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Edited Transcript of 4519.T earnings conference call or presentation 23-Apr-20 9:00am GMT

Q1 2020 Chugai Pharmaceutical Co Ltd Earnings Call

Tokyo May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Chugai Pharmaceutical Co Ltd earnings conference call or presentation Thursday, April 23, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Minoru Hirose

Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept.

* Shinji Hidaka

Chugai Pharmaceutical Co., Ltd. - VP & Head of Marketing & Sales Division

* Toshiaki Itagaki

Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol.

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Conference Call Participants

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* Fumiyoshi Sakai

Crédit Suisse AG, Research Division - Research Analyst

* Hidemaru Yamaguchi

Citigroup Global Markets Japan Inc., Research Division - MD and Analyst

* Kazuaki Hashiguchi

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

* Motoya Kohtani

Nomura Securities Co. Ltd., Research Division - Senior 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. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [1]

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[Interpreted] Good evening, ladies and gentlemen. I am Toshiaki Itagaki, the Executive Vice President and CFO of Chugai Pharmaceutical. Thank you very much for taking part in our conference call at this late hour during the emergency.

In our company, since March 28, starting at the offices in Tokyo Metropolitan area, employees have been working from home as a general rule. This earnings report has been prepared by people working from home but we have been able to announce the financial result as scheduled. But in locations like factories, the members of some departments still commute to work in order to ensure stable supply. There are no employees infected with COVID-19, and we are determined to be fully prepared to continue to do what needs to be done.

Now let me go into the slide presentation. Please turn to Page 2. Starting with this earnings report, we have summarized particular topics to note into a slide called Business Update. Items written in blue are actions related to development pipeline, which will be explained more later, so I would like to focus on those in black.

In January, we announced a stock split and our new management team. The stock split will take effect on July 1, and so you may want to be mindful of that when you calculate EPS and dividend per share for the full year.

In February, for the SGLT2 inhibitor, tofogliflozin, which had previously been marketed under 2 brands through 2 channels, we announced that we would terminate our licensing agreement with Sanofi KK, and the drug will be marketed solely by core pharmaceuticals in Japan from around June. We believe the changes will not affect Chugai's consolidated earnings forecast. We also held a workshop on multidisciplinary team care in the medical center in Cambodia. This is part of our efforts to contribute to better access to reimbursable medicine globally.

In March, as a general rule, employees in the Tokyo metropolitan area began telecommuting as a countermeasure against COVID-19. And at present, employees in locations across the country, as a general rule, are required to work from home until May 6. Moreover, a resolution of year-end total dividend of JPY 92 per share, JPY 40 ordinary dividend and JPY 44 in special dividend has been adopted at the General Shareholders Meeting. We also announced Chugai Digital Vision 2030 designed to realize digital transformation. We will be pursuing business innovation through digital technologies and health care solutions to change society.

Please see Page 3. The financial overview is the summary of the financial result of the first quarter. Revenues reached JPY 179.4 billion; the operating profit, JPY 74.1 billion; and the net income, JPY 52.7 billion, achieving year-on-year increases in both revenues and profit. There was only a minor impact on the financial results of the first quarter by COVID-19. Both revenues and profits posted a double-digit growth, surpassing the results of the same period last year significantly. This represents record high Q1 revenues, operating profit and net income. Operating profits and net income were the highest ever, not just among the past first quarters but as any quarterly results. Progress made versus full year forecast announced at the beginning of the year is in line with the forecast in terms of revenues, expenses and profits.

Now let us go into more details. Take a look at Page 4. Starting from the top. Revenues totaled JPY 179.4 billion, up 16.3% year-on-year. Sales went up by 4.9%, with domestic sales showing strong performance due to sales growth of new and mainstay products. In overseas business, export of Hemlibra increased in royalties and other operating income due to increase in royalty income for Hemlibra royalty and profit-sharing income grew by JPY 12.7 billion. Other operating income went up by JPY 5.6 billion due to increase in onetime income. The cost of sales ratio improved by 4.1 percentage points to 42.2% as the share of in-house products in the product mix increased and export of Hemlibra were charged at ordinary supply price from the first quarter.

Operating expenses increased by JPY 1.7 billion, mainly due to the rise in research and development expenses. As a result, operating profit grew by 54.7% to JPY 74.1 billion, with the operating margin reaching 41.3%. When you subtract financial account balance and income taxes from the figure, you will get the net income of JPY 52.7 billion, up JPY 16.4 billion or 45.2% year-on-year.

Page 5 shows the breakdown of the increases and decreases of sales. And the sales by disease area on the left, overseas sales totaled JPY 42.6 billion, up 10.9% or a double-digit growth. If you look at sales by product on the right, the top right shows Hemlibra with JPY 7.9 billion increase year-on-year, the largest sales growth among the products. On the other hand, Alecensa overseas and Actemra overseas are listed on the list of those which decreased, as they were affected by decreasing the unit export price and the stronger yen. Their volumes were flat year-on-year, and this was due to the timings of the shipments. The global sales of those products by Roche are growing steadily.

Back on the left chart, domestic sales went up by 2.6% to JPY 101.9 billion. At the bottom, the oncology area grew by 5.2%. By product on the right bottom, Tecentriq and Perjeta showed strong growth. Those that decreased are Herceptin, down 27.4%; Xeloda, down 54.2%; Rituxan, down 38.7%; and Avastin, down 4.7%, all affected by biosimilar and generic products.

Back on the left chart, bone and joint area rose by 2.9%. There are no specific products mentioned, but Actemra and Edirol posted growth. Renal disease area dropped by 15.2%. No product names are listed, but Mircera and Oxarol fell slightly. Lastly, others went up by 2%, with domestic sales of Hemlibra posting JPY 5.2 billion growth. On the other hand, because of the outbreak of influenza was the slowest in 10 years, the ordinary sales of Tamiflu fell by almost 90%.

Page 6 shows the factors behind the JPY 26.5 billion increase in operating profit. Under the second factor from the left, gross profit from sales, the sales increased by JPY 6.8 billion, while cost-to-sales ratio improved by 4.1 percentage points due to the product mix and ordinary supply price applied to Hemlibra exports, with cost of sales itself dropping by JPY 2.7 billion. Thus, increasing sales and decreasing cost of sales together resulted in a JPY 9.6 billion increase in gross profit.

Royalties and other operating income increased by JPY 18.3 billion, with increases in income for Hemlibra and in onetime income. The full amount of the increase is reflected in the increase in operating income.

Operating expenses are divided into 3 sub items, all of which increased. In particular, R&D expenses increased by JPY 1.4 billion due to increase in costs for clinical trial materials based on the steady progress of development projects.

Page 7 shows progress in the first quarter against the full year forecast. We have made progress nearly in line with the forecast. In the third line from the top, domestic sales posted 24.8% in progress, faster than the 22.7% posted in the same quarter last year. This is because the impact from the NHI drug price revisions will be seen during the 9 months from April, making the progress rate of first quarter that much higher. Royalty and profit-sharing income posted 18.7% progress, which is still in line with the plan, as Hemlibra was planned to grow exponentially.

Other operating income is driven by events. But in the first quarter, relatively large onetime income was received, which makes the progress rate higher at 44.7%. This, again, is in line with the plan. Operating expenses posted slightly slower progress than that in the last year as some events were either canceled or postponed.

In summary, domestic sales benefited from the fact that the quarter was prior to the NHI drug price revisions, onetime income was posted in the first quarter and slightly less expenses than planned were spent. As a result, the operating profit appears to have made more progress than the last year at 26.9%, but it is fair to say that the progress was more or less in line with the forecast.

Page 8 describes progress rates of sales by product. In domestic sales, many of the products posted faster progress than the last year. Those which look better in progress due to the advantage of the first quarter being pre-NHI price revisions are Avastin, Perjeta, Xeloda, Actemra and Hemlibra. Due to loss of innovative drug premiums and market expansion repricing, after April 1, NHI drug prices of those 5 products would be reduced by 15% to 27%. For more details, please see Page 12 of the appendix.

Edirol, for which a generic is expected to be added to the NHI drug price list in June, will stay at high progress rate until then. On the other hand, overseas sales progress rates depend on the shipment timings. And therefore, it is difficult to determine the progress in the snapshot. For example, Alecensa posted progress of 15.9% while Hemlibra 36.0%. This reflects the differences in shipment timings and do not indicate they are way ahead or behind the forecast. Both are in line with the forecast made at the beginning of the year.

Page 9 is a familiar and the most popular slide. But this time, we just added the first quarter results, and there is no other update to share with you.

Please turn to Page 10, which is our last page for the main presentation. This describes the impact of the new coronavirus pandemic on business performance. As I mentioned earlier, the impact during Q1 was minor. However, if the situation persists and exacerbates, we cannot exclude a possibility of seeing an extensive impact on our business from April. First, because of restricted sales activities and declining inpatients as well as outpatients, we may face delayed market launches of new products such as Tecentriq and Hemlibra as well as products with additional indications affecting our domestic sales. Overseas, delayed new patient acquisition of Hemlibra may have a negative impact on exports, royalties and profit-sharing income.

Next, on regulatory affairs, we may experience delays with regulatory authorities' application and review processes in each country. Third, for projects under development, restrictions on visits by medical institutions as well as patient hospital visits could impact our schedule for launching new clinical trials and advancements of ongoing clinical trials.

For the projects under drug discovery phase transition to the development phase may be delayed in the mid- to long-term perspective. Capital investment may face a slower progress or schedule adjustments. In addition, to maintain each function, we may have to incur onetime expenses that were not included in the original forecast. At this stage, there is no major delay in the product supply, both in Japan and abroad. Even if the situation persists and worsens, we will ensure stable product supply.

Finally, we issued a press release pertaining to a clinical study of Actemra for COVID-19 pneumonia. The details will be covered in the following R&D section.

To conclude, we do not know when the pandemic will be over. Therefore, we cannot ascertain the extent of the impact on our businesses at this stage. We will closely monitor the situation and disclose a new guidance if necessary at conference calls.

With that, I'd like to conclude my presentation. Thank you very much.

Next presenter is Dr. Hirose, Head of R&D Portfolio Management Department, presenting the development pipeline.

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [2]

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This is Hirose speaking. I'd like to outline the development pipeline in Q1.

Please turn to Page 18 for the projects in oncology and bone and joint as of April 23. The red stars indicate updates since the previous briefing, though individual projects will be outlined in the following slides.

In oncology, 2 in-house development projects as well as 2 projects, in-licensed from Roche, began Phase I studies. In addition, OBP-301, in-licensed from Oncolys BioPharma last year, was added anew in the pipeline under Phase II. RG6058, tiragolumab, migrated to Phase III. The combination of Tecentriq and Avastin has been filed for unresectable or metastatic liver cancer.

Please turn to Page 19, which describes projects in renal, autoimmune, neurology and other areas. Under neurology, RG7906, ralmitaront, in-licensed from Roche, started Phase II study.

Page 20 shows key news flows in Q1. First, Rozlytrek was approved for the additional indication of ROS1 fusion-positive, unresectable, advanced or recurrent non-small cell lung cancer. Based on the results of domestic investigator-led study, Alecensa was approved for the additional indication of ALK fusion-positive, recurrent or refractory anaplastic large-cell lymphoma. At the Review Committee of Development Requests for Unapproved Drugs/Indication, Rituxan was evaluated favorably and approved for the additional indication of acquired thrombotic thrombocytopenic purpura.

Next, under filed projects. After Phase III study named IMbrave150 for unresectable, advanced or recurrent HCC, the combination of Tecentriq and Avastin filed an application in February. The indication was qualified for a priority review designation this month. As a liquid biopsy testing that provides comprehensive genome profiling for solid tumors, F1L CDx filed for manufacturing and marketing approval. Under phase progress, anti-TIGIT antibody, tiragolumab, in combination with Tecentriq, migrated to global Phase III for SCLC and NSCLC. Ralmitaront, in-licensed from Roche, started a global Phase II study for the expected indication of schizophrenia. Under new to pipeline, oncolytic virus, OBP-301, initiated a domestic Phase II study for esophageal cancer in conjugation with radiation therapy. In-house developed STA551 started Phase I study for solid tumors. I will explain the details of this project later.

AMY109, developed for endometriosis, began Phase I study for solid tumors as well. Glofitamab, in-licensed from Roche, started a domestic Phase I study for hematologic tumors, which I'm going to explain in detail later. RG6171, a selective estrogen receptor downregulator, began a domestic Phase I study for the expected indication of hormone positive breast cancer.

Under development discontinued, the results of IMvigor010 study revealed that Tecentriq monotherapy failed to show any significant improvement in the disease-free survival endpoint as an adjuvant for muscle invasive urothelial carcinoma. Thus, the development has been discontinued.

Under designation, RG6042, tominersen, was designated as an orphan drug by the MHLW for the expected indication of Huntington's disease. Tominersen is an antisense oligonucleotide designed to inhibit the production of huntingtin protein expressed by the gene causing the Huntington's disease. Currently, global Phase III study is underway. In a domestic Phase II study for the combination of polatuzumab vedotin, in combination with bendamustine and rituximab on recurrent or refractory diffuse large B-cell lymphoma, complete remission was achieved as an endpoint. Based on the results, together with the results of global Phase III studies, we are planning to submit an application.

On medical conference, in patients aged 2 to 25 with type 2 or type 3 spinal muscular atrophy, we presented the data for 1-year results of SUNFISH Part 2 study. The risdiplam-administered group compared to the placebo group showed a statistically significant improvement in the change from baseline in motor function at 12 months after first dose.

Under others, nemolizumab, anti-IL-31 receptor antibody, which was out-licensed to Galderma. The results of Phase II study for prurigo nodularis, or PN, were published in the New England Journal of Medicine. I am going to show the details later.

To study the possibility of alleviating COVID-19 pneumonia with Actemra, global Phase III study was initiated overseas, and a notification of clinical trial plan was filed in Japan. I am going to explain this in the next slide.

Please turn to Page 21. As you may be aware from the media coverage, COVID-19 causes severe symptoms through excess immune response. IL-6 is one of the cytokines involved in the immune response. Therefore, expectations are rising for Actemra, which is an anti-IL-6 receptor antibody. Amid the situation, Roche started Phase III study, COVACTA, with a target of about 330 adult patients hospitalized with severe COVID-19 pneumonia. It is a randomized double-blind placebo-controlled Phase III study to evaluate the safety and efficacy of Actemra plus standard of care versus placebo plus standard of care. Primary and secondary endpoints include clinical status, mortality, mechanical ventilation and intensive care unit variables. Meanwhile, we have filed a clinical trial notification to perform a domestic study in preparation for patients hospitalized with severe COVID-19 pneumonia. We aim to start enrollment as soon as possible once the preparation completes, with a target submission before the end of this fiscal year.

Next is the result of Phase II study for nemolizumab in PN conducted by Galderma. Please turn to Page 22. Possible causes of the disease are atopic disease, allergy, infections, renal and hepatic damage. However, details remain unknown. PN is characterized as multiple symmetrically distributed, highly pruritic, hyperkeratotic, erosive or crested nodules and papules. Currently, there are limited options to treat severe chronic itch and skin lesions, impairing patient QOL.

Page 23 shows the results of Phase II study on 70 moderate-to-severe PN patients. Primary endpoint was improvement of PP-NRS at week 4. The group administered with nemolizumab, demonstrated an improved NRS, starting from week 1, with an approximately 50% improvement at week 4. On IGA 0/1, clear or almost clear success rate at 18 week, the administered group achieved almost 42% compared to 9.3% in the placebo group. The tolerance was similar to already confirmed levels. Taken together, nemolizumab has been designated as a breakthrough therapy by the FDA. Galderma is currently preparing for a Phase III study.

Next, let me introduce OBP-301 on Page 24. We previously announced the mode of action for this product when it was in-licensed. This is a virus preparation that recombines telomerase promoter, hTERT, whose expression is often elevated in cancer cells. Thus, it can specifically proliferate in cancer cells, causing oncolysis to exert strong antitumor activity. On the other hand, it cannot proliferate in normal cells, which have no or almost no telomerase activity. As the slide indicates, currently, Oncolys BioPharma is conducting various studies, both in Japan and overseas. Under the licensing agreement, Chugai began a domestic Phase II study for esophageal cancer, combined with radiotherapy.

Please turn to Page 25, describing the synergy when combined with radiotherapy. Radiation therapy accumulates mutations by causing DNA damage, leading to cell death. However, there is a defense mechanism known as the DNA damage response, which triggers MRN complex binding to a damaged DNA site, activating ATM, resulting in cell cycle suspension as well as DNA repair activation. It is this DNA repair that reduces the effect of radiation therapy. When OBP-301 infects a cell, it is expected that E1b55k is expressed to promote the degradation of MRN complex, thereby blocking DNA repair and enhancing radiosensitization.

Please turn to Page 26. STA551 is an in-house developed new-to-pipeline product based on our Switch Antibody technology. As was announced in the antibody technology briefing last December, Switch Antibody binds to the antigen only in the presence of highly concentrated, disease tissue-specific small molecule metabolite. It does not bind to the antigen in any tissue which only has a low concentration of switch molecule, while it binds to the antigen in disease tissues where the switch molecule is present in high concentration. It is expected, therefore, to reduce side effects and enhance therapeutic effects through this mechanism. We started Phase I study in solid tumors.

Page 27 shows RG6026, glofitamab, in-licensed from Roche. RG6126 (sic) [RG6026] is a humanized bispecific monoclonal antibody targeting CD20 and CD3. The antibody's 2:1 format confers high binding ability. Thus, it is expected to exert strong activity in the presence of residual anti-CD20s from previous lines of therapy. Overseas study is underway in recurrent or refractory non-Hodgkin lymphoma. We also began a domestic Phase I study as well.

Page 28 shows projected submissions.

With that, I'd like to conclude my presentation. Thank you very much.

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Questions and Answers

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [1]

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Thank you for your attention. Now we'd like to spend the rest of the time taking questions. The first question is from Mr. Yamaguchi of Citigroup Global Markets Japan.

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Hidemaru Yamaguchi, Citigroup Global Markets Japan Inc., Research Division - MD and Analyst [2]

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Hello, can you hear me?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [3]

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Yes.

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Hidemaru Yamaguchi, Citigroup Global Markets Japan Inc., Research Division - MD and Analyst [4]

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The first question is about Actemra. Due to COVID-19, overseas local sales of Actemra soared, especially those in the U.S. jumped by 40% in Q1. There are 2 related questions. I suspect the sales will continue to grow going forward, and your export results in Q1 did not reflect the increase directly. But in collaboration with Roche, have you started to increase production of Actemra, assuming that the export will increase even though they are not reflected in the numbers yet?

Secondly, yesterday, Roche presented a map indicating they will produce Actemra in their factories around the world. However, I believe that since Actemra is your product, no matter who will produce and where, export and royalty incomes will be attributable to Chugai even when transactions take place within Roche Group. Is my understanding correct?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [5]

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Thank you for your questions. Itagaki speaking. Yesterday, Roche Group announced their earnings results of Q1 and said the global sales of Actemra jumped by 30% year-on-year. But our company's exports results to Roche in Q1 was a negative figure, affected by the stronger yen despite the fact that the volume was unchanged.

To your question whether our exports will increase, led by the external sales by Roche, as you know, with regard to COVID-19, sales by Roche are already increasing when a clinical study just started. This may suggest sales are driven by potential off-label use or inventory buildup. Now our exports of Actemra to Roche for the moment are done for the indication of rheumatoid arthritis or RA, and it is not the case that RA patients to be treated are suddenly increasing. So in theory, our exports will not increase due to COVID-19. But given the possible demand for off-label use in the market, the volume could increase more than initially expected. However, when it comes to the export value, we simply cannot tell. As for the off-label use, since it has not been approved for its safety or efficacy, we have nothing to say.

Apart from that, they say they are starting a clinical study for COVID-19, and export price of Actemra to be used in clinical studies will be set differently from when they are for commercial use. Therefore, even though the volume is to be increased, it does not necessarily lead to the kind of increase in the sales value based on the commercial unit price. After the approval for COVID-19 in or after the second quarter, depending on when it is approved, we cannot tell what will be the reimbursement price or retail price. In some cases, the drug may be stockpiled, but we do not know the price for stockpiling. In short, since we don't know the retail price, we cannot tell our unit export price either. So there are so many things that we don't know for now. However, the volume is likely to increase compared to last year.

As for production, Roche said yesterday that as the sales volume is expected to increase, they will prepare for enough supply. The slide presented showed global production sites for Roche. But they were not saying Actemra would be produced in those sites. We believe the slide showed Roche's network of manufacturing sites for biologics. As Actemra is Chugai's in-house product, there is a supply route of Chugai manufacturing APIs and drug products and exporting them. I think we have explained this previously, but we produce APIs not just in our domestic manufacturing sites but some of the global manufacturing sites of Roche Group. I think Roche said yesterday that it will work to increase the production capacity of Actemra by 50%. And on our part, we would like to make our utmost efforts to ensure stable supply to meet the demand for use in COVID-19 patients by working with Roche.

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Hidemaru Yamaguchi, Citigroup Global Markets Japan Inc., Research Division - MD and Analyst [6]

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I see. One clarification. I understand the factory San Francisco is used for production for subcutaneous injection. Will there be any money you will be entitled to when the manufacturing is done by Genentech?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [7]

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That will mean we are outsourcing the production to Genentech.

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Hidemaru Yamaguchi, Citigroup Global Markets Japan Inc., Research Division - MD and Analyst [8]

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Okay. Outsourcing to Genentech. I see. My second question is about STA551. It uses Switch Antibody technology. In this study, Tecentriq is used in combination for metastatic solid tumor with quite a number of patients enrolled, 188, if I remember correctly. What kind of mode of action is used? Of course, you will have to test it to know this. But could you tell us whether there is a common switch antibody used for any types of solid tumors, or you're using a switch antibody specific to a particular solid tumor?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [9]

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Hirose speaking. I'm afraid we do not disclose the mode of action for now, to your first question. To answer your second question, in the future, depending on the research results, if there is a high concentration of the switch molecule in tumor tissues of a particular tumor type, there could be a switch antibody specific to that. But at the moment, we do not focus on any particular tumor type.

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Hidemaru Yamaguchi, Citigroup Global Markets Japan Inc., Research Division - MD and Analyst [10]

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I see. How do you read the name, S-T-A or STA?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [11]

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Internally, we call this S-T-A.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [12]

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Thank you. The next question is from Mr. Sakai of Crédit Suisse Securities.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [13]

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Hello. Sakai speaking. Can you hear me?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [14]

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Yes.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [15]

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I just want to ask for clarifications on numbers. On Page 4, the royalties and profit sharing for the quarter is indicated as JPY 26.4 billion. And moving to Page 6, the slide shows the increase in income for Hemlibra and increase in onetime income totaled JPY 18.3 billion. Then if you jump to Page 9, the actual result from January through March is indicated at JPY 17.4 billion for Hemlibra transactions. Earlier, I thought Mr. Itagaki said JPY 18.3 billion is the royalty income for Hemlibra and other related income.

Can you sort them out again for me, do I understand correctly that the total amount of royalty income includes JPY 17.4 billion, which is a total of ordinary royalty on Hemlibra and price adjustment for the previous year? Where did JPY 18.3 billion come from? Could you explain more?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [16]

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Please take a look at Page 4 again. JPY 18.3 billion is the growth in the total of royalties and other operating income. Of this amount, royalty and profit sharing income grew by JPY 12.7 billion and other operating income grew by JPY 5.6 billion. The total growth is JPY 18.3 billion. Then on Page 6, JPY 18.3 billion mainly consists of increase in income for Hemlibra, which is royalty income, including what we call royalty 2 or adjustments on the initial supply price as well, an increase in onetime income. Therefore, JPY 18.3 billion includes all increases in royalty income, royalty 2 and profit sharing.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [17]

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Then am I correct to understand that the JPY 17.4 billion in the actual result for January through March is the total growth of royalty income on Hemlibra and adjustments for shipments made last year?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [18]

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Yes.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [19]

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I believe the ordinary royalty income can be calculated by multiplying a certain percentage to the Roche sales and the adjustment is the difference from that number. Then I should not be asking this question by now, but is there a 3-month time lag between recognition of sales by Roche and of income by your company?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [20]

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Well, it may be difficult to say because you take the 3 months average. You're talking about the time lag between our exports and sales by Roche?

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [21]

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No. I am talking about your royalty income and sales by Roche.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [22]

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Then there is no time lag, because we received royalty between January and December this year for the sales posted by Roche between January and December.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [23]

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I see. My last question is quite simple. And if you were to answer that by yes or no, the answer will be probably no. It's about COVID-19. The antibody test often talked about. Roche uses its cobas to provide diagnostic test. I would assume your company has no relation with Roche Diagnostics in Japan. But in terms of antibody tests, are you not considering any initiative, including something related to Actemra?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [24]

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With regard to diagnostics, RDKK has the marketing right in Japan. Therefore, we are not involved.

The next question is from Mr. Wakao of Mitsubishi UFJ Morgan Stanley.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [25]

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Wakao from Mitsubishi. I have 2 questions regarding COVID-19 and Actemra. It may be difficult to foresee now, but suppose you export Actemra for COVID-19, is the trigger or milestone for you to start increasing exports or preparing for increasing production a positive result from the Phase III clinical trial, COVACTA, which Roche is conducting currently. The result of the study is expected to come out in June, and if it turns out to be positive, the volume is likely to increase. So depending on the result, if it is positive, is there a possibility to see a significant increase in exports between July and September or October and December? So the volume and time line are my question.

And in terms of the amount of use per patient, since the current clinical trial employs a dosing regimen of up to twice per day per patient, it will be quite limited compared to ordinary dosing of Actemra. But on the other hand, if you look at the sales of Actemra between January and March, though it is not clear to what extent the result was impacted by COVID-19. I was under the impression that the number was much more than originally expected given the sales trend last year. Was it because there was global efforts to stockpile the drug, especially in the U.S. and Europe, in case the condition of the patients become severe? Or am I wrong in my assumption of the amount of use per patient for COVID-19? If there is any insight that you can share with us, that will be appreciated.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [26]

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Itagaki speaking. The clinical study Roche is leading currently is expecting the result to become available early summer instead of June. Obviously, as a Roche Group member, if we wait until the result to come out and then try to figure out how to shore up the production, we would be too late. Therefore, we will work to be fully prepared for the production. But everything will depend on how Roche will come up with the demand forecast and place export orders with us. Will it be before early summer or after? We simply do not know right now and are not in a position to answer that question.

With regard to how it will be used, we are still at the clinical study phase. And the only thing we can tell for now is that it will be different from the dosing for RA and it is not the kind of indication the drug will continue to be used permanently.

As for the price, again, there are so many unknowns. We can only guess whether a 30% increase in Actemra sales was because of COVID-19 outbreak. But considering the fact that RA patients are not increasing that much, obviously, we suspect there may have been off-label use or building up of inventories in advance in the market. But beyond that, we cannot tell for sure.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [27]

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I see. My second question is about the status of Hemlibra. With regard to U.S. and Europe, I believe we should look at the earnings results of Roche. But in Japan, sales in the first quarter seems to be flat from the previous quarter. But if sales between January and March were at this level, considering that there would be the impact of the 15% price cut in April, the first quarter looks a bit weak. Could you give us your take on this?

You also mentioned a possible slowdown in taking up new patients in the future due to the impact from COVID-19. But have you been so far witnessing any slowdown in increase of new patients for Hemlibra because of the stay-at-home restriction to stem the outbreak of COVID-19 in Japan?

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Shinji Hidaka, Chugai Pharmaceutical Co., Ltd. - VP & Head of Marketing & Sales Division [28]

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Hidaka, the General Manager of Marketing and Sales division, speaking. With regard to progress in the first quarter for Hemlibra, although in March, there may have been some impact from COVID-19, we were only slightly behind the stretched target, but the gap would have been small enough for us to try and manage to catch up with if we did not have COVID-19 breakout.

On the other hand, as you know, Hemlibra requires weekly dosing during the introduction. And in some hospitals, patients are requested to be hospitalized for the purpose of education. Therefore, as some beds are being converted into those dedicated for COVID-19 patients, there are hospitals that are postponing the decision to switch patients to Hemlibra for the time being, honestly speaking. Therefore, if the outbreak of COVID-19 is prolonged, we assume that there will be an impact on our efforts to win new patients for Hemlibra.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [29]

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Next, Kohtani-san from Nomura Securities.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [30]

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Can you hear me?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [31]

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Yes.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [32]

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I have a quick question on expenses. Expenses were spent slower than expected. I assume that sales promotion fees declined after March. How much did it fall? How did it impact on the overall expenses, if you could tell? That will help us forecasting an expected fall in Q2.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [33]

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Itagaki speaking. The impact is even greater in April. After the state of emergency declaration, numerous events had to be canceled. However, that does not mean it costs us nothing. We paid cancellation fees to the venues that we booked in Q1. However, we think that the net amount will not exceed the initial budget.

In addition, we are discussing whether we can spend more on digital and IT technologies to arrange internal events. At this stage, we cannot issue any guidance to estimate the exact amount. When we announce Q2 business results, we'd like to update you on new topics after examining the situation at that time.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [34]

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So the impact during Q1 was in the order of a few hundred million yen? Am I right?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [35]

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Somewhere around or slightly below JPY 100 million, I think.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [36]

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I understand. On Hemlibra, Yamaguchi-san before may raise the similar question. Please tell me if I misunderstand anything. Roche pays Chugai royalty on their sales for the ones developed by Chugai and purchases API, but royalty is paid only for the ones produced at the Genentech plant. Am I wrong?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [37]

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You were talking about Actemra?

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [38]

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Yes.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [39]

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Chugai has the right to manufacture the product. Part of API manufacturing is consigned to Genentech. For the outsourced API, we purchase the amount. Then we combine that with the API that we produce in-house. We formulate the product to export to Roche. We then receive a margin for the exports as well as royalty revenue on their global sales. That is the mechanism we have in place. So Roche and Genentech is whom we outsource. Thus, we do receive margin and royalty from them under the scheme.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [40]

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I understand. My last question is on SERD, RG6171, which advanced to Phase I. Why are you working on SERD at this timing? I understand that this is a new SERD. We already have Faslodex, which is a rather inconvenient intramuscular injection, I must admit. I also understand that ER-positive breast cancer may be a large market to tap into. But what makes your new drug unique or novel? Is it effective for ESR 1 mutation? Could you please elaborate?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [41]

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This is Hirose speaking. As you rightly said, it is a selective estrogen receptor downregulator, and there is already a product available in the market. But RG6171 is an oral agent. That is why we started a clinical trial. The biggest concern with the ER-positive hormone agent is that there is an escape route, which is known as ESR1 mutation.

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Motoya Kohtani, Nomura Securities Co. Ltd., Research Division - Senior Analyst [42]

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Irrespective of that, however, do you think that your oral administration will offer a greater convenience than the currently cumbersome intramuscular drug?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [43]

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Yes. You are right.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [44]

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Next, Mr. [Oogane] from Nikkei.

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Unidentified Analyst, [45]

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Can you hear me well?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [46]

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Yes.

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Unidentified Analyst, [47]

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This is [Oogane] speaking from Nikkei. I have a question on your financial status. You are debt free and cash rich right now. So I am sure you are all right. But with the prospect of persisting COVID-19 impact, are you considering or actually taking financial measures at this stage?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [48]

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We are cognizant of the importance of cash visibility especially during the time like this. Net cash plans significantly from the year-end to March because of income tax payment and year-end dividend payments. As you can see, the line below operating cash in, major creditors are Roche and other large wholesalers in Japan. Thus, our cash inflow will not be significantly impacted.

Having said that, though, we are taking measures to deal with potential financial risks in our relationship with the financial institutions. Although I cannot disclose the details, we are confident that we remain all right.

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Unidentified Analyst, [49]

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Is my understanding correct that you are not planning to set any commitment line or anything in an immediate future?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [50]

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Yes. That is right.

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Unidentified Analyst, [51]

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And your major creditor is Roche. So you're all right at this stage. Am I right?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [52]

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Yes. Next is Mr. Hashiguchi from Daiwa Securities.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [53]

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This is Hashiguchi speaking. I'd like to ask COVID-19 impact on sales. You mentioned the penetration of new products and additional indications as a topic. Does that mean you do not foresee a major impact on existing products for existing indications?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [54]

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This is Itagaki speaking. It is a difficult question. For example, we cannot tell whether Cancer Institute Hospital, for example, can perform as many surgeries as before. Our existing products may suffer decreased prescriptions and volumes with COVID-19 measures in place, such as securing oncology wards and restricting outpatient visits. As I mentioned earlier, we cannot tell how much impact we will face at when. However, I'd like to reiterate the fact that the majority of our products are for HPs and that our GP products can be prescribed for a long period of time. We therefore predict that the impact will be minor unlike other companies with a different product mix.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [55]

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On clinical trials and drug discovery research, you mentioned the possibility of delay. Could you clarify which projects are more likely to delay and which are less likely to delay?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [56]

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This is Hirose speaking. I suppose clinical studies for immune diseases will have difficulties with recruiting subjects at this time out of concerns for patient safety. Also, we need to minimize the impact on study sites as well as health care workers when we launch studies. On the discovery side, late-stage projects will be prioritized, and non-urgent items will be deferred to adjust R&D activities.

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Kazuaki Hashiguchi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [57]

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When you mention clinical studies for immune diseases, do they include cancer immunotherapy as well?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [58]

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We'd like to refrain from commenting on specific R&D projects.

We would like to entertain our last question, Mr. Muraoka from Morgan Stanley.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [59]

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This is Muraoka from Morgan Stanley. I have questions pertaining to Actemra for COVID-19. Of the severe cases, I wonder what percentage needs to use Actemra to prevent a possible cytokine storm. Could you please share any referenced ballpark figure? Also, Mr. Itagaki referred to a possibility of government stockpiling of Actemra. But because Actemra is a protein formulation, I suspect that it has a short -- relatively short shelf life. Could you please tell us whether it can actually be stored for a long time?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [60]

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This is Hirose speaking. Regarding the percentage of patients who will need the drug, according to the data from China, severe cases account for 19% of the overall cases. Having said that, though, the question is what percentage of that 19% will be considered for administering Actemra. I am afraid I do not have any specific number to answer that question.

On your second point, for the stockpiling. Actemra formulation has a 36-month shelf life. API has its own shelf life as well. We need to factor in those 2 when we plan for the product supply.

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Shinichiro Muraoka, Morgan Stanley, Research Division - Research Analyst [61]

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One last quick question, on your sales activities. Considering the impact of COVID-19, how likely are you to incorporate e-detailing activities going forward?

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Shinji Hidaka, Chugai Pharmaceutical Co., Ltd. - VP & Head of Marketing & Sales Division [62]

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I am Hidaka from Sales department. As you pointed out, we generally refrain from visiting medical facilities at this stage. However, if physicians require, we can e-mail them and offer web-based meetings. We will also consider leveraging e-detailing and utilizing paid media so that we can combine multiple avenues going forward.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - CFO & EVP - Fin. & Acct., Corp. Communication, Purchasing, Dig. Strategy & IT Sol. [63]

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Thank you very much.

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