Otsuka Holdings Co., Ltd. (4578) Earnings Call Transcript & Summary

Now I would like to present the consolidated financial results for the second quarter of FY 2025. These are the 2 agenda items I will cover today. First, I would like to explain an overview of our consolidated results. Revenue increased 6.5% to JPY 1,180.8 billion and business profit increased 12% to JPY 239.2 billion, largely attributable to increased sales of Global 10+2 products in pharmaceutical business. In the first half of the fiscal year, although the yen appreciated compared to the previous year, we achieved year-on-year growth in both revenue and all profit items and exceeded the plan for the first half of FY 2025. Next, I will explain year-on-year differences in business profit. Following the first quarter, gross profit increased by JPY 62.6 billion, driven by higher sales and a decrease in the cost of goods sold ratio, mainly in pharmaceutical business. SG&A expenses increased mainly due to higher co-promotion expenses associated with strong sales in pharmaceutical business and the acceleration of growth investments in new indications and new products as well as expansion into women's health and new areas in nutraceutical business. R&D expenses increased due to the acquisition of Jnana in September 2024, along with active development activities for repinatrabit and increased expenses related to a Phase III trial of ulotaront. We will continue our development efforts to maximize the value of growth drivers that will lead our business performance beyond the fifth midterm plan. As a result, the increase in gross profit absorbed the rise in SG&A and R&D expenses, leading to a JPY 25.6 billion increase in business profit to JPY 239.2 billion. Excluding the impact of ForEx rates, business profit increased by JPY 31.5 billion to JPY 245.1 billion. I will now explain Pharmaceutical business. Revenue increased 8.7% to JPY 833.8 billion. In addition to robust performance of REXULTI in North America and Japan, overall growth was driven by ABILIFY MAINTENA, JYNARQUE, increased royalty income and domestic products. Sales of REXULTI increased 26.5% to JPY 154.8 billion, driven by growth in prescriptions for major depressive disorder and agitation associated with Alzheimer's disease. Sales of LONSURF declined in the U.S. due to increased corporate burden following the redesign of the health care system. However, prescriptions for bevacizumab combination therapy for colorectal cancer increased. As a result, sales decreased by 4.1% to JPY 49.7 billion. Next, I will explain revenues by region. Overseas revenue went up due to robust performance of REXULTI, JYNARQUE and increased royalty income as well as revenue from Otsuka ICU Medical, which operates IV therapy business in the U.S. The company was included in the financial consolidation starting in May this fiscal year and revenue is recorded from the second quarter. In Japan, revenue increased due to strong performance of REXULTI, Moizerto and other products. In particular, prescriptions for REXULTI for AD agitation grew due to active promotional activities. Each major product in Pharmaceutical business is making steady progress in line with the full year plan. Next, I will explain the performance of Nutraceutical business. Revenue increased by 1.6% year-on-year to JPY 276.1 billion. By category, growth was centered on Women's Health and Healthier Life with Japan and North America leading other regions. Sales in Climate and Environmental Risks increased, excluding ForEx impacts, driven by Pocari Sweat's strong performance in the Philippines and Japan. Sales in Women's Health increased 7.8% to JPY 29 billion, driven by enhanced product awareness through aggressive promotional activities of Bonafide, which addresses diversified needs of women and steady growth of EQUELLE due to the wide-ranging efforts to provide useful information. Sales in Healthcare Life increased 2.3% to JPY 109.7 billion. In the U.S., we have continued consumer-focused promotional activities for Nature Made, leading to the significant growth in e-commerce sales. Calorie Mate sales also rose, mainly driven by increased younger consumers as a result of continued marketing efforts that promote the products as nutrition support for various occasions such as entrance exams and school club activities. Lastly, I will explain the consolidated financial forecast for FY 2025. We have revised upwards the full year forecast announced in February, taking into account the first half results of Pharmaceutical and Nutraceutical businesses as well as gains from the partial sale of shares of an equity-method affiliate in the second half. Revenue is expected to remain at JPY 2.308 trillion as initially announced, while business profit is projected to increase by JPY 25 billion to JPY 400 billion, or JPY 410 billion, excluding the impact of ForEx rates. SG&A expenses are expected to be on the press of the initial plan, excluding ForEx impacts. R&D expenses are also in line with the initial plan, excluding ForEx impacts and the research and development activities for future growth are progressing steadily. Operating profit is projected to increase by JPY 75 billion from the initial plan to JPY 450 billion due to estimated gains of JPY 40 billion to JPY 50 billion from the purchases of MicroPort shares. This concludes the presentation of consolidated financial results. Mr. Inoue will explain the mid- to long-term strategies for each business.

Now I would like to explain the progress we have made so far and the future outlook for FY 2025. First, the positioning of the fourth midterm plan and the current status of our KPIs. As informed, we have revised our FY 2025 plan. Despite the impact of LOE, we are making steady progress toward 2025 plan and business profit before R&D investment is expected to exceed the 2025 plan in the midterm plan. And we aim to achieve an ROE of over 12% by enhancing capital efficiency in line with strong business performance. We are accelerating investment in new business expansion and next-generation growth drivers. And we will continue to implement measures to minimize and shorten the performance adjustment phase following LOE with aim of achieving a swift return to regrowth. First, I would like to discuss an update on Pharmaceutical business. In our latest revision for FY 2025, our Global 10 Plus 2, a group of our growth drivers are expected to achieve a year-on-year increase of 15.2% and our overall pharmaceutical business to grow by 2.1% despite the impact of LOE of JYNARQUE. We will continue to focus on expanding new business opportunities and nurturing these growth drivers in the midterm plan. Next is the sales situation of REXULTI for AD agitation. In the U.S., as of April this year, the proportion of prescription of AD agitation among all REXULTI prescriptions has solidly grown to 21.7%, and probably most recent number is around 25%. And the treatment with REXULTI has increasingly gained recognition. In Japan, we have initiated comprehensive approach to addressing the environment surrounding Alzheimer's dementia, such as a cross-factor collaboration with primary care physicians and inclusion in the clinical treatment guidelines. As a result, REXULTI has been prescribed to about 100,000 patients in 10 months after approval. Also, the Advisory Committee meeting for PTSD was held on July 18. Although the outcome was disappointing, we will continue to cooperate with the FDA to make sure that the review will proceed smoothly and be completed. From here, I would like to explain our mid- to long-term growth strategy for the next midterm plan and beyond. The chart shows the progress of the Next 8 products that we have positioned in the current plan as next growth drivers in the fifth midterm plan and beyond. We are beginning to see the results of our proactive investment made since the third midterm plan with several assets now filed for approval or in late development stage. So to be more specific, I would like to show you our initiatives for sibeprenlimab. Sibeprenlimab is currently under review by the U.S. FDA with the PDUFA action date set on November 28 this year. We are actively pursuing life cycle management, including disease awareness activity for IgA nephropathy, a global marketing expansion and initiation of Phase II study for Sjögren's disease, with the goal of early maximization of the product value. We are accelerating efforts in a speedy fashion to make sibeprenlimab a first-in-class and best-in-class drug. Next, I would like to explain the therapeutic area expansion based on the drug discovery technology. We have been strategically expanding our business in the autoimmune space based on our know-hows in the specialty business gained through JYNARQUE for ADPKD. In 2018, we acquired Visterra with the aim of strengthening our pipeline in the renal space and acquiring a unique antibody drug discovery platform. And since then, we have enhanced our pipeline in the autoimmune space by creating multiple assets, including sibeprenlimab through its excellent antibody drug discovery technology. Furthermore, in 2024, we acquired Jnana, through which we have obtained its small molecule pipeline in autoimmune field as well as small molecule drug discovery technology for undruggable targets. In June of this year, we acquired HBM7020 from Harbour Biomed and in July, CAN10 from Cantargia. These 2 assets have diversified our portfolio in terms of both MOA and modalities. In this way, we will enrich our pipeline in the autoimmune field through asset acquisitions and alliances that can utilize our drug discovery platform and will promote innovation to establish the next-generation core area. This is our mid- to long-term growth strategy for oncology area. Among the growth drivers called Next 8 products, zipalertinib, INQOVI and ASTX030 have made significant progress in FY 2025. In addition, our acquisition of Araris in March this year has added a new modality of ADC technology to our oncology portfolio, enabling us to pursue first-in-class ADC drug discovery. We are committed to creating new value to elevate our oncology business to the second pillar of our core revenue. Here, I would like to show our ecosystem to create innovation. Otsuka's management style features horizontal collaboration, leveraging the strength of each group companies to the fullest. Through organic collaboration across the group companies, we will integrate knowledge and technology to build a robust drug discovery platform. In addition to our unique platform, we will continue to generate innovation by taking social issue centered approach and co-creation efforts with our partners. By solving social issue through innovation and supporting individual well-being, we aim to enhance our existing value as an indispensable company. Now let me explain our idea on how to achieve sustainable growth in pharmaceutical business. We have diversified and expanded our growth drivers in the midterm plan, resulting in strengthened business foundation with long-term perspective across a broader range of disease areas. Looking ahead to the next midterm plan, we are steadily enhancing into the specialty autoimmune field, starting with JYNARQUE and sibeprenlimab, while accumulating commercial expertise and advancing our drug discovery technologies. We are also accelerating efforts to further strengthen other core areas such as psychedelics and next-generation ADCs to drive innovation. We are laying the groundwork for establishing solid base to develop our business and feel quite confident of realizing sustainable growth. Next is Nutraceutical business update. First, I would like to talk about the progress of business performance. FY 2025 forecast for nutraceutical business has been revised to JPY 567 billion, which exceeds the previous year results, reflecting continued solid performance in women's health and supplement as well as changes in market conditions of POCARI SWEAT in Asia and ForEx impacts. We will continue to work to appeal brand value tailored to each region and hold global perspective toward resolving the social issues around the world. Next, I would like to introduce for women's health category. For women's health category, we are focusing on is expected to grow by 17% during the fourth midterm plan period. We are steadily growing this category by creating new markets to achieve our goal of over JPY 100 billion in the fifth midterm plan. Driven by the product features of high reliability supported by scientific evidence, our brand has earned strong recognition from medical professionals and continues to cultivate a strong base of loyal users. We will continue to contribute to resolving social issues by providing products and support that attentively address consumers' needs. Next is let me explain our initiative for Nature Made. With a long-standing commitment to product quality and brand line of broad line of products, Nature Made has been expanding its share as the #1 brand in the supplement market. To better meet customer needs and further solidify our position as category leader, we have built a factory for gummy supplements and strengthened our R&D capabilities to further accelerate value creation. Lastly, I would like to talk about management conscious of cost of capital and a new plan for shareholder returns. Since the third midterm plan, we are promoting the understanding of ROIC-based management and its implementation. For 2025, our overall business is progressing strongly toward achieving the goals set in the fourth midterm plan, and both revenue and profits are expected to reach record highs. As a result of this strong performance, both ROIC and ROE are expected to exceed 12%. To further improve capital efficiency, we have been reviewing cross-shareholdings and business assets from the perspective of elevating corporate value. We have also conducted share buybacks as one of the -- our flexible shareholder return measures. We will continue to promote management conscious of cost of capital. This shows our shareholder return policy. As you can see from my talk on the current business status and our mid- to long-term strategy, growth certainty going forward is now visible with the good progress of Next 8 products, including sibeprenlimab and the growth of Nutraceutical business. Based on this situation, we have decided to increase annual dividend to JPY 140 per share in FY 2025. We will continue to implement shareholder returns in line with the fourth midterm plan, while promoting flexible capital policies that respond to changes in the business environment from multiple perspective. This is a summary of my presentation. We would greatly appreciate your continued support. Thank you very much for your attention.

I would like to present an update on our pharmaceutical development. I will cover these 4 items today. The table shows the key progress in the second quarter of FY 2025. As a highlight, I would like to explain sibeprenlimab, which we filed with the FDA for accelerated approval for IgA nephropathy. The application was accepted in May and is under priority review with the PDUFA action date set on November 28 this year. At the European Renal Association meeting in June, the results of the interim analysis of Phase III study basis of the registration data were presented. And the sibeprenlimab-related IR event was also held in June. The lower part of the table shows the progress of other assets under development. Centanafadine Phase II/III studies was initiated in Japan for adult patients with ADHD. Sibeprenlimab Phase II study for Sjögren's disease was initiated in the U.S. Zipalertinib Phase I study, RESILIANT5 was initiated in Japan as an exploratory study to evaluate the effect of combination therapy with a MET inhibitor gumarontinib, an HSP90 inhibitor pimitespib, and CD73 inhibitor quemliclustat in patients with EGFR mutation positive NSCLC. On the other hand, as a result of the development of a strategic review, the following licensing out deals and discontinuation decisions were made. ASTX029, ASTX295 were licensed out to Mosaic Therapeutics, while TAS1440 was licensed out to Benz Sciences. Developments for centanafadine's MTD and OPC-131461 were discontinued. Finally, as an event after the second quarter, we filed an sNDA of INQOVI, oral decitabine and cedazuridine combination with the FDA for additional indication of venetoclax combination therapy for AML, and the application has been accepted. Next, as the first topic, I would like to talk about the data on zipalertinib and INQOVI among the 5 data presented at ASCO meeting in May as well as their current status. First, about zipalertinib. Zipalertinib was evaluated in a REZILIENT1 study, Phase IIb study in 176 patients with EGFR Exon20 insertion mutation-positive NSCLC who had received prior platinum therapy. Primary endpoint of overall response rate was 35.2% and the median duration of response was 8.8 months. Since clinically relevant efficacy was confirmed with no safety issue, an approval application is planned based on this data. Next is an update on INQOVI. The Phase I/II study evaluated the safety and efficacy of an oral administration of regimen of INQOVI paired with venetoclax in 101 AML patients who were ineligible for first-line induction chemotherapy. The primary endpoint of complete response rate was 46.5%. Based on this data, we filed for approval in the U.S., which was accepted by the FDA. The PDUFA action date is now set on February 25, 2026. As for our hematologic cancer strategy, as we presented in the fourth midterm plan, we will continue our efforts to maximize the value of our oral hematologic cancer assets. As the second topic, I would like to introduce 2 antibody assets in autoimmune space that we acquired in June and July. Currently, in the drug discovery of autoimmune diseases, antibody drugs are the mainstream approach to target proteins that are considered undruggable. Against this background, in addition to Visterra's drug discovery platform technology, we licensed in and acquired 2 new antibody drugs, HMB7020 and CAN10. HMB7020 is a bispecific T cell engager that binds to both BCMA and CD3. Favorable safety and efficacy profile have been confirmed in preclinical studies, and we are currently preparing for Phase I study as we expect its potential application in autoimmune diseases. CAN10 is an anti-IL-1RAP antibody that can simultaneously block multiple cytokine signals of IL-1, 33 and 36. It is expected to have a broad and potent anti-inflammatory effect. Phase I study is currently underway. Furthermore, we will accelerate the development of new therapies in the field of autoimmune diseases by utilizing Jnana's unique small molecule drug discovery platform for targeting intracellular and druggable target proteins. By combining the drug discovery technologies of Visterra and Jnana with the synergistic effect of the 2 new assets we acquired this time, we will further promote innovation in the field of autoimmune diseases. We have positioned this autoimmune area as our next-generation core field and will continue to contribute to solving various social issues. This shows the key NDA and MAA submissions and Phase III transitions scheduled for FY 2025. The project in red are those in NDA/MAA submissions completed or ones advanced to Phase III. This is the last slide, which shows the key project under NDA/MAA review. The one in red is also the project that received approval this year. As a major progress in Japan, the approval of uRDN system was recommended at the medical device and extracorporeal check medicine section council of the MHLW on July 18, and approval is expected soon. We are preparing for the launch of uRDN system, hoping to make contributions to patients with refractory hypertension as a new treatment option. For our major development project by therapeutic area, please refer to the appendix. This concludes my presentation on the pharmaceutical development update. Thank you very much for your attention.