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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
And now if you could please refer to the documents for the conference call and please look at the slide. As you know, "Tenki ni sanyo suru" is our basic values. Our mission is to contribute to the well-being of patients, their loved ones and consequently, to society by focusing on ophthalmology. Under these values and basic mission, we promote our business. This shows our MTP2020, which is the midterm plan between 2018 to 2020. Our fundamental policy is to become a specialized pharmaceutical company with a global presence, which is our long-term vision. We also aim to construct a path for sustainable growth beyond fiscal 2020.
To realize this, we promote global business strategy, we enhance the product pipeline and develop new treatment options and raise the strength and efficiency of business framework. By doing this, we aim to increase customer satisfaction, profitability and organizational strength. Now let me turn to the consolidated financial results for first quarter 2018. If you could please refer to Slide #5. In terms of revenue. For domestic prescription pharmaceuticals, we had some impact relating to a transient adjustment of inventory and distribution when we had the impact of NHI repricing in April. However, these negative impacts were offset by overseas business of Asia and EMEA, which continued to grow, leading to a plus 1.0% on year-on-year basis or JPY 600 million of increase.
In terms of operating profit, we continue to control SGA for each business. Our R&D spending level is almost the same as that of the previous year. We had a transitory factor impacting our domestic business. We also had an increase of the cost ratio impacted by product mix and NHI repricing in this fiscal year. Therefore, in terms of the core operating profit, it was minus 15% decline or JPY 11.7 billion. On full basis or IFRS basis, on operating profit basis, we had negative 11% -- or negative 17% or JPY 10 billion. However, this was greatly impacted by transitory factor. Therefore, we are on plan in terms of the fiscal 2018, which is our plan of 6% increase on a core basis. Also, there's not a major transitory factor in terms of other revenues and expenses included in IFRS basis. Next slide. This shows the positive and negative factors on each business impacting our revenue in the first quarter. In the domestic business, prescription pharmaceutical had a transitory impact of inventory adjustment and NHI repricing. We also had the impact of the sales campaign of the last fiscal year in OTC. However, there's not a major trend in terms of growth trend of our major products. For overseas business, we continue to introduce new products and expand on the penetration and sales of existing products. As a result, we continue to see strong growth in each region. These have offset the negative impacts, leading to a positive 1.0%. This is to show you changes year-on-year of core operating profit. In Japan, thanks to measures to control SG&A, the expenses were contained below the last year's level. However, the profit was overall down in Japan, driven by the decline in revenue due to the factors already explained. In Asia, core operating profit grew strongly by more than 40% in yen basis. In EMEA, although underspending of expenses and the demand boost in Russia last year caused a decrease in the profit in the first quarter of this year, we are steadily increasing our presence. In these 3 months, we didn't have any special onetime factor to increase the profit by comparison with last year. Due to this, the profit declined by about 15% for the entire group. But the overall growth trend is well kept and, through our efforts, will improve to keep us on track towards the full year target. This is to show you the trend of the first quarter from FY '13 to FY '18 of Japan business in revenue and OP before R&D. 3 months are quite short, therefore, the impact of any onetime factor, including legal or regulatory changes, has felt more notably than not, yet we aim to generate a continuous growth through identifying potential markets and making sure to tap into the demand. Now let's take a look at the business trend in Asia. We follow the same trend as before and are growing steadily through the factors -- through the faster-than-the-market growth. We're expanding our coverage in China and elsewhere, and registering and launching more than 30 products each year in this region to respond to their medical needs. We are starting to see contributions coming from these products. We'll make further efforts to have even bigger growth mid- to long term based on the results so far. Now EMEA. We have continued to grow driven by strong demand coming from the market around glaucoma products. Ikervis, for dry eye, sales is growing as well and we'll expand our presence even further through higher uptake of these products. This is the FY 2018 forecast. JPY 237 billion for revenue, JPY 48 billion for core operating profit, this means no change from the announcement made on May 9.
Finally, this is the dividend forecast for FY 2018. We expect to pay an annual dividend of JPY 26, no change from the announcement made on May 9. This concludes my presentation on the consolidated financial results of the first quarter FY 2018.
Now R&D update from Shams.
Thank you very much. This is Naveed Shams, I'm the Head of R&D and the Chief Science Officer for the -- for Santen. I'll give you a quick update. I'll give you a quick update on the progress of the pipeline. Page 14 on the presentation. Let's start with DE-117. This is a EP2 receptor agonist. The indication is going to be glaucoma and ocular hypertension. Currently, we are planning to start a Phase III in the U.S. Sorry about the interruption. So I was saying about DE-117. We are on track to starting a Phase III program in the U.S. in the second half of fiscal 2018. As you know, we already have filed in Japan and are expecting approval on time in the second half of fiscal '18. And the Asia study will complete in the second half of fiscal 2018. DE-126. This is a EP3 receptor dual agonist, also indicated for glaucoma and ocular hypertension. It is in -- continues to be in Phase IIb and we are analyzing the data. Next is DE-128. This is the InnFocus MicroShunt device for glaucoma. We continue to forecast to complete the study 2018-2019 time frame and launch between 2020 and 2021 calendar year. DE-109. This is the intravitreal sirolimus for uveitis. We plan to start an additional pivotal study in the second half of fiscal 2018. DE-122. This is for wet age-related macular degeneration. It's currently in Phase IIa. We plan to complete the study in the first quarter of 2019 calendar year. On Page 15. We plan to launch DE-089, or Diquas as it is commonly known, in fiscal 2018 in China. We think this will be a very important product for the Chinese market. For our ciclosporin product, DE-076C for allergic -- for vernal -- sorry, for vernal keratoconjunctivitis or severe allergy of the eye, was approved in Europe and will be launched very soon. Similarly, with the DE-114A, this is epinastine for allergic conjunctivitis. In Japan, we intend to file for approval in the second half of fiscal 2018. DE-127, which is atropine for myopia, is in Phase II, and we intend to complete the study in -- next year in the second half of fiscal '19. That's all from R&D.
That's all from our side. We now would like to take questions.
[Operator Instructions] There's the first question from Citigroup, Mr. Yamaguchi.
I am Yamaguchi from Citi. Can you hear me?
Yes, I can hear you.
My first question relates to what Mr. Sakurai mentioned for domestic transitory prescription pharmaceutical inventory adjustment. This is after NHI repricing, so I would assume that you had an increased inventory, I would assume. Can you explain about this transitory factor and its impact, if you can tell us?
Thank you. Yes, as you rightly pointed out, with regards to NHI repricing, yes, you are right in pointing out; that's how it happens. But we had a pollinosis season with more pollen in the air. And we expected a long-term pollinosis season. So in March, we increased our inventory by delivering more than we planned. So irrespective of the NHI repricing, we had more delivery from our site. And as a result, we had less delivery in the first quarter starting from April. Without these factors, compared to the last first quarter and this quarter, we see a decline. That's how it seems. With regards to the impact, the impact is about JPY 1 billion. Thank you.
So can I assume that that's unusual because we had less pollen than we had expected. So you had less consumption of your product. You had increased the delivery, but you had less pollen.
Yes, with regards to our forecast, there was some gap between what did actually happen. However, the consumption of product was on plan.
So can I assume that you would be able to offset this JPY 1 billion?
Yes, this is the 3-month result. But for the year, this will be -- the impact will be lessened.
One more question with regards to R&D. Can I ask Japanese in case -- I don't know about the translation. Can I ask you in Japanese?
Yes. Please do that.
109, you mentioned additional trial for Phase III -- Phase II. So my impression is that it was nothing mentioned on the design of that drug. Can you share with us the design and some other factors that you can share with us with this additional clinical study?
This is Naveed Shams. We are currently in discussions with the FDA and we'll very soon be able to finalize the protocol so that we can start on time in the second half of this year. There are no red flags, but we wish to make sure that we are in complete alignment with the agency on this pivotal study. And so we are taking extra effort to align with the agency on every major element of the study, such as inclusion criteria and statistical plan, et cetera. But I can't give you any more details. But the goal here is to succeed. The goal here is not to fail. And so we are working very closely with the agency. Thank you.
So now we'd like to take next questions. Seki-san from UBS Securities.
This is Seki. Can you hear me? Sorry about the noisy background. Three questions about the cost. Last year's expenses, Mr. Sakurai, you spoke about that yesterday. This year's challenge for you is to control the margin or the cost. Are you seeing any extraordinary factors emerging?
Yes, you're right. We would like to optimize the costs. That is the big target that we are currently working on. And this initiative has started just now, so we are not really seeing any extraordinary impact being seen just yet. Compared to the last year, rather than underspending, we are seeing steady reduction of the costs in each business unit. So going forward, we will be able to make an announcement in the future. But we are seeing some effect already.
My second question goes to Dr. Shams about MicroShunt. 2018 to 2019, the study is going to complete. So a 12-month follow-up, is it agreed upon by FDA? Or do you have to provide the follow-up of 24 months?
Thank you for the question. We are in discussions with the FDA about the 12-month data. And we will provide information as it becomes available in the near future. But we are currently sticking to our original plan unless something changes.
But this discussion has been taking place with the FDA for a long time. So what is exactly the discussion point?
You are right in that, and there is no guarantee how long this will take. But the issue at hand is the duration. How long is sufficient actually to see safety and efficacy for this type of device? According to the guidance for MIGS devices, 2-year data is required and is set as precedence. So therefore, you can imagine that we would like to convince the agency, if possible, to reconsider that guidance.
My last question is about Shire. Xiidra for dry eye has been delayed in Europe. This Europe delay of Shire, how is it going to impact your Ikervis business in Europe?
Well, about the growth of Ikervis, I think it's on plan. We are seeing a steady growth. Or it is actually better than we expected since the beginning of this financial year. That's all I can say.
From Goldman Sachs, Ueda-san, please.
Ueda from Goldman Sachs. I have also 3 questions. First of all, with regards to the transitory factor, I also have a question on OTC. The sales campaign of [ Sante FX ] that conduct -- was conducted last year had an impact. So what would be the impact in terms of value? And how is the actual growth of OTC business?
Thank you. Thank you for the question. With regards to the transitory factor in OTC, as you rightly pointed out, the major factor relates to the sales campaign that we conducted last June, which is a collaboration of animation and [ Sante FX ]. The impact of this campaign is around JPY 600 to JPY 700. And for fiscal 2018, June, July -- April, June we don't have any particular campaign, that has no impact. Therefore, we see a negative impact. However, this transitory factor or demand, other than that, we don't have any particular change in the trend and our inbound business remains the same as before. And this inbound demand comes from the brokers as well as from the tourists. The tourist business remained the same. However, the broker business, rather is unforeseen aspect in terms of the timing. There was not a major impact in the first quarter. However, there may be an impact in some quarters.
So last year, we had JPY 3.9 to JPY 4 billion of sales. And this fiscal year, your OTC's 36, 35 billion -- JPY 3.4 billion, JPY 3.5 billion. So JPY 600 million to JPY 700 million. And if it is that, my understanding correct?
Yes, that's correct.
The second question is about Asian business. We looked at the numbers from China and Korea and we also have close to a 20% increase on Asian market as a whole. Compared to MTP, I think your plan is good. And can you give us the reason why you're ahead of the plan? Is there any onetime impact on the positive side?
Thank you. In the first quarter, the growth of Asia business, it does not have any transitory or onetime factor. We continue to penetrate and expand the sales, meeting the demands of the local market. And I think these efforts are bearing fruits for growth.
My last question, 119 (sic) [ 117 ]. I have a question on 119 (sic) [ 117 ]. You mentioned that you formally decided on the development in the U.S. As we look back, you started in Japan instead of going ahead with U.S. And as a result, you also came to realize that you had the growth in -- or competitiveness in U.S. AYAME and FUJI also had good results recently. So what made you confident that your product is competent in the U.S. market? And is this your own development within your organization? Do you plan to co-promote or co-sell your products in the future?
I think -- this is Naveed again. I'll briefly answer the last part of the question. No decision has been made on how the product will be commercialized in the U.S. at this point. But all of the options probably are on the table. I -- as far as 117, why are we confident that this will be a solid product for the U.S. has to do with what we have seen in the Asia and Japanese development programs. Most importantly, there are 2 elements that make us very comfortable: one is the long-term 12-month data in Japanese subjects showing very robust lowering of IOP for at least 12 months; and the second is, as you mentioned, is -- or somebody mentioned, was -- is to do with nonresponders to Latanoprost and the effect of 117 on these subjects, where additional lowering of IOP was seen. Thank you very much.
I have additional question. When it comes to the development, are you going to develop this product on your own? Or do you plan to co-develop this? Do you have any plan on this?
Currently, we will develop this product on our own.
And we'd like to take next question from SMBC Nikko Securities. Mr. Nakazawa, please.
Nakazawa speaking. Sorry to go back to the previous question about Japan revenue. A 4.5% reduction in price cut and the revenue, according to your material, is minus 3.2%. So that means that the volume grew only by 1.3%. And you said there are negative factors of about JPY 1 billion. And I think you are here talking about Alesion. But apart from that, aren't there any negative factors seen in Japan? For instance, eye drops are usually not affected by generics so much. But maybe you are seeing such impact from generics on your eye drops. So aren't there any other negative factors?
For Japan pharma, apart from the NHI price revision, we are not really seeing any special factors or events taking place for any particular products. Compared to the last year, we are seeing some decline, but apart from the NHI price, there aren't any special factors that are negatively affecting our products. Thank you.
Overseas, Asia, Hyalein, I think that this is really growing. A 50% growth year-on-year. Page 14 in [Foreign Language] material, it's already JPY 2.6 billion and your annual plan is JPY 9.1 billion. So this speed will provide better-than-expected result for this product. Am I right? Or were there any special factors in the first quarter?
In China or in Asia, Hyalein growth is -- the highest growth is being seen in China. And in China, we are expanding our penetration and coverage. And that is positively affecting our result. So as there aren't special factors there, I think our continuous efforts have been generating some results. In China, I think 50%, the growth is being seen year-on-year. Yes, that is the effect of our usual efforts.
My final question is about R&D. DE-126, you said that Phase IIb data analysis is taking place right now, Dr. Shams. Data readout, when is it going to be?
We have had data readout already. We are trying to fully understand the outcome of the study. And so as soon as we complete all the -- all of the review, including our business assessment and everything else, then we will discuss that in the near future. But that should not indicate any problems or red flags.
Well, you may not be able to answer this. But if you are going to go for a stage up, the -- you have to do milestone payment to the originator of this agent. Is that right?
That is probably correct, but I'll have to confirm that later.
And the next question we'd like to move on to from Crédit Suisse, Sakai-san, please.
I am Sakai. I have 2 simple questions. First of all, with regards to the cost, I would assume that this is due to the NHI price cut that can explain this. But 40.8%, as is mentioned in [Foreign Language], you have an increase of 200 basis points. For -- throughout the year, it's 38.8% that is your plan. Is -- are you going to dilute this since after the second quarter? What is the reason why you have an increase in the first quarter? And what would be the reason for this to come down in the second quarters and onward?
Thank you. With regards to cost, yes, you're right, in the first quarter, it's 40.8%. There's an increase. The major reason for that, as you rightly pointed out, is due to the NHI price cuts. In addition to that, Eylea had an increased sales. Among our products, Eylea is one of the product with the high cost. On the other hand, as we explained earlier, Alesion, we had inventory adjustments for this revision which reduced sales in the first quarter. And so the share of Alesion was lower in terms of our revenue. So Alesion and Eylea are completely opposite in the spectrum with a very low cost from Alesion. And so this comparison has led to an increased cost for the first quarter. Throughout the year, we expect sales of Alesion or sale -- share of Alesion of sales, it will increase particularly with the pollinosis season in the second half. So we will reach our plan of 38.8%.
So Eylea will continue to grow, but can I understand that the contribution for Alesion can be realized in the third quarter and onwards because of the pollinosis season? So up until the middle of the third quarter, can we understand that your cost ratio remains high?
As far as these products, 2 products are concerned, that's right. But we have to look at the overall product line. So there will be a gradual lessening of the impact of high cost. Thank you very much.
One more question. 109. With regards to 109, I have a question to Dr. Shams. Sorry for the repeated question. I understand that you're discussing this with the FDA. And once the protocol is announced, we'll be able to see. But the question of whether you're going to measure the visual acuity, that will also impact the term or the length of the study. And can you give us any comment on that?
That and similar points are under discussion, exactly as you say.
Next question from Mr. Kohtani of Nomura Securities.
Kohtani speaking from Nomura Securities. Most of the questions have been already answered. And this question goes to Dr. Shams. In Roche presentation, Phase II LADDER trial was reported, Lucentis Port Delivery System. Very small, the rice-sized material is going to be implanted in the eye. And in -- at 15 months, it will be refilled. And in 8% of the patients, the -- 6 months is the refill time for that. So compared to Eylea, the injection frequency can be reduced quite dramatically. And they are starting Phase III trial before the end of 2018. And here in Japan, this kind of an implant may be averted by some people. People may not like it. But about this product, what is your view vis-Ã -vis Eylea? Is it going to be a threat to your Eylea? That's my first question.
Thank you very much, Kohtani-san. It's kind of difficult to comment on a competitor's product. But I feel from -- basically, as a clinician, that there is a room and there is place for a lot of these products. And it should not have a dramatic effect on either Lucentis or Eylea. That's probably my best guess.
Thank you very much for your very solid comment on a difficult question. My next question is about MicroShunt. Probably my understanding is not correct, but clinical.gov (sic) [ clinicaltrials.gov ] in November of 2018, the study was completed -- and the study is going to be completed in November 2019. And around that time, we will have the results from the first year. However, according to the guidance, you have 24-month data, so we still have to wait. But my question is if the data out of 12 months is stellar data, can you disclose that data? Or disclosing the data will give the bias, therefore, you can't disclose that data if the data at 12 months is really good. So my question is about disclosure of data of a study.
Thank you for the question. That is exactly what we are discussing with the agency, and it's taking time because we have to make the case to do exactly what you're saying. I am sure you would agree that without the agreement of the FDA, we will not be able to release any data before the study is completed in 2 years.
But what I don't fully understand is that what kind of bias is going to be expected because of the disclosure in the middle of the study? Because everyone is implanted already and the 12-month data is already out. And how could it bias the second year data? I couldn't really fully understand that.
That is our argument as well. That there is no -- there may not be any bias, but there is precedence, as I mentioned, in the guidance. And so as you know, regulators are conservative people, they like to stick to the guidance.
So my last question is about INN-007 study for MicroShunt. This was mentioned in the material for the financial results presentation. And I made a misleading question in the past, so I'd like to correct this. So after 12 months, the intraocular pressure reduced to 15-milligram Hg -- millimeter Hg, excuse me, and I thought that it was not good enough. But Glaukos and other companies' studies include cataract surgery and reduced to 15 millimeter Hg. But in your case, there's no cataract surgery. And of course, without the lens, the intraocular pressure comes down naturally. But in your case, without that, you reduced the pressure down to 15 milligram -- millimeter Hg. That is, I think, quite good. And if you reduce further to 10, according to some guidelines, that's too much of a reduction. What's your comment on that?
Yes. Briefly, somewhere, the gold standard would be 15 millimeters of mercury or less and above 6 millimeters of mercury. So somewhere between 6 and 15 is the sweet spot.
I'm just guessing it got lost in translation. Let me just try this in English. So you -- the DE-128 does not require an insertion of intraocular lens. Obviously, all of the other competitors, with the exception possibly of XEN, require IOL. And so if you insert an IOL, just by the fact of doing so, it will lower the IOP. And in your case, you didn't do that and still got 15 millimeter Hg. Is that correct?
That's correct.
And the next question from Morgan Stanley, Muraoka-san, please.
I am Muraoka from Morgan Stanley. This is a continuation question about the implantables. In the competition for glaucoma, PD [indiscernible] once in 4 months implant product had a successful clinical Phase II study by Allergan. For the midterm glaucoma strategy, how would this impact your midterm glaucoma strategy when you have the successful implant product in the market for Santen, this slow-release technology? Do you have any technology that you have now? Or do you plan to acquire this slow-release technology in the future?
Thank you for the question. We don't consider the -- at least in its current configuration, a threat to our glaucoma franchise from this product. And it will take some time to develop. And all I can say is that we have our own effort in this area.
I would like to ask you a further question. At what timing and when can we expect some comments from Santen or expect some disclosure of the technology from Santen? At what point in time in the future?
In this business, it's very difficult to forecast how long it will take. But we are trying our best to expedite and clearly communicate that when it is ready. I'm sorry I don't have an exact date for you. I can only say that -- I can only say that we have a team working on drug delivery systems.