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My name is Hiroshi Nomura. I am the President and CEO of Sumitomo Dainippon Pharma. Thank you for joining the conference call for the third quarter of fiscal year 2020. As you have probably noticed in the presentation material as well as supplementary financial data, we did not revise the financial forecast. This is because there are some variables that make it difficult to make forecasts. More specifically, that's napabucasin colorectal cancer study has in Phase III. The top line results were supposed to come out in July last year, as you recall. However, due to the COVID-19 pandemic, data cleaning process took longer. This month, in January, we are pleased to have completed data cleaning, and we are diligently working on analysis. In February, long-awaited results for napabucasin study will be revealed. Once the results are available, we will announce the full year financial outlook. Because the study results will be available soon after this conference call, we would like to wait for the results first and inform you more accurate forecast. So that's our thinking. And I wanted to personally inform you where we stand today in terms of the financial results for the quarter and for year forecast. I hope you understand our position.
My name is Hisayoshi Kashima. I will use the slide deck to explain the financial results for the third quarter fiscal year 2020 and the development status updates. Please go to Slide 3. I will explain the third quarter financial results. Revenues were JPY 394.8 billion, an increase by JPY 37.7 billion or 10.6%. The increase was driven by both Japan and North America segments. SG&A expenses increased from the same period last year because of Sumitovant expenses despite decreased activities as a result of the COVID-19 pandemic. R&D expenses also increased for the same reasons. As a result of these, core operating profit increased by JPY 8.3 billion to JPY 72.6 billion. Changes in fair value of contingent consideration decreased because last year, clinical development plan was revised in oncology area. Other nonrecurring items include sales of the Ibaraki plant that we completed during the quarter. Meanwhile, we booked impairment losses for multiple development pipelines in the same period last year. As a result, other nonrecurring items increased by JPY 39 billion. The changes in fair value of contingent consideration and increase in other nonrecurring items offset each other. As a result, operating profit increased by JPY 6.1 billion to JPY 87.5 billion. Income tax expenses decreased significantly this fiscal year because deferred income tax asset was reversed in the United States in the same period last year. Furthermore, net income attributable to orders of the parent for the quarter increased substantially because of deduction of losses in the noncontrolling interest of Sumitovant in this fiscal year. The percent of progress against full year outlook for revenues was 78%, which is positive. Meanwhile, both SG&A expenses and R&D expenses were underspent because of the pandemic. As a result, profit below core operating profit was all better than full year forecast. Next is Slide 4. The revenues in Japan increased by JPY 14.3 billion from the same period last year to JPY 118.5 billion, which is 77.3% progress to the forecast. Despite the negative impact of NHI drug price reductions, Equa/EquMet contributed to revenue growth since November 2019. Trulicity continues to grow, however, it was below expectations because face-to-face promotions were restricted. The new product, LATUDA, made good progress according to the plan despite the circumstances. Meanwhile, LONASEN Tape struggled even after the 2-week prescription ban was lifted because we were not able to promote face-to-face as much as we had hoped. Slide 5 shows revenues in North America and China segment. The revenues in North America were JPY 218 billion, an increase by JPY 22.4 billion from the same period last year. The total revenues were JPY 160.5 billion, an increase by JPY 18.5 billion from the same period last year. That's approximately 16% increase in revenues in the local currency basis. The ex factory sales continued to remain strong, while the price impact -- or the payer mix impact that we estimated for COVID-19 was not as high. Also, the wholesalers' inventory level increased because of the year-end, which had positive impact for the quarter. LATUDA is making progress better than the full year forecast. APTIOM grew substantially from the same period last year. With regard to China segment, the revenues decreased to JPY 19.1 billion, down by 5.4% from the same period last year, because the drop in sales in the first half due to COVID-19 was not restored. For your information, the revenues outside Japan, including export, account for 63.1% of total revenues. Please look at Slide 6. I will explain segment information. Japan segment increased gross profit because revenues increased. SG&A decreased in the meantime. The core segment profit increased by JPY 2.9 billion from the same period last year. In North America, the segment income increased by JPY 14.3 billion to JPY 104.5 billion due to increased revenues primarily LATUDA and reduced costs at Sunovion, which covered the incremental cost of Sumitovant. The China segment decreased profit by JPY 900 million, mainly due to lower revenues. Please go to Slide 8. I would like to explain the collaborative agreement that Myovant entered into with Pfizer at the end of December. Myovant grants Pfizer the right to jointly develop and commercialize relugolix in North America region. Under the terms of the agreement, Myovant and Pfizer started joint promotion of ORGOVYX. That was launched in January for the treatment of prostate cancer. And if approved, 2 companies will begin co-promoting relugolix combination tablet in women's health. Myovant records sales revenues, and Myovant and Pfizer equally share profits. Myovant will receive up to $4.2 billion, including an upfront payment of $650 million. Other milestone include regulatory milestones for FDA approvals and tiered sales milestones. Upfront and regulatory milestones are expected to record deferred revenues on a straight-line basis over a certain period. Myovant also grants Pfizer an exclusive option to commercialize relugolix in oncology outside U.S. and Canada, excluding certain Asian countries. Please look at Slide 9. The financial performance remained strong until the third quarter, primarily driven by LATUDA. Furthermore, part of upfront payment from Pfizer will be recorded as revenues. Core operating profit will increase because of stronger yen, although revenues will decrease. These are some positive factors that raise financial forecast. However, we are still in the process of analyzing napabucasin Phase III data because we just completed data cleaning in January. The analysis will complete in February. After that, we will revise forecast, if necessary, and we will inform you promptly. Please go to Page 11. I would like to explain development pipeline. This table shows a list of our development assets and development stages. The changes since October will be explained in the next slide. Please look at Slide 12. This slide summarizes changes since October 2020. In the area of psychiatry and neurology, a Phase III study started in China for bipolar 1 depression indication. In oncology, relugolix was approved for prostate cancer in December 2020 and was launched under the brand name ORGOVYX in January this year. In other areas, vibegron was approved in December 2020, for overactive bladder and is scheduled to launch in April of this year under the brand name GEMTESA. Meanwhile, we obtained results from Phase II study in the United States for pain associated with irritable bowel syndrome. The study did not meet the primary endpoint versus placebo. The decision was made to discontinue development for the indication. We also obtained results from 1-year extension study of Phase III program for relugolix endometriosis indication. The results show clinically meaningful reductions in dysmenorrhea and non-menstrual pelvic pain over 1 year with minimum bone mineral density loss, while the study also demonstrated well-tolerated safety profile. Based on the positive Phase III results and 1-year data from the extension study, NDA submission is being prepared. For your reference, Slide 18 in the appendix show development status of relugolix and vibegron.
My first question is regarding financial forecast and the expectations for Phase III napabucasin study. What expectations did you include in the current forecast? What kind of results would affect the financial forecast and to what extent? Could you briefly share with us the scenario you apply?
Thank you for your question. Our expectation is that the study will be successful, and we think it will be. Should it fail, we have to book impairment losses and change in fair value of contingent consideration. These things will be affected. In other words, lines below core operating profit will be affected.
Okay. I'm sure you have estimated probability of success. When the study achieves the primary endpoint, you will revise revenue forecast. And based on the revised outlook, how likely that you make changes that you just mentioned?
The current study was designed to achieve a certain level of revenues. Therefore, as long as the study meeting the -- its primary endpoint, we should be able to achieve the expected revenues. Having said that, no one can guess the types of results that the study will achieve. The first step is to review the results.
My second question is about acquisition of additional shares of Urovant. Is the gain or loss of step acquisition going to be one of the variables that affect the financial forecast? You did not mention this in your presentation. Are you estimating any loss or gain? Is it minimum?
With regard to Urovant, there is no guarantee that we can take Urovant private until all the proxy processes are complete. Having said that, we believe we can achieve this. And therefore, it is not one of the variables that will affect financial forecast.
I see. In other words, the gain or loss of step acquisition of shares is not likely to affect forecast. Is that what you are saying?
It is not one of the uncertainties that affect the financial forecasts.
My last question is regarding KYNMOBI uptake. It was launched in September, and revenues have not been very high. What do you think about the launch uptake? And how do you see the sales estimates?
As you know, many hospitals are limiting access due to COVID-19, which makes it difficult to have face-to-face interactions with physicians. It's taking longer to penetrate the product. But the brand awareness among physicians is gradually improving, so we expect KYNMOBI to start growing in the future.
My question is about the financial forecast for the fiscal year. I understand napabucasin is one of the variables that affect the financial forecast. After the third quarter, LATUDA remained strong, while SG&A expenses were favorable. You already exceeded the core operating profit for the full year. You did not revise forecast at this point because of napabucasin study. Is this the correct understanding?
Thank you for your question. As we said during the presentation, LATUDA is performing well, while SG&A spending was favorable. We will review the fourth quarter spending. But anyhow, we think we end the year better than the current forecast.
My second question is about LATUDA. In the revenue projection, you considered changes in the payer mix. Has there been any change in the payer mix that affect revenues for LATUDA?
As you pointed out, we expected the unemployment rate would increase, resulting in the changes in payer mix. That was our initial thinking. However, the unemployment rate is somewhere between 6% to 7%, and it has been stable. So LATUDA has not been affected by the changes in the payer mix.
My last question is regarding the collaborative agreement with Pfizer. By entering into the agreement, you both equally share profits and expenses. Compared to the midterm business plan outline you showed us in February, I think the profit will be better and expenses will be lower because of the agreement. Am I correct to say this?
Myovant will receive up to $4.2 billion, including upfront payment, regulatory milestones and sales milestones, and profits will be shared in the meantime. That's the deal. Of course, Myovant investigated standalone options versus collaboration with Pfizer from economic point of view. As a result of different simulations, it makes more sense to collaborate with Pfizer instead of Myovant standalone. The collaboration will bring more positive financial effects. Through the collaboration, sales uptake at the launch will be steeper than if we did this alone. So P&L will be more positive because of the collaboration.
I have 2 questions. First is accounting treatment of napabucasin because I always get confused. So please allow me to confirm again. I'm looking at supplementary financial data from the second quarter financial results. On Page 8, it says former BBI, JPY 17.1 billion for contingent consideration. Now I'm looking at the same section for the third quarter, and it's JPY 26.3 billion. Please explain why it's increased. And I would also like to understand whether this will be a positive influence on the profit during the fourth quarter, if the Phase III study is successful.
Thank you for your question. Let me explain. The value of napabucasin is booked under intangible assets, that's JPY 26.3 billion. This hasn't changed in September-December period. Meanwhile, contingent consideration liabilities from napabucasin is JPY 17.1 billion. If we have to record impairment loss for napabucasin, the difference between the 2 will be recorded as a loss.
I see. So in other words, the impairment loss will hit below core operating profit line?
That's right.
And if the Phase III study is successful, you move this to assets?
No. Asset side will be the same. On the liabilities side, the balance of fair value of contingent consideration will increase.
I see. In other words, you have to pay more because the study was successful.
Yes. The possibility will increase.
And will it hit P&L?
Yes.
The increase will hit P&L?
Yes.
And do you have that number? I guess not.
No, we don't.
My second question is regarding Sumitovant meeting scheduled on March 23, Japan time. Since Myovant is a subsidiary company of Sumitovant, I'm sure Myovant will be part of the agenda. But it's a publicly traded company at the same time. In that meeting, I hope to understand how profit will be recognized because it will affect the financial results greatly in the next fiscal year.
Thank you for your question. What exactly would you like to understand about Myovant profit?
Well, I'm asking about the collaborative agreement with Pfizer. Myovant will record profit, the profit will be consolidated to Sumitovant 100% or not. That's what I want to know.
I see. The contribution will be 100%, but it will be deducted in the net profit attributable to owners of the parent. The profit will be captured 100% in revenues, core operating profit and operating profit.
I see. And what would be the extent of deductions? Is it 40%, maybe?
Well, we own a little over 50% of Myovant shares. So it will be 40% something, 47% or 48% deducted.
So it will be about half then.
Yes, almost half.
My first question is regarding collaborative agreement with Pfizer. I would like to understand how milestones are recognized on the financial statement. The upfront payment was $650 million and $200 million for regulatory milestone. $850 million in total will be divided by a certain period and will be recorded starting this fiscal year. Am I correct?
Well, we are talking about accounting treatment of a publicly traded company. It's not appropriate for me to discuss the topic before they disclose information. You will find more information in Form 10-Q. The income will be recognized for a certain period. That's all I can say.
I see. Myovant also closes the book in March. So $650 million in upfront payment will be divided by some duration. And when you need to provide a financial forecast, will you add the 3-month number for January-March period?
Yes, it will be added to the forecast.
I see. And my next question is the timing of napabucasin top line. Earlier, you sounded as though the study results will be available soon like tomorrow. You mentioned the results will come out sometime soon. After that happens, you will revise the financial forecast accordingly, plus the upfront payment from Pfizer we just talked about. Are you prepared to make the revisions quickly?
Yes. Well, napabucasin top line results will not be available tomorrow, for sure. It will take longer than that. We have prepared for different situations, but we won't be able to revise the forecast on the same day of napabucasin results. We will do so as soon as possible.
Just to recap the time line here, of course, the year-end is always busy, but napabucasin top line will be available sometime soon. Then after that, you will revise financial forecast. That's the sequence of events?
Yes.
Okay. And another thing that affects us is the midterm business plan. I think napabucasin top line will trigger revising the midterm plan, and I think you mentioned that before. When do you think it will happen, the midterm business plan revision?
I have said before that as soon as we receive the results of the napabucasin study, we would revise the midterm business plan. In the meantime, we've been investigating mid- to long-term business plan, analyzing different cases. We are currently reviewing many things in the meantime. So the midterm business plan will be revised immediately after napabucasin results become available. My goal is to present the midterm plan before the fourth quarter financial briefing in May.
I see. So just to recap the sequence of events here for the next 3 months or so. Napabucasin top line results will come first, followed by revision of financial forecast for fiscal year 2020, if you need to revise forecast. After that, you will revise the midterm business plan, and the fourth quarter financial briefing will take place in May.
Yes.
I also have a question from investor outside Japan. So Myovant will receive up to $4.2 billion, including sales milestones. I think the size of the deal is big. Theoretically speaking, Sumitomo is entitled to receive 54% of that. If you have the confidence in the income stream, why not acquire Myovant altogether? That's a question coming from an investor outside Japan, I'm guessing one of the Myovant investors. Have you thought about that?
Well, when we took Urovant private, Myovant's share price also increased. And it's difficult for me to comment on the question you just asked. If we take the company private, in theory, the cash flow and P&L will be maintained. But I'm not going to offer comments here.
My first question is on Slide 5. You said LATUDA is doing well in North America, and China was affected by COVID-19. You said China segment is recovering, but I think it was affected partly because of the product, MEROPEN, is an antibiotics and infectious disease area is not increasing in China. Is that the reason for China segment slowing down instead of the pandemic? And Japan segment was affected by limited promotional activities. Is this correct understanding?
With regard to MEROPEN, the revenues decreased by JPY 1.6 billion from the same period last year. In China, as you know, the pandemic hit the peak in January-March period last year. MEROPEN was not prescribed as much due to the pandemic during the period. So the inventory level was high in March. Therefore, ex factory sales in April-June period was not high because we did not ship MEROPEN as much. That's the impact you see here. The hospital sales have restored to previous year's level. That's where we are.
And drugs like LATUDA and APTIOM were not affected as much. For example, APTIOM is a treatment for epilepsy, these patients still need to come to hospitals to receive treatment regardless of the pandemic. Do you think that's the reason for these products remain strong?
Yes.
My next question is regarding SG&A expenses. I understand it's difficult to have face-to-face promotions under the pandemic. Previously, Nomura-san was talking about the use of medical sites, such as CareNet, MedPeer and M3. The percent of progress in SG&A spending was 67.8%, which is slow, but you are spending more than the same period last year. Do you think the spending mix has changed?
If you look at the right-hand side of Slide 3, you see Sumitovant SG&A expenses. These are new since last year. The percent of progress was 67.8%. This is because SG&A expenses of Sumitovant will be spent more in the fourth quarter more so than the first 3 quarters so far, because promotional activities will take place a lot in the next quarter. It's also because of the pandemic, we did not spend travel expenses as much, for example.
I see. Have you increased expenses for CareNet and other services?
Some spending has increased in this area, but in other areas, spending was a lot less due to COVID-19.
I see. Do you think the trend will continue in the fourth quarter?
That depends on the pandemic. I don't think it will change much.
And you said that percent of progress has been slow because Sumitovant expenses will increase in the fourth quarter. So it's misleading, if I just look at the percent of progress to understand the SG&A expenses.
That's right.
I have a question regarding collaborative agreement with Pfizer. The upfront payment will be recorded for a certain period of time. I would like to understand how long the duration is. Is it the duration of the agreement? Or is it patent protection period?
When I said a certain period, it's an agreement reached by both parties, and there are different cases where a milestone payment is recorded. For example, for the duration of the agreement or for the patent period. Anyhow, as I said before, Myovant is a publicly traded company. Things like this nature cannot be discussed before they disclose information because it is about how the profit is recognized. It's not appropriate for me to comment on this. That's why I said for a certain period of time. In February, Form 10-Q will be submitted. You will learn more about accounting treatment of the agreement with Pfizer. They usually submit 10-Q in early February.
I understand. The press release regarding the agreement was issued on December 28, 2020. Is the upfront payment already on your balance sheet?
It is already captured on the balance sheet. If you go to the financial data and look at our balance sheet, cash and cash equivalents are JPY 219.8 billion as of December 31, 2020. It increased over JPY 110 billion since March 31, 2020, of which $650 million is the payment that Myovant received from Pfizer. If you could go to the liabilities section, current and noncurrent liabilities also increased for the $650 million. That will be recognized as deferred revenues.
I want to double check here. Will the upfront be recorded as revenues?
Yes, revenues.
I have a basic question regarding Sumitovant SG&A spending. The first quarter expenses were JPY 6.4 billion, and the second quarter was JPY 15 billion. It increased by JPY 7 billion. The third quarter spending was JPY 26.6 billion, an increase by JPY 11 billion. And it says on Slide 3, "Include amortization of patent rights through Sumitovant acquisition," with asterisk. Please explain what that is. Also, you earlier said the SG&A expenses will increase more in the fourth quarter. How much increase are you estimating for the next quarter? I'm asking this because it will affect next year's projection.
As for amortization, relugolix and vibegron used to be intangible asset in process R&D. With the approval of relugolix and vibegron in December 2020, it's been switched to patent rights and amortization started. But the yen value isn't that high. Regarding SG&A expense forecast, it hasn't changed since we disclosed forecast in the beginning of the year, and that's approximately JPY 46 billion.
I would like to understand next year's SG&A expenses. I understand the pandemic affects expense spending. Do you think JPY 46 billion spending will continue next year? Or will you spend more for promotions?
In the first and the second quarter, the commercial structure was not in place in full scale in the current fiscal year. Next fiscal year, the SG&A expenses will be spent throughout the year. So the fourth quarter spending, I think, will be the baseline or benchmark for next year.
I see. So I look at the fourth quarter spending and multiple like that by four?
Well, it may not be as simple as that, but the baseline benchmark will be the fourth quarter SG&A expenses, yes.
I see. My second question is regarding other SG&A expenses. If you exclude Sumitovant, SG&A expenses were down by about JPY 20 billion through the third quarter. Do you think it's all because of COVID-19? Were there any other reasons for the decrease?
The SG&A expenses decreased primarily in North America. In the last fiscal year, we went into strategic alliance with Roivant. These expenses did not occur this fiscal year. There are other reasons for SG&A reductions such as Sunovion's ongoing efforts to reduce expenses. So it's not all because of COVID-19.
I see. My third question is about LATUDA revenue forecast. I was not totally convinced how you estimated the pandemic impact on LATUDA. You thought that the patients would be changing payers and the payer mix would affect LATUDA. But it takes long to switch insurance, usually over 6 months according to the insurance industry standard in the U.S. So my question is, how many LATUDA patients are on Medicaid now?
63 million individuals used to be enrolled in Medicaid and the number increased to 70 million as of September. I don't think the number will decrease anytime soon. So next year, the percent of patients on Medicaid will probably increase.
So my question is, what is the current ratio between Medicare versus Medicaid? Do you think the payer mix will affect to the performance next fiscal year? This is my last question.
Right now, the ratio hasn't changed much. Medicare is about 30%. In the next fiscal year, the payer mix could change, but we don't know for sure.
You said Medicare 30%. And is Medicaid, so 36% will change?
Almost no change.
My question relates to collaborative agreement with Pfizer, more specifically, sales milestones. Myovant will receive tiered sales milestones upon reaching certain share holds up to $2.5 billion in net sales for prostate cancer and also for the combined women's health indications. In my opinion, the share hold seems high. Usually, the first milestone payment is triggered after $1 billion sales is achieved. Could you explain why $2.5 billion?
The detailed negotiation was done by Myovant's CEO and the team, so I'm not fully aware of all the details. Nevertheless, the upfront payment is high. So I guess it's a matter of balancing between upfront payment and sales milestones.
My next question is also Vant related. The CEO of Roivant Sciences, Mr. Vivek Ramaswamy, recently stepped down as CEO and became Executive Chairman of the company. So my impression is that he will begin to shift his role from business filings. As a 10% shareholder of the company, do you agree with the role change? If he has a different role, perhaps business development activities will not take place like before because he's not actively engaged. It's just my impression. What's your understanding?
Well, Vivek is now a Chairman of Roivant, but he is just as committed to the company's management as he was as CEO. And the leadership team is the same. I don't think how the company operates will change as a result of his role change. They will continue to run businesses as they have been.
I see. I was just wondering if Vivek-san was going his way to start another Vant company. That's not going to happen then?
Tada-san serves on the Board, and he told me about the role change, but I'm not aware of what you just said. Vivek-san will continue to be actively involved in the company's management. That's my expectation.
My next question is about the midterm business plan that you will probably announce in April. Nomura-san, earlier, you implied there are other things you are investigating for the midterm. What other things are you considering other than SG&A expenses in the U.S. and napabucasin that we are not aware of?
Well, SG&A expenses, napabucasin and LATUDA are important components of the midterm business plan. What I meant was, we are also discussing mid- to long-term focus areas and what it looks like for portfolio. These things will be also considered for the midterm business plan.
I have a question on Slide 16 regarding purchase price allocation for Sumitovant. The total intangible assets are almost the same. But if you look at the breakdown in the securities report, for example, vibegron decreased and the relugolix increased as far as I can see. Please tell me why. And I thought the assets in cancer had greater potential than the women's health. So please explain how intangible asset value changed from provisional to finalized.
You're right. On the right-hand side, you see relugolix oncology, $573 million. The provisional value used to be $184 million. That was the biggest change. The results of Phase III HERO studies for prostate cancer indication were not fully captured in the provisional value. That's why. On the other hand, provisional value for relugolix women's health and by vibegron were challenging numbers. The finalized value were revised. So you're right, the total number seems almost the same between provisional and finalized, but relugolix prostate cancer increased while relugolix women's health and vibegron decreased.
So the numbers indicated here a reflection of revenues in both oncology and women's health. Is that right?
Yes. It's not just revenues, but based on the cash flow projections, the fair value was estimated. [Statements in English on this transcript were spoken by an interpreter present on the live call.]