Kyowa Kirin Co Ltd

TSE:4151

Earnings Call Transcript 2018-Q2

[Masashi Miyamoto, executive]

This is Miyamoto. Good morning, everyone. Thank you very much for coming to the meeting despite the heat.

Now I'd like to briefly report the results of the second quarter. The revenue declined JPY 4.9 billion year-on-year. As you may know, it declined because of the drug price revision in April and the transfer of a subsidiary Kyowa Medex at the beginning of the year. The progress against the full year plan was 51%, which shows a good progress in line with the plan. Even though the revenue declined, the core operating profit increased JPY 2 billion year-on-year. As we had mentioned during the first quarter results briefing, Fujifilm Kyowa Kirin Biologics also known as FKB, which runs biosimilar business, received the upfront revenue from Mylan for the marketing license in Europe, and this improvement in the income of equity method affiliates was the main reason for the increased core operating profit.

The bottom line profit achieved a very big increase of JPY 13.9 billion year-on-year. The reasons are the same as the first quarter, but it was due to the JPY 11 billion gain on sale of Kyowa Medex and the JPY 3.4 billion gain on reversal of impairment losses for bardoxolone methyl or RTA 402. Therefore, the progression rates of the core operating profit and the bottom line profit may seem very high, but they were due to the aforementioned one-off factors weighing heavier in the first half. Overall, there is not much deviation from the initial plan and since we believe that the progress has been good, we are not revising the full year forecast.

The financial details will be explained by Mr. Kawaguchi, the Executive Officer and Director of Accounting Department.

[Motohiko Kawaguchi, executive]

This is Kawaguchi. I'd like to present the financial part. Page 7 shows the breakdown of the JPY 13.9 billion profit increase in a waterfall chart. First, the gross profit increased slightly even though the revenue declined. The SG&A pushed down the profit due to an advanced investment in the selling and marketing expenses to expand the sales of both Pharmaceuticals and Bio-Chemicals. On the other hand, as Mr. Miyamoto explained earlier, there was a one-off income at an equity method affiliate and some substantial gains in the others. As a result, the bottom line profit increased very much year-on-year.

Page 8 shows the results by Pharmaceuticals and Bio-Chemicals segments. Both segments saw a decrease in revenues, but increase in core operating profits resulting in margin improvements. Please note the progression rate. The Pharmaceuticals' core operating profit progress is 66%, which may seem a little high, but this is due to the positive factor from FKB mentioned earlier and a one-off gain from selling a voucher, which will be explained later. Moreover, the costs tend to be heavier in the second half and that is another reason for the high progression rate. However, we are basically making a good progress in line with the initial plan.

As far Bio-Chemicals, the core OP progression rate is 43%, which is slightly low. This seemingly low progress is because of some concentrated advertising spending for the mail order business in the first half of the year, which will be explained later, but in general, Bio-Chemicals is also making a good progress. Bio-Chemicals segment is working on the profitability improvement with the full fiscal year target to achieve 10% or higher core operating profit margin. The current margin is about 9%, so the improvement so far has been good.

Page 9 explains the details of each segment. First, regarding the Pharmaceuticals, the revenue of the domestic drug declined, but it was offset by the overseas drug and a positive contribution from the technology licensing. However, during this fiscal year, we have a negative impact of nearly JPY 6 billion from Kyowa Medex, which was deconsolidated at the beginning of the year. So as a result, the segment revenue declined. The reasons for the decline in domestic drug revenues are shown on the right-hand side, but in short, we suffered a full impact from the drug price cut. As for the positives, new products such as rituximab BS and ORKEDIA have been doing well since the launch, with the revenues of JPY 1.1 billion from rituximab BS and JPY 400 million from ORKEDIA. In June, we also launched Dovobet gel. As for the overseas drug, Crysvita, which is our very important global strategic product, was launched in the U.S. and Germany in April as scheduled and the growth has been strong. In addition to this, the business in Asia has also been growing continually.

With regards to the technology licensing revenue, we have a big topic to mention. We saw the priority review voucher, which was issued by FDA upon the approval of Crysvita in the U.S. And the proceeds, which were shared with Ultragenyx in a profit sharing scheme was booked in the second quarter. The amount after the conversion into Japanese yen is JPY 4.4 billion. On the other hand, benralizumab related licensing revenues declined a little, so in the end, the technology licensing revenue increased about JPY 2 billion.

The following slide is the year-on-year analysis of our core OP. The gross profit was negatively impacted by the deconsolidation of Kyowa Medex, but remained at the same level as the previous fiscal year. With regards to SG&A, the expected launch of Crysvita and mogamulizumab in the EU and U.S. during the second half of this fiscal year are the reasons for the increase in advance expenses for selling and launch preparation, which are dragging down the profit. On the contrary, the R&D expenses have peaked out and started to fall for these drugs as they are shifted from R&D to selling expenses. As for the gains and losses on equity method, we booked the upfront revenue from Mylan as explained earlier as well as the R&D expenses of FKB327 peaked out and declined from the previous fiscal year, pushing up the core OP.

The next slide is the revenue of our major items. Since the launch of Crysvita in April, we booked revenue of JPY 800 million up to the end of this quarter. The full year forecast for this fiscal year 2018 is shown on the right column, but unfortunately, we cannot disclose the figure due to the NDA with Ultragenyx. The revenue from technology licensing in overseas were JPY 12.4 billion, a year-on-year increase of JPY 2.9 billion. Contrary to the positive JPY 4.4 billion from proceeds on the sales of priority review voucher as mentioned earlier, there are other negative year-on-year factors, mainly the milestone revenue received from AstraZeneca on benralizumab. In this fiscal year, there were milestone revenues along with the approval in Japan and EU, but similarly, we had the milestone revenue in the previous fiscal year from technology licensing to Asia, which amount was slightly higher than that of this fiscal year.

The next slide is our Bio-Chemicals business. The revenue had declined year-on-year due to the following 2 reasons: first, the others revenue on the right side of the bar chart was negatively impacted by JPY 800 million due to the spin out of our plant growth regulator business to Sumitomo Chemical. The rest is due to increased competition for some items in overseas and due to revamp of domestic product lineup.

Please turn to the next page. These are products with low profitability thus the impact is minor to our gross profit. On the other hand, there is a positive impact to our gross profit margin due to the initiatives for improvement in product mix, taken in our Bio-Chemicals business. At the same time, we have seen drop in cost of sales from the stable operation in our overseas plants based on the realignment of production sites. For these reasons, the gross profit has increased from the previous fiscal year.

Regarding SG&A, we spent upfront advertisement for the second half of this year, which is mainly online advertisement for our mail ordering business as it proved effective in winning customers in the past.

This is all for my presentation.

[Masashi Miyamoto, executive]

This is Miyamoto speaking. I would like to touch on the R&D review and business topics. On Page 15, the dark shaded boxes in the chart are the major progress in Q2, or April to June.

Let me explain from the top. Regarding bardoxolone methyl, we started Phase III study in May for diabetic kidney disease. I will cover details on this later. Next is brodalumab or the drug named LUMICEF, which launched in Japan in 2016. There were partial progress in Asia for the indication of psoriasis. Next is burosumab, as explained earlier by Mr. Kawaguchi. For the pediatric indication, it was conditionally approved in Europe in February and sales in Germany began from April. We also met primary endpoint in Phase III study in May. For the pediatric and adult indications, both approvals were obtained in U.S. and we started sales of this product in April. We have filed approval in Canada in the month of May. In fact, U.S. and Canada are profit-sharing territories with Ultragenyx. As mentioned at the beginning, the post marketing of Crysvita in Germany and U.S. is going well.

Moving to the next slide, at the top is evocalcet or KHK7580. It was approved as a successor to REGPARA in March and following the launch in May, we believe it is increasing market penetration very smoothly. The bottom shows mogamulizumab, which we filed for the indication of CTCL in U.S. and is currently under FDA review. Although the initial PDUFA due date was June, it has been extended to September. Nevertheless, we believe the review progress is very steady towards achieving the renewed due date.

Using the slides from Page 17, I will give some colors around bardoxolone methyl. As you know, there is a rapid increase in the number of diabetes patients and there are estimated 8 million or less patients in Japan undergoing diabetic treatment. Part of those patients are, in fact, suffering from the so-called diabetic kidney disease, DKD. There are approximately 40,000 patients or less entering dialysis treatment in Japan each year, of which 40% or more are caused by DKD, diabetic kidney disease and it has become a large social problem today. On this backdrop, the Ministry of Health, Labour and Welfare issued the report from the investigative committee for kidney disease in July, in which the target is set to reduce the number of new dialysis patients by around 5,000 each year through the effort to reduce the DKD-caused dialysis patients.

Based on this background, it is recognized that the treatments for diabetes mellitus and diabetic kidney disease are very important. And we have to address this issue as a company. As you know, once a patient starts dialysis, the patient has to visit the hospital for dialysis 3 times a week, and it takes for 4 to 5 hours per dialysis. Various complications are developed due to dialysis and the deterioration in QoL is a very big issue. In addition, the treatment is very costly. Thus, we have to do something about it. And we have worked in the nephrology area for many years and we want to do whatever we can do. This is the reason we are now developing bardoxolone methyl. The Phase II data were very good and thus our expectation is growing.

As you can see in the next slide, the Japanese Society of Nephrology has revised the guideline on clinical evaluation and proposed a new surrogate endpoint, estimated GFR change ratio to replace ESRD development. And we started a clinical study of bardoxolone methyl based on this guideline. As has already been announced, we obtained the SAKIGAKE designation from MHLW, a large Phase III study started from May.

Next slide shows the situation of the completed Phase II study and the ongoing Phase III. In the Phase III study, approximately 700 patients will be enrolled in total, and we will follow up each subject for about 2 years. In fact, this is a very large, long-term Phase III study, which will be completed in 2022. You may know this already, but let me briefly touch upon the Phase II data.

Please take a look at the next slide. The study is called TSUBAKI study. We performed a study with an endpoint to directly measure the glomerular filtration rate instead of estimated GFR, which is calculated based on the creatinine concentration in the blood. This study required a lot of efforts by the patients as well as the study sites, but we made our utmost efforts to complete the study. There has been a long controversy whether eGFR is truly equal to GFR. We believed we would need to verify whether bardoxolone methyl truly improves GFR or renal function. That is why we run the study with the design even though we had to overcome an unprecedented challenge.

You can see the details on the next slide. We could show up to week 16, even in a short time, that GFR, the actual renal function or glomerular filtration rate of subjects who were on bardoxolone methyl, improved significantly. We believe this is revolutionary data. The improvement in eGFR by bardoxolone methyl, which has been shown in various data, is reproduced as the improvement in the actual renal function. I believe this is an epoch-making study suggesting the possibility to improve the renal function.

Next slide please. Based on the background that I explained earlier, together with the Phase II study data, we started a large Phase III study, AYAME study in May. As mentioned before, the follow-up period is 3 years and the size of study is very large, which requires us to spend some time to complete the study. We believe this is our mission to deliver this medication to Japanese patients. Thus, we have started the study with the goal to successfully complete it.

Next, let me briefly talk about some business topics. This slide explains the progress in products under the alliances with partners. The first one is Dovobet gel, which Mr. Kawaguchi mentioned briefly before. We have already launched the ointment of Dovobet in collaboration with LEO Pharma. The ointment is very effective, however, it is difficult to apply it to the head or other hairy areas. It is difficult for patients to use the formulation in that sense. But the gel is very easy to apply to the hairy areas. It was well accepted by the subjects in the clinical study as well, and the physicians have waited for the formulation. We could launch the gel in June, and the second one is rituximab BS, which was launched in January and has had a very smooth progress.

On the next slide, I'll talk about the progress in the biosimilar business of FKB, which we are working on with Fujifilm. For FKB327, the biosimilar of Humira, we concluded a sales agreement with Mylan, which has a very strong marketing capability for Europe. We have already received an upfront payment.

In the third quarter, CHMP adopted a positive opinion recommending the marketing authorization for FKB327 very recently. Thus, we will be able to obtain approval and provide the first shipment to Mylan by the end of this year. We are continuing the negotiation with Mylan for additional territories.

The presentation has been concluded. We will move on to the Q&A session.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi of Citigroup. I'm sure many others will be asking similar questions, but my first question is regarding Crysvita. The sales reported to be JPY 800 million, but could you give me a breakdown between Europe and the U.S.? Also in the U.S., the indications for both pediatric and adult XLH patients were acquired, but could you give me a little more color on the progress made in the prescriptions between the pediatric and adult?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. With regards to the sales results of Crysvita, I'm sorry but we cannot disclose the breakdown for each region due to a nondisclosure agreement with the partner company. However, at an earliest possible timing, we would like to be able to disclose the data in Europe and the U.S., so please allow us some time to discuss further on our side.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. How about my latter part of the question? Could you comment on the progress of the prescriptions?

[Wataru Murata, executive]

This is Murata. With regards to the breakdown of adult and pediatric XLH patients, prescribed Crysvita in the U.S., I'm sorry but we cannot comment because it is the territory of Ultragenyx, our partner company. Ultragenyx is scheduled to announce their results this weekend, so they might comment on the matter then.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. Then how is the progress in Europe, which is your territory?

[Wataru Murata, executive]

This is Murata. In Europe, we only have the indications for pediatrics.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. How is the penetration among the pediatric XLH patients?

[Wataru Murata, executive]

This is Murata. I cannot give you any specific data, but it has been penetrating well.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. Secondly, I'd like to ask for an update on the application status of KW-6002 in the U.S.?

[Mitsuo Satoh, executive]

This is Satoh. After the Type B meeting with FDA, we got a clear understanding on the application package contents and the documents expected by FDA, so we are steadily preparing for the application. We think we can apply in the not so distant future.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. So you are scheduled to apply by the end of the year?

[Mitsuo Satoh, executive]

This is Satoh. Yes, that is our target, hopefully, but we cannot commit yet.

[Atsushi Seki, analyst]

This is Seki of UBS Securities. I have 2 questions. The first question is about Crysvita. Sorry to push again, but may I confirm if the JPY 800 million sales included the inventory and others? Also you said that it has been progressing well in Europe, but can you elaborate a little more on what you meant by saying so?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. Crysvita's JPY 800 million sales was the shipment-based sales. Also the reason why we said it has been progressing well is because the sales growth up until June has been outpacing our plan.

[Atsushi Seki, analyst]

This is Seki. My second question might be a delicate matter, but it is regarding the relationship with Kirin Holdings. I believe there are an increasing number of investors asking about this topic since the beginning of this year. According to a media interview in April, President Miyamoto mentioned that there is no disadvantage from the parent-child relationship with Kirin Holdings. However, from our perspective, the lack of advantage seems like a disadvantage. Perhaps in case of other companies, there could be some examples of advantages, but in your case, don't you think it is a disadvantage? Also, the president mentioned that there is a low risk of being acquired by another company, but that may lead to a concern on our side that the management and R&D are left without a sense of tension. What would you say about that?

[Masashi Miyamoto, executive]

This is Miyamoto. It is a very frequently asked question. We realized that there might be various opinions with regards to the structure that both the parent and the child companies are listed. Yet, when it comes to question of advantage or disadvantage, the key point is, how we could bring about the synergy as a group. At this moment, we are not yet ready to introduce you to the actual examples, but the R&D departments of the 2 companies are discussing. In fact, Kyowa Hakko Bio has launched a new brand called iMUSE together with Kirin Group companies and has already been engaged in collaborative activities. Also you may know, Kirin Holdings began to invest in a health food company in the U.S. and that brings us expectations for further collaborations. Food and health are the keywords. With that in mind, we would like to discuss various possibilities with Kirin Holdings, so your expectations on our new ideas and synergy in the future would be appreciated. Also with regards to your concern that we may like a sense of tension, that does not apply to us at all. We're managing our company independently, always discussing what we should do to realize global specialty Pharma and always aware of the competition, so you should not be worried at all.

[Kazuaki Hashiguchi, analyst]

This is Hashiguchi of Daiwa Securities. I have 2 questions. The first is about Crysvita. Could you tell us about the future projection? In your midterm plan, you have shown us some vision, such as the expected sales in 2020 and the peak sales. Now that you have actually started selling in the U.S. and Europe, what is your current prospect based upon the inquiries from doctors and patients and the discussions with the insured?

[Wataru Murata, executive]

This is Murata. Crysvita is positioned as the key driver in our midterm plan and I know that a lot of investors are interested in the matter that you asked. However, Crysvita was just launched in April in Germany and the U.S., so we do not yet have any particular updates on the future forecast, but we surely feel a good response. We have launched in the Netherlands in July and we will also launch in Austria by the end of the year. So we think we made a good start.

[Kazuaki Hashiguchi, analyst]

This is Hashiguchi. Secondly, during the presentation on RTA 402, you repeatedly mentioned that it was a significant test. Based on that, where are the future prospect of R&D expenses? This year's R&D expense seems to be lower than last year and I remember you saying before that it is likely to decline for a while considering the pipeline situations. But could you please tell us your latest forecast?

[Mitsuo Satoh, executive]

This is Satoh. So as to carry forward the R&D activities towards the launch of global strategic products, the R&D expenses peaked in 2015. As such strategic products reached the approval of Phase I after another, the R&D expenses declined over time. And this year is considered to be the bottom. Now we are reentering the investment phase to develop the next coming global products, so it will not decline in the next year.

[Kazuaki Hashiguchi, analyst]

This is Hashiguchi. You mean that in the same pace of decline in the past few years, it will increase again?

[Mitsuo Satoh, executive]

This is Satoh. That's right.

[Seiji Wakao, analyst]

This is Wakao of Mitsubishi UFJ Morgan Stanley. My first question is regarding Crysvita. According to epidemiological surveys, such as research papers in the past, the number of XLH patients has been reported to be 12,000 in the U.S. and about the same number in Europe as well. The survey must have continued on and now that Crysvita was launched, I suppose the estimated number of patients has changed. Could you please update me on the estimated number of patients with the breakdown between adults and pediatrics, and Europe and the U.S.?

[Wataru Murata, executive]

This is Murata. At this moment, it is difficult to provide any update on this estimated number of patients. We are trying to discover patients, but we are not yet at the stage to share any information. One of the reasons why it is especially difficult to identify patients is because it takes quite a long time until the patient himself or herself would acknowledge that he or she has XLH. We are conducting surveys while trying to shorten such time.

[Seiji Wakao, analyst]

This is Wakao. Pediatric patients might be easier to identify, especially in the U.S. because they go to hospitals. Adult patients might be more difficult to identify, but is it still the case that the adult patients are difficult to discover? Or did you see some kind of breakthrough in identifying adult patients?

[Wataru Murata, executive]

This is Murata. There is not much I can comment at this moment, but we are carrying on as we planned.

[Seiji Wakao, analyst]

This is Wakao. Another question is regarding the overseas pharmaceutical revenue, which seemed to be rather strong in the second quarter. Even excluding Crysvita, it was fairly strong from the major products and others. Could you please elaborate a little more on why the overseas Pharmaceuticals business in the second quarter was strong? Also, will this trend continue?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. The overseas revenue includes technology licensing revenue in addition to the product revenues, the overseas technology licensing revenue includes JPY 4.4 billion gain from selling the priority review voucher, which was explained earlier. As for the product revenues in Asia, China grew substantially. KKI, Abstral and others are also constantly achieving good revenue growth.

[Seiji Wakao, analyst]

This is Wakao. Even excluding the technology licensing revenue, it seems to be strong, but could that be explained by the good progress in China and Abstral?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. Yes, China and some products' revenues growth were rather outpacing our plan.

[Fumiyoshi Sakai, analyst]

This is Sakai from Crédit Suisse. I would like to ask about the alliance with Mylan. According to the press release, the sales of FKB327 seems to be booked by Mylan. How would this appear on your P&L? Also, CHMP, Committee for Medicinal Products for Human Use adopted a positive opinion recommending the marketing authorization of FKB327. So is it possible to launch this product in EU in the second half of this year? Another question is regarding your thoughts on alliance with Mylan on marketing outside of the EU territory. The only non-EU territory that comes to my mind is U.S. But do you mean you will collaborate with Mylan in the U.S. market as well?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. Let me explain the financial impact on KHK from the alliance with Mylan. There is an agreement between Mylan and our affiliate FKB, and this FKB will be the counterparty selling the product to Mylan. The product will be shipped from our company KHK to FKB and then from FKB to Mylan. The proceeds from Mylan will be booked as gains on equity method and that is how it will appear on KHK performance. In specific, about half the profit from sales will be reflected as the gains on equity method in KHK. This is the same for the upfront licensing revenue or the milestone revenue, which is received by FKB.

[Wataru Murata, executive]

This is Murata. As shown in the presentation material, the non-EU territory is also under negotiation for exclusive agreement with Mylan. For further details on the regions, it will be better perhaps if you asked Mylan as well. This is as far as what we can disclose.

[Fumiyoshi Sakai, analyst]

This is Sakai again. Next is the question around the business environment of biosimilar in Japan. We are starting to hear the word biosame and I believe this word indicates the authorized version of NESP, which is what your group Kyowa Kirin Frontier is working on. Will the drug price of biosame be 50% or 70% of branded drugs? I think this will make a large difference in the profitability of the authorized version of NESP. So are you negotiating the price with the authority? Also, there has been an entry of the branded drug manufacturers and the biosimilar BS market in Japan seems to have entered an expansion phase. My impression is that there is a gradual increase in expectation that the Biologics in Japan will be replaced by BS going forward. Could you give us your thoughts on this?

[Wataru Murata, executive]

This is Murata speaking. As for the outlook on the drug price for the authorized version of NESP, we are not negotiating with the authority. So I don't have any particular comments on this point. We set up the company Kyowa Kirin Frontier and are working on the authorized version of NESP project based on the midterm business plan. Regarding your question on whether there is a market expansion of biosimilar due to the branded drug manufacturer's entry, your point may be valid. For everyone involved including the patients, the government and the medical institutions, I think market expansion is one direction that has to take place. Generally speaking, the market is perhaps undergoing an expansion phase today like you mentioned.

[Fumiyoshi Sakai, analyst]

This is Sakai. I just want to confirm my first question. In the second half this year, does FKB factor in any sales proceeds from Mylan?

[Motohiko Kawaguchi, executive]

Kawaguchi again. In the second half, we do have expected sales to be booked by FKB, but it is not a huge amount. In the financial forecast for KHK, those are included in the projection of the gains/ losses of equity method.

[Hiroshi Tanaka, analyst]

This is Tanaka from Mizuho Securities. My first question is regarding Crysvita. There was a decision by NICE of U.K., the National Institute for Health and Care Excellence, recently that it will not recommend use of Crysvita from the perspective of price. I believe you have made presentation to NICE sometime around March. And after the pediatric Phase III results were obtained in May, you have renegotiated with NICE in July. Finally, in October or so, there were news that whether NICE will recommend its use will be presented. A while ago, you mentioned that the marketing in Europe in the second half of this year will start in Netherlands and Austria, which gave me the impression that you are not thinking of launching in U.K. by end of this year. Could you please explain your thinking?

[Wataru Murata, executive]

This is Murata. We did receive the first comment from NICE, but to some extent, the result was within our expectation. We will be having discussions with the Institute going forward, make progress based on the similar time frame, as you mentioned, and would like to wait for the end results.

[Hiroshi Tanaka, analyst]

Tanaka speaking. If NICE will keep its position of not recommending the use of Crysvita, how do you think it will be used in U.K? Will it receive support from funds, for example? Or will it be covered by a private insurance by any chance?

[Wataru Murata, executive]

This is Murata. The negotiation with NICE is progressing in line with our expectation, and we are going to continue the negotiation process. So far, the current situation is within our assumption and we are not thinking of taking other measures than continuing our negotiations with NICE.

[Hiroshi Tanaka, analyst]

Tanaka again. My second question is on FKB327. You mentioned that the shipment will start by the end of this year. Is the milestone revenue upon the launch of product included in the full year estimated loss on equity method of JPY 3.5 billion? These losses on equity method is around JPY 400 million just in Q2, so that gives the impression that R&D expenses have declined largely. You mentioned that your FKB business will turn profitable in 2020, but I feel that timing may come earlier. What is your view on this?

[Motohiko Kawaguchi, executive]

Kawaguchi speaking. As described in our press release announcement on the alliance with Mylan the other day, we will book milestone revenue upon sales of the product. In fact, this revenue has already been booked in the first half 2018, due to the adoption of IFRS 15, where the accounting requires revenue recognition at the point when there is a high probability of each milestone achievement. Therefore, the milestone payment upon the sales of product has already been booked in the second quarter. This amount was not included in the initial forecast for this fiscal year, as the launch was originally planned at the beginning of 2019. So that will be a slight upside to our initial forecast.

[Takashi Akahane, analyst]

This is Akahane from Tokai Tokyo Research Center. I have two questions. First is regarding your top seller NESP. The sales progress is 49% against the full year forecast so it is not so bad. However, there are some concerns. On top of the fall in drug price, are you seeing impact from the slight change in the insurance system for dialysis? There were a result announcement yesterday by a company that sells biosimilar drug for dialysis and apparently, the market share of the biosimilar drug is slightly increasing. As your sales progression rate is less than 50% as of end of June, could you comment on the reason for the slow progress?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. Regarding NESP, this is a product with seasonality, where the second half or especially December is the peak month in sales. From our understanding, 49% progression rate of sales is in line with our forecast. In fact, this is the figure factoring the amount of shipment to wholesaler and the actual timing of use by medical institutions may differ, but as mentioned, the 49% progression rate is in line with our assumption.

[Takashi Akahane, analyst]

Akahane speaking. The other question is regarding your contract with Mylan on FKB327. In Europe, Mylan will commercialize the product and you have received the upfront revenue. In the press release, you mentioned that the agreement for other regions are still under negotiations. Is this because Europe is institutionally easy to conduct the BS business for Mylan, but the conditions in other regions are difficult and that is why you have not reached agreement yet? From your perspective, do you prefer Mylan to commercialize the product in other regions as well?

[Wataru Murata, executive]

This is Murata. I believe it is better to you to ask Mylan what they are thinking. For our company, we believe it is quite difficult to commercialize FKB327 globally by ourselves. For such reason, we hope we can find a good partner in other regions. At any rate, we are in negotiation process now with Mylan on other regions, so we would like to refrain from commenting further.

[Takashi Akahane, analyst]

This is Akahane. If you are not able to agree with Mylan on other regions, will you look for other partner?

[Wataru Murata, executive]

Murata speaking. I believe there are many possibilities.

[Motoya Kohtani, analyst]

This is Kohtani from Nomura Securities. My first question is regarding biosimilar. So far, Remicade BS has a low penetration in Japan market. There are mainly 4 reasons: first, it was not clear whether Remicade BS will be a subject drug for high-cost medical expense benefit; second, there are indications of Remicade, which are not approved for Remicade BS; third, the clinical data on Remicade BS were only limited to Japanese patients; and fourth, the sales force of branded-drug manufacturer, who sold Remicade, had exceptional skills. As for the rituximab BS, which is sold by KHK, it is hard to believe that branded-drug companies are focusing on protecting their market. And both the branded drug and rituximab BS are subject to the high cost medical expense benefit. Further remaining 2 conditions, I believe it is the same between branded drug and rituximab BS. The indication of the branded drug is not completely approved for rituximab BS and we believe there are not many clinical data obtained from Japanese patients. Considering the fact that cancer treatment is generally subject for high cost medical expense benefit, is it right to understand that biosimilar will finally penetrate the market in the field of cancer treatment? Do you think that we are now at the point where biosimilar will be accepted in the market? I believe the sales of rituximab BS were slightly over the company forecast but what is the reason behind the better-than-expected results? Could you share your thoughts?

[Wataru Murata, executive]

This is Murata. As you said, the sales of rituximab BS have been better than we expected. I'm not sure of the situation of the other biosimilars, however, I think there is a trend that the price sensitive medical institutions are more likely to accept biosimilars.

[Motoya Kohtani, analyst]

This is Kohtani. Is my understanding correct that biosimilars will be penetrated into the markets to some extent when oncology products such as Avastin BS are made available?

[Masashi Miyamoto, executive]

This is Miyamoto. We need to think about it separately how the other products will be penetrated into the market. However, for our rituximab BS, we've had strong presence in the therapeutic area in which the drug is used. In addition, Kyowa Kirin has its strength in Biologics and the company has endorsed the quality and others looking at the data of Sandoz, which developed rituximab BS. We believe these are partly the reasons why the product is well accepted by the clinicians. When various conditions including the ones you mentioned are satisfied, I think biosimilars will be smoothly accepted in the Japanese market as well.

[Motoya Kohtani, analyst]

This is Kohtani. I am sorry that I didn't take your strong sales capability into consideration. My second question is about authorized version of NESP. It may be difficult for you to answer, however, please tell me who will manufacture it and where it would be manufactured and who will sell it? I would like to revisit the information. The reason why I'm asking this is that the classification of the product will be different and the price is likely to be different depending on the manufacturer?

[Wataru Murata, executive]

This is Murata. Please excuse us for not disclosing the information as it is closely relevant to our business strategy. It hasn't been decided yet who will sell it and thus we cannot answer the question.

[Motoya Kohtani, analyst]

This is Kohtani. I see, so here is the next topic. Humira biosimilar that FKB will manufacture and Mylan will sell, has a formulation in a plastic syringe. In addition to a self-explanatory benefit of not being broken easily, are there any other benefits?

[Wataru Murata, executive]

This is Murata. Basically, we are developing the product to be the same as the branded drug as it is a biosimilar. There is no particularly different element in the formulation.

[Yasuhiro Nakazawa, analyst]

I'm Nakazawa from SMBC Nikko Securities. For RTA 402, the Phase III study will be completed in March 2022, based on the presentation. But you have obtained SAKIGAKE designation and thus, I wonder whether you have any opportunity to facilitate the timeline for NDA? This is my first question.

[Mitsuo Satoh, executive]

This is Satoh. The primary endpoint in the study is to how much RTA 402 can lower the number of subjects who have 30% decline in the eGFR over 2 years. Thus, we need a long time for the evaluation. The key will be how quickly we can enroll 700 subjects. It is also important how much cooperation we can have from the clinical operation team and the clinicians nationwide. But the primary endpoint requires a certain period of follow-up. Thus, we cannot avoid that the study will take some time.

[Yasuhiro Nakazawa, analyst]

This is Nakazawa. You mean that you will need the full data set of 700 subjects. Is it correct?

[Mitsuo Satoh, executive]

This is Satoh. Based on the findings obtained up to Phase II, we calculated the sample size of 700 to statistically investigate the efficacy. Unless we enroll a sufficient number of subjects, we won't be able to show statistically significant data. Thus, the current goal of our clinical team is to enroll to that number of subjects.

[Yasuhiro Nakazawa, analyst]

This is Nakazawa. Could you please give me some clue on the prospect on FKB from the next fiscal year and onward? I have an impression that full year expectation for this fiscal year of JPY 3.5 billion in red is too conservative. You will receive some revenue from Mylan for FKB327 from the next fiscal year. In addition, looking at the numbers in the second quarter, I don't think you have spent R&D expenses so much. I assume you need to spend some expenses as the clinical study of Avastin BS has progressed. However, the third development compound is still in the early stage. Thus, you won't spend so much R&D expenses in the next fiscal year either. Under such circumstances, is my assumption correct, that you may be able to start making profits next fiscal year considering you will have revenue from Mylan from FKB327? Please give me some clue?

[Motohiko Kawaguchi, executive]

This is Kawaguchi. We haven't developed detailed a budget for the next fiscal year. And so, we cannot address the question with certainty. However, considering the current situation, we are confident that it will start making profits in 2020. Of course, when FKB327 is launched, it will make profit contribution as you said. Thus, we have an expectation for the numbers in 2019, but we don't have accurate numbers with us now, and we cannot give you a clear story for 2019.

[Motoya Kohtani, analyst]

This is Kohtani from Nomura Securities. The Phase I study of KHK6640, an amyloid beta antibody, has already been completed. I remember that you mentioned, that some data had been presented at the Medical Congress, but only some safety data. What were the results? Did you measure the concentrations of amyloid beta in the spinal fluid or in the brain? If so, please tell me about it as well?

[Mitsuo Satoh, executive]

This is Satoh. For KHK6640, the safety data from Phase I was presented at the Medical Congress last year. We took a look at ARIA-E, a bleeding side effect, in comparison to aducanumab, a competitor being ahead of us developed by Eisai and Biogen. We investigated whether the incidents of the side effect wouldn't increase when the dose went up. We could confirm the safety seems to be high, even though it was only Phase I data. In addition, we also evaluated how much KHK6640 was transferred into the cerebral spinal fluid after dosing.

[Motoya Kohtani, analyst]

This is Kohtani. This may be difficult to answer as well, I assumed the biosimilar of NESP will be launched after NHI price listing around November 2019. Would you make a press release after making an application to the authorities for the authorized version of NESP? Or are you planning to make an announcement only after you obtain approval from the authorities and not to let us know until that moment?

[Wataru Murata, executive]

This is Murata. I am sorry, but we cannot disclose the information due to a strategic reason.

[Hiroshi Tanaka, analyst]

This is Tanaka from Mizuho Securities. I have one question on RTA 402. Reata announced the results of the clinical study for ADPKD the other day and their stock price went up after that. Please tell me what kind of collaboration you will have with Reata for the indications other than CKD. Will ADPKD be included as well? How about the other indications?

[Mitsuo Satoh, executive]

This is Satoh. Reata presented the clinical study data for an indication of Alport syndrome, and shows that RTA 402 improved the renal function. Some Japanese patients with Alport syndrome participated in this clinical study performed by Reata. It depends on the situation of the future clinical studies, whether we will file an application to the authorities for Alport syndrome or diabetic kidney disease that we started working on.

[Yo Mizuno, analyst]

This is Mizuno from Tokio Marine Asset Management. Have you already filed an application for KW-6002 overseas? Or are you still in preparation? Then I have a question on your marketing strategy. How will you market KW-6002? Please tell me your current thinking?

[Mitsuo Satoh, executive]

This is Satoh. As you know, the Phase III study of KW-6002 was performed in the United States and the primary endpoint wasn't achieved. On the other hand, we obtained approval for the product in Japan based on good clinical study results. We have solid results from the pivotal study performed in Japan. And we are now in negotiation to file an application for approval to the U.S. regulatory authorities using the pivotal study data and the data from the U.S. clinical study. We already had a Type B meeting with FDA and got a sense that they would thoroughly review the data after our NDA. As to the timeline, we would like to file an application by the end of this year. There are still some uncertainties, whether we can make it. However, we are now making preparation to deliver.

[Wataru Murata, executive]

This is Murata. I will explain the future marketing plan for KW-6002. We are now conducting a marketing research. We will consider how to market the product in the future. I cannot give you the details however, we are discussing some specific options.

[Yo Mizuno, analyst]

This is Mizuno. Is my understanding correct that those options include the one you will sell the product by yourself?

[Wataru Murata, executive]

This is Murata. We are considering the option among some of the others.