to contribute to health of the people in the world. To that goal, we'd like to continue to create innovation and provide solution to unmet medical needs.

Next, I'd like to talk about nutraceutical business update. I would like to discuss nutraceuticals business progressive status, in the second midterm plan. The big theme is to accelerate global expansion and foster new products. Reviewing the business assets that support value chain, we set a goal to maintain operating profit margin of 10% or higher. Each key measures were steadily implemented and we achieved those goals early.

The next stage of this is business scale expansion and revenue growth, we have been discussing this and as a part of that efforts, we have been proposing new solutions, introducing new products. We will have a global operation of domestic plans. Also, we have been challenging to new category with new businesses. And thus, we have been expanding our business scale and trying to achieve revenue growth. I'd like to introduce some of those.

The progress in the first half of 2018, nutraceuticals business, 2 new solutions were provided. One is POCARI SWEAT [indiscernible] as a heat disorder countermeasure, we focused on deep core body temperature and POCARI SWEAT [indiscernible] was launched to cool down the body from the core. Second is EQUELLE [indiscernible]. Not just superficial beauty, but from the inside of the body, women's beauty and health is supported. This is a new proposal to support the fundamentals of beauty and health. We will continue to propose Otsuka's unique solutions to the consumers' yet-to-be-imagined needs.

Next, I'd like to talk about the progress status with the group operation in the second term midterm plan. As we explained in Japan, we provided new-to solutions. In Asia, in Singapore, where people are more conscious about health, ion water was launched. In Indonesia, new category beverage, Oronamin C, local production system is now in place and it's launched. In North America, Nature Made continued to outperform the market in terms of growth rate and driving the nutraceuticals business. Daiya Foods, we acquired last year, they're providing a plant-based products to mainly health-conscious people and it's growing steadily. That's all about the progress status of new the nutraceuticals business.

And maintaining operating margin profit 10% or more and highly profitable organizational system, we'd like to continue making efforts to expand our business scale.

This is a summary slide. As we discussed in the beginning towards sustainable growth. The foundation construction is our theme and we made various efforts, and I shared the progress status of FY 2018. All those 5 items mentioned this year have been making steady progresses. Especially our efforts toward sustainable growth beyond 2030, we could lay the foundations.

We continue to take those measures so as to establish firm management base to enable sustainable growth and would like to create virtuous cycle for innovation. Thank you very much.

[Kuniaki Natsume, executive]

I will explain R&D updates in pharmaceuticals business. I will cover these 3 items. Because of time constraints, I will focus on the topics. We have made progress, including generic approval in the U.S. and REXULTI approval in Europe as you can see, we have made great progress. Stage-absent discontinued projects are shown on this slide.

An additional Phase III study of brexpiprazole started in June for treating agitation associated with dementia of Alzheimer's type in the U.S. This is a comparative study of 3 arms, including high-dose and low-dose brexpiprazole arms and placebo. Primary endpoint is average change in the CMAI total score from baseline, the same as before. We will make full use of these past Phase III studies to deliver the product to the patient as soon as possible.

Now I'll explain clinical study results of TAS-102 or product named LONSURF. On the left-hand side, you will see that TAS study. And is a global Phase III study to evaluate third line treatment in patients with unresectable gastric cancer. TAS-102 showed significantly better results compared to the placebo in OS or overall survival and PFS or progression-free survival. We plan to use the study results to follow an application of additional indication to treat unresectable gastric cancer in Japan, U.S. and Europe.

TASCO-1 study is a Phase II study for the first line unresectable metastatic colorectal cancer in patients, who are non-eligible for intensive chemotherapy compared to the standard therapy of capecitabine and bevacizumab combination. TAS-102 and bevacizumab combination showed favorable results in both PFS and OS.

Now I want to explain Hierotope platform and antibody engineering technology by Visterra. Process of antibody drug discovery requires much engineering expertise, facilities and time to generate [indiscernible] by immunizing antigens to obtain target antibodies. Hierotope Platform technology can design antibody candidates [ in-silica ] first the technology identifies, [ in-silica ] a target epitope called Hierotope. This is an area where amino acids keep a strong 3D structure in the protein molecule. By using the antibody library, antibody candidates are specifically bind to the identified target or Hierotope as such to prepare and select it. This technology does not depend on conformational information of antigen protein, making it possible to aim at promising targets for which we could not design antibodies in the past.

ReCor Medical is developing ultrasound-based renal denervation device system. Let me explain about this.

By ablating a part of renal sympathetic nervous system of hypertensive patients, this new therapy is expected to control sympathetic overactivity to lower blood pressure or BP. The catheter-based approach percutaneously ablates sympathetic nervous system surrounding renal arteries by thermal sources such as radio frequency or ultrasound.

Many of the features of those product under development is its ultrasound energy, which can reach deeper than the conventional system and shorter time for ablation is possible. Another feature is the catheter balloon, which is cooled from inside by circulating water to protect lining of blood vessels and ablation can be done in a doughnut-shaped circumferential manner with the size of 1 to 6 millimeters.

The SOLO study is for mild to moderate hypertensive patients in the U.S. and Europe, data and average systolic pressure has shown significant improvement for the denervation group compared to the sham operation. In Japan, study is ongoing for treatment resistant hypertensive patients with a history of using 3 or more antihypertensives.

The slide shows projects planned for MDA and Phase III studies in FY 2018. SGI-110 Phase III top line results were reported on July 31 for treatment naïve AML in the co-primary endpoints of OS and CRO complete remission, we were unable to show a significant difference. We are currently analyzing the results in detail. This concludes my updates. Thank you very much.