Sumitomo Pharma Co Ltd
TSE:4506
Earnings Call Analysis
Q1-2024 Analysis
Sumitomo Pharma Co Ltd
Sumitomo Pharma America (SMPA) was launched through the amalgamation of seven U.S. subsidiaries, which is projected to reduce total North American employees by 500 and slash SG&A and R&D expenses by $260 million in FY '23 and $400 million in FY '24 compared to no consolidation.
In the first quarter of FY 2023, revenues plummeted by JPY 84.2 billion, leading to a core operating loss of JPY 33.5 billion. Nonrecurring severance costs pertaining to the North American reorganization contributed to an operating loss of JPY 51.6 billion, while a favorable foreign exchange gain softened the blow to net profit, which nonetheless concluded in a substantial loss of JPY 38.9 billion.
Encouraged by stable forecasts, the company expects sales to rebound and a reduction in general expenses beginning in the second quarter, driven by the North American subsidiaries' consolidation. Severance and associated costs have surpassed the planned annual loss of JPY 16 billion, with the bulk recorded in the first quarter.
The culmination of LATUDA's exclusive sales period in the U.S. had a pronounced negative effect, resulting in a JPY 59.7 billion reduction in North American sales. Nonetheless, the company remains optimistic about the second-half performance of its three key products: ORGOVYX, MYFEMBREE, and GEMTESA.
ORGOVYX is tracking closely with its FY '23 forecast, having been administered to approximately 36,500 patients. MYFEMBREE's growth has been curtailed by prescription delays and price drops from co-pay card usage, a concern the company aims to rectify. GEMTESA experienced decreased prices due to increased Medicare Part D rebates but achieved around 250,000 prescriptions, aligning with its annual forecast.
Profit in the Japanese sector diminished by JPY 6 billion due to reduced sales. Profits in North America were severely impacted, registering a loss of JPY 23.7 billion stemming largely from LATUDA's lost exclusivity. The Asian sector saw a modest decline in profits of JPY 1.5 billion, attributable to decreased gross profit.
The company has embarked on a Phase I/II study of retinal pigment epithelial cells derived from allogeneic iPS cells. However, the Phase IIb study of rodatristat ethyl for pulmonary arterial hypertension did not meet the primary endpoint, leading to the discontinuation of ongoing studies. The development strategy for this compound is under review. Additionally, ulotaront's efficacy in Phase III schizophrenia studies was inconclusive, with further data analysis and regulatory discussions planned.
You don't have any saved screeners yet
I am Koji Ishida. I will now explain the financial results for the first quarter FY 2023 based on the presentation materials.
Please turn to Page 3. This page summarizes the completion of the combination of U.S. group companies and the launch of Sumitomo Pharma America. Sumitomo Pharma America was established on July 1, 2023 by consolidating the functions and human resources of 7 U.S. group companies, including Sunovion Pharmaceuticals, Sumitovant Biopharma and Myovant Sciences. The combination is expected to reduce the total number of employees in North America by approximately 500 by the end of FY '23 compared to the end of FY '22 and to reduce SG&A and R&D expenses by approximately $260 million in FY '23 and $400 million in FY '24 compared to the case where no combination was made.
SMPA whose profile is shown on the slide has a leadership team comprised of industry-leading experts with deep expertise in the life sciences field. Myrtle Potter, President and CEO; and 2 others also became executive officers of Sumitomo Pharma on July 1.
Please turn to Page 4. We are here to report our first quarter operating results, which are shown on a core IFRS basis. Effective from the first quarter of the current fiscal year, the company changed its reporting segment from 4, which is Japan, North America, China and Other Regions to 3, Japan, North America and Asia.
Revenues were JPY 75.7 billion, a decrease of JPY 84.2 billion from the same period last year. Sales declined in Japan, North America and Asia segments.
In addition to a decrease in selling, general and administrative expenses, other operating income also recorded due to the transfer of shares in Sumitomo Pharma Animal Health.
However, our core operating profit decreased by JPY 46.9 billion year-on-year to a core operating loss of JPY 33.5 billion due to the significant impact of the decrease in gross profit caused by the decline in revenues.
Due to nonrecurring items such as severance payments of JPY 18.1 billion associated with the combination of group companies in North America, operating profit decreased by JPY 66.2 billion from the same period last year to an operating loss of JPY 51.6 billion.
Profit before income taxes and minority interests were JPY 20 billion due to a foreign exchange gain of JPY 20 billion, resulting from the yen depreciation at the end of the quarter. However, the impact of the decrease in operating profit was significant resulting in a loss before tax -- before income taxes of JPY 31.1 billion, a decrease of JPY 77.7 billion from the same period last year.
As a result, net profit attributable to owners of the parent also declined significantly to a loss of JPY 38.9 billion.
While the first quarter sales revenue progress is low compared to the annual forecast, each profit level is progressing at a high rate. Sales are expected to grow while selling, general and administrative expenses are expected to decrease from second quarter onwards due to the effect of the combination of the North America subsidiaries.
Since the first quarter results did not change significantly from our assumptions, we have not revised our full year forecast at this time.
Severance and other costs associated with the combination of group companies in North America have already exceeded the annual planned loss of JPY 16 billion, most of which was recorded in the first quarter. The assumed exchange rate of JPY 130 to the dollar remained unchanged.
Page 5 shows revenue from sales in Japan. Revenues decreased by JPY 21.7 billion from the same period last year to JPY 30.4 billion. Sales of LATUDA and TWYMEEG increased, but were affected by the termination of the Trulicity sales collaboration in December 2022. It was also affected by the onetime payment of JPY 6.1 billion from the out-licensing of DSP-0187 in Japan segment, which had been recorded in the overseas and other segment in the same period of the previous year.
Revenues declined mainly because the Sumitomo Pharma Food & Chemical is no longer under the group umbrella following the transfer of all shares at the end of March 2023, losing its revenue recorded in the Other Regions in the same period last year.
Progress against the full year forecast was 26.6% with the segment as a whole progressing largely in line with the expectations.
Page 6 shows revenue from sales in North America and Asia. In North America, sales of the 3 key products, ORGOVYX, MYFEMBREE and GEMTESA, grew. However, the end of LATUDA's exclusivity period in the U.S. had a significant impact, resulting in sales of JPY 35.5 billion on a yen basis, a decrease of JPY 59.7 billion from the same period last year.
Although progress against the full year forecast for the 3 key products is low, we plan to make progress for second half of FY '23 and we are generally making growth as expected.
In Asia, the segment as a whole was affected by the decline in sales of MEROPEN in China, which became subject to volume-based procurement, resulting in a JPY 2.8 billion decline in sales compared to the same period last year.
Page 7 shows the marketing status of ORGOVYX. ORGOVYX has been administered to a cumulative total of approximately 36,500 patients through the first quarter of FY '23, which is generally in line with the forecast of FY '23 despite a slight price decline relative to the annual forecast. For marketing activities, the advanced analytics team will analyze various sales metrics and utilize real-world data to optimize targeting and field force deployment.
Page 8 is the marketing status of MYFEMBREE. MYFEMBREE's progress against the annual forecast is low due to delays in obtaining prescriptions for endometriosis and lower prices due to the increased use of co-pay cards. It is planned to grow towards second half of FY '23. In addition, we obtained approximately 24,000 prescriptions in the first quarter of FY 2023.
As for co-pay cards, we will work to improve gross-to-net by monitoring their use for eligible patients and by suspending their use in some pharmacies to ensure appropriateness and further expanding commercial insurance coverage for endometriosis.
Page 9 shows the marketing status of GEMTESA. GEMTESA had lower prices versus the annual forecast due to increased rebate payments to Medicare Part D. In Q1, the number of prescriptions have increased steadily with approximately 250,000 prescriptions obtained, and progress is generally in line with the forecast of FY '23.
With the establishment of SMPA, the sales forces of Urovant Sciences and Sunovion in charge of GEMTESA were integrated and we expect to be able to operate the organization and conduct marketing activities with a greater sense of unity.
Page 10 shows operating results by segment. In Japan, core segment profit decreased by JPY 6 billion to JPY 2.8 billion due to a decrease in gross profit from lower sales.
In North America, core segment profit decreased by JPY 46.8 billion to a loss of JPY 23.7 billion due to the significant impact of lower gross profit from lower sales despite lower selling, general and administrative expenses resulting from the end of LATUDA's exclusive sales period and other factors.
In Asia, core segment profit declined by JPY 1.5 billion to JPY 4.3 billion due to a decrease in gross profit from lower sales.
I will now explain the current status of clinical development. Please turn to Page 12. I will explain about research and development. This table lists the development stages of our development pipelines. The changes effective from May of this year are explained on the next page.
Please turn to Page 13. This section summarizes the changes that have been made since May of this year. In the psychiatry and neurology area regarding retinal pigment epithelial cells that are cell therapy-derived from allogeneic iPS cells, the Phase I/II study of retinal pigment epithelial tear was initiated in Japan.
In other areas, the results of the Phase IIb study of rodatristat ethyl in pulmonary arterial hypertension conducted in the U.S. failed to meet its primary endpoint. Based on the results of this study and the analysis of safety data, the ongoing studies were discontinued. The future development strategy of this compound is currently under consideration.
In addition, the development of MVT-602 for infertility, which had been conducted in Germany was discontinued.
Please turn to Page 14. We have obtained the results of DIAMOND 1 and DIAMOND 2, the Phase III schizophrenia studies of ulotaront, and we would like to show them. The study design is shown on the slide. In terms of efficacy, both studies did not demonstrate significant improvement versus placebo on the primary endpoint. Ulotaront showed improvement, but a large improvement was observed in the placebo group, which we speculate may have influenced the study results. In the pooled analysis of subjects enrolled prior to COVID-19 for both studies, ulotaront group showed a similar trend in efficacy as in the Phase II study, SEP361-201 study. Regarding safety, ulotaront was generally safe and well tolerated. Further data analysis and discussions with the FDA are planned for the future.
Please turn to Page 15. The results of the primary endpoint of the Phase II study of ulotaront and the DIAMOND 1 and 2 studies are shown. Top left of this page is the results of SEP361-201 Phase II study. Then the middle figure shows the results of the 301 study, the DIAMOND 1 study. The far right shows the results of the DIAMOND 2 study. The DIAMOND 1 and 2 studies did not show statistically significant improvement. In general, we believe that the placebo effect was high and masked the efficacy of ulotaront compared to the Phase II study and published reports. Further detailed analysis will continue in the future.
This concludes the presentation.
We would like to move on to the question-and-answer session.
Wakao from JPMorgan Securities. First, let me ask about ulotaront. I assume that you are going to proceed with the analysis and aim to submit an application. But what scenario can you envision? According to what you have explained, would the strategy be to collect only patients before COVID-19, collect them from Phase III study in Japan and then apply for this Phase II study. And when will this become clear? It says that a similar trend was observed this time, but does it mean that this is a trend and not a statistically significant difference?
First, for the scenario, we are currently analyzing the detailed data. Based on the results, we would like to discuss this with Otsuka Pharmaceutical. So at this time, we are unable to present a clear scenario.
For the timing, we will proceed with the analysis as soon as possible and consult with the FDA in the end.
Then there was a question about the 201 study being the same trend as the Phase II study since there is also the issue of the sample size.
As for the analysis before COVID-19, there is a significant difference in terms of so-called p-value being 0.05. However, since we did not agree with the FDA on this type of analysis in advance, we have considered it carefully and made a qualitative comment that the results were similar to those of the Phase II study.
I see. Is it safe to assume that whether or not that will be accepted will be the focus in the future?
Leaving aside the argument as to whether that is the only focus or not, that will be our forecast. However, this will also be a matter of future discussions with Otsuka. We will discuss various options, including whether to leave it to discussions with FDA alone or to conduct another study.
Okay. My second question is about the 3 key products. The assumption is that the plan will go up towards the second half, towards the end of the fiscal year. But I still think there are a few shades of gray. In particular, MYFEMBREE still seems a bit challenging. As for MYFEMBREE, the quarterly data from Symphony Health shows 22% growth in Q-on-Q, while the weekly data shows a flat growth since April.
How are you analyzing the factors that the trend since this April is worsening in the first place? Also, why will the volume grow in the future? Can you give us a little more background there?
Yes. Regarding MYFEMBREE, as you mentioned, we are expecting very positive results this year. In Q1, our calculation showed that sales are more than 60% of our initial target. Unlike what you said, we do not recognize it being flat in April and May. We are working on gross-to-net, in other words, the issue of discount rates and such, and we expect sales to increase in the future.
We expect sales to grow in the future, especially in endometriosis. We have just launched a new integrated company on July 1, and we will be discussing these areas with Pfizer as we work to increase sales.
This is Hiroshi Nomura. It is true that some of the shipments were high in March 2023 and then decreased in April, so it appears to have leveled up a bit in May and June. But we think we are hoping for a better uptick from the start in the second half. So once we have established a new company, SMPA, we are going to narrow down the targets. In the past, for example, the indications for uterine fibroids for women between the ages of 18 and 15 (sic) [ 50 ] and so on. However, we will also promote narrowing down to the women with uterine fibroids for patients with such diseases, and we will also promote DTC in various ways.
Also, according to our data, we know that the frequency of detailed calls and visits to important Tier 1 and Tier 2 doctors is still insufficient. We will improve that in many ways. I would like to change the way we have been doing things in the past in order to promote our sales activities in a way that will help us to tap into this demand for MYFEMBREE.
Then we will take various measures, including, for example, reviewing the allocation of sales reps. But I think it will be very difficult for the effect of these to appear immediately and easily. So we hope to see such effect in Q3 and Q4.
Muraoka from Morgan Stanley. I agree that these 3 key products are looking weaker. I hope the company can conduct a reanalysis of ulotaront to send application. However, it is difficult to expect that to be the case. The study will have to be conducted again and it will take a considerable amount of time to get the 2 together at adjunct MDD and GAD, so I suspect that the timing of ulotaront's contribution to financial performance will be delayed back by 4 years to 5 years, in my opinion.
What I would like to ask you is whether the term, Plan B, is the right word? Or if it is no longer a Plan B, what are your plans for avoiding a deficit in the next fiscal year? In other words, loss in 2 consecutive years. Can you please tell us what you did not say when you explained the Mid-term Business Plan 2027?
Regarding the contribution of ulotaront to the financial performance in the indication of schizophrenia, there is certainly a milestone in terms of the application in the current fiscal year and then the approval in the next year. However, as you know, schizophrenia has many Medicaid patients and low drug prices. On the other hand, we also need to have a certain number of sales reps.
Considering these factors, the contribution to profit and loss was not necessarily large during the Mid-term Plan 2027 period. Of course, beyond that, I think that, beyond 2027, it will have a profit-and-loss contribution and also an adjunctive MDD contribution will be a significant addition.
In that sense, if we do not hire new sales reps or incur other marketing costs, in the next fiscal year onward we would rather curtail the incurrence of costs. Of course, it is very unfortunate that this schizophrenia indication -- or rather the clinical study did not meet the endpoint.
We are very disappointed and we could not achieve what we had hoped for, and we apologize for that. I can only say that at this point, we will wait for further analysis of the data and then a new policy. However, from a profit-and-loss perspective during the Mid-term Business Plan 2027 period, as I mentioned earlier, this is the case.
I see. Let me just ask one more question. In this situation, I'm actually wondering if narcolepsy royalties from Jazz Pharmaceuticals is becoming more important, although it's a bit further down the road.
So I would like to know a little bit about science. As much was discussed at Takeda Pharmaceutical company's meeting last week, a detailed paper of TAK-994 in The New England Journal of Medicine was on the topic and there was a lot of discussion about it. Is the molecular structure of DSP-0187 that your company gave just very different from Takeda's TAK-994 or TAK-861? And there was a discussion by Takeda about metabolites affecting safety, but can we reasonably assume that this is unlikely to apply to your companies? Please share any basic science findings in this area.
Okay. In terms of the face of the compounds, we think that the compound's and Takeda's compounds are different. Then there was the TAK-994, I think this is the one with hepatotoxic. But the face of such parent compound to the original compound is different, hence, hepatotoxicity due to metabolites will be different.
As for our company's drug, it is developed by Jazz. So we do not have such information at this point.
Yamaguchi from Citi. I would like to ask you a question or 2 about ulotaront. First of all, it means that this placebo effect was very large, which is twice the placebo effective as the normal study. So it seems to be more effective than the drug. Is it possible to conversely have a logic that could eliminate this without study? Is it still something that can only be understood by doing the study?
That is exactly the area that we are also considering a lot right now. The placebo group dropped nearly 20 points on the path. This is especially true for DIAMOND 1, and we are currently conducting a detailed analysis to determine how we can eliminate this in advance. But as I said, that has not happened in patients who were enrolled before COVID-19. So I think there must have been some kind of timing factor. However, we are in the process of doing a detailed analysis so we are not in a position to say anything properly at this point.
I see. As you mentioned earlier, what about the possibility of the same thing happening with placebo in other studies?
Well, adjunctive MDD and GAD are in progress. I don't believe any interim analysis is done yet at this point. So in that sense, we would like to analyze it if we have a chance at one point in the future.
However, I don't think it's impossible that other drugs may have such different results before and after the spread of COVID-19 as well. Therefore, we would like to proceed with careful analysis in this area and consider the influence of other drugs as well. However, at this point, we are honestly not sure.
Okay. I guess your company must have been surprised when you saw the results. The placebo effect tends to appear, to some extent, but it is a bit unexpected to see to this extent.
Yes. The placebo level is generally around 10. So we have heard that it is very rare for placebo to reach 20 even in the past. We will have to do more analysis to determine the cause of this unusual result.
I see. And one more thing, thank you for your comments and discussions about MYFEMBREE. I understand the logic of your company. But looking at it from the outside, I see that it is nevertheless starting off quite harshly. Is there still a possibility of revising this again around Q2, especially for these 3 key products? This includes both up and downwards revision.
Regarding the meaning of revision, there are 2 elements where we place it as a goal and where the current achievable range is. For example, if we forecast around September, what kind of measures can we think of to make them reach our goal? What happens when we take those measures? We do not believe that a simple sales forecast will lead to a financial forecast. So we are taking various measures in the future as we become a new company and as our sales executives are changing. We would like to consider what the future sales of these 3 drugs will be like taking into account what kind of effect this will have.
Hashiguchi from Daiwa Securities. As for the U.S. sales, LATUDA is at $8 million, which is quite low compared to your forecast for the full year. Can you tell me if this includes some sort of price retroaction for the previous year's shipment and why?
As for LATUDA, the payment of rebates for sales made from January to March of this year occurred in Q1 and the adjustment for this occurred in Q1.
Is that factored into the full year plan? Or is there a possibility that this is not in and -- but retroactive? And if so, is there a possibility of a downside for the full year.
This portion has already been incorporated in the full year plan.
My understanding is that the impact of the sales of the 3 key products that were retroactive in the previous fiscal year and delivered products are not included in the results for Q1, is it correct?
Basically, the situation of LATUDA is a special situation because it is right after the loss of exclusivity. Some adjustments, such as true-up, are naturally applied to the 3 key products as well, but the effect is not as great as in LATUDA.
I was wondering if you could comment on the results of Phase III studies of ulotaront and how safe it is. I remember a clean profile in Phase II study with almost no increase in schizophrenia common adverse events in ulotaront compared to placebo. This time, the observation period and observation -- administration period have been extended and the number of subjects have also increased significantly. Could you tell how it has been changed?
The results on safety and tolerability are good reflection of the results that have been obtained so far.
Finally, I'm afraid this is a similar question, but do you have any hypothesis as to why the placebo effect was greater with COVID-19? Does schizophrenia have any particular features of the disease that make such things susceptible to amplification by COVID-19? Or did the change in handling of the 2 studies by your company an effect of the start of the COVID-19 pandemic? Is there anything you know at this point, even hypothetical, that you would be willing to share?
We are still analyzing the details of what you just asked me so...
Sakai from Credit Suisse. I'm a little concerned about the part that was registered before the pandemic comment for ulotaront. As I recall, your company stopped clinical trials for a time when there was a crisis in Ukraine. I think they were Phase III studies. I can imagine that the patients would have been from different areas and their backgrounds would have been quite different.
I know you probably don't have an answer to this question, but how about an impact on that area? Although it is said to be before the pandemic, do you see the so-called Ukraine crisis as having had some impact on the recombination of clinical trials? This is my first question.
DIAMOND 1 and then also the DIAMOND 2 study started on September 11 -- or 30, 2019. Also regarding the definition of the start date of COVID-19, we are considering March 13, 2020, the date when the emergency declaration was issued in the U.S.
The war in Ukraine started in February 2022. So in that sense, regarding your question, we believe that we can relatively distinguish between patients who were recruited before COVID-19 and after COVID-19. However, since the war in Ukraine and Russia started, we have not been recruiting patients from Ukraine and Russia. So we have shifted our recruitment to other regions.
So you're talking about patients starting in 2019 until March 2020 when the COVID-19 emergency declaration was issued.
Yes. I think that is correct.
I see. Since the CEO, Nomura-san, is here today, I would like to ask you a few questions. Based on the Q1 results or -- rather the situation, it is said that there are delays in the 3 U.S. products.
On the other hand, do you feel the need to review and change the operations in Japan? And I wonder if it will be necessary to leverage the balance sheet in some way. Can you tell me a little bit about these 2 points?
Thank you very much. I think there are many ways to leverage the Japan business. However, I have been saying this for a long time, but we believe that our first priority is to search for such opportunities to use our existing business assets.
Then as for the balance sheet, of course, we cannot just leave as it is. I cannot give you specifics at this time, but we are considering various possibilities. I cannot be more specific, I apologize.
[ Ishii ] from [ Iyaku Tsushin ]. Regarding the ulotaront, you mentioned earlier that 10 is common for placebos. Is there anything other than COVID-19 that could cause that placebo effect to increase?
The details of how the placebo effect became such a very large value now are under analysis. We believe that COVID-19 may be one of the factors, but we are also analyzing other factors.
You mean you don't know yet, I see. Also I would like to know a little bit more about the profit progress forecast for ORGOVYX, MYFEMBREE and GEMTESA and the current response in terms of profit.
With regard to ORGOVYX and MYFEMBREE, we are talking about splitting the profit with Pfizer. So from that perspective, it is as expected.
Regarding GEMTESA, at this point in Q1 we are at about 89% of our budgeted sales, which is a little short of what we had expected. We expect that we'll be able to achieve our annual target for the year Q1. ORGOVYX is at 106% in yen. From this perspective, only MYFEMBREE is still a bit weak. As I was asked by analysts earlier, MYFEMBREE is the only thing that I'm concerned about right now.
However, since I mentioned earlier that we are considering various measures, I'm very hopeful that the various sales measures we are taking now will have -- will somehow have an effect in Q3 and Q4.
Chiboshi from Jiho. I have 2 questions. And the first is the part of the performance plan based on the results of the Phase III studies of ulotaront. My understanding is that the market for schizophrenia was not that large and that this is not enough to change the plan for the Mid-term Business Plan 2027, is this correct?
If we take only the period of the Mid-term Business Plan 2027, there is no significant impact on profit and loss. So I understand that this is not a situation that would require a change in the midterm business plan itself.
I see. Also I believe that Mr. Nomura mentioned earlier that he has been looking for opportunities to introduce the sales force in Japan business in a way that would allow them to make the best use of the sales force for some time. Is there any good progress in this area or any good news to talk about? I would like to know about that.
Well, I cannot be more specific here, but in various ways our salespeople in charge of alliances are looking for opportunities for alliances in various forms. At this point, we do not have any specifics yet, but we are working hard to promote these activities.
I have a feeling even as an amateur, that the sales force in Japan may become a bit redundant if things continue as they are. What is your perception of that?
Yes, I think you are saying that there will be a surplus in the future. For example, when the affiliated products in the diabetes area will reach loss of exclusivity. Our current thinking is that we would like to take some measures to prevent such a situation from occurring.
[ Tsubokura ] from The Chemical Daily. Is the fact that LATUDA's Q1 results in North America are considerably less progress than the full year forecast as expected? Or is it that the decrease was a bit unexpected and large? Can you tell us how you view that?
To some extent, the situation in LATUDA was within our expectations.
So you are saying that the range of 5% of the fiscal year for the April to June period is as expected.
The progress of LATUDA sales in Q1 was as shown here and the fact that the progress was a little slower than for the full year is within the range we had expected.
Okay. So is it safe to assume that there will be -- there will not be that much of an impact with respect to the full year?
Yes, that's my understanding.
This concludes the financial results briefing of Sumitomo Pharma for Q1 FY 2023. Thank you very much for joining us today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]