Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Analysis

Strong Financial Growth with Upward Revisions

In the second quarter of FY 2024, the company saw significant growth with revenue increasing 17% to JPY 1,109.8 billion and business profit up 37.8% to JPY 213.6 billion. Strong performance in pharmaceutical and nutraceutical businesses fueled this growth. The revenue forecast for FY 2024 has been revised upward by JPY 175 billion to JPY 2,315 billion, and business profit is now projected to be JPY 390 billion. Notably, net profit is expected to double compared to 2023, reaching JPY 240 billion. The company also announced a JPY 50 billion share repurchase plan for FY 2024.

Financial Performance

In the second quarter of FY 2024, the company showed robust financial performance. Revenue grew by 17.0% to JPY 1,109.8 billion year-on-year, significantly driven by strong sales in the pharmaceutical and nutraceutical sectors. Business profit saw a notable increase of 37.8%, reaching JPY 213.6 billion, despite an impairment loss related to AVP-786. The company's net profit also grew by 5.1%, benefiting from favorable finance income.

Revenue Drivers

The growth was largely fueled by the company's strategic pharmaceutical and nutraceutical products. In the pharmaceutical segment, key contributors included ABILIFY MAINTENA, JYNARQUE, and Core 2 products such as Rexulti and LONSURF. The nutraceutical business, segmented into categories addressing climate & environmental risk, women's health, and healthier living, saw revenue increases across all areas. Notably, the For Women's Health category surged by 56.9%. POCARI SWEAT and Nature Made also performed well in international markets.

Cost Management

The company effectively managed its costs, resulting in a 1.9 percentage point improvement in the cost of sales ratio. However, SG&A expenses increased due to higher co-promotion costs for products like ABILIFY MAINTENA and REXULTI, as well as increased advertising. R&D expenses decreased slightly, excluding currency fluctuations, following the discontinuation of AVP-786 development and the completion of REXULTI's Phase III PTSD studies.

Business Segments

The pharmaceutical business remained strong, with substantial contributions from ABILIFY MAINTENA, JYNARQUE, and LONSURF. Overseas sales were particularly vibrant, especially for POCARI SWEAT in Asia. The nutraceutical business grew by over 20%, achieving JPY 271.8 billion in revenue, surpassing initial plans by 7%.

Outlook for FY 2024

Given the strong performance in the first half of the year, the company revised its full-year forecast upward. Revenue expectations were increased by JPY 175 billion to JPY 2,315 billion, and business profit projections were raised by JPY 60 billion to JPY 390 billion. The company anticipates a net profit of JPY 240 billion, nearly double that of the previous year.

New Developments

The company announced an acquisition deal aimed at enhancing its drug discovery technology through a Boston-based firm, promising detailed insights in a subsequent briefing. Moreover, the company has made strides in its Phase III trials for various products, including bempedoic acid for hypercholesterolemia and brexpiprazole for PTSD, which shows promising results.

Strategic Initiatives

The fourth midterm business plan emphasizes sustainable growth through ventures into new markets and tackling social issues. The plan includes advancing the 'Next 8' product pipeline, which holds potential growth beyond the fifth midterm plan. Products like REXULTI, especially for PTSD, and sibeprenlimab are in critical stages of development.

Shareholder Returns

The company reaffirmed its commitment to rewarding shareholders, announcing a share repurchase plan of JPY 50 billion to be completed by December 2024. This move is in line with its policy of maintaining strong shareholder returns while continuing to look for additional ways to enhance shareholder value.

Earnings Call Transcript 2024-Q2

[Yuko Makino, executive]

Now I'd like to present the consolidated financial results for the second quarter of FY 2024. These are the three items I will cover today.

First, I will explain an overview of our consolidated results. In the second quarter of FY 2024 as in the first quarter, both revenue and business profit grew significantly year-on-year, led by strong sales in pharmaceutical and nutraceutical businesses. As a result, revenue increased 17.0% to JPY 1,109.8 billion (sic) [ JPY 1,108.9 billion ] and business profit increased 37.8% to JPY 213.6 billion.

Operating profit had an impact of the impairment loss on AVP-786, but net profit increased 5.1% due to the impact of finance income and et cetera. So as a result, overall revenue and profit increased.

Also shown on Page 15 of the reference material, operating cash flow before R&D investment also increased by approximately JPY 20 billion from the previous year. As announced on July 26, results of the first half of the fiscal year exceeded the revised plan announced in May.

Next, prior to the detailed explanation of business profit, I would like to briefly explain the new categories of pharmaceutical and nutraceutical businesses, which have been newly set up in the fourth midterm plan.

In pharmaceutical business, Rexulti and LONSURF are classified into Core 2, which are positioned as growth drivers for fourth MTMP. The next-generation growth drivers are categorized as Next 8, and Kiaqali and Pluvicto are called Plus 2”, from which royalty income is expected.

Nutraceutical business is classified into three categories by social issue; which are For Climate & Environmental Risk, For Women's Health and For Healthier Life. We are engaged in the business to deal with social issues.

Now, I will explain the differences in business profit compared to that in the same year from the previous year. Revenue has increased due to the growth of Core 2 products, ABILIFY MAINTENA, and JYNARQUE in pharmaceutical business and the contribution of all three categories in Nutraceuticals. The overall cost of sales ratio improved by 1.9 percentage points due to the sales growth of home-grown assets such as Core 2 products, licensed-out assets in Plus 2 and others in pharmaceutical as well as the improvement of product efficiency and the product mix in Nutraceuticals.

SG&A increased due to the increase in co-promotion expenses resulting from the sales growth of ABILIFY MAINTENA and REXULTI. And in addition, advertisement and promotion expenses increased due to the promotion of Bonafide product and AD agitation indication for REXULTI.

The overall R&D expenses decreased, excluding the impact of ForEx fluctuation, due to the discontinuation of development of AVP-786 and the completion of REXULTI Phase III studies for PTSD, despite an increase in R&D expenses for sibeprenlimab and ulotaront.

As a result, business profit increased 37.8% year-on-year to JPY 213.6 billion, and even excluding the impact of ForEx, the business profit increased by JPY 40.3 billion.

Pharmaceutical business is growing steadily as a whole, mainly with the Core 2 product, key growth drivers in the MTMP period, as well as ABILIFY MAINTENA and JYNARQUE. Revenue for LONSURF achieved a significant increase as the bevacizumab combination therapy for colorectal cancer has been recommended in the treatment guidelines in multiple countries.

As for other main products, ABILIFY MAINTENA and JYNARQUE continued to support stronger growth. The total of upfront milestone, and royalty revenue decreased to JPY 41.8 billion due to the lower rate -- lower sales milestone income than previous year despite the increase in royalty income, mainly from Kisqali and Pluvicto.

Sales in Japan increased by 6.1% due to growth in clinical nutrition products and other products in Japan. As a result of these, revenue in pharmaceutical business increased by 17.9% year-on-year to JPY 766.7 billion. We also achieved 108% of our initial plan.

Next, I will explain the revenue in Nutraceutical business. Nutraceutical business has introduced a newly classified three categories by social issue since the start of the fourth MTMP. And revenue increased in all three categories in the first half of this year, especially led by For Women's Health.

Revenue in the For Climate & Environmental Risk increased 13% year-on-year, mainly due to the growth of POCARI SWEAT overseas. Revenue in the For Women's Health increased 56.9% year-on-year as sales of Bonafide has contributed to our revenue from the beginning of the year. We will work to provide unique solutions For Women's Health according to their symptoms, which is major social issues.

Revenue in For Healthier Life category increased 25.5% year-on-year. Thanks to promotion of sales activity, leveraging the strength of Nature Made brand and the spread of Mega Food brand.

By area, revenue in overseas market, where we expect growth account for more than 70% of the sales, and show an increase of 27.9% year-on-year. In particular, sales of Bonafide product and Nature Made in the U.S. and POCARI SWEAT in Indonesia and other Asian countries have contributed significantly. As a result, revenue in Nutraceutical business achieved more than 20% growth rate to 271.8% (sic) [ JPY 271.8 billion. ] Achievement rate versus the initial plan is 107%.

Here is the consolidated financial forecast for FY 2024. We have revised the full year plan announced at the beginning of the fiscal year to take into account the strong progress in the first year -- first half results of pharmaceutical and nutraceutical businesses, the impact of ForEx fluctuation, and impairment loss on intangible assets already disclosed.

Revenue is revised up by JPY 175 billion to JPY 2,315 billion and business profit is revised up by JPY 60 billion to JPY 390 billion.

As for operating profit, although we recorded impairment loss, we expect it to be more than JPY 300, billion due to the steady growth of our business. As a result, we have revised the plan for net profit to JPY 240 billion, which is almost in line with the initial plan and approximately double the net profit of 2023. We will continue to maintain strong momentum in the Pharmaceutical and Nutraceutical segment and aim to achieve the revised 2024 full-year plan.

And please refer to the appendix for a major financial information. That concludes the presentation on the consolidated results for the second quarter and the forecast of 2024.

[Tatsuo Higuchi, executive]

Thank you very much for attending this session despite your busy schedule and also under the very hot weather. This is breaking news. And I would like to mention that. This is a new development matter. We have been negotiating the acquisition of a company in Boston for drug discovery technology. I have just got the information.

We have made a press release at 1:00 this afternoon. And for the details of this acquisition in this matter, we would like to take up a time tomorrow to discuss specifics about this matter.

So, I would like to start my presentation. I would like to talk about the progress and the outlook for FY 2024. First of all, I would like to explain an analysis of factors for changes in business profit in FY 2024. We expect the gross profit to increase significantly due to the strong performance of pharmaceutical and nutraceutical businesses. SG&A expenses are expected to increase due to the aggressive growth investment in pharmaceutical and nutraceutical businesses planned in the second half of 2024.

Although R&D expenses fell short of its forecast in the first half of this year, we expect the progress to be as planned, excluding the impact of ForEx rate fluctuations due to an increase associated with the contract change with Sumitomo Pharma.

Based on these results, business profit was revised upward from JPY 330 billion to JPY 390 billion and is expected to JPY 364.6 billion, even after excluding the impact of ForEx impact. This business trend is a result of evolving previous investment into a solid foundation by repeating the cycle of steady profit growth that we have built on turning into new growth investments.

From the next slide, I will explain the specific progress of the pharmaceutical and nutraceutical businesses in terms of our business scale expansion strategy and our contribution to social issues as a total health care company.

From here, I will update you on the pharmaceutical business. First, I will explain the progress of the pharmaceutical business. Global 10 Plus 2, which are positioned as the growth drivers of the fourth MTMP are making steady progress, mainly on Core 2 products. We plan to revise up the revenue forecast for FY 2024 by JPY 30 billion to approximately JPY 481.5 billion.

The strategic framework for the fourth mid-term business plan is to achieve sustainable growth by taking on the challenge of new businesses. And we are focusing on providing value in new markets such as AD agitation in which there have been no approved drugs.

In addition, we will steadily commit ourselves to tackling the issues for the future. In particular, we will advance development of Next 8 product, assets expected to grow after the fifth midterm plan, and a new drug candidate discovered internally as well as the ones acquired from outside and nurture them as next-generation growth drivers.

And in the midterm plan, we also include the discovery and acquisition of the new drug discovery technology, as I mentioned at the very beginning. This is the progress of our major product in 2024. Progress since fourth midterm plan announcement is highlighted in red. For REXULTI, the sNDA for PTSD has been filed in the U.S., where no new drug have been launched for more than 20 years and great unmet needs for treatment remain.

As explained in the fourth midterm plan, the patient enrollment of sibeprenlimab has been completed in March. We will conduct the clinical trials with extreme care so that the positive results can be reported. With regard to the uRDN, renal denervation, we are currently working on a wide range of activities for reimbursement and have seen good progress.

One example is that the actual treatment for patients under the global GPS, Global Paradise System Registry was initiated in July this year. In addition, we are working on expansion of our pipeline beyond the Core 2 and Next 8 product, such as addition of Asian territory, including Japan, to the license agreement for donidalorsen and the new alliance with Arcus Biosciences in oncology business.

Next, I would like to talk about REXULTI's sales status for AD agitation in the U.S. According to the data as of April this year, the prescription for AD agitation has been growing strongly since this additional indication was approved in May this last year. The number of prescriptions for AD agitation is steadily growing, which account for approximately 13% of REXULTI's total prescriptions for all indications, which was only 4.7% before the approval.

Aiming for further growth, since July this year, we have restructured our commercial organization in the U.S. to strengthen sales activity and promoted disease awareness and launched a new DTC advertisement campaign for MDD.

In this manner, we'll ensure future growth of product that by addressing promptly and appropriately to all the potential issues we can think of.

Next is regarding ulotaront. One of the major factors hindering schizophrenia patients from reintegrating to society is the problem of side effects caused by the medications they take. Based on the results of the Phase II study, ulotaront is expected to have a high safety profile, almost comparable to that of placebo in terms of adverse events, which remain an issue for existing drugs.

As for the development for schizophrenia, we plan to conduct one 3-arm comparative Phase III study that has been agreed with the U.S. FDA in order to maximize the benefits of innovative MOA that this asset brings.

As we have made a paradigm shift in the treatment of schizophrenia with ABILIFY and REXULTI, we will continue to take on challenges with our unique approach to create new value that leads to well-being for patients.

This is the completion time line for major Phase II and Phase III programs. We will continue our utmost efforts to make sure that our late-stage assets will successfully reach the market and drive future growth.

This concludes the explanation of the Pharmaceutical business.

Next is an update on the Nutraceutical business. First, let me talk about the progress of our revenue in nutraceutical business. With regard to the sales plan for this year, nutraceutical business as a whole is expected to increase approximately 14% from the previous year to JPY 553 billion, thanks to the contribution of the new categories set out in the fourth MTMP. And we are working on solving social issues from a global perspective. In the midterm plan, we will continue to pursue global expansion, a high-margin strategy based on brand value and creation and development of next-generation products, and work to step up the business scale further.

In recent years, a variety of social issues have become apparent, and we made it clear in the fourth midterm plan that we will focus on three social issues. For Climate & Environmental risk is a category that contributes to countermeasures against heatstroke and environmental impact caused by global looming.

The second is For Healthier Life. This is a category that responds to various life stages and needs of consumers. The third one is For Women's Health. This is a category that provides solutions to health issues specific to women, for which treatment satisfaction has been low for many years. By providing unique solutions to each of these three categories, we will realize mid- to long-term growth.

Next, I will introduce Bonafide, in the Women's Health category. Bonafide which joined the Otsuka Group in December 2023 has been developing products with the scientific evidence based on thorough clinical testing and extensive data collection.

Bonafide's products are made of natural ingredients that are hormone-free, and use unique patented formulation methods to maximize the effectiveness and recommended by many healthcare professionals. These features are consistent with our product concept that emphasizes the added value of the brand that we consider most important.

Since this category is highly specialized field, we will work to create a brand that is trusted by many consumers and easy to access while incorporating external opinions. Nutraceutical business has built a solid foundation by implementing a high-margin strategy based on brand value. While making aggressive upfront investment to further expand the business scale, we will continue to maintain a high profit margin structure and aim for further improvement through the growth of our major global products such as POCARI SWEAT and Nature Made.

That concludes the update on our pharmaceutical and nutraceutical businesses.

Lastly, I would like to make an announcement on the shareholder returns. As stated in the fourth mid-term business plan and in accordance with our shareholder return policy, we have decided to repurchase and eliminate our own share in FY 2024. The planned period for repurchase is until December 20, 2024, and aggregate amount of repurchase price is JPY 50 billion. With a stable shareholder returns as our basic policy, we will continue to consider additional shareholder returns in line with our business growth.

This is the summary of my presentation.

So that is the progress and the outlook for FY '24. As a breaking news, I mentioned at the very beginning of my presentation, we reached an agreement on the acquisition to acquire the new drug discovery platform of Otsuka Group. We made a press release at 1:00 pm today. And tomorrow, as is shown here, we are going to have an online briefing session at 1:00 p.m. tomorrow, in which we will explain details on this matter.

[Tomohiro Emura, executive]

Thank you for your attention. I'd like to present an update on the pharmaceutical development. I will cover these four topics today. This table shows a major development progress in the second quarter of FY 2024. As highlights, brexpiprazole sNDA filing for the treatment of PTSD has been accepted by the U.S. FDA as we previously announced. The PDUFA date for review completion is February 8, 2025.

A Phase III trial of bempedoic acid for the treatment of hypercholesterolemia conducted in Japan, met the primary endpoint. We are planning to file for approval in Japan by the end of this year.

The table below shows progress of the key projects. Brexpiprazole was approved in China for the treatment of schizophrenia. It's sNDA filing for treatment of PTSD has been accepted by the U.S. FDA, as I mentioned at the beginning. Phase II/III trials of ASTX030 for MDS, CMML, AML have been initiated in the U.S.

Development of AVP-786 for agitation associated with dementia due to Alzheimer's disease was discontinued for strategic reasons.

The first topic is brexpiprazole. It is under review by the U.S. FDA for PTSD indication. PTSD may occur in people who have experienced or witnessed a traumatic event, series of events or circumstances. About 40% of the patients don't respond to existing medications. No new drugs have been approved for more than 20 years. And there is a great need for drugs that have broad effect on four major symptoms of PTSD.

On the right, we have put together the results of the past three clinical trials for PTSD. The combination of brexpiprazole and sertraline met the primary endpoint in two studies.

In a pooled data analysis of the three trials, the combination of brexpiprazole and sertraline shows a statistically significant efficacy compared to sertraline alone. The safety results of the three trials were consistent with the previously obtained safety profile of brexpiprazole. We will continue to strive to provide treatment options for many patients and caregivers affected by PTSD.

The second topic I would like to introduce is the Taiho Pharmaceutical's in-licensed assets from Arcus Biosciences in the U.S.

In July of this year, Taiho Pharmaceutical acquired the exclusive rights to develop and commercialize quemliclustat, AB680, CD73 inhibitor, in Japan and Asian territories, excluding certain region and China.

In addition to the previously licensed in three drug candidates from Arcus that are currently in clinical development. This is the fourth option that Taiho exercised.

CD73, which AB680 targets, is set to be closely involved in immunosuppressive mechanism in the cancer microenvironment. AB680 is expected to reduce adenosine production, thereby weakening the immunosuppressive effect and promoting tumor cell death.

Arcus has been conducting clinical trials in previously untreated metastatic pancreatic ductal adenocarcinoma patients to evaluate the clinical efficacy of AB680 when added to the standard therapy. Although direct comparisons with other drugs cannot be made, the results suggest a very promising effect, leading to the initiation of a global Phase III, in which Taiho will also participate.

Advanced pancreatic cancer is known as a cancer with an extremely poor prognosis and treatment options are limited. The development of new drugs is eagerly anticipated. We will continue to work with our partners to deliver innovative treatments to patients as quickly as possible.

This slide shows the key projects scheduled for NDA/MAA and Phase III transition in 2024. The project in red are the ones whose NDA and MAA has been submitted and the stage has been advanced to Phase III.

The last slide showing the key progress under NDA and MAA review. The projects in red is the one that were approved in this year. For major development projects by therapeutic areas, please refer to the appendix.

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

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