Sumitomo Pharma Co., Ltd. (4506) Earnings Call Transcript & Summary

Good afternoon. Thank you for taking time out of your busy schedule to attend our financial briefing today. As time is limited, I will try to concisely explain. First of all, financial results are shown here. The actual results are exactly the same as the forecast that we already announced at the end of April. Therefore, I will omit a detailed explanation, but core operating profit has fallen significantly from JPY 34 billion to JPY 16.4 billion compared to the forecast as of the end of January, which was originally forecasted. This is partly due to LATUDA's gross profit decreased significantly as it reached loss of exclusivity. Another factor is higher shift in payer mix than forecasted towards lower product prices as well as lower sales by volume than forecasted. Unfortunately, we were not able to achieve our goal of JPY 34 billion in core operating profit due to a slight increase in expenses. Other nonrecurring items, minus JPY 62 billion. This includes an impairment loss on assets such as KYNMOBI. The impairment loss of goodwill of oncology area and compound TP-0903 has also had an impact as well as restructuring expenses in North America. As a result, operating profit is minus JPY 77 billion. In the area of financial income and costs, there was a foreign exchange gain of more than JPY 26 billion. On the other hand, income tax expenses, which is a large amount due to profit in Japan, resulted in a net profit for the period of minus JPY 96.7 billion. Net profit attributable to owners of the parent was minus JPY 74.5 billion. Regarding sales in Japan, there is a year-on-year decrease of JPY 23.8 billion, as you can see on the right side of the slide. This was due to the loss of sales of REPLAGAL and the termination of sales collaboration of Trulicity in December 2022. As for sales in North America, unfortunately, LATUDA sales were lower than the previous year, even in dollar basis. The third one from the top, RETHYMIC in 12 patients has permitted surgery. I hope that we can make progress so that patients will not have to wait for surgery. For ORGOVYX, MYFEMBREE and GEMTESA, naturally, there was an increase over the previous year. Regarding ORGOVYX, while we haven't obtained sales of 20% our original forecast, in terms of the payer mix, Medicare Part D accounted for a large percentage of the total sales. There are not many cases of office dispensing for tablets, and considering issues such as the handling of health insurance or supplier authorization, there are some doctors' offices not well versed in that. As a result, it has not gone as smoothly as we would have liked. In the case of MYFEMBREE, use of the copay card was greater than we had forecasted, which led to a decrease in the average price. One positive point to note is that MYFEMBREE gained the indication of endometriosis during the period. GEMTESA is doing very well. And sales have already increased more than we originally forecasted. I will now present results by segment. The most notable feature is that selling, general and administrative expenses in North America have increased significantly. Most of the increase is due to Sumitovant Group while some is due to exchange rate fluctuations. Another factor behind the increase is costs associated with Myovant Sciences becoming 100% owned by Sumitovant Biopharma. I have prepared a special slide on ORGOVYX, MYFEMBREE and GEMTESA, but I won't spend much time on them. I can tell you that the number of patients is steadily increasing. The other 2 are the number of prescriptions, but this 1 is in the form of estimated number of patients, as it is difficult to tell the number of prescriptions as it also includes office dispensing. As you can see, the figure for MYFEMBREE is increasing steadily. The market is also expanding. The key point of MYFEMBREE is that the right-hand side of the square bullet points is an appeal for further potential utility by gathering new evidence. We will submit this long-term endometriosis administration safety data with the FDA in the first quarter FY 2023. We are very interested in how the label will be handled. The verification of contraceptive efficacy is currently being studied, with last patient out expected in April 2025. Performance of GEMTESA is also solid. The middle of the square on the right shows insurance coverage, which previously accounted for 55% of the commercial coverage. The figure is now over 70%. Below that, we expect to know the results of the Phase III study for overactive bladder associated with benign prostatic hyperplasia in the first half of FY 2023. Next, I will present the forecast. We have already explained the financial forecast up to the point of core operating profit when presenting the Mid-term Business Plan 2027. Today, I would like to explain the core operating profit results in more detail. I will also give a breakdown of the JPY 362 billion figure for sales. SG&A expenses are forecast to decrease significantly to the JPY 220 billion level and R&D expenses to the JPY 84 billion level. The minus JPY 16 billion in nonrecurring items is mainly due to the cost for employees who will leave the North American subsidiaries or retention expenses for employees in FY 2023, as a result of the organizing efforts in North America. The loss is JPY 80 billion, which is the amount of net profit attributable to owners of the parent. As for the financial forecast by segment, I will show you the sales goals later on. But in North America, there has been a decrease in SG&A expenses of JPY 73.6 billion. This is due to the decrease in sales reps at Sunovion Pharmaceutical as a result of LATUDA loss of exclusivity as well as reduction in the number of SG&A personnel. An additional reduction of personnel related to the reorganization in North America is scheduled for 2023, so related expenses will be reduced in comparison to the previous year. This equates to a decrease in sales of JPY 21.1 billion compared to the previous year, which means that the impact of Trulicity is significant. The impact of the NHI price revision is also noted at the bottom right of this page. Next, ORGOVYX sales in North America, in dollar basis, were $396 million; MYFEMBREE, $192 million; and GEMTESA, $362 million. Looking at the results from the previous year, we are forecasting that the goal for ORGOVYX will double. MYFEMBREE will increase by a factor of 5, and GEMTESA will also double. For example, if I take calculating this, based on shipments at the end of March 2023 and if the March shipment pace continues for 12 months, there will not be much difference in GEMTESA. ORGOVYX will be a little less challenging, although not as much as double. MYFEMBREE is still a tough one, but we will have to see how much it grows after this fiscal year. From my point of view, these numbers are a bit of a stretch for MYFEMBREE, but I don't think it would be that difficult for ORGOVYX and GEMTESA. With LATUDA, of course, loss of exclusivity means a large decrease. The decrease in other areas is due to the onetime payment for endometriosis from Pfizer in the previous year, licensing and the loss of sales of BROVANA and XOPENEX. The result was a negative figure of about $100 million. In China, there has been a significant decrease in MEROPEN sales. This is due to the impact of volume-based procurement. Next, I will talk about research and development. In research and development, we have classified areas on psychiatry and neurology, oncology, others, regenerative medicine and cell therapy and frontier business. As I explained in the meeting for the Mid-term Business Plan 2027, we have reorganized the categories a little so that the regenerative medicine/cell therapy field is now included in the psychiatry and neurology area. The frontier business is also included in the psychiatry and neurology area, now being the area as a modality. The area shown here in red are the change points. This shows progress in clinical development. As for ulotaront, I believe Otsuka Pharmaceutical has already explained it, so I will omit the explanation here as well. We have high expectations for the results of the DIAMOND 1 and 2 studies for schizophrenia in the first half of fiscal year 2023. We hope to submit the applications as soon as possible so that they can be placed on the market. And this is the last slide in my explanation, and I would like to talk about the main events. I have just mentioned ulotaront for schizophrenia. In the psychiatry and neurology area, we are planning to submit an IND for clinical study for retinal pigment epithelial tear using iPS cells in Japan in May and to start an investigator-initiated study for Parkinson's disease in the U.S. in June. We hope to move forward with a clinical study in the U.S. by the end of this fiscal year. That is all from me.

Muraoka from Morgan Stanley. I was going to ask you if in your product-specific forecasts, the figure for ORGOVYX and MYFEMBREE, in particular, were a little too high. However, you said they are supposed to be challenging. So I think that's what you mean. For example, if you fall short of your sales plan of $396 million and $192 million by, say, 20% or 30%, I'm sorry to be a little blunt, but in that case, the patent rights shown on the balance sheet at the end of March 2023 for these 2 products amount to a little over JPY 200 billion. Would it be correct to assume that if you fail to achieve sales by a margin of about 20%, an impairment loss would be incurred?

Thank you for your question. As far as MYFEMBREE is concerned, I think there is a possibility of a certain amount of impairment by a little less than the amount written here. I don't know if the figure will be 20% or not, but it could be a certain amount of impairment.

Okay. Should we worry too much about ORGOVYX?

No, I'm not too worried about ORGOVYX.

Understood. I could tell because the intangible amount of goodwill is also by far the most for MYFEMBREE. I guess the timing of this guidance will change when this guidance needs to be changed appropriately as quarter of the year goes on.

Yes, that's right. I'm sure that you are very interested in the sales of these 3 products and us even more so. We will continue to monitor them very closely. During this 1-year period, we will take various marketing measures, including those that we have not been able to do in the past.

Okay. I'm sorry to be hypothetical, but if those sales were to fall short, is there any option to reduce the impact on core operating profit by further cutting costs elsewhere? Or would it be a case of covering it with sale of assets?

We will monitor FY 2023 closely. At the end of the second quarter and the third quarter, for example, we will be able to see whether or not we can achieve this goal. As I mentioned in the Mid-term Business Plan 2027, we will consider what we can do to achieve a surplus in FY 2024 rather than FY 2023. And we will come up with additional plans.

I see. Rather than focusing on this fiscal year's numbers, you will take steps in the second half of this fiscal year to contribute to profitability in the next fiscal year, if necessary.

Yes, of course, we are focused on the figures for the current fiscal year, but we would like to avoid 2 consecutive years of deficits. So we will do what we can in FY 2024 within FY 2023. If the situation becomes as bad as you just mentioned, we will consider what we can do.

Understood. Sorry, this is an extension of the same question, but if these 2 products are insufficient this fiscal year, is there any need to think that this will lead to the risk of reducing or not receiving the milestone that is a major prerequisite to achieving profitability next fiscal year?

Well, this is, of course, because there are -- these are the figures that are assumed for the sales in 2024. We do not expect to be suddenly hitting this goal in FY 2024. So we will continue to make steady growth from FY 2023. However, I mentioned earlier, this forecast is very much double the result numbers from last year. Both ORGOVYX and GEMTESA appear to be doubling, but the trend is gradually growing. So I'm not sure if the March 2023 shipments, for example, reflect a normal trend. But if you look at it that way, it's not that big of a gap. Considering that sales of these products are going to grow, I don't think it will be that difficult to achieve for ORGOVYX and GEMTESA. However, I would say MYFEMBREE, I still think it is a stretch. And one of the reasons for this is that awareness among patients and doctors is still relatively low. We are trying to raise awareness about MYFEMBREE as a treatment for uterine fibroids and endometriosis among patients through various media, including television commercials.

Yamaguchi from Citigroup. As you explained earlier, the forecast costs in North America for the fiscal year ending March 31, 2024, were reduced by about JPY 70 billion. The figure was JPY 73.6 billion. Can you please give me a breakdown of that figure?

What do you mean by breakdown?

In short, what does this decrease of JPY 73.6 billion represent? I wonder if your company's LATUDA-related sales reps are decreasing or if there was some kind of synergy.

It's not just LATUDA sales staff that is being reduced, but SG&A staff is also being reduced at the same time. And we are also cutting costs -- or rather, personnel in North America. Therefore, when all of these items are added together, the decrease on an individual company basis would be a little over JPY 60 billion. The rest is made up of things like reduced amortization of patent rights. So this is mostly made up of cost reductions through reductions in staffing. If you compare, for example, the end of March 2022 in North America, with the end of this reorganization in the end of March 2024, there will be roughly 1,000 fewer people. However, just LATUDA and SG&A alone have already reduced by just under 500 people. The remaining 500 or so will be reduced gradually during FY 2023. By the end of next March, most of the planned 500 or so people will have already left.

I see. However, if 1,000 employees quit and the cost in the U.S. is almost -- is about JPY 30 million per employee, the cost -- actual cost is much larger than JPY 30 billion. Actually, the cost would be much higher. But do you think JPY 60 billion, the bulk of JPY 73 billion can be explained by a reduction in headcount?

There is the cost, labor plus the cost of various activities that are carried out by these employees. As a result, there are also decreases in other areas. It is a mistake to say that in North America, unlike in Japan, it is quite easy to lay off personnel. The reality is that it is quite difficult and make necessary considerable amount of cost. However, the effects will be seen in the future, and we will make sure they will occur.

Understood. Conversely, from the current fiscal year to the next fiscal year, the profit recovery will be driven by the growth of 3 products, as you mentioned earlier. Comparing the current and next fiscal year, would it be correct to say that the current year has the biggest reduction in personnel costs and that the benefits of synergies will come about next year and beyond or sometime in the near future?

Could you be more specific about what you mean by synergies?

Yes, synergies that will be achieved by group integration by reducing the number of companies. That's what I meant. Are the benefits of that already included in the results for this fiscal year?

It is included to some extent in this fiscal year, but I think we will see the full effect from FY 2024.

I see I understand. I understand that the current forecast for MYFEMBREE is in place, but I have the feeling that the original plan is still running, although I'm not sure of how realistic it is. I feel that it would be more reassuring externally, if you made some revisions to the Mid-term Business Plan 2027. But I guess you have decided that it is not the right time yet.

Well, regarding ORGOVYX and MYFEMBREE, I don't think that we have done enough compared to GEMTESA. GEMTESA, with Myovant Sciences, was made it 100% subsidiary. We have a history of achieving a stretch goal, with marketing reflecting our intention. However, as for Myovant until March 2023, in this sense, as a publicly traded company, they have been working with a view to minority stakeholders, not us. Moreover, they are not sharing marketing data with us. Some data have been shared but not all. Therefore, in many ways, we were not able to provide support for marketing activities that will change. Of course, Sumitomo does not have the know-how much, but the Sumitovant staff in the U.S. have a great deal of know-how in this area. So I think the first step would be to grow ORGOVYX and MYFEMBREE utilizing their strength. We will examine our future measure based on the results or the outcome to some extent. At this stage, I think it is too early for us to make a decision on what we think is the right or wrong.

Wakao from JPMorgan Securities. The first question is a continuation of what you just said about MYFEMBREE. I understand the forecast is stretch, but I was just curious about the premise of this forecast. Even if we simply look at the growth of prescriptions in the quarter you just showed us and the volume grew by 1.3x for every quarter in FY 2023, the volume itself would only increase by about 2x. On the other hand, there was the use of copay card last year, and new applications will be made in first quarter FY 2023. So I think there -- these are some positive factors. Please tell us the assumptions for this forecast, such as how much the volume is assumed and what the price is and what at timing the volume will grow in each quarter. In addition, I think Pfizer was working with you on MYFEMBREE. Can you also tell me how Pfizer has positioned it? This is my first question.

I cannot give you detailed figures, but at least in the previous fiscal year, for example, we thought that use of copay card would be about 30%, but it was [ above ] 50%. We will need to monitor the situation closely. We are concerned about the market growth of gonadotropins in this class since we have heard that AbbVie has not been focusing much on this area recently. However, comparing the start and the end of the previous fiscal year, I feel that the momentum became very strong in the direction of MYFEMBREE being prescribed for uterine fibroids and endometriosis. As I mentioned earlier, we will also include television commercials to raise awareness of the product. Also, while this will take some time, in first quarter FY 2023, we intend to submit an sNDA for endometriosis long-term safety data to the FDA. One of the key points will be how that will be described in the label. Pfizer is also doing a good job with both ORGOVYX and MYFEMBREE. However, I understand that up until now, Myovant has not been able to make sufficient request to Pfizer, partly because Myovant is the company that has been doing the work. After the reorganization, we will make -- we will have Ms. Adele Gulfo, a former Pfizer executive. There are still people in the organization in Pfizer that she has working with. She will provide a communication channel for us with those on the Pfizer side, helping to communicate our viewpoint to them and facilitate our work together. I believe that these are still areas that we can approach with Pfizer's resources such as relationship with various patient groups and KOLs. And we are planning to do so under a new leadership.

Thank you very much. Regarding ulotaront, I think there's readout data for schizophrenia. And I have some level of expectation for that. Since the indication is schizophrenia, I think the company has told us from LATUDA that the scale of sales for the first indication is not that large. So I was thinking that in the U.S., sales for the indication of schizophrenia will be about $300 million. Is that correct? I would like to confirm that.

Well, opinions about LATUDA were divided. As you say, a lot of people felt that the sales would only attain a certain level if it was just schizophrenia. However, as you know, ulotaront is not a D2 receptor antagonist, unlike conventional antipsychotics, so the side effect profile is different in many ways. It is very easy to use for patients. We believe that it will perform strongly on the market, thanks to its novel mechanism of action. In general, schizophrenia is covered by Medicaid, so the product price is low. But from our viewpoint, this is a different class of product. We expect that prescribing will be different from that of conventional schizophrenia products.

Understood. In the impression of the Mid-term Business Plan 2027, the contribution of the first new product to sales was not so large. However, from your explanation of ulotaront, I think it has potential depending on the data that comes out. So I have high expectations for it. So thank you.

Thank you. As you said, the data will come out. And it will be very important. We have high expectations for the results of DIAMOND 1 and 2 studies.

Haruta from Credit Suisse. You will reduce SG&A expenses for the fiscal year ending March 2024. How much of this reduction can be considered optimization in the U.S. or a lean organization? And how much will be spent? And how many people will be hired for ulotaront launch in FY 2024?

Thank you. Regarding ulotaront, it would have been better if the LATUDA sales reps could have been used as is, but there is a time lag. Some of LATUDA's excellent sales reps are handling some of other products, although they are a bit different. If ulotaront is approved in FY 2024, we are likely to hire new sales reps at that time. The scale of the project is included in the Mid-term Business Plan 2027, but we have not yet had a full discussion with Otsuka Pharmaceutical, so I cannot give any specifics. We would like to have about the same number of sales reps as we had for LATUDA, about 300.

I'm sorry. Incidentally, in terms of optimization before the ulotaront launch of personnel in the U.S., should we expect that to be completed during the fiscal year ending March 2024?

The optimization will be completed in the period from this April to the end of March next year.