Shionogi & Co Ltd

TSE:4507

Earnings Call Transcript 2019-Q3

[Yoshimasa Kyokawa, executive]

Let me start the presentation. On Page 2, this is the agenda for today's conference call. First of all, I'll give you the overview of the third quarter financial results, followed by efforts and progress in the third quarter and shareholder return to be presented by Mr. Hanasaki.

First of all, I'll give you the overview of the third quarter fiscal year 2018 financial results. Page 4 gives you the summary of the consolidated financial results. The first column indicated the full year forecasts revised on October 29. The next 2 columns show the April-December results and progress versus forecasts. For your reference, you can find the actual April-December results in fiscal year 2017 and year-on-year growth in percentage and value.

The sales were JPY 265.2 billion with 74.9% progress versus forecasts. The year-on-year growth was 0.7% with the increase by JPY 1.9 billion. The operating income was JPY 97.4 billion with 78.3% progress versus forecasts. It increased by 8.1% with JPY 7.3 billion increase year-on-year.

The ordinary income was JPY 115.7 billion with 77.9% progress versus forecasts. The growth rate was 9.7% with JPY 10.2 billion increase year-on-year. The profit attributable to owners of parent was JPY 94.3 billion with 79.6% progress versus forecasts. It grew by 18.3% with JPY 14.6 billion increase year-on-year.

The sales and profits have made a good progress against the full year forecasts. We had higher sales and profits year-on-year. For each profit, we had the record-high results in the April-December period.

The operating income and profit attributable to owners of parent grew for 4 consecutive years and the ordinary profit for 10 consecutive years.

For the average exchange rate at the beginning of the period, the yen depreciated slightly against the dollar and pound, as you can see in the table right below.

On Page 5, I will explain the statement of income. The actual sales were JPY 265.2 billion with achievement of 74.9%, which grew by JPY 1.9 billion year-on-year. The sales of prescription drugs declined due to the impact from generic drugs, while the royalty income grew in the HIV franchise and we obtained the milestone income from Roche for Xofluza. The last 2 factors contributed to the higher sales.

The cost of sales was JPY 40.4 billion with achievement of 70.8%. It declined by JPY 16.3 billion year-on-year. This decline is mainly due to the lower sales of prescription drugs in Japan. As a result, gross profit was JPY 224.9 billion, which increased by JPY 18.2 billion year-on-year.

The SG&A expenses was JPY 127.4 billion with achievement of 73.9%, which increased by JPY 10.9 billion year-on-year. The selling and administrative expenses was JPY 74.5 billion, which increased by JPY 3.5 billion year-on-year. The R&D expenses were JPY 53 billion, which increased by JPY 7.4 billion year-on-year. The main reason for higher R&D expenses was JPY 14.8 billion of strategic investment.

The ordinary R&D expenses were JPY 38.2 billion, which declined by JPY 7.4 billion year-on-year. In total, the R&D expenses increased by JPY 7.4 billion. The ordinary R&D expenses declined because the proactive investment in the development of Xofluza up to the last fiscal year doesn't have impact anymore. The achievement ratio of ordinary R&D expenses was 75.8%, in line with our expectation.

As a result, the operating income was JPY 97.4 billion with achievement of 78.3%, which increased by JPY 7.3 billion year-on-year. The nonoperating income and expenses were JPY 18.2 billion, which increased by JPY 2.9 billion year-on-year. The ordinary income was JPY 115.7 billion, which increased by JPY 10.2 billion year-on-year. The profit attributable to owners of parent was JPY 94.3 billion, which increased by JPY 14.6 billion year-on-year.

Page 6 summarized the year-on-year comparison and main variation factors. The box on the right indicates the main variation factors in the third quarter from October to December. The sales actually declined year-on-year up to the first half due to the penetration of generic drugs of Crestor and Irbetan franchise. However, as the sales of new products started to grow in the second half, the sales of prescription drugs in Japan bottomed out and, in addition, we obtained the milestone income from Roche for the approval of Xofluza in the U.S.

Thus, the sales turned to be positive with JPY 1.9 billion growth year-on-year.

For the JPY 16.3 billion decline of cost of sales, the main reason is the lower sales of prescription drugs as mentioned before. But this comes mostly from the year-on-year difference in the first half. And the gross profit grew by JPY 18.2 billion.

The R&D expenses grew by JPY 7.4 billion year-on-year. As explained before, this is due to strategic investment. In the third quarter, the net increase of strategic investment was JPY 1.7 billion.

The operating income increased by JPY 7.3 billion. The nonoperating income and expenses increased by JPY 2.9 billion due to the impact of the year-on-year difference in the first half. The ordinary income grew by JPY 10.2 billion.

Lastly, the extraordinary income and losses grew by JPY 3.8 billion due to the profit on sale of investment securities. The profit attributable to owners of parent was increased by JPY 14.6 billion year-on-year.

Page 7 shows the sales by segment. The sales of prescription drugs in Japan were JPY 88.3 billion with 74% achievement, which was declined by JPY 20.1 billion year-on-year. The decline was mainly due to the penetration of generic drugs. I'll give you the breakdown by product later.

The sales of overseas subsidiaries and export was JPY 22.1 billion with 70.6% achievement, which increased by JPY 4.6 billion year-on-year. For Shionogi Inc., the sales were JPY 9.4 billion with 75.6% achievement, which increased by JPY 1 billion year-on-year. We started marketing Symproic and Mulpleta, which were developed internally. For Osphena, we continue to facilitate the cooperation with Duchesnay, and the sales were JPY 2.4 billion with 58.4% achievement, which declined by JPY 600 million year-on-year. We think this was mainly due to severer competition.

The sales of contract manufacturing were at JPY 9.2 billion, which declined by JPY 2.6 billion year-on-year. The sales of OTC and quasi-drug were JPY 6.3 billion, which increased by JPY 600 million year-on-year.

The total royalty income was JPY 137.5 billion, which increased by JPY 19.4 billion year-on-year. More specifically, the royalty income from the HIV franchise was JPY 89.9 billion, which increased by JPY 15.9 billion year-on-year. The sales of Tivicay and Triumeq by ViiV were good. The royalty income from Crestor was JPY 16.4 billion, while that of others was JPY 31.2 billion, which increased by JPY 4.1 billion year-on-year. Others includes the milestone income we received in the third quarter from Roche for the approval of Xofluza in the U.S. As a result, the total sales were JPY 265.2 billion, which increased by JPY 1.9 billion year-on-year.

On Page 8, you can find the year-on-year comparison and main variation factors for the sales by segment. Like before, the box on the right explains the main variation factors in the October-December period. The royalty income from HIV franchise grew by JPY 15.9 billion while overseas subsidiaries export grew by JPY 4.6 billion, and royalty income from others by JPY 4.1 billion. These 3 contributed to the increased revenue for us. As explained before, the royalty income from others includes the income from Roche for the approval of Xofluza in the U.S.

The sales of prescription drugs in Japan declined by JPY 20.1 billion, which was a negative factor for our revenue. However, the sales from influenza family mainly from Xofluza, which was launched in March last year, have started to make a big contribution. Thus, the proportion of sales from the strategic products is outstanding. I'll explain this by product on the next page.

Page 9 shows the sales of prescription drugs in Japan. Among the strategic products, Cymbalta suffered a big impact from NHI drug price revision last spring. However, the volume has grown steadily since last year. The sales were JPY 18.6 billion, which increased by JPY 400 million year-on-year. The sales of Intuniv were JPY 3.9 billion, which increased by JPY 2.7 billion. The year-on-year change was 223.6%, meaning that sales were about 3x higher. The product is making a good progress.

For Xofluza, the influenza period started relatively slowly due to a warm winter. However, we started the full-fledged shipment of the product towards the end of the year. The sales of Xofluza were JPY 9.9 billion. However, Rapiacta and Brightpoc Flu suffered from an impact of slower start of the influenza season and haven't made a big contribution to the sales yet. The sales were JPY 770 million and JPY 580 million from Rapiacta and Brightpoc Flu, respectively.

OxyContin franchise is influenced by generic drugs. The sales were JPY 5.8 billion, which declined by JPY 1.2 billion year-on-year. The sales of Symproic were JPY 1.2 billion, which increased by JPY 800 million year-on-year. As a result, the total sales of strategic products were JPY 40.8 billion, which showed a big growth of JPY 12.2 billion year-on-year.

Total sales of new products adding Actair, Mulpleta and Pirespa to the strategic products were JPY 45.6 billion, which increased by JPY 11.8 billion year-on-year.

On the other hand, Crestor and Irbetan suffered from the penetration of generic drugs. The sales of Crestor were JPY 7.8 billion, which declined by JPY 18.5 billion. The sales of Irbetan franchise was JPY 4.4 billion, which declined by JPY 7.5 billion. Thus, both products had a significant decline in sales. These 2 products are the main factor for the lower sales of prescription drugs in Japan. But the quarterly sales trend of Crestor and Irbetan franchise shows a sign of bottoming out. In addition, the year-on-year decline in sales is shrinking on a quarterly basis. Thus, the impact of these products on the year-on-year decline in sales is becoming smaller.

The total sales of prescription drugs in Japan were JPY 88.3 billion, which declined by JPY 20.1 billion. The lower sales of Crestor and lrbetan franchise due to the penetration of generic drugs are gradually offset by the growth in sales of strategic products.

This concludes the overview of the third quarter fiscal year 2018 financial results.

[Kohji Hanasaki, executive]

Now, I myself, Hanasaki, will explain the efforts and progress in the third quarter fiscal year 2018.

Please go to the next slide. This page summarizes the major progress we made in the third quarter fiscal year 2018. There are 3 categories: Japanese business, overseas business and R&D. And we indicated a mid- to long-term plan and the major progress in the third quarter fiscal year 2018.

For the Japanese business, Crestor and lrbetan have lower sales due to the penetration of generic drugs, as was explained before. But in the third quarter, we saw a sign of bottoming out. On the other hand, the new products, including Xofluza, Cymbalta and Intuniv are growing. Thus, we are shifting much resource to the new products. As a result, the October to December sales were increased by JPY 3.1 billion from the previous year. This is actually shown in the graph on the next page. I'll explain Page 12 first.

Up to the second quarter, as you can see, the quarterly sales declined year-on-year due to the launch of Crestor and Irbetan generics. However, in the third quarter, as was explained before, the sales from the new products have started to grow with JPY 3.1 billion increase. Therefore, we are now in the phase of sales growth by our own earning power. The details of this JPY 3.1 billion increase are shown on Page 31 in the appendix.

The sales of Crestor and lrbetan declined by JPY 4.4 billion year-on-year. The sales from the others declined by JPY 2.3 billion due to the NHI drug price revision. However, the sales of new products grew by JPY 9.8 billion. These factors have led to the increase by JPY 3.1 billion shown on Page 12. We are aiming to achieve JPY 3.3 billion increase as our second half forecasts. Thus, we would like to facilitate sales growth by our own earning power further.

I'd like to once again revisit the table on Page 11. As mentioned earlier, our revenue increased JPY 3.1 billion year-on-year. The ratio of strategic products increased from 39.2% in the first half to 55.5% in the third quarter, increasing its weight in total revenue. This shows that concentrating resources on the new products is driving more revenue.

Next, overseas business. This slide shows our efforts to enhance our presence in the US. Cefiderocol is on track to meet our planned approval timelines. Upon termination of our alliance with Purdue, we started self-promoting Symproic, which is generating revenue. We initiated full-scale promotion for Mulpleta in December.

Third, R&D. To advance the development of next growth drivers, we have identified 8 high-priority projects, which consist of the 7 projects outlined on the R&D Day last year, in addition to S-812217 in-licensed from Sage. The priority projects are making steady progress. HIV drugs are also advancing smoothly. Under the framework of strategic investment, we have signed 4 new business alliance agreements. We would like to continue investing for the next stage while aim to increase both sales and profit for fiscal 2018 as well as to make a solid progress toward continuous growth in 2019. Those are the results that we have achieved in the third quarter.

Page 12 is already presented so I'd like to proceed to Page 13, which describes Japanese business. The slide shows new product family by product category. Although the April 2018 price revision reduced the price for Cymbalta, the prescriptions have increased more than 15% from the previous year. As a result, revenue rose 1.9% year-on-year. The growth is most prominent in pain area with a 29% surge in year-over-year prescription in the orthopedic market.

Revenue for Intuniv increased 3.2 fold from the previous year. The product gained the largest share in the nonstimulant market for pediatric ADHD in terms of naive and switch patients as well as add-on treatment. Furthermore, Intuniv and lisdexamfetamine are under review for adult and pediatric use , respectively.

Next, influenza family. As mentioned earlier, the start of the flu season this year came slightly late in December. However, the flu started spreading very rapidly in January. December saw increased shipments to wholesalers in preparation for January, driving more revenue. As the influenza epidemic reaches warning level in some regions, sales for Xofluza is surging. Because the product draws much societal attention, we'd like to maximize its value through continued development.

On opioid family, more than 90% of OxyContin has now switched to the TR formulation. Sales for the new product, Symproic, increased 3.2 fold from the previous year.

This slide outlines Xofluza. The product receives societal attention. It is a single-dose oral therapy characterized by enhanced convenience of single dosing that can complete the treatment in one cycle and rapid viral decrease in the body. Those features make the product rated highly by both medical experts and patients and drawing much attention by the media.

In Japan, through sales activities tailored to each region and e-detailing, product information is delivered effectively. Moreover, clinical studies are underway for prophylaxis and new dosage for children.

Overseas, Roche Group has launched the product in the U.S. mid-November and is strongly promoting the product through their sales activities. Their sales already topped JPY 1.4 billion as of the end of December. As part of their global development program, Roche is making steady progress with clinical trials in pediatric and the severely ill hospitalized patients.

Next, business in the U.S. In infectious disease, Cefiderocol is on track to meet our planned approval timelines in the U.S. Also, enrollments are progressing smoothly for the carbapenem-resistant and HAP/VAP studies. In pain and CNS, we are self-promoting Symproic by utilizing contract sales reps' capability to ensure efficient promotion of the product while maintaining sales channels established by Purdue. We are currently seeking a new partner to further the growth.

Mulpleta initiated full-scale promotion in December. We are aiming to swiftly penetrate the market through Mulpleta Assist program while expanding our sales channel through targeted efforts made by contract sales reps.

The share of Osphena has been slightly encroached by generic products. However, in January, we have obtained supplemental indication for dryness. Leveraging this, we'd like to aim to grow with revenue.

To conclude, we are making steady progress to reach the breakeven this fiscal year. We are also building our foundation to expand the U.S. business.

Next, R&D. I'd like to update you on next growth drivers. In infectious disease, we have an anti HIV drug with novel mechanism of action, whose nonclinical studies are progressing to enable the initiation of Phase I study in fiscal 2019.

On S-004992, tuberculosis, nonclinical studies are progressing to support the initiation of Phase I study in China. In pain and CNS, we have an internally developed S-600918, whose Phase II POC study is underway for refractory, unexplained chronic cough in Japan. The preliminary results will be available by the end of fiscal 2018.

On S-637880, Phase I study and micro-dose study are progressing to determine the propensity of the drug to penetrate into the central nervous system. On S-812217, in-licensed from Sage, Phase I study was initiated in October. Under others, for the internally discovered vaccine adjuvants, nonclinical studies are progressing. On S-770108, or Pirespa inhaled product, Phase I study has been completed. Under peptide, we'd like to optimize multiple HIT peptides, which we have identified, while continue launching new drug discovery programs.

That was an overview for the 8 high-priority projects. Details will be announced on R&D Day, scheduled for March 14.

This slide outlines S-812217. The mechanisms are shown on the left. While existing antidepressants exert their effect by increasing monoamine, S-812217 has a binding site that is different from GABA and functions as a positive allosteric modulator. By directly acting on inhibitory neurons, it can have a rapid onset of efficacy.

The pipelines of Sage is shown on the right. SAGE-217 met primary and secondary endpoints in Phase III clinical trial for postpartum depression. Rapid onset and prolonged efficacy after drug cessation have been confirmed in the study. Currently, Phase III clinical trial for major depression disorder is proceeding. Brexanolone is an IV drug that has the same mechanism. The product is under review by FDA for postpartum depression. The review is expected to complete on March 19. Sage and Shionogi will be cohosting a briefing on S-812217 on February 5.

This is an update on HIV treatment platform. The first 2-drug regimen, Juluca, was launched in Japan in December. On the first cabotegravir, rilpivirine long-acting injection, the FLAIR study in October showed equivalent efficacy in naive adult patients switching from Triumeq. We plan to make NDA, MAA submissions in the U.S. and EU during the first half of 2019. To conclude, steady progress has been made to maximize the value of the HIV platform.

Next, progress of strategic investment. By the first half of the year, we have entered into agreement with 4 companies, namely Hsiri, Sage, Nemesis and Rohto Pharmaceutical on cell therapy. In the third quarter, we have concluded 4 more business alliance agreements. First, we invested in Vast to in-license a nitric oxide inhaled formulation platform for the treatment of respiratory infections. This secured our preferential negotiation rights for future in-license of the leading compound and subsequent compounds. Local release of nitric oxide in the lung is expected to have wide-ranging antimicrobial effects on resistant bacteria. Second, we launched collaborative research with Ube for novel, anti-RS virus drug candidates. Utilizing the strengths of Ube in small-molecule therapies for respiratory diseases caused by RS viruses, we'd like to accelerate the development of candidate compounds. Third, through in-licensing from Tetra, we obtained BPN14770, a drug candidate for cognitive and memory deficits. The product is a phosphodiesterase 4D negative allosteric modulator that has a novel mechanism. It is expected to improve cognitive function by raising the cyclic AMP level. Because of its novel mechanism, we can also expect to avoid adverse effects, such as vomiting frequently caused by conventional PDE inhibitors.

Finally, we launched collaborative research with PeptiDream for a peptide drug conjugate, PDC technology platform that can enhance brain permeability of compounds. PDPS technology will be used to bind cargo peptides to target molecules to pass across the BBB. The objective of our joint research is to bind specific small to mid-molecules in such a way that compounds are selectively delivered to the brain. That concludes our presentation on main activities and achievements, which came to fruition in the third quarter.

The last topic before I finish is shareholder return. Please refer to Page 21. Since July 31, we have spent JPY 50 billion to buy back 7,000,350,400 (sic) [ 7,350,400 ] shares. The initial upper limit for the share buyback was set to around 8.6 million shares. However, during the share buyback period, our stock price rose, reducing the number of shares to be bought back to 7.5 million. With the rising stock price, the euro-yen convertible bonds due 2019 have been converted, making us to contribute 3.9 million shares. This lowered the percentage of treasury stocks. Throughout our history, the percentage of treasury stocks has been maintained around 3% through acquisition and cancellation. To ensure capital agility going forward, we decided to change the number of shares to be canceled to 7.35 million shares, which we have acquired recently. This will lower the percentage of treasury stocks to 1.8%. Going forward, we will maintain the 2% level to drive our corporate value while ensuring capital agility.

That concludes our briefing on financial results for the third quarter of fiscal 2018. So let's move on to the Q&A session. The Q&A session will be moderated by an operator.

[Operator]

The first person is Mr. Seki from UBS Securities.

[Atsushi Seki, analyst]

This is Seki speaking. I have several questions. My first question is the gross profit margin ratio excluding royalty income was very good in this 3 months period. Is there any outstanding factor to improve the gross profit margin ratio excluding royalty income other than Xofluza?

[Unknown Executive]

We didn't observe anything outstanding.

[Atsushi Seki, analyst]

Thus, it is mostly due to Xofluza.

[Unknown Executive]

Yes.

[Atsushi Seki, analyst]

My second question is about Xofluza in the U.S. I got the Roche's number of CHF 13 million and based on that number of weekly prescriptions from IQVIA, I had a discussion with an investor that the startup maybe slow. How do you see the situation from the launch to the end of the year in the U.S.?

[Unknown Executive]

We have heard that the influenza epidemic is milder in the U.S. We also have heard that the market share is in line with Roche's expectation.

[Atsushi Seki, analyst]

I think that the market share is still in low single digits, but it is within your expectation.

[Unknown Executive]

Yes.

[Atsushi Seki, analyst]

I don't know whether I can ask you the current situation of Xofluza in Japan. There was media coverage on the restriction on shipment. Externally, I can assume that you had good sales of Xofluza in January and February. Do you have any specific intention to maintain the guidance?

[Unknown Executive]

As was explained in the presentation, the influenza epidemic season started slowly in December. We shipped a large quantity of the product to wholesalers to be well prepared for the peak season in January.

[Atsushi Seki, analyst]

So the company wasn't encouraged enough to change the guidance?

[Unknown Executive]

Correct. In addition, the epidemic is spreading quickly now. However, it is uncertain how the peak season will proceed going forward. Thus, we don't change our sales forecast as of now.

[Atsushi Seki, analyst]

I saw the media reporting on I38 mutation with Xofluza, a resistant virus issue. I know that you expected this would happen already last year. Could you please tell me the measures you are taking to protect the value of Xofluza?

[Unknown Executive]

We are now implementing research and analysis on the profile of this mutant. As of now, we have confirmed that the susceptibility declines by 50x at maximum due to this I38 mutation. However, an issue is whether it can be transmitted from the patients to others. An in-vitro study had shown that the mutant has lower repetitive capacity. We are planning to perform additional nonclinical and clinical studies on the transmission of mutation.

[Atsushi Seki, analyst]

Next is my last question. I know that you will shift to IFRS from the next fiscal year ending March 2020. Would you receive the royalty income in the same quarter even though it is not received in the following quarter?

[Unknown Executive]

The royalty income will be received in the following quarter even after shifting to IFRS.

[Operator]

Let's move on to the next question, Mr. Yamaguchi from Citigroup Global Markets Japan.

[Hidemaru Yamaguchi, analyst]

You mentioned the milestone income from Roche many times in the presentation. Please remind me if you had similar milestone income in the second quarter as well.

[Unknown Executive]

Yes, in the second quarter, we had the milestone income for the high-risk study.

[Hidemaru Yamaguchi, analyst]

This is also a detailed question and I am not updated yet. But I saw a media report on the delay of Vyvanse approval. Do you have any further update?

[Unknown Executive]

Vyvanse is a CNS stimulant. Thus, we need to establish a robust system for distribution and management. And PMDA is now carefully reviewing the application. The public comment collection is now over and the application will be discussed in the Committee on Drugs. And we are waiting for the review result. As a company, we are making efforts to establish a sufficient system for the use and management of the drug. Once such a system is established, you can move forward because there is no issue with the drug.

[Hidemaru Yamaguchi, analyst]

Yes. I understand. This is kind of a repeat question. You said that you shipped a large quantity of Xofluza in the October-December period to be well prepared for the peak season in January. The number of patients is increasing significantly now. I think that you will decide how much to ship assuming the volume which has already been shipped will be consumed as expected. You shipped a lot in December, but I think that the actual sales in the period was only about JPY 3 billion. The difference will be sold in the fourth quarter and you are still not sure how much incremental sales will be booked. Is it correct?

[Unknown Executive]

We shipped the product in January as well. I believe that the volume shipped in December will be consumed in the fourth quarter.

[Hidemaru Yamaguchi, analyst]

I see. My last question is a semi macroeconomic question. There has been a lot of discussion on the pricing in the U.S. from a macroeconomic perspective. Especially, in the protected CNS area, there is a discussion on revising the pricing. On your actual business basis, do you have any new topic for HIV treatment pricing?

[Unknown Executive]

Nothing especially. Nothing.

[Operator]

Next is Mr. Ueda, Goldman Sachs.

[Akinori Ueda, analyst]

This is Ueda, Goldman Sachs. I'd like to ask several questions. First, pertaining to Xofluza, the product is frequently prescribed in Japan. How do medical experts evaluate the product? Also, there seems to be a difference in terms of how the product is increasing its market share between the U.S. and Japan. What do you think are the factors behind the difference? Could you please describe?

[Unknown Executive]

In terms of evaluation by medical experts, unlike existing influenza drugs, Xofluza completes the treatment by a single-dose oral therapy. The product is also characterized by rapid viral decrease. Medical experts fully understand these advantages and are adopting our product.

[Akinori Ueda, analyst]

Do you hear any different comments on clinical evaluation between Japan and the U.S.?

[Unknown Executive]

We have not heard of any difference at this stage.

[Akinori Ueda, analyst]

I understand. Second on Intuniv. The product seems to be threading slower than the guidance, although the share is steadily increasing. Do I understand correctly that the slower progress is attributable to some factor in the market? For example, potential patients who have not been diagnosed?

[Unknown Executive]

Yes, Intuniv is often used concomitantly. We need to clearly present main features of Intuniv to stakeholders in order to further grow its share, especially naive patients. We'd like to provide accurate product information in order to prepare for an expanded indication for adults during the next fiscal year.

[Akinori Ueda, analyst]

My final question is on your cost outlook for the next fiscal year. Cefiderocol, which is making steady progress, needs to prepare for a possible launch during the next year. Do you anticipate a cost increase associated with the preparation? Moreover, you are currently aggressively promoting strategic investments. Do you foresee any changes in cost under these items in the coming year? Please let us know.

[Unknown Executive]

Thank you for your question. On strategic investment, we are currently promoting 8 priority projects this year. The next fiscal year is a stage in which we will progress these 8 priority projects. Thus, during the next fiscal year, new strategic investment framework has not been earmarked for any further investment.

[Akinori Ueda, analyst]

Is it going to cost a lot to prepare for the launch of Cefiderocol?

[Unknown Executive]

On Cefiderocol, in anticipation for an approval, we will make sure to arrange necessary prelaunch activities.

[Operator]

Next is Mr. Wakao, Mitsubishi UFJ Morgan Stanley.

[Seiji Wakao, analyst]

This is Wakao from Mitsubishi UFJ Morgan Stanley. First on Xofluza. Maybe I should raise this question with Roche, but how big will the size of the government stockpile be considering the size of the U.S. market? Moreover, what percentage will the government stockpile represent in your peak sales? In addition, if there is going to be a government stockpile, at what timing will the authorities start stockpiling?

[Unknown Executive]

Thank you. I am sure Roche is anticipating a government stockpiling and considering making necessary arrangements in the future. However, because multiple clinical studies are still underway, it will take time to start concrete discussions on the matter. As for the domestic stockpiling, the product has a stable shelf life of 2 to 3 years. Considering both its longer stable shelf life and further actual usage of the product, we will discuss the matter with competent authority.

[Seiji Wakao, analyst]

I understand. You just mentioned that the strategic investment is not budgeted for the next fiscal year. Under R&D expense, strategic investment, which is forecasted to amount JPY 18 billion this year, will be gone next year, but the inputs you made under strategic investment will require additional R&D expense in the next fiscal year. Is my understanding correct?

[Unknown Executive]

Phase III studies for Xofluza have been completed. Thus, R&D expense in the next fiscal year will remain the same as this fiscal year.

[Seiji Wakao, analyst]

I understand. Having said that though, a lot of strategic investment items are in early stage and thus unlikely to inflate the R&D expense that much.

[Unknown Executive]

That is correct because many of them are still in early stage.

[Seiji Wakao, analyst]

I understand. On Cefiderocol, could you clarify how to market the product?

[Unknown Executive]

The product may not be frequently prescribed. However, FDA is considering granting medical institutions marketing authorization so they can generate revenue by distributing the product as a way to boost R&D in this area.

[Seiji Wakao, analyst]

I assume that Shionogi is pursuing that direction. Could you please update us on the matter? Are we expecting that to happen when the drug is approved?

[Unknown Executive]

Pricing is an important point. As we are still in consultation with the authority, nothing in certain is done. We will study the details in the future.

[Operator]

Next is Mr. Sakai, Crédit Suisse.

[Fumiyoshi Sakai, analyst]

This is Sakai. I'd like to raise 2 questions. One is on Xofluza. Roche reported that the fourth quarter sales topped CHF 13 million. I understand that Shionogi is exporting semi products or prepackaged products to Roche. Is this figure booked as a revenue for your overseas subsidiaries' export? In other words, do your results include those shipments to Roche?

[Unknown Executive]

Xofluza shipment to Roche is included in the figure.

[Fumiyoshi Sakai, analyst]

It is included.

[Unknown Executive]

Yes.

[Fumiyoshi Sakai, analyst]

However, the amount is undisclosed?

[Unknown Executive]

That is correct.

[Fumiyoshi Sakai, analyst]

But the figure was insignificant as of the end of the third quarter. Am I right?

[Unknown Executive]

It is reflected in the contract manufacturing figure for the third quarter.

[Fumiyoshi Sakai, analyst]

Okay. It is included under the contract manufacturing.

[Unknown Executive]

Yes.

[Fumiyoshi Sakai, analyst]

So do I understand correctly that this portion will grow as Xofluza expands its sales?

[Unknown Executive]

Yes.

[Fumiyoshi Sakai, analyst]

I understand. My other question is, well, I may have to save this question until the joint briefing on S-812217, but according to the table on Page 17, the compound is described in the context of postpartum depression. I believe that the original indication of the product was depression when you in-licensed it. Underneath S-812217 is ZULRESSO, which is developed by Sage and indicated for postpartum depression. With the PDUFA date approaching near, are you going to in-license ZULRESSO and develop S-812217 for postpartum depression? Is that the reason why the product is listed here?

[Unknown Executive]

We will consult with Sage regarding ZULRESSO as well as an indication for postpartum depression. We have not officially decided to in-license the product yet.

[Fumiyoshi Sakai, analyst]

All that is certain is S-812217 for depression. Correct?

[Unknown Executive]

Yes.

[Operator]

There is no more question. Mr. Kyokawa, please.

[Yoshimasa Kyokawa, executive]

With that, we'd like to conclude the Q&A. Thank you very much for attending our briefing today. Thank you.