Sumitomo Pharma : May 01, 2024 Conference on Financial Forecasts Revision for FY2023 and Financial Forecasts for FY2024 transcript

Sumitomo Pharma Co., Ltd.

Conference on Financial Forecasts Revision for FY2023 and Financial Forecasts for FY2024

May 1, 2024

Event Summary

[Company Name]	Sumitomo Pharma Co., Ltd.
[Company ID]	4506
[Event Language]	JPN
[Event Type]	Earnings Announcement
[Event Name]	Conference on Financial Forecasts Revision for FY2023 and Financial
	Forecasts for FY2024
[Fiscal Period]	FY2024 Annual
[Date]	May 1, 2024
[Number of Pages]	24
[Time]	13:00 - 14:18
	(Total: 78 minutes, Presentation: 10 minutes, Q&A: 68 minutes)
[Venue]	Webcast
[Number of Speakers]	3
	Hiroshi Nomura	Representative Director, President and CEO
	Toru Kimura	Representative Director, Senior Managing
		Executive Officer
	Naoki Noguchi	Executive Officer Corporate Governance;
		Corporate Communications Vice President,
		Head of Corporate Communications
[Analyst Names]*	Seiji Wakao	JPMorgan Securities Japan
	Shinichiro Muraoka	Morgan Stanley MUFG Securities
	Fumiyoshi Sakai	UBS Securities Japan
	Hidemaru Yamaguchi	Citigroup Global Markets Japan
	Kazuaki Hashiguchi	Daiwa Securities
	Stephen Barker	Jefferies (Japan)
	Hiroshi Wada	SMBC Nikko Securities

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A or whose questions were read by moderator/company representatives.

1

Presentation

Noguchi: Now that it's time, we would like to start the briefing on Sumitomo Pharma Co. Ltd.'s financial forecasts revision for FY2023 and financial forecasts for FY2024.

Thank you very much for joining us today despite your busy schedules and the short notice. This presentation will be webcast live via Zoom webinar from our Tokyo Head Office.

After explaining all about the Company in accordance with the presentation materials posted on our website yesterday, there will be time for a Q&A. We look forward to your cooperation.

First of all, I would like to make an announcement and request to all of you. Please change the participant information displayed on your Zoom screen to your company name and your name.

I would like to introduce today's speakers from the Company. Mr. Nomura, Representative Director, President and CEO; Dr. Kimura, Representative Director, Senior Managing Executive Officer, and I'm Noguchi, Moderator.

Thank you.

Now, Nomura will explain the revision of the financial forecasts for FY2023 and the financial forecasts for FY2024.

Mr. Nomura, please go ahead.

2

Nomura: Hello, my name is Nomura, and I am the president. Thank you very much for taking time out of your busy schedules today to attend our briefing.

Now that our time is limited, I will explain the situation based on the materials.

This has already been disclosed to you. In January, we announced our fiscal year 2023 forecasts in the Q3 financial results, and this time, compared to that, we are forecasting a decrease of JPY2.4 billion in revenue. The situation is that there has been a decrease in the North America and Japan segments.

On the other hand, the core operating profit will improve by JPY1 billion from the forecast. Although gross profit will decrease, the decrease in R&D expenses and SG&A expenses will be resulted in an increase of about JPY1 billion.

Then, at the operating profit level, we will post a significant loss of JPY354.9 billion, as this is written below here, which means that a total of JPY180.9 billion in impairment losses will be recorded.

The breakdown of the impairment loss is, in addition to the estimated impairment loss, JPY10.6 billion for the discontinuation of development, including rodatristat ethyl and EPI‐589, impairment loss for MYFEMBREE, and the impairment loss of goodwill of the business in North America due to reevaluation of the business in North America.

In particular, the performance of what we call the three key products, ORGOVYX, MYFEMBREE, and GEMTESA, continued to fall far short of our expectations.

Therefore, when we evaluated the North American business, we requested third parties to forecast our revenue in addition to our own revenue forecasts and various other assumptions. Based on this, we

3

reassessed the value of our North American business, and based on this, we wrote down the patent rights of MYFEMBREE and goodwill of North American business.

We are very sorry and take very seriously the fact that the loss attributable to owners of the parent for the current fiscal year increased significantly more than expected as a result of the large amount of impairment losses incurred.

As you have probably already seen, for the fiscal year 2024, we are aiming for revenue of JPY338 billion and core operating profit of JPY1 billion. We know we are in a difficult situation, but we hope to somehow secure a profit of JPY1 billion.

This is predicated on expanding sales of our three key products in North America: ORGOVYX, MYFEMBREE, and GEMTESA.

Please refer to the slide on page nine to see a little more about this.

4

This is a time‐series graph of these three products.

In 2023, the actual amount is estimated to be less than JPY90 billion, and we are planning to grow to JPY130 billion in FY2024 and JPY180 billion in FY2025. In 2024, as I mentioned, we are planning to secure profits based on revenue at the JPY130 billion level.

I would like to ask you to go back to where we were before.

I would like to explain later on the rationalization of SG&A expenses and R&D expenses.

Regarding the dividend for FY2024, our Mid‐term Business Plan originally projected a core operating profit of about JPY40 billion. Under such circumstances, we have been talking about resuming dividends, but since the core operating profit is JPY1 billion, which is an extremely low level, we are now planning to defer a dividend payment.

5

Now, I would like to talk a little bit about reducing SG&A and R&D expenses.

The core operating loss was JPYJ133 billion, which we will improve by JPY108 billion by improving SG&A expenses and R&D expenses.

Also, since the sales of the three key products I mentioned earlier are about JPY130 billion, this means that gross profit will increase.

We also have about JPY2 billion, and we are trying to achieve a core operating profit of JPY1 billion through a combination of these items. In particular, the rationalization of the JPY108 billion in SG&A and R&D expenses is a very serious matter, which I will explain on the next page.

6

In North America, the number of employees was originally 2,200 during FY2023 and was decreased to 1,200 at the end of FY2023, so it is assumed that the number of employees has already decreased by about 1,000. SG&A expenses decreased from JPY236 billion to JPY169 billion, a decrease of JPY67 billion.

There is a JPY26 billion reduction in personnel costs, and then for the amortization of intangibles, this is due to a decrease in amortization of intangibles as a result of the significant impairment of MYFEMBREE. Then, JPY31 billion in cost reductions will be implemented.

This is the material that Sumitomo Chemical used in its Investors' Meeting for the Current Priority Management Issues and Business Strategy yesterday, and we will continue to make further improvements to this JPY31 billion cost reduction and realize more reductions.

And also, R&D expenses are in the direction of a decrease of about JPY18 billion due to the fact that the number of personnel has already been reduced.

Then, we narrow down the cost of the clinical studies. The clinical study programs will be narrowed down to regenerative medicine/cell therapy and oncology in the late stage program, which will result in a significant decrease in R&D expenditures, with an overall decrease of JPY41 billion. This means a decrease of JPY108 billion in total.

In Japan, costs and budgets have been considerably reduced, aiming for slimmer costs and budgets. Furthermore, we are working to make more efficient use of the budget.

Through these efforts, we are trying to achieve a core operating profit of JPY1 billion by expanding revenue and reducing expenses.

7

The following pages and beyond are all for reference only, so that is all for my explanation.

Noguchi: Thank you very much, Mr. Nomura.

8

Question & Answer

Noguchi [M]: I would now like to move on to the question‐and‐answer session. The order in which we will take questions is by 1:50 PM, we will start with analysts and institutional investors, and then move on to questions from the Medicare.

If you have any questions, please let us know by pressing the raise‐your‐hand button on Zoom. Also, we would like to reiterate our request that you change the participant information displayed on your Zoom screen to your company name and your name.

The moderator will call out your name in turn and we will unmute the microphone, so please tell your name and affiliation, followed by your question.

Mr. Wakao from JPMorgan Securities Japan, please go ahead.

Wakao, JPMorgan Securities Japan [Q]: I'm Wakao from JPMorgan. Thank you.

The first question is that the forecasts for FY2024 was JPY1 billion for the core OP, I think. And then, what are your thoughts on whether you will be able to maintain this profit level or grow beyond the next FY2025?

Since you have made drastic cost reductions in your forecasts for FY2024, I think the key point will be whether you can achieve your forecast for the current fiscal year, but I also think the stock market is concerned about what will happen in the next fiscal year and beyond. Can you tell us what will happen in FY2025 and beyond, and whether this cost reduction will allow you to maintain a certain level of profit?

Nomura [A]: Thank you. Now, to answer your question first, we will continue to reduce costs under this system, so we will manage our business with very low costs.

On the other hand, revenue is a little lower than we had originally expected, but our three key products are growing. In FY2024, core operating profit will be slightly in the black, and will be even more profitable from FY2025 onward. That is what we are assuming.

Wakao [Q]: Thank you very much. I would like to know about the part on the ninth slide of the reference material, which is still important for growth in FY2025 and beyond. We have been given the prospect of ORGOVYX, GEMTESA, and MYFEMBREE, but I am not sure if this is feasible.

I understand that you are planning to do your best to achieve this goal, but I am still very concerned about whether or not this figure is achievable, given your past performance and the fact that your company's guidance has always been below the actual guidance.

In particular, the competitive environment for each drug and the circumstances in which they are placed are likely to change in the future, so I'm also interested in how you are taking these risks into consideration. So, I was wondering if you could tell me a little bit about the sales forecast for each of these drugs, including how you are taking the risks into account.

Sorry for this question being long, but as for ORGOVYX, I'm not sure if you anticipate the impact of the Medicare Part D reform. Also, please tell me if you are taking the generic impact of Astellas' Mirabegron into consideration for GEMTESA.

9