Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2021-Q1

[Osamu Okuda, executive]

Welcome to our conference call. I am Osama Okuda, President and CEO of Chugai Pharmaceutical. I'd like to give you the overview of the first quarter fiscal 2021. Please turn to Page 5. Revenues in January to March quarter totaled JPY 168.8 billion, down 5.9% year-on-year, while the operating income was JPY 65.4 billion, down 11.7% year-on-year, posting a decrease in both revenues and profits at the start of the fiscal year. However, in terms of the progress, this represents 21.1% against the full year forecast of JPY 800 billion in revenues and 20.4% in operating income, mostly in line with the initial expectation.

There is no change in the outlook for earnings growth from April onward, and therefore, we expect an increase in revenues and profits for the full year as initially forecasted.

Next, I'd like to explain about the top line. Please go to Page 6. In the domestic business, Tecentriq in the oncology area has achieved steady market penetration and Kadcyla has been performing well as well.

In the primary year, Enspryng penetrated into the market and Hemlibra has shown strong performance. On the other hand, due to the impact by NHI drug price revisions and penetration of generics, Avastin, Herceptin and Edirol, saw their sales decline. As for the overall domestic sales, the volume increased but the value fell year-on-year as there was a large impact of the NHI drug price revisions in April last year.

Overseas sales dropped because of the decline in unit export prices and time lag in exports of Actemra to Roche. If you look at royalties, due to growth in overseas local sales, Hemlibra and Actemra posted increased royalties and profit share. On balance, we started the fiscal year with decreased revenues but achieved progress in line with the forecast made at the beginning of the fiscal year.

Please turn to Page 7. In R&D, a major progress was made as we obtained approval for 2 first-in-class products in Japan, which are expected to contribute to sales this year and went along with development of COVID-19 treatment drugs. Polivy, a new anticancer drug is an antibody drug composite indicated for relapsed/refractory diffuse large B-cell lymphoma.

In an overseas clinical study, when compared to existing treatment, it has shown a higher complete response rate. Based on this result, it has been already approved overseas and launched and used by many patients. We are aiming for early market penetration ahead of the planned addition of the indication for the first-line treatment. FoundationOne CDx cancer genomic profile, which was launched in June 2019, has already been used in many of the designated core hospitals, designated hospitals or cooperative hospitals for cancer genome medical care. On top of that, we were granted with an approval for FoundationOne Liquid CDx, a comprehensive genomic profiling test, which can detect genetic mutations from DNAs derived from tumors in the blood. By adding block-based FoundationOne Liquid CDx to tumor tissue-based FoundationOne CDX, we believe we can meet the diverse needs of the clinical practice in a mutually complementary manner.

In Japan, this was the first approval obtained as a blood-based cancer genomic profiling test. Next, I would like to discuss the status of development pipeline for COVID-19 for which there is a concern for expansion of infections of variants. As for Actemra, its REMDACTA study to see the effectiveness of the combination with remdesivir failed to meet the primary endpoint. There have been multiple clinical studies conducted and therefore, analysis of their results in an integrated manner are underway.

With regard to antibody cocktail therapy created by Regeneron, we have achieved primary endpoints in multiple Phase III clinical studies being performed overseas for nonhospitalized patients and for the prevention of COVID-19 in household contacts of infected individuals.

In Japan, we started a Phase I study for Japanese patients in March and expect to file for approval in 2021. Last but not least, AT-527 is an oral RNA viral polymerase inhibitor, created by Atea Pharmaceuticals of the U.S., and we are preparing for development in Japan.

In addition to the ones mentioned, among those new drugs filed and expecting approval are Enspryng in Europe, nemolizumab for the indication of atopic dermatitis, which is effective for pruritis and risdiplam for a refractory disease called spinal muscular atrophy as a drug convenient for pace to use due to its oral formulation. That is all from me. Thank you for your attention.

Next presenter is Toshiaki Itagaki, CFO.

[Toshiaki Itagaki, executive]

I am Toshiaki Itagaki, and I will discuss the financial overview. Please turn to Page 9. I will review the first quarter result by comparing it to the result in the same quarter last year. Revenues came in at JPY 168.8 billion, down JPY 10.6 billion or 5.9% year-on-year. In the breakdown of revenues, domestic sales went down by 6.9% due to NHI drug price revisions in April last year and launch of generic drugs.

Overseas sales dropped by 16.9% due to the timings of exports and a decline in export unit price of Actemra. Royalty and profit-sharing income increased by JPY 10.2 billion, mainly due to increase in royalty income for Hemlibra.

Other operating income posted only JPY 2 billion due to a decrease in onetime income. The decline in revenues in the first quarter was in line with expectation, and there is no change in our forecast for a positive growth in revenues for the full year.

As for cost of sales, some products saw their cost of sales ratios go up due to the NHI drug price revisions in April last year. However, because of the increased share of in-house products in the product mix, we were able to maintain the last year's cost of sales ratio of 42.2%.

In operating expenses, we have controlled the increase in M&D and G&A expenses to 1.5%, so that we could more proactively invest in R&D.

Along with the progress made in the development projects, the R&D expenses rose by JPY 3.7 billion or 14.8%. Now for the full year, R&D expenses are planned to be increased by JPY 18 billion or 15.9%. And therefore, this increase in the first quarter is in line with the full year plan.

Consequently, the operating income was JPY 65.4 billion, down 11.7% year-on-year, with the operating margin at 38.7%. Subtracting from this, financial account balance and income taxes will give us the net income of JPY 48.4 billion.

The profit had been assumed to decrease year-on-year in the first quarter, and we expect to record a positive growth in both revenues and profit for the full year, posting a record high impose for 5 consecutive years.

Page 10 shows the breakdown of factors for increase and decrease in sales. By area, oncology at the bottom increased by 4.7% with Tecentriq surging by 80.8%, as shown on the right, by product. Kadcyla also grew due to expansion in indications.

On the other hand, Herceptin, Avastin and Perjeta decreased mainly due to the later drug price revisions last year. Domestic primary area dropped in sales by 20.8%. In-house products, Enspryng and Hemlibra grew their sales with progress in the market penetration.

Hemlibra, despite a 15% reduction in its NHI drug price due to recalculation based on the market expansion in April last year, achieved an 11.4% increase with the growth in volume of about 32%. On the other hand, Edirol dropped by JPY 5.9 billion, effected by generics and Tamiflu for government stockpile fell by JPY 1.4 billion.

Overseas sales, as explained, dropped by 16.9% due to the timings of exports and declined export unit price for Actemra. Of the total decrease of JPY 6.7 billion in exports of Actemra, JPY 6.6 is attributed to decline in exports to Roche. I will elaborate more on the exports of Actemra to Roche in the next page.

Please go to Page 11. Horizontally from left to right, you see years of 2019, 2020 and 2021. While vertically from the bottom, you see the first through the fourth quarter. In 2021, the JPY 66.2 billion for the second to fourth quarter is what you get by subtracting the first quarter result from the full year forecast.

First of all, the full year amount of 2020 was JPY 132 billion, up 52.6% year-on-year while in 2019, the growth rate was 9.9%. Given that the demand for rheumatism tends to be stable, the remaining 40 percentage points plus in the growth rate for 2020 is presumed to have been driven by demand related to COVID-19.

The numbers in blue indicate increases in sales of Actemra by Roche, which show an 8% increase in 2019 and 39% in 2020, respectively. This demonstrates a fairly large amount of demand related to COVID-19 in Roche territories.

Now compared to the 39% increase in sales in Roche territories in 2020, our exports to Roche in the same year posted a higher growth of 52.6%, indicating that shipments were front-loaded from Chugai to Roche. Partly due to this background, our export in the first quarter of this year was somewhat curved and ended up with JPY 16.9 billion.

The export in the first quarter had become a firm order at the time of coming forward with our forecast. And so the JPY 16.9 billion, which was a decline of 28.9% year-on-year was in line with our plan. Now the full year forecast of JPY 83 billion takes into account the impact by demand related to COVID-19 only in a limited fashion.

However, considering that sales growth in the first quarter in Roche territories was still strong at 26% as shown on the right bottom, we can expect incremental growth to our exports later this year, which was not included in the initial full year forecast.

On Page 12, you can see a waterfall chart showing factors for changes in the operating income. There are 3 bars, starting from the left, which shows the breakdown of JPY 8.3 billion decrease in gross profit. Sales volume did increase but you can tell NHI drug price revisions in the domestic market and export unit price reduction overseas had large impacts. The increase in royalty and profit-sharing income of JPY 10.2 billion directly contributed to the increase in the operating income.

Other operating income declined by JPY 6.5 billion due to the absence of the onetime income present in a fairly large amount last year, which directly pushed down the operating income by that amount. In operating expenses, increases in M&D and G&A expenses led to a drop of JPY 300 million.

Our sales promotional activities in China pushed up the expenses, while M&D expenses in Japan and Europe dropped slightly. R&D expenses went up by JPY 3.7 billion, as was explained already.

For the next 3 slides from Page 13, you will see data in terms of quarterly changes. The first of the 3 is about the cost structure. The right dock describes the comparison with the first quarter of the previous year we just already explained. Therefore, let me just focus on the right bottom, which shows the comparison with the immediate past quarter, in other words, with the fourth quarter last year. In terms of the bar chart on the left, I am comparing the 2 rightmost bars.

As you can see, the fourth quarter last year posted larger sales and expenses while the first quarter of this year recorded smaller sales and expenses. Although there is no major change in the cost structure, in the first quarter this year, the rate of R&D as percentage of sales went up to 17%.

You can tell one of the strategies of TOP I 2030, RED shift or research and early development shift has already been implemented. The cost of sales ratio was maintained around 42%, showing no major changes.

Page 14 shows the structure of revenues. Again, I will just highlight the comparison to the fourth quarter of last year. Please take a look at the 2 bars on the right in the bar chart. Starting from the top, other operating income goes up and down from quarter-to-quarter because this item is event-driven. In the first quarter, it was JPY 2 billion, up JPY 0.6 billion.

Below that is royalty and profit-sharing income, where income for Hemlibra decreased. Sales of Hemlibra by Roche are steadily growing, royalty related to initial supply or royalty 2 is increasing, but royalty related to the ordinary supply or royalty 1 is supposed to have its rate gradually go up depending on the cumulative annual sales under the contract, which is what is called progressive royalty rate.

Therefore, royalty received in the first quarter was at a lower rate, which is why the royalty income dropped as compared to the fourth quarter. Overseas sales did fluctuate depending on the timings of the exports. Since the timing of export of Actemra was skewed toward the fourth quarter of last year, the amount of decline in the first quarter was slightly larger. Alecensa fell in sales due to export unit price and the timing of shipments. Domestic sales usually tend to decline in the first quarter compared to the fourth quarter in the year before, every year.

Another factor in the decline of sales is increasingly larger impacts by generics. The bottom 2 portions of the bars, overseas and domestic sales, have been analyzed in the breakdowns on the next page.

On Page 15, overseas sales significantly dropped from the JPY 62.6 billion posted in the fourth quarter to JPY 35.4 billion in the first quarter as indicated in gray.

As described on the right, in overseas business, Actemra dropped by JPY 19.4 billion and Alecensa by JPY 7.6 billion. As for Enspryng last year, as part of the efforts to build up the inventory and its initial supply to the market, relatively large sales were recorded, absence of which in the first, quarter resulted in a JPY 40 billion drop.

On the other hand, Hemlibra enjoyed a rise of JPY 4 billion. In domestic oncology and primary areas, the impact of NHI drug price revisions in April last year was neutral.

The declines are attributed to the typical quarter-to-quarter trend. But Avastin, Herceptin and Mircera was slightly affected by generics. Tecentriq saw its sales go up by JPY 2.1 billion, partly due to the addition of the indication for hepatocellular carcinoma.

Next, I'd like to discuss the progress against the full year forecast announced at the beginning of the period. Page 16, please. In a nutshell, sales, costs and profits are all progressing as expected. First, line 3, domestic sales are at 24.1% progress, almost on par with last year. As for overseas sales, since the first quarter is within the firm order period to begin with, the export was in line with the plan.

As for the full year forecast, we did not include the COVID demand for Actemra. That assumption is not changed now, the progress is as expected. Royalty and other operating income are also in line with the forecast. Cost to sales ratio was 40% in the full year forecast. Compared with that, 42.2% in the Q1 is slightly higher. We expect it will gradually improve since in-house products will further grow towards the end of the year. Operating expenses are nearly in line with the forecast since activities were carried out generally as planned in spite of the emergency declaration in the first quarter in Japan. As a result, the progress of operating profit of 20.4% was generally as planned.

Page 17 shows the progress of the sales by growing products. I mentioned that progress was as planned for both domestic and overseas sales, but the situation varies depending on the individual product. As slightly slow progress is seen in Herceptin, Gazyva, Rituxan, Xeloda and Rozlytrek in oncology products on the left. Foundation Medicine shows 13.9% progress, but F1 Liquid CDx obtained cancer genomic profile indication in March, and thus, we expect the growth of the sales after April.

In primary area, Hemlibra seems slightly slow. The progress of Edirol is 16.8%, but we will solely be marketing this after April 11 and expect the increase of its sales. Good progress is seen in Avastin and Tecentriq on the top, as well as Kadcyla on oncology area, on the left. In primary area, new product, Enspryng shows a good progress of 35%. Overseas sales progress is affected by timing of exports and cannot really be compared with previous year. The progress is as planned since the Q1 is in the period of firm order. We also expect the increase of exports in the Q2 and later.

Page 18 shows the outline of Hemlibra sales to Roche. Both export sales on the top and the royalty income on the bottom have progressed as planned in Q1, and there is no change in the full year forecast. Forecast of royalty income for initial shipment is JPY 95 billion for full year, and it will end at the end of this year, as explained at the beginning of the year. This concludes the explanation of profit and loss, and Page 19 is the balance sheet.

From the top on the left, net working capital decreased by JPY 18.7 billion compared with December last year due to the decrease in trade accounts receivable. Long-term net operating assets increased by JPY 4.3 billion due to investments for future growth, including new research labs and manufacturing facilities.

Payment of corporate tax and year-end dividends took place in Q1. So the net cash decreased by JPY 35.2 billion, but there is no financial problem. As shown at the bottom of the left table, shareholders' equity ratio increased by 6.5% points to 85.8%, which is the highest since 2013 when we adopted IFRS standards.

Let's look at the net cash at the end on Page 20. First, JPY 72.2 billion cash in from operating activities. When decrease in net working capital is added and investment for new research lab and manufacturing facility is subtracted, operating free cash flow was JPY 78.3 billion. When income tax, JPY 65.9 billion and the dividends, JPY 49 billion were paid from it, the net cash was JPY 343.4 billion at the end of March, showing JPY 35.2 billion decrease from the end of last year.

We expect increase our sales and profits from Q2 and thus expect a better balance sheet and cash flow. That is all from me. Thank you.

Next, Yamaguchi, Head of Project and Life Cycle Management Unit will make a presentation.

[Tetsuya Yamaguchi, executive]

This is Yamaguchi. I would like to talk about the development pipeline. Please look at Page 27. As usual, the first page of the pipeline shows a list of oncology projects. Compounds in orange are in-house projects and those in blue are Roche products. And the red stars indicate projects with changes from the previous meeting.

Phase III study started for intermediate stage, HCC for a combination of Tecentriq and Avastin. Next page, please. The second page shows the development projects in other areas. As you know, domestic Phase I study has started for antibody capital of casirivimab and imdevimab for COVID-19. Also Phase III study for faricimab for retinal vein occlusion started.

Next page, please. Page 29 shows main new topics in the first quarter. First, approved products, all of which have been announced by press releases. Actemra was approved for SSc-ILD in the U.S. This is the first biologic approved for this indication.

Polivy, anti-CD79b antibody-drug conjugate was approved for lymphoma as explained by the President. We will continue to obtain data for this after the launch.

FoundationOne Liquid DCX was also discussed earlier. Going on to projects new to pipeline. I mentioned about Tecentriq and Avastin earlier. We obtained the approval for advanced stage unresectable HCC in September last year. And this time, Phase III study started for patients in earlier intermediate stage HCC in combination with TACE. As for faricimab, we are participating in 2 Phase III studies for CRVO, central retinal vein occlusion, and BRVO, branch retinal vein occlusion. Retinal vein occlusion is a disease where the vein is occluded by thrombus and macular edema develops, leading to the decrease in vision.

Moving on to development discontinuation. Development of neoadjuvant, Tecentriq for HER2-positive early breast cancer was discontinued by the recommendation of the independent data monitoring committee.

With regard to the late-stage result, Actemra study for severe COVID-19 pneumonia, in combination with remdesivir failed to meet endpoints, including the primary endpoint of time to hospital discharge, as you know.

In the interim analysis of Tecentriq, adjuvant study for NSCLC, stage 2 to 3A, the primary endpoint of extension of disease-free survival was met. Based on this result, we will file for approval this year, one year ahead of plan. As for studies for casirivimab/imdevimab carried out by Regeneron, as you know, both 2067 study for nonhospitalized patients for COVID-19 and 2069 study for household contacts of infected individuals achieved the primary endpoints.

As for medical conferences, data were presented for 2 pivotal studies of risdiplam for spinal muscular atrophy showing sustained improvement of motor function after 2 years. Good results of 4 pivotal studies of faricimab for diabetic macular edema and age-related macular degeneration were presented.

Lastly, AT-527, as you know, is an RNA polymerase inhibitor from Atea and was sublicensed from Roche for Japan. We will develop this as a new oral treatment for COVID-19.

Please move on to Page 30. This page shows positionings of various drugs for treatment of COVID-19. The higher up the pyramid, the higher the severity of the disease. In our development pipeline, we have Actemra as immunomodulators for severe patients.

Casirivimab and imdevimab as neutralizing antibodies for mild and moderate patients and AT-527 as an oral antiviral. From the next page, I'd like to explain further the situation of Actemra and neutralizing antibody cocktail.

Page 31, please. This slide shows the overview of the studies of Actemra by Roche and Chugai. Unfortunately, REMDACTA study failed to show significant improvement of clinical symptoms. However, considering all data obtained so far, including EMPACTA study that achieves the primary endpoint, we believe that it is still possible that Actemra could make a contribution to treatment of COVID-19 including investigator-initiated studies such as recovery study overseas, we will further analyze data in cooperation with Roche going forward and consult with regulatory authorities in various countries, assess the overall risk and benefit of Actemra and make a judgment with -- not to file for approval.

Page 32, please. From this slide, I will discuss the result of overseas studies of antibody cocktail by Regeneron. First, Phase I study is ongoing in Japan. And combined with overseas data, we will aim at filing within this fiscal year, as explained earlier. REGN-COV 2067 study is the Phase III study in nonhospitalized patients with a risk factor including obesity, advanced age and cardiovascular disease. Both doses reduced the risk of hospitalization or death by about 70% and met the primary endpoint. In addition, all major secondary endpoints were also met, and especially both doses reduced the duration of symptoms from 14 days to 10 days.

No new safety concern was observed. Below that, COV 20145 study is a Phase II study for low risk patients. Doses used ranged from 300 milligram to 2,400 milligrams. There was a significant and comparable reduction in viral road at all doses.

Please move on to Page 33, showing the results of 2069 study. This is a Phase III study for prevention of symptomatic COVID-19 infections for household contacts of infected individuals. The product was administered subcutaneously. It significantly reduced the risk of symptomatic infections by 81%, meeting the primary endpoint. Also, all major secondary endpoints were met. In patients who developed symptomatic infections, mean duration of symptoms were shortened from 3.2 weeks to 1.2 weeks. In addition, for asymptomatic patients that is subjects who were infected but had not developed symptoms, there was a 31% reduction in the risk of transition to symptomatic status, and there was no new safety concern.

Let me move on to Page 34. This is about genomic profiling using blood samples by the FoundationOne Liquid CDx that I mentioned earlier. In particular, it explains the difference from the FoundationOne CDx using tissue samples. When tissue specimens are used naturally, tumor cells can actually be seen and both morphological and molecular evaluations are possible.

On the other hand, invasive procedures are required for specimen collection, and test result may not be obtained because specimens with the quality and quantity required for genomic profiling are not available. On the other hand, when blood specimens are used, specimen collection is easy and the test can be performed when necessary.

Furthermore, it is possible to capture the intra-patient heterogeneity in cancer genome information. However, if the amount of circulating tumor DNA is insufficient, accurate test results will naturally not be obtained. Therefore, we believe that both test methods will be used in a complementary manner.

The next slide shows the schedule for future applications, as usual. Those previously disclosed as 2023 or later have been divided into 2033 and 2024 or later.

The next slide, Page 36 shows the status of the companion diagnostics for FoundationOne CDx as usual. Pemigatinib has now been approved for biliary tract cancer FGFR2. Currently, companion diagnostics are available for 8 cancer types, 14 gene alterations and 18 drugs. A list of companion diagnostics have been added as the last page following the approval of F1 liquid. At the time of launch, companion diagnostics are available for 2 cancer types, 6 gene alterations and 8 drugs. That's all from me. Thank you.

That concludes the presentations. Now we will start taking questions as we receive them until the scheduled time to end the conference call. Today, also attending is Shinji Hidaka, Vice President and Head of Marketing and Sales Division.Let us entertain the first question.

[Seiji Wakao, analyst]

Wakao from JPMorgan. My first question is on Page 11, where you explained that exports of Actemra to Roche could see an upside later in the year. Since Roche holds some inventory at hand, in order to estimate the possible upside amount by taking the inventory held by Roche into account, I'd like to ask for some kind of clues. Currently, sales by Roche, except for Japan, totaled CHF 695 million, and if its sales continue to stay as strong as they are now, they could reach a slightly less than CHF 2500 million, a level achieved as overseas sales of Actemra in the previous fiscal year.

Should that happen, it is not likely for you to reach the JPY 132 billion in exposed to Roche achieved last fiscal year as there is inventory held by Roche. But suppose Roche's sales of Actemra, excluding Japan, reaches the same level as the previous year, how much do you expect your export to Roche to be given the inventory held by Roche?

[Osamu Okuda, executive]

Thank you for your question. Export of Actemra to Roche is tricky because, first of all, we cannot tell how large the COVID-19 patient population will be in Roche territories and how long the pandemic will last, what would happen to the development and conditions of use of vaccines and treatment drugs going forward, on top of the inventories held by Roche, and in the market, as you said. So there are so many certain factors involved. Under such circumstances, we receive orders from Roche and produce and export the product. At the beginning of the fiscal year, since there is so much that is unknown, we choose not to include the potential upside.

Having said that, now that the actual result of Roche sales in the first quarter is out, showing a 26% increase year-on-year, excluding the impact of the foreign exchange and sales by Chugai, which therefore is linked to exports from Chugai.

The 26% increase was achieved compared to what Roche had achieved in the first quarter of the previous year when it grew by 35% from a year before. This demonstrates the continued high needs for Actemra in the clinical settings. And if the growth stays at this rate, as I said, we can expect incremental exports to be recorded from the second quarter onward or later in the year. Therefore, we will be able to achieve at least our full year forecast of JPY 83 billion or exceed the amount. However, in terms of the company guidance, there are still too many uncertain factors for us to give you a specific number. So our honest answer is that we don't know.

[Seiji Wakao, analyst]

Okay. Suppose Roche sales end up with the same level as the previous year, should we not expect your export to reach the previous year's level of JPY 132 billion. In other words, should we take the inventory by Roche into account?

[Osamu Okuda, executive]

Yes, we expect a certain level of impact by the inventory this year. So it will be better to account for inventories to some extent...

[Seiji Wakao, analyst]

I see. My second question has to do with the manufacturing of Actemra. Roche signed an agreement for outsourcing manufacturing of its API with Novartis the other day. Does this mean that since the production capacity of Chugai is expected to fall short of what is needed, Roche has decided to contract out to Novartis? Or is this decision totally unrelated to your company? Furthermore, could you update me on the production of Actemra within Roche Group in terms of allocation of the volumes between different locations and their capacities?

[Osamu Okuda, executive]

In Japan, we produced the API, make it into the drug product and export it to Roche. And at the same time, the API is also produced at a plant of Genentech in the West Coast of the U.S., which is purchased and used by Chugai to produce the drug product to sell. That used to be the whole scheme conventionally.

However, due to COVID-19, from the first to second quarter last year, technology transfer was made to another plant located in Hillsboro, U.S. to produce drug products so that if necessity arises, the plant will be ready. Having said that, however, throughout the last year, there was a huge demand for Actemra, but our production capacity proved enough to fulfill that needs. Therefore, there is no concern over a possible shortage this year. But this was a decision taken by Roche to do more outsourcing of production to Novartis.

But when it comes to the overall scheme of production within Roche Group, in terms of the practice of us procuring the API from both internal and external sources, producing the drug product, recording export sales and receiving royalties, there is no impact whatsoever.

[Seiji Wakao, analyst]

I see. My last question is about NXT007. It has been about 2 years since a Phase I/II clinical study was started in 2019. Could you give us the timing of the next update on this, if possible? Moreover, NXT007 has a longer half-life than Hemlibra. Hemlibra's longest interval for dosing was once every 4 weeks. Have you obtained any data that suggests possibility of a longer interval than this for NXT007?

[Tetsuya Yamaguchi, executive]

Yamaguchi speaking. Thank you for your question. At the moment, we are not in a position to refer to the next update. And as you said, we are developing both drugs in the context of its relationship with Hemlibra.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley. I want to ask for clarification on the outsourcing to Novartis by Roche. Mr. Itagaki said that this was a decision made by Roche, which was unrelated to Chugai. Does that mean that once Roche starts to procure the API from Novartis without affecting the P&L of Chugai, the whole process of export and royalty payment will be completed only between Roche and Novartis? That was not clear to me. I also need to ask again about the supply of Actemra. Am I correct to understand that even when considering a 26% increase of Roche sales in the first quarter, you're confident to be able to provide enough supply with the current production scheme?

[Osamu Okuda, executive]

With regard to the involvement of Novartis, Genentech, who, as a member of Roche Group is consigned by Chugai to produce API under its sole responsibility simply outsources some of the production to Novartis, so it can also procure the API from the Norvartis to supply to Chugai. Therefore, in terms of the transaction between Roche Group and Chugai, there will be no change.

As for the production capacity, we do have a track record from last year. And now that there are more options of locations where API can be produced, we feel quite assured.

[Shinichiro Muraoka, analyst]

I'm sorry to keep asking about this, but last year, there was JPY 50 billion worth of outsourcing done to Genentech. If Genentech uses the capacity of Novartis, the outsourcing to genetic will increase further, but am I correct to say that, ultimately, that extra part will be also reflected in Chugai's export profit?

[Osamu Okuda, executive]

Yes, you're correct.

[Shinichiro Muraoka, analyst]

II see. My next question, you repeated several times that even though the first quarter saw a drop in both revenues and profit, you expect an increase in revenues and profits from the second quarter onward. I'm sure there's no doubt about that for the second quarter. But were you implying that the performance would be so good that you can expect an increase in revenues and profits in each of the remaining quarters? In other words, in the third and fourth quarter, respectively.

[Osamu Okuda, executive]

I said we expect to see an increase in revenues and profits from second quarter onward and did not refer to whether that would be the case in each of the remaining quarters. Exports could fluctuate depending on the timing. So I'd like you to expect to see an increase in revenues and profits for the period of the remaining 9 months.

[Shinichiro Muraoka, analyst]

Getting back to Actemra, there has been heightened risk of biosimilars due to Biogen and others. And in yesterday's earnings call by Roche, there was discussion on the possibility of Fresenius came up with its biosimilar in 2022 or 2023. Are you mindful of the possibility of the export negotiations that will take into account such risks of biosimilars from the next fiscal year or from the latter half of this fiscal year? Or do you expect that to happen further down the road?

[Osamu Okuda, executive]

Obviously, we are aware that about 4 companies are developing and aiming to launch biosimilars of Actemra. But when it comes to the timing, since it is related to the issue of our patent, we are not in a position to comment on when. Furthermore, with regard to exports, you set negotiations with Roche, but we are on the receiving end of orders based on the demand. Therefore, we expect it to happen further down the road. In terms of prices, there is no particular information to be disclosed related to biosimilars. So please wait for that information a bit longer.

[Fumiyoshi Sakai, analyst]

Sakai from Crédit Suisse Securities. I have 2 simple questions. Hemlibra results were disclosed by Roche already, showing a 33% increase in sales with a steady growth in its market share. Is this something you don't think that has significantly deviated from what you had expected given different variables such as royalty 1 and 2 and export value?

I was under the impression that the momentum of Roche sales has been picking up further based on its first quarter result. Could you give us your thoughts? Secondly, there was no export of Enspryng in the first quarter. I take it that your initial supply was only for the first indication, which I believe was approved in Europe. Am I correct? It may not become as big as Hemlibra. But like in Hemlibra, do you expect to see adjustments like export at cost going forward? Moreover, since the approval was obtained in Europe, I would assume, there will be a lot of additions of indications to follow. If you can comment on that possibility at this moment, that will be appreciated?

[Osamu Okuda, executive]

Yes. First, about export to Hemlibra. Yesterday, Roche announced the Q1 growth of 33%, as you said. By region, the share in U.S. happened to be also 33%. Roche discloses U.S. patient share by quarter, and the quarterly growth in the past was 2% to 3% points. But from the fourth quarter last year to first quarter this year, 5% point growth was seen, market penetration jumped. On the other hand, Roche says that there still is a minor COVID 19 impact and so I think there still is a significant room for growth. But we take such matters into consideration in our export plan so that the results are within our expectation.

As for Enspryng, export in Q1 was 0. Approval was obtained in the U.S. last year, but not in Europe yet. But we had significant export in Q4 last year. Because of the timing of export shipment, we expected that the export will be 0 in Q1 this year. We hope Roche does its best to get the product penetrate into the market and hope for additional indications, which I don't comment on.

[Tetsuya Yamaguchi, executive]

This is Yamaguchi. With regard to additional indications, since this is an antibody against IL-6 receptor, naturally, we would actively develop it to obtain additional indications for autoimmune diseases where IL-6 is involved and make it a large product. In the future, when development progresses concretely, we will disclose it.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi from Citi Securities. I have 2 questions about Hemlibra. I think you said that the royalties changed progressively during the period. Have you said that before? And is the royalty going to increase every quarter in the year going forward? That is my first question. Also, Hemlibra in Japan still shows good growth in volume even after drug price reduction. And still, you mentioned that it is slightly slow compared with your plan. Could you discuss the reasons?

[Osamu Okuda, executive]

I will answer the first question. And Hidaka will answer the second one. Regarding the progressive scheme of royalty on Hemlibra from Roche, it was the first time today to disclose it. Looking at quarterly changes, some people may think it's strange. So we decided to disclose the scheme for the first time today. I am not going to disclose schemes for other products.

[Shinji Hidaka, executive]

This is Hidaka. Thank you for your question. As for the impact of COVID-19 this year, our plan was challenging and included the assumption that the COVID-19 would somewhat subside. But because of the current COVID situation, the recovery is not as fast as expected, but we are now delivering to big hospitals where we did not before, that is a silver lining.

[Hidemaru Yamaguchi, analyst]

I see. Regarding Actemra, only IIT in U.K. had positive results and top line results of others were generally negative. I understand your point about risk and benefit. You may say that I should ask Roche, but the filing is planned in this year. Most of the results are available now so that I can expect the filing before long. Our global activities and domestic activities are always going to be linked. In other words, if global files, you file in Japan and if global does not file, you don't file in Japan?

[Osamu Okuda, executive]

Thank you. Since data are not consistent, I think the situation is rather difficult. Studies done by Roche range widely in terms of time from the quite early stage in the pandemic to quite late such as REMDACTA. During that time, treatment of COVID-19 has evolved significantly.

Concomitant drugs have changed considerably. And as you know, RECOVERY and REMAP-CAP, I believe there are some responses in real world. So currently, Roche and Chugai are cooperating in detailed analysis of the data from individual patients. We will closely consult with regulatory authorities in the 3 regions going forward. So it is possible that judgment, whether not to file for approval may be different in different regions depending on the positions of the regulatory authorities. Under such circumstances, it is not yet the time to revise our plan to file within this year. We would like to follow through.

[Akinori Ueda, analyst]

Ueda from Goldman Sachs. I have a question about export of Alecensa. You talked about the revision of the price and timing of export. Roche shows increase, but you still see negative growth year-over-year. Is it mainly because of the export timing or due to the big change of prices that will negate the trend in Roche?

[Osamu Okuda, executive]

Thank you. Roche announced yesterday that Alecensa grew by 14%. The share in the first-line and share in new patients in U.S. are very high. In addition, international growth rate was 44%. Especially when it was listed in the NRD reimbursement list in China, there was a big growth, but the prices declined.

We revised the price for Roche in January, referring to the weighted average of last year's global retail prices. Thus, export unit price declined due to the global expansion of sales. As you know, our export grew over 30% year-over-year in volume. But the unit price declined offsetting the growth.

[Akinori Ueda, analyst]

Second question is about Hemlibra in Japan. Roche sales in U.S. and Europe are growing rapidly, but there is not much growth from the second half of last year even considering the impact of recalculations. Is it because of the difference in COVID-19 situations? Is there a different trend in Japan?

[Shinji Hidaka, executive]

This is Hidaka. In Japan, patients are sometimes hospitalized for training or visit hospitals frequently for several weeks. So COVID-19 may affect the domestic situation more easily. Especially big hospitals converted some beds for COVID use during the pandemic, that may have affected.

[Motoya Kohtani, analyst]

Kohtani from Nomura Securities. My first question is about the patent for Actemra. I asked Roche about it, and I was told to ask Chugai. But you are not able to discuss much, which may make some investors and the analysts confused. I think you have IV and SC, and patents for SC may still be effective after 2030. I think subcutaneous injection is common in U.S. and EU. So until the SC patents expire, will there be an entry barrier? Could you comment?

[Tetsuya Yamaguchi, executive]

This is Yamaguchi. I am sorry, but we are not able to discuss information about patents. Given the development activities of biosimilars, we would like to protect our intellectual property as much as possible. So we will take appropriate measures going forward.

[Motoya Kohtani, analyst]

The second question is about Actemra's clinical studies for COVID-19 on Page 31. We only know of these 4 studies that you list here, and so we assume REMDACTA and COVACTA must be important. Is there any information that the use of Actemra dropped sharply after March 12 when REMDACTA results were announced? That is my first question.

[Osamu Okuda, executive]

Yamaguchi will answer, including overseas situation.

[Tetsuya Yamaguchi, executive]

We do not know of any reduction of the use of Actemra due to REMDACTA study. We understand that it is continued to be used in the clinical settings. Then what people look at would be recovery study because the number of patients is 4,100.

There have been about 6 randomized studies in the past. But they are small studies, and the number of deaths is less than 100. On the other hand, this study is a large one. Further, the paper says when all 8 trials are considered together, a location to tocilizumab is associated with a 13% proportional reduction in 28-day mortality. Death rate ratio, 0.87, p equals 0.005. It is written in the paper.

[Motoya Kohtani, analyst]

I think there are even higher hopes for Actemra, thanks to recovery study. Any comments?

[Osamu Okuda, executive]

Yes. Based on recovery study and also [indiscernible] EU recommendation and the U.K.'s national health service recommendation, are maintained. We are not aware any activities to change it based on REMDECTA. So as you point out, I think Actemra is used in the clinical settings. The infection was quite prevalent in Q1. And so we do not know if recovery further enhance the use or not.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]