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Edited Transcript of 4519.T earnings conference call or presentation 24-Apr-19 9:00am GMT

Q1 2019 Chugai Pharmaceutical Co Ltd Earnings Call

Tokyo Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Chugai Pharmaceutical Co Ltd earnings conference call or presentation Wednesday, April 24, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Minoru Hirose

* Tadahiko Sato

* Toshiaki Itagaki

Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division

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Conference Call Participants

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* Akinori Ueda

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Fumiyoshi Sakai

Crédit Suisse AG, Research Division - Research Analyst

* Hidemaru Yamaguchi

Citigroup Inc, Research Division - MD and Analyst

* Seiji Wakao

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

* Shinichiro Muraoka

Morgan Stanley, Research Division - Research Analyst

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Presentation

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [1]

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Good evening, ladies and gentlemen. I am Toshiaki Itagaki from Chugai Pharmaceutical. Thank you very much for joining us from late afternoon. With regard to the presentation material, I have made some changes to the way results are described and moved some of the slides, which used to be in the main text to the appendix, as well as added some new ones. So I will point to them as I go along. I hope you will stay with us till the end.

Please take a look at Page 2. This is a 1-page summary of the results intended to make the result easier to see.

In this first quarter, we saw increased revenues and operating profit with profit posting a double-digit growth. We achieved record high Q1 results in terms of revenues, operating profits and net income.

Furthermore, strong progress has been made against the full year forecast announced at the beginning of the fiscal year. With 33.5% of the full year forecast already posted in operating profit, we made a head start in this quarter.

Now let us move to Page 3 where we will look at more details. Conventionally, we included 1 slide before this to explain reconciliation of IFRS results to core results. However, since the adjustment hardly changed from quarter-to-quarter, I have decided to move it to appendix. Therefore, Page 3 shows the profit and loss results on the core basis. Let me go over the slide from the top.

Revenues posted JPY 154.3 billion, up JPY 6.9 billion or 4.7% year-on-year. Average sales were JPY 133.7 billion, up JPY 13 billion or 10.4% year-on-year.

Of the JPY 13 billion growth in sales, JPY 6.4 billion came from domestic products and JPY 6.5 billion from overseas, showing strong growth both in and outside of Japan.

We used to indicate sales of Tamiflu separately from the total domestic sales, but since it has become less important, its sales are now included in the total domestic sales.

In domestic market, given the fact that we were subject to a 6.7% reduction in the NHI drug price revisions in April last year, in terms of sales volume, our growth was more than 10% year-on-year.

New products such as TECENTRIQ and HEMLIBRA as well major products including Alecensa, Perjeta, Actemra and Edirol grew steadily in sales.

In overseas business, exports of Alecensa and Actemra to Roche was strong, resulting in a 20.4% jump in sales.

In royalties and other operating income. While royalty income for HEMLIBRA did increase, the absence of the onetime income present in the first quarter last year, due to the transfer of long-term listed products, led to a significant drop in other operating income.

On a net basis, we sustained a JPY 6.1 billion decline.

The cost of sales ratio improved significantly by 4.6 percentage points from the last year's 50.9% to 46.3% due to changes in the product mix or a substantial increase in the share of in-house products. While sales increased by JPY 13 billion, the cost of sales went up only by JPY 200 million.

As for operating expenses, research and development expense increased, which was partially offset by the reduced expenses for other items, resulting in a JPY 1.6 billion increase in total. Thus, the operating profit was JPY 47.9 billion, up 11.9%. We see operating margin of 31% achieved.

Nonoperating items such as financial account balance and income taxes remained unchanged from a year before.

The net income increased by the same amount as the operating profit or JPY 5.1 billion, representing a 16.3% growth. As for EPS though the number of shares has not changed substantially as we made the joint venture with Sanofi Aventis in France, a wholly owned subsidiary, its entire profit would be attributable to the owner of the parent from this fiscal year. This has pushed up the EPS further to post a 17% increase year-on-year.

Please move to Page 4. Here, you can see the familiar chart showing the breakdown of the year-on-year changes in sales. On the left is the year-on-year comparison of sales by disease area and the top blue box indicates the overseas business, representing the sum of local sales by local sales subsidiaries and exports.

JPY 38.4 billion was achieved, up 20.4%. On the right, you see individual products in the descending order in the value of change.

The largest growth was posted by overseas sales of Alecensa with JPY 4.6 billion or 121.1%. Actemra, the third from the bottom, also grew by 8.1%.

Getting back to the left-hand chart, domestic sales increased by JPY 6.4 billion or 6.9%. At the bottom is the oncology area, posting 7% growth.

By product, the second from the top, TECENTRIQ, launched in April last year, grew by 37% whereas Perjeta, shown around the middle of the charge, recorded a 75% increase.

On the other hand, among the ones which saw a decrease in sales was Rituxan, for which biosimilars were launched last year and NHI drug price was reduced by as much as 26.2% due to the return of the price maintenance premium. As a result, its sales halved year-on-year.

Furthermore, at the left bottom of the slide is details for the HER2 franchise where you can see Herceptin posting sales decline, again, due to the reduction of the drug price of 20.4%, based on the return of the price maintenance premium.

Next on the purple box, bone and joint area, where we saw a 12% or double-digit growth in sales. By product, on the right bottom, 2 in-house products, Actemra and Edirol, showed strong growth. The yellow box, renal disease area, dropped by 1.3%. Though there is no reference sales by product, Oxarol shrank slightly due to the NHI drug price revisions last year. Last but not least, others, shown in gray, showed 4.1% growth.

By product, government stockpiles of Tamiflu or dry syrup stocked by MHLW, increased by JPY 3.1 billion and HEMLIBRA, launched May last year, posted domestic sales growth of JPY 2.7 billion.

On the other hand, ordinary sales of Tamiflu faced [fierce] competition from generics and competitor products, fell by JPY 3.6 billion.

Moreover, many of the products transferred to Taiyo Pharma company used to be included in the category of others, the incremental sales of HEMLIBRA was more or less canceled out by the absence of those long-term listed products transferred.

I will now move on to the next slide. Previously, you would have seen a slide showing sales of Tamiflu at this point, but its sales, like every other product, are now included in the domestic sales. And therefore, we have decided not to put together the slide this time.

Page 5 shows the factor analysis of increase of operating profit. Please see the left chart first.

In the first quarter, we generated JPY 5.1 billion more in operating profit than the year before. The gross profit from sales alone contributed JPY 12.8 billion. As I said, the changes in the product mix led to the improvement of cost of sales ratio, allowing for sales increase of as much as JPY 13 billion with only JPY 200 million increase in cost of sales, thus the difference of JPY 12.8 billion was the direct contribution to the total operating profit. Royalties and other operating income dropped by JPY 6.1 billion. The reason is, as I explained earlier, shown on the second item.

Expenses are divided into 3 items: M&D (sic) [R&D], marketing distribution and G&A. General and administrative expenses, decreased by JPY 500 million and JPY 600 million, respectively.

As for M&D, overseas subsidiaries saw their M&D expenses shrink in terms of yen due to [depreciation] of the yen. G&A expenses decreased due to the decline in legal and other miscellaneous expenses.

On the other hand, in research and development, proactive investments are being performed, including those who are progressing development themes, resulting in the increase of JPY 2.7 billion.

Now the full year forecast announced at the beginning of the fiscal year presumes a JPY 7.8 billion increase in the R&D expenses. And therefore, the increase in the first quarter was mostly in line with the plan.

Now let's take a look at the comparison to the full year forecast on the next page, Page 6. If you take a look at the progress made against the full year forecast, cost of sales achieved 25% to 26%. Expenses, 21.7% and operating profit and EPS, about 33% each.

These are almost the same as the progress made in the first quarter last year as shown further to the right on this table.

However, around the middle role of this table is other operating income, which achieved a progress of 63.4% last year. This was because of the onetime income from the transfer of long-listed products posted in January last year.

In the first quarter of this year, though, there was no such large onetime income. And yet, the progress of operating profit outperformed last year at 33.5%.

There are 2 reasons for this strong progress in this quarter. First, I would like to draw your attention to royalty and profit-sharing income. This item includes royalty income and profit sharing income on HEMLIBRA in 3 European countries.

On April 17, Roche reported its sales for the first quarter. It said HEMLIBRA made a good start in the U.S., especially among noninhibitor patients with worldwide sales of HEMLIBRA at CHF 219 million.

Sales of HEMLIBRA in the world, except for Japan, for which we would receive royalty, was CHF 194 million, which was almost the same as the global sales excluding those for Japan for the entire year last year. Therefore, we believe the performance exceeded what we had expected. Hence, the description on the right of this page, which reads: income for HEMLIBRA progressed well in view of the forecast.

The other reason for the strong progress in the operating profit lies in the domestic sales. Last year, there was NHI drug price revision in April, which proved favorable for the first quarter with 23.2% progress ratio.

In comparison, in the first quarter of this year, we already achieved 25.5% as much as 2.3 percentage points more than the previous year. Thus, we believe we made a better-than-expected start in domestic sales as well. Sales of HEMLIBRA and domestic sales were both strong. And those with strong sales were mostly in-house products, which helped improve the cost of sales ratio as well.

As a result, we have seen more than 33% of progress made in the operating profit.

Next, let's look at the sales progress by product on the next page, Page 7. First on the oncology area, which achieved a progress of 24.1%, 2.6 percentage points better than the previous year. For Avastin, we have incorporated expected launch of its biosimilars by the end of the year in our forecast, which made the progress in the first quarter look more favorable, but it was in line with the expectation.

The forecast for Herceptin also accounted for the possible impact from biosimilars. But for now, the impact turned out to be mild and its progress was more or less in line with our expectation.

And Perjeta made good progress with more-than-expected [brisk] sales for [advanced] therapy. New products such as TECENTRIQ and Gazyva are expected to be on the growth trajectory between the beginning and the end of this year with 28.2% and 33.3% progress ratios achieved, respectively. In the first quarter, their performance was relatively good.

In bone and joint area, Actemra performed better than the previous year, but since our budget was put together based on the assumption that it would be subject to the market expansion repricing, and therefore, 23.6% of progress is mostly in line with the plan.

Now here, take a look at the top right corner, renal area. Oxarol was slightly ahead of the plan in its progress.

In others, HEMLIBRA penetrated into the noninhibitor patients faster than expected allowing for a good start. Tamiflu for ordinary use already exceeded the full year forecast.

With regard to exports and overseas sales, shipment is made in lots and therefore, some quarters are better than others. So you cannot tell whether the performance was good or not only from the progress in the first quarter. But the third-party sales of Alecensa by region, announced last week by Roche, came across as extremely good in international markets.

Our exports could grow accordingly, from the second quarter onward. Thus, looking at the performance by product, many had made good progress. And therefore, provided that this momentum can be maintained in the second quarter and beyond, we may outperform the full year forecast.

That's all for the main part. This time, we also have an appendix attached at the following 8 pages. Let me give you a brief explanation of that part.

Turning to Page 9. Here, noncore items are listed which we usually include in the main part, but this time in the appendix. For the first quarter, the noncore adjustment was JPY 1.8 billion.

Now Page 10. This explains an early retirement incentive program, which has also been press released today. Just to give you a summary outcome of the program, we received 172 applications from our employees who will retire at the end of June. Special additional allowance and other expenses related to the program altogether amount to approximately JPY 5.1 billion. The entire month will be booked in the second quarter and not the first quarter. All of those expenses are considered noncore. Therefore, the core-based forecast announced at the beginning of the term would be affected only at their minimum levels.

Turning to Page 11 on the impact from foreign exchange. This used to be included in the main part but in the appendix this time. As you know, for most of the foreign currencies were hedged during the previous year. Even major ForEx fluctuations during that term do not affect actual performance against the plan in a major way. The impact for the first quarter was minus JPY 400 million on the profit.

Now Page 12 is on balance sheet and Page 13 on cash flow. These 2 financial aspects were not included in the past for the first and the third quarter results presentations, but we have decided to include them for -- from this year, but only as a part of the appendix.

Now Pages 14 through 16. These 3 pages give you an explanation on core ROIC, which is an indicator we use internally as a measure of the company management. Due to a growing attention on corporate governance, we are measuring our capital efficiency with core ROIC as a KPI instead of ROE, which is an indicator often used for the same purpose. Against this KPI, we aim to improve our capital efficiency in the long run. We are not disclosing a target nor a projected figure for this KPI, but you can see actual numbers for core ROIC and some of its components such as margin indicator or turnover indicator on Page 10 of the supplementary materials for consolidated financial results for your reference.

Thank you for your kind attention.

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Minoru Hirose, [2]

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Now Hirose, R&D Portfolio Manager. We will give you an update on the development of pipeline for the first quarter. Please take a look at Page 18. This is a list of pipeline projects as of April 24 in therapeutic areas of oncology, bone and of joint and renal disease. Changes since the last time are indicated with red stars.

Entrectinib was filed for treating ROS1-positive non-small cell lung cancer this March.

Page 19 is a list of pipeline in autoimmune, neurology and others. In neurology, we started a Phase I trial for RG6100 in-licensed from Roche, which is in anti-tau monoclonal antibody.

For RG6042 or HTT ASO, also in neurology, we have joined a Phase III trial carried out by Roche for Huntington's disease.

In others, we have started to take part in a global Phase III trial of RG7716 or faricimab for wet AMD.

Page 20 provides some of the highlights of our R&D activities in the first quarter. A list of major R&D topics will be presented from this time and in the future.

First, on approvals. HEMLIBRA was approved in March in Europe, following approvals in the U.S. and Japan, for noninhibitor hemophilia A. New dosage and administration for every 2 weeks and every 4 weeks were also obtained at the same time. Actemra was approved for cytokine release syndrome. This agent is the first such agent approved for CAR-T-associated CRS in Japan.

Also, Rituxan was approved for CD20+ chronic lymphatic leukemia.

Now what's being filed. Entrectinib was filed for ROS1 positive non-small cell lung cancer following submissions for NTRK fusion positive solid tumors in December last year.

Foundation 1 CDx, a companion diagnostic product approved for cancer genome profiling tests and for some cancer molecular targeting agents last December, had partial change applications as CDx for entrectinib and LYNPARZA.

For phase transitions. A biospecific antibody in-licensed from Roche which inhibits both the VEGF vascular endothelial growth factors and angiopoietin-2, an inducer of vascular permeability, faricimab entered a global Phase III trial for wet age-related macular degeneration, following another indication that is diabetic macular edema.

HTT ASO and anti-tau monoclonal antibody, in-licensed from Roche, are new to the pipeline.

I'd like to give you more details of these projects later on. In February, development of crenezumab was discontinued due to the termination of 2 global trials.

Suvenyl in China demonstrated no inferiority in its Phase III trial for knee osteoarthritis compared to the comparator in the top line results.

And nemolizumab, in its Phase III trial conducted by Maruho for atopic dermatitis with moderate to severe pruritus in patients aged 13 or older, demonstrated a statistically significant difference against placebo in the primary endpoint, which measures improvement in pruritus at week 16 as already announced.

On medical conference, once again, nemolizumab's Phase IIb results were presented at American Academy of Dermatology by Galderma. EASI score, a score for dermatitis, was significantly improved against placebo, meeting the study's primary endpoint.

Other topics, risdiplam and the development for spinal muscular atrophy was granted orphan drug designation.

Turning to Page 21. With the next 2 pages, I'd like to explain HTT ASO, which we have in-licensed from Roche. This HTT ASO is a first antisense oligonucleotide drug for Chugai. Its target disease is Huntington's disease, which is a genetic disease inherited through autosomal dominant mutation. The disease is characterized by involuntary movements, including jerky movements, psychiatric symptoms and dementia. The age of onset is often in the 40s and that the duration of the disease is set to be around 10 to 20 years with no curative treatment available, consequently addressed just with symptomatic treatment. The number of patients in Japan is estimated at 933.

Now on Page 22. As HTT ASO is an antisense oligonucleotide, its mode of action is exerted through binding the target HTT messenger RNA. Thereby, DNA-RNA hybrid is degraded by ribonuclease. This way, Huntington abnormal protein synthesis is inhibited. Disease progression is expected to slow. Last August, prime designation was granted in Europe.

Next, let me explain RG6100, also in-licensed from Roche, which is an anti-tau monoclonal antibody. Phase II trials are conducted by Roche overseas for Alzheimer's disease. We have started a Phase I trial in Japan this month.

Tau is one of the proteins which binds microtubule, mainly expressed on neurons in CNS. This protein promotes microtubule assembly contributing to neuronal integrity. In tau-associated neurodegenerative diseases, including Alzheimer's disease, tau protein through excessive phosphorylation aggregates and accumulates in the brain. It is believed that such aggregates are toxic to neurons.

Pathologically, tau is also considered spreading through extracellular space between neurons. Propagation of tau across the whole brain is closely associated with neurological symptoms and the progression of Alzheimer's disease.

Untied tau antibody binds multiple isoforms of tau in extracellular space in the brain, expected to slow progression of the disease or hold it altogether.

Now let me turn to Telomelysin, which was press released on April 8. Please turn to Page 24. Telomelysin is an oncolytic virus for which we have obtained exclusive rights for developing, manufacturing and sale from Oncolys BioPharma in Japan and Taiwan with the right to sublicense.

We have also obtained exclusive option rights for development, manufacturing and sales for the rest of the world, excluding Japan, Taiwan, China, Hong Kong and Macau.

Telomelysin is a viral product, which incorporates hTERT, a promoter of telomerase, often very active in cancer. As such, it specifically replicates in cancer cells, thereby causing oncolysis, which is the strong antitumor action of this agent.

On the other hand, in normal cells, different from cancer cells, telomerase activity is none or very low, therefore, the virus can hardly replicate.

A Phase I trial is ongoing in Japan for esophageal cancer and the SAKIGAKE designation has been granted in April.

Overseas, clinical trials are underway for melanoma and hepatocellular carcinoma.

Apart from clinical studies, investigator-initiated clinical research projects combining this agent with checkpoint inhibitors are carried out. We expect additional systemic antitumor effect of Telomelysin on top of its direct antitumor effect by combining it with checkpoint inhibitors which trigger immunity against tumor.

Page 25 gives you an idea of projected submissions in the future. This concludes my presentation.

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Questions and Answers

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [1]

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Yamaguchi from Citigroup Global Markets, Japan. First of all, the summary chart you provided this time helps us understand better. My first question is about HEMLIBRA. It is outperforming the expectation globally. You said at the last earnings announcement briefing that the export unit price had been suppressed at lower levels, but after a certain period, it was supposed to return to the regional level, but not until the end of this year based on the current assumption. So my question is, whether it is possible for the unit price to return to the regional level sooner, like in Q4 of this year since it is performing so well?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [2]

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We have been exporting the product at what we call the initial shipment price. So what you are asking about was that, since Roche's external sales are higher than originally expected. And once it sells out all the inventory shipped at the initial price there will be another round of exports from Chugai, at which time the shipment price would return to what we call the normal shipment price. Is that the thought behind your question?

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [3]

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Yes.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [4]

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Since we sold such a large amount to Roche, even if the performance is more than expected, to a certain extent, we do not anticipate all the inventory Roche holds currently to be sold out to require more exports, realistically speaking. However, royalty and point profit-sharing associated with the initial shipment is expected to total JPY 24.4 billion for the full year, but this may be exceeded.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [5]

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I see. My next question. I would like to ask about the basic interpretation of the guidance. Roche doesn't give out specific numbers but raised their target sales levels significantly in Q1. And your company has been performing so well in Q1. Though you disclosed numerical targets and, therefore, it will be difficult for you to adjust the numbers, but can you not make what I would call implied upward revision?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [6]

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Roche did not give any numbers and just raised the level by changing the description from low single-digit to mid-single digit for sales growth rate. We disclose numbers for both sales and profits. And yet, I think, in my presentation today, although we did not revise the numbers, I went into quite a depth in explaining our thought. Unless the forecast changes more than plus/minus 10% for sales and 30% for profit in accordance with our timely disclosure criteria, our company does not revise our forecast. Given that description, I believe I did as much as I could to provide guidance to you.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [7]

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I see. Another question about HEMLIBRA. I believe it has started to be prescribed to noninhibitor patients in Japan. Just by looking at the sales numbers, I was under the impression that there had not been that much change on quarter-on-quarter basis. Could you give us updates, if any, on the status of HEMLIBRA for inhibitor and noninhibitor patients in Japan?

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Tadahiko Sato, [8]

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Sato speaking. With regard to inhibitor patients, penetration in terms of the number of prescriptions is steadily growing. That has not changed much from the last time we explained. In other words, the drug has been prescribed to most of those who should receive it. As for noninhibitor patients, penetration has been expanding, especially among pediatric patients initially. But on the other hand, in June, long-term prescription will be allowed for which preparation is now underway, but things are going well.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [9]

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My last question. You explained about early retirement incentive program. I understand any special charges would be recorded as noncore items, but the expected decrease in SG&A expenses due to the retirement of those people has been accounted for in the company forecast. Correct?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [10]

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Yes. The cost of salary will be reduced by the amount currently paid to those people. Is that what you meant? If yes, it is included.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [11]

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Muraoka speaking. I'm merely bringing up the same topic again. You said you did everything you could in explaining about the full year forecast, but it sounded to me that you were implying that you will make upward revision at the second quarter earnings report. Am I correct in understanding that that was close to what you tried to imply?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [12]

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I didn't mean to say that much, but as I said earlier, we are obligated to disclose the information in a timely fashion if the forecast is changed by more than plus/minus 30%. And we do disclose the information. But we just got the results of the first quarter and if the current pace is assumed to be maintained, then it is likely that we will overachieve the full year forecast. That is as far as I got in our guidance.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [13]

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I see. Then if this positive momentum and upside trend in sales and gross profits continue, are there any investments you now wish to carry out in the second half?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [14]

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When it comes to investments in technologies and development pipeline, they have to be done whenever there are chances. Without being bound by the status of sales or profit of the company, we will make investments in a timely fashion if there are chances to do so. Therefore, at this moment, we do not have anything in particular just because we now have this positive momentum. In terms of investment in plants and equipment, we will invest in a new manufacturing building for APIs in Fujieda plant announced today. And we also have at least a plan to construct a research facility on a piece of land purchased at the end of last year in Totsuka district in Yokohama City. For now, we do not have any details to share with you. But in the future, we will continue to make steady investments in plants and equipment for future growth, regardless of the momentum in the company's performance.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [15]

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Does that mean you're not assuming anything major that could hit the P&L?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [16]

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Well, we don't have anything particular to share with you. But most of the major items such as in-licensing tend not to hit the P&L but would be reflected in intangible assets and other items in the balance sheet. Therefore, should there be any major investments made, it is unlikely to affect this year's full year forecast.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [17]

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I see. Another question is about minor details. You recognized the impairment for JPY 1.5 billion in this quarter. Was it related to crenezumab? The amount seems to be a bit too low for impairment for crenezumab.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [18]

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We do not disclose the breakdown of the impairment. I'm sorry to sound so blunt, but we don't disclose the breakdown of the impairment. So I would like to ask for your kind understanding.

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Akinori Ueda, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Ueda from Goldman Sachs Securities. First, I would like to ask you to elaborate more on the positive factors behind the good growth margin. I believe very good progress has been made compared to either the plan or the previous year. It is not as if the royalty income was larger, especially in the first quarter, compared to the rest of the year. So could you explain in more detail what was different from your assumption that has led to the very strong progress against the full year forecast?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [20]

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The cost of sales ratio that I referred to is based on the calculation where denominator is the sales of products, which does not include royalties and others. Therefore, this ratio is not affected by something like royalties where revenues are almost equal to the profit. The cost of sales ratio improved as the in-house products, as percentage of the total product mix, significantly increased. This is because in exports, Actemra and Alecensa were growing rapidly. And in domestic sales, in addition to those 2, Edirol was also growing and those were the factors behind the improvement.

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Akinori Ueda, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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It may be hard to answer, but if that is the case, can we assume that this trend will basically continue in the second quarter and beyond? In other words can we understand that there were no special factors in the first quarter?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [22]

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The cost of sales does include royalties paid and other items. We cannot disclose in detail and, therefore, it is possible that some fluctuations may be seen from quarter-to-quarter. Now the full year forecast assumes the cost of sales to be 47.8%, which in itself, is an improvement from the previous year, incorporated originally in the forecast. In addition, the increased share of in-house products were slightly better in the first quarter. Provided that this momentum is maintained, there is no possibility to go slightly below 47.8% for the full year.

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Akinori Ueda, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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My second question is about the domestic situation of HEMLIBRA. What is the trigger for noninhibitor patients to switch drugs? You earlier talked about how it has penetrated into pediatric patients well. What factors and types of patients have you focused on in particular? Are there any particular profile of patients you found easier to switch? Could you comment on the current status of penetration?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [24]

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The key in switch over was the number of hospital visits to be made. Considering initial administration would require weekly visits to hospitals, there have been more pediatric patients and working adults who switched to the drug. But going forward, as long-term prescription will become available, new patients, including those adults will be administered with the drug, where those patients who undergo prophylactic administration will be the target for HEMLIBRA. And so we expect those patients to be administered with the drug as well.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [25]

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Now the next question is from Sakai-san. It's Sakai-san speaking. It may be because of a lack of knowledge of HEMLIBRA on my part. How would the end of prescription restriction contribute to further penetration of that product? Was it [Avastin]? Could you answer this question?

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Unidentified Company Representative, [26]

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Generally speaking, those patients with low bleeding risk do not have to come to hospitals very often. This is a starting assumption. Against this, HEMLIBRA allows extension of the treatment interval up to 4 weeks. But once the prescription restriction is lifted after the first year, the situation allows patients to visit hospitals only every 3 months, which makes it easier for those lower risk patients to choose HEMLIBRA.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [27]

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I see. So it can extend the visit frequency to 3 months for the benefit of the patients, right?

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Unidentified Company Representative, [28]

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Yes.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [29]

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I have 2 more questions on Avastin. Pfizer, I think, is launching its biosimilar of Avastin, and that's not for all the indications but just for colorectal cancer. So if I may, could I ask you about the sales of Avastin for colorectal cancer indication. How much is it? And I'm sorry, the next question also reveals my lack of understanding of pricing rules properly. So once the biosimilars comes to the market, how would the price maintenance premium return be calculated? Avastin has already suffered recalculation of its price twice on an account of market expansion. If my memory serves me right, given that, could you make me understand the available rules of price calculation of such product once again?

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Unidentified Company Representative, [30]

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Well, first of all, we do not disclose sales figure for each cancer indication and we plan for returning the price maintenance premium portion next year.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [31]

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As the biosimilar is introduced, does that mean Avastin is subject to the usual rule of returning the price maintenance premium portion you have received over the years at maximum?

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Unidentified Company Representative, [32]

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Yes, that's right.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [33]

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My -- another question about Avastin is about its intellectual property rights and related legal cases. You still have IPs until about 2020 and there have been talks about court cases. But for colorectal cancer, that's the prospect of biosimilars means you just cannot stop that, at least for colorectal cancer.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [34]

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This is Itagaki speaking. Of course, it is true that we have a lot of IPs for Avastin, but we have never talked about any legal battle with a third company because there is no such legal battle. For Herceptin, yes, there are legal cases. For Rituxan, also there are legal cases. And we have said so, but not actually for Avastin.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [35]

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I see. My last question is about Roche acquisition of Spark Therapeutics. Well, you may be thinking that I should ask Roche, but what was the communication which took place between you and Roche regarding this acquisition? I'm asking you this because Spark has products for hemophilia. They also have gene therapy products and their pipeline includes therapies for rare diseases including Pompe disease. It may be too early for you to tell, but what is your reaction to the acquisition, especially regarding hemophilia? Also about potential drug candidates. Roche plans to close the deal in the first half. Can you already opt in at that point in time, just assuming that there is a possibility of opt-in?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [36]

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This is Itagaki speaking. First of all, because of the management autonomy and because of the nature of such M&A transaction, which comes with confidentiality, we are not informed of anything about the Spark acquisition deal in advance. Having said that, the deal is not closed and it will be closed in due course only after an anti-trust clearance in the U.S., according to Roche. So we know only as much as you know to the extent Roche has disclosed about this deal. If the acquisition completes successfully, we at Chugai are of the position that the Spark acquisition will complement and upgrade our hemophilia franchise in the Roche Group as a whole. So we take it positively in this regard. Once the deal is closed, we'd know whether we would have rights to negotiate for development and the marketing of some of their projects or products with Spark, or with Roche for that matter. But this is completely unknown as of now.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [37]

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I am Wakao from Mitsubishi Morgan Stanley. I have 3 questions. First one is about HEMLIBRA and its export. Looking at the current sales level, it does not seem additional supply begins anytime soon. That's my impression and you have not said you would, either. It's selling a lot and it's a new product. I guess you are controlling your production carefully so as not to have supply shortage properly. So as not to miss sales opportunity, I assume you are very careful not to rush for additional export. Are you engaged with regular communication, for instance, monthly communication with Roche to discuss about additional supply? That's what I'm wondering. For Actemra, every few months you have said, you're together with Roche review to adjust to fluctuations, which are often seen. What about for HEMLIBRA? Do you have a similar communication with Roche?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [38]

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Itagaki speaking. About the product supply, what's more important is to deliver the product to patients who need it rather than loss of opportunity. So that is our mission. Therefore, we are reviewing that demand forecast from Roche very carefully. Based on which, we manufacture for Roche the right amount at the right time, taking into consideration of the lead time as well. That's what we have done and will do so to avoid stockout. For that purpose, we have close communication with Roche on a monthly basis. So what's different from Actemra is there were products before Actemra entered the market, and there were other factors, such as a switch from IV formulation to SC formulation. But in a case of HEMLIBRA, we tried to sufficiently understand how many patients or, rather, people with hemophilia A are out there and where they are, which provides us with the basis of calculation. So it's rather different from what happened with Actemra in the past.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [39]

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So you know the number of patients and there aren't many? And given the current sales level, you would not start resupply right away. Is my understanding correct?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [40]

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Yes. That's also our understanding.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [41]

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The second question is not directly related to the financial performance. You have made a press release on the construction of a new manufacturing building for API for middle molecule drugs. Last time, when you announced the midterm business plan, there was no mentioning of this investment, yet you've made this decision not long after you announced the midterm plan. Does this mean there have been a major breakthrough with middle molecule drugs? I'm just wondering.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [42]

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In our IBI21, we said that we would like to bring at least 1 middle molecule to clinical stage within 3 years. On our Okemah premise, for manufacturing method development of small and middle molecules, we are constructing a new synthetic research building from last year with an investment of JPY 4.5 billion in total until 2020. So that's under construction. The announcement made this time is about our Fujieda premise. We have decided to build a production building for APIs, mainly for clinical studies of both small and the middle molecules. This starts from this year until 2022. Of course, to design facilities of this kind takes time. We are making this announcement externally at this particular timing because we have completed a due process for making such capital investment internally. So research of middle molecule is steadily making progress as planned. So this announcement is not meant to hint at any major breakthrough.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [43]

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I see. About the timing of starting a clinical trial for middle molecule, is it going to be after the completion of the building to manufacture clinical study drugs there? Or if it is just clinical trial drugs, can you also consider outsourcing to manufacturer for you.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM - Finance Supervisory Division, Finance & Accounting Dept. & IT Supervisory Division [44]

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As middle molecules will be manufactured through our proprietary technology, we'll be producing them by ourselves. And of course, we have to start manufacturing APIs for study drugs before a trial starts. So the facilities will have to be up and running before clinical trials start. So that's what we are aiming for.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [45]

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My final question is about Telomelysin. Such an oncolytic virus as a modality is attracting much attention nowadays, as it also explored in combination with checkpoint inhibitors and other companies are also attempting to develop their oncolytic viruses. Against the background of such competition, what was the factor for you to pick Telomelysin? You also hold option rights for developing this overseas. If you had to exercise the option right overseas, does that mean Roche would inevitably be in the position to decide whether to develop this overseas? What is the scheme there?

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Minoru Hirose, [46]

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This is Hirose speaking. As to the first question, as already explained in the presentation, Telomelysin is highly selective of tumor, which differentiates this -- the rest from others. About whether to exercise the optional right, we will for sure look at the data carefully to decide. And if, after looking at the data, we have to decide to exercise the right, Roche would be a natural candidate to develop this globally.

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