Astellas Pharma Inc. (4503) Earnings Call Transcript & Summary

Good afternoon. Welcome to the J.P. Morgan Healthcare Conference. I'm Seiji Wakao, Japan pharma analyst. And it's my pleasure to introduce Okamura-san, CEO of Astellas, and welcome him to the conference. Please go ahead, Okamura-san.

Thank you, Wakao-san. Hello. Good afternoon, everybody. My name is Naoki Okamura. I'm President and Chief Executive Officer of Astellas Pharma, Inc. I'm excited to be back in the J.P. Morgan Healthcare Conference. I hope some of you know a little bit about Astellas, but probably there are someone who, for the first time, start engaging with us. So I would like to talk about where we are today, where we are going to be in the near, mid to long term and more importantly, how we get there. Actually, we feel strong confidence in our growth trajectory in the longer term, so that I would like to share some excitement as well as the momentum that we feel today. So first of all, we have a very clear, simple vision, which is to turn innovative science into VALUE for patients. When we use this, all capital, VALUE, it is clearly defined among the people at Astellas, which is outcomes that truly matter to patients divided by the costs to the entire health care system. It's not the cost to us. It's about the health care system. Therefore, if we are to explore increasing value, that means we try to create better outcomes for the patients and try to help managing the health care costs as the entire ecosystem. So we put patients at the center of everything we do at Astellas, and it has become our DNA as a company. So let me show you a kind of snapshot where we are today. Our fiscal year starts at April 1 and ending at the March 31 the following year. Therefore, the most recent full year for our accounting is we call fiscal year 2024 that ended March 31 last year. In FY 2024, we recorded JPY 1.9 trillion revenue, which is -- in accordance with the current foreign exchange, it is like $13 billion in revenue with JPY 392 million core operating profit, which represents 20.5%. And we have guidance for revenue as well as the core operating profit for FY 2025, which is going to be JPY 2.0 trillion revenue with 24.1% core operating profit. So that's the size, that's the scale of our company. And even though we are a company based in Japan, Tokyo, Japan, actually, we have a global reach. As you can see at the bottom left, more than 85% of our revenue comes from outside of Japan. We are operating by ourselves more than 70 countries, and we have a good global commercial capabilities to deliver our outcomes to the patients all over the world. And thirdly, I would like to point out, we are investing 17%, 1-7 percent of our revenue back to research and development because we are exploring innovation, constantly exploring innovation, and it is required to reinvest part of our revenue back to our research and development. Astellas was created through the merger of 2 Japanese pharmaceutical companies back in 2005 20 years ago, and at the time, Astellas was nobody in oncology. Neither of the combined company had any oncology pipeline or in-market sales for oncology products. But after 20 years, now the oncology products are representing 75% of our revenue, and the strongest track record is the journey that we had with XTANDI, which is over $6 billion prostate cancer drug. Not only it is a privilege to have more than $6 billion prostate cancer drug. That has made the difference in the lives of over 1.3 million men with prostate cancer over the time, but at the same time, we are acquiring many different capabilities to run this great product. For example, we have to have the brand maximization capability with the life cycle management. We have to have the global reach because prostate cancer patients are all over the world. And we have to ensure that the patients can get this drug. In order to do that, we have to have the good market access capabilities as well. So these capabilities will be a foundation to really have the strong growth of the next generation of our products, which consists of 5 strategic brands, as you can see on the slide, from PADCEV, which is the bladder cancer drug antibody drug conjugate; VYLOY, which is the most recent addition to our oncology pipeline for gastric cancer; XOSPATA, acute myeloid leukemia drug; IZERVAY for geographic atrophy secondary to age-related macular degeneration; and last but not least, VEOZAH, which is the first nonhormonal therapy for vasomotor symptoms of the menopausal women. So as you can see, each of them has a blockbuster potential, and we are confident that these 5 strategic brands are going to get us to the growth trajectory even after XTANDI. So we have deliberately executed the strategy to overcome the XTANDI loss of exclusivity. This is something that we knew that would come, so we deliberately created the 5 strategic -- portfolio of 5 strategic brands so that we have the -- kind of elevate the peak, flatten the dip and then inflect to growth even after XTANDI loss of exclusivity. And we need to maximize the revenue of our XTANDI as well as the strategic brands. We have to accelerate the pipeline so that they come to the marketplace as fast as possible. And at the same time, in order to maintain our reinvestment to the research and development, we have to do -- we have to establish the financial discipline so that we can improve the profitability structure of the company. XTANDI, we have a co-promotion arrangement with -- initially with Medivation but now part of Pfizer. Therefore, we have to pay out almost 50% of our sales in XTANDI back to Pfizer. Now the 5 strategic brands are majority fully owned programs that is highly profitable compared to the XTANDI situation. Therefore, even with the kind of dip and regrowth trajectory of the top line, from the profitability standpoint, we will have much better core operating profit margin structure, which we aim to reach 30% by fiscal year 2027 and sustain that 30% level going forward. Now let me shift the gear to our lifeline, which is the R&D. Probably, you hear many pharmaceutic companies define themselves by, for example, therapeutic area or the key technology platform, like we are oncology company. We are ADC company. But Astellas doesn't. We are taking a very unique research and development strategy, which we call focus area strategy. We start from biology that has a strong disease linkage. Then, we try to identify the best modality to address the biology. And finally, we are figuring out who are the best patient population to benefit from the combination of this biology and modality. Once this triangle of biology, modality and disease is established, we believe we can produce multiple projects from that triangle by pivoting either points of the triangle. That's the beauty of our focus area approach. This is most likely the unique way of showing our marketed products and the pipeline. Usually, you see the table format. Why we created this chart? Because we tried to show you that we have a good focus especially for oncology, the majority of the production pipeline are from oncology. But at the same time, we have a properly diversified portfolio, for example, ophthalmology product and programs, rare diseases as well as the very selected specialty therapeutic areas. We are not trying to be as exclusively focused on some technology platform or the therapeutic area, but we have to have decently diversified portfolio. That is our aim. As I mentioned, once the triangle of biology, modality and disease is established, we call it primary focus. And we have currently 4 primary focuses starting with the targeted protein degradation, which is initially aiming for oncology indications. Secondly, immuno-oncology. We have a broad pipeline to address the immuno-oncology. Third one is blindness and regeneration, which is mostly the cell and gene therapy targeting ophthalmology indications; and last but not least, genetic regulation with the gene therapy. Let me take a couple of examples how we use this focus area approach and how this primary focus can strengthen our leadership position in some of the areas that we're in. First, let me talk about KRAS. Targeted protein degradation flagship program is targeting KRAS G12D mutation, which is -- which has become relatively hot topics for the past couple of years. We are addressing the -- used to be undruggable target, KRAS, by combining 2 small molecules with linkers. Astellas has a very strong legacy of a small molecule medicinal chemistry. This targeted protein degradation is the best area for us to move forward and leverage our heritage of the medicinal chemistry. The leading pipeline 3082 has the KRAS G12D mutation -- targeting KRAS G12D mutation. But as I mentioned, once the primary focus is established, we hope that we can produce multiple projects from that triangle. As you can see, we have another follow-on programs, which is ASP5834, just entered into clinic. And this 5834 is targeting not only one single mutation, but pan-KRAS mutated cancers. This is one of the data that we presented, and ASP3082 with the combination of the standard of care presented a good overall response rate with duration of efficacy. We hope it's going to be longer. And because of the safety profile, we have, the patients can tolerate this product so that they can complete the treatment cycle. And the -- we have our Chief Research & Development Officer, Tadaaki Taniguchi here. So after this presentation, if you have any question about those programs, he will be able to address those questions. So the next example is the Claudin 18.2 franchise. We have the traditional monoclonal antibody product, VYLOY, which targets Claudin 18.2. The program -- the product is on the market already, and the product is receiving very strong support from the medical community. The issue, if there is an issue, VYLOY needs to be targeting relatively high Claudin 18.2 expression level. Therefore, we need to cover the entire spectrum of the Claudin 18.2. We started as part of the immuno-oncology primary focus the bispecific T cell engager with targeting Claudin 18.2. We hope to have a wide range of Claudin 18.2 expression patients, can be subject to this bispecific T cell engager. We also have recently in-licensed ADC for Claudin 18.2 from a Chinese company, Evopoint, so not only traditional monoclonal antibody bispecific engager ADC programs so that we can have the unique leadership position in the Claudin 18.2 space. This is one of the data from ASP2138 in gastric cancer. Probably, you cannot see it, but the color of the bar represents the level of expression of Claudin 18.2. So across different level of Claudin 18.2, ASP2138 presented a good overall response. And if you can see the spider chart on the right-hand panel, we expect that 2138 is a much longer duration of efficacy. And we are using the subcutaneous dosing so that we can minimize the risk of safety profile of cytokine release syndrome. On top of those maximizing the brands and accelerating the research and development, we are committed to make the cost optimization initiatives. We are committed to deliver JPY 150 billion annual recurring benefit by FY 2027 so that it contributes to get to the core operating profit margin of 30%. In order to navigate the company through a significant transformation, of course, we need to have a strong management team as well as the Board. As you see, Tadaaki comes from other companies in the pharmaceutical industry. Other members of the management team comes from other companies or even other industries so that we can learn from those different companies. And the most recent Board refresh added Andreas and Mark as the independent outside directors. This is for the first time for Astellas to have someone has the pharmaceutical industry expertise on the Board. And just after 6 months, they are making significant contribution to the Board dynamics and the interaction with the executive team. We really feel grateful for their experience, guidance and valuable insights. So in summary, I would like you to take away 3 major messages from me today. Number one, we are maximizing our revenue to address the XTANDI loss of exclusivity. Five strategic brands has a strong growth trajectory for now, and we are expecting them to continue to grow in the coming years. Number two, we are accelerating our pipeline so that we have -- we can deliver the product onto the marketplace as fast as possible from 4 primary focuses that we have. Number three, not only just maximizing the revenue or accelerating the pipeline, but we are committed to establish the financial discipline so that we can improve the profitability. So by these levers, we are aimed to turn innovative science into, all capital, VALUE for patients, and we believe that is creating a value for shareholders as well. Thank you very much for your kind attention. Thank you.

I start the Q&A session. From here, Taniguchi-san, Chief Research & Development of Astellas will also be joining us. If you have a question, please raise your hand and wait for microphone. First question from me. Regarding the share price, how do you view the share price performance following the second quarter earnings announcement? The share price has been performing very well in our view. As CEO, how do you assess the key drivers behind this performance?

Thank you for the question. So under the current corporate strategic plan 2021, which is a 5-year corporate strategic plan, we have 3 performance goals and which based on that, we create the 3 initiatives, which is growth strategy; bold ambition for the pipeline; three, strategic margin transformation. So we have been doing these 3 initiatives constantly, and the current share price is probably the reflection of that we have started delivering against those performance goals. And looking back a couple of years ago, we felt that we lost the trust from the investment community because of the different peak sales guidance and not delivering the commitment against the commitment. But now I feel -- as I mentioned at the very beginning of my presentation, I feel the momentum. The investment community recognizes the delivery against our commitment, and that brings us somewhat trust back to Astellas. So those -- that is my reflection to the current share price performance. Thank you.

Any questions from floor? Okay. So I'd like to ask about how do you overcome the XTANDI LOE. Could you share the rationale and the level of confidence behind your view that the company can overcome the impact of XTANDI LOE and the return to growth?

So first of all, it is a privilege to have $6 billion product that helped over 1.3 million patients over the world. But every single product has the loss of exclusivity, and it is known far before that loss of exclusivity actually comes into place. Therefore, we have the deliberate strategy to create not the single product replacing XTANDI but a portfolio or the group of products to really compensate the loss of XTANDI. And we believe we have good group of strategic brands, each of which has blockbuster potential not like XTANDI, and those strategic brands, most of them are acquired -- completely acquired or internally developed. Therefore, the profitability -- the gross margin of the product is much higher compared to that of U.S. XTANDI. And on top of that, we are trying to establish the real financial discipline so that we can, even on top of those efforts, we try to improve our profitability. So from -- as I show you the chart of crisscrossing, declining XTANDI and the growing strategic brands, from the top line perspective, we have -- it looks like we have a dip. But from the profitability standpoint, we continue to grow our profit so that we can meet our shareholders' expectation.

Any question? Okay. So please, wait a microphone.

Could you comment on the first year or so of sales of VEOZAH and how you're thinking about that product?

Thank you. We first thought VEOZAH is kind of a different product from other prescription medicine, but eventually, we noticed that VEOZAH is another prescription drug. So we had to go through convincing the prescribing doctors. We have to have the payers negotiated. Then, we have to go to patients to increase the disease awareness. When we noticed this, VEOZAH needs to be another prescription medicine, we downgraded our peak year sales. But after that, the VEOZAH sales performance is on track, and we are diligently following those 3 steps of convincing the prescribing doctors. We are going through all the negotiation with the payers, and then we try to have the disease awareness campaign to encourage patients to talk to their doctors. I think it is not as quick as we originally expected, but after the revision, VEOZAH is following the on-track performance of our expectation. So we have significant confidence in the disclosed peak year sales numbers for VEOZAH. Does that answer your question? Thank you.

Any other questions? Please.

My question is as you focus on strategic brands, XTANDI and the 3 main priorities you have there, how is Astellas thinking about talent products, whether they're still patent protected or already post LOE?

Thank you. Those are -- those products continue to be important cash generator. That's for sure. For example, Prograf, after, I don't know, 15 years of patent expiry, Prograf is generating over $1 billion cash year-over-year. So we are not saying that we stop doing anything for those mature products, but in order -- from the strategic standpoint, we want organization to focus on those new strategic brands because we have to maximize the value of those programs. So we have -- as far as we have the patients who need our products, of course, we continue to support those programs, but from the strategic focus prioritization standpoint, we will shift our focus to those new strategic brands. Thank you.