Sawai Group Holdings Co Ltd

TSE:4887

Earnings Call Transcript 2019-Q2

[Mitsuo Sawai, executive]

Good afternoon. Now I would like to explain about financial results of Sawai Pharmaceutical in first half of fiscal year 2018. Today, we also have presentation from Rusty Field, CEO of Upsher-Smith Laboratories, who explains about U.S. market. Take a look at the handout material. Page 1, overview of the results. Although there was a NHI price revision in last April, thanks to the promotional measures for the use of generic drugs, both sales and volume increased year-over-year in Japan. In the U.S., Upsher-Smith Laboratories had steady and strong sales for their major products. As a result, overall net sales was increased by 11% to hit JPY 88.792 billion. Core operating profit also increased by 9.5% to JPY 17.777 billion. Profit attributable to owners of parent was JPY 10.517 billion, down by 2.5% from last year's first; half.

Page 2 is analysis of factors causing changes in operating income. In Japan, operating income declined by JPY 1.5 billion due to the reasons including gross profit decline caused by NHI price revisions. On the other hand, as our U.S. business is now fully consolidated and its sales continue to be strong, our U.S. operating income rose by JPY 3.6 billion before amortization of intangible assets and impairment. Negative factor was JPY 1.7 billion increase of amortization of intangible assets and impairment from last year. As a result, U.S. operating income increased by JPY 1.9 billion, that means consolidated OP was up by JPY 400 million. Page 3 is about adjustment of our first half results from full basis to core basis. Cost of sales was adjusted by EUR 300 million due to the inventory step-up with Upsher-Smith acquisition. Amortization of intangible assets of products and pipeline and impairment losses were JPY 3.7 billion. As a result, total adjustment we applied was JPY 4 billion.

Page 4 is sales per medical institution types. This is about our nonconsolidated basis product delivery from distribution companies to medical institutions in value. Delivery amounts to hospitals were down as they were directly hit by NHI price revision and the volume was not weighing very much. On the other hand, with the help of generic drug promotion policy, dispensing pharmacy was up by 2.8%. So overall, we had a slight increase as a total. Page 5 is sales by listed year of drugs in Japan. Sales of products listed in 2015 or later showed strong growth, and our new products in this year are also showing better-than-expected progress.

Page 6 is our forecast for fiscal year ending March 2019. Progress of both sales and profit against target has been steady and strong. So far, however, we still do not know about details of next NHI price revision in relation to the scheduled consumption tax hike and market environment around us is also not so clear, so we are not changing our full year forecast this time.

From next page, we have reference information, our sales trend by distribution channels, by therapeutic category, financial data and so on.

Now I would like to hand over to Rusty Field, President and CEO of Upsher-Smith Laboratories, and he will explain about U.S. market and business.

[Rusty Field]

[Foreign Language] I'd like to give a brief update on the U.S. market and also talk about Upsher-Smith's performance in the first half of 2018.

As you can see on the slide, the price deflation in the United States continues to be challenging, but it has recovered a bit from the lows in the second half of 2017, and settled in the low single-middle digits in deflation. So while the market is still challenging, it has shown some signs of improvement. On the next slide, there are 2 primary drivers of the deflation in the United States. The first is the consolidation of the generic purchasers. Red Oak, Walgreens Boots Alliance and ClarusOne now control 90% of the generic purchasing in the United States. This allows them to harmonize to the lowest price across their portfolio and to negotiate Most Favored Nation Pricing agreements with manufacturers. On the next slide, the second key driver is the record number of ANDA approvals by the FDA. 2018 will continue the trend we've seen over the past 2 years with another record year of ANDA approvals. And approximately 60% of those approvals are Indian manufacturers, low-cost country manufacturers.

So that increase in supply has driven prices down and makes it difficult for prices to rise again. However, we are seeing signs of oversupply appearing in the market today. In 2017, only 20% -- 27% of the ANDA approvals were launched in the United States. And in the first quarter of 2018, only 8.5% of ANDAs approved were launched. Upsher-Smith during 2017 and 2018 launched 85% of our products that were approved. In addition to companies choosing not to launch products, large manufacturers in the United States are pulling products off the market. That rate's higher than we've seen in recent history. And the big 3 generic purchasers are communicating concerns and issues with their supply to pharmacies. So there are opportunities within certain molecules where supply becomes an issue for manufacturers like Upsher-Smith to improve and enhance market share.

Upsher-Smith is positioning itself for a success in this market by expanding our pipeline, keeping our pipeline around 40 products in development in any given time. Our current on-market portfolio is roughly 22% nonsolid oral dose. Our active pipeline in development is roughly 35% nonsolid oral dose and products that we are considering to add to our pipeline are 59% nonsolid oral dose. So we are focused on diversifying our pipeline to more complex products that will have higher barriers to entry. In 2018, we estimate 9 submissions to the FDA after completing 9 submissions in full fiscal year 2017. Next slide please. For our financial performance, we have outperformed our expectations in terms of net sales, operating income and EBITDA based on strong performance of our core generic portfolio and performance of Qudexy. And while we will see our growth slow a little bit in the second half due to a competitor entering in the Chlorpromazine market, we expect to hit our forecast for the year.

Year-to-date in the first half, we have had 4 products approved, and we have launched 4 products, and you can see the products listed on the page that have been launched. We have seen competition, significant competition on a couple of these products, in particular, vigabatrin. So our expectation of the revenue performance of those launch is below what we originally had expected. And since the end of the second half, we have had 3 more products approved and launched 2 of those products, and we have one more product that was approved that will launch in the first quarter of 2019 calendar year.

And finally, we have had 2 recognition of our key employees that are a reflection of the quality of the talent that we feel we have at Upsher-Smith. First, Rich Fisher, our SVP of Corporate Development and Corporate Strategy, was recognized as one of the top 500 business people in the state of Minnesota in the United States. And Sami Yusuf, our VP of Corporate Development, was recently accepted as a board member on the Board of Directors for DCAT, the Drug, Chemical and Associated Technologies Association. I look forward to your questions in the Q&A. [Foreign Language]