Nxera Pharma Co., Ltd. (4565) Earnings Call Transcript & Summary

Good morning, everyone. Thank you very much for taking time out of your busy schedule to attend this meeting. I am Shinichi Tamura, Representative, Executive Officer, President and Chairman. I will be presiding at this meeting pursuant to Paragraph 1, Article 15 of the Articles of Incorporation. Will the 30th Annual General Shareholders' Meeting please come to order? Today, due to the spread of COVID-19, there is a restriction -- travel restriction. So Director, David Roblin; and Executive Officers, Malcolm Weir and Tim Tasker, are not attending this meeting. I would like to ask you for your understanding. If the shareholders seem to be having some health problems, our staffs may talk to you. And if it is considered necessary to maintain the health of the surrounding shareholders, I may ask the person to leave. So I would kindly ask you to understand. I would like to ask for your cooperation to support the smooth progress of this meeting. We would like to accept questions and comments after going through the report of the matters to be reported and explanation of matters to be resolved. And when you ask questions or state your comment, please do not touch the microphone. To protect the virus infection, the staffs will disinfect the microphone after each question. There's a video camera in the back of this room to record the proceedings of this meeting. Webcasting of this meeting is scheduled, focusing on the directors. And we would like to ask for your kind understanding while we consider each shareholder's privacy. First, I would like to announce the number of shareholders present at this meeting and the number of voting rights held. Out of 31,165 shareholders, 29,687 shareholders are entitled to vote at this meeting, and the number of voting rights are 770,357. The number of shareholders present at today's meeting, including those who exercised their voting rights through Internet and mail, are 7,944 shareholders and the number of voting rights exercised are 402,757. Therefore, I declare that the quorum necessary to deliberate full agenda has been met. First, I would like to request the report of the results of the audit by the Audit Committee. Mr. Tohyama, Chairman of the Audit Committee, would you please present the report?

I am Tohyama, Chairman of the Audit Committee. I would like to report the results of the audit by the Audit Committee. The Audit Committee of Sosei Group Corporation has audited the performance of duties by directors and executive officers for the 30th fiscal year, from January 1, 2019 to December 31, 2019. The results are provided on Page 34 of the Notice of Convocation distributed to you as the audit report of the Audit Committee has stated. The committee found that the business report and supplementary schedules accurately present the status of the company in accordance with the laws, regulations and the Articles of Incorporation. The committee did not find any inappropriate conduct related to the execution of duties by directors or executive officers or any material facts indicating violation of law or the Articles of Incorporation. The committee found that the contents of resolution of the Board of Directors related to the internal control systems are appropriate. In addition, the committee did not find any matters requiring us to comment on the contents of the business report or execution of duties by directors or executive officers regarding internal control systems. The committee found that the methods and results of the audit of consolidated financial statements, nonconsolidated financial statements and supplementary schedules performed by the independent auditors, Deloitte Touche Tohmatsu LLC, were appropriate. That concludes the report from me.

Thank you, Mr. Tohyama, Chairman of the Audit Committee. Next, we would like to move to the matters to be reported. The business report, the financial statements, the consolidated financial statements in the fiscal year under review are provided on Pages 12 to 36 of the Notice of Convocation distributed to you. As to the overview, I will be using the presentation materials to explain. Please take a look at the screen at the front. Unfortunately, Chris Cargill, CFO of the company, cannot come to Japan due to coronavirus spread. He regrets not being able to speak in person and can't wait for the next visit to Japan. Given the situation, I will explain fiscal year 2019 full year results on behalf of Chris. As the figures are on Page 18 of the convocation notice, please refer to the handout. I am delighted to say that we had a fantastic full year executing on all strategic goals. The successful execution of our corporate strategy drove significantly improved financials. We generated significant cash profit, which is a key metric that we look at that -- as it best reflects the cash flow generation of the business. And thanks to the support, we have been able to return the term loan. So we have no debt at the moment. We are extremely proud of what we achieved in fiscal year 2019, and we aim to deliver the same in fiscal year 2020 as the group continues to pursue a sustainable growth business model, targeting profitability. This slide shows the group's P&L breakdown for the 12-month period ended December 31, 2019. This year, execution of the strategy generated multiple new upfronts and milestone payment. Combined with prudent cost management, we delivered profitability. Revenue related to upfront fees and milestones totaled JPY 6.013 billion, an increase of JPY 5.616 billion versus the prior year. The large increase was primarily due to commencement of new collaborations with Medicxi, Genentech and Takeda, in line with our strategy to broaden partnership and diversify revenues. We drove manageable cost down in the pursuit of profitability. Cash R&D expenses in the year under review totaled JPY 3.937 billion, a decrease of JPY 2.55 billion versus the prior year. The decrease in R&D spend was the result of more focused approach to drug discovery and early-stage development programs. Cash G&A expenses in the year under review totaled JPY 2.164 billion, decrease of JPY 350 million versus the prior year. The decrease was primarily due to strict management of costs. As mentioned earlier, this resulted in very strong cash generation profitability for the business. Cash profit in the year under review totals JPY 2.802 billion, a huge increase of JPY 8.506 billion. Net profit before tax totaled JPY 534 million, a huge increase of JPY 9.58 billion versus the prior year. Net profit in the year under review totaled JPY 1.432 billion, huge increase of JPY 8.351 billion versus the prior year. I'll now explain the situation concerning novel coronavirus, COVID-19. As the phenomena and request by countries pertaining to COVID-19 outbreak change dramatically, we carefully observe the situations worldwide. The primary importance remain health and safety of employees, visitors and subjects in clinical trials. In both Japan and U.K., we execute emergency measures immediately and effectively. Whenever there are changes in the situations, we respond without delay. We are part of health care industry and we have 3 physicians in the company. We are meticulous in taking measures. The employees are encouraged to work from home and commute avoiding rush hours. The researchers are divided in 2 groups and working office through rotations. If we say there's no impact to business at all, it's a lie. We evaluate project priority rigorously and focus the partnerships with huge importance. Major partners are all highly credible mega pharmas. There should not be delinquency of contractual payment and major project schedule delay. The partnership relations are managed by steering committees with the partners. With the CROs, we have close collaboration. On a daily basis, we are updating the situation. Ironically, many of the CROs secure inventories and alternative routes in response to Brexit. We judge that there shouldn't be much problem in the supply chain. Our CRO network is broad and geographically diversified. Minor delay may not be major obstacle to business continuity. In terms of business development, there are many negotiations ongoing under the surface. And the negotiations are conducted without any obstacle through virtual meetings using IT tools. In terms of financials, we don't have any liability. Cash at hand is JPY 15 billion. Credit line is JPY 5 billion, and we are unlikely to assume decline due to COVID-19 in terms of the royalty revenue. Even under these circumstances, in drug discovery and early clinical development, we see steady progress. This slide shows our guidance for fiscal year 2020. We will continue to focus on our core competencies to deliver sustainable growth and target profitability. We expect cash R&D expenses to be in the range of JPY 4.2 billion to JPY 4.7 billion. To achieve this, we will increase the number of programs fully funded by partners, extract savings from enhanced procurement practices, maintain rigorous cost control. We expect cash G&A expenses to be in the range of JPY 1.8 billion to JPY 2.3 billion. Key areas of focus in fiscal year 2020 will be investing in the new cloud-based ERP system to drive group-wide efficiencies and eliminate control issues. We will make tactical hires to strengthen specific compliance and support functions. We are investing sensibly for the future whilst maintaining a strict control on cost and extracting efficiencies. I will now provide an operational summary and strategic outlook. I will briefly talk about the highlight of 2019. In January, from AstraZeneca, milestone, JPY 1.5 billion was received as milestone payment. Inexia, Orexia were launched, and as a result, we had the JPY 5 billion commitment. And in February, SSTR5. This is a CNS-related compound and we started a clinical trial for that. In May, from Novartis, third triple combo, we have started the submission to EMA, and we have received JPY 250 million. By achieving milestone from Pfizer, around JPY 6 million milestone was received. In July from Genentech, we had upfront payment, and we had a total of 20 -- JPY 2.6 billion. So this is basically the milestone exceeding JPY 10 million. In August from Takeda, this is similar to Genentech upfront payment and we had a payment of around JPY 2 billion. In total, it was a milestone of around JPY 120 billion. Entering in October, similarly from Genentech, we achieved a milestone and we received JPY 300 million. In December, from Pfizer, new compound clinical trials started and we received JPY 500 million. Also, we have nominated new candidate for clinical advancement, and we received JPY 300 million. Next. This shows our overview of the pipeline. As for the details, I won't explain now. From drug discovery to launch, we are one of the handful unique Japanese pharmas covering both of them. There are more hit and lead stage compounds but statistically, probability of success of reaching to approval is low. So I'm not including that in the pipeline. I will talk about the details on the next slide. As I mentioned, hit and lead stage, we're starting from the leading compound and spending 4 years. One of them to reach preclinical is the ordinary statistics in the industry. And we spend 2 additional years to enter into a clinical stage. This is common and we have very unique drug discovery system. So it's not just the 1,000, but out of 500, 1 will reach a preclinical. And instead of 4, we will be reaching in 2 to 3 years. And we spent another 2 years to reach the clinical stage. But we are very efficient. As of now, in the past decade, 25 candidates are for preclinical, and 7 of them are candidates for clinical. So as I mentioned in the performance highlight, I talked about the progress in Pfizer and we had a contract in 2012 and then spent 4 years, 3 drug candidates have been produced after 4 years since 2015. So this is our result. This is the concept of our strategy. So technology, StaR technology and we do drug discovery and partner at various stages, and the proceeds will be invested in the technology and drug discovery and circulate the cycle in spiral. We will expand the leadership in drug discovery and also generate new drug candidates and enhance focus on high-value collaboration or long-term ventures. Acquire the new partnership is the core -- new and the existing partnership is our core. This is the basis of our technology. StaR technology, our platform technology. This is one and only at the top level of GPCR drug discovery around the world. But if we are content with one technology, we will face other competitors and this will be obsolete. So we need to constantly refresh our technology. So Cryo-EM, this is -- one of the Heptares' founder, Richard Henderson. In 2017, he won the Nobel Award and -- for the Cryo-EM, and we are ahead of the curve here. In SaBRE, this is -- we acquired G7, a Switzerland company and DNA-encoded libraries. We partner with a German company here and we use AI with Cambridge University partnership. But we are not content with all of this. This year, we are acquiring new technologies and tools to add more platform technology and capabilities. Next, recently, we are seeing new emerging drug discovery modalities, peptide, antibody, nucleic acid, cell medicine, among others. But 63% of the global pharmaceutical market sales is small molecules. And FDA novel drug approvals, majority is small molecule. And this ratio has not declined. And therefore, the molecule, small molecule discovery technology is most established, and this is still the classic method of drug discovery. There are new modalities but it takes considerable amount of time for new drug discovery modalities to be established as drug discovery method. We will progress on this classic or royal road of drug discovery while promoting the R&D through partnership for new drug discovery modalities. New drug discovery modalities are explored for various reasons. One important factor is that proteins that are relatively easy to target are depleting. Remaining targets, including not only GPCR, are high-hanging fruits and cannot be tackled without bleeding-edge technology. We have such cutting-edge technology on GPCR drug discovery, and are partnering with Pfizer, Takeda, Genentech and pharmaceutical companies that have realized that. GPCR accounts for -- sold 40% of the approximately 1,000 protein drug discovery targets, of which approximately 60% are high-hanging fruits. So 60% of 400, so over 200 untapped drug discovery targets are remaining. I'm not saying we can monopolize them, but there is a good chance that we can continue our technology innovation and capture the majority of them. Next, therapeutic area. Platform technology can accommodate all therapeutic areas by meeting the other party's request and form various partnerships. But in development candidate phase, we need to narrow down the therapeutic areas and gather our knowledge and enhance our expertise. We will focus, especially on immunology and inflammation, for the time being. Now this is the general flow of the drug R&D, from drug discovery to development, from low risk/low return to high risk/high return. Given our financial strength, our short-term strategy is to invest up to JPY 5 billion a year in R&D and proceed up to Phase Ib at most and partner with large pharmas. Of course, another option is to only go up to discovery and expand our profit. But given the future upside, we think this is the optimal risk balance now. Of course, we may partner in an earlier stage if attractive conditions are met. And once we become more financially robust, we can possibly develop up to Phase II and license out at more beneficial conditions. Next, please. So this is our partnership policy. So strategic focus on executing new programs to be funded by partners, so Pfizer, Genentech and Takeda. Next primary goal is $500 million-plus deals with world-leading pharmas and biotech. And we had 2 partnership in 2019 of this sort. Seed novel candidates into long-term Orexia, Inexia with Medicxi, so that kind of venture with upside. So without risk, it will be low cost, low value, but that is not interesting, it's not appealing. And if you take too much risk, it will be high-cost, high-value. Too much risk is difficult for us at this point. So our focus is low cost, high-value partnered and co-owned program. Now other than the platform technology partnership, we have 15 compounds that can be partnered immediately beyond drug discovery phase, and we are adding value in negotiating licensing and establishing of JV. So we will promote such negotiation going forward. With the existing capacity, we can generate around 4 lead compounds every 2 years and maintain a sustainable strategy for long term. That concludes my presentation. Lastly, we received opinions stating appropriate from independent auditors, and the Audit Committee of the company found that the methods of the -- and the results of the audit performed by the independent auditors were appropriate. I would like to conclude the reporting of the business report, the consolidated financial statements, audit report of the independent auditors and the Audit Committee on the consolidated financial statements and the financial statements in the fiscal year under review. I would like to present the proposal, election of 6 directors. Please take a look at Pages 5 to 11 of the Notice of Convocation distributed to you. The terms of office of all 6 directors will expire upon conclusion of the meeting. Accordingly, I would like to propose the election of 6 candidates of directors, including 1 new candidate. The candidates are Tomohiro Tohyama; Kuniaki Kaga; David Roblin; Noriaki Nagai; Rolf Soderstrom; and I, Shinichi Tamura. Career summaries, et cetera, for each candidate are as provided in the Notice of Convocation. I move to the adoption of the proposal election of 6 directors. The details are as explained previously. Please express your affirmative votes by applause. [Voting]

Based on the vote, this proposal received a plurality vote presented in person or in writing or via Internet. Therefore, this matter has been approved as proposed. Thank you. Since all the matters have been resolved, I declare the 30th Annual General Shareholders' Meeting of Sosei Group adjourned. Thank you for your attendance. Now I would like to introduce to you our new director, Mr. Rolf Soderstrom. Due to coronavirus, he is absent today. So please allow me to introduce him through video.

Good morning, everyone. I'm Rolf Soderstrom. I apologize that I can't be with you today to introduce myself in person, but given the current situation surrounding the coronavirus, it was decided that it was in the best interest of everyone to minimize travel. I hope that in this short video I can provide a bit more information about the experience and expertise that I bring to the Sosei Heptares' Board of Directors. Firstly, I'd like to thank you for electing me to the Board of Directors. It's a great honor to be joining the company at this exciting stage in its development. The discovery of groundbreaking drugs targeting new indications and unmet needs is vitally important to today's world. To be part of an organization involved in the leading edge of this research is both exciting and humbling. Having spent the past 12 years involved in drug development, manufacture and commercialization, I understand the challenges of identifying drug targets that can translate through effective clinical trials to ultimate approval and use for patients. The world of drug discovery is complex, lengthy and expensive. Sosei Heptares' StaR technology, combining science and technology to deliver more effective and efficient drug targets, has the potential to demonstrate real competitive advantage and value to both Sosei Heptares and its partners. Turning to my own experience. I've worked in finance for over 30 years, and I'm a qualified chartered accountant by training. After qualifying as an accountant, I spent a number of years advising companies on international acquisition strategies, covering market entry, acquisitions, disposals and fundraisings. During this period, I worked extensively in Europe and Central Asia, including as [ an incumbent ] to the U.K. Foreign and Commonwealth Office, where I worked for the U.K. Embassy in Thailand. For the past 20 years, I've worked in various commercial finance roles across a number of different highly regulated industries, including telecommunications, aerospace and pharmaceuticals. I've worked extensively in Asia, the United States and Europe. My areas of expertise include strategy, mergers and acquisitions, fundraising and improving financial performance. For the past 12 years, I was Chief Financial Officer of BTG plc, a U.K.-listed company focused on combining technological advances in imaging, clinical and material sciences to develop and commercialize interventional medicine products which could target disease at the point of treatment, delivering better clinical outcomes in a more cost-effective way. This company was sold to Boston Scientific in 2019. I'm currently a non-Executive Director of Ergomed plc, a specialist pharmaceutical services business also listed in the U.K. Over the past 30 years, I've developed a deep understanding of the opportunities and challenges facing businesses seeking to grow in the international marketplace. I hope that I can bring some of those experiences to help and contribute to the exciting future of Sosei Heptares. I hope this has been a useful introduction. I humbly thank you for placing your trust and confidence in me. I'm delighted to be joining the Sosei Heptares team and look forward to meeting you in the future.

So that was Rolf Soderstrom. Directors and executive officers, please stand up. Thank you very much for large turnout of the shareholders today. And thank you very much for your understanding and cooperation to respond to coronavirus. We will together -- to further enhance the corporate value. Thank you very much for your continued support. [Statements in English on this transcript were spoken by an interpreter present on the live call.]