Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2019-Q2

[Yuko Makino, executive]

Let me explain our consolidated financial results FY 2019 for second quarter. Please look at page 3. I will cover these 4 topics today. First, let me give you an outline of consolidated financial results of the second quarter of FY 2019. Sales of 4 global products of the pharmaceutical segment increased by 36.6% year-on-year and exceeded FY 2019 forecast with its progress rate at 105.6%, significantly contributing to total revenue growth. Business profit before R&D expenses grew by 25.9% year-on-year, also exceeding FY 2019 forecast with progress rate at 108.6%.

In addition, R&D investment towards sustainable growth increased by 14.6% year-on-year, with clinical trials progressing as scheduled. As a result, business profit was JPY 97.7 billion, grown by JPY 28 billion year-on-year with progress rate at 126.8%, significantly exceeding FY 2019 forecast.

Next, let me explain the variance year-on-year. Net profit attributable to owners of the company increased by JPY 3.5 billion only due to transient gain from ReCor Medical merger booked in the first half of FY 2018. Excluding factors such as impairment loss and other income and expenses, business profit, indicating too earning power, increased by JPY 28 billion, and earning power is steadily growing.

Now let me explain the consolidated financial results by segment. Pharmaceutical segment drives the consolidated results with increased revenue by 12.7% and business profit by 48.4% over the previous period.

Next, let me focus on pharmaceutical and the nutraceutical segment. First, revenue of pharmaceutical segment. Sales of 4 global products driving the growth in the third midterm plan increased by JPY 46.4 billion, highly contributing to the revenue growth of the pharmaceutical segment. ABILIFY MAINTENA sales were JPY 48.6 billion, increased by JPY 7.1 billion through sustained total prescription growth in the United States, driven by additional indication of bipolar disorder. REXULTI sales were JPY 40.9 billion, increased by JPY 10.3 billion through total prescription growth in the U.S., driven by DTC for major depression and total prescription growth in Japan due to the lifting of total prescription limit in May 2019.

Samsca/JINARC sales were JPY 66.9 billion, increased by JPY 27.9 billion due to total prescription growth driven by awareness increase and the growth of aquaretic and ADPKD (Autosomal Dominant Polycystic Kidney Disease) treatment in Japan and the rapid growth of total prescription in the U.S. through disease awareness activities. From these main factors, revenue was JPY 438.6 billion, increased by JPY 49.4 billion.

Next, let me explain the business profit of pharmaceutical segment. As I have already mentioned, revenue growth by JPY 49.4 billion greatly contributed to the increase of business profit, driven by 4 global products of origin in Otsuka. On the other hand, promotion expenses increased by JPY 9 billion due to increased co-promotion expense associated with sales growth of REXULTI and ABILIFY MAINTENA. In R&D, clinical trial expenses increased for such projects as AVP-786, ultrasound ablation system for renal denervation, centanafadine, REXULTI, TAS-120 and Visterra pipelines. As a result, business profit was JPY 84.9 billion, increased by JPY 27.7 billion.

From now on, I will explain the nutraceutical segment. First, revenue. Functional beverages sales were JPY 57.7 billion, increased by JPY 2.8 billion due to POCARI SWEAT sales growth in Japan and overseas, driven by expansion of acceptance and understanding on the product value through appealing usefulness of hydration and promotional activities based on the needs and specifics of individual regions as well as due to sales increase of OS-1. Functional foods sales were JPY 42.4 billion, declined by JPY 2.7 billion, owing to a decrease of Nutrition & Santé sales due to increased competition and the ForEx fluctuation, albeit solid growth of plant-based food sales by Daiya Foods. Nutritional supplement sales were JPY 49.9 billion, increased by JPY 700 million, mainly due to growth of EQUELLE sales through new customer expansion. Although Nature Made had some sales decline in January through March 2019 due to transient factors such as restriction in distribution owing to severe winter, mainly in the Midwest in the United States, it is now recovering with growth in April through June, year-on-year, fulfilling the FY 2019 forecast. As a result, nutraceutical segment revenue was JPY 165.4 billion, increased by JPY 2.7 billion year-on-year, and overseas sales ratio was approximately 58%.

Now I'd like to explain main factors of variance. Revenue grew by JPY 2.7 billion, as was mentioned.

Advertising expenses and promotion expenses to BODY MAINTÉ, EQUELLE, and Daiya Foods, 3 Nurture Brands anticipated to contribute greatly in the third midterm plan, increased due to aggressive investment to them. From these factors, advertising expenses of nutraceutical segment increased by JPY 600 million, whereas promotion expenses declined by JPY 100 million, striking a good balance in investment. As a result, business profit was JPY 21.7 billion, increased by JPY 2 billion.

Lastly, let me share with you FY 2019 forecast. We have amended FY 2019 forecast upward due to sales increase of 4 global products, in particular JYNARQUE in the United States. Revenue is planned at JPY 1.4 trillion, increased by JPY 10 billion. Business profit before R&D expenses is forecast at JPY 395 billion, increased by JPY 22 billion. And business profit at JPY 175 billion, increased by JPY 27 billion. The factors contributing to the business profit amendment will be explained by Mr. Higuchi, the President and CEO, later.

This concludes the presentation of the consolidated financial results of the second quarter of FY 2019. Thank you very much for your kind attention.

[Tatsuo Higuchi, executive]

Now I would like to explain the current progress of our third midterm plan following the agenda in this slide. The plan just started this year, so this is an update on the performance for the past 6 months.

First, this is a summary of the FY 2019 plan. On July 30, we reported that the business and other types of profit for the first half exceeded the plan we announced at the beginning of the year. Given the fact that 4 global products in our pharma business, especially JYNARQUE in the U.S., have been doing better than planned, together with the slow progress in SG&A expenditure, we have made an upward revision to the 2019 full year plan, as Ms. Makino has just explained.

In the next slide, I will explain the factors behind the revisions to our business profit estimate. This is a factor analysis of the revisions to our business profit. The full year business profit estimate at the beginning of the year was announced as JPY 148 billion, but we have revised this upward by JPY 27 billion to JPY 175 billion. There are 2 reasons for this. The first reason is that we experienced higher-than-expected sales with our 4 global products which allowed us to revise the full year sales estimate upwards, with increase in gross profit by JPY 22 billion. The second reason is that the review of SG&A and R&D expenditures resulted in an upward increase of JPY 2 billion and JPY 5 billion, respectively, whereas the share of profit of associates was revised downward by JPY 2 billion.

As for the revisions in the second half alone, the main change is attributed to the upward sales of JYNARQUE in the U.S., which increases the gross profit by JPY 9.7 billion. SG&A expenditure increased slightly from the original plan due to increased sales promotion expenses in accordance with estimated sales growth and additional DTC investment for REXULTI growth. These are the main reasons for the upward revision to the full year plan. We will move ahead toward achieving the full year target of JPY 175 billion.

From now, I will discuss the current status of our pharmaceutical business. This shows the current status of our 4 global products, the main drivers of growth in the third midterm plan. The total sales of Otsuka-originated 4 global products stand at JPY 173.1 billion, up by JPY 46.4 billion, with growth rate of 36.6%. These products got off to a great start with an achievement rate of 105.6%. ABILIFY MAINTENA, REXULTI, Samsca/JINARC and LONSURF, all 4 products achieved sales of more than 100% of the plan. Given such a robust sales trend in the first half of the year, we made an upward adjustment to the full year sales plan by JPY 20 billion to JPY 364.5 billion. The main driver of this adjustment is the strong sales of JYNARQUE in the U.S., of which I will show you more details in the next slide.

We are excited to know that JYNARQUE is now contributing to more patients than we expected in the U.S. without any issues related to REMS, a system to ensure the safe use of the drug. The cumulative number of new patients is increasing at faster pace than we initially anticipated early this year.

Based on the current situation, our full year estimate has been increased by JPY 16 billion from JPY 28.5 billion to JPY 44.5 billion in the U.S. We will continue our activities related to disease education and the clinical data provision, while ensuring that safety measures are in place so that product can further contribute to ADPKD treatment and maximize its value.

Next is the update on our oncology business. As was previously explained, our oncology strategy in the midterm plan is to put together the strength of our assets to maximize the business value. In addition to the recent positive Phase III readout for ASTX727, we also announced the commercialization of SGI-110 and ASTX727 in North America by TAIHO ONCOLOGY and TAIHO PHARMA Canada. We will advance such collaborations among the group companies to take advantage of our individual strengths.

LONSURF, a mainstay in our oncology business, enjoys an increase in prescriptions for gastric cancer after U.S. approval in February this year. In Europe, the product received a recommendation for approval from the CHMP. In Japan, a positive opinion was granted by the second committee on drugs of MHLW in August. Our efforts continue to maximize the business value by building up a strong R&D and sales and marketing platforms that can generate innovative new drugs.

This shows the completion time line for major clinical development programs that will accelerate our mid- to long-term growth. As a point of interest, the Phase III clinical trial for AVP-786 in agitation associated with Alzheimer's disease, the most important program for our future growth, is scheduled to be completed in September this year. We are executing the study in a careful and expeditious manner, hoping to bring about the best outcome from our efforts.

From now, I will explain the current status of our nutraceutical business. This is the slide that was presented in the third midterm plan announcement presentation. Our major strategy for nutraceuticals is to expand the sales by nurturing new products, accelerating global expansion and promoting new businesses, including plant-based products.

In particular, the focus of our plan is to grow sales as well as business profit, stemming from our 3 major brands: POCARI SWEAT, Nature Made and N&S product; and 3 Nurture Brands: Daiya products, EQUELLE and BODY MAINTÉ, all of which are key drivers of our nutraceutical business.

From the next slide, I will show you the progress of this major policy, thus far. First, the global expansion status update for POCARI SWEAT. We are aggressively working on further business expansion in growing Asian countries, where we have been investing during the second midterm plan period. In Asia, we made investments for establishing a new growth platform for enlarging business scale as well as maintaining a high share in the sports drink market in Indonesia. And as a result, the percentage of sales volume in growth countries, excluding Indonesia, to the total POCARI SWEAT sales overseas rose from 18% to 38%. Sales volume in growth countries in the first half of 2019 achieved a solid start, with an increase of 8.2%.

In the coming 5 years of the midterm plan, we will further reinforce our efforts to expand the business in previously invested countries, such as Vietnam and the Philippines, so that we can expect profit contributions. Capitalizing on our unique marketing strategy, we will continuously take on approach that enables us to gain the understanding of consumers on our product concept and create more users.

Next is the status of our 3 Nurture brands. Specifically, I want to focus on Daiya Foods, a new business pillar in our third midterm plan. The plant-based alternative market in the U.S. continues to show high growth in 2019. In this environment, Daiya is maintaining a growth rate of 28%, surpassing the market growth. Among the plant-based alternative market, the cheese category shows quite high growth of 19%. Taking advantage of this positive trend, we will implement aggressive marketing activities by positioning cheese alternative and other related products as our growth drivers to establish solid status as plant-based category leader.

This shows the status of our 3 Nurture brands in Japan. In the first half of 2019, domestic sales rose by JPY 3.1 billion, especially EQUELLE and BODY MAINTÉ, which were invested in heavily in the previous plan period to be positioned as current growth drivers are contributing to the sales growth in Japan. Sales of EQUELLE, which contains equol as a main ingredient, has gained awareness, supported by health seminars for women and others. BODY MAINTÉ was launched nationwide in October 2018 as body conditioning drink for various daily activities. Both of these products are pushing up sales in Japan. That is the progress update on our nutraceutical business.

Lastly, this is a summary of my talk today. Given our current strong business performance, we have made an upward revision to the full year plan for 2019. To realize the plan, we will steadily work on focused measures and resolve the business challenges we are facing. For both our pharmaceutical and nutraceutical businesses, we will implement measures of key focus and take a hard look at sustainable growth beyond 2030 as well as short term achievement of the plan, thus reinforcing our business platform and improving our corporate value further.

This concludes my presentation. Thank you very much for your attention.

[Yuko Makino, executive]

Now I'd like to give you an update on pharmaceutical development. I will discuss these 3 topics today. As to key development progresses in the second quarter of FY 2019, the first item, ENORAS liquid for enteral use, concentrated enteric nutrition, was listed in May and launched in June in Japan. This product is designed to supply energy and nutritional elements efficiently with small volume. One package contains 300 kilocalorie and about 1/3 of the recommended daily amount of vitamins and trace elements defined in the Japanese dietary standard.

The second item, brexpiprazole, initiated its Phase III study in China in May for schizophrenia indication. We will work on to make it available soon for patients in China.

The third item, OPA-15406/difamilast, initiated its Phase III study in Japan in April for atopic dermatitis in adults and children. It's formulated as an ointment containing PDE4 phosphodiesterase inhibitor as the active ingredient. As corticosteroids and tacrolimus are the only topical treatments available for atopic dermatitis patients in Japan, this will give them another much-awaited treatment option with PDE4 inhibition, a new mechanism of action.

In addition, LONSURF, in the footnote, as has been explained already, received a positive CHMP opinion on July 25, local time. With this, let me announce also that the approval is anticipated to be given in the third quarter.

Now let me move on to the topic on the next page. Astex has become an Otsuka Pharmaceutical subsidiary, having been acquired in 2013. It's an R&D-oriented company with clinical development in California in the United States and a drug discovery lab in Cambridge, U.K. Unique fragment-based drug discovery technology is a strong advantage. It has generated promising compounds in oncology, some of which have been licensed out and already approved overseas. Moreover, these 4 compounds are now in clinical stage as Otsuka-originated compounds. As has been mentioned, intergroup collaboration has been expanding, beginning to see progresses in the drug discovery research with Otsuka Pharmaceutical and TAIHO PHARMACEUTICAL. We will further cooperate in the U.S. sales and marketing in the future.

Now let me introduce to you ASTX727 Phase III study in relation to Astex. This is the world's first oral DNA methylation inhibitor containing decitabine and DNA methylation inhibitor cedazuridine, its metabolizing enzyme, and cytidine deaminase inhibitor. The study compared this compound with IV decitabine as an active comparator and treatment naive in intermediate to high-risk MDS patients. Primary endpoint was the AUC comparison between ASTX272 (sic) [ ASTX727 ] arm and decitabine arm for 5 days, and the equivalence was demonstrated. We will work on the preparation, aiming at the submission for approval in the United States by the end of this fiscal year.

Lastly, I'm sharing with you the progress of major projects for NDA submission and advancing to Phase III scheduled in FY 2019. Those in red are the advancement achieved during this term. And also, please find attached appendix containing major development projects by therapeutic areas.

This concludes my presentation on pharmaceutical development update. Thank you very much for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]