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

Good afternoon, ladies and gentlemen. Thank you very much for joining Sosei Group Corporation's Teleconference despite a very busy schedule. In this meeting, we have Mr. Shinichi Tamura, CEO; and Mr. Chris Cargill, CFO; and myself, Nomura is joining from IR and Corporate Strategy. First of all, Mr. Tamura and Mr. Cargill will talk about the financial results of fiscal year 2020 and the future strategy for about 50 minutes and followed by a Q&A session. The meeting is to last for about an hour. Due to the COVID-19 pandemic environment, our CFO, Chris Cargill, will be joining from overseas through a simultaneous interpretation. Please allow us to provide simultaneous interpretation. In the Q&A session, we hope that you will speak clearly and slowly. The presentation materials were uploaded to our website on the 12th last week. Please refer to the materials. In the first presentation, we will be using the financial results materials. Prior to the beginning of the teleconference, we have some disclaimers. This is based on the forecast of the future as of now, and they are associated with the risks and uncertainties. Please be aware that there could be some differences from the guidance. So now we would like to begin. Chris, over to you.

Thank you very much, Nomura-san. Please everybody turn to Slide 5 in the presentation materials. Good afternoon. My name is Chris Cargill, Chief Financial Officer of Sosei Group Corporation. Today, as I presented on here last week, we are extremely pleased to report another year of strong financial performance. Throughout FY' 2020, we executed on a very long list of corporate goals, and these achievements have helped us to drive a second consecutive year of profitable performance. Our balanced business model which emphasizes having multiple collaborative partnerships to share the costs and risks involved in drug discovery has allowed us to achieve positive operating performance and positive cash flows. In addition, international investors took note of our leadership position in drug discovery and our growth prospects, and supported us to successfully raise $200 million, Japan's largest biotech-focused financing during COVID-19. We are now very well positioned to invest and expand corporate value from 2021. The group will continue to pursue a balanced business model and sustainable financial profile. Please move forward to Slide 7. Now on Slide 7, this slide shows the group's profit and loss breakdown for the 12-month period ended 31 December, 2020. Our emphasis on collaborative drug discovery partnerships and co-investments drove a balanced split of revenues and allowed for strong management of costs. Total revenue was JPY 8.8 billion, a slight decrease of JPY 884 million versus the prior year. Our biggest source of revenue is revenue related to upfront fees and milestone income. Revenue related to upfront fees and milestone income was similar to last year and totaled JPY 5.4 billion, a slight decrease of JPY 660 million versus the prior year. As I mentioned on the previous slides, this result was not unexpected given the delays we saw U.S. pharma companies experience during the COVID-pandemic environment. In line with our strategy to broaden collaborative drug discovery and to diversify our revenues, we added 3 new major pharma partners in FY 2020, AbbVie, Biohaven and GSK. Furthermore, we created a co-owned investment called Tempero Bio with industry veterans and a decent buyer. These 4 new deals brought in significant new revenue in FY 2020 and will continue to generate milestone income as the collaborations progress into the future. We drove manageable costs down in the pursuit of a sustainable financial profile and, therefore, delivered a cash earnings profit. Cash R&D expenses in the year under review totaled JPY 3.4 billion, a decrease of JPY 526 million versus the prior year. The decrease in R&D spend was largely the result of several new collaborations, which enabled us to shift costs and development risk to our major partners. Cash G&A expenses in the year under review totaled JPY 2 billion, a decrease of JPY 169 million versus the prior year. This decrease was primarily due to the strict management of costs. For those investors focused on our operating profit, as reported in the [ time sheet ] we delivered an operating profit of JPY 928 million, an increase of JPY 544 million versus the prior year or 142% increase in percentage terms. Turning to the items below the operating profit line, there was an increase in net finance income this year. This is primarily due to the inclusion of a larger contingent consideration fair value movement gains in the current year versus the prior year. Following Sosei's acquisition of Heptares in 2015, Sosei became obligated to pay certain contingent earn-out payments based on the progress of programs up until an expiry date of 31 December, 2021. As the expiry date is now a near-term event, we have reassessed our position regarding the likelihood of making the remaining payments and this has resulted in us releasing some additional credit. You may also recall at the half year results, we had a paper tax charge of JPY 847 million, due to IFRS methodology, and I said a large proportion of this would reverse in the second half of the year. And as you can see, it did. Net profit in the year under review totaled JPY 1.5 billion, an increase of JPY 47 million versus the prior year. Please turn to Slide 8. This slide highlights the group's balance sheet as of December 31, 2020. Positive operating cash flows and the highly successful capital raising have us well positioned to invest in enhancing corporate value. On the right-hand side chart, you can see we generated almost USD 40 million of positive operating cash flow. This is a direct result of our collaborative drug discovery strategy, where costs and risks are shared with major partners. Furthermore, international investors took note of our drug discovery business and its growth prospects. It's reported that we successfully raise nearly $200 million, Japan's largest biotech-focused finance during COVID-19. We finished the year with cash paid of JPY 40 billion or USD 387 million, as of 31 December, 2020. Please jump ahead now to Slide 10. This slide, Slide 10, shows our guidance for FY 2021. We plan to make modest increases in investment to fuel programs, add new major partners and drive a step-up in our corporate valuation. We expect cash R&D expenses for the underlying drug discovery business to be in the range of JPY 4 billion to JPY 5 billion. As a result of our recent muscarinic program review, we have decided to increase our investment in this program, HTL’878, a selective M4 agonist lead program. Our independent review suggests that a novel drug with a new mechanism of action in schizophrenia is a blockbuster opportunity. The HTL’878 M4 program represents a unique and valuable investment opportunity and is positioned well against other early-stage programs being developed for schizophrenia. Our investment will enable us to accelerate and build value in the HTL’878 program, whilst we can currently seek a new major partner to take the program forward from Phase II in the next 12 to 18 months. We will also maintain sustainable levels of investment across all other discovery and development programs, including the other muscarinic programs, such as the M1 Agonist program and the dual M4, M1 agonist program. We expect cash G&A expenses to the underlying drug discovery business to be in the range of JPY 1.8 billion to JPY 2.3 billion, which is the same guided range as last year. We will continue to make new hires to strengthen our compliance, governance and support functions. Our aim is to prepare for and to meet the highest standards of corporate governance code in Japan. We want to operate at the same level as TSE section 1 listed companies, even though we are currently TSE Mothers listed. This year, we will also implement our new cloud-based Oracle NetSuite ERP system, designed to drive group-wide efficiencies and eliminate control issues. We are investing today to drive the corporate value growth tomorrow. Please turn to Slide 12, and I'll touch now on the operational highlights for FY 2020. The operational highlight summary, and I'm extremely pleased to report that another excellent year of operational performance has occurred as we look to build Sosei Group into a drug discovery powerhouse. I will begin by talking about the organic growth plan that is driving our world-leading position in GPCR drug discovery. And there are 4 areas of focus: one, extending technology and platform leadership and expanding our expertise in GPCRs; two, generating high-quality drug candidates, and we will aim at least 2 new preclinical candidates on average every year; three, advancing the pipeline, demonstrating that we progress programs in-house and via partnerships; and four, executing high-value partnerships, and we aim to secure 2 to 3 new major partnerships or co-investments every year. Please turn to Slide 13. Against that backdrop, I am pleased to announce that we successfully executed on all organic growth objectives in 2020. Regarding point one, extending technology and platform leadership, we achieved a scientific breakthrough at our co-investment company, Orexia, which brought forward new funding. This program is in the highly sought after area of Orexin agonism, and we look forward to more strong progress in 2021. Point two, regarding generating high-quality drug candidates. We beat our target of 2 and achieved 3 new preclinical candidate nominations, H4, EP4, and GPR35. The last target is such a highly sought after novel GPCR target in IBD that GSK licensed from us towards the end of the year. Point three, regarding advancing the pipeline. We saw 2 in-house programs move to Phase I and concurrently both were licensed as well as our partner, Pfizer, moving its second program from our technology collaboration into Phase I studies. Of course, Enerzair was also approved, and it moves into launch phase. It will start to contribute royalty income to Sosei alongside the other Novartis products, SaBRE and Ultibro. Point four, regarding executing high-value partnerships, we beat our target of 2 to 3 and achieved 4 new major partners, AbbVie in Immunology; Biohaven with our CGRP program for severe headache and migraine; GSK with our GPR35 program in IBD and other GI areas; and our co-owned investment with Aditum in Tempero Bio to advance our mGlu5 program in substance use disorders. These new collaborations and co-investments add significant value to Sosei's business, whilst shifting cost and development risks to partners. Please move now to Slide 20. I will now turn to our strategic growth plan, which is designed to drive Sosei's corporate value expansion. And here, there are 4 areas of focus: one, to seek out revenue-generating opportunity. Here, we completed a $200 million capital raise in FY 2020 that puts us in a position to seek out opportunities in FY 2021. Invest and collaborate in novel technologies that enhance our SBDD platform. Here, we will add new technologies to our SBDD platform. For example, GPCR targeted protein degradation, which we are doing via our collaboration with Poland-based Captor Therapeutics. And after the period under renew ended, we also entered into a new collaboration with Cambridge-based AI company PharmEnable to drive AI-driven chemistry against a difficult GPCR target of interest. Point three, expanding drug target classes beyond GPCRs. Here just after the period under review ended, we've taken steps to expand into ion channel discovery via collaboration with Cambridge-based Metrion Biosciences. Lastly, point four, we continue to seek in-licensing opportunities in Japan to bring important international medicines to Japanese patients in areas of high unmet medical need. Our strategic growth plan is about adding new revenues and accessing new technologies to expand future profile capabilities to ensure corporate value expansion at Sosei. Please move now to Slide 22. We wanted to highlight now that we are covering around 50% of the total drug discovery landscape through the tactical expansion of strategic collaboration. As you can see on this slide from our core capabilities and competencies in small molecule chemistry, we are quietly and confidently expanding both the drug targets we work on and the modalities used. With cautious expansion to our SBDD platform will ensure we remain one of the world's leading drug hunters for many years to come. We look forward to updating our shareholders in the coming years regarding the process of these tactical collaborations. I'll now hand over to CEO, Shinichi Tamura, to talk about future themes and the strategic outlook shaping our business. Over to you, Tamura-san.

Thank you very much. Please turn to Page 24. There are 2 important items for the development of our business. First, is to how we tackle the challenges of drug discovery, which has very low success rate. And secondly, how to become a company that can fulfill the responsibility of an ESG leader. First of all, how we couple the challenges of drug discovery and development. On the far left, it says the -- specifying the patients with biomarker and discovering of therapeutic agents. For these two, based on the DD, drug discovery, we have over 10-year experience, and we are well prepared for the future. So I will not explain details. And on far left, we're choosing the right target. That is the starting point for drug discovery. And the importance of that point is becoming more and more important. So to -- for us to develop as innovative to be the drug discovery leader, this is going to be a very important point for us. By managing this decision point, we'll be able to develop ourselves as innovative drug discovery leader and also to increase our corporate value. And to do that, we need to identify and validate GPCR target. And to do that, we have created a new target ID and validation TIV framework. This framework to expand our drug discovery technology, we will use our mixed big data and target validation, and we are going to work together with companies who have a top level technologies, of course, AI will be running in the background. And as such, we will be a novel and hot GPCR target and identification and validation will be maximized. Page 26, please. For the next 3 to 4 years, the current therapeutic areas of interest, GI immunology and neuroscience, that will be our focus and we'll be working together with the existing partners to pursue first-in-class drug discovery. In the TIV framework, through new partnerships, we would like to improve the productivity of drug discovery as much as possible. A new novel and attractive targets if we can identify them, we will be utilizing the drug discovery engine, which we have a lot of experience in creating drug candidates. Page 27, please. Another important theme that we should be working on is ESG. In December 2020, in our blog, we talked about our initiatives on ESG-related activities. Our company is to support people to have healthy lives and lives with dignity, and we are committed to realize the sustainability. Our corporate activities include our fulfillment of responsibilities to our stakeholders. So ESG is an important challenge for us. Not limited to corporate activities, we need to make sure that individuals are committed to ESG as well. In the end, it is really up to conscience and behaviors of individuals, so just talking about is not sufficient. And now let me talk about the target or outlook for FY 2021. Please turn to Page 29. There are 3 objectives, as I mentioned earlier and not only talking about this, but we would like to become a true ESG leader. And secondly, to progress the organic growth plan. We would like to utilize the existing and new technologies and platform, to come -- to generate high-quality preclinical stage candidates, which would lead to high-value partnerships, and our target is execute 2 to 3 new high-value collaborations for investment. And thirdly, is the strategic growth. In 2020, we did the financing, as I explained back then, we -- to seek out revenue generating opportunities, and we would also like to add new values for -- beyond the GPCRs, and our target is also to do in-licensing of late-stage assets for Japan market. Over this, I would like to conclude my explanation.

Thank you very much. Now we would like to move on to Q&A session. So first of all, from Nomura Securities, Matsubara-san, please.

Yes. My name is Matsubara from Nomura Securities. Can you hear my voice?

Yes. We can hear you.

The first question is on Page 20. The future strategic plan. You have been showing acquisitions and unmet medical needs in Japan. And do you have any examples? Or do you have any objective at the moment?

Yes. I would like to respond to that question. First of all, the implementation of the profitability plan. Since this is M&A activity, we are now reviewing many deals and we are trying to narrow down. So at least, at the latest, within this year, and if possible by the middle of 2021, we would like to implement. And for the late phase, stage development for licensing to Japan. We have several targets, and we are narrowing down, but there is counterpart, and we don't know when we come to close. But once we see the results, we would like to make an announcement immediately.

Understood. And coming to my second question, this is related to Allergan and muscarinic agonist. And what is the current situation? And what is your plan going forward? Can you also respond to this question as well?

Yes. As for that, I would like to ask Chris to respond to this question, first.

Sure. Thank you, Tamura-san. So with regard to the programs that have come back from Allergan, we have conducted an independent review, which reported to the Board. And we have, as a result of that review, decided to increase our investments in the M4 HTL’878 program. And this is going to get a lot of development focus from us moving forward. We like this program. It's a program with a faster and much more manageable clinical pathway. We are seeing high levels of investor interest, particularly in Cerevel Therapeutics' M4 Positive Allosteric Modulator program and Karuna Therapeutics programs. And we also see a large opportunity in schizophrenia for a new mechanism of action drug. And so we are going to put incremental R&D investment behind this program to ensure it moves forward quickly and that it will remain as high interest to potential partners. With regard to the other programs, we are going to maintain sensible levels of investment behind the M1 program, and this is both HTL’318 and the next-generation backup program that we have also created, as well as the M4/M1 dual, which is a similar compound to the Karuna compound. So if we look at our investment focus in these programs going forward, approximately 50% of our committed R&D for the muscarinic programs is going to go to the -- to the M4 lead program. And then the remainder for now, roughly 25% and 25% against the M1 and the M4/M1 dual programs. And that is everything from me. Back to you, Tamura-san.

Thank you very much. Then if I may elaborate a little bit for the partnering from Allergan and from AbbVie, the asset was returned, and we immediately had a [indiscernible] meeting. And there, with a myriad of companies we have contacted. Out of that potential or we have selected the companies which were promising and the mega pharma, mega bio companies and there were several bio venture [ destiny ] companies, and we are currently negotiating under the surface. As Chris mentioned, the value is identified immediately in M4 schizophrenia, and the benchmark will be Karuna and Cerevel, so that will be the case. But having said that, for M1, we are not giving up dementia as well. As you know, in the area of dementia, a disease modifier, we don't know the status of a disease modifier. But even if we succeed, we are hoping that this will succeed. And the target will be the initial stage of dementia. So that will be almost for sure. But as this kind of therapy, our M1 compound is, even if the disease status progresses, we may be able to deal with the situation. As we mentioned in our presentation, Aricept, even if it does not become efficacious, even with a more advanced stage, our mechanism of [ compaction ] can't work. So it can co-exist with disease modifier. So including that, partners are interested. So if possible, M4/M1 dual, we are hoping to have partnership together. That is our strategy.

Now I would like to ask Tsuzuki-san from Mizuho Securities to ask your question.

This is Tsuzuki from Mizuho Securities. Very nice to hear from you. Can you hear me?

Yes.

I have -- first of all, my first question. This is something that's been taken up as a topic. So people are talking about shifting to prime according to the net income. But according to my understanding, you should look at income before taxes. But if you look at that, it doesn't go above the threshold. Can you share with us your thoughts?

Absolutely. The target, the standards of TSE is looking at income before taxes. It's not net income. So therefore, as you mentioned, with net income, for 2 consecutive terms, we have been able to generate profit of over JPY 2.5 billion. So we are above that threshold. But if you look at the income before taxes, it is only JPY 2.1 billion. So we are a little short of the threshold. So we have not reached the standard. So we are not going to be shifting to prime for December -- fiscal year 2020 ended in December. But we have plans to purchase or acquire targets with profitability or with revenue. So there is no guarantee, but we are quite confident that we'll be able to achieve a certain level of performance. And if we can achieve that, I think we will be able to generate a situation where we can fulfill the standards requirements by TSE. So there is a possibility that we shift to prime for December 2021.

Another question I have is, a few things I would like to know about GLP-1, which is out-licensed to Pfizer. Can you explain the competitiveness of this program, please.

I would like to ask Nomura-san to answer to that question.

Thank you very much for the questions. So GLP-1 agonist, which is licensed out to Pfizer, if you can turn to presentation material, Page 17. I believe you are talking about the program that is on the Phase I. Talking about the competitiveness. I think there are 2 questions related to that. The first question is that, you already know, GLP-1 agonist is [ developers ] of Novartis. So this is already launched and available in the market. It has been launched in the Japanese market as well. And what I'm about to say is something based on the fact that this is something that's been developed by Pfizer. And this is on the very objective information that I will be providing. And also this program is still in Phase I. So depending on the future development of the program, there is uncertainties. And based on that understanding, allow me to give a comment. GLP-1 agonist, which is already launched in the market, Novartis. This is a oral treatment drug. It's a peptide, which is already treated. So therefore, vial availability is very low, which is pointed out by PMDA as well. So of course, there is efficacy because the large dose is administered, but considering the fact this is a peptide drug compared to small molecule, the cost of goods is higher. And furthermore, this is also mentioned in the PMDA review report, and I would like you to look at the API of Rybelsus as well. This is a overall administered peptide. There are different conditions for administrations. For example, it's got to be taken during the fasting. And you need to -- and after administration, you cannot eat or drink for next 30 minutes. And according to TPI, it's 30 minutes, but it is recommended to refrain from eating or drinking for next 120 minutes. And if you consider that small molecule and peptide, there are differences in substances, substance properties. So therefore, there is a possibility that we'll be able to show a different characteristic compared to that drug. And this is not the competitive drug, but Pfizer is developing another GLP-1 agonist. This product is in Phase II. And including the partnered program with us, they are developing 2 programs. So we started later than them, and this is something that the Pfizer is doing. So I cannot give you any comments on their thoughts. But if you look at the clinicaltrials.gov, already administered a GLP agonist, which is not ours, it is to be administered twice a day according to the clinical trial design. So our products or program is still in Phase I. And according to the clinical trial is designed for once-a-day administration. So as of today, there are differences between those 2 programs. And we would like to move on to Tsuzuki-san from Mizuho Securities.

I'm sorry to ask question for the second time, but please allow me to ask questions. In this disclosure, thank you very much for disclosing so much information. On Page 39, when you take a look at Page 39 of the presentation materials, as the structural analysis the Takeda pharmaceuticals and we think you received a milestone payment. And if you look at the 1 year earlier from Daiichi Sankyo, the structural analysis was completed, and the lead compound is to be obtained within a year. So Takeda and AbbVie, looking at this time span, I think, you will be getting the lead compound next year, but is there anything that you can suggest at this point in time?

Yes. For this question, Chris would like to respond to your question.

Thank you very much. Unfortunately, as these are partnered programs, we can't give too much detail around time lines and when we expect specifically to receive milestone income, except to say that one of the reasons that we enter into these multi-target collaboration style deals is to ensure that we are working on lots of programs with partners, and that will, hopefully, over the long term, generate sustainable year-on-year milestone income events. Something like, as you see on this slide, structures being solved and us delivering stabilized protein, moving through into lead optimization and then the creation of preclinical programs and beyond. All of those progress events typically generate larger and larger milestone income as we move forward towards clinical development. And the more of these discovery collaborations that we execute, the more we expect over the medium to long-term that we will get sustainable income from milestone which will increase year-on-year. That completes my question.

So I would then like to move on to the next question from [indiscernible], Hashimoto-san.

I hope you can hear me.

Yes, yes. We can know you, but the audio is very poor. If you can speak closer to the microphone, please.

Page 25, Page 26. I have questions related to those, about TIV. So I believe this covers a very wide range of topic. So compared to the strategy that you invest -- you implemented so far, what is the difference? And what is your -- going to be your focus? Can you explain more in details about this?

Thank you. So allow me to answer to that question. In Heptares, to identifying new target was done mainly manually looking into literatures and also investigating and looking into patents. So therefore, KOLs, we're providing opinions, and that's how we identified. So those are the ways that we have been doing it. Of course, we have been using AI as well. But we wanted to do it more comprehensively, and we wanted to do it more in a more systematic manner. When you use AI, you need big data. But with regards to GPCR, and the amount of data available, I believe that we are the ones who has the largest amount of data for GPCR. So we decided to make use of that. And in addition, there was an article, nature, Human Genome project. There were some outcomes. And it seemed so that they are a lot of unused data and the target can be explored even further, and there are many drug discovery targets available. So if you look -- if you explore drug discovery targets, 1/3 to 1/4 I would take GPCR. So instead of doing it manually, we wanted to make use of AI, machine learning and also since we do have data. And this is something that we cannot do by ourselves. They are professional expert companies that focused on different technologies. So we would like to partner with them. Fee-for-service is something that we have been doing, but we want to remain more proactive. We did a lot of financing. So we are considering a possible big partnership. [ Protomix ] transcript mix, there are a lot of omics. We would like to combine them, so that we can be more productive and efficient in doing TIV. So this partnership or collaboration and the -- this is not related to the strategic partnership. It is related. When we partner, we will be partnering with the expert companies. But before that, we need to look for deeper partnerships and also possible acquisition as well so that we can create a big drug discovery engine. Basically, we want to become a kind of company who can become with different targets in terms of drug discovery. So it is related.

We would like to move on to the next question. [indiscernible] Securities Arai-san.

Can you hear me?

Yes, we can hear you.