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Edited Transcript of 4565.T earnings conference call or presentation 13-Aug-19 10:59am GMT

Q2 2019 Sosei Group Corp Earnings Call

Tokyo Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Sosei Group Corp earnings conference call or presentation Tuesday, August 13, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Cargill

Sosei Group Corporation - Executive Officer, Executive VP & CFO

* Shinichi Tamura

Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO

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Presentation

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Operator [1]

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Thank you very much for attending the online financial results briefing of Sosei Group Corporation for the first half of fiscal year 2019. First, CFO Chris Cargill will explain the first half results followed by CEO Tamura on operational highlights and strategic update. After that, we will take questions from you real time. This entire session is scheduled for about 45 minutes. The presentation material is posted on the download material on the lower right of the screen, so please take a look. We will now start the presentation.

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Chris Cargill, Sosei Group Corporation - Executive Officer, Executive VP & CFO [2]

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Good afternoon, everyone. My name is Chris Cargill, CFO of Sosei Group Corporation. Thank you all for joining our first half webcast. I am delighted to say that we have had a fantastic first half executing on a number of the strategic goals outlined by Chairman Tamura in November last year. Please note, comparison of the financial results for the 6 months fiscal period with that of the previously reported 6 months fiscal period is impacted by the change of accounting reference date to 31st of December 2018. Therefore, the 6 months period ended June 30, 2019, is compared to the prior 6 months period ended September 30, 2018.

Please turn to Slide 4 now. This slide shows the group's revenues for the 6 months period ended June 30, 2019. I am very pleased to report that Sosei has had a strong first half in the fiscal year 2019, delivering on several strategic priorities. Total revenues for the 6 months were JPY 5.056 billion, an increase of JPY 3.253 billion versus the prior year corresponding 6 months period. The significant increase in revenue was driven by milestone income from exciting progress with existing partners, AstraZeneca and Pfizer.

Milestones shaded in gray color on the chart totaled JPY 3.173 billion, an increase of JPY 2.863 billion versus the prior corresponding period. As I mentioned, this is primarily the milestones received from partners AstraZeneca, $15 million, and also Pfizer, $6 million. Royalties shaded in turquoise color on the chart totaled JPY 1.201 billion and were broadly in line with last year.

Please turn to Slide 5. This slide shows the group's cash operating expenditure for the 6 months period ended June 30, 2019. We are driving manageable costs down in the pursuit of profitability. Cash R&D expenses shaded in gray on the chart totaled JPY 1.862 billion, a decrease of JPY 2.141 billion versus the prior corresponding period. This decrease was primarily due to the voluntary hold on our Phase II DLB study in Japan as well as our more focused approach to R&D activity in the first half.

Cash G&A expenses shaded in the turquoise color on the chart totaled JPY 1.239 billion, an increase of JPY 343 million versus the prior corresponding period. The increase in G&A spend primarily related to U.K. headcount costs, specifically national insurance charges for U.K. employees, which rose due to the increase in the company's share price over the period related to stock-based compensation. This was partially offset by tight G&A expense management.

Please turn to Slide 6. This slide highlights the group's cash profit for the 6 months period ended June 30, 2019. As I mentioned, a significant increase in milestones from existing partners, combined with tight cost management, enabled us to deliver a major positive shift into cash profit. We encourage our investors and analysts to focus on cash profit as the best measure of earnings as it adjusts out noncash costs.

Therefore, we believe cash profit better demonstrates the true earnings ability of the company. Specifically, cash profit shaded in the gray color on the chart, totaled JPY 1.578 billion versus a cash loss of JPY 3.096 billion in the prior corresponding period.

Please turn to Slide 7. This slide shows the group's noncash costs and financing costs for 6 months ended June 30, 2019. Noncash costs totaled JPY 847 million, an increase of JPY 190 million versus the prior corresponding period. The increase is primarily due to depreciation related to the recent move to our state-of-the-art research facility in Cambridge, U.K. Financing costs totaled JPY 385 million, a decrease of JPY 154 million versus the prior corresponding period.

Please turn to Page 8. This slide shows the accounting profitability for the 6-month period ended June 30, 2019. On the more traditional measures of accounting profit, we were also in the black. Net profit totaled JPY 395 million versus a net loss of JPY 3.327 billion in the prior corresponding period. So it was a truly excellent first half.

Please turn to Slide 9. This slide shows the group's consolidated balance sheet. For a fast-growing biotech company, our consolidated balance sheet remains extremely well capitalized. We have a cash at hand of JPY 16.950 billion as of 30th of June 2019. And we are actively seeking to maintain or grow that balance going forward.

Please turn to Slide 10. As a result of the progress mentioned in the previous slides, the number of programs being created from our GPCR-focused discovery engine is increasing. At the beginning of the year, we promised our shareholders that we would invest our capital behind only the highest priority discovery programs, and this is what we are doing.

We will continue to create novel discovery candidates of high value with a strong potential for partnering with other world-leading companies. And in addition to our existing discovered candidates, our core StaR technology and SBDD platform remains as popular and in demand as ever as evidenced by the recent new partnerships struck with Genentech and Takeda. The power of our technology and platform remains -- the future looks very bright for Sosei.

Please turn to Slide 11. Before discussing our forecast guidance, please let me draw your attention to some changes in the way we present certain R&D expenses. Certain R&D items have been reallocated from cash R&D to new lines in our PL statement. Item number one is cost of sales related to R&D. This relates to the fully loaded cost of R&D employees providing R&D services to customers under contracts. We are now providing more paid-for R&D services as part of our new partnering strategy.

Item number three is R&D facility lease costs. These costs have been moved to interest and depreciation categories in [April], and this is in accordance with IFRS 16. Item number two is cash R&D, and these are all the R&D costs that remain after the reallocations to items 1 and 3.

Please turn to Slide 12. We remain fully confident in our fiscal year 2019 guidance, and this guidance has not been changed since November 2018. We expect total R&D expenses to be unchanged and in the range of JPY 4.320 billion to JPY 4.860 billion. We expect cash G&A expenses to be unchanged and in the range of JPY 1.620 billion and JPY 2.160 billion. We will continue to aggressively manage costs and target a more sustainable balance of resources and capital in order to prioritize the pursuit of profitability.

This concludes the financial update section. And I will now hand over to Chairman Tamura.

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Shinichi Tamura, Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO [3]

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This is Tamura. I would like to provide an overview of our operational highlights for the first half fiscal year 2019.

Please turn to Slide 14. First, let me review our core strengths. Our core platform technology, StaR technology, is the most valuable asset protected by basic patents. We created new target molecules through structural analysis of the stabilized GPCR protein that is the basis of drug discovery. SBDD-based drug discovery generates high-quality compounds more efficiently than industry average, attracting partners.

Japan development team has a track record of acquiring multiple marketing approach and successfully launched ORAVI this year. U.K. team successfully entered 2 assets into clinical trial in the past 12 months. Lastly, business development division achieved all the targets for fiscal year 2019 announced at the end of last year in the first half. We raised the targets even further and are taking up challenges for the new additional partnerships.

Please turn to Slide #15. This is the summary of the first half results. We had excellent progress with the partnered programs, AstraZeneca, Pfizer and Novartis, all triggering progress-related milestones. We had positive clinical data readouts of partner programs, preclinical and Phase Ia data for AZD4635 presented at AACR 2019 by AstraZeneca and Phase II data for QVM149 presented by Novartis at ATS 2019. We are seeing progress with the in-house pre-partnered pipeline. SSTR5 candidate is successfully dosed in subject and new clinical programs are initiated and other programs are advancing.

We created 2 spinout companies, spinout of discovered assets, orexin agonists into Orexia Ltd and Inexia Ltd with funding from Medicxi up to EUR 40 million. In product launch, ORAVI mucoadhesive tablet 50 milligram for oropharyngeal candidiasis has launched -- was launched in Japan, Ultibro Breezhaler and Seebri Breezhaler for COPD in China.

Next is Slide #16, detail on progress of partnered programs. AstraZeneca's next-generation immuno-oncology program moved towards Phase II, which triggered $15 million progress-related milestones from AstraZeneca. This represents fourth milestone received since exclusive licensing of compound in 2015. Pfizer nominated 2 candidates to advance into clinical development, which triggered $3 million milestone from Pfizer for each candidate nominated. This is multi-target collaboration by Pfizer directed at up to 10 GPCR targets. Novartis submitted valid marketing authorization application to the EMA, which triggered $2.5 million milestone from Novartis. Phase III studies is expected to complete in 2019.

Please turn to Slide 17. These are some details on the presentations in academic societies on partnered programs. AstraZeneca's presentation in AACR in April showed that AZD4635 restores anti-tumor activity by preventing adenosine-mediated suppression of immune cells. AZD4635 also shows clinical activity as monotherapy or in combination with Imfinzi durvalumab in patients with advanced solid tumors.

Novartis' presentation at ATS in May showed Phase II data. QVM149 demonstrates improvements in lung function in patients with asthma, irrespective of time of dosing, and QVM149 is superior to high-dose salmeterol/fluticasone propionate in improving lung functions in patients with asthma.

Please turn to Slide #18. Next, this is update on muscarinic program. Works continue on the portfolio of muscarinic agonists to advance certain compounds through development. Multiple compounds with the potential to be new candidates have been discovered. Clinical development of HTL0018318 in Alzheimer's disease remains voluntarily suspended while investigative work regarding toxicity findings is continuing. Update is expected in late 2019.

Decision is made to withdraw current Phase II trial of HTL0018318 in DLB patients in Japan in order to minimize unnecessary ongoing expenditure on clinical trial activities while it is suspended. However, this does not mean DLB program is canceled. Sosei Heptares remains committed to continuing the DLB program in Japan and plans to file a new clinical trial application with the Japanese PMDA in the future.

Please turn to Slide #19. We are improving our business across the board. In Governance & Management, we elected Mr. Noriaki Nagai as External Independent Director and Mr. Tadayoshi Yasui as Executive Officer. We also newly hired experienced personnel for our Internal Audit, among others.

We closed our Zurich R&D facility and core technology assets CHESS and SaBRE has been repatriated and are housed in Granta Park, U.K. We created new employees incentive plans for directors, executive officers and senior managers to encourage and reward corporate growth. The plan consists of RSU, restricted stock unit plan tied to the duration of service, and PSU, performance share unit plan linked to predetermined performance targets.

New Cryo-EM technology is a valuable tool for viewing and studying structures of various biological molecules and determining high-resolution structures of 200-kD proteins. New purpose-built facility is added to R&D center housing state-of-the-art ThermoFisher Glacios electron microscope.

Please turn to Slide 20. Left side is the purpose-built facility in Cryo-EM. Nobel Prize in Chemistry in 2017 was awarded to 3 Cryo-EM researchers, one of which is Dr. Richard Henderson, Founder of Heptares, who currently serves as the science and technology adviser. Cryo-EM allows GPCR structural analysis without the crystallization and complement StaR technology. Cryo-EM resolution is lower compared with X-ray crystallography, but it gives insights on site of action and is useful to identify initial hit compounds.

And now I would like to continue to talk about the strategy. Please turn to Slide 22. Our new short to midterm growth strategy was announced in November last year. And the goals were to turn the business profitable and also to move to Section 1 listing of Tokyo Stock Exchange, to recap, to extend our leadership in the platform technologies and also to have GPCR targets across a range of diseases.

And please turn to Page 23. And these are the goals that we have announced for 2019, which was announced in November last year. As I explained in the highlights, all of the business goals and the business developments were achieved in the first half of this fiscal year, but we will not be content, but we will continue to take on challenges to -- in the second half of this year to achieve higher targets, and we will continue to aggressively strengthen our cost management.

Now I would like to move on to talk about our partnership with Genentech and Takeda. Please turn to Page 24. This explains our partnership with Genentech, which was announced in July. Needless to say, Genentech is a company that triggered the rise of bio industry, and it still remains to be one of the most innovative biopharmaceutical companies. We will discover and develop novel small molecules and/or biologics, which is the objectives of the partnership.

GPCR targets across a range of diseases and that Genentech will have exclusive global rights. We will be eligible to receive USD 26 million in upfront and near-term payments. And in addition to USD 1 billion in potential future milestone payments and royalty payments will be received after commercialization.

Please turn to Slide 25. This talks about our partnership with Takeda, which was announced last week. And our goal is to discover and develop novel small molecules and/or biologics. There will be GPCR targets, which are across a range of diseases. But the initial focus will be on high-priority gastrointestinal targets. Takeda will hold exclusive global rights.

We will be eligible to receive a USD 26 million in upfront and near-term payments. And in addition, there will be research funding over term of the agreement and USD 1.2 billion in potential future milestone payments. And tiered royalty payments will be received by Sosei after commercialization.

Please turn to Slide 26. StaR Technology, SBDD technology are applicable to a wide range of molecule targets. And these technologies are also capable -- compatible with wide range of GPCR or other targets. Up until today, our company has been focusing on central nervous systems space. But recently, we are also paying attention to immunology as well as GI space and we are accumulating expertise, and we are expecting the weight of R&D in these therapeutic areas to increase.

Please turn to Page 27. The total market size of GI diseases is as big as USD 50 billion. The number of patient visits a year is about 31 million and number of prescriptions is about 40 million a year. In gastrointestinal tract, there is a rich resource of GPCR targets. And there is a lot of attention on interactions with intestinal flora, and they are high unmet needs and there are multiple clinically validated mechanism of action.

Please turn to Page 28. We will be extending our GPCR leadership in new platform technology collaborations and we are prioritizing high-value pipeline programs. And we -- our in-house candidates have entered clinical development, and we will be having new discovery and development partnerships. And we have seen excellent progress related to existing partnered programs.

In this second half of fiscal year 2019, we will be focusing on strong cost control and project delivery and targeting to achieve -- added value and we'll be maintaining R&D expenses. It is possible to reduce R&D spending to increase short-term profit, but that would mean impairing future potential for growth.

With this, I would like to conclude my presentation. Thank you very much for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take the first question.

In your management and R&D focus, what is the balance between the developing assets to out-license and those to advance internally?

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Shinichi Tamura, Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO [2]

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Let me respond to that question. Last fiscal year, we spent a big amount of money, close to JPY 10 billion to R&D. But last year, we changed our strategy. We focused on raising profitability to meet the expectation of the investors. So partnered is our higher priority. But as I mentioned earlier, we will not just do partnerships and nothing else. It -- the key is the timing of the partner. We need to partner with added value. So we need to be -- to consider our physical ability. If we find good partner, we may do this early on. And in some cases, we may wait and add more value and partner at a later stage. That is my question -- that is my answer.

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Operator [3]

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Now we would like to move on to the next question.

This fiscal year, do you expect any further significant milestone payments for partners?

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Shinichi Tamura, Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO [4]

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I would like to ask Chris, our CFO, to answer to that question.

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Chris Cargill, Sosei Group Corporation - Executive Officer, Executive VP & CFO [5]

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Thank you, Tamura-san. The answer is, yes, we do expect further milestones from existing partners and collaborations. However, as is the nature of these milestones, we can't comment to the exact timing as to when we will receive them. However, they're core to our strategy and they help us to fund further platform development as we look to build the company into one of the world's leading GPCI drug discovery businesses. Thank you.

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Operator [6]

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We will take the next question.

In the last financial results briefing, compared to that, in the in-house development pipeline, EP4 has come off the list compared to the last quarter presentation. How should we read that? Does it mean the program has been terminated, slowed down or has been picked up by the partner? Can you say it was Genentech or Takeda if it's a partner?

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Shinichi Tamura, Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO [7]

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Chris will respond to that question.

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Chris Cargill, Sosei Group Corporation - Executive Officer, Executive VP & CFO [8]

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Thank you very much. That's a good question. I can confirm that the discovery asset has not been terminated. It has actually been picked up by a partner recently. However, we are not allowed to disclose which partner, it was -- they picked it up, but that is still ongoing and it has been partnered.

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Operator [9]

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Next question. The question is related to muscarinic program with Allergan. If 318 is to be terminated, do you have any backups? And how long will it take to get into clinical development?

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Shinichi Tamura, Sosei Group Corporation - Founder, Executive Chairman, Representative Executive Officer, President & CEO [10]

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Allow me to answer to that question. As I explained a little bit in my presentation, you never know what will happen in the process of development. So we do have backups all the time. So we will be focusing on backups as -- increase the number of backups and we'll be -- we have been able to create a number of new compounds. 9939, which existed before 318, which was in the clinical stage, is also included in backups. So even if 318 is to be terminated, the program will stay. So that is an update of this program.

And how long it will take? As you know, together with Allergan, there is an issue of integration between Allergan and AbbVie, which has already been announced. From both parties for M1 and M4, they are -- have already disclosed that they are paying attention to this program. So it is really up to them to decide whether -- how they're going to progress with this program. So I cannot say what will happen when.

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Operator [11]

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So it seems those were all the questions. It is still before schedule, but we would now like to close the financial results briefing of Sosei Group Corporation for the first half of fiscal year 2019. This video today can be viewed on our company website and company hotline archive. This closes our financial results briefing. Thank you very much again for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]