Idorsia Ltd (4565) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, since its time, about the acquisition of Idorsia Pharmaceuticals business in Japan and APAC, ex China, [indiscernible]. We would like to have a first conference. Despite such a short notice, we would like to thank you for coming, such a large turnout. I'm [indiscernible] here at the venue. Not all of you are here, but more than 220 people are joining us on the web. So allow me to get started. Today, for 1 hour, 5 p.m. to 6 p.m., we'd like to have this meeting. Firstly from us, we would like to give the presentation. Here are the venue using the materials for the presentation, followed by the questions and answers. Time is limited, allow us to get started. First, allow me to introduce today's speakers to your right. On left-hand side, that's Chris Cargill, the Sosei Group CEO; right next to him is Idorsia Pharmaceuticals' Jean-Paul, represented Director; President, Dr. Satoshi Tanaka. I am the CFO of the Sosei Group, Hironoshin Nishishita, our [indiscernible] today. I'd like to invite Chris to talk about this acquisition of Idorsia's Pharmaceutical business in Japan and [indiscernible]. Chris, the floor is yours.

[Interpreted] Thank you very much. Can you hear me? Good afternoon, ladies and gentlemen. My name is Chris Cargill, CEO of Sosei Group. Slide 3, please. Thank you. Here, let me welcome the newest member of our executive leadership team, Dr. Tanaka. Today is an exciting day for Sosei as we announced the acquisition of Idorsia's Japanese and APAC business, that this is a fantastic transaction that will create significant value for Sosei immediately and in the years to come. The transaction brings a highly experienced clinical development team and profitable commercial operation to our world-leading drug discovery platform. This transaction accelerates our mission to deliver life-changing medicines to patients. Sosei is now a fully integrated biopharma committed to helping patients in Japan and APAC. Next slide, please. This transaction is valued at JPY 64 billion. The transaction is highly funded -- fully funded from our existing cash plus a new 7-year long-term low rate corporate loan from Mizuho. Sosei will have JPY 42 billion of cash remaining after the transaction. The transaction is expected to be cash flow positive in its first full year after acquisition. The transaction will achieve double-digit rates of return. That transaction brings two major products, PIVLAZ and daridorexant, plus rates for up to 7 more products. We have the rights to develop and commercialize all the potential products in all markets across APAC, excluding China. PIVLAZ is commercially available in Japan. PIVLAZ was launched last April, and we expect fast growing sales over the next few years. To date, over 6,500 patients have been treated with PIVLAZ. And this number is growing and the neurosurgeons increase usage. Next, concerning daridorexant. Daridorexant is already approved in the U.S. and Europe. It is a best-in-class treatment for insomnia major unmet need in Japan. Positive Phase III data in Japan was achieved in 2022. Filing is expected in 2023, and launch is expected in 2024. Daridorexant will be co-promoted with Mochida and Shionogi. We expect the combined peak sales of both products across the territory to be more than JPY 35 billion. This transaction with Idorsia secures our business in Japan and provides a platform to expand across APAC. We expect the transaction to generate multiples of value compared to the price so they have paid. Next slide, please. The transaction has 4 major investment highlights. It accelerates our mission to deliver medicines to patients. It secures and expands our in-house pipeline, adding 2 major products, PIVLAZ and daridorexant plus up to 7 other products. It brings a highly skilled team with a proven track record and several product approvals and successful commercial launches. It enables us to leverage the best of Japan's quality clinical environment to expand to the high-growth APAC region and extend product launches. Next slide, please. The Idorsia Japan commercial business is profitable and fast growing. The commercial strategy is focused on a small number of internal MSLs and MRs. The business model leverages digital engagement and contract sales forces to grow sales profitably. This approach has driven a leading industry profitability ratio in the first full year after the launch of PIVLAZ. This lean commercial strategy would create a strong synergy with our existing business and also drive industry-leading profit ratios in the long term. Next slide, please. The transaction can transform our in-house pipeline over the long term with up to 9 programs. PIVLAZ is in its first full year post commercial launch and is expected to continue to grow fast. Daridorexant has many near-term milestones before a potential launch next year with co-promotion partner, Mochida. Going forward, we will be less reliant on our partnered pipeline for revenue and news flow catalysts. The transaction gives us greater control to deliver medicines to patients. This will create value for shareholders. Next slide, please. Taking a different view. The transaction means we have three sources of innovation to feed the pipeline. For the first time, we will have a leading capacity in Japan and APAC to take programs from discovery and development through to profitable commercialization. Sosei can deliver medicines to patients itself in Japan and APAC and globally with partners. We also expect Sosei to become a partner of choice for pharma companies that want to access the high-growth APAC region. This will create values for shareholders. Please turn to the next slide. We are acquiring a highly skilled team with a proven track record of success in Japan and APAC. Dr. Tanaka will lead our new Japan and APAC business. In respect of his leadership, we have also invited Dr. Tanaka to become a new Executive Officer of Sosei Group. Dr. Tanaka's team has delivered several product approvals and successful commercial launches in recent years. This expertise is rare and valuable. We are so happy to welcome Dr. Tanaka and team to Sosei. Next slide, please. Japan is renowned for its quality healthcare system and clinical environment. Japan is the second largest developed single pharma market in the world. Japan is an excellent location to deliver innovative medicines to patients and to extend those medicines to patients across APAC. APAC is one of the fastest-growing regions. APAC is readily accessible with quality clinical data from Japanese approvals. This transaction, we have our Japan focus and enable us to expand to APAC. These strategies are aligned with the goals and initiatives of Japan's MHLW. This will secure our long-term growth potential and make Sosei a partner of choice for pharma companies that want to access this high-growth region. Then I'd like to ask Dr. Tanaka to give us his presentation.

[Interpreted] This is Tanaka speaking. Allow me to give you some explanation. Idorsia Japan, Idorsia [indiscernible] on behalf of the two entities. We are so excited by this deal, because as I can share with you now, the two companies' collaboration has extremely good synergy. Next, please. Currently, already available product for [indiscernible]. I'll come back to this later with PIVLAZ. The third quarter this year, it will be before filing. But in so many year, this is QUVIVIQ and [indiscernible] treatment. Well, the first two already administered the drug and remodel. And for [indiscernible] disease drug globally, it's already in the Phase III. In Japan, we are preparing for the Phase III. In addition, for [indiscernible] products negotiation rights ROFR/ROFN, these will be available, and we will create a solid platform. At Sosei Group, generates a lot of new products. First time in Japan will be developing. This synergy is something we value and we are so delighted. Next, please. Currently, PIVLAZ is already available. For the first time in 25 years for subarachnoid hemorrhage, after the hemorrhage, there is vasospasm and also the strike and the neuro disorders, they can be prevented by this drug. For the first time in 25 years here in Japan, it's been approved for development. For Sosei Group, it has a lot of impact that we are proud to say. Compared with overseas, we are actually ahead here in Japan for development, and it's been approved. With this in South Korea, we are already in the process of filing in a few years, it's likely to be approved. Subarachnoid hemorrhage in principle, in North America, more than 8 persons, the European, that's 8 persons for 100,000. But here in Japan -- South Korea, it's 3x as much per 100,000, 28 persons. So you can see the mobility is pretty high. So in these markets, this drug is welcomed by doctors already, more than 6,500 patients have been administered with this particular drug. This year -- well, last year, it was launched in April NIH base, JPY 7.5 billion. Revenue was delisted this year. It's about double, more than JPY 13 billion is likely to be listed. Next page, please. Similarly, so this is insomnia, sleep disorders again here in Japan, something unique, placebo-controlled [indiscernible], clinical tests and long-term safety-related tests were conducted, Japan-specific ones. October last year, the results were very good. So we reported that result. So actually, in the Western countries, it's only launched and then we are able to get even better data than the Western countries data. And for this product, we of -- the drug attribute insomnia, sleep induction or the prolonging the sleeping time, these are to the mechanism of action, but our drug is reducing vaso, the wake after sleep [ on set. ] And also, there is no next day's sleep. So -- or reduced next-day sleep. So for this particular drug, we are very much interested in seeing this drug being prescribed. And so that I quickly went through my presentation. So I think we need to go back. Subarachnoid hemorrhage. So after this subarachnoid hemorrhage, you have to stop bleeding that's -- first of all, you have to [indiscernible] after stopping that. And then from the [indiscernible] and the surgeon, and then there is a vasospasm. So that stops the flow and then that could lead to stroke and that can lead to newer logical disorders. But here, our prevents vasospasms. By preventing vasospasm, subarachnoid hemorrhagic patients because of hemostasis, really, they die, but with vasospasm, there's sometimes they suffer the neuro symptoms. And the biggest problem is that they cannot go back to the workplace. But this drug overcomes that difficulties, that problem. April, it was launched last April. Already, August this year in the guideline for stroke -- brain stroke, it's already listed there. So highly appreciated. In the [ bus ] guidelines, this one is receiving the highest valuation in terms of this listing guideline. Next page, please. So I touched up on this already a little bit. So for taking the drug for insomnia, in Japan, I think there is estimated 14 million people with insomnia. Orexin is very strong and also, it doesn't have the wake asleep onset. And then there is no next day sleepiness. So this drug needs is increasing in the future, I believe that 40% of share or maybe more than 40% of the share can be obtained by this drug. Next slide, please. So as a result, so the reduced [indiscernible] and also time to -- sleep induction time is being shortened. Our -- the clinical trial data in Japan is equivalent to other ones in a global study. And also, this is dose dependent result, and it was reported in October of last year and the physicians are waiting for this drug to be launched. Thank you. So cenerimod, this is for SLE drug, and we are preparing the Phase III trial for systemic lupus erythematosus. Normally, injectables are used. However, this is oral drug and have a comparable efficacy with the injectable drug. And Lucerastat is for Fabry disease. Currently, Phase III study is completed, including global study. This is again oral drug to treat Fabry's disease. This is the first oral drug in the world. So as I said earlier, the global study is significantly done. And Japanese clinical research is the -- included in global study. But having said that, a Japanese site or Japanese patient are sometimes difficult to be included in global study. Rather, a Chinese site are included, more often the Japanese sites. However, under this environment, the clinical trial started in Japan and also fighting is done with Japanese data. That is the experience that we have been accumulating. So as a new product of Sosei Group, including our existing product, we can start the development, originated in Japan. And we have a very high expectation for us to be able to do that to create a synergy. That is the reason why we are very much excited. That is all for me. Thank you.

[Interpreted] Tanaka-san, thank you very much. Next slide, please. Thank you. So I will summarize this announcement over the next few slides. We have now global -- 370 employees globally to help accelerate our mission and vision. We expect to merge Idorsia, Japan with our existing Sosei Japan business in the next 12 months. We expect to form a single global brand and corporate identity in 2024. Next slide, please. Our pipeline is now broad, diversified and balanced. We are pioneering novel therapies across multiple therapeutic areas. We are now a fully integrated biopharma business with fast-growing sales and near-term product launches. Next slide, please. We now have greater control over our pipeline, news flows and value catalysts. This slide shows there are several catalysts on track to be achieved in the next 18 months. Next slide, please. The transaction has 4 major investment highlights. It accelerates our mission to deliver medicines to patients. It secures and expands our in-house pipeline, adding 2 major products, PIVLAZ and daridorexant plus up to 7 other products. It brings a highly skilled team with a proven track record of several product approvals and successful commercial launches. It enabled us to leverage the best of Japan's quality clinical environment to expand to the high-growth APAC region and extend product launches. Next slide, please. We are on track to achieve our 2023 vision. Thank you for your time. We'll now take questions.

[Interpreted] Thank you for your kind attention and also on the webinar. Thank you for joining us, 345 of you are viewing despite such a short notice. Thank you so much for joining us. Now we would like to entertain your questions in this Q&A. In this meeting, it's held in a manner that anybody can participate, but media, institutional investors, analysts, mainly those of you are the targets. So media, institutional investors, analysts, those of you who are at the venue, if you have a question, please raise your hand. And from [indiscernible], so many of you are participating. As we understand, there is a raise hand button. So similarly, if you have a question, please press the raise hand button, and allow me to invite you for questions. And the rest of you, there are so many of you are participating. But in the webinar, there is a Q&A corner available and please use the chat function then later, please give me some time, but I would like to address those questions on behalf of you. Now if you have a question, please raise your hand. The gentleman over there, please.

[Interpreted] [indiscernible] is my name from [indiscernible] company. About accounting, 2 brief questions. Later, if time allows me to do so 2 more questions. First, acquisition, CHF 400 million -- allow me to use Swiss Franc, CHF 400 million. And for the equity, Japan and Korea, CHF 45 million. So the difference between the two [indiscernible] the intangible assets concerning products as I interpret. Concerning this is the PPA or how to respond to PPA or some conditions. And after amortization of the intangible on the accounting base, making a profit, do you think you can actually generate profits?

[Interpreted] Thank you for your question. I think allow me -- it will be a profitable for me to address that question. So allow me to do so. In this material, if we look at Page 28, we deleted it from the main parts. But regarding the accounting matters, there is a slide available. As you rightly said, the acquisition price is at JPY 65 billion, as Chris said. And there regarding your question in the center, this is JPY 65 billion, goodwill and it's about accounting intangible assets. And intangible assets, how it's going to be up, what about the amortization? And this amortization, there will be no payment out, but there will be accounting-wise losses. So can we still generate profit? I think that was your question. Goodwill and intangible assets regarding the balance between to do at the moment, with the accounting firm, we are still in the consultation. It's been scrutinized. As you asked, intangible assets is likely to be higher without doubt, we believe that will be the case. Now regarding the intangibles, generally speaking, this patent period we're pending on the drug to be the reamortization. How it's going to be amortized? Indeed, it has not been decided. To put it plainly, for quite a long time, there is going to be amortization. People at less than 10 years, we still have the period patent, [indiscernible] it's longer. I wouldn't say 20 years, but more than 15 years, will be protected by [indiscernible]. So in the slide, for a very long time, the amortization is going to take place. That's our estimates. So after the amortization, can we still maintain the generating profits [indiscernible]. Of course, of course, that's what we intend to do. And that's how we would like to do the M&As in terms of doing the M&As. Going away -- getting away from the amortization, peak sales, EBITDA, just for your fracs, we put that in the material. As Dr. Tanaka said, current PIVLAZ was just launched last year. So this is just year 2, we're still growing. In addition to PIVLAZ, daridorexant for sleep disorders. Together with that, APAC, we have rights covering the entire APAC. If I say immediately, it's not 1 month, 2 months. I don't want to mislead you, but already, it's kind of a visible market, Japan, South Korea, Thailand. So for three areas, [indiscernible] to focus on those, so that's JPY 35 billion or even more. On EBITDA, again, this is a estimate of JPY 10 billion -- more than JPY 10 billion. On the right-hand side, as you can see, the obvious reason, we have rights covering the broader areas. And as we said with [indiscernible] rights in total, for 9 products, we do have certain kinds of rights. And this is just -- these are just two of them. So as they grow, we saw that we can [indiscernible] get the profit, we have as an entire team, we would like to work. So I just deviated a little bit, and that's my answer. Thank you.

[Interpreted] So is there going to be the price against based on the condition now? In terms of options, there is a certain option, the amount. The second question, so you will have the long-term loan. And I think the [indiscernible] is the interest rate for the loan. The interest rate, it seems to be going up. So I just want to confirm that for 7-year long-term loan, in terms of the interest, is that variable, is that the fixed rate? Or if -- even if it's a variable, can change it to the fixed rate? I'd like to understand the risk of interest rate.

[Interpreted] Yes. Thank you very much for your very important question. In conclusion, it's a fixed rate. And the rate actually is -- I wanted to disclose, however when we talk to Mizuho Bank, we are not able to disclose that number. It's -- I just want -- we can all say that Mizuho Bank is very cooperative with us, and we appreciate their effort. Yes. And interest rate is going up, particularly in overseas market, as you all know. But in Japan, still low interest rate is being maintained. We're not able to give you the general interest rate talk. However, it's between 0.5% to 1% interest rate is still a standard rate in Japan, generally speaking. And what I'd like to say is, as Chris said, we are able to receive a very low rate, even if it's between 0.5% to 1%, we don't call it low, because it's a standard. So we are able to receive very attractive rate. Again, we appreciate Mizuho Bank's cooperation. That's all for me.

[Interpreted] Third question related to business. PIVLAZ is very attractive, interesting drug, I think. So subarachnoid hemorrhage and vasospasm, are there any other drugs that you used? What about the competition landscape, the existing ones and the [indiscernible] ones being developed, but the situation here in Japan. In addition to the 2022, that was to be launched in Japan by 2030, that you have exclusivity in terms of sales. Normally, 8 years or 9 years, strike me as kind of a short period. Is there a possibility to extend that exclusivity period?

[Interpreted] I would like to invite Tanaka to address the question.

[Interpreted] Currently, 25 years ago, there were 2 products launched to [indiscernible], those are being used too. And then for the first time in 25 years, this is now launched, and that's why doctors are happy. Regarding this drug, Currently, 10 years is what we have been in my mind, but including the expansion of the indications, you -- we believe it's a very valuable drug. And this year, already in October, for [indiscernible] is listed. That means it's highly valued and pretty sure you can understand how it is valued, appreciated.

[Interpreted] My last question about acquisition. As Sosei not only about products, but in terms of science know-how or Dr. Tanaka, you're able to invite Dr. Tanaka, your management. So you have a strength on the operation in terms of science and also the business operation, what kind of synergy you can expect and also what timeline? I would like to understand your future outlook and also your expectations.

[Interpreted] I'd like to ask Chris to give us the answer to your question.

Yes, sure. Thank you for the question. So these 2 businesses are highly complementary. So obviously, our research and discovery platform in the U.K. is world-class. And we talk a lot about taking programs through to early development. So Phase I, Phase Ib, and that's what we do in the United Kingdom. What Tanaka-san and his team have been doing consistently for the last 2 decades, is taking products through Phase II/III and registration. So the natural synergy for us now is we have a team that has a lot of experience that can take products all the way. So we really hope now that we will be at some point in the near future, discovering products at our research facilities in the U.K. and delivering those products through the business that we've acquired today, to patients in Japan. There will be no change to the way that we developed drugs in the United Kingdom. If there is a right value inflection opportunity to work with a partner to take the product global, we will continue to out-license to partners globally. But what we will do more of going forward is if that program is valuable and there is a commercial story and a patient need in Japan, we will be keeping those rights for ourselves and delivering the medicines to patients in Japan and APAC ourselves. So that you can sort of see how the business fits really well. If we had not had the opportunity to work with Idorsia, this was something that we were already planning to do. It's just if we hadn't done it organically, it would have taken a lot longer. So by my estimate, we've probably saved ourselves 5 to 10 years of organic build-out, and we've got the products now to support that pipeline for the next 10 years, certainly.

[Interpreted] Mr. -- Dr. Tanaka is going to give you additional information of the pharmaceutical company.

[Interpreted] Sosei has a great [indiscernible]. And also, they are having a license partner. However, with this development team, Idorsia, we can develop much quicker and to deliver the program a product to the market faster than before. That is the best synergy. In Japan, we can have a high-quality product development. And this is a highly well received by Japanese physicians from clinical. The development -- we are developing a commercialization in our mind.

[Interpreted] Any other questions? Raise your hand, please. The gentleman on the front, wait for the microphone, please.

[Interpreted] [indiscernible]. I have several, so perhaps one by one, please. This IPJ, the acquisition of this company. Sosei, you have been saying that you are not doing M&A and in Japan, late development stage products or the already marketable products and then introducing them and becoming a company -- pharmaceutical company here in Japan. I thought those 2 were different. But as I look at this, it looks like you are doing both of them at the same time. Am I correctly interpreting this way? In other ways, M&A, are you going to just pursue M&A separately, JPY 65 billion, given this value, I think my first estimate is correct. Just wanted to clarify. I just wanted to ask this question. Why did you take this kind of a methodology or this way because doing M&A in the United States in terms of enhancing function, expanding the vision coverage, that will probably be the best scenario. Well, I used to think in that way. But here in Japan, [indiscernible] it in Japan, I would understand. How come you didn't do the M&A in the United States? Why did you decide to do the transaction in this way? That's my question number one.

[Interpreted] Could I invite Chris to address that question, please?

Sure. We are a company that has grown consistently in the last 20 years by acquisition. So we're very focused on using M&A as a way to accelerate our growth. So our first acquisition was Arakis in 2005, that brought us our first product, [indiscernible] and Enerzair, which are currently marketed. Find Novartis, and we receive royalties still to this day. 10 years later, the discovery platform that would give us all the seeds that we need to build a really strong discovery business that was Heptares. And now 8 years after Heptares, we have found the perfect complementary acquisition in Idorsia, Japan and Korea, which gives us the ability to not only market drugs that target GPCRs to patients. In our home market, we are a Japanese company, but also to help us pull through those seeds discovered in Heptares and deliver those to global partners and also to Japanese patients. So we think the timeline and the acquisitions, they fit very, very well. Why did we not do a deal in North America? The reality is North America is an attractive place, but it's an extremely competitive place as well. Asset values can be very, very high. And we, as a company, we actually don't have any experience operating in North America. All of our exposure to North America is currently through partners. So do we want to go to North America someday? Yes, we do. But we want to do that from a stronger base. And we found the perfect opportunity in Idorsia, Japan to build a strong base in our home market, so that we can grow corporate value, generate profits and be in a stronger position when the time comes to go to North America. North America is competitive, it's capital intensive, and you need to be a very strong company to play in that market. We think we would like to build a stronger foundation and base in our home territory first before we seek to expand to North America.

[Interpreted] Yes, I would like to -- yes, you're correct. So my second question. So 7-year long-term loan, so that means that you are confident that you can repay JPY 45 billion in 7 years. So if you have the cash flow in 7 years that you'll be able to repay JPY 45 billion for 7 years. I'm just trying to understand the meaning of 7 years in terms of loan and the synergy by this acquisition. Sales and EBIT, I understand, but cash flow, what is your expectation or forecast of cash flow being generated every year for upcoming 7 years?

[Interpreted] Yes. Thank you very much for your question. Chris, would you please answer about the synergy? Then I would like to talk about cash flow. Chris, please.

So I think I got the question, but basically, our current business model is cash flow neutral to cash flow positive because we don't spend excessive amounts on R&D. We rely on partners to support that cost. We are adding on top of that business, another business, which is cash flow positive. So we expect fully over the next 7 years that not only will sales and EBITDA increase, EBITDA is a proxy for cash flow. Cash flows will also increase. I can assure you, Mizuho would not be lending the money to us if they did not think that our business, which is cash flow positive, could support the repayment plan over 7 years. It can, and it will very comfortably cover the repayments. So what you will see over the next 3 to 5 years is a real change in the shape of the P&L of the company, but also the sustainability of cash flows, because our business today before Idorsia Japan, the cash flows are very lumpy. They only come when a milestone is generated or when a partner chooses to work with us. Going forward, we now have a business that sits on top of that, which has a revenue line, which goes like this. And we don't have any expensive clinical trials that need to be done on PIVLAZ and daridorexant. It's just sales and marketing expenditure that will increase, and that expenditure will drive sales and cash flows.

[Interpreted] I don't have anything to follow up. But simply said, in 7 years, can we repay with our positive cash flow? As Chris said, yes, we are able to do so. But if I were to give you just additional information, cash flow base is of course, it's based on the repaying of loan. But in terms of PL, as you understand that it doesn't impact. So PL, the income is excluding the repayment of the loan with a certain amount of amortization. And also synergy is -- was one of your question. And synergy is not reflected when the bank did the valuation. So if you ask us, what will be the amount of the synergy in terms of cash flow generation? I'm not able to answer that. However, including the new product development, the Heptares development is also generating cash flow.

[Interpreted] Third question, regarding the acquisition, this [indiscernible] Japanese entities function clinical trials, clinical tests before overseas focusing on Japan, this development on clinical trials capability and also doing the tie-ups with overseas partners. It will be a lean team that has the sales capabilities. That much I understood, but this IPJ drug discovery and research that do you have that function? Or home market or external markets will be licensed in development products and then you will work on the development in Japan. Is that how it is done?

[Interpreted] Tanaka, I will invite Tanaka.

[Interpreted] Thank you for your question. As you already know, we -- Idorsia headquarters in Switzerland. So from that research, when Japan and Korea, we did the development and then this deal concerning the synergy. So the new products from Sosei, we do the clinical trials and then we market them and including the license team, I hope you will interpret it in this way. Thank you.

[Interpreted] Please use the microphone, the translator cannot hear the question.