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

Q3 2019 Chugai Pharmaceutical Co Ltd Earnings Call

Tokyo Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Chugai Pharmaceutical Co Ltd earnings conference call or presentation Thursday, October 24, 2019 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.

* Toshiaki Itagaki

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

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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

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

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Good evening, ladies and gentlemen. I am Toshiaki Itagaki of Chugai Pharmaceutical Co., Ltd. Thank you very much for joining us for this conference call at this late hour. I hope you will stay with us until the end.

Please take a look at Page 2, which is a 1-page summary of the financial results. We have achieved a double-digit growth, both in revenues and profits, significantly exceeding the previous year's results, posting record highs as Q3 performances in revenues, operating profit and net income.

Revenues reached JPY 508.9 billion, topping the JPY 500 billion mark in 9 months for the first time ever. Operating profit recorded JPY 171.1 billion, which was the highest ever, even compared to any past full year's results with operating margin at 33.6%. The net income was JPY 124.5 billion, exceeding JPY 100 billion for the first time, even for a full year's figure.

Both operating profit and EPS have already overachieved our original full year forecast, and therefore, we have made upward revisions to the entire forecast. The new forecasts are: JPY 680 billion in revenues, JPY 218 billion in operating profit and JPY 302 in EPS. This is our first revision to the forecast in 8 years since 2011 when after the Great East Japan earthquake, we posted extraordinary charges, which led to a revision to the forecast for the net income.

Now let's take a closer look with the table on the left of the financial overview on Page 3. Starting from the top, revenues went up by JPY 82.5 billion or 19.3% year-on-year to JPY 508.9 billion, of which sales reached JPY 440.5 billion, up JPY 51.8 billion or 13.3%. Of the JPY 51.8 billion growth, domestic sales contributed JPY 33.6 billion, while overseas, JPY 18.1 billion, both posting double-digit growth.

Domestic sales did include last-minute demand surge right before the consumption tax hike in October but achieved an 11.6% year-on-year increase. Sales expansion was led by new products such as Hemlibra, Tecentriq and Gazyva as well as our mainstream products, including Alecensa, Perjeta, Actemra and Edirol. Overseas sales grew due to a significant growth of exports of Alecensa to Roche, bringing a total growth rate to 18.5% year-on-year.

With regard to royalties and other operating income, as there was a onetime income through business transfer of 13 long-term listed drugs in the previous year, other operating income fell from a year before, but an increase in royalty income for Hemlibra resulted in a net growth of JPY 30.7 billion from a year before.

Cost-of-sales ratio improved by 4.3 percentage points from the previous year to 45.7% as the share of in-house products increased. Operating expenses increased by JPY 7.6 billion, due mainly to increase of research and development investments. As a result, operating profit grew by 65.6% to post JPY 171.1 billion, with operating margin of 33.6%. If you deduct financial account balance and income taxes from this figure, you will get JPY 124.5 billion in net income, up JPY 49.9 billion or 66.9% year-on-year.

As a joint venture with Sanofi-Aventis was turned into a wholly-owned subsidiary at the beginning of this fiscal year, the entire net income of the joint venture was now attributable to the owners of the parent company, which resulted in a 68% year-on-year increase in EPS, a growth even larger than that for the net income.

Page 4 shows the breakdown of increases and decreases of sales for the 9 months. The bar chart on the left indicates year-on-year comparisons of sales by disease area. The top light blue box represents overseas sales, a sum of sales by our overseas subsidiaries and Chugai is exposed to third parties, including Roche, posting JPY 116 billion, up 18.5%. On the right, you can see sales by products in a descending order in terms of year-on-year changes. Overseas sales of Alecensa grew by 78.5% or JPY 15.3 billion, the same amount as that of Hemlibra in domestic sales, thus both coming in at the top.

Going back to the left chart, domestic sales, as indicated in the middle, posted JPY 324.4 billion, up JPY 33.6 billion or 11.6%. At the bottom, the green box represents the oncology area with 10% growth. On the right, in terms of products, Perjeta, third from the top; and Tecentriq, launched in April 2018 as well as Avastin, shown at the bottom, all saw an increase in sales.

On the other hand, among oncology products, we have seen declines in sales of 45.9% for Rituxan for which NHI drug price was reduced by 26.2% in April as it lost innovative drug premiums due to the patent expiration. We're proactively encouraging to switchover to Gazyva, and it was also affected by the replacement by a biosimilar. Tarceva suffered a 46.2% decline in sales due to intense competition.

The bone and joint area, shown in purple, grew by 11.2%. By product, in-house products such as Edirol, third from the bottom on the right chart as well as Actemra showed continued growth. Renal diseases in yellow has declined by 1.5%. We were affected by the reductions in NHI drug prices last year for Mircera and Oxarol, though they are not listed on this slide.

Last but not least, the great portion or others, grew significantly by 33.3%. By product, Hemlibra, launched in May 2018, recorded JPY 18.3 billion in sales, a growth of JPY 15.3 billion. On the other hand, Tamiflu in its ordinary sales dropped by JPY 3.6 billion, affected by competition and generics. In summary, in both overseas and domestic markets, in-house products performed well and new products are penetrating into the market expeditiously, which led to the top line result gaining more than expected growth momentum.

Page 5 shows the breakdown of factors behind the changes in operating profit. Please take a look at the graph on the left. The operating profit grew by JPY 67.8 billion year-on-year, of which about 2/3 or JPY 44.7 billion was derived from the gross profit from sales, shown in the second light blue upward arrow from the left.

On the right, in the second line from the top, you can see sales increase was JPY 51.8 billion, and yet the cost of sales further down by 2 lines, showed an increase of only JPY 7 billion, which resulted in a jump in gross margin of as much as JPY 44.7 billion. This was because, as described in the first bullet point in the middle, cost-of-sales ratio improved due to a change in the product mix.

Royalties and other operating income contributed JPY 30.7 billion to the profit increase. This was because of the large increase in royalties for Hemlibra that we received from Roche, as I said at the outset. The operating expenses all increased. The promotion costs for Sigmart, which we started to sell by ourselves in China, increased.

R&D expenses increased by JPY 5.7 billion since the development projects were making steady progress. On a full year basis, we expect to spend JPY 102.5 billion, JPY 500 million more in R&D than the original forecast, which represents an JPY 8.3 billion increase from a year before. G&A expenses increased because value-added portion of the corporate taxes increased because of the increase in profit.

Page 6 shows the financial overview of the most recent 3 months of July to September. Increases in revenue and profits gained traction as we went through first, second and third quarter. In the first quarter, there was only a slight year-on-year growth as the unit prices in the first quarter last year were pre-NHI drug price revisions, and there was an extraordinary income from the business transfer of long-term listed products. In the second quarter, as there were no longer such disadvantages, revenues increased by about 20% and profit by twofold.

In the third quarter, last-minute demand surge before the consumption tax hike was partially included in the domestic policy performance and the timings of exports of Alecensa to Roche happened to be in this quarter. Furthermore, onetime payments and royalty income amounted to as much as JPY 12 billion in the quarter alone. All these resulted in a growth of 33.5% in revenues.

As for cost of sales, royalties not recognized until second quarter were now booked for the entire amount for the last 9 months as an agreement on payment terms was reached. Therefore, the cost-of-sales ratio was 46.7%, up from the 44.2% recorded in the second quarter. However, compared to the same period last year, 2.7 percentage points improvement was achieved mainly due to the change in the product mix. All these factors resulted in the JPY 35.9 billion in growth in the operating profit to reach JPY 67.5 billion, more than double the amount posted last year.

On Page 7, I will explain about the revisions to the original forecast. First of all, forecast for revenues has been raised by JPY 87.5 billion to total JPY 680 billion, which would take us beyond JPY 600 billion for the first time. Domestic sales forecast has been increased by JPY 47.9 billion due to the strong performance in new and mainstay products. Our original full year forecast for domestic sales was a year-on-year decline of 2.7%, but this would be revised to a 9.3% increase. As for overseas sales, since exports of Actemra and Alecensa to Roche have been strong, JPY 10.1 billion upward revision has been made.

Royalty and profit-sharing income has been raised by JPY 20.5 billion as overseas sales of Hemlibra by Roche have been significantly exceeding the original forecast. Multiple onetime income and royalties not included in the original forecast have been recognized in the third quarter, which is reflected in the revised forecast for other operating income. As for cost of sales, due to the more-than-expected increase in the share of in-house products, cost-of-sales ratio has been lowered by 2.6 percentage points to 45.2%.

R&D expenses has been increased by JPY 500 million, but increased efficiency in other expense items is expected to absorb the increments so that the total operating expenses would be maintained at the original forecast. As a result, the forecast for the operating profit has been raised by JPY 75 billion from the original forecast to reach JPY 218 billion, surpassing the JPY 200 billion mark for the first time. The operating margin is expected to be 32.1%. EPS has been revised to JPY 302, about 1.5x higher than the original forecast of JPY 198.

Page 8 shows revised sales by disease area. Forecast for all the disease areas have been revised upward. Domestic oncology area has been raised by JPY 24.7 billion or 11.4%.

Looking at the reasons for the revisions by product. Avastin benefited from the delay in the launch of a biosimilar pharmaceutical from our assumption. Perjeta has seen its prescriptions for adjuvant therapy exceeding the original forecast. Tecentriq has been prescribed more than the original forecast, mainly for non-small cell lung cancer. The bone and joint area has been raised by JPY 6.3 billion or 6.1%. We had originally assumed a repricing of Actemra for market expansion, but it doesn't appear to take place at least until the end of this year. Therefore, we have made an upward revision of JPY 4.4 billion. The renal disease area has been increased by JPY 2.3 billion based on the actual result up to September.

In others, Hemlibra alone is expected to bring in JPY 12.2 billion more in sales. Since prescription switching in hemophilia A with and without inhibitors has transpired faster than originally expected, the original forecast has been now doubled to JPY 25.1 billion. Last but not least, as for overseas sales, exports of Actemra have been raised by JPY 4.6 billion to total JPY 89.2 billion, while Alecensa by JPY 5.4 billion to JPY 42 billion.

Now this slide lists products that have been upward revision of more than JPY 4 billion only. For the revised sales of all the products, please refer to the supplementary materials for consolidated financial results for the third quarter of fiscal year 2019.

Now on Page 9. This is about Hemlibra sales to Roche. It's now updated from the announcement at the beginning of the year. First, about export sales. The forecast is now revised to JPY 3.3 billion, up JPY 900 million from the original forecast of JPY 2.4 billion. According to the original forecast, we were to ship the product worth JPY 2.4 billion before the end of last year to be inspected by Roche this year. Other than that, normal export sales were expected during this year. But now we see an additional supply worth JPY 900 million at the initial price.

The original forecast of JPY 2.4 billion plus JPY 700 million out of JPY 900 million, that is the total of JPY 3.1 billion, have been recognized as sales as of the end of September. With the remaining JPY 200 million to be inspected in the fourth quarter, the total now stands at JPY 3.3 billion as a revised forecast value. Export at ordinary supply prices are not expected during this year and will start only from next year.

Now about royalty sales. As Hemlibra at Roche are exceeding our expectations, royalty income for initial shipment, that is the settlement of the difference between the initial price and the ordinary supply price, is now revised upward to JPY 40 billion for the full year, which includes an increase of JPY 15.6 billion from the original forecast of JPY 24.4 billion. Below that, the royalty income for intellectual properties is also expected to increase, although we don't disclose any specific amount here. On the other hand, profit sharing income for co-promotion activities, whose numbers are also not disclosed, is expected to stay in line with the original forecast.

If you think about Hemlibra sales of Roche in terms of different geographies such as the U.S., Europe and others, it is the U.S. and others where the sales are dramatically exceeding our expectations. And in the markets where we have co-promotion, the sales are more or less as expected. That is why we decided to keep the forecast unchanged for profit-sharing income.

Page 10 carries revised forecast for other items than earnings. First of all, investment on tangible assets. The original forecast of JPY 56 billion has been revised downward to JPY 49.5 billion. Back in May, we made an announcement that we planned to make an investment of JPY 127.3 billion for the next 3 years to construct a research building at the Chugai Life Science Park Yokohama. As of now, we have not changed the total amount of investment expected no other construction plan. This revision is simply due to a change in payment timing shifting partly from this year to the next year.

Next, about an upward revision of depreciation as we close 2 research laboratories and dismantle our distribution subsidiary following outsourcing arrangements, which has been announced during this year, and accelerated depreciation is now underway, pushing up the amount of depreciation.

Now about the dividend. According to our announcement at the beginning of the year, we expected to pay an interim dividend of JPY 48 and a year-end dividend of JPY 48, the total of JPY 96 for the full year. But we have revised our year-end dividend to be undecided for the time being. As you would understand from the revision of forecast for profit and loss, the company's profit structure is experiencing very rapid and drastic changes, as written on the page, and year-end dividend will be decided after the fiscal year-end when we will also have a good understanding of next year's profit projection, which will be in January.

This is not written on the slide, but IBI 21, which is our midterm business plan for 3 years starting this year, includes core EPS as one of the financial KPIs. The target there is a high single-digit number. We're now undertaking discussions as to whether this target should also be revised. A result of such discussion will be made clear by the time we announce this fiscal year's performance at the latest.

Page 11 is about financial performance vis-à-vis our full year forecast. First, if you take a look at the progress ratios against the original forecast, those numbers are all very high, with some already exceeding 100%. On the other hand, the progress against the revised forecast is more or less in line with that of last year.

Now on Page 12. This is about sales progress of growth products against full year forecast. Once again, the current progress against the revised forecast is in line with last year, across all the products.

Just to note, Tecentriq at 65.9% and Hemlibra in Japan at 66.9%. The progress ratios appear to be low compared to other products. But these are growth products, and we have higher sales expectations for the fourth quarter. So those lower ratios are only very natural when it comes to growth products.

That is all from me. Thank you very much.

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

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I am Hirose from R&D portfolio. Let me review the status of our development pipeline as of the third quarter.

Please turn to Page 18. This is an overview of our pipeline in oncology, bone and joint and renal areas as of October 24, 2019. The red star represents projects which saw advances in stages since the last time. In oncology, Kadcyla was filed for approval in August in Japan based on the results of KATHERINE trial for HER2-positive early breast cancer, adjuvant therapy indication.

Now Page 19. This is an overview of the pipeline in autoimmune, neurology and others. In autoimmune, we have started a Phase I trial in Japan for RG7880, a human IL-22 fusion protein we in-licensed from Roche. In neurology, SA237/satralizumab has been filed for approval in the U.S. and Europe based on the results of 2 Phase III trials targeting NMO spectrum disorder. In others, for NXT or NXT007, which is from our own pipeline, a Phase I trial has started for hemophilia A.

Page 20 provides you with a list of major R&D topics in the third quarter. Rozlytrek has been approved and launched for NTRK mutation-positive solid tumors. Approved agents include Tecentriq based on IMpower133 study, which is a chemo combination study, was approved in August for extensive stage small cell lung cancer. The drug has also been approved for PD-L1-positive triple-negative breast cancer based on another chemo combination study, IMpassion130.

F1CDx has been approved as a companion diagnostic for Lynparza, a PARP inhibitor for first-line therapy in BRCA-mutated ovarian cancer. With this latest approval, F1CDx can now be used as a companion diagnostic for the total of 15 oncology agents.

As for filings, satralizumab, as already mentioned, has been filed in the U.S. and the EU, based on 2 Phase III trials for NMO spectrum disorder. F1CDx has been applied for partial change to be available as a companion diagnostic for Rozlytrek ROS1 fusion protein mutation non-small cell lung cancer, which itself is now under review for approval.

New to pipeline include NXT007, from our own pipeline for hemophilia A, as a planned indication and RG7880, in-licensed from Roche, for inflammatory bowel disease. I shall give you more detailed explanation about this project later on. Tecentriq for castration-resistant prostate cancer has been terminated based on the results from IMbassador250 study, which tested a combination with enzalutamide.

As for late-stage readouts, there are 3 for Tecentriq, 2 of them were announced at ESMO just a short while ago; 1 was for unresectable metastatic urothelial carcinoma. IMvigor130 study results were presented. In IMvigor130 study, Tecentriq was combined with a platinum-based chemotherapy and was compared with chemotherapy alone. A statistically significant improvement in PFS was demonstrated.

And as a readout was about IMpower110 interim analysis for advanced NSCLC, both squamous and nonsquamous. In patients with high PD-L1 expression, Tecentriq monotherapy, compared to chemotherapy mono, significantly extended overall survival, which was a primary endpoint of the study. Last readout about Tecentriq has been press released this week. It is about Tecentriq for unresectable hepatocellular carcinoma. In the Phase III trial, Tecentriq combined with Avastin, compared to the standard of care, which is sorafenib monotherapy, improved overall survival and PFS as the co-primary endpoint with a statistical significance and in a clinically significant manner.

Perjeta and Herceptin fixed-dose combination for subcutaneous administration has been confirmed to be non-inferior compared to its IV version.

As for presentations at medical congresses, results of SAkuraStar study, which tested satralizumab monotherapy, were presented at ECTRIMS. I will give you more detailed explanation on the results of the study later. ALEX study update and an analysis of Alecensa cohort of B-FAST study were presented at ESMO. Nemolizumab positive result of the primary endpoint of a Phase II trial conducted by Galderma overseas for prurigo nodularis was also presented at EADV.

And as others, satralizumab has orphan drug designation granted. For nemolizumab, Galderma has initiated a Phase III trial for atopic dermatitis. OWL833, that is GLP-1 receptor agonist out-licensed to Eli Lilly, now has a Phase I study initiated overseas.

Next, please turn to Page 21. This is about NXT007. This is new to our pipeline. Just like Hemlibra, NXT007 acts on factors IX and X in the coagulation cascade. Activation of factor X is promoted through catalysis of factor IX to activate the coagulation system. It is a bispecific antibody. It is designed to maintain a hemostatic ability comparable to that of healthy adults and children.

In order to satisfy the multiple expectations for NXT007 such as efficacy, safety and convenience at the same time, more optimal technologies such as FAST-Ig and ACT-Fc, which are different from Hemlibra, are incorporated. FAST-Ig is a technology to control electrostatic interactions between heavy and light chains to enable improvement of large scale production. ACT-Fc is technology expected to improve pharmacokinetics. For more details, please come to our R&D meeting to be held in December.

Now Page 22. With the next 2 pages, let me give you an explanation about RG7880, a human IL-22 fusion protein in-licensed from Roche. Inflammatory bowel diseases such as ulcerative colitis and Crohn's disease, which can both take a chronic course or remission relapse, are the target indications. These conditions can see clinical remission with existing therapies, but the real treatment goal is endoscopic remission or mucosal healing is hard to reach in some of the patients at present. RG7880 is an IL-22 fusion protein. As such, it is expected to heal intestinal tissue by promoting epithelial cell proliferation and reinforce the intestinal barrier through mucin production, thereby, repairing and protecting epithelial cells to exert therapeutic effect in IBD.

On Page 24. We are looking at study results of satralizumab for NMOSD as an add-on therapy on top of the standard of care presented in last year's ECTRIMS. NMOSD is a condition involving nerve and spinal lesions. It is an autoimmune disease of the central nervous system. With repeated relapse, patients experience visual and motor functions disorders. As such, it is important to prevent relapse as much as possible.

To the left, this shows results in the overall study population. To the right is results in aquaporin-4-positive patients. In the overall study population, the risk of relapse was reduced by 62%. Relapse-free rates were 89% and 78% at week 48 and 96, respectively. In the specific patient population with aquaporin-4 positivity, the risk reduction was 79%, and the relapse-free rates were almost 92% at both 48 and 96 weeks.

Page 25 shows study results of monotherapy satralizumab presented at ECTRIMS this year. The risk was reduced by 55% in the overall population in monotherapy and the relapse-free rates were 76% and 72% at week 48 and 96, respectively. In the specific aquaporin-4 population, the risk was reduced by 74% and the relapse-free rates were 83% and 77% at week 48 and 96, respectively. Based on these positive results, we have filed for approval in the U.S. and Europe this year.

Page 26 is about projected submissions. Tecentriq for urothelial carcinoma and hepatocellular carcinoma, now listed under 2020, were planned under 2021 before. But as we've seen good progress in development activities, they are now brought forward to 2020.

This concludes my presentation.

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Questions and Answers

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [1]

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Wakao from Mitsubishi UFJ Morgan Stanley Securities. My first question is about exports of Hemlibra to Roche. Once you resume the exports, I thought the price would be changed to the ordinary supply price, but it turned out, the price remained at the previous lower level. Though I was given the explanation by one of your IR personnel earlier, but could you share with us the background again? Am I also correct to assume that when the exports are resumed at the initial supply price, you will receive royalty payment?

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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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Itagaki speaking. Yes, we will ship another JPY 900 million worth this year. In fact, we already started the shipment, but it is being done at the initial supply price instead of the ordinary one. Let me explain why. In countries other than U.S. and Europe, the product has been launched sooner than expected, and we have been blessed with brisk demand. And as a result of discussions with Roche, we have decided to perform additional shipment at the initial supply price.

Another point I have not referred to so far is that as we, Chugai, produce Hemlibra here in Japan for global markets, export it to Roche to provide supply in various countries. It is our mission to ensure delivery of stable and sufficient supply to Roche. As we do so, we actually had a lawsuit filed against us for alleged patent infringement in Japan. In this context, we needed to make sure enough shipments to Roche as we had a risk of facing an injunction order to suspend shipments.

At the beginning of this fiscal year, our assumption was to see the court ruling sooner rather than later. But it turned out, the second instance court ruling came in later than originally expected, in October this year. We won the case, but this is the background that led us to ship another JPY 900 million worth this year to minimize risks. Obviously, for any of the volumes supplied at the initial supply price, once Roche has sold the product at the retail level globally, we will be entitled to what we call royalty 2 or compensation.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [3]

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I see. Since the demand is so strong, you want to make sure there is enough inventory at Roche so they can be fully prepared. Originally, I was under the impression that the royalty 2 payment could be completed around next year since you resumed exports, but based on what you just said, it would not be so accurate to assume that all the shipments made at the lower price would be sold through to the market by the end of next fiscal year. There is no doubt that it will not be completed by the end of this year. There will be payment obviously next year. So the question is how far the arrow on Page 9 has been drawn.

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

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But at this moment, we do not disclose until when it will be continued. Roche's sales to its customers have been quite strong. So we are still examining the future sales prospect at the moment.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [5]

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I see. My second question is about IBI 21. In your presentation, you implied that quantitative targets may be reviewed. In the CEO meeting that was held the other day, he commented that since there are still uncertainties, including the impact from biosimilar products, your company does not plan to change the quantitative targets. However, based on the third quarter results, with quite a strong performance of Hemlibra, the likelihood to make upward revisions to the quantitative targets has been enhanced, which has led to comments you made today. Is that correct interpretation?

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

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At the CEO meeting, he said, we would not make revisions at that particular moment. And my comment today was also to the effect that we will not make revisions at this present time. But since I kind of anticipated that questions would arise around this topic, I got ahead of myself and made comments. Given the most recent solid performance by reexamining market environment trends for the midterm, prospects of sales of our mainstay products as well as the progress in the pipeline, we are in the process of trying to see if we need to revisit the target of high single-digit CAGR for core EPS. We plan to come forward with earnings results for the full year at the end of January next year, at which point we intend to share with you the result of the reexamination together with the year-end dividend.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [7]

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I see. My last question is about NXT007. You said your target profile is to achieve normal level of hemostatic ability. I'm interested to know what level of hemostatic ability Hemlibra has.

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM of Finance Supervisory Division, Finance & Accounting Dept. [8]

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In terms of ABR, there seems to be hardly any bleeding, which makes me think that it does have normal level of hemostatic ability.

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Seiji Wakao, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [9]

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And yet you say there's still a lot of room for improvement. So compared to NXT007, which is aiming for a normal level, how would you position the current level of Hemlibra? That is what I would like to ask.

Another question around NXT007. As we look at the status of hemophilia market, a new treatment expected to be introduced is gene therapy products. So are you positioning NXT007 as something to aim to fight gene therapy or something to outperform gene therapy? Or is it something completely different in concept from gene therapy, and therefore, it is not appropriate to compare the 2? Could you comment on this?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [10]

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Hirose speaking. First, on the comparison of hemostatic ability. My answer would be that there's no quantitative data available. In terms of comparison with Hemlibra, based on the real-world clinical data that is expected to become available going forward for Hemlibra and the results of clinical studies for NXT007, we will try to figure out how we differentiate the positioning of the 2.

With regard to gene therapy, we believe, in the future, there will be some patients who will use gene therapy. But if you look at the results of clinical studies by BioMarin this year, it seems to me that there may be a slight issue in terms of long-term efficacy. Therefore, we would like to continue to closely monitor its safety and efficacy.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [11]

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Yamaguchi from Citi speaking. I have 2 simple questions. The first question is on NXT007, where you shared with us your antibody engineering technology. As this technology is expected to improve antibody pharmacokinetics at ACT-Fc, I suspect your aim is not just to improve the inherent hemostatic ability but also to extend the interval of dosing for the benefit of patients. Can you comment if I'm correct?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [12]

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Hirose speaking. As was said, we expect the pharmacokinetics profile to be improved. So it may be possible to extend the dosing interval. But we just started these clinical studies. And so we will wait until the results of the studies come in and then make decisions. Furthermore, we hope to take into account enhancing convenience for the patients, such as improved devices, as we develop NXT007.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [13]

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What you meant is, for instance, making the device easier to use, isn't it?

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Minoru Hirose, Chugai Pharmaceutical Co., Ltd. - Department Manager of R&D Portfolio Management Dept. [14]

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Yes.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [15]

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I see. Another question is on dividends. Since your financial result this time was incredibly good, it would only make sense if you pay dividend of JPY 100 per share in the second half. You said you will decide as you look at the performance of the next fiscal year. But did you mean that you will not stick with a 50% payout ratio but by looking at the performances of this and next fiscal years and make adjustments so as to ensure you're on track to increase dividends year-on-year?

Or is it your plan to pay dividend based on the payout ratio of 50% once the result is finalized for this year and again pay based on close to 50% payout ratio for the next year's results? Listening to your presentation, I sense that it was a bit shaky, whether your EPS will increase next fiscal year from the current one or not. Am I right to assume that EPS will basically increase?

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

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Our hope is that we will pay dividends stably and in increasing amounts continuously. And we just announced our forecast for this fiscal year and started to work on the rolling forecast for next fiscal year. And therefore, we need more time to come forward with the dividend amount. At this moment, it is not the case that we have changed our dividend policy.

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Hidemaru Yamaguchi, Citigroup Inc, Research Division - MD and Analyst [17]

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I see. Another question is on Page 9, where royalty income for initial shipment has been increased significantly. Is this because your sales secured for Roche after a review has been increased significantly, which has been simply reflected in this increase of JPY 15.6 billion, indicated in green?

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

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Well, I'm not sure what you meant by the word secured, but Roche's sales to its customers has been revised for this year, based on which we recalculated the royalty income and ended up with this number.

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

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This is Muraoka speaking from Morgan Stanley. I am very happy to see such a brilliant performance for this fiscal year, it's really great, but what about next year? Overwhelmingly, I see positive signs on the factors for next year as well. But can you tell us about any potentially negative factors for next year's performance, both on top line and on the cost side?

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

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Kosaka may have explained this in the CEO meeting in terms of business environment and that we may see from next year and beyond. One thing is, in Japan, we will see more of the headwind. One of the reasons is, of course, the pricing reform. Also, as sales of a product grows bigger, price recalculation on the ground of market expansion may be imposed outside of the usual price revision.

Biosimilars, they are already approved for Rituxan, Herceptin and Avastin. As they have just been approved this year, so we may not have seen their full potential yet. We will start to see some effects from next year and beyond. Apart from that, for overseas, we assume the current positive trend will continue for some time.

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

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How do you see the cost side?

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

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Cost-wise, R&D is an area of focus where we will spend a lot. In addition, digital and IT, we've not fully utilized their potential so far. We would like to invest more in those areas as well. This is also focusing on R&D.

That being said, our primary focus is on overall balance of resource allocation. And let me add some more comments on the top line, and it's about one of our small molecules that may see its generic version launched next year. So you may want to assume some impact of that from next year.

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

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Oh, I see. So it's about Edirol, right?

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

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Yes, that's right.

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

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Well, my last question is about influenza epidemics. There have been talks about that already this season. Do you see it as a positive factor vis-à-vis your revised forecast?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM of Finance Supervisory Division, Finance & Accounting Dept. [26]

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Well, Tamiflu for the fourth quarter, if I recall it right, our forecast is JPY 1.5 billion. It's smaller against last year's fourth quarter of JPY 1.8 billion. We have to watch out for what would be the magnitude of this season's epidemics. And what about our competitors? Development of resistance seems to be a hot topic, but it's really hard to predict. That's why we say JPY 1.5 billion, and please take it as a comfortable number for the time being.

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

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But is the sales already quite strong?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM of Finance Supervisory Division, Finance & Accounting Dept. [28]

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No, not so. I think there still is a distribution stock of a certain level out there.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [29]

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This is Arai speaking from Merrill Lynch. I have mainly 2 questions. First, the royalty income is revised upward. It's JPY 9 billion increase. Is that right?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM of Finance Supervisory Division, Finance & Accounting Dept. [30]

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Yes, it's revised upward by JPY 9 billion. At the beginning of the year, the forecast did not include certain things because of the risk of certain things not happening. They are event-driven, and therefore, not in our control. So in the third quarter, some of these events materialized and brought some income. How much forward? We have maintained a policy of not disclosing it, but the income has already been generated. That included, we now forecast JPY 20 billion all in all for the full year.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [31]

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Let me stay with this royalty topic. You've made an upward revision of JPY 29.5 billion from the original forecast. And this includes JPY 15.6 billion from the initial shipment of Hemlibra, plus the JPY 9 billion you've just explained. The remaining portion is about JPY 4 billion. Can I understand this comes from more sales than expected of Hemlibra to end users?

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Toshiaki Itagaki, Chugai Pharmaceutical Co., Ltd. - EVP, CFO and GM of Finance Supervisory Division, Finance & Accounting Dept. [32]

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Yes, you may say so. It comes from additional sales on top of our usual royalty income.

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Tatsuyuki Arai, BofA Merrill Lynch, Research Division - Junior Analyst [33]

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Does that mean export sales royalties of Actemra and Alecensa were more or less in line with the plans?

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

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Well, we receive royalties based on how much Roche sells. As for Actemra and Alecensa, their sales are good but not as good as Hemlibra. That means their impact on the revision is minor.

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

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One more question. Exports of both Actemra and Alecensa have been revised upward quite substantially. May I understand that expected sales for this year are unchanged, but sales expected for next year are higher than the original expectation?

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

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As we export the products in batches, it is quite hard to evenly distribute the shipments over quarters. That being said, what we can state for sure is we have increased the amounts of export for Roche because sales by Roche are higher than we originally expected. We're not ready to discuss next year yet. But Alecensa's international sales by Roche are brisk. Especially in China, Alecensa may soon be listed for reimbursement. So that's one area of expectation. We think Actemra has not peaked yet globally. Therefore, we assume the product can still continue to grow, albeit with single digits.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [37]

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This is Sakai speaking from Crédit Suisse. I have only 1 question about satralizumab. You've shown us some slides on satralizumab, which were more or less the same slides Roche used for their conference call. On the other hand, NMOSD is a unique condition according to Roche. Medical needs on the part of patients are quite high. And I had an impression that Roche expects quite high numbers for this as well. Let me confirm. Back in the September release, you said filing in the U.S. and EU was still under consideration, but may I understand that you have already filed? So that's my first question.

And another question is about the market here in Japan. This condition is quite similar to multiple sclerosis, or MS, which has a high prevalence in white women in the West according to my understanding. What about the market here in Japan? I understand that you have an orphan drug designation for satralizumab, but can you explain a bit more about the domestic market?

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

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About the filing, yes, it has been filed both in the U.S. and EU. And the number of patients in Japan is estimated at around 4,400. The prevalence is about 3 to 4 out of 100,000. So this is a disease whose prevalence is higher here in Asia than in the West.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [39]

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According to Roche material, 5 out of 100,000 is cited. So your number is close to that in Asia or in Japan for that matter, is that right?

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

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Yes, that's right.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [41]

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Understood. And the prices will be different for this indication?

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

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Different? Satralizumab has not been launched.

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Fumiyoshi Sakai, Crédit Suisse AG, Research Division - Research Analyst [43]

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Well, yes. So I know -- what I mean by that is as an IL-6 product, prices at home and abroad will be set with new criteria, not the same as other IL-6 products?

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

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Well, we do not disclose information about prices. Sorry about that.