Otsuka Holdings Co Ltd

TSE:4578

Earnings Call Transcript 2019-Q4

[Yuko Makino, executive]

Let me report you on the consolidated financial results for fiscal year 2019. These are the 4 agenda items today. First, let me outline the consolidated financial results for FY 2019. Four global products in the pharmaceutical segment significantly grew 34.9% year-on-year, contributing to the consolidated results. In addition, business profit before R&D expenses, a key performance indicator stipulated in our 3rd Medium-Term Management Plan, rose 28.4% from the previous year. Both business profit and profit attributable to owners of the company increased 54.8% and 54.1% year-on-year, respectively. R&D expense is also soared, suggesting our investments for sustainable growth.

This slide compares the business profit this year versus last year. As was explained earlier, 4 global products internally developed in the pharmaceutical segment contributed to the revenue increase of JPY 104.3 billion. Although the details will be given later for each segment, overall business profit was up 54.8% to JPY 187.2 billion. We are confident that this is a testament to our improved earning potential.

This slide shows revenue and business profit by segment. The pharmaceutical segment increased both revenue and business profit by 13.1% and 72.1%, respectively. This propelled the increase in both revenue and profit in the consolidated financial results.

Now let me explain specifics of the pharmaceuticals and NC, nutraceutical-related segments in the next slide. This describes revenue of the pharmaceutical segment. The sales for 4 global products were up 34.9%, topping JPY 375.1 billion. This made a significant contribution to overall revenue increase. Major factors behind this include ABILIFY MAINTENA, REXULTI, Samsca/JINARC and domestic products, whose sales were brisk. In particular, JINARC grew significantly, and more specifics on the current situation as well as the plan for 2020 will be given by Higuchi later. As a result, sales revenue grew 13.1% to JPY 924.3 billion.

This slide shows business profit of the pharmaceutical segment. As stated earlier, 4 global products were highly conducive to the overall revenue and profit increase. Under other expenses, profit increase was attained by the elimination of the impact of one-off litigation-related expenses reported in the previous year as well as cost efficiency efforts. Under R&D expenses, clinical trial-related costs increased mainly for AVP-786 ultrasound system for renal denervation, TAS-120 and centanafadine. As a result, business profit for the segment was up 72.1% to JPY 167.3 billion.

This is a summary of revenue for nutraceutical segment. Sales went down for the entire category of functional beverages because of the unusual weather patterns in Japan last July as well as the backlash of scorching summer 2 years ago. However, sales for POCARI SWEAT and other products soared, thanks to promotional activities tailored to regional characteristics and needs, raising product recognition.

Next, functional foods. Although the sales of Nutrition & Santé were down because of foreign exchange rate fluctuations, we made progress on the reform of business structure, including the value chain. Also, sales for Daiya Foods' plant-based foods steadily increased. As a result, revenue for nutraceutical segment was down 1.5% year-on-year to JPY 333.8 billion.

I'd like to explain upward and downward factors contributing to the business profit in the nutraceuticals-related segment. As was explained earlier, business profit remained mostly unchanged from the year earlier at JPY 42.9 billion, although sales revenue were down 1.5% due to the absence of one-off factors reported in the previous year.

Finally, performance forecast for FY 2020. We plan to grow both revenue and profit by maximizing the value of global products in the pharmaceutical segment, which we have been working on. To achieve future growth, R&D expenses are likely to increase mainly for centanafadine, vadadustat and the TAS-120. Business profit before R&D expenses is expected to increase 3.0% year-on-year to reach JPY 415 billion.

That concludes my presentation on the consolidated financial results for FY 2019 and performance forecast for FY 2020.

[Tatsuo Higuchi, executive]

I'd like to explain the current progress of our third midterm management plan (sic) [3rd Medium-Term Management Plan ]. Year 1 of the plan, 2019, has just finished. We have seen better-than-expected growth with our 4 global products in the pharmaceutical sector, which resulted in a substantially higher business profit before R&D investment than our initial plan. We plan to keep this momentum and plan for further increase in sales and profit in 2020. Also, in the last part of my presentation, I will explain the current situation as well as our business prospects given the progress so far.

So before I start, please take a moment to look at the forward-looking statement.

These are the items I would like to cover today. As an update on the third midterm plan, I will give you the current status of our pharmaceutical business and the nutraceutical business.

This is a summary of our plan for FY 2020. Just as in the past, we have set 5 themes to realize sustainable growth. In the pharma segment, since we are enjoying robust growth of our 4 global products, we are putting a special focus on creating new values to address unmet needs. In the nutraceutical business, we will try to disseminate the product concept of our growth drivers to consumers and expand the business scale and sales.

First, I will illustrate our pharma business in detail. This is the outline of our strategy laid out in the third midterm plan. The main themes are to maximize the existing business values as well as to create new values. I will talk more in line with these themes next.

This is the update on our 4 global products. During the third midterm 5-year period, the sales of these products are expected to increase by JPY 200 billion. In FY 2020, sales are estimated to reach JPY 415 billion, up 11% year-on-year and an increase of about JPY 140 billion from 2018. Sales are progressing faster than our original plan. The biggest contributor to this strong performance is JYNARQUE in the U.S. I will explain more about JYNARQUE in the next slide.

This shows how the JYNARQUE business have been progressing. Our sales estimate of FY 2020 is USD 620 million, more than a 40% increase year-on-year. The total number of cumulative new patients is showing steady growth. We expect the current momentum will continue throughout 2020. Aiming to make further contributions to ADPKD patients and maximize product value, we will continue our focus on various activities, such as disease education and the clinical data provision, while ensuring strict measures for the safe use of the drug.

Now I will give you updates on key achievements made since the previous meeting in August last year. As is shown here, to maximize existing business value, we have made steady progress in the life cycle management of existing products such as ABILIFY MAINTENA, Samsca, LONSURF and Abraxane, thereby successfully contributing to patients' medical needs in the clinical setting by offering new treatment options.

For innovative value creation, our Phase II/III trials of fremanezumab for migraine have generated positive top line results. Details on this topic, including product characteristics and the study design, will be discussed by Dr. Emura later.

ASTX727, orally administered Dacogen, a DNA methylation inhibitor, was filed for approval for MDS and CMML with U.S. FDA. It is subject to priority review, and the PDUFA action date is scheduled for August 11. We hope this new formulation, compared with the injection Dacogen, will reduce the patient's burden of hospitalization and hospital visits and allow for long-term treatment.

In basic research area, new initiatives for enriching our research pipeline have started such as newly formed strategic collaboration in oncology by Taiho, Astex and MSD as well as a joint research collaboration agreement with PhoreMost in the U.K.

Next, I will show you some of these efforts to create innovation. First, innovation creation in our research area. Otsuka Group has been devising a new approach for collaboration through combining various research platforms that each company, namely Otsuka Pharmaceutical, Taiho, Astex and Visterra, has established, thereby making evolution of drug discovery platform to accelerate innovation.

We are also actively seeking joint research arrangements with external institutions and academia to generate synergy with our own research base and investment participation in startups and consortium through corporate venture capital to access state-of-the-art science.

I will take up 2 examples of our collaborations. One is a deal with MSD made through an intra-group collaborative initiative, and the other is a joint research with Takara Bio for new gene therapy.

First, I will explain our R&D collaboration with MSD in oncology that we announced on January 6. Merck, also known as MSD, Taiho and Astex concluded an exclusive worldwide research collaboration and licensing agreement focused on the development of small-molecule inhibitors against several drug targets, including KRAS oncogene. This alliance validates the high quality of drug discovery technology of Taiho and Astex as well as the achievements of Otsuka's long-term research targeting KRAS oncogene. Through this alliance with MSD, we expect that the combined drug discovery capability will allow us to utilize expertise and external talents and resources to significantly accelerate the global research development and the commercialization of a number of mutant KRAS programs. We will implement all necessary measures aiming to get the programs to the clinical phase as quickly as possible.

Another example of a collaboration is a T-cell receptor, TCR, gene therapy joint development program with Takara Bio. TCR gene therapy is one of the gene-engineered T-cell therapies utilizing the anticancer effect that the T lymphocytes originally have. T lymphocytes are isolated from a patient and the TCR genes, which specifically recognize cancer cells, are transduced, amplified and infused back into the patient. The characteristic of this therapy is Takara Bio's proprietary siTCR vector technology, which minimizes the involvement of endogenous TCRs. This allows for the enhanced expression of transduced exogenous TCR complex, thereby improving efficacy. The therapy has been designated for development under the SAKIGAKE designation system in Japan as a treatment for synovial sarcoma. The program has been progressing towards the world's first launch with its target filing scheduled for the end of this year.

This shows the completion time line of the major pipeline programs that are ongoing. The ones in red boxes are programs scheduled to be completed in 2020. Numerous projects are expected to make large contributions to achieve our sustainable growth. We will make sure that our steady hard work will lead to the successful outcomes of these programs.

I will now give you updates on our nutraceutical business. This is the outline of our nutraceutical business strategy. Similar to our pharma business, our main themes are value maximization of existing businesses and new value creation. We are conducting business based on these themes, and I will explain our progress so far.

This shows where we are in terms of the progress in business profit of the NC business against our plan. We have been improving the business profit ratio significantly in the past several years and established business platforms to sustain stable business profit ratio. To make NC business more profitable profit base, the biggest challenge in the next 5 years is how to achieve sales expansion.

I will talk about the current status of 3 major brands and the 3 Nurture brands that will make great contribution to this sales expansion. First, our 3 major brands. The sales estimate of our 3 major brands, POCARI SWEAT, Nature Made and N&S products, is JPY 211.5 billion in 2020. Specifically, for POCARI SWEAT, we will make aggressive investments for growth in new Asian markets such as Thailand, the Philippines, Vietnam and Myanmar, appealing its functional features to consumers to boost sales. The existing brand of Nature Made based in the U.S. will be further strengthened by introducing new products as well as taking on challenges in a new category. For products by N&S, we will continue to work on business restructuring, including distribution reform and SKU optimization, to realize business turnaround at an early timing.

Next, our update on our 3 Nurture brands, Daiya products, EQUELLE and BODY MAINTE. In FY 2020, we are targeting sales of JPY 28 billion, up by more than 30% year-on-year. Daiya, which markets daily alternative products mainly in North America, is preparing to open new manufacturing facilities scheduled for the fourth quarter of this year. In this plant-based category, we are aggressively making investments in marketing to capture additional market share. For EQUELLE, we will continue to provide information to gain consumers' understanding of its product concept and the benefits. Efforts are needed for BODY MAINTE to communicate the product concept and brand equity to grow this brand. For all these 6 brands, we will tackle the challenges that each brand faces so that our initiatives will lead to sales expansion.

I have explained the current status and the progress of the third midterm plan. So far, we have been making great progress, surpassing our original plan. However, the basics of our plan have remained unchanged after year 1. The only change from the midterm plan so far is the positive impact of JYNARQUE in the U.S. on sales and profit in 2020 onwards, which is estimated at a JPY 25 billion increase versus the plan.

This graph shows the business profit estimate based on U.S. JYNARQUE impact that I just mentioned. In the midterm plan, we targeted a CAGR of business profit of 10% or more. However, considering the JYNARQUE impact after year 1, we would like to set a new target of 13% or more.

That concludes my presentation on the progress of the third midterm plan.

Lastly, this is the summary of my talk today. As for the progress of the midterm plan, I explained the new value creation in our pharma business and our initiatives for sales expansion in NC business as well as the prospect for business profit going forward.

In pharma business, our 4 global products, which are the major drivers in the plan, are performing stronger than expected and are making significant contributions to the overall performance. In such situations, we are actively taking various measures and taking on management challenges from long-term perspective to ensure sustainable growth beyond 2030 such as strengthening our drug discovery platform, developing our next-generation core businesses and expanding our NC business globally.

I have served as President of both Otsuka Holdings and Otsuka Pharmaceutical Co. But as was announced in December last year, I will assume position of Chairman of Otsuka Pharmaceutical with the intention of transferring management responsibilities to the next generation. The company has decided to form a new cooperative system of myself and the newly appointed President, Mr. Inoue, who has an abundant experience and expertise. Under the new management of Otsuka Pharmaceutical, Otsuka will continue to create universal value that can contribute to health of the people around the world. Your continued support would be very much appreciated. Thank you for your attention.

[Tomohiro Emura, executive]

Let me report you on pharmaceutical development update. These are the 3 agenda items today. The table summarizes the key development progress as of the end of December 2019. ASTX727, oral C-DEC, submitted its application for the U.S. FDA in February to be indicated for myelodysplastic syndrome, MDS, and chronic myelomonocytic leukemia, CMML. As the world's first oral combination drug, including DNA methylation inhibitor, the product is expected to serve as a new treatment option for MDS.

Tolvaptan submitted an application to be indicated for syndrome of inappropriate secretion of antidiuretic hormone, SIADH, in Japan in October. The product is expected to provide a treatment option for SIADH, which currently has no proper treatment.

OPF-109 on TPN, total parenteral nutrition, for chronic renal failure initiated Phase III study in Japan in November.

Brexpiprazole began a clinical trial for Post Traumatic Stress Disorder, PTSD, as well as Phase II study for borderline personality disorder in the U.S. in October. We continue developing and maximizing business value for brexpiprazole in order to meet unmet treatment needs in the domain of psychiatry and neurology.

OPB-111077 initiated Phase I study for DLBCL, diffuse large B-cell lymphoma, in Japan in December.

For strategic reasons the development of TAS4464 for solid tumor and blood cancer was discontinued in Japan, the U.S. and Europe.

I'd like to introduce you some key topics. Fremanezumab is a subcutaneous injection containing an anti-CGRP monoclonal antibody in-licensed from Teva. This product is expected to prevent and chronic -- prevent chronic and episodic migraine. CGRP is considered to play an important role in the occurrence of migraine. This product inhibits CGRP binding to its receptor, preventing migraine. Migraine is a highly prevalent neurological disease. Approximately 8.4 million patients are said to suffer from the condition. The highest prevalence of migraine in women in their 30s tops about 20%. Two Phase II/III studies were conducted with an aim to achieve a prophylactic treatment of chronic and episodic migraine. Both studies met the primary endpoints with a statistically significant difference. We will be presenting the detailed study results with further analysis at an academic conference. Prophylactic treatment of migraine requires an agent that is sufficiently effective, highly safe with lower dose frequency. Fremanezumab is expected to serve as a new treatment option for migraine prevention.

I'd like to introduce another topic, TAS-102, LONSURF. The life cycle management of LONSURF is making smooth progress. The product was approved for advanced recurrent colorectal cancer in China in August 2019. As of the end of November 2019, the product has been approved in 76 countries and regions. As part of LCM, our licensing partner, Servier, is conducting Phase III study for those undergoing primary therapy for colorectal cancer who are not subject to intensive chemotherapy.

LONSURF also obtained its additional indication for advanced recurrent gastric cancer in Japan, the U.S. and Europe last year. From LCM perspective, a clinical study is underway to test combination therapy with other agents in gastric cancer subjects. In Japan, a combination therapy with ramucirumab currently being tested. Ramucirumab is widely used in combination with taxane.

This table indicates progress for the major NDA submissions and Phase III advancements scheduled at the beginning of FY 2019. The red ones made progress in the current year. The ones not included in the initial plan are listed in the margin. As you can see, the progress was almost as planned during the last fiscal year.

This slide shows the projects planned for NDA submission and Phase III advancement in FY 2020. 5 projects are planning for submission and 4 projects are expected to migrate to Phase III. For your reference, major products by category are shown in the Appendix.

With that, I'd like to conclude my presentation on the pharmaceutical development update. Thank you very much.

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