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Chugai Pharmaceutical Co., Ltd. (OTC:CHGCF) Q1 2017 Results Earnings Conference Call April 25, 2017 9:00 PM ET

Executives

Shinichiro Iida – SVP and General Manager of Marketing & Sales Division

Susumu Kato – SVP and General Manager of Marketing & Sales Division

Toshiaki Itagaki – VP and General Manager of IT Supervisory Division & Finance & Accounting Department

Analysts

Atsushi Seki – UBS Investment Bank

Fumiyoshi Sakai – Crédit Suisse AG

Hidemaru Yamaguchi – Citigroup Inc

Kazuaki Hashiguchi – Daiwa Securities Co. Ltd.

Seiji Wakao – Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

Shinichiro Muraoka – Morgan Stanley, Research Division

Operator

I am Itagaki. Please open the slide. Slide 2, this page shows the summary of the result of the first quarter. We posted an increase in both revenues and profit, with revenues at JPY 125.5 billion, up JPY 5.6 billion or 4.7% year-on-year.

Looking at the breakdown of the revenues, domestic sales, excluding Tamiflu, decreased by JPY 2.7 billion or 3.1% year-on-year, due to the impact of the NHI drug price revisions carried out last year.

On the other hand, overseas sales increased by JPY 4.8 billion or 23.1% year-on-year, due to the growth in the volume of exports of Alecensa and Actemra to Roche, offsetting the negative impact from the foreign exchange hedging against the yen’s appreciation.

Royalties and other operating income went up by JPY 3 billion from the year before, due to onetime milestone incomes. Cost of sales ratio to sales improved by 1.1 percentage points from 52.7% of last year to 51.6% due to change in the product mix.

Operating expenses posted a slight decrease of JPY 0.7 billion from the year before. As a result, on IFRS basis, we have achieved operating profit of JPY 26.3 billion and net income of JPY 18.7 billion, both posting a double-digit year-on-year growth.

Core operating profit and net income also showed a significant increase, respectively. The core EPS on the net income basis was JPY 34.22.

Please turn to Page 3. Here you can see the core results, which were derived by adjusting what we regard as noncore items from IFRS results. If I can draw your attention to the mid column, which says noncore items and the intangible assets, for the operating profit, it says plus 0.3.

This represents amortization of intangible assets, where onetime fees and subsequent milestone fees paid depending on the progress for the items in-licensed from third parties, including Roche, are amortized with the straight-line method for a certain period, after the launch of the products.

In the first quarter, this amounted to JPY 300 million, which was reversed in the core results, increasing the operating profit from JPY 26.3 billion on an IFRS basis to JPY 26.7 billion on a core result basis. From the next slide onward, I would like to use the figures based on the core results.

Let’s move on to Page 4, which shows the financial overview of the first quarter. You can see the results of the first quarter of 2017, highlighted in yellow in the middle as compared to the results from the previous year shown in the column next to it. The revenues were JPY 125.5 billion, up 4.7% year-on-year.

If you go down by 3 lines, you will find domestic sales, excluding Tamiflu, which totalled JPY 85.1 billion, down 3.1% from a year before due to the impact of the revision of the NHI drug prices last year.

Export to Roche was JPY 21.3 billion, up 29.1% year-on-year, with strong results from Alecensa and Actemra. As for sales of Tamiflu, ordinary sales decreased by JPY 900 million to JPY 6.1 billion, but together with the government stockpiles of JPY 1.3 billion, the total sales of Tamiflu increased by JPY 400 million. Royalties and other operating income increased by JPY 3 billion to reach JPY 7.3 billion, based on the onetime and milestone payments.

Cost of sales ratio versus sales shown on the right improved to 51.6% by 1.1 percentage points from the previous year. Back on the left table, the operating expenses totalled JPY 37.9 billion, down JPY 700 million year-on-year. Operating profit reached to JPY 26.7 billion, up 30.9% from the year before, with operating margin topping 20% to post 21.3%.

Going down by 3 lines to other expenses indicated as minus JPY 1.1 billion, you can find the breakdown on the right that says adjustment from transfer pricing taxation. The Japanese and Swiss tax authorities, who had reached a tentative agreement on advanced pricing arrangement for transfer pricing taxes as of the end of last year, went on to reach a formal agreement in the first quarter, where the income taxable by the Japanese authority would be reduced, while the income taxable by the Swiss authority be increased by the same amount.

This would result in a decline in the tax payable by our company, an increase in the tax payable by Roche. Therefore, we are going to pay part of the amount reduced in our tax payable in Japan to Roche for its additional tax payment, which led to the posting of JPY 1.1 billion in other expenses in the first quarter.

Moving back to the left table. In the third line from the bottom, JPY 6.3 billion in income taxes for the first quarter do represent a net effect of adjustments, such as the reduction in our tax payment. Though it is not indicated on the slide, this has resulted in a tax burden rate of 24.9%, down 2.4 percentage point’s year-on-year. Consequently, the net income was JPY 18.9 billion, up 26.8% year-on-year.

Now please turn to Page 5, where you can see increases and decreases of sales, excluding Tamiflu. Starting from the left up, in the top 2 lines, overseas sales went up by 23.1%. On the right, under sales by products year-on-year changes indicated in the same blue color, Alecensa overseas and Actemra overseas, both of which grew significantly from the previous year, representing a relatively strong performance overseas.

On the left, domestic sales were JPY 85.1 billion, down 3.1% year-on-year. By therapeutic area, at the bottom, is the oncology, minus 3.5%, and if you look at the bars on the right highlighted in the same green color, Alecensa increased by JPY 1.1 billion, while as indicated at the top, Avastin dropped by 8.1%, reflecting the 10.9% reduction in the NHI price last year under a special expansion repricing group.

All the way down to the bottom, HER2 franchise fell by 2.4%, breakdown of which is described at the bottom of the slide, with Herceptin minus 3.8% and Kadcyla minus 5.3%, respectively.

Back again to the left. The bone and joint, in purple color, grew by 3.0%. By product, Suvenyl saw a drop in sales, affected by the NHI drug price revision last year, while Edirol, Actemra and Bonviva all increased their sales. The renal disease, shown in yellow, dropped by 13.5%, with Oxarol and Mircera posting a negative growth, both affected by the NHI drug price revisions.

And let’s move on to Page 6 now and take a look at sales trends of Tamiflu. The top part shows ordinary sales followed by the government stockpiles in the middle and the total at the bottom.

As for the ordinary sales, during the period between January and March 2017, JPY 6.1 billion was posted, whereas, in the period of July to December 2016, JPY 4.7 billion was recorded, totalling JPY 10.8 billion for the influenza season indicated on the right.

If you look at the past 6 seasons, you can see JPY 10.8 billion is relatively large, considering that the price of the capsule formulation of Tamiflu was reduced by 11% last year, 2016 season was actually as large as 2014 season. The government stockpiles for this year was worth JPY 1.3 billion, reflecting the build-up of the stockpile of dry syrup of Tamiflu.

Now please turn to Page 7, which shows the increase and decrease of operating profit. Total operating profit grew by JPY 6.3 billion year-on-year, and you can see the factors behind this shown as 4 bullet points on the right.

Firstly, there was an increase of JPY 2.6 billion in gross profit from sales. As I said at the outset, in the domestic market, we struggled slightly, partly due to the NHI drug price revisions, but exports grew significantly. Domestic sales and exports together showed a JPY 2.5 billion increase, while there was an improvement of cost of sales ratio. Cost of sales in terms of the absolute amount recorded 0 increase or decrease, which meant that increase in sales directly was reflected in the contribution by the growth in gross profits.

The next bullet point says increase in royalties and other operating income. Onetime increase in revenues was JPY 3 billion, which was translated into a direct contribution to the operating profit. In terms of expenses, firstly, marketing and distribution expenses declined by JPY 1.1 billion from the year before, which is accounted for by the temporary increase of expenses we recognized in the first quarter of 2016.

Last year, the allowance for inventory write-down of a certain product was provided for, which pushed up the marketing and distribution expenses of last year. There was no change in the R&D expenses from last year to this year at JPY 19.2 billion.

On the other hand, the general and administrative expenses increased by JPY 500 million. This was mainly due to the increase in the corporate enterprise tax rate.

Moving on to Page 8. This page shows progresses in the first quarter against the forecast announced at the beginning of the fiscal year. For your reference, the progresses in the first quarter of last year were presented as well.

In terms of revenues, the progress was 24.1%, slightly behind the progress made last year of 24.4%. In the first line from the top, in domestic sales, there was especially large difference from last year, with 21.6% progress made this year compared to 23.1% last year.

Last year, there was going to be NHI drug price revisions scheduled in April. Usually, in the year when the NHI drug price revision is scheduled, we tend to see better progress in the first quarter.

Because of the special situation, we cannot make any simple comparison, but the progress in domestic sales this year is slightly slower against the forecast that we came up with at the beginning of this year.

On the other hand, exports to Roche showed strong performance at 31.6%. Royalties and other operating income made progress of 24.3%. This really depends on what timing onetime payments get recognized, but it is mostly in line with the plan.

The operating expenses made progress of 21.5%. This is slightly slower than the last year’s 23.5%. But from the second quarter, we expect the joint research with IFReC of Osaka University to start running at a full gear. Furthermore, the new sales organization established in April is expected to start functioning with more aggressive sales promotion activities from the second quarter.

In addition, products developed in-house have been making steady progress. Therefore, we anticipate more expenses to be posted going forward, and it that sense, we regard the progress in operating expenses to be more or less in line with the plan.

Next, Page 9. Similarly on this page, progress by product is shown with a full year forecast. Progress in domestic sales was slower than last year, partly attributable to the impact of drug price revision. Sales of some products were somewhat affected by repercussions of strong sales in last April during the January through February period, but generally, sales progressed almost in line with the forecast.

On the other hand, overseas sales were relatively better tracking the forecast. Lastly, Page 10. This slide shows the impact from foreign exchange. On the right-hand side, lines in 4 colors are the trends of for exchange rates for currencies we mainly use.

From the top, euro and the red line is Swiss franc. Green line is U.S. dollar, and the one at the bottom is Singaporean dollar. Dotted lines are the actuals for the last one year and the solid lines to March is the actual rates for the first quarter. The horizontal straight lines are our assumptions for the current year.

Excluding Swiss franc, the other 3 currencies had narrow gaps between actual rates and the forecast rates. As for Swiss francs in red, yen depreciated significantly during the first quarter, while our assumption was JPY 106 to the franc. We used Swiss franc a lot in transactions both in sale and purchase with Roche.

We have hedged by the end of last year about 80% of the transactions in Swiss franc for this year. The rate for hedging was chosen as the rate for planning. Therefore, while we see such a big a gap between the planned rate and actual rates, the net impact on the results with the plan was neutral.

With this in mind, please look at the table on the left. There was not much impact on sales and the cost of sales, which heavily depend on Swiss franc. Royalties and other operating income and expenses, part of which had not been hedged, were not affected by the ForEx a lot because there was not large gaps between the actual rates and our forecast rates.

The impact of ForEx versus assumption was limited to a small and negative JPY 0.2 billion. This concludes my presentation. Thank you very much. Let us continue with presentation on the overview of development pipeline by Shinichiro Iida of Project & Lifecycle Management Unit.

Shinichiro Iida

Thank you. This is Iida speaking. Let me start from Page 12. Here is the list of projects under development in oncology franchise as of April 25. Letters in orange indicate our in-house projects and those marked with red star indicate projects with advances in stages since February when results for last fiscal year were announced.

From the right, we filed for RG7446, atezolizumab, targeting NSCLC. For AF802, Alecensa, submission was filed overseas for the first-line therapy for NSCLC in ALK inhibitor naive population. Phase III studies were initiated for RG7446, atezolizumab, for ovarian cancer and prostate cancer.

Please turn to Page 13. This slide shows the list of projects under development in other areas than oncology. Focusing on changes since February 1, Phase III study was started for RG7412, crenezumab, anti-amyloid beta antibody for Alzheimer’s disease. Phase I study was initiated overseas for EOS789 for hyperphosphatemia. I will explain details in the following slides.

Please look at Page 14. Here is development status. First, our in-house project, Alecensa, was approved in Europe and Taiwan in February 2017 for indication of post-crizotinib treatment for patients with ALK-positive NSCLC. We have also submitted for marketing approval overseas in EU and the U.S., targeting the first-line treatment for ALK-positive NSCLC or ALK inhibitor naïve population.

For our in-house project, RG7446, atezolizumab, we filed for marketing approval in Japan in February this year for treatment of NSCLC, which was our first submission for this project and the first as PD-L1 antibody in Japan.

We started a global Phase III study in March for ovarian cancer. This study is named IMaGYN050 in which combination with Avastin, carboplatin and paclitaxel as first-line therapy is being studied. For castration-resistant prostate cancer, a global Phase III study was started in March this year.

This is IMbassador250, in which a combination with enzalutamide is being studied in castration-resistant patients who have been treated with abiraterone. In total, we have participated in 15 ongoing Phase III studies for 9 indications in 7 types of cancer.

Please go to Page 15. Let me continue with development status. For EOS789, after Phase I study was conducted with Japanese subjects, Phase I study was initiated overseas with patients with hyperphosphatemia.

And in-licensed project RG7412, crenezumab, is an anti-amyloid beta antibody. While this antibody is reactive to all types of amyloid beta, including monomer, oligomer and aggregate, it is particularly active with oligomer.

We participated in a global Phase III study targeting patients with prodromal and mild AD in March. RG435, Avastin, had been developed for malignant pleural mesothelioma, but development was discontinued for this indication. For this indication, global submission was planned based on the results from an overseas investigator-initiated trial.

However, Roche gave up the submission in consideration of compliance with requirements for regulatory submission. Given this decision by Roche, development in Japan was discontinued.

Next, Page 16. This slide shows other progresses. What have been already announced through press releases are listed here. First, Copegus. A submission had been filed for an additional indication targeting patients with chronic hepatitis C or compensated cirrhosis related to hepatitis C, except for serogroup 1 and 2 being developed upon request from study group for unapproved and off-label drugs and was approved in March this year. As a result, Copegus is currently indicated for improvement of viremia in hepatitis C and cirrhosis, except for serogroup 1.

For Tamiflu, whose development was also requested by the study group, we filed an application based on public knowledge, and approval was granted in March for additional dosage and administration for newborns and infants with influenza.

The third project on this page is Alaglio. This was in-licensed from SBI Pharmaceuticals in March this year, as a photodynamic diagnosis agent for TURBT transurethral resection of bladder tumor. This is a procedure for bladder cancer where an endoscope is inserted through urethra to resect the tumor in the bladder rather than laparotomy. When the patient takes Alaglio, preoperatively, it accumulates selectively, in tumor and it emits light. This enables operators to discern tumor from normal tissues more easily.

The fourth on this slide is anti-dengue antibody project, aiming at social contribution to global health. This has been jointly researched with A*STAR, the Agency for a Science, Technology and Research in Singapore and Singapore Immunology Network.

This project was selected as grant recipient by the GHIT Fund, the Global Health Innovative Technology fund, last month. Approximately JPY 530 million will be granted with which we aim to promote nonclinical studies and to develop manufacturing processes for clinical trials.

Please turn to Page 17. This slide provides results of clinical trials obtained during the first quarter. For Alecensa, primary endpoint was achieved in global Phase III study, ALEX, for first-line treatment for patients with ALK-Positive NSCLC. Progression-free survival was significantly, extended versus crizotinib.

In Perjeta program, primary endpoint was achieved in global Phase III study, APHINITY, as an adjuvant for patients with HER2 positive breast cancer. Adjuvant therapy with Perjeta demonstrated statistically significant reduction in the risk of recurrence of invasive disease or death versus postoperative adjuvant treatment with the combination of Herceptin and chemotherapy.

Next, ACE910, emicizumab. Favorable interim results were obtained from global Phase III study, HAVEN 2, targeting hemophilia A in children with inhibitor. Interim analysis was conducted on 19 patients after a median of 12 weeks of treatment and a clinically meaningful reduction in the number of bleeds was confirmed.

Next, Page 18 shows our presentations at the conference and publications. CIM331, nemolizumab, is an anti-I/O 31 receptor antibody being developed atopic dermatitis. Results from global Phase II study, run by Chugai, were published and presented. The safety and efficacy data at 12 weeks were published in the New England Journal of Medicine. In addition, the safety and efficacy at 52 weeks in extension study were presented at the American Academy of Dermatology.

For Alecensa, results from the overseas Phase III study, ALEX, will be presented at the ASCO meeting in June. For ACE910, emicizumab, results from the global Phase III study, HAVEN 1, will be presented at ISTH, while top line results were released last year.

The favourable interim results from HAVEN 2 will be also presented. As we plan to hold a conference call after ASCO and ISTH, we will inform you of details of the calls.

Please turn to Page 19. This is the summary of results from a number of studies, which were used in submission for atezolizumab for lung cancer in February. I think you have seen this through presentations or publications. But let me explain this briefly.

Atezolizumab has showed statistically significant improvement in overall survival compared with docetaxel regardless of PD-L1 status. Kaplan-Meier curves are shown here. Red line is for docetaxel and the blue line is for atezolizumab. The OS measure for atezolizumab was 13.8 months, while that for docetaxel was 9.6 months and a significant extension was observed with hazard ratio of 0.73. Adverse events reported in old trial were consistent with those previously observed, and we do not consider this to be a major issue.

Page 20 is the last slide. This shows the list of projected submissions. As you see on the left side, during 2017, submissions are planned for emicizumab for hemophilia patients with inhibitor.

For atezolizumab targeting urothelial carcinoma. For obinutuzumab for indolent non-Hodgkin’s lymphoma and for Perjeta as adjuvant for breast cancer. We started disclosing our projected submissions for 2019 and after and we plan to submit for atezolizumab for small cell lung cancer in 2019.

This concludes my presentation on the update of our development pipeline. Thank you for your kind attention.

Question-and-Answer Session

A – Unidentified Company Representative

Now we’d like to start taking questions. Today, we have Mr. Kato, the General Manager of Sales and Marketing division to be present with us as well. [Operator Instructions] The first question is from Mr. Yamaguchi, the Citigroup Global Markets, Japan.

Hidemaru Yamaguchi

Yamaguchi speaking. Can you hear me?

Shinichiro Iida

Yes.

Hidemaru Yamaguchi

My first question is on the strong performance shown in exports of Actemra and Alecensa to Roche as compared to the full year forecast. Are there any particular factors behind this performance for each of the products? And do you expect the full year performance to exceed your original forecast?

Toshiaki Itagaki

Itagaki speaking. Thank you for your question. Let me first talk about Actemra. Let me talk about last year. The export unit price went down last year, and in the third and fourth quarters, there are inventory adjustments made by Roche, which made us struggle a bit. The full year forecast this fiscal year was put together assuming that export unit price would not drop and that inventory adjustments have run its course.

However, we have made foreign exchange hedging against a stronger yen and the yen’s appreciation has been somewhat offsetting the growth in the volume, which obviously, had been incorporated in the forecast. With this assumption, how has Actemra been performing?

It may look doing well, but we guided this performance as expected. As for Alecensa, some of the volumes scheduled to be exported in April has been moved up to March, making its progress in the first quarter look better, which means that this is expected to be netted out on the full year basis. But we do have this feeling that it is doing recently well in terms of the volume.

Hidemaru Yamaguchi

Does that mean Alecensa is doing well though there are some deviations, while Actemra though it appears to be doing better, is likely to be in line with a forecast, considering expectations from both your company and Roche.

Toshiaki Itagaki

We’re not sure about Roche’s view. But what you’re saying is right about us.

Hidemaru Yamaguchi

Another question. In the domestic market, some of your products were subject to NHI drug price revisions and others were not. When you said that domestic sales were weaker, generally, is this because of the market being weak or because of competition or is it due to less activities in sales prior to the organizational change in April?

Could you tell us major reasons for the weak domestic sales, if any? Or any particular weakness you have seen in specific products?

Susumu Kato

Kato speaking from Sales and Marketing division. Thank you for your question. Itagaki explained that the domestic sales were weaker. In December last year, before the closing of the fourth quarter, shipments were slightly stronger, which backlashed in January resulting in the sales slightly behind the forecast.

Of course, in March, the shipments have been restored to the normal level, but we seem to have been somewhat affected by that. There are no particular unexpected negative factors specific to any of the products so far, and so we expect the domestic sales to grow steadily going forward.

Hidemaru Yamaguchi

Are you saying that in the fourth quarter of last year shipment was slightly ahead of the forecast resulting in a slightly weaker January, which should pretty much explain the whole picture?

Susumu Kato

Yes.

Unidentified Company Representative

The next question is from Mr. Hashiguchi from Daiwa Securities.

Kazuaki Hashiguchi

Hashiguchi speaking. There are 3 questions. Firstly, on the performance of Avastin, although I expect that there is not much change from what you shared with us in the earnings briefing back in February. I assume that you have incorporated a possible impact from the launch of Keytruda for lung cancer in your forecast.

Could you tell me how things have been so far in terms of not just the sales figures, but in terms of responses from medical institutions and the physicians, the status of PD-L1 tests conducted, and your views on prices? Can you comment on your take on the voices from the market?

Susumu Kato

Kato speaking. Thank you for your question. With regard to Keytruda, since its launch in February, I would assume it is now in the process of trying to penetrate into the market. But at this moment, it has not been any more than we had assumed.

Right now, we are closely watching how the PD-L1 test will go. We do expect to some extent it to have more impact in the first-line therapy for EGFR-negative patients of lung cancer from the second quarter. But we’d like to see how the market will go for the moment.

Kazuaki Hashiguchi

Does that mean it has not been more than you had expected, but it is still early to say it is less than you expected?

Unidentified Company Representative

Well, at this moment, we have not seen anything significantly above or below what was expected, and expect to some extent things may start to change from April.

Kazuaki Hashiguchi

I see. My second question is about the future development of Alecensa. As for lung cancer, with the success of ALEX study, I would assume, to some extent, you now have a pretty good idea about the future path.

Previously, in some analysts’ meeting, you said you’re thinking about possible development of the drug for tumor types other than lung cancer for ALK-positive patients. Has there been any progress made so far there?

Shinichiro Iida

Iida speaking. At this time, we have nothing to share with you. But there are some other gene mutations that we can target. So we’d like to work hard to continue to explore the possibilities.

Kazuaki Hashiguchi

Are you saying that though there is nothing to disclose at this time, there has been progress made for the past year or 2? Or are you saying progress has yet to be made?

Shinichiro Iida

I would say progress has yet to be made.

Kazuaki Hashiguchi

My last question is about SKY59, which you did not mention today. Does the global multi-center clinical study now under way include the U.S. as one of the geographic regions or is it only in Europe and in Japan?

Shinichiro Iida

I believe the U.S. is not included, but I would like to check and get back to you, again.

Kazuaki Hashiguchi

Are there any particular reasons why you believe the U.S. is not included?

Shinichiro Iida

We’re working with Roche in carrying this out. And so we need to check. Thank you very much. We will get in touch with you on this later on this question.

Unidentified Company Representative

Thank you very much. The next question is from Mr. Seki from UBS Securities.

Atsushi Seki

Seki speaking. I have 3 questions. My first question should probably be addressed to Mr. Kato. It is about Alecensa. In terms of monthly sales, it had been taking off rapidly so far, but seems to have been slightly slowing down becoming flatter in the growth curve more recently.

Should I understand that its penetration in the domestic market, especially the penetration against crizotinib, has run its course? How much have you share have you taken so far in the first-line therapy?

Unidentified Company Representative

Let me answer the first question. I believe Alecensa has been prescribed relatively smoothly. The administration period is relatively long, and so no rapid change is likely to emerge. Though you said the growth curve is becoming flat, from our perspective, prescriptions have been obtained well, and administration period has been extending. And so we see things going well so far.

Atsushi Seki

Do you have any data to suggest how much share you have now and how long the administration period has become?

Unidentified Company Representative

I’m sorry, but we would like to keep the information on the share undisclosed. With regard to the administration period, so far, we have exceeded the median of 40 months, and that is how long the administration period is at present.

Atsushi Seki

I see. My next question. You have filed for approval of atezolizumab for the second-line therapy of non-small cell lung cancer. Have you obtained priority review status for this in Japan? And this may not be the question to ask you, but has there been any submission made for PD-L1 assay SP142?

Shinichiro Iida

Iida speaking. I’m afraid we do not disclose the details of the filing, including those on priority reviews or diagnostic kits.

Atsushi Seki

I see. My last question has to do with emicizumab or ACE910. In February, there was quite an unfortunate event, the death of one patient. I read on the website of an academic society that, that patient refused to receive blood transfusion for some reason. In the clinical trial on hemophilia, where there is a risk of bleeding, how come a patient with an inhibitor, who would refuse blood transfusion has been enrolled?

I’m fully aware that the risk of bleeding is extremely low due to the progress in therapies for hemophilia, but since we’re talking about a clinical trial, I wonder why those kinds of patients were not subject to the exclusion criteria? Considering the value of ACE910, this is a big question in my mind. So I would like to ask what your thought process was?

Shinichiro Iida

Iida speaking. We understand that when we started the clinical trial and did the screening based on inclusion and exclusion criteria, such exclusion criteria were not employed and, therefore, the patient got enrolled in this trial.

Atsushi Seki

Is it a common practice with exclusion criteria of hemophilia clinical trials not to include patients who would refuse blood transfusion? Whatever the reason is, is there not a question in the criteria on whether subjects would accept blood transfusion, if necessary?

Unidentified Company Representative

That is not described in the criteria.

Unidentified Company Representative

We would like to invite the next question. Mr. Wakao of Mitsubishi, UFJ Morgan Stanley Securities.

Seiji Wakao

This is Wakao of Mitsubishi UFJ Morgan Stanley Securities speaking. I have 2 questions. First question is about the factors for improvement in cost ratio in the first quarter compared to that last year. Was this due to the improvement in product mix increasing the ratio of in-house products and the impact of hedging against the ForEx?

Toshiaki Itagaki

This is Itagaki speaking. Yes, that is correct.

Seiji Wakao

Understood. My second question concerns nemolizumab. In clinicaltrial.gov, I saw you are preparing for another Phase II trial, which seems to be dose-escalation study. And I know that this will be run by Galderma and you may not be able to answer this question, but could you tell me how this study is positioned and whether this Phase II study was originally planned? I would appreciate if you could answer as far as possible.

Toshiaki Itagaki

Yes. What we know is that Galderma is going to initiate Phase II study to identify dose for combination therapy with steroid. As this is related to the policy of the company, so I’m afraid you may have to ask Galderma for details. We assume either is possible. So if necessary, a study needs to be done.

Unidentified Company Representative

I would like to invite the next person. Mr. Sakai of Credit Suisse Securities.

Fumiyoshi Sakai

This is Sakai speaking. I have 2 questions. I did understand well your explanation of ForEx that its impact is neutral on cost throughout the year because it is hedged and fixed at the forecast rate. On Page 10, FX impact versus assumption is indicated as 0 for royalties and operating income and revenues.

Actual rates have moved toward weaker yen than assumption. So I expected a certain level of gains on ForEx to be recorded in the first quarter. I recall that you once told us that there is a time lag of about 6 months before recognizing the net impact of ForEx. Is this relevant as I thought there was a significant positive this time around? I wanted to confirm?

Toshiaki Itagaki

This is Itagaki speaking. What we hedge is not only for sales and the purchases but for royalties and operating income. While hedge accounting cannot be applied to onetime items, royalties can be, in principle, hedged in accounting because they accrue as operating items.

Although we have not hedged them, for this year, we have hedged a part of royalties. Hedging is made at focused rate to record the actual results. Thus, minimizing the impact of FX. Our hedging policy is flexible every year.

That means we are making trial and errors to explore ways to make the impact neutral vis-à-vis forecast. And hedging for royalties is slightly different from what we did last year.

Fumiyoshi Sakai

Understood. Do one-off items include payment from Roche for opting in SKY59, for example?

Toshiaki Itagaki

We are not able to mention what we received for specific products. But what we received upfront for products we licensed out is not accounted for as one-off revenue, but posted on our balance sheet and then amortized over a certain period. Even if there had been such a payment, it shouldn’t have been significant large sum appearing on our P&L.

Fumiyoshi Sakai

Understood.

Toshiaki Itagaki

As hedge accounting cannot be applied to milestone and upfront payments, such exposure will remain without being hedged.

Fumiyoshi Sakai

My next question is about the results from APHINITY, which I believe gave large impacts on Roche. How are they going to be used in Japan? As defense against biosimilars, I assume the results were desirable for Roche. How are you dealing with them in Japan? If there is a policy, let us know it.

Shinichiro Iida

This is Iida speaking. Primarily, we think this brought us an opportunity to deliver benefits to patients as primary endpoint was achieved with efficaciousness. We also expect that certain level of contribution will be made in terms of protection of Herceptin against biosimilars.

Fumiyoshi Sakai

It may be still too early to consider, including it in sales forecast, but do you think the results from APHINITY are not of major to be factored in sales projections for Herceptin, as well for Perjeta and Kadcyla? What is your policy?

Unidentified Company Representative

Data became available recently and we plan to use them for submission this year. So incremental sales, if any, will be recorded from next year onwards. We assume that sales may be added with Perjeta in adjuvant setting, so we will factor them in going forward.

Fumiyoshi Sakai

Will this require change of labeling anyway, right?

Unidentified Company Representative

Yes, it will be an addition.

Fumiyoshi Sakai

When will it be done in Japan?

Unidentified Company Representative

We have disclosed that submission is scheduled for this year and please estimate the timing based upon it.

Unidentified Company Representative

I would like to invite the next person. Mr. Muraoka of Morgan Stanley Securities.

Shinichiro Muraoka

This is Muraoka of Morgan Stanley speaking. I just want to start with simple clarification on ACE910. Are both results from HAVEN 1 and 2 going to be presented at ISTH?

Unidentified Company Representative

Yes, both will be presented.

Shinichiro Muraoka

Understood. My next question is a follow-up question to the one asked previously regarding results of Avastin for the first quarter and the impact of Keytruda. I have heard here and there that Keytruda is not ramping up since its full-fledged launch in February as strongly as expected. Is this true or not? I know this is not something that you can comment, but I would like to know whether there are any [strategy] preparation or points to be considered, or lessons learned for the upcoming launch of atezolizumab?

Susumu Kato

This is Kato speaking. We are also investigating on Keytruda, and it will be better asking the relevant company for a more correct answer. Anyway, the launch of atezolizumab is scheduled, and I believe, we can learn from it for various measures, such as guide for appropriate use, physicians’ opinions as to how to set lines of treatment. So we intended to continue monitoring the market closely.

Shinichiro Muraoka

Do you have an impression that guide for appropriate use has made physicians more cautious in prescription?

Unidentified Company Representative

I admit that it may be true. But I believe we have to continue to watch carefully how much this penetrates among physicians and it restrains prescription. And we would draw up our launch strategy based upon such insights.

Shinichiro Muraoka

Understood. My last question is about how the results from APHINITY will be positioned in Japan?

Unidentified Company Representative

I am not sure whether my understanding is correct. But in Japan, Perjeta has been prescribed for a long time and its use as adjuvant has already spread in practice. That is to say, even if additional labeling is approved with APHINITY, well, it may contribute somewhat as countermeasures against biosimilars, but I wonder whether it will boost sales significantly. Is this too conservative a view?

Unidentified Company Representative

The duration of first-line Herceptin and Perjeta has extended for long by now. And its prescription as first-line treatment has been extended as suggested by guideline, but I do not think that use as adjuvant has been in practice yet.

Therefore, the results from APHINITY have presented us with its possibility as adjuvant, and it will be beneficial to patients. We intend to carefully examine sales projections going forward.

Shinichiro Muraoka

Could you tell me the ratio of adjuvant in the sales of Herceptin?

Unidentified Company Representative

I think it now accounts for about 50%. That means about 50% of the current sales of Herceptin is for adjuvant monotherapy. Of course, it is used as monotherapy, right?

Unidentified Company Representative

Yes.

Unidentified Company Representative

We would now like to close this briefing session. Thank you very much for your participation.

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