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Edited Transcript of 4519.T earnings conference call or presentation 26-Jul-19 1:00am GMT

Q2 2019 Chugai Pharmaceutical Co Ltd Earnings Presentation

Tokyo Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Chugai Pharmaceutical Co Ltd earnings conference call or presentation Friday, July 26, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Osamu Okuda

Chugai Pharmaceutical Co., Ltd. - Executive VP and Co-Head of Project, Lifecycle Management Unit & Foundation Medicine

* Tatsuro Kosaka

Chugai Pharmaceutical Co., Ltd. - President, CEO & Representative Director

* Toshiaki Itagaki

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

* Yasushi Ito

Chugai Pharmaceutical Co., Ltd. - Executive VP and Co-Head of Project & Lifecycle Management Unit

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Conference Call Participants

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* Fumiyoshi Sakai

Crédit Suisse AG, Research Division - Research Analyst

* Hidemaru Yamaguchi

Citigroup Inc, Research Division - MD and Analyst

* Kazuaki Hashiguchi

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Seiji Wakao

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

* Shinichiro Muraoka

Morgan Stanley, Research Division - Research Analyst

* Tatsuyuki Arai

BofA Merrill Lynch, Research Division - Junior Analyst

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Presentation

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Tatsuro Kosaka, Chugai Pharmaceutical Co., Ltd. - President, CEO & Representative Director [1]

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Good morning, ladies and gentlemen. I am Tatsuro Kosaka, President and CEO of Chugai Pharmaceutical Co., Ltd. Let me review the results of the first half of fiscal 2019.

The first half went quite well, making better progress against the full year plan than we had expected, as we started out on IBI 21. We achieved a significant year-on-year increase in revenues and operating profit. Revenues came in with JPY 320.3 billion between January and June 2019, up 12.3% year-on-year, with a progress ratio of 54.1% against the full year target. Core operating profit grew by 44.6% to JPY 103.5 billion, achieving a progress of 72.4%.

One of the reasons for this excellent result is that HEMLIBRA enjoyed strong local sales overseas, bringing in a better-than-expected increase in royalty revenues. The second reason was just as strong domestic sales, led by growth in new products, such as HEMLIBRA, TECENTRIQ and Gazyva and in mainstay products, including Perjeta and Alecensa.

In IBI 21, in order to accelerate corporate and social development through innovation focused on innovative products, we have set 5 strategies in accordance with which I would like to walk you through the progress we have made so far.

First, on value creation, value delivery and personalized health care, let me talk about the progress in our development projects. We obtained approval for HEMLIBRA for its indication of hemophilia A without inhibitors in Europe. At the same time, we are granted approval for dosing schedule of once every 2 weeks and every 4 weeks, thus getting approvals for all major indications in Japan, U.S. and Europe. As for Rozlytrek or entrectinib, for its generic name, we obtained 2 more agnostic approval for NTRK positive solid tumors in Japan. The approval was given in Japan ahead of anywhere else in the world. We also filed for approval of the drug for the indication, ROS1 positive NSCLC.

Nemolizumab was licensed out to Maruho in Japan and achieved primary endpoint in its clinical study for atopic dermatitis in Japan. Galderma, to which we have licensed it out for overseas territories, is scheduled to start a Phase III clinical study soon.

Telomelysin is an oncolytic virus, licensed in from Oncolys BioPharma. We entered into an agreement and acquired a 3.31% stake in the company as well. It has been designated for SAKIGAKE for combination therapy, with radiation for esophageal cancer. We also obtained approval for Actemra for additional indications of cytokine release syndrome and Adult Still's disease. We have filed for approval for an additional indication of ALCL or anaplastic large cell lymphoma for Alecensa. In Personalized Health Care area, FoundationOne CDx Cancer genome profile was launched on June 3, and order taking has already been started. It was granted an additional approval as a companion diagnostic for Rozlytrek for the treatment of NTRK fusion positive solid tumors.

In October this year, Digital and IT Supervisory division will be established, designed to lead a company-wide IT and digital strategies in a more centralized fashion. Thus, projects under IBI 21 have been making steady progress in the first year.

Next, on structural reform and strengthening of sustainable platforms. We have decided to transfer businesses of one of the long-term listed products, Oxarol dermatological products, to Maruho and domestic and overseas businesses of Ulcerlmin to Fuji Chemical Industries so that we will be better organized to focus more on new products. For the past 5 years, we have carried out business transfers of 19 products in all.

We have also decided to outsource Pharmaceutical Products Logistics business to Mitsubishi Logistics Corporation. Chugai Distribution Co., Ltd., one of Chugai's subsidiaries with about 50 employees is planned to be dissolved. We also studied the possibility of full outsourcing of packaging operations for both products launched and drugs under the clinical trials so that internal human resources can focus on more value-added work. And we entered into an agreement with Bushu Pharmaceutical and several others may follow.

As you are aware, we have been providing early retirement program aimed at two objectives: a, providing support for employees seeking for a new life plan; and b, addressing the company's management issues in the fast and dramatically changing business environment. 172 people signed up and retired at the end of June. Last month, we held our first ESG meeting, where we explained about our approaches in ESG to our stakeholders.

The total of global sales or local sales in countries outside of Japan for 3 in-house products reached JPY 300 billion at the end of last year and went well in the first half as well. In IBI 21 outlook for overseas, while factoring in Actemra's maturation, we project dramatic growth in global sales of Alecensa and HEMLIBRA.

As part of key activities for future growth, we are making active investments in research and production functions. Chugai Life Science Park Yokohama is aimed at integrating research function platforms to establish a global base for researches. We plan to close the current Gotemba and Kamakura Research Laboratories. The total investment is JPY 127.3 billion, with the expected completion year in 2022. But if the land cost is included, the investment will surpass JPY 170 billion. Its design has incorporated environmental considerations, such as the reduction of CO2 emissions.

Manufacturing building for small and middle molecule APIs will be built in Fujieda plant in Shizuoka prefecture. The purpose is to enhance our capability of high potency, middle and small molecule APIs, especially for clinical studies. The total investment is expected to be JPY 18.2 billion with scheduled completion year to be 2022. It is expected to adopt advanced containment facility.

Let me now summarize the result of fiscal 2019 first half. The financial performance exceeded our expectation of full year forecast. Development projects and structural reforms to fundamentally prepare ourselves for an extremely challenging business environment expected going forward are progressing as planned. We also initiated key activities and upfront investments for future growth. Thus, it is fair to say that we made a great start in IBI 21 to achieve the goals in the midterm business plan.

That is all from me. Thank you for your attention.

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

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Good morning. I am Toshiaki Itagaki, CFO of the company. Please move to Page 10. I will give you the overview of the financial results, but this page is a single-page summary and overlaps with what was covered by President Kosaka's presentation. And so I would like to skip this slide and move to Page 11 and take a closer look at the financial results.

This page shows the financial overview, represented on the core basis. Revenues increased year-on-year for eight consecutive years in terms of first half to first half comparison, and the net income for 3 consecutive years, both achieving the highest ever for the company. Starting from the top row, revenues posted JPY 320.3 billion, up JPY 35.2 billion or 12.3% year-on-year. Of this, sales came in at JPY 282.4 billion, up JPY 26.8 billion or 10.5%. The increase in sales of JPY 26.8 billion consists of JPY 18.9 billion in domestic sales and JPY 7.9 billion in overseas, both showing a strong growth.

In Domestic business, our company as a whole was subject to a 6.7% reduction in drug price in the NHI price revision in April last year. Taking this into consideration, approximately we have posted a 12% increase in sales in terms of the volume. New products, such as HEMLIBRA, TECENTRIQ and Gazyva as well as Alecensa, Actemra, Perjeta, Edirol and other major products, all demonstrated solid growth in sales.

In the overseas sales, we enjoyed a positive performance in the export of Alecensa to Roche, resulting in a 12.2% growth in the total overseas sales. As for royalty and other operating income, while we saw the income for HEMLIBRA increase, there was a decrease in other operating income due to the absence of the onetime income in the previous year from the transfer of long-term listed products. With those factors netted each other, we achieved a growth of JPY 8.4 billion in this category.

In the cost of sales, the share of Chugai original products has been increasing, leading to a cost of sales ratio of 45.1%, which represents an improvement of 5.2 percentage points year-on-year. As for the operating expenses, as we have been proactively investing in R&D, a total of JPY 4.3 billion increase was recorded. As a result, the operating profit increased by 44.6% year-on-year to reach JPY 103.5 billion, with operating margin of 32.3%. It was our first time to see the operating profit exceed JPY 100 billion and operating margin surpassed 30% in the first half of the year. When you subtract the financial account balance and the income taxes from the operating profit, you will get the net income of JPY 75.1 billion, up JPY 22.5 billion or 42.8% year-on-year.

At the last line, EPS, though there was no major change in the outstanding number of shares, because we made a joint venture with Sanofi Aventis in France, a wholly owned subsidiary, allowing us to record the whole amount of net profit from the subsidiary as profit attributable to the owners of the parent. We have seen further improvement of 43.9%.

The following slide shows the breakdown of changes in product sales. On the left, you can see the sales by disease area. The blue on top is overseas, which is the sum of export sales and the overseas sales of Chugai's territory. The total was JPY 72.4 billion, up 12.2% year-on-year. On the right, you can see sales by product, listed in the order of the size of year-on-year changes. As blue item, Alecensa overseas on the top, recorded the biggest growth year-on-year, with an increase of JPY 9.6 billion or 93.2%.

Going back to the left graph, domestic sales totaled JPY 210 billion, up JPY 18.9 billion or 9.9%. By disease area, green at the bottom is oncology, up 8.4%. By product, as shown on the right, third from the top TECENTRIQ and one below Perjeta, saw a big growth. By contrast, sales declined for Rituxan, which saw NHI drug price reduced by about 26.2% last year due to the loss of premium pricing status for new drug creation. Added with the effect of successful switching to our own Gazyva and the adverse impact of biosimilars, the Rituxan sales declined by 46.2%.

Towards the bottom of the slide, you can see the details of HER2 franchise. NHI drug price of Herceptin was reduced by 20.4% last year due to the loss of premium pricing status for new drug creation. But as the negative impact of biosimilars felt during this fiscal first half was limited, the sales decline was kept minimum at JPY 200 million.

Bone and joint, in purple, recorded a double-digit growth of 10.6%. By product, in-house products such as Edirol and Actemra, listed at the lower right, continued to increase sales. Renal diseases in yellow grew slightly by 1.2%. This was the first time in 11 years since 2008 that sales from renal disease area for the first half posted a year-on-year growth. Although it's not shown in the slide, by product, Mircera sales increased by about JPY 400 million.

Lastly, but not the least, Others, in gray, was up 21.9%. By product, domestic sales of HEMLIBRA, launched in May of last year in Japan, totaled JPY 9 billion, up JPY 8.5 billion. Tamiflu for government stockpiles was up JPY 3.1 billion, while Tamiflu for ordinary use was down JPY 3.5 billion due to the negative impact of competition and generics.

In summary, in-house product sales were strong, both in Japan and overseas. Added with market penetration of new products, this proved to be a strong first half in all disease areas.

Slide 13 shows the variance analysis of the operating profit. Starting from the left chart, operating profit increased by JPY 31.9 billion during the first half. Gross profit from sales alone accounted for the increase of JPY 27.9 billion. Main reasons were, as described in the middle section of the right chart, the increase in sales and the improvement in cost of sales ratio, resulting from a change in product mix.

Next is royalties and other operating income. As the momentum of sales growth of HEMLIBRA by Roche far exceeded our expectation, royalty income increased steadily to more than offset the negative impact of the transfer of the long-listed drugs last year, bringing about the net profit increase of JPY 8.4 billion.

Expenses are divided into three parts. Marketing and distribution expenses were JPY 300 million less this year, and thus, contributed to profit by JPY 300 million. The reason was that when consolidating the cost of the sales subsidiaries, we convert the expenses into Japanese yen, and because the yen appreciated year-on-year, the amount in yen terms turned out to be less. Research and development expenses increased by JPY 3.9 billion as projects progressed smoothly.

At the beginning of the year, we explained that the full year R&D expenses are projected to increase by JPY 7.8 billion. At the halfway point, at the end of June, year-on-year increase was JPY 3.9 billion, a half of that projected full year increase of JPY 7.8 billion, so we can say that we are progressing just as we had planned. General and administrative expenses were higher as the business tax portion of value-added tax increased resulting from the profit increase.

Page 14 is the financial overview for the second quarter alone, for 3 months from April to June. The momentum for sales and profit growth during this quarter was stronger than the momentum felt during the first quarter. For example, the third line from the top, domestic sales, grew 12.6% year-on-year. Since last year's drug price revisions became effective in April, year-on-year comparison of the April to June quarter reflects the true domestic sales growth, since there was no disadvantage of drug price revisions this year. The 12% growth on a volume basis that I mentioned earlier, is consistent with the growth shown here.

Next is other operating income. As explained earlier, a year-on-year decrease on a half year basis due to the non-recurrence of onetime income recorded in the first quarter of the previous year, coming from the transfer of long-listed drugs. However, looking only at the second quarter, other operating income was up JPY 2.9 billion. All in all, quarterly operating profit increased by JPY 26.9 billion to total JPY 55.7 billion, nearly double that in the previous year.

Page 15 shows the progress against the full year forecast announced at the beginning of the year. Both revenues and profit progressed faster than in the previous year. The third line from the top, domestic sales, 47.8% last year versus 54% this year, clearly representing a faster progress this year. There were three reasons for the faster progress. The first is the -- the first is that the effects of repricing and biosimilars felt during the first half were less than we had expected. More specifically, since our forecast incorporates the repricing of Actemra and others from the second half, that has the effect of inflating the progress rate during the first half.

Another factor was that the launch of biosimilars to Avastin did not come about during the first half, contrary to our expectation. And a biosimilar to Herceptin was not awarded approval for the 3 weekly or Q3W dosing regimen during the first half. Due to these reasons, progress was favorable during the first half. That's reason one. The second is that following the consumption tax hike, NHI drug price revisions are expected in October. And that expectation hastened the progress in the first half. The third is that the actual performance was far better than our projection. More specifically, domestic new products such as TECENTRIQ and mainstay products, such as Perjeta and Actemra were very strong. These three factors strongly drove the progress of domestic sales during the first half.

Among the royalty and profit share income driven by very strong sales of HEMLIBRA by Roche, royalty income exceeded our projection. Other operating income was generally in line with our forecast. Although given that these are one-off and event-driven in nature, it's hard to say whether the progress rate of 69.1% is favorable in and of itself.

As for cost of sales, as described in the right-hand note, a portion of royalties included in the current year forecast was not recognized in the first half as the negotiation is still underway and has yet to be concluded. That is one reason why cost of sales ratio was lower than the forecast because it is not included in the first half. Due to these factors, progress of operating profit was 72.4% of the full year forecast.

According to the timely disclosure requirement under the TSE rules, if sales change by plus or minus 10% or profit changes by plus or minus 30%, the company is to immediately revise the forecast. But the current internal forecast indicates that we have not met that requirement. And therefore, we have not revised the full year forecast announced at the beginning of the year.

Next slide shows the product sales progress against the full year forecast. All in all, there were many products that progressed better than last year. They are divided into three groups. First is the product that recorded very strong sales, which included Perjeta and TECENTRIQ in oncology, HEMLIBRA, domestic and others and Alecensa overseas. The second is the products that saw strong performance in the first half, mainly due to the factors incorporated in the second half projection, such as repricing, NHI drug price revisions and the impact of biosimilars and others. This group included Avastin and Herceptin in oncology, Actemra in bone and joint and Mircera in renal disease. On the other hand, 3 products were behind the forecast, all in the oncology area, Alecensa and Tarceva, for which the plan proved to be somewhat ambitious; and Rituxan, which was affected by successful switching to our own Gazyva and which felt somewhat large impact of biosimilars. These are the three items whose progress was behind the full year forecast.

That's it for the financial overview. And I have two more slides to cover. The first is the overview of financial position.

Starting from the bottom left, total liabilities, JPY 31.5 billion more than at the end of last year. One line above, the total assets were JPY 67.1 billion, which grew at larger amount than the liabilities. Total net assets increased by JPY 35.7 billion since the end of last year, with the balance at the end of June totaling JPY 792.2 billion. About 70% of that, JPY 550 billion, was NOA or net operating assets, indicated with the double underline in the middle. Meaning, the net of operating assets and liabilities accounted for 70% of the total net assets.

Among the items listed above the double line, property, plant and equipment was the largest in balance at the end of June and represented the largest change from the end of last year. This was mainly in relation to the new construction of Life Science Park Yokohama, which accounted for an increase of over JPY 200 billion -- or JPY 20 billion.

Right below property, plant and equipment is the right-of-use assets, the amount of which was 0 at the end of last year and JPY 11.5 billion at the end of June. This item reflects the adoption of IFRS 16 lease accounting from this year, as described on the right. With this adoption, these assets, called right-of-use assets, have been recorded on the asset side, and lease liabilities have been recorded on the liability side, thus increasing both sides of the balance sheet. The remaining 30% of the total net assets was the fourth line below the double line, net nonoperating assets. Most are net cash held as cash and deposits and investment securities. Net cash was JPY 261 billion, up JPY 11.8 billion from the end of last year. I will describe the breakdown using the next slide.

The large upward arrow on the left graph is operating profit after adjustments, that is the operating profit on the P&L, on which depreciation expenses with no cash out is added back. Cash in from operating activity was JPY 112.3 billion, from which increase in net working capital and investment are subtracted, resulting in operating free cash flows of JPY 65.3 billion in 6 months. Then, income tax is paid from it, resulting in free cash flows and year-end dividends of JPY 30.1 billion were paid and overall, cash increased by JPY 11.8 billion in 6 months, resulting in the net cash of JPY 261 billion.

That is all for the explanation on the main part, but I have 2 pages of appendix and I'd like to explain it.

Page 20 shows noncore items, which were included in the main part until last year. On the right, intangible assets are usually generated every time, and it is JPY 3.1 billion in total this time. Underneath it is others and first one is early retirement incentive program of JPY 5.1 billion. 172 people retired at the end of June and this is the expense related to that.

Next line is restructuring of JPY 0.3 billion. As we announced on May 21 in the press release, we are going to establish Chugai Life Science Park Yokohama and we are going to close the existing research labs in Gotemba and Kamakura at the end of 2022. Thus, the completion of depreciation for existing facilities and buildings in these 2 sites are moved forward to the end of 2022. So the depreciation amount is increased and the increase due to the accelerated depreciation is recorded as a noncore item. The total amount is JPY 12.2 billion in 4 years. In this year, the amount between May 21 and the end of June is about JPY 0.3 billion and full year amount this year is about JPY 2 billion. From next year through the end of 2022, the amount is about JPY 3.4 billion non-core item every year.

Last slide is the impact from foreign exchanges. Many transactions with foreign currencies were hedged last year and this is not a big difference from the plan. So the impact on the operating profit in the first half year was about minus JPY 1.0 billion.

That's all for me. Thank you.

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Yasushi Ito, Chugai Pharmaceutical Co., Ltd. - Executive VP and Co-Head of Project & Lifecycle Management Unit [3]

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I'd like to discuss the status of development pipeline. The first slide shows the projects in oncology, bone and joint and renal areas. As usual, the red stars indicate the changes from April. Phase III study started with TECENTRIQ for NSCLC neoadjuvant therapy in addition to adjuvant therapy. Next is the projects in autoimmune, neurology and other areas. Newly added in the Phase I is the RG7314 balovaptan for autism spectrum disorder. I will discuss the details later.

This slide summarizes the major topics in Q2. Actemra was approved for Adult Still's disease, which is an autoimmune disease with strong systemic symptoms, and there is no approved drug available for this disease after the patient becomes steroid resistant and there are very high unmet needs. Next line, Rozlytrek was approved for NTRK positive solid tumor. Together with it, F1CDx cancer genome profile received an additional approval as a companion diagnostic for Rozlytrek.

Next, Alecensa was filed was for approval for recurrent or refractory ALK-positive anaplastic large-cell lymphoma, ALCL, in June. Orphan drug designation was granted for this compound. I will discuss the study results for Rozlytrek, HER2 franchise and HEMLIBRA later.

On the other hand, we decided to discontinue the development of Actemra for systemic sclerosis. The main reason is that the primary endpoint for global Phase III study, focused study, was not achieved. But secondary endpoints, especially the improvement of respiratory function showed positive results as presented at scientific meetings. Since positive results were obtained in improvement of respiratory function, that is an important factor among high unmet medical needs in systemic sclerosis, we have been searching for some way to take advantage of the data but eventually gave up.

The first, I would like to explain about RG7314 balovaptan, for which Phase I study started. Balovaptan is a vasopressin 1a receptor antagonist, and it is being developed for autism spectrum disorder or ASD. ASD is characterized by core symptoms, including impairments of social interaction and communication and restricted repetitive pattern of behavior, interest of activities. In addition to that, associated symptoms shown on the slide are observed. Overall prevalence rate is estimated to be about 1%, but there is no approved drug that improves the core symptoms. Vasopressin is known to play an important role in social behaviors and stress control via vasopressin 1a receptor in the brain. By suppressing the function of the vasopressin 1a receptor in the brain, balovaptan is expected to promote social behaviors and help with social and communication challenges of people with ASD.

This slide shows the results of Phase II study, VANILLA study, to evaluate the efficacy and safety of balovaptan in adult ASD. As shown on the right, secondary endpoint was Vineland Adaptive Behavior Scale to assess the living skills through interviews with caregivers, and efficacy of balovaptan was shown here. Based on the results of VANILLA study, we agreed with FDA to make the Vineland Adaptive Behavior Scale as the primary endpoint and balovaptan was designated as a breakthrough therapy. If we are able to verify the results of VANILLA study, balovaptan potentially is the first drug that improves the core symptoms of impairment of social communication and interaction in ASD.

Rozlytrek was approved with FoundationOne CDx as its companion diagnostic for NTRK fusion gene positive advanced and recurrent solid tumors. The indication is not specific to cancer types such as breast or lung cancers, and Japan was the first country to get the approval. The diagram on the right shows what is meant by across different tumors. Blue shows patients with NTRK positive tumors that is present across different organs. This product has a good match with our strategy to realize an advanced personalized health care. We experienced a SAKIGAKE review for the first time for this drug. It is designated as breakthrough therapy in the U.S. and Prime in EU and we expect swift reviews overseas.

The results of STARTRK-NG study were presented at ASCO this year. It was to evaluate the efficacy of Rozlytrek for NTRK, ROS1 or ALK fusion gene-positive solid tumor in children and adolescents. The graph on the left shows the response rate, and colored bars show fusion gene-positive cases and gray bars show fusion gene-negative cases. If one of NTRK, ROS1 or ALK fusion gene is positive, response rate was 100% and efficacy was maintained with no relapse. On the other hand, there were no efficacy in patients with no fusion, and the results were very clear. There were 11 cases with NTRK, ROS1 or ALK fusion gene, shown on the left graph, and 5 of them had primary high-grade CNS tumors. All case responded, including 2 complete response cases. Also, in remaining 6 cases, all case responded. Rozlytrek was designed to cross blood-brain barrier to show its effects, and the concept is reflected in these results.

The graph on the right shows PFS, progression-free survival data. The purple line represents the cases with NTRK, ROS1 or ALK fusion Gene. The results suggest very strong efficacy, although the sample size is small now.

This slide shows recent presentations related to HER2-positive breast cancer. The graph on the left shows the final analysis results of CLEOPATRA study presented at ASCO this year. The median follow-up period was 99 months, and maximum follow-up period was 120 months. CLEOPATRA study is a Phase III study to evaluate the add-on effect of Perjeta to naive HER2-positive metastatic breast cancer patients being treated with Herceptin plus chemotherapy. Based on these results, Perjeta was approved for HER2 positive unresectable or recurrent breast cancer in June 2013. Also, treatment regimen with Perjeta used in CLEOPATRA is currently considered the standard of care for HER2-positive metastatic breast cancer in treatment-naive patients. The final analysis of CLEOPATRA study showed the OS at 8 years was 37% in Perjeta add-on arm and 23% in control arm, as shown on this slide.

The results of KATHERINE study, shown on the right, was presented at San Antonio Breast Cancer Symposium at the end of last year. KATHERINE study is a Phase III study comparing adjuvant therapy with Kadcyla alone and Herceptin alone in patients with HER2-positive breast cancer who did not achieve pathological complete response with neoadjuvant therapy. Kadcyla reduced the relative risk of death or recurrence, extending the invasive disease-free survival period, as shown on the slide. At 3 years, 88.3% of those who received Kadcyla did not have breast cancer recurrence, but the ratio was 77% in Herceptin group.

Based on these results, Kadcyla was designated as a breakthrough therapy in U.S. and was approved in May this year after a very short 12-week review period. This is the first approval obtained by Roche utilizing real-time oncology review pilot program. The details of the study was published in New England Journal of Medicine in February this year. Although no patients participated in KATHERINE study from Japan, we are making preparation now to be able to deliver a new treatment option in Japan for high-risk patients not achieving pathological complete response. These results show a long-term commitment of Roche Group for breast cancers, especially HER2-positive breast cancer. It has led to the filing of additional indication of metastatic triple-negative breast cancer for TECENTRIQ based on IMpassion130 study last December and development of ipatasertib in Phase III.

At ISTH, International Society of Thrombosis and Hemostasis, the results of combined analysis of global Phase III HAVEN studies were presented. It is the long-term follow-up data of HAVEN 1, 2, 3 and 4. Long-term follow-up data for 400 cases of hemophilia A of all ages with or without inhibitor show that median annualized bleeding rate 0 is stably maintained even after 25 weeks of treatment, as shown in the orange bars on the left.

The graph on the right shows the number of joint bleeds requiring treatment. As indicated by the dark blue bars, over 87% of patients had 0 bleed requiring treatment during each period after week 25. This data suggests that HEMLIBRA prevents the joint injury that is a major unmet medical needs in hemophilia, making it possible to protect joints for a long time.

This slide shows projected submissions filing for application of Kadcyla adjuvant therapy for breast cancer that I discussed earlier is expected to take place within this year. We also plan to file globally for satralizumab, SA237, for NMOSD. Prefiling meetings with each regulatory authority is taking place smoothly.

In 2020, in addition to TECENTRIQ, we plan to file for risdiplam for spinal muscular atrophy and ipatasertib for breast cancer indication as well.

As indicated in the footnote, nemolizumab for atopic dermatitis has been licensed out to Galderma for overseas and Maruho for Japan. Maruho announced that Phase III study in Japan showed the positive results, and we have been informed that overseas Phase III study will be started soon.

Lastly, filing time of TECENTRIQ as advanced therapy for NSCLC was put off slightly because of the revision of the plan due to the design changes of the study. There is no change about the situation of the development request for unapproved drugs and indications.

That is all from me.

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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. My first question has to do with the general impression of the financial results. Both speakers kept saying the result was better than expected. I understand you have not changed your full year forecast this year, but my memory tells me that you're required to make a timely disclosure when you have outperformed your internal underscore sales target by 10% and profit target by 30% in the interim earnings. Have you exceeded your targets in the first half by that much or not?

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Unidentified Company Representative, [2]

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First of all, there is no such rule. And what you need to compare your current result to is the full year results of the previous year. But that rule only applies when you have not disclosed the full year forecast for the current year. We did disclose our forecast for this year, which makes it necessary for us to compare our result only to that forecast.

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

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If there is no such rule, that's fine. But if there were, which you have disclosed, all I can say is we are better than expected in terms of the progress, but I cannot say we were better by how much, like 10% or 30%.

My second question. The strong performance in HEMLIBRA is especially noteworthy. Roche gave us a lot of information about the U.S. on the conference call yesterday. My question is about its share in the Japanese market. In June, the permission for long-term prescription was granted, and you posted sales of about JPY 9 billion. So you must have reached a share of at least roughly 20%, in my view. Roche told us that it reached 14% in the U.S. But are you doing even better in Japan? And what about inhibitor and non-inhibitor markets? If you can share with us as far as possible, that would be appreciated.

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Osamu Okuda, Chugai Pharmaceutical Co., Ltd. - Executive VP and Co-Head of Project, Lifecycle Management Unit & Foundation Medicine [4]

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Thank you for your question. I am Okuda. Let me answer that question. With regard to the reasons for strong performance of HEMLIBRA, we obtained approval for use in non-inhibitor patients last year. Especially, patients with difficulty to find the appropriate vein for injection and to control bleeding turn out to be more than expected. That is where HEMLIBRA was used heavily. Especially for non-inhibitor cases, among pediatric patients aged under 10, the drug was penetrating faster than we had expected.

On June 1, the long-term prescription was permitted, which allowed patients who have been administered with HEMLIBRA by May to be given up to 3 months' worth of prescription. Because of this, its sales appeared to have increased temporarily in June. We have not seen a significant increase in new patients for HEMLIBRA so far just because it is now allowed for long-term prescription. We will closely watch how things play out going forward, but we expect the current trend to continue.

As for the sales share, we have not disclosed the specific numbers, but in the U.S., it has reached 14% for our total market of inhibitors and non-inhibitors. And we believe our share in Japan is equivalent to that in the U.S.

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

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My last question. Last time, you told us HEMLIBRA was used by more than half of the 200 patients with inhibitors. Has it changed since?

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Unidentified Company Representative, [6]

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Well, about 4% of hemophilia A patients have inhibitors, and of those, more than 100 use HEMLIBRA. More than half, yes.

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

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My last question is about satralizumab and NMO. You have explained to us several times, but NMO is an extremely rare disease in Japan and there are only about 20,000 cases globally, according to Roche. What kind of impact does this drug have on the treatment? It may be inappropriate for me to ask about the size of the sales, but if you have any specific level of expectations you already have, could you share that with us? Especially in relation to MS or multiple sclerosis, I have heard once that there may be more patients than people have thought.

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Unidentified Company Representative, [8]

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With regard to MS, there are more patients in Europe and U.S., especially in the northern parts, while there are very few in Japan. And vice versa for NMO patients, more in Japan and less in Europe and U.S. At least that's what was believed previously. However, once we started clinical studies overseas, we found more patients than expected.

As for the impact on the treatment in NMO, if there is an attack on optical nerves or spinal cord, especially if the attack is on optical nerves, it can cause blindness. And therefore, it is definitely a serious disease. There are no drugs approved for NMOSD so far. Therefore, in the sense that to those patients who have never been treated with approved drugs, satralizumab and several other drugs can be offered now, we believe it's significant and somewhat hopeful. Does that answer your question?

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

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You're saying there are more patients overseas?

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Unidentified Company Representative, [10]

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We suspect there may be more patients overseas than previously thought. There is something I forgot to mention earlier. I touched on the epidemiology of multiple sclerosis and NMO, but in most cases, the doctors who see the patients of the 2 diseases are the same. In overseas and in Japan, neurologists who treat MS patients often treat NMO patients as well. You can say NMO has some commonality with MS in that sense.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [11]

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Hashiguchi from Daiwa Securities. I have several questions. Firstly, on the revenue from Roche on HEMLIBRA. I would assume exports here represent those shipped last year and received this fiscal year. When do you expect the new round of shipments to begin? And I believe the amount of those posted as export sales out of the initial shipments is increasing. When do you expect this to be over? Could you give us updates considering more recent developments?

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Unidentified Company Representative, [12]

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At the beginning of this fiscal year, when we issued guidance for this year's transactions, we had a full year forecast of JPY 2.4 billion for exports of HEMLIBRA to Roche. All of this had already been shipped by the end of last year, and they are being recognized as export sales in accordance with the timing of their receipt by Roche. In the first half, we posted JPY 1.6 billion, which is mostly within our initial assumption. On the other hand, sales by Roche to their customers are going better than we expected, as was described by Roche as strong. Accordingly, we have shipped our products, including those on inhibitors. But if that is not enough, then our export sales at the ordinary price instead of the initial shipment price could be posted in this fiscal year. But for now, we do not expect that to happen. I stress for now, though, depending on how Roche's sales to their customers will be going forward, we cannot tell what will happen. But at least at present, we are not in a position to change that.

Based on Roche's sales to their customers, we are supposed to receive payment to settle the difference in initial shipment price, which we internally call royalty 2. This amounts approximately to JPY 24.4 billion for this year. We cannot disclose the actual amount, but Roche's sales to their customers are strong, and therefore, royalty 2 has been posted for more than we expected. If things go as they are right now, we expect royalty 2 to exceed the planned JPY 24.4 billion for the full year.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [13]

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Don't you know when royalty 2 will end?

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Unidentified Company Representative, [14]

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No. At this moment, we do not believe it will end by the end of this year.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [15]

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I see. My second question, you explained in detail about the expected impact by the new research facility in Yokohama to 2022. What about 2023 and onward? What sort of impact of the expenses do you expect on the profit and loss for each fiscal year, including depreciation expenses to be incurred? Could you give us some guidance?

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Unidentified Company Representative, [16]

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The impact associated with accelerated depreciation will continue to 2022. Beyond that, we have not incorporated in our forecast any impacts that might happen from the closure of former Kamakura and Gotemba laboratories for now. This is because we will not use the facilities anymore. And so the question is whether we will leave the buildings as they are or dispose of them and who we will sell them to. We have not figured this out yet. But after 2023, a total of JPY 127.3 billion in capital investments will be made on the property and equipment in Yokohama, which should lead to depreciation expenses to be incurred. But at the moment, we do not disclose how much the depreciation expenses are.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [17]

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I see. My last question is about when to file for the combination therapy for Avastin and TECENTRIQ for hepatocellular carcinoma. Roche said there will be a readout of the data this year and make submission this year. But your document indicates that it will be done in 2021. I assume both of you are talking about the same clinical study. So it is because the data package required for filing are different?

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Unidentified Company Representative, [18]

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Basically, we are participating global clinical studies, and so we will probably review our domestic filing strategy in accordance with the global filing strategy.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [19]

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Muraoka from Morgan Stanley MUFG Securities. In relation to HEMLIBRA, I have a question on your thoughts on R&D or therapeutic direction overall. Now results of various gene therapy studies are being released. But on the other hand, some in the market are of the view that gene therapies are effective for only about 5 years. Now objectively speaking, how do you think the different medical needs will be addressed effectively between the 2 approaches, HEMLIBRA versus gene therapies?

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Unidentified Company Representative, [20]

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Yes, some results of gene therapy studies are being presented overseas. And they indicate that some efficacy is observed. But still, over a long term, coagulation factor VIII activity declines gradually, at least some data seem to indicate that tendency. So sustaining efficacy in a stable manner over a long term seems to be a major challenge for gene therapies going forward, along with the safety aspect. That is how I perceive of gene therapies.

Having said that, given the nature of hemophilia, gene therapy does seem to make sense. Although it's not yet finalized, there is a pending acquisition of Spark Therapeutics by Roche. So gene therapy is certain to become one of the alternatives of hemophilia treatment. But there's also a price issue or therefore different diseases. Some gene therapies have been priced extremely high in the U.S. So I think there are many difficult challenges that need to be cleared.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [21]

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You just mentioned Spark Therapeutics acquisition is still pending, and you haven't decided whether to opt in. But should you decide to opt in, in the future, some will resort to gene therapies, while HEMLIBRA will be the mainstream treatment. Is that the picture you have in mind?

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Unidentified Company Representative, [22]

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Well, in light of hemophilia franchise, I think those approaches can exist, catering to different needs effectively. But as you have correctly described, the deal has yet to be closed. So it's rather difficult to answer a hypothetical question.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [23]

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I see. What are the frontline sales reps telling you about the feedback from doctors? If you don't mind me asking that question. Visibility of gene therapies has strengthened over the past year or so. So in interacting with Japanese doctors in relation to HEMLIBRA, are they noticing any differences in doctors' response to gene therapies over the last 6 or 12 months compared to a couple of years ago or not so much difference, at least in Japan?

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Unidentified Company Representative, [24]

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Thank you for your question. Gene therapies, particularly for hemophilia treatments, how has expectation or appreciation changed is your question. Various data presented internationally and doctors specializing in hemophilia are watching and following these developments. But in terms of safety and long-term administration and sustainability, some doctors are expressing their intention to look at the data carefully. That's what I'm hearing.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [25]

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I see. My next question is on R&D. Now that we've seen the big success of HEMLIBRA, we are tempted to look for the next success in the development pipeline. It used to be you would give us some guidance on what to expect from Singapore, like 2 agents by such and such date. Can you give us some similar information, anything interesting in the pipeline with some specific time frame?

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Unidentified Company Representative, [26]

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As Chugai's R&D, we started from small molecule and are now working in the antibody area based on various antibody technologies. And as the third pillar, we are focusing on middle molecule in our R&D activities. As envisioned in the IBI 21, our target is to have at least one middle molecule agent start the clinical study during the period under the IBI 21.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [27]

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Anything interesting to expect within the next 6 months, not necessarily middle molecule, 6 months to a year?

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Unidentified Company Representative, [28]

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We will be sharing information with you when we are ready to disclose. Among in-house projects, what was mentioned earlier -- and there was a question on it earlier as well as well -- Satralizumab awaits global filing, and there's also anti-C5 antibody, SKY59, which expects to enter Phase III in a not-so-distant future. In addition, nemolizumab for atopic dermatitis is under development by licensees and progressing steadily. And there's another licensed out agent, OWL833, new GLP-1 receptor agonist. We expect that the licensee, Eli Lilly, is about to start Phase I trial. So even with a quick glance, you will find several such candidates, albeit not as big as HEMLIBRA, but I think we do have a rather solid pipeline.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [29]

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Wakao from Mitsubishi UFJ Morgan Stanley. I have a couple of questions. First is on exports. You talked about HEMLIBRA export sales earlier. I have a question on Actemra and Alecensa exports. Up to the first quarter, Alecensa was strong and HEMLIBRA was strong during the first quarter because of the time lag in recognizing sales and slight decline in the second quarter. Can you elaborate on the progress for the first half?

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Unidentified Company Representative, [30]

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Actemra for the first half was down JPY 1.4 billion year-on-year. Export is not constant on a monthly basis. Shipments are made on a lot basis, and there are ups and downs, thus, declined year-on-year. But in our forecast, we are projecting growth and, in fact, currently, we expect our full year results to exceed the forecast. Global sales by Roche were strong, and with additional indication for giant cell arteritis, global sales were strong.

Alecensa grew very strongly year-on-year, progressing at a faster rate than our forecast. As you know, it is penetrating as a first-line treatment primarily in Europe and North America. And accordingly, our export sales are increasing.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [31]

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My next question is on Rozlytrek, entrectinib. Approval has been granted for the treatment of patients with NTRK fusion gene-positive solid tumors to be used regardless of their cancer type. So I suppose that going forward, with Roche as a key player, pan-tumor development approach will be more common. Now what do you think was the major reason for the approval? Is it because it is for extremely rare observed conditions? Or because of impressive data? ORR was 100%, and with 50 patients, the ORR was something like 60%. What was the main reason for the approval, do you think?

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Unidentified Company Representative, [32]

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I think it's both. The high efficacy was shown for treating rare cancers. It's not either/or. With rare cancers, it's very difficult to conduct clinical studies for each relevant organ. So I believe anti-rare cancer drugs will follow this approach going forward.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [33]

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I see. How many pan-tumor genes are reported so far? Can we assume that there are many so-called key genes that can be targeted going forward? And when Chugai -- or should I say the Roche Group accumulates data based on the foundation medicine through cancer and genome profiling and others and succeeds in finding a pan-tumor gene that affects a certain number of patients, not few, in other words, when such driver gene is identified, would you be granted approval for multiple tumors, do you think? Or would it be difficult unless it's for rare cancer, do you think?

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Unidentified Company Representative, [34]

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Given that cancer is caused by gene mutation, I think there could be quite a few. In fact, with FoundationOne CDx cancer genome profiling, 324 genes are being looked at as relevant genes. But the question is how much of a driver each gene is relative to different tumor types. So we don't know if we can develop anticancer drugs for all of 324 genes.

And the other question of whether this development approach will become more commonplace, I certainly think so because conventionally with rare cancer, finding cancer in itself was difficult. But with the spread of the next-generation sequencer, identification became possible. What this means is in a conventional approach, you collect cancerous tissue to check on genes one by one. But before you get to the frequency of 1% or 0.5%, the tissue will be used up, whereas with the next-generation sequencer, you can do a comprehensive profiling, which lets you find cancer. So the chances are higher.

Now does it have to be targeting rare cancer for approval? I think rather it will be based on safety and efficacy. As this approach becomes more common, patients who conventionally had been neglected in terms of treatment will now be provided with medication. That is indeed the essence of personalized health care that we pursue.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [35]

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This is Arai from Merrill Lynch. My question is about HEMLIBRA. Getting a good share in adult non-inhibitor is an important factor for growth of HEMLIBRA. In Japan, what type of adult patients have strong interest in HEMLIBRA? And conversely, what type of patients are not switching from existing treatment? If you have such market research data, could you share them with us?

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Unidentified Company Representative, [36]

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Thank you for your question. I'm sorry but we do not share the results of market research. What we know now is that penetration is faster in pediatric market, especially among patients with poor bleeding control because a venous route is not established. Conversely, the penetration is comparatively slower in patients with good bleeding control.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [37]

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Then is it faster or slower compared with the original plan?

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Unidentified Company Representative, [38]

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In pediatric, it's faster. Compared with the original plan, overall penetration is significantly faster.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [39]

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Regarding the cost of goods, the royalty that had been paid until last year has not been paid partially this period yet. How material is it? And is it going to be an upside factor in full year? Or are you going to pay eventually?

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Unidentified Company Representative, [40]

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Focus of cost-to-sales ratio for full year is 47% and first half is 45%. It is 5% points better year-on-year for the first half. One of the factors for the improvement is the royalty that you mentioned, which had been paid last year but not in this first half. It is included in the full year forecast but not paid yet, so the progress is slower and the cost-to-sales ratio is lower. It is up to our negotiation. If the amount that we planned at the beginning of the year is recorded in the second half, the cost-to-sales ratio in the second half will be high. So in terms of materiality, yes, there is, but it is already included in the full year forecast of 47%.

And as I mentioned earlier, in explaining the reasons of good results in the first half, the cost-to-sales ratio for the second half results will probably be worse than that of the first half because of combined effects such as the drug repricing and price revision. And in total, it will be about 47% or slightly less in full year.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [41]

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Is there a possibility that you may not have to pay in the second half at all?

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Unidentified Company Representative, [42]

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There is such a possibility depending on the negotiation.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [43]

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Lastly, regarding the pipeline, satralizumab again. I think Rituxan is used off-label. Considering that, my impression is that the annual drug price may not be very high. So what should we think about the price? This is the first point. Although there is no existing therapy now, how will it be used in the real world? Will Rituxan be used first on off-label basis and then switch to Soliris and satralizumab later? Could you explain how the drug will be used in real world?

Since there is no approved drug now and so immunosuppressant or Rituxan is actually used, as you mentioned, the question is if an approved drug becomes available, will off-label drug use continue for long? It is understandable that there is no way other than using off-label drugs if there is no approved drug available. But is it okay to use off-label drugs if there is an approved drug? I think there should be such a discussion.

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Unidentified Company Representative, [44]

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Since I am in charge of R&D, I am not able to discuss drug prices. But that will be up to the future discussion.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [45]

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Sakai from Crédit Suisse. I have 2 brief questions. First is about cancer genome profiling or foundation medicine. You had an information meeting the other day, and I think you showed JPY 200 million forecast this time. According to an article of a trade paper this morning, there seems to be an issue of testing fee. There is a concern about successful dissemination of the idea of personalized medicine and companion diagnostic in terms of the fees in Japan. Could you discuss your idea, including the comments on this morning's article?

Second question is a brief one, about HEMLIBRA. Roche talked about the venous route establishment and bleeding. Also, they said that dosing frequency is now becoming once a month. Could you confirm if the dosing frequency is also becoming once a month in Japan?

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Unidentified Company Representative, [46]

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Thank you for your question. HEMLIBRA and F1CDx. Let me answer to your second question first. In U.S., as Roche mentioned yesterday, 4-week interval for dosing is now rather widely accepted and used. In Japan, 3 kinds of dosing interval are possible. That is once a week, every 2 weeks and every 4 weeks. And dosing frequency is selected according to patients' convenience. 4-week interval is not particularly common, but 2-week interval is also quite commonly used. So this is the situation about HEMLIBRA.

Second question is about F1CDx. F1CDx is a cancer genome profiling test that comprehensively analyzes 324 oncogenes. Based on the mutations, information about the companion diagnostics is attached to that test. So in terms of technology, it is one technology with one process using the same data. Comprehensive genome data and the companion data are produced. And 2 different prices are set for that, and we are a little perplexed about that.

When this cancer genome profiling is used widely in the future, we expect that appropriate therapy for each patient will be selected, leading to the progress of personalized medicine. We are a little perplexed and probably hospitals as well. We hope that will not have any impact on the advancement of the genome profiling.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [47]

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You submitted the peak sales forecast of JPY 7.5 billion for Foundation 1, 2, 3 here. And am I correct to understand that you have not changed the assumptions for that?

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Unidentified Company Representative, [48]

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As written in the document that was submitted and disclosed, JPY 7.5 billion is the forecast when it is used under the described conditions, and the number of patients is 13,000.

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