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

We will now hold a briefing session regarding the establishment of RACTHERA, a joint venture company in the regenerative medicine and cell therapies business. Thank you very much for taking time out of your busy schedules despite the short notice. This briefing session will be streamed live via Zoom webinar. After the briefing, there will be a session for your questions. [Operator Instructions] To begin, I would like to introduce today's attendees. Mr. Iwata, President and Representative Director of Sumitomo Chemical Company Limited; Mr. Kimura, Representative Director, President and CEO of Sumitomo Pharma Company Limited; Mr. Kobayashi from Sumitomo Chemical, who will moderate today's session. First of all, Mr. Iwata from Sumitomo Chemical will discuss the purpose of today's briefing. President Iwata, the floor is yours.

Hello, everyone. My name is Iwata, and I am the President of Sumitomo Chemical. Thank you very much for attending today's joint press conference between our company and Sumitomo Pharma despite the short notice. First, I would like to explain the purpose of today's briefing. Last year, in fiscal 2023, our group had extremely unfavorable results, but thanks to group-wide efforts in short-term concentrated measures to improve business performance, such as business restructuring. This year, we have made strong progress towards a V-shaped recovery. The near-term growth drivers for our group are on the left side of this slide. The Agro & Life Solutions sector, which focuses on crop protection chemicals and the ICT & Mobility Solutions sector, which focuses on semiconductor materials. Following these areas, we are committed to cultivating a new growth area shown in the center, which is the Advanced Medical Solutions sector, focusing on health care. This is a field we intend to nurture steadily with a medium- to long-term perspective. Today's topic, the regenerative medicine and cell therapy business is the core of this growth sector. First of all, I will look at the market. The global market for cell therapies was estimated at $2 billion in 2022, with sharp growth expected in the future. Turning now to development. Sumitomo Pharma has world-leading technology and expertise built up over many years, including the development of the world's first iPS cell-derived therapy for Parkinson's disease. This can be combined with Sumitomo Chemicals expertise in industrial engineering, analysis and quality management as well as bioscience. By levering these strengths and accelerating the global expansion of this business as a group, we will be able to provide new therapy options to patients around the world. At the same time, we aim to expand the business into a large-scale operation of JPY 350 billion at peak in the late 2030s. Note that this figure is before adjustment based on probability of success. This slide is unchanged from April. The Advanced Medical Solutions sector, which we expect to be a third core business, aims to achieve sales of JPY 300 billion by 2035 through regenerative medicine and cell therapies, which is the topic of today's briefing. The CDMO for regenerative medicine and cell therapies that was reorganized in October as well as the CDMO for small molecule and nucleic acid and the analysis business. There are no changes to this plan. Although not directly related to today's announcement, we previously issued a press release announcing our decision to transfer the shares of our 50% subsidiary, Nihon Medi-Physics to our long-term partner, GE HealthCare. Nihon Medi-Physics has steadily provided high-quality products over the many years since its establishment in 1973. Its performance has been well received, and it has now grown into one of Japan's leaders in RI diagnostic reagents. We are confident that GE HealthCare will be the best partner for achieving sustainable growth as it has a wide product lineup related to diagnostic drugs and medical devices and is the world's largest business in this field. Now President Kimura of Pharma will provide an explanation about the establishment of a new company for regenerative medicine and cell therapies. Over to you, President, Kimura.

My name is Kimura, and I am Representative Director, President and CEO of Sumitomo Pharma. I would like to explain the establishment of RACTHERA, a joint venture company with Sumitomo Chemical or Sumitomo Pharma's regenerative medicine and cell therapy business. We are putting a lot of effort into regenerative medicine. We firmly believe that among the various medicines available in the world, regenerative medicine is the only treatment option for diseases and disorders that result in the loss of cells and tissues. We are working to deliver regenerative medicine products to the many patients who are waiting for the practical application of these treatments as soon as possible. To accelerate this effort, we have established RACTHERA. And today, I'd like to introduce it to you. This slide will provide an overview of RACTHERA. As you will see, the name RACTHERA is a combination of the initial letters of regenerative and cellular therapy. The company will primarily draw on personnel from Sumitomo Pharma and will work closely with Sumitomo Pharma to promote research and development of regenerative medicine and cell therapy. Dr. Atsushi Ikeda, the Vice President, Head of Regenerative & Cellular Medicine Kobe Center, Sumitomo Pharma has been appointed as the Representative Director and President of RACTHERA,. I will also be involved in the management of RACTHERA, as the Chairperson of the Board. Although this company has already been established with 100% funding from Sumitomo Pharma, it will begin operations as a joint venture company with Sumitomo Chemical holding a 66.6% stake and Sumitomo Pharma holding a 33.4% stake from February 1 next year. In the regenerative medicine and cell therapy business, RACTHERA will play a central role, but for that to be successful, Sumitomo Pharma must also take a proactive approach. Sumitomo Pharma has a solid research base for R&D and clinical development, including safety. We also have a lot of know-how, human resources and functions as a pharmaceutical company, such as relationship with KOLs and negotiations with the government and authorities. Of course, we also have a solid commercial platform, and we believe that our close collaboration with RACTHERA will be the key to success. Furthermore, we are determined to make this business a success in collaboration with S-RACMO and Sumitomo Chemical. The following slide provides an overview of the operation structure for the regenerative medicine and cell therapy business after the establishment of RACTHERA. This slide is somewhat complex, but first of all, in the middle, we have RACTHERA, the company that will be mainly responsible for promoting and conducting research and development in the regenerative medicine and cell therapy business. At the same time, it is essential to operate the business by maintaining close ties with Sumitomo Pharma, which has all the necessary pharmaceutical functions. Furthermore, there is S-RACMO, the CDMO business company for cell therapy that has already been established by Sumitomo Chemical and Sumitomo Pharma. By transferring the smart manufacturing facility for iPS cells currently owned by Sumitomo Pharma, we will be able to consolidate production and manufacturing technologies at S-RACMO. By pursuing synergies in this way, we aim to achieve stable production at a lower cost using more advanced technologies. The 4 companies, Sumitomo Pharma, RACTHERA, S-RACMO and Sumitomo Chemical will work together to contribute to the practical application and development of this business. Next, RACTHERA, Sumitomo Pharma, S-RACMO and Sumitomo Chemical are not just about a simple capital relationship. Sumitomo Chemical's industrialization, analysis and quality control technologies are essential for the development of the regenerative medicine and cell therapy business. Sumika Chemical Analysis Service, a member of the Sumitomo Chemical Group has a wide range of analysis technologies. We aim to develop this business as a Sumitomo Chemical Group by combining all of them. Next, I will show you the structure for promoting the regenerative medicine and the cell therapy business. While RACTHERA is the primary entity driving this initiative, as previously highlighted, Sumitomo Pharma will also contribute significantly through its various pharmaceutical functions. Ensuring seamless integration and collaboration among these different roles is paramount to the success of this business. To this end, the individuals leading RACTHERA's various programs will also be contributing to Sumitomo Pharma, advancing research and development in collaboration with the company's pharmaceutical functions within the department promoting regenerative medicine. As I mentioned previously, this slide underscores the pivotal role of RACTHERA's establishment for Sumitomo Pharma and the regenerative medicine and cell therapy business. Sumitomo Pharma will hold 1/3 of RACTHERA, so the investment burden is also 1/3. In other words, compared to developing the regenerative medicine and the cell therapy business solely by Sumitomo Pharma alone, the burden of R&D and capital expenditure is reduced. In addition to the 1/3 share of the business revenue that will naturally be received as a result of establishing RACTHERA, upfront transfer consideration of JPY 2 billion, up to JPY 4 billion in development milestones and up to JPY 150 billion in sales milestones, once the business has developed, will be received. Furthermore, as we are going to grow the regenerative medicine and cell therapy business with less financial burden for ourselves, we benefit from higher flexibility in terms of our own R&D spending in our 2 priority disease areas, Oncology and Psychiatry and Neurology. While some employees involved in the regenerative medicine and cell therapy business will remain at Sumitomo Pharma, others will move to RACTHERA or S-RACMO. This will allow us to continue and develop the teamwork we have built up to date and expand the business. From the perspective of the regenerative medicine and cell therapy business, the establishment of RACTHERA can be summarized as follows: By accepting capital from Sumitomo Chemical, we can secure stable R&D and capital expenditure without being constrained by the extremely severe financial situations of Sumitomo Pharma at present compared to the situation where Sumitomo Pharma alone provides the capital. Furthermore, we believe that it will be easier to demonstrate the synergistic effect of being able to make the most of the technology, know-how and human capital of Sumitomo Pharma, Sumitomo Chemical, RACTHERA, and S-RACMO. This is our business outlook. We are proud to be a world leader in regenerative medicine and cell therapy, especially those using iPS cells. Our goal is to expand our sales revenue to a maximum of JPY 350 billion by the late 2030s by providing new value that can only be realized through regenerative medicine to patients and the world. In 2013, we entered the regenerative medicine and cell therapy business in earnest. And in 2021, we launched a drug for congenital athymia called RETHYMIC in the United States. By 2027, we aim to achieve sales revenue maximum of over JPY 10 billion. And by the mid-2030s, we aim to grow the business to a maximum of over JPY 100 billion. In the late 2030s, as I mentioned earlier, we aim to grow the business to maximum of approximately JPY 350 billion. Finally, I have listed the Sumitomo Pharma's launched products and development pipeline of the regenerative medicine and cell therapy business. RETHYMIC at the top of the list is already marketed in the United States. The rest of the programs are in the pipeline of regenerative medicine using iPS cells and we plan to focus on R&D for all of them, including Parkinson's disease, retinal pigment epithelium tear, retinitis pigmentosa, spinal cord injury and others with RACTHERA playing a central role. One recent topic is DSP-3077, the 3D retinal tissue. Clinical trials for retinitis pigmentosa have commenced at Massachusetts Eye and Ear, a Harvard affiliated eye hospital in the United States. We aim to expand our regenerative medicine and cell therapy business by accelerating the commercialization process for our programs. That concludes my explanation.

Thank you for the presentation. We will now move on to the Q&A session. [Operator Instructions] First, we'd like to hear from Mr. Watabe of Morgan Stanley MUFG Securities.

My name is Watabe of Morgan Stanley. I would like to ask a question to President Iwata. Sumitomo Pharma was positioned as others while your company was searching for the best owner, but I think that the company will be quite involved in this time's regenerative medicine and cell therapy business. Could you please explain the background and the company's strengths, particularly its competitive advantages to other companies?

Thank you for your question. You asked about the positioning of the regenerative medicine and the cell therapy business from the viewpoint of best owner. As I have previously explained, chemical manufacturers contribution in the area of drug discovery should be extremely small. This means we should never stop thinking about ideal system or framework that help companies making drug products continuing its sustainable growth. This belief has never been changed. I firmly believe that the field of regenerative medicine and cell therapy is an area in which Sumitomo Chemical can make significant technological contributions. iPS technology is originally from Japan, and our country can be proud of this. For its social implementation, Sumitomo Chemical wanted to contribute by fully leveraging our capability as an entire group. This was our original motivation to enter this business. As President Kimura explained, Sumitomo Pharma has been the frontrunner in this field worldwide and has a high level of technology and expertise. In addition to this, as for what kind of contribution Sumitomo Chemical can make, Sumitomo Pharma will naturally take the lead in establishing evidence of the efficacy of the medicine. But in terms of aspects such as stable quality or cost, the establishment of production technology will be a very important factor. Sumitomo Pharma and Sumitomo Chemical share this kind of awareness of issues. In the past, Sumitomo Chemical succeeded in creating a 3-dimensional retina from ES cells in 2012. And this became the starting point for Sumitomo Pharma's regenerative medicine and cell therapy. Since then, we have continued to exchange personnel, and we believe that we can make a significant contribution to this regenerative medicine and cell therapy business in terms of human resources and technology. Furthermore, in the area of mass calculation of regenerative cells with stable quality, digitalization, robotics, AI or combination of these DX elements should be necessary. And this is also an area in which Sumitomo Chemical's knowledge can make a significant contribution.

Now we will hear from Mr. Wada from SMBC Nikko Securities.

This is Wada from SMBC Nikko Securities. Can you hear me?

Yes, we can hear you.

With regard to the setting of development and sales milestones, you have set the maximum development milestone at JPY 4 billion. Could you please clarify whether this is the total amount for all of the pipelines you showed us on your slide or whether you have identified the pipelines that are likely to progress quickly from among these and set development milestones just for them.

In addition to the pipeline I just showed you, there are also a number of other research themes. However, in terms of stage of progress, while some are already in clinical trials, there are also many that are still in the in vitro testing stage. Based on this, we have set development milestones for specific regions or countries. In terms of the possibility of the nearest future development milestone, I think it would be Parkinson's disease and alike. On the other hand, future sales of those in, in vitro testing stage remain uncertain. In conclusion, the current situation can be considered as including Parkinson's disease and some of the ongoing programs.

The next question is from Mr. Okazaki from Nomura Securities.

My name is Okazaki from Nomura Securities. Sumitomo Pharma Materials put sales up to JPY 10 billion in fiscal '27. But elsewhere, it says that the domestic Parkinson's disease is in the lead of development in the world. Can we assume this therapy has been factored into the sales figure? Also, I understand that the approval filing in Japan has been postponed. Could you provide information on the timing of a market launch and a breakdown of the JPY 10 billion figure? In addition, you mentioned the sales target of up to JPY 350 billion in the late 2030s. Would you mind providing a breakdown and probability of achievement of this figure?

This is Kimura. Thank you for your questions. First, I will answer about whether Parkinson's disease is included in sales for fiscal '27. In November, we announced that we would rethink the approval and application schedule. However, after that, we made some progress towards filing for approval. We have also reviewed the schedule. And as a result, our current outlook is that we can probably make an application or even obtain approval in the next fiscal year. We are now putting our full weight behind working towards that scenario. Since next year is fiscal '25, we expect time-limited approval in fiscal '27. So while sales will probably be limited, we hope you understand it has been substantially reflected in the target. On the other hand, although we are also proceeding with development in the United States, honestly, I think it will be difficult to get approval by fiscal '27. However, in the regenerative medicine and cell therapies business, we have already sold several billion yen of RETHYMIC in the U.S., although we haven't drawn up an official schedule yet. We are watching the development of RACTHERA and we'll think of bringing RETHYMIC here while considering the timing and methods. So we think altogether a figure of JPY 10 billion in fiscal '27 is a firm estimate. Now about the JPY 350 billion in the late 2030s. This figure is premised on a POS of 100%. The biggest driver is the Parkinson's therapy, followed by DSP-3077, which has only very recently started clinical trials in the U.S. for 3D retinal tissue. We expect these two to dominate sales, but we believe other products may have reached approval or even launch by that stage.

Are there any other questions? Another from Mr. Okazaki from Nomura Securities.

Is it okay to ask another?

Yes, go ahead, please.

This question is about the fourth page of Sumitomo Chemical's materials. Regarding the state of business received in the CDMO business, could you tell us again about the competitive position of the group relative to rivals such as Takara Bio or Nikon and Lonza?

This is Iwata. Thank you for your question. CDMO is one more pillar within the Advanced Medical Solutions sector, which we view as a growth sector or a potential third driver. The CDMO business is divided into 3 parts and the regenerative medicine and cell therapy business that is the topic of today's discussion have been reorganized separately as S-RACMO. Another competitive edge is that we are building a business using nucleic acids that are extremely advanced even for a nucleic acid with molecular structures that have long sequences of 100 nucleotides or more. In addition, our partners are academic entities and start-ups. And while there are still a few examples of these molecules being used in drugs, the current developments will eventually lead to pharmaceutical products. Once this happens, the business will expand. We are excited to be involved in CDMO for these nucleic acids. Although sales at present primarily consist of small molecules, Sumitomo Chemical has been commercially involved in small molecules for a long time. I believe that among Japanese CDMO companies, Sumitomo Chemical Group has the highest revenues, if including group companies. A long time ago, the business was a CMO that is it was only involved in contract manufacturing. However, our goal now is to add the kind of value that only Sumitomo Chemical can provide by taking on contracted development work as well, the D and CDMO. We still have small molecules in the pipeline. And indeed, the projects under development, small molecules are still the most common. More than half of our new drug candidates are small molecules. And we believe that by providing added value through contracted development of small molecules, Sumitomo Chemical's operations in this field could form another crucial part of this business. At least we aim to grow this business to that end.

Taking, for example, nucleic acid or regenerative cell therapy, could you please briefly explain your company's position relative to your competitors?

Regarding nucleic acid, there are many different types of nucleic acid. But right now, the battlefield is being thought over how long to make the molecule sequence. Sumitomo Chemical is able to produce nucleic acids of over 100 nucleotides with extremely high purity. I think there are probably only 1 or 2 companies in the world at this level, and Sumitomo Chemical is the only one in Japan. We want to build upon that technological advantage. I will hand over to President Kimura, who is more knowledgeable of regenerative cell therapy for an explanation of S-RACMO and its strength in regenerative cell therapy CDMO.

This is Kimura. Actually, I am also the Chairperson of S-RACMO and S-RACMO has 2 strengths of the CDMO. The first is that it undertakes the manufacture of approved products. Take, for example, a corneal endothelium product, Vyznova released by Aurion Biotech. From the autumn, it has been apparently been extremely well received and is being widely used by patients. The second strength is our experience in discussing pharmaceutical regulations with the authorities, which has helped us to obtain approval. Sumitomo Pharma, together with S-RACMO and Aurion was successful in obtaining approval for Vyznova. Similarly, the Japan-based Sumitomo Pharma was very proactive in obtaining approval for RETHYMIC in the U.S., a product owned by Sumitomo Pharma. Admittedly, S-RACMO does not actually manufacture RETHYMIC. The people who work on these approvals are now with S-RACMO, bringing with them expertise in obtaining approval or in negotiating over pharmaceutical regulations with the FDA or PDMA or offering related services. I believe this puts a distance between us and other CDMO businesses and our clients are very appreciative of the value of these services.

The next question will be from Mr. Sakai from UBS Securities.

My name is Sakai from UBS Securities. I would like to ask President Kimura about the development pipeline on the eighth page of the Sumitomo Pharma materials. Could you explain where the intellectual property rights will reside and what form they will take? I guess the rights relationships could be quite complicated in some situations, but would it be correct to assume that they will all transfer to the new entity?

For now, if we look at RETHYMIC at the top, we are not thinking of transferring the rights to RACTHERA. For the intellectual property rights for all the other programs held by Sumitomo Pharma and Sumitomo Chemical, we are thinking of transferring rights to RACTHERA in one go. And there are some patents that have been jointly filed with academia and others. However, we are thinking of transferring rights to RACTHERA if we can get the necessary consent. Many programs do not need consent.

Would I be right in understanding that this would give rise to a transfer of price and gains?

It's an absorption type split. So the rights will simply be yielded from Sumitomo Pharma. However, once the initial allocation has taken place, Sumitomo Chemical will acquire 2/3 of the RACTHERA shares from Sumitomo Pharma. At that point, payment will be received that is equivalent to the above-mentioned IT or other development assets or data or other business value. Some of this will be as lump sum payments, but most will be sales milestone payments related to the development of the regenerative medicine and cell therapies business in RACTHERA. Up to JPY 150 billion will be received by Sumitomo Pharma.

Understood. Am I right to understand that other revenue or capital gains will be booked within the fiscal year ending March 2025?

I think most will be recorded in the fiscal year ending March 2025.

Any other questions? Mr. Matsubara from Nomura Securities.

My name is Matsubara from Nomura Securities. Can you hear me?

Yes, we can hear you.

When you were talking about S-RACMO earlier, you said you were making Vyznova. Since you are able to manufacture clinical-grade product, is the sale of supernatant something you are considering as part of your business as other companies do?

I have heard that other companies are involved in such a business. However, S-RACMO is fundamentally only involved in selling medical products, and we are not thinking of using the supernatant for anything else.

If there are no more questions, then we will end today's briefing for the establishment of RACTHERA, a joint venture in regenerative medicine and cell therapy. Thank you very much for joining us today despite the short notice. [Statements in English on this transcript were spoken by an interpreter present on the live call.]