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Edited Transcript of IDIA.S earnings conference call or presentation 23-Jul-20 12:00pm GMT

Half Year 2020 Idorsia Ltd Earnings Call

Aug 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Idorsia Ltd earnings conference call or presentation Thursday, July 23, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André C. Muller

Idorsia Ltd - Executive VP & CFO

* Andrew C. Weiss

Idorsia Ltd - Senior VP and Head of IR & Corporate Communications

* Jean-Paul Clozel

Idorsia Ltd - CEO & Director

* Simon Jose

Idorsia Ltd - Executive VP & Chief Commercial Officer

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Conference Call Participants

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* Barbora Blaha

Crédit Suisse AG, Research Division - Research Analyst

* Graig Suvannavejh

Goldman Sachs Group, Inc., Research Division - Executive Director & Senior Equity Research Analyst

* Jameel Bakhsh

Barclays Bank PLC, Research Division - Research Analyst

* James Daniel Gordon

JPMorgan Chase & Co, Research Division - Senior Analyst

* Nicholas Peter Russell Nieland

Citigroup Inc., Research Division - VP & Analyst

* Raghuram Selvaraju

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Idorsia conference call. At our customer's request, this conference will be recorded. (Operator Instructions) And after the presentation, there will be an opportunity to ask questions. (Operator Instructions)

May I now hand you over to Andrew Weiss, who will lead you through this conference.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [2]

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Please go ahead. Thank you, operator. Good afternoon, good morning, everyone to wherever you're calling in from. My name is Andrew Weiss, and I want to welcome to -- welcome you all to our first half 2020 financial results call. Today, we will be talking about the performance over the first half as well as progress that has been made and how we look at the rest of the year.

With me on the call, as usual, are our CEO, Jean-Paul Clozel; our CFO, André Muller; and I'm also pleased to welcome Simon Jose, our Chief Commercial Officer, to the call.

Since the positive results of both our pivotal trials for daridorexant, many people have been asking how is Idorsia intending to commercialize daridorexant. Simon has joined in this call to give his first impressions on how we see the insomnia market and how he -- and then he will be able to take questions later on.

Next slide, please. Before handing the microphone, I need to remind everyone that we will be making forward-looking statements. You, therefore, have been appropriately warned about the risks and opportunities of investing in Idorsia shares.

Next slide. Jean-Paul, the floor is yours.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [3]

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So Slide 3. So the beginning of 2020, the first half of 2020 has been a tough beginning of the year, of course, because of this COVID crisis. But despite the COVID crisis, Idorsia has moved forward in a tremendous fashion. And I think that I would like to tell you that the whole company is now working very hard to prepare the filing of our NDA for the end of the year -- hopefully before the end of the year.

Next slide. So the first half of 2020 has been marked by a remarkable achievement. I've mentioned the positive 2 Phase III results with daridorexant, but we have also achieved a licensing agreement with Neurocrine, we have issued 11 million new shares, raising our cash liquidity. And also, this is important for Idorsia, Janssen submitted an NDA, both at the FDA and at the EMA for ponesimod in multiple sclerosis. We believe that ponesimod is substantially differentiated from other S1P1 receptor agonists, and we are really very hopeful that it will be a commercial success. And remember that we get 8% royalty on the sales of ponesimod.

What is also important is that despite -- sorry, Slide 5. Despite the COVID crisis, we are moving rapidly our pipeline forward. Basically, during this crisis, only one project was more or less on hold. This is the clazosentan, because clazosentan patients are hospitalized in intensive care units and we wanted in conjunction with investigators to really keep these intensive care rooms for patients with COVID. But now the project has restarted, and all other Phase III programs are moving forward. We got a delay, and it's very difficult for me to tell you how much is the delay, because all will depend how fast the hospitals can reopen, how fast the traveling, because we need to be able to go to see the patients in the centers and the investigators. All depends on how well the countries are going to be able to deal with this crisis. But what is very reassuring for me is that -- to see recruitment picking up now with some of our Phase III projects, and for example, I'm confident that we will get the results of lucerastat next year.

So next slide. So I think we are on track within Idorsia to achieve the goals that we have given to us when 3 years ago we were created. First thing was to get 3 products on the market. And you see with daridorexant, but with lucerastat, with aprocitentan with clazosentan following rather rapidly after daridorexant, I believe this goal is achievable.

The second goal was to build a commercial organization, and very soon Simon will tell you what is going on about this goal.

And the third point was to bring Idorsia to a sustainable profitability. When we think of the future income of ponesimod, of daridorexant and all the other Phase III program which are coming, I think that this profitability should be able to be achieved in a reasonable time line. But what is very important was not only to reach profitability, but to be able to grow for the next 10 or 15 years, and to have brought to the market sales with a potential of CHF 5 billion sales, and I think we're on good track.

And finally, what is important, and this is going to be extremely important for the launch of daridorexant, we want to use all state-of-the-art technologies, not only for research, not only for development, but also for marketing. And I think people speak about digital launch. I believe that you cannot only launch 100% digitally, but this digital means are going to be very helpful to make daridorexant a success.

Slide 7. Next slide, Slide 7. So we have discussed in length, and I will not come back on that, the fantastic results we got with daridorexant. We are continuing since the 2 last webcasts to analyze these 2 studies, and I would say we have not found any disappointing -- we have not had any disappointments. We discover more and more, I would say, gems in this huge data mine that we have. This product, daridorexant, is really an outstanding product. I think it's going to be really changing the life of many patients within insomnia, not only they will be able to sleep quicker, to sleep longer, to sleep, I would say, better, but I'm convinced that we have evidence to show that with this drug, people can function better during the day.

So we are soon going to show the results at a scientific conference. The first results will be shown in August. But of course, there are, I would say, tens of papers to be written based on the huge database that we have.

So now we must not do the mistake -- now next slide. We must not do the mistake to believe that even we saw fantastic results, a drug can sell by itself. We need to explain the differentiation of daridorexant. We need to explain what are going to be the benefit of this drug. And this is going to be the goal of the launch, which is now orchestrated and prepared by Simon Jose, who's our Chief Commercial Officer. Simon has now -- he's been with us for more than a year. He has a fantastic experience for not only -- but for large -- for this type of products, he got this experience in GSK, and he's going to tell you what is happening on the commercial front. Please, Simon?

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Simon Jose, Idorsia Ltd - Executive VP & Chief Commercial Officer [4]

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Thanks, Jean-Paul, and good morning, good afternoon, everybody. I'm very pleased to join today's webcast and provide you with a short update on our commercial strategy. Obviously, following the positive Phase III results with daridorexant, we're moving full speed now to prepare for a successful launch. And as you've seen, we've established the U.S. affiliate and already appointed a talented leadership team with deep experience of the U.S. market. And to give you an idea, they collectively have 178 years of experience, and have worked on 40 launches between them. Daridorexant is the first sleep medicine to demonstrate not only an improvement in sleep onset and sleep maintenance, but also, as Jean-Paul has said, in daytime functioning, all without compromising safety. So with this outstanding profile, we believe daridorexant will be clearly differentiated from existing orexin receptor antagonists and the older widely prescribed sedating sleep agents.

Now while we're clearly excited about the Phase III results, I'd like to take just a few minutes to share with you why we're also excited about the opportunity we have in front of us in the insomnia market.

Next slide, please. The insomnia market is huge, with an estimated 20 million adults in the U.S. alone suffering from chronic insomnia, and with more than twice that number experiencing poor sleep. Insomnia at night affects every aspect of a person's day, including reduced productivity and greater work absenteeism than healthy sleepers. Relationships with family, friends and coworkers can suffer too. And the impact goes beyond quality of life. Insomnia costs the global economy approximately $100 billion a year. And furthermore, there's growing evidence that chronic insomnia is associated with increased risk of other diseases, such as cardiovascular and cerebrovascular disease. But despite the substantial burden, the insomnia market is underserved. Existing products all have limitations, whether that be insufficient efficacy through the night, next-morning residual effects or other well-known adverse events. So all in all, there's a high unmet need in a very large patient population.

Next slide, please. Now one of the things that gives us confidence in the magnitude of the unmet need is the prescribing patterns in the U.S. that we've seen over the last 15 years-or-so. As you can see from the chart, there's been a significant decline in the use of the Z-drugs following the FDA dose change and safety warnings in 2013. With the addition of the black box for complex sleep behaviors last year, we expect the shift away from the Z-drugs to continue. Now since 2013, we've also seen a corresponding increase in the use of trazodone. We're doing more analysis on this, but we estimate that 70% to 80% of trazodone scripts are written at doses primarily used to treat sleep complaints. And this, despite trazodone not being licensed for insomnia, and the American Academy of Sleep Medicine guidelines explicitly recommending against its use. This clearly suggests there is a large unmet need and a big opportunity for a product that is specifically developed to treat insomnia that can deliver the desired efficacy without compromising safety. And as an aside, these data also remind us that we need to account for this large and growing off-label use of trazodone in order to get the true picture of market potential.

Next slide. So I'd like to finish by sharing our commercial approach of launches and how that applies to daridorexant. First, although there's a real opportunity to transform and modernize the insomnia market, we cannot approach it in a standard way. We need to bring innovative approaches to our launch, including predictive analytics and, as Jean-Paul has said, the use of digital channels and wearables, and an overweighted focus on the patient, given the disease area we're entering. Second, we believe daridorexant will have a clearly differentiated profile. I've spoken to this already, as has Jean-Paul, but the effect on day-time functioning and the safety profile of daridorexant are 2 obvious and important areas that stand out for their difference to existing sleep products. Daridorexant has the potential to bring patients suffering from insomnia what they want: to sleep longer at night and feel better during the day. Third, we need to be flexible and nimble in how we build the commercial organization. We'll build global brands with consistent positioning and claims, and use best-in-class platforms and ways of working. Since we're building our organization from scratch, we have an opportunity to design this in from the beginning, allowing us to move fast, make quick decisions and grow in a cost-effective way.

And finally, when we look across our pipeline, all our late-stage assets are in the specialty area, except for daridorexant, where as you all know, a large volume of insomnia prescriptions are in primary care. We're confident we can build the capabilities we need to successfully launch our specialty assets, and they do not require large infrastructure. But for daridorexant, in order to capture the full potential of the product, we need to effectively reach the primary care market, and we will do so through selective partnerships. As you know, we have already announced a partnership with Mochida in Japan, and we are currently in discussions with a leading contract sales organization in the U.S. to partner for our launch there. This partnership strategy allows Idorsia to retain control of the product and build our own core capabilities, while leveraging our partners' experience and track record of launching products in the primary care market.

So in closing, daridorexant is the first asset we will commercialize globally from our robust pipeline. We're very excited about the Phase III results and believe we have a product that will enable Idorsia to lead the much-needed modernization of the insomnia market. Our launch preparations are well underway, and we're ramping up the recruitment of our team. Our partnering strategy to reach primary care is clear, and I very much look forward to providing you with updates on our progress over the next year.

And with that, I'll hand over to André. Thank you.

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André C. Muller, Idorsia Ltd - Executive VP & CFO [5]

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Thank you, Simon, and good afternoon or good morning to everyone on this call.

With no further ado, I will go directly to see the next slide, number 13. Let me start here with the P&L and how our results came about. On the left side, you see the revenues of CHF 58 million. This relates to a CHF 48 million corresponding to the portion recognized in the P&L of the $57 million paid by Neurocrine for the rights to develop our calcium T channel blocker -- develop and commercialize, of course -- and a 2-year research collaboration for backups or follow-ons. Out of this $57 million, 5 million were already paid in Q4 2019, and 52 million were paid in Q2 2020 following the IND granted by the FDA for this calcium T channel blocker. The rest is CHF 10 million, and it's deferred revenue with the previous collaboration already announced, Janssen with aprocitentan, 5.5 million; Roche with a research collaboration, 2.5 million; and Mochida, 1.8 million, the collaboration Simon Jose alluded to in Japan as a co-marketing for daridorexant.

I will detail the CHF 193 million non-GAAP OpEx in a minute, and go directly to the next bucket, which is, I would say, usual D&A, CHF 10 million. Stock-based compensation, CHF 11 million. These are usually the main differences between non-GAAP and U.S. GAAP, around CHF 40 million on a full year basis. So you see here that we are well on track.

But there is here, and you see it in this bucket, Other, of CHF 24 million, there is another difference between non-GAAP and U.S. GAAP which is relating to an accrual in connection with an ongoing arbitration. Bear with me, because I think it's worth spending some time to really explain you what is this all about. This CHF 24 million accrual is relating to clazosentan. Idorsia currently develops clazosentan. As you know, we have almost completed the Japanese registration trial. And the ongoing REACT trial will also be hopefully completed by end of next year. So we should commercialize clazosentan in various -- across the globe, if the drug is approved.

Clazo was acquired by Actelion through an SPA, or share purchase agreement, with a company called Axovan. And the Axovan vendors were entitled or are entitled to CHF 115 million potential regulatory and sales milestone if and when due. Out of these vendors, 65 (sic) [65%] of these Axovan vendors entered into an arbitration claiming that the J&J transactions -- and here used the approach to encompass the J&J acquisition of Actelion, but also the prior spin out of Idorsia. So the claimants believe that this transaction has triggered the change of control, and therefore that they are entitled to the accelerated payment of all outstanding milestones. This would mean CHF 75 million relating to clazosentan, and they even claim another CHF 5 million for another compound that was discontinued many years before the merger.

Remaining Axovan vendors included Actelion for 7% or CHF 8 million, so this is Idorsia now, and we will never have to pay this milestone, because it's left pocket, right pocket. And 28 (sic) [28%] have decided not to join the arbitration.

In H1 2020, Idorsia acquired from this 26% -- 26% of this 28% non-claimants, all their future potential milestone, around CHF 30 million, for a cash consideration of CHF 9 million. Obviously, the nonclaimants, 2 seasoned and reputable venture capitalists, considered that this deal is a fair deal, considering the probability of success and, of course, their cost of capital. So the CHF 9 million is, in essence, an accelerated milestone, and therefore, was booked as an R&D expense, as you will see in the next slide. But before, I would like also to recall that the same offer was also made to the remaining 2% nonclaimants. Some of them have already taken our unconditional offer, but we also expanded this offer to the 65% claimants, such settlements being under certain conditions, notably the claimant bearing all arbitration and royalties. Should these 67 remaining vendors -- 2 nonclaimants, 65 claimants -- take our offer, Idorsia would pay a onetime payment of CHF 24 million in lieu of 77 staggered milestone. So this CHF 24 million accrual is also booked in R&D expense. So the total impact in H1 2020 is an expense of CHF 32 million. And for further details, please refer to the legal update of the press release or the Note 12 of our interim consolidated financial statement.

To finish with this slide, you have also, below EBIT, an CHF 11 million item, and this CHF 11 million item is mainly relating to the interest paid on the CHF 200 million convertible bond that has a coupon of 75 basis points. And our deposits, who have a negative yield on the Swiss deposits, almost compensated by the way -- by the positive yield on the U.S. dollar deposit. We have also a CHF 4 million accretion expense on the J&J CHF 445 million convertible loan, and CHF 4 million unrealized loss on the 1.3 million Santhera shares that we hold, and that are valued on a quarterly basis mark-to-market.

We can go now to the next slide, number 14. As you can see here, we see non-GAAP operating expenses. We spent much less in H1 2020 than in H1 2019. If you exclude the CHF 9 million milestone, the spend was CHF 184 million, so 50% less than in H1 2019.

Going from right to left, so we already discussed the CHF 9 million milestone, you see a small increase of CHF 3 million in G&A, which was mainly driven by IT systems because we need to prepare the supply chain and commercial systems and processes to enable us and to enable Simon and his team to launch the products starting with daridorexant across the globe. Commercial went up from CHF 5 million to CHF 7 million, with now the core team recruited in H2 with Simon, and also in the U.S. with the GM, Patty Torr.

And you see that clinical development went up from CHF 101 million to CHF 151 million (sic) [down from CHF 151 million to CHF 101 million]. So CHF 50 million more (sic) [less], and that's mainly due -- more than CHF 40 million out of this CHF 50 million decrease, is due to the pivotal trial for daridorexant, which came to end -- at least for the pivotal trials, there's still a lot of work to do -- but in H2 2020. And drug discovery went also slightly down from CHF 56 million to CHF 49 million, mainly due to some projects that were postponed. There is, very clearly, also in the numbers of the first half of 2020, an impact due to COVID-19. So a clear underspend really relating to COVID-19, which is around CHF 30 million, CHF 40 million.

Let's go to the next slide, 15. So let's hear how our cash flow came about. We started the year with CHF 739 million liquidity. We spent CHF 193 million non-GAAP OpEx, as we just discussed. We cashed in CHF 59 million milestone, so it was the CHF 50 million from Neurocrine, but also the CHF 9 million from Mochida. We had limited CapEx, CHF 4 million, and an increase in working capital requirements, mainly CHF 16 million. And as Jean-Paul already mentioned, we raised CHF 330 million growth with the issuance of 11 million new shares, so at CHF 30 per share, or 323 million net after the 1% stand duty on any capital increase in Switzerland, and also after lawyers' and bankers' fees. So we entered the second half with a strengthened balance sheet with CHF 908 million liquidity.

Let's move to the next slide, number 16. This slide briefly gives you the breakdown of our liquidity with various durations to offset the negative interest rate environment on the Swiss francs deposit. And as you can see, our liquidity is mainly held in Swiss franc to avoid any currency risk. But 146 million are also held in U.S. dollars to cover our forecasted expenses in U.S. dollars.

Next slide, please, number 17, and I will finish with the revised guidance. But before giving you more color on this guidance of CHF 490 million non-GAAP and USD 530 million US GAAP, keep in mind that it excludes additional milestone payments. So in this guidance, the CHF 9 million are included, of course, and any potential award granted in the ongoing arbitration. The arbitration is substantially completed, witnesses hearings took place a few weeks ago. So we can now reasonably expect the decision of the arbitration panel before year-end. Then the CHF 24 million accrual that we also discussed a few minutes ago, will be reversed, and see the final award will be booked in the R&D expenses. So the final award is almost binary. It will be 0 if the arbitration panel concludes as we believe that there was no change of control triggered by the J&J transactions. It could go up to CHF 92 million if the arbitration panel concludes that there was a change of control that would then -- that triggered the acceleration of the milestone, CHF 75 million for Clazo, and possibly CHF 5 million for the second compound. And on top, you would have statutory interest for late payment, CHF 12 million as of end of June. So should we lose the arbitration, of course, we would pay the same award to any remaining nonclaimants. They are below 2% now, so it would be less than 2 million by now. And as I told you, we have some nonclaimants already -- that has already taken the offer we made. So in the worst-case scenario, the total impact could be up to CHF 94 million, plus additional statutory interest for late payment between end of June and the final judgment, plus potentially arbitration costs. Again, we believe that no change of control occurred, and therefore, the arbitration panel should not award any claim to the claimants, who will still be entitled, of course, to CHF 75 million staggered milestone, if and when due.

So now back to the guidance. The CHF 490 million -- or let's exclude the CHF 9 million. So the CHF 480 million guidance, this means that with roughly CHF 183 million paid in H1, this would mean that we will spend CHF 300 million in the second half of 2020. First, as explained, there is a nonstandard spend in Q2 due to COVID-19 prices, and this should be spent in H -- most of it should be spent in H2. We also plan for some significant drug substance and drug product supply, around CHF 25 million for daridorexant, in order to have enough finished products for the launch of daridorexant, starting with the U.S. We also plan for a significant increase with some commercial or marketing and selling expenses, fixed but also variable, it's another CHF 25 million in order to really prepare the market for the launch of daridorexant. And we have another bucket, which is around CHF 20 million, where we are preparing for the Phase III of our main Phase II assets, i.e., cenerimod and selatogrel. So yes, it looks like a huge spend -- the CHF 300 million looks like a huge spend in the second half of 2020. There is a catch-up due to the lower spend due to COVID-19 in the first half and also some one-offs in order to properly prepare the launch of daridorexant and to supply with finished products.

With this, I hand over to Jean-Paul for his concluding remarks. So operator, please, next slide.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [6]

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So Slide 18. So thank you, André, thank you, Simon.

I hope you have seen that the company is moving forward, getting ready for a successful launch of daridorexant. It's always difficult, because I have seen the data, you have not seen the data of daridorexant, but in August, you will start to have a first look and I think that you will not be disappointed. What you have also to remember that, until the end of the year, a lot of events, not only you will see the data of daridorexant, but there will be a lot of results that we will get. We are in the second half of this year, we are going to have the result of clazosentan in Japan, we are going to have the Phase II -- maybe the Phase II results of daridorexant in Japan. A lot of new information will come. And so I'll say stay tuned, because it's going to be an exciting second half of 2020. Thank you.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [7]

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Thank you, Jean-Paul. So with that, we've come to the end of our prepared remarks. Next slide, please. So now we can go into the Q&A session. Operator, please prepare the lines.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, we will now begin our question-and-answer session. (Operator Instructions) And the first question is from James Gordon, JPMorgan.

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James Daniel Gordon, JPMorgan Chase & Co, Research Division - Senior Analyst [2]

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James Gordon from JPMorgan. First question was about orexin competition and J&J. So we recently saw that J&J sold their stake in Idorsia, and that decision seemed to come quite shortly after they got the full rights to their orexin-2, seltorexant, return to them. So 2 elements to the question. One is, how do you think daridorexant stacks up against seltorexant based on what we've seen so far in insomnia? Is that a significant competitor we should worry about? And also, I think they're quite bullish about their orexin for use in depression rather than just in insomnia. Are you thinking about also doing darido for depression? Could that be an interesting opportunity? That was the first question.

And second question, which is the -- on partnering, so I know Idorsia wants to take darido's market itself or maybe you're using some sales organization, but in terms of other assets in the pipeline, do you still think that you necessarily want to put everything yourself? Or now that daridorexant is basically now done, could you actually say, "with something else we'd consider licensing to someone?" Or could you monetize other things like the ponesimod royalty stream? So is there anything else that you might do more collaborative actions on?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [3]

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Okay. Let me just summarize your question. So on the one hand, competition in the orexin environment, you're looking for comments on what do we think about seltorexant and whether we're interested in developing daridorexant in the direction of depression? And the second question is with regards to partnering. On the one hand, we acknowledge daridorexant. We look for marketing muscle. But your question goes to whether we'd be inclined to partner out other things. Did I summarize that correctly?

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James Daniel Gordon, JPMorgan Chase & Co, Research Division - Senior Analyst [4]

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Exactly. Partner out on other things or even could you divest…

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [5]

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Jean-Paul, do you want to take that question, please?

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [6]

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I think you have a very good question, James, about depression and sleep. Because it was a choice we had, let's say, 3 or 4 years ago: Should we try to niche our product into a small indication? Or should we go to the very large indication? Which we did. And at this time, we had also some discussion with the FDA and -- so we know a little bit what is their mind. And I think, frankly, it was very clear to me of why to go for a small niche indication if you have the whole big indication? Because, frankly, somebody who cannot sleep with depression can take daridorexant any day. There is no barrier, and there is no reason why he should not take it. And how you can really make money, if you go to a niche indication when somebody with supposedly a lower price, we have covered your indication in addition to all the other indications. So we always thought that there is no possibility to go to a niche first, but of course, because of our very good results, it doesn't exclude at all that we cannot start studies. But I don't think this will be a registration study, but certainly scientifically valid studies in many different type of patients. And this might include, of course, depression, but this might include also patients with sleep apnea, or every type of indication you can think of -- and that's our strategy. First, let's get the bigger label, and then show the benefit in a much more concrete way in subgroup of patients. And this is, of course, a program which we are designing now.

So -- and I think that for seltorexant, frankly, what we have seen, it's a selective orexin. We do believe we need to block both receptor to get the whole benefit. And the first results were not really convincing. So I'm not sure what is going to do, Janssen, with this drug.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [7]

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Do you want to comment on our appetite for partnering other drugs than daridorexant?

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [8]

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Yes. I think that because we now know that daridorexant is going to be put on the market, we are a little bit more relaxed to be able to find a partner. However, now we have also revenues, and so we know that we are closer to -- I would say, closer to profitability than before. So frankly, we will partner, and we are in discussion with some partners, but we need to have really good conditions, because it's not a few million milestone which is going to change anything for Idorsia. We need either a very large partnership or no partnership.

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Operator [9]

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And the next question is from Jameel Bakhsh, Barclays.

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Jameel Bakhsh, Barclays Bank PLC, Research Division - Research Analyst [10]

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It's Jameel Bakhsh from Barclays. Apologies if I missed this on the call, but could you firstly remind us of your timing estimation just for clazosentan's REACT study and on aprocitentan's Phase III as well?

And then 2 more questions. Firstly, could you outline the potential implications that your daridorexant commercial plans will have on the company's capital requirements? Do you expect to raise more funds? And thirdly, what's your long-term vision for that -- for your subsidy, which now holds the full amount of Vaxxilon? And are there any R&D projects of interest that you might want to call out that are going on in there?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [11]

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Okay. Thank you, Jameel. I understood your second and your third question. So what are our additional funding requirements and how does Vaxxilon potentially impact going forward? Those are 2 finance questions, I would defer those to André. Could you repeat your first question, please?

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Jameel Bakhsh, Barclays Bank PLC, Research Division - Research Analyst [12]

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Sure. It was just an update on your timing estimation for the REACT study for clazosentan and on aprocitentan's Phase III.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [13]

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So as for -- REACT is restarted, as we said, it was really stopped the recruitment. It started -- the Japanese studies have finished recruitment. So we get the results this year. The REACT study is restarting, and frankly, it depends on what is going to happen in the United States and in some countries because of the COVID. So we know more about the timing exactly, I would say, at the end of the year. I know that some patients have been recruited already. But frankly, is there a second wave in September or not? That's going to be the key. But our intention is to finish recruitment the whole next year -- by the end of the year, next year. So we should have finished recruitment of REACT at the end of next year. And then you have to count 3 months of follow-up, so that the beginning of 2022, we should. But it all depends on -- of this COVID crisis.

Aprocitentan is moving well. We are opening a lot of new centers because we really want to compensate for these COVID delays. So -- and again, we are -- a lot of these patients come from United States and who knows what is happening in the United States, frankly, it's -- so again, we are -- difficult to give you some timelines. We have more than halfway through. What is very important for you to know is that both for REACT and aprocitentan, during -- of course, the patients continue to be treated during this COVID crisis, or assess -- the assessments were continuing during this COVID crisis. We had, for both of the program mentioned, DSMB, looking at the data. And to my knowledge, no negative information came to us. So the studies are continuing, which I think is very, very good, because I have no doubt that, for example, aprocitentan works on blood pressure, its safety is always a very important element to be informed.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [14]

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Thank you, Jean-Paul. André, do you want to pick up on the funding requirements and Vaxxilon, please?

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André C. Muller, Idorsia Ltd - Executive VP & CFO [15]

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Let me start by the smaller one, Vaxxilon. Yes. As you've seen, we acquired the minority, 26% equity stake, and also subordinated debt of CHF 12 million for -- [not from that] CHF 1.5 million. And we also terminated with Max Planck license around the synthetic carbohydrate vaccines. Now we are -- so we fully integrate Vaxxilon in our drug discovery organization. And there are 2 programs ongoing, 1 on CD. So there's one on Klebsiella pneumoniae. And that will require some more funding to go to the end of Phase I, around CHF 10 million to CHF 15 million. And if we enter in Phase II, then the minority shareholders would be entitled to an amount of CHF 3.6 million, but only if it's one -- if both would enter into Phase II.

And you're right, we are not a vaccine company. We believe that if we have compelling results after Phase I we should seek for a partner for these 2 assets and maybe also the knowhow developed by the Vaxxilon team. So that's your third question.

Regarding the second one and the funding gap. Yes, we see CHF 330 million. We have a strengthened balance sheet, as Jean-Paul said, this also allows us not to take offers from potential collaboration if we believe they are not -- do not reflect the real value or potential value of some of the assets. But we have some discussion on some of our assets as we had one concluded with Neurocrine for the calcium T channel blocker. And clearly, also ahead of the launch like the one of daridorexant that will require a set up the commercial organization and prelaunch marketing and selling expenses. Yes, we are definitely not funding that at breakeven. Here, we want to remain nimble and to see if and when we want to raise cash, either through equity capital market or equity-linked capital market. You also alluded to royalty monetization deals. You have an ideal candidate now with the 8% revenue sharing we are entitled to regarding ponesimod. And of course, out-licensing deals with, hopefully, upfront payments, and sharing of the development cost that would also reduce this funding gap. So yes, not funded until a breakeven. So we will need -- in one way or the other, we need to raise more cash.

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Operator [16]

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Yes. The next question is from Ram Selvaraju, H.C. Wainwright.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [17]

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Just 2 very quick ones. If we look at daridorexant and the commercial considerations for this molecule. Is your thinking that if you were to pursue the commercialization of daridorexant exclusively independently, that having one product in the bag of the sales rep would be sufficient? Or do you believe that it's potentially best to optimize daridorexant's commercial chances by having it paired to additional products?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [18]

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Thank you, Ram. Simon?

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Simon Jose, Idorsia Ltd - Executive VP & Chief Commercial Officer [19]

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Yes, I'll take that. I mean, if you look at it purely through a financial lens, often people will conclude that having a second product clearly allows you to amortize the cost of the sales force. Conversely, we also know that when people are very focused on 1 disease area, 1 product, they're actually way more effective. So right now, when we launch daridorexant with the sales force, it will just be carrying daridorexant. If in the future, there is a call for other primary care support for a future asset, then clearly, we can bolt that into the sales force. But when we launch, it will just be with daridorexant in insomnia.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [20]

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Okay. And then just very quickly on a -- just a clarification question on the time line. Is the revised time line or the time line that you talked about today of mid-2022 taking into account sort of a full resolution of the COVID-19 situation and its impact that you have seen so far on enrollment? Or are you assuming sort of continuation of the COVID-19 impact throughout the course of next year? Just wanted some clarity on that, please.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [21]

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Yes. I think we are not so optimistic to believe this is going to resolve. I don't think that until we get a vaccine, I think, unfortunately, we will have to live with that. But many countries reopen, many countries seem to be able to cope with it, and can now recruit patients, include patients. So what we told is that we have anticipated -- we are anticipating the problems of COVID and, for example, increasing the number of centers, because we think that the output of the centers is going to decrease from what we had planned. So the timing that mentioned -- but it's difficult -- really, really difficult to precise -- to be precise. But the timing is including continuation of the crisis. The question of course is, which geographical areas is it going to get worse or better? Some studies, for example, lucerastat, maybe more European studies, where we can really recruit patients in Europe. In Japan, we have also done the lucerastat study. It's possible. But some -- for some disease. U.S. is very important, and the U.S., surprisingly, in my mind, surprisingly is in bad shape for the COVID crisis in the present time.

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Operator [22]

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The next question is from Graig Suvannavejh, Goldman Sachs.

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Graig Suvannavejh, Goldman Sachs Group, Inc., Research Division - Executive Director & Senior Equity Research Analyst [23]

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I've got 2 today. The first, I really want to go back to the Phase III data for daridorexant, and the plan to pool the data from the 2 studies. I just want to clarify, is your understanding that pooling of the data is something that the agency will accept? In other words, did you need to show 2 separate positive Phase III studies? Or is it prespecified that you could pool the data together in order to have an integrated view of the efficacy of the product? So that's my first question.

And then my second question really speaks to the commercialization efforts around daridorexant. And I'm just wondering, at this stage in the game, if I could ask, what does the company think the key critical success factors are for a successful launch in this space, in light of the fact that there is heavy use of nonbranded products like trazodone, as you pointed out, but you will be the third door to the market and differentiation versus the other 2 doors. I'm just trying to get a better sense of how the company is thinking where darido can really differentiate not only versus other doors, but just generally in the market?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [24]

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Great questions, Graig. Thank you. Jean-Paul, do you want to take the one on the…

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [25]

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Yes. I will take the one -- and half of the second one. I'll leave half to Simon.

But first one is -- first of all, we don't need to pool. The 2 studies are positive. And when you see the data, there is no doubt, and the FDA wants to know what is the dose, and we know that the 50 milligram, everything was positive. And frankly -- and 25 milligram, a lot of elements are positive in both studies. So I think there is no doubt that this 25 milligram doesn't need the pooling. So pooling is just going to precise for the FDA, the extent of the effect, because we have a very clear confirmation of how much is the 25 milligram efficacy. There is no doubt that the 25 milligram work, and there is no doubt that the 25 milligrams has an effect on the functioning.

Just for your information, 10 milligrams, which was suvorexant, which was approved by the FDA, has never been tested in Phase III. Never. So the FDA doesn't really want to have 2 studies. They can even approve a dose which has never been tested. They want to know if the drug works and what is the dose. And we have given to the FDA -- we're going to give them the best data they'd ever had with a sleeping agent, where we know that the 10 milligram really has a minimum effect -- this is a very small effect. While the 50 milligram is fantastic, gets everything we want. And where 25 milligram is between the 2. And frankly, I think that -- with that, and with incredible safety, which is very interesting because 50 is even, I would say, at least as safe as 25. So really, I have absolutely no doubt that the FDA will be very happy to see this data.

Now of course, the pooling is very nice, but it's a cherry on the cake, because, frankly, I don't think it's even needed. But we'll do it. It has been preplanned. And the FDA knows that we are going to do it. And of course, this is going to be interesting information.

Now just before Simon answer, it's interesting because you say it's 1/3 of the product, it's 1/3 of the -- thing there are 20 generics or 30 generics company. The most important is what is really -- do you have the right product? You can have 40, 50, 100 products, if they are not the right product, it doesn't matter. You need to have the right product, the best product. The product which does the job. And frankly, we have it. This is the first time in the sleep market you will see a drug which can make you sleep faster, better, longer and doesn't have safety consequences, and even more, can improve your functioning in the day. No drug can do it because it took us 22 years to get it there. It didn't come by chance. We fight it so much. We made 30,000 products in order to get this one, and frankly, it was so difficult because you need the perfect pharmacokinetic, the perfect affinity over the receptors, so it's going to be really disruptive.

Now starting from the big product, there is a lot of things to be done, and Simon is going to tell what is going to be important.

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Simon Jose, Idorsia Ltd - Executive VP & Chief Commercial Officer [26]

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Yes. Thanks, Jean-Paul. And there's no doubt that, just because we're another door, they are very different in their PK profile. You only have to look at the dose response we get on efficacy and the lack of dose response we see with our adverse event profile, that is a very different product than suvorexant or lemborexant. And in a way, I think that flips into the access point because we're obviously aware that we're entering a largely generic market. So the first thing is we've got to have a differentiated product, which we absolutely have. Secondly, I think, unlike many generic markets where people, by the way, can still succeed, we know that there's a systemic concern about the use of the generic agents at the moment. And I think the reason we're seeing people moving to trazodone is because they don't have other options. So when you start using the off-target effect of an unlicensed medication in preference to the licensed medications, to me, that just tells us that we've got a big opportunity in front of us. So obviously, we're working through all the activities around market access and payers and everything else. But I think we're confident with the profile of the product and the growing concern about the agents that are in the market right now, [levels] not be a barrier to us being successful.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [27]

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As you know, also, as we say, the preparation, the premarketing, the market access, which was mentioned, there are a lot of other activities. Launch is a huge enterprise, and I would say the most important success factor, because you are going to ask me, is the experience of people who have made successful launch? Because you cannot invent what is needed to successfully launch. And I think that we have a good team. And really, we have -- the most important is a fantastic product.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [28]

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I hope that satisfies your questions, Graig. And we've come to the top of the hour. Operator, are there more questions?

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Operator [29]

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We do have another question from Nick Nieland with Citi.

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Nicholas Peter Russell Nieland, Citigroup Inc., Research Division - VP & Analyst [30]

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Just a quick one. So I note that the second door to the market looks to have been launched at a price discount to Belsomra, and I wondered whether you could comment on whether you think the profile you've demonstrated for daridorexant would command a price premium.

Secondly, on daridorexant, I wonder how much of the marketing is going to be direct-to-consumer. And how much that might be part of your costs in 2021? And then thirdly, just on the CHF 300 million cash burn for the second half of 2020, is that a realistic run rate for 2021? I wonder if you could just talk about the moving parts of your cost in 2021, and whether we can use that CHF 300 million as a run rate. Or will that be lower?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [31]

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Thank you, Nick. So the first 2, I think, for Simon. And then the third one on the cash burn run rate coming out of the second half of the year. André, do you want to comment on 2021 after Simon?

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Simon Jose, Idorsia Ltd - Executive VP & Chief Commercial Officer [32]

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Sure. Thanks, Nick. Good question. You have to obviously ask Eisai about why they've gone 25% lower than suvorexant. We certainly -- it's early days for us to be talking about price, but we certainly plan to price the products according to the value that we're bringing to the marketplace.

And on the second thing, with regard to DTC, we absolutely see the patient and the consumer being critical in this launch in this product. I think DTC now we should not be just thinking of big television spend. I think there's an awful lot now of different channels where we can get to patients through digital technology, omnichannel marketing, much more targeted, much more personalized messaging, and that certainly would be part of our plan. In 2021, obviously, there will be no branded activity, because we won't be approved, but we would expect to be starting our prelaunch activity, as Jean-Paul has referred to.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [33]

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Just before we go to the finance, and André, maybe answer the last question. I just like really to make a quick scientific explanation why it's so important to have a short half-life and a reproducible absorption. I think that's what you see with Eisai's product is a huge problem related to a half-life for 14 or 15 hours, and a huge variability into the absorption. So in order to avoid, you have between the rock and -- either if you want to get good efficacy, you are going to get long-term side effects, because people won't be able to wake up. Or if you don't want side effects, you have to have a low efficacy. And the worst of it is you don't know how to choose the dose, because from one patient to the other, there is a huge overlap between the 2 plasma concentration. So you are stuck. And this is why we took so much time for us to find the right kinetics, short half-life, good absorption, reproducibility, no drug interactions, because that allows to perfectly titrate each patient to the right plasma concentration, and also to avoid the remaining efficacy of the drug in the morning. What can you do if you are still sleeping in the morning? You cannot avoid that -- the only way is to give less. And if you give less, you have less efficacy. So there is really a huge importance of the pharmacokinetics for this product and you have to remember that. And this is why we have a unique drug.

Now maybe André can discuss about the -- but we are not in the guidance of 2021, I suspect. But maybe, André, you can give some answer?

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André C. Muller, Idorsia Ltd - Executive VP & CFO [34]

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No. I always agree with my CEO. We are not -- definitely not giving a guidance for 2021. What is clear and I was quite transparent, there are some one-offs in the second half, catch up due to delays of COVID-19. And one-offs because of significant drug substance and drug product, notably for daridorexant, plus some extra cost to prepare for the Phase III of selatogrel and cenerimod. So I would rather not take the second quarter -- the second half as a basis for 2021. But you have -- we could spend up to CHF 480 million, excluding the milestone. So CHF 480 million -- for sure, next year, we will go down in R&D because we finished some very expensive Phase III trial with daridorexant. Depending when we will initiate the Phase III for lucerastat and selatogrel, this will have an impact and -- but for sure, so globally, I would expect to be low.

But for sure, Simon will have to properly assess market by market, starting with the U.S., not so much with the commercial organization, but also with all the prelaunch marketing expenses, which will be a one-off, how much would be spent in 2021, ahead of the launch that should take place at the beginning of 2022 with the current time line. So we're not willing to make any commitments. The only thing I can tell you is that there will be a shift between R&D and G&A in favor of additional costs in commercial. But that's the price to pay in order to size what we believe is a huge opportunity in the insomnia market.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [35]

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Operator, do we have questions left?

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Operator [36]

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We have one final question from Barbora Blaha, Crédit Suisse.

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Barbora Blaha, Crédit Suisse AG, Research Division - Research Analyst [37]

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I have 2 very quick questions. First, for daridorexant. Can you remind us of the filing and commercialization plans in Europe? Do you intend to file here and also launch with a partner, et cetera? And then the other question is regarding cenerimod. Do you plan to do the Phase III trial in -- with a partner and share the R&D costs? Or do you prefer it to do it by yourselves?

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [38]

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Okay. With regards to European launch, Simon, it will be nice to have a comment from you. And for cenerimod, the future of the Phase III, Jean-Paul, maybe?

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Simon Jose, Idorsia Ltd - Executive VP & Chief Commercial Officer [39]

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Yes. I mean, we see a big opportunity in Europe, actually. All of the issues we've talked about today, although focused on the U.S., are all there in Europe in terms of the prevalence of the use of the Zs and Benzos. In fact, I think there's increased concern from the regulators in Europe about the use of these agents and restricting use to much shorter time lines than we see in the States. So we do see an opportunity in Europe. Obviously, it's a heterogeneous market. So the countries look different in terms of which products are predominant, and also the concentration of the prescription. So in terms of your question on partnership, that's something that we're looking at. And as we've said, with both Japan and the U.S., where we believe we require to get into primary care, then we'll look somebody to work with regard to sales force support to do that. But we would continue to remain in control of the core commercial capabilities in the asset across Europe.

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Jean-Paul Clozel, Idorsia Ltd - CEO & Director [40]

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And for cenerimod, you have seen, I think that lupus becomes more and more exciting. I think that there were many candidates in Phase III, you have seen some -- many failures now recently. And therefore, the value of cenerimod increased. I think it's going to be -- we are closer to the results, and it's going to be difficult for people to partner a drug a few weeks or months before getting the results. So I think that we first should see the results, and then we see the strategy, because I think that -- it's very difficult because it's a very big product. It would be a very large milestones or amount of money, and it's difficult to pay for such a milestone a few months before the results.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [41]

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Operator, I assume we don't have -- no more questions?

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Operator [42]

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That's correct. We have no questions left.

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Andrew C. Weiss, Idorsia Ltd - Senior VP and Head of IR & Corporate Communications [43]

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Thank you. So with that, we come to the end of today's first half conference call. Thank you very much for your ongoing interest in Idorsia. And as Jean-Paul said, it is going to be a very busy second half, so stay tuned. Operator, please close down the lines.

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Operator [44]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.