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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you very much. Based upon the materials that have been distributed, I would like to explain.
Page 3. This is Santen's value.
And Page 5. Based upon the Santen's basic philosophy, in 2020, Santen would like to become a specialized pharmaceutical company with a global presence. This is our long-term vision. And as a step towards this, from 2014 to 2017, we have a midterm plan that we have been engaged in, and this will be last year of the midterm plan. And the content is as you can read on the slide. Next, Page 6. This is the Q3 financial highlights. On the left-hand side, we have provided revenue and profit. With regard to the revenue, compared to the previous year, there was an increase of 11.9%; and gross margin, 10% -- 10.1% increase; SG&A and R&D expenses, 12% increase, respectively; and OP, 6% increase. Those were the core basis figures, which shows the capability of the company.
And in the full base, OP, a 9.5% increase YoY; and net profit, 59.3% increase. This is due to the impact of the U.S. tax rate reduction, and the tax was reduced on the accounting book. And that is the reason behind the 59.3% increase of net profit. Next, Page 7. This is with regard to the revenue of -- increase of 11.9%. It's a breakdown, and there has been a contribution from both Japan and outside of Japan.
On Page 8, this is about core operating profit breakdown. And likewise, the growth has been very smooth, both within Japan and outside of Japan. Especially in Europe, there is a great growth, and this is impact of the foreign exchange rate. After this, on Page 9, this is the performance by business in Japan, including Japan pharmaceuticals, OTC and surgical. These are the revenue and also the OPB for R&D. And you can see the movement of these figures.
On Page 10, this is the business in Asia. On the left-hand side is the Japan yen basis; and on the right-hand side is the local currency basis. On Page 11, this is the EMEA business. As the items are revenue and OPB for R&D, likewise to the business in Asia.
And in Q3, based upon the accumulated performance on Page 12, we have our forecast of P&L for 2017. The revenue and full base net profit with regard to these 2 items, there has been some changes. And with regard to the revenue, on the 10th of May last year, what we announced, JPY 218 billion, there has been change to JPY 224 billion, meaning a JPY 6 billion increase. And in full base net profit, initially it was JPY 26.8 billion, but it has increased to JPY 32 billion, an increase by JPY 5.2 billion. And the revenue increased due to a positive momentum. And with regard to the full base net profit, there has been an impact by the U.S. reduction of tax. On Page 13, this is the dividend forecast. And in Q3, with regard to the dividend forecast, as has been anticipated, there has been no change from the initial forecast. And on the calculation, as has been said, based upon the forecast, 32.9% was the payout ratio. And so this is a decline from the initial forecast of 40%. However, because the factor of the increase of the profit is not based upon cash but it is based upon the accounting financial settlement, and because a stable reimbursement to the shareholders is our basic philosophy, and due to these factors we have decided to make no changes to the dividend. That concludes my remarks about the third quarter results.
And next, I would like to talk briefly about an event during the quarter, which was our December 21 announcement of the receipt of a complete response letter from the FDA for intravitreal sirolimus DE-109.
Feedback from the market, including a drop in our stock price, was significant. In particular, there was a negative surprise based on the difference between our disclosure on April 25, when our filing was accepted, and this disappointing result. I am afraid this may have caused uncertainty, which may still exist. Therefore, as we have said, we are reviewing the CRL and plan to work with the FDA to determine what steps, including possible additional data needed, to address the FDA's concerns. While we have no updates on this today, I wanted to explain the background in more detail. As a person in charge of IR, let me explain to you the process that we have experienced to this day.
On Page 14 of the handouts, press release and the process is cited.
First of all, on November 28, 2016, we announced Phase III SAKURA Program top line results in patients with noninfectious uveitis of the posterior segment. Findings from SAKURA Study 1, the first Phase III trial, established the efficacy and safety of OPSIRIA as a potential treatment. In SAKURA Study 2, the second Phase III trial, the difference in the effect between the low dose of sirolimus injection and OPSIRIA was not statistically significant, though clinical findings provided supportive evidence confirming the efficacy of the product. As a result, Santen planned a new drug application filing to the FDA and based on the totality of the data from the SAKURA Program.
In particular, Santen most emphasized that Study 1 and Study 2 consistently showed statistical significance in the majority of subjects where mild subjects are excluded based on the data from baseline visual acuity, retinal thickness and oral corticosteroid. Later, we submitted our filing on February 28, 2017, and disclosed that our filing had been accepted by the FDA on April 25 of the same year. At that time, we recognize that the application was accepted, including integrated data of studies 1 and 2. Since March 31, 2017, we have been supplying data and samples and answering questions, as requested by the FDA, in a timely manner. Over the period, normal communications, including meetings and emails, took place.
In the October-November month, Santen began to feel a slight discrepancy regarding the FDA's view on our emphasized visual acuity. But it was our view that the review was continuing as expected and based on a belief that efficacy and safety had been established, and, therefore, we could only wait for approval and review completion. In the end, we received the CRL on December 21. While it is not clearly known at the present time what additional information will be necessary to confirm efficacy, we will confirm in a planned future FDA meeting.
This was the DE-109 process from filing to CRL. As disclosed, the CRL announced on December 21 is not expected to have a material impact on fiscal year 2017 earnings. Specifically, we plan to have about JPY 3 billion in expenses this year versus prior year to prepare for the launch of the product, but a portion of the spending was frozen in the fourth quarter based on the CRL. Also, when ready, we expect to have a similar level of costs in the future related to the sales and marketing of this future product.
At the earnings announcement last May, we disclosed our plan for DE-109 that included reaching USD 30 million in breakeven profit in fiscal 2020. This impact on the consolidated results of Santen is not significant. At the same time, from the strategic point of view of entering the U.S. market, the world's largest ophthalmic market, the impact is not small.
So later, President Kurokawa and CEO Kurokawa will discuss our future direction and growth. He will share with us what he can say as of today.
That is all for myself. Thank you.
The next, we have Dr. Naveed Shams for the Research and Development.
Thank you very much. This is Naveed Shams, Head of R&D. I will start with giving you a quick update on first, the 3 IOP-lowering agents, then just a brief comment on 109 and an update on the rest. [Foreign Language] So DE-117, as you know, is an EP2 receptor agonist to lower intraocular pressure. We filed in Japan last year -- end of last year, and we expect approval in the second half of fiscal 2018, which is later in the calendar year. [Foreign Language] DE-126 is an FP/EP3 receptor agonist, again to lower intraocular pressure, and it is finishing Phase IIb. We expect a completion and -- by the middle of this -- by June or so of 2018. [Foreign Language] The market authorization trial for DT-128, our MicroShunt device for glaucoma, is running smoothly, and we continue to predict or forecast a launch in the calendar years 2020, 2021 as planned. [Foreign Language] DE-109, as you have heard our detailed explanation, I won't go into the details of it except to say that we look forward to having a fruitful conversation with the FDA to determine next steps. [Foreign Language] Our retinal product, DE-122, an anti-endoglin antibody, is currently in Phase II, and we hope to see results in calendar year '19, sometime in the middle of 2019. [Foreign Language] We had mentioned this before. Our -- the product DE-089, or Diquas, this is Slide 17, for dry eye in China was approved, and we are planning a launch in fiscal 2018. [Foreign Language] The Ikervis, or DE-076B, product for severe keratitis in patients with dry eye, we continue to expand geographically the availability of the product. [Foreign Language] DE-076C, which is also referred to as Verkazia, was -- received a positive opinion from CHMP for -- and we are waiting for European Commission approval. [Foreign Language] Epinastine, DE-114A, for allergy met its primary endpoint in the Phase III study, and we look forward to completing everything by the first half of fiscal 2018. That would be the completion of the Phase III program. [Foreign Language] DE-127, which is atropine sulfate for myopia, severe myopia, in Asia is running without a hitch currently, and we continue to forecast looking at the data in fiscal -- second half of fiscal 2019. [Foreign Language] And that's all for my side. Thank you very much. [Foreign Language]
Now we would like to ask President Kurokawa to discuss the summary of Q3 fiscal year '17 announcement.
This is Kurokawa speaking. Today, I -- we are explaining the Q3 fiscal year 2017 performance.
And with regard to the performance, Mr. Koshiji has already given you an explanation, and we have exceeded the plan. The speed -- the Q3 of fiscal year 2017 has had a good momentum with good speed, and we would like to achieve the objective of fiscal year '17 in order to expect your -- in order to meet expectations. But in the mid- and long-term management strategy, there has been some incidents with impact. One is that the change to the Japan NHI price reform system. And secondly, this is our issue, but we have received a CRL related to DE-109 from FDA.
With regard to the changes to the Japan NHI price reform system, the impact can be said to be a great magnitude, generally speaking. However, as far as Santen is concerned, I don't think it will be a very big impact. However, it will be a reform which may impact us in the long term. What I want to say is that in 2018 and 2019 fiscal years, a big negative impact is not expected.
With regard to DE-109 in the United States, the fact that we have received CRL from FDA, Mr. Koshiji has given you a full explanation of the process, and we would like to further continue our discussion with FDA to confirm the content or the intent behind the CRL.
Based upon the CRL of DE-109, we need to consider our future policy or how to deal with this. But with regard to our business strategy in the United States, there'll be no changes as far as the company is concerned.
United States is an attractive market for Santen. And with regard to 109 and the other products like our MicroShunt and DE-117, which is being developed in the United States right now, with regard to the treatment of glaucoma, we can say that we can go into the U.S. market with great differentiation, and we have products that are fully competitive. Therefore, our policies for the U.S. market will be kept. With regard to 109, the result has been a disappointing result, but the level of negative impact to our business will not be large in general. By responding to the issue in the right manner, we would like to consider how to deliver this good product to the patients in the United States.
And as has been said, we want to become a specialty company. We want to leverage our strength as a specialty company, and we want to establish our global presence. That is our ultimate objective.
So in Japan, Asia and EMEA, the growth and the profitability's level is increasing. So in Japan and Asia, the profit in Japan and Asia will be used for further R&D and also business development. We want to accelerate them. And also, in the United States with regard to the glaucoma pipeline, we would like to go into the U.S. market. This is the policy that we will continue to have. With regard to Vision 2020 and its implementation, that is our goal, of course. And with regard to this policy, it has been explained fully: R&D and also improvement in productivity; and furthermore, business development speed in order to increase our global presence. This will lead to new opportunity to create new business as well. And so with this present business speed that we have, we would like to further develop the company.
With regard to strengthening of the personnels and organization, this is a matter of great need. And Santen has been dependent on the Japanese market, but we are developing ourselves globally. Therefore, global management and personnel development and also the strengthening of the organization is an urgent matter that we need to deal with. So we would like to consider the needs of the patients, and we would like to compete strongly to our competitors so that we can become a global company in the true sense.
From myself, that is all.
[Operator Instructions] The first question, Citigroup, Mr. Yamaguchi.
My name is Yamaguchi from Citi Securities. My first question, the forecast for this fiscal year, the change of the forecast. There was a change of JPY 6 billion of the sales, and Eylea has been changed a lot. But basically, including Eylea, there have been some changes. And on the other hand, the COGS. The COGS Of Eylea has been very high, and it's very high. So if you can explain how you changed or the background of those changes.
This is Koshiji speaking. The increase is mainly due to Eylea and OTC business. In Asian business, some part of the Asian business is the cause. As to the increase of the COGS, the background is the increase of the Eylea. Because of the change in the product mix, the COGS has increased. And the other thing is OTC. The COGS of OTC, it's been 30%. But as to EMEA, in Europe, the waste or evolution of the product happened. And due to this process, the COGS level have been risen.
Okay. The second question, 109. Let me confirm. As you have explained, SAKURA 1 and SAKURA 2, the data of those 2 studies were different. So you combined those 2 and made it integrated SAKURA. And I understand that you got an agreement about this process by FDA. And the situation remains the same? Or maybe there was no agreement between you and FDA on how to treat the data.
This is Naveed. Maybe I can try to answer the question. We presented the data to the agency in different -- with different analyses, and one of the analyses had to do with integration of the data. However, the decision, while I cannot say for sure because we have not had a conversation with the agency since we received the CRL, was based on the totality of the information presented to the agency, not just one way of analyzing the data. That's my best estimate at this point, but we are willing -- we are waiting to hear and discuss this with the FDA as soon as they can make themselves available to us.
The third question. In your presentation, you talked about the visual acuity regarding the efficacy. So there may be a difference of understanding as to the visual acuity in terms of the efficacy of the product.
About this point, FDA is not satisfied with the improvement of visual acuity. That's the problem. As to -- we are not sure about the understanding of FDA. We are not sure yet, so. [Foreign Language].
Yes, this is Naveed. I just would second what Koshiji-san just mentioned. We -- it would be premature to say what the agency looked at and what the basis for the CRL was. I think I would ask for some patience. As soon as we get into discussions with the FDA, we will have clarification. Like I said, as you know, SAKURA 1 and SAKURA 2 had slightly different primary outcomes, and so we just have to wait for the agency to tell us how they looked at the data. We made our best case, and then we'll get back to you as soon as we have some clarity on this one, the agency whenever they can make themselves available. [Foreign Language]
[Operator Instructions] UBS, Mr. Seki, please.
This is Seki speaking. I have a few questions. First, with regard to sirolimus. So with regard to sirolimus, 109, you say that there was a difference in opinion with regard to visual acuity between you and FDA. And what you are saying is in the SAKURA Program, VCVA -- I think it was about 5 letters with regard to the range, and it's not very large. And the FDA, is -- does FDA has a question with regard to the benefit? And you're talking about -- on the other hand, we score the vitreous haze. I think that is the benefit on the side of Santen. Is there a difference in that view? And also, I think depending on the baseline of the visual acuity, the improvement may vary across different patients. And so what is the concern? Is the concern there the fact that there is no continuation or...
Thank you for the question. I would like to just go back to the point that if -- we don't really know at this point what exactly is -- was the concern. We, as I mentioned, analyzed the data many different ways for our file to support the efficacy and safety of the product, and we are waiting to talk to the agency about how -- what is the basis for their CRL. And after that, I think we can make some next steps and let you know. [Foreign Language]
I have a question to President Kurokawa with regard to your commitment to the United States market. You said that your policy towards the United States is not changing. And on the 21st of December and after that, I think there has been various discussions amongst investors. And as the investors consider, your company's evaluation in Asia and Europe is very high. So I think if you're going to use the resource for the United States, I think you should use the resource to Asia and Europe. I think that is the discussion of the investors. And you talked about the organization and personnel development, and I do not agree to such discussion. But -- so how would you respond to shifting your resource to be spent to the United States, to Asia and Europe?
With regard to the future growth expectations, the global presence is what we want to establish, and this will lead to sustainable growth. That is our belief. In the United States, well, United States is a very attractive market, which is growing. And therefore, I think in order -- to establish a presence in the United States will lead us to global presence. And how are we going to implement this? Well, it should be product driven, and the product-driven competition is most important. And therefore, it depends on the product that we will be marketing in the United States. And when we look into the Santen R&D, we are not so emphasized in drug discovery. So business development opportunity is very important for us to lead us to further growth. And when we consider that, the U.S. presence is very essential. Not to have a presence in the United States will be problematic when we discuss these matters with other ventures and so forth. And sometimes, the negotiation can be very complicated. So based upon this background, the product that we have today, 109 is one of them, but MicroShunt and 117 and 126, these are glaucoma pipelines. When we consider these products, the competitive products can be attained with these developing products. And with these glaucoma products, we want to enter into the U.S. market, and that is very important for the Santen's business development. In the company, Asia, EMEA, Japan, some people say that we should emphasize on these 3 territories. However, when we look at the total Santen business management, it can be one-sided in a sense. So U.S. business, I think, is a -- very much important and necessary.
And I have a question to Mr. Koshiji next, that is, with regard to the correction of the forecast. I understand about the revenue and the profitability. But in case of cost, you have increased by JPY 1 billion. And you said in the latter half, there was this freezing. And in spite of that, your -- you have increased JPY 1 billion in terms of cost. Why is that?
This is a sales promotion-related cost mainly. And ultimately, this has increased. For the future, upfront investment is being made in a sense, especially in Asia, in order to capture the growth opportunities. So it is a positive expense. May I add one more thing? In -- of -- with regard to 2017, the sales correction was made upward. And with regard to OP as well, this -- one idea is to correct by upward. But in Japan, we are expecting the approval of DE-117, and the Diquas launch in China is now possible. And also, there are tangible benefits or outcomes that we are seeing. And so in Japan and Asia and in Europe, the revenue is growing. And by balancing this with cost control, we want to maximize our OP. That is the policy that we have for 2017.
The next question -- [Operator Instructions] From Goldman Sachs, Mr. Ueda.
My name is Ueda from Goldman Sachs. I have a question about DE-117. According to your attachment, there was a good result from FUJI Study. So in response to these good results, how do you assess the potential of this product, the potential number of patients and the situation of the competitors? And in terms of the global development, including the U.S., I understand that you are starting with Japanese market. But how are you going to expand the geographical market of this product?
Kurokawa speaking. As to DE-117, we filed this product and now we are waiting for an approval. As to glaucoma agent, the prostaglandin is the mainstream agent, and we've been doing tafluprost. And in the market, there are generic Xalatan already. Given the situation, DE-117, it doesn't have side effects that prostaglandin has. As to the potential of this product, we are looking at nonresponders of prostaglandin or those patients who are having problems about the side effects. For those patients, DE-117 is a very good product. I think this is a very good option for those patients. What is encouraging is that the fact that we launched this product in Japanese market is that as we have the #1 market share in Japan and we have a very good relationship with glaucoma doctors in Japanese market and we are enhancing our product services, therefore in DE-117 can be launched in a very good timing. As to potential, it's about 20% of those patients who are having problems as to current product. And as to the sales, as we are having the situation related to NHI price change, we cannot say any clear figure. But I think it can be as close as tafluprost. Similar products go -- expire in 2022. So given that situation, we have a very high expectation for this product. Thank you.
As to the overseas market, what's your plan?
As I mentioned, the clinical study in the United States has been successful in Japan. In the U.S. as well, with the same concept and the same profile, I think we can satisfy American doctors. And we've already obtained the market survey results. In the U.S. as well, glaucoma market is a very attractive market. So we will not -- we are not going to change the profile of this product for the U.S. market. So as to DE-117, we are now considering the global promotion.
My second question is about OTC. It's been very successful for this year. What about the demand forecast and also the peak sales for the future? And as to OTC herein, what is the situation?
As to OTC business, we are now having a big momentum, thanks to inbound sales. That's why we are seeing extra sales for this fiscal year. For the full year, our forecast is that -- JPY 14 billion. And 40% -- or 45% of that comes from inbound sales. As to the inbound sales, we are talking about tourists, overseas tourists to Japan and that tourists are increasing by 20% to 25% annually. So that JPY 14 billion portion, I think we are going to have double-digit growth for foreseeable future. And as to OTC switch -- switch OTC, fiscal year 2018, late fiscal year 2018, at around October, we are targeting the launch. Inbound and also the increase of existing products and switch OTC, the increase of the sales have come from those factors, and we are having a very good forecast. As to switch OTC, there is no cannibalization with prescription drug. Are we expecting JPY 1.5 billion? And so that would be the increase.
[Operator Instructions] Next, Hashiguchi -- Mr. Hashiguchi from Daiwa Securities.
This is Hashiguchi speaking. There are 2 questions. One is with regard to the sales of glaucoma in the Japanese market. Your sales forecast has been shifted downward, and the sales is going upward. But the OP's revision has not been revised so much. And from the first quarter, I believe that there was some slowdown. And how do you analyze this performance of the glaucoma market in Japan?
As you have indicated, Tapros -- with regard to Tapros and Timoptol, with regard to these products, we have made a revision. Tapros was JPY 1 billion -- sorry, JPY 10.4 million, but -- billion. But JPY 9.7 billion. With regard to Timoptol, there has been a revision from JPY 850 million to JPY 790 million. And so I think we have revised the numbers to become more conservative. But the number itself, the sales figure itself, is not facing a drastic against wind as this is due to some detailed analysis of the company.
The second question, [ Tinapsin's ] high-dose product. You have met the primary endpoint. And what kind of result have you attained? If my memory is correct, the number of administration was reduced, and you wanted to prove the non-inferiority to the existing product. Was that your intent of your study?
Yes. This is Naveed. [Foreign Language]
Were there any other positive matters that you were able to prove this time?
I think the attractiveness of this new is -- of this product in the future is the way the product is formulated, and that would bring a differentiation as well as protection for this product and -- as -- when it's launched. [Foreign Language]