Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2018-Q3

[Yuko Makino, executive]

I will now explain consolidated financial results up to the third quarter FY 2018.

Page 2, please. I will cover these 4 topics.

Page 3, please. Here is the summary of consolidated results up to the third quarter. Growth drivers in the second midterm plan, including global products and new drugs in Japan, enjoyed good growth, making a significant contribution to push up sales and operating profit.

We followed the 2018 theme of aggressive R&D investment for sustainable growth and still, we were able to increase operating profit. Operating profit before R&D investment significantly increased, exceeding our plan.

Page 4, please. I will now explain sales and operating profit by business segment. Our core businesses, pharmaceutical and nutraceutical, both increased in sales and profit to drive good performance on a consolidated basis. I will now explain each business segment.

Page 5, please. Let me start with sales in pharmaceutical business. Sales of 3 global products were up JPY 43.0 billion from last year. In the U.S., we continued to appeal ABILIFY MAINTENA's usefulness in bipolar disorder, which resulted in increased prescriptions and sales volume growth. REXULTI in U.S. communicated its usefulness in major depressive disorder through DTC advertisement. We enjoyed prescription growth better than our initial plan.

Samsca/JYNARQUE continued to grow in Japan for the treatment of cardiac edema. In the U.S., it was approved as an ADPKD drug and from June this year, it has been contributing to sales. Sales of JYNARQUE in the U.S. from June to September was JPY 2.3 billion.

As for long-listed products in Japan, because of NHI price revision and generic promotion policy of the government, Mucosta, Pletaal, and TS-1 together were down in sales by JPY 16.4 billion from last year. The decrease in others of JPY 21.9 billion was mainly from lower ABILIFY sales in Japan and U.S. As a result, overall sales went up by JPY 17.8 billion to JPY 590.3 billion from last year.

Next, I will explain operating profit. Page 6, please.

As explained in the previous slide, sales increased by JPY 17.8 billion, significantly contributing to boost profit. On the other hand, there were some negative factors, such as an increase in R&D expenses and other expenses.

R&D expenses increased by JPY 36.7 billion, mainly from increased development expenses of REXULTI and vadadustat. Vadadustat Phase III trial is ongoing for renal anemia, development of centanafadine and SGI-110 was revisited, which resulted in impairment loss. The others came mainly from REXULTI DTC and legal expenses.

On the other hand, positive factors in operating profit include lower impairment loss in ONZETRA Xsail and mark-to-market valuation gain of ReCor Medical Inc. compared to the valuation from the second quarter. As a result, operating profit increased by JPY 800 million to JPY 71.7 billion.

Page 7, please. Going beyond the third quarter performance, I will now explain progress and measures to accelerate growth of new drugs.

New drugs are growing very well. In August, we revised our plan for the year upward by JPY 10 billion to JPY 415.0 billion. This time, we increased our sales focus once again by JPY 5.0 billion to JPY 420.0 billion for the year.

I will now explain measures to accelerate growth in FY 2019 and beyond. For ABILIFY MAINTENA, we continue our efforts to expand LAI market in bipolar disorder.

REXULTI was approved in July in Europe. Together with Lundbeck, we are negotiating reimbursement with health authorities in Europe. We are preparing for launching in the first half of 2019.

JYNARQUE, as mentioned, was launched in U.S. as an only drug to treat ADPKD. It has started making contribution to the patient. We promote optimal use of this product under strict safety measures. The number of prescribing doctors and the patients on this drug is increasing, exceeding our plan.

Formulary listing by the payer is also making progress as planned. So far, U.S. JYNARQUE business has been going very well in every aspect. We revised our annual sales plan upwards to JPY 5 billion. From the next earnings IR meeting, we will disclose sales amounts of Samsca and JYNARQUE separately.

LONSURF was filed in Japan, U.S. and Europe for gastric cancer. In the U.S., LONSURF's value in the gastric cancer for the third and later lines was recognized and regained priority review designation. PDUFA date is set for February 2019.

As I have explained, for new products to drive our growth, life cycle management strategy will continue to be pursued. We will implement priority measures to achieve annual targets and maximize product value for the future, so that these new products would drive our performance furthermore.

Page 8, please. I will now explain NC business. First, about sales. Otsuka was an official partner sponsoring the sports event 18th Asian Games, in which POCARI SWEAT's functional features and brand value were communicated. We also appealed importance of rehydration and supply of electrolytes in the summertime in various regions to communicate the usefulness of our products in various promotion campaigns. The summer climate was also positive for our business. Sales volume for POCARI SWEAT significantly increased by 10.6% in Japan and 14.2% in overseas. On the other hand, Oronamin C sales suffered, due to the product recall in Japan and the introduction of excise tax in the Middle East for carbonated and energy drinks.

Although sales volume was impacted by the product recall, from October we are heading for the recovery trend. Thus, sales of functional beverages went down by JPY 800 million, but excluding the negative impact of IFRS 15, sales were actually up by about JPY 2.0 billion. Supplement business went up by about JPY 2.6 billion, thanks to Nature Made sales in the U.S., which outpaced the supplement market growth.

Others increased by JPY 12.4 billion. Daiya Foods sales were newly consolidated and awareness of OS-1 as an oral rehydration was enhanced. And hot summer also helped our business performance. EQUELLE showed steady growth. It is now better appreciated as a product to support women's health. As a result, NC sales as a whole went up by JPY 13.3 billion to JPY 256.6 billion.

Page 9, please. This slide explains factors impacting operating profit in NC business. As I have explained, sales went up JPY 13.3 billion from last year, thanks to increased sales of POCARI SWEAT and supplements.

Cost of sales increased by JPY 8.4 billion, due to the increase in sales and change in the product mix, including items newly added to the consolidation. Promotion expenses went down by JPY 4.0 billion, mainly because of the impact of application of IFRS 15.

Other expenses increased by JPY 4.0 billion, due to Oronamin C recall expenses and impact from newly consolidated Daiya Foods.

As a result, operating profit was JPY 36.5 billion. We are making progress as planned towards achieving record-high operating profit in the NC business.

Page 10, please. This is my last slide. FY 2018 forecast is revised based on the results up to the third quarter, including the impairment loss. Sales are now revised downward by JPY 10.0 billion from the initial plan, reflecting the current situation of functional foods and Oronamin C performance in NC business. Operating profit is revised downward by JPY 18.0 billion due to increased R&D expenses, including impairment loss from the change of SGI-110 development plan.

That's all for the consolidated results up to the third quarter FY 2018.

[Kuniaki Natsume, executive]

I will explain R&D update in the pharmaceutical business. Page 15, please. I will cover these 3 topics.

Page 16, please. One of the significant achievements in the third quarter was REXULTI being approved in Europe for the treatment of schizophrenia in adults in July. Negotiations of drug price and reimbursement is underway in European countries. Launching is planned in the first half of 2019 and onwards, depending on the timing of the drug price and reimbursement agreement in each country.

LONSURF was filed in August in Japan for the treatment of unresectable or recurrent gastric cancer. As events after the third quarter, LONSURF was filed in Europe in October. And in the same month, NDA was accepted in the U.S. for the priority review. PDUFA date is February 24, 2019.

Treatment of gastric cancer has made remarkable progress in recent years. But for patients with late-stage advanced cancer, intensive chemotherapy may not be possible because of complications and other reasons. LONSURF can be one of the new treatment options.

Page 17, please. Brexpiprazole moved to Phase III in Japan for adjunctive therapy for major depressive disorder in August and for agitation associated with dementia of the Alzheimer's type in September, respectively. We make most of our experience in the U.S. as we advance our studies in Japan.

BTK inhibitor TAS5315 moved to Phase II in August in Japan for the treatment of rheumatoid arthritis. BTK signaling pathway is associated with exacerbation of autoimmune diseases. By inhibiting this pathway, the compound is expected to show anti-inflammatory effect. Basic research have also shown repair effect on bone destruction, which is one of the unmet medical needs in rheumatoid arthritis. We will evaluate this effect in the clinical trial.

VIS410 is a monoclonal antibody designed by the proprietary platform by Visterra. Since Visterra was acquired by Otsuka in August, this antibody was newly added to our pipeline.

Visterra started a Phase II trial in January for the treatment of severe influenza A in the U.S. It targets an epitope common to various virus strains of influenza A. Therefore, we expect this single antibody can be effective for various types of influenza A.

Discontinued project in this period includes ASC-01, whose development was discontinued in Asia. In Japan, application was withdrawn. Development of AVP-923 and OCV-501 were discontinued for strategic reasons.

Page 18, please. This shows planned completing timing of major Phase III trials. From the left top, brexpiprazole for bipolar disorder is expected to complete in January and top line results will come out in the first half of 2019.

Phase III trial of SGI-110 for treatment-naïve AML patients did not meet the primary endpoint. Accordingly, SGI-110 trial for relapsed and refractory AML shown in the center bottom would discontinue enrollment of new cases, but the study will continue with already enrolled patients. The study for the treatment of relapsed and refractory MDS will continue as planned.

AVP-786 for indication of agitation in Alzheimer's dementia requires 2 studies for submission. In order to accelerate submission process, we will focus our resources on the second study, that is a study to be completed in December 2019.

Page 19, please. This slide shows progress of initial projects planned for NDA and Phase III in FY 2018. Projects in red achieved planned stage-ups up to the third quarter. Stage-ups not included in the initial plan are mentioned outside each table. SGI-110 for treatment-naïve AML is shown in gray because of discontinuation.

This is all for R&D update. Thank you very much.