Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2018-Q2

[Tatsuro Kosaka, executive]

Good morning, ladies and gentlemen. I am Tatsuro Kosaka, President and CEO of Chugai Pharmaceutical. I will now dive into the overview of the results of the first half of fiscal 2018.

We had a good progress in the first half against a full year forecast posting steady results as we aim to achieve the midterm business plan, IBI 18. Revenues and the core operating profit increased by 12.8% and 42.6% year-on-year, respectively, demonstrating an outstanding growth during this period. Global expansion of Actemra and Alecensa resulted in the increase in our exports to Roche and ROI.

We did post one time income from transfer of long-term listed products on the first quarter, but even if it was excluded, we would have performed quite well. HEMLIBRA is an in-house product, which is the most important growth driver for us. It was approved for people with hemophilia A with the inhibitors and subsequently launched in Europe and Japan for an additional indication of hemophilia A without inhibitors and for extended dosing intervals of biweekly and every 4-week treatments. We achieved simultaneous submissions for approval in Japan, U.S. and Europe, completing all the filings based on its major clinical trials.

TECENTRIQ is another important growth driver and was launched in Japan for the treatment of nonsmall cell lung cancer, NSCLC, in the second-line settings. In the first-line treatment of NSCLC, where there is intense competition, we have successfully achieved global simultaneous filings.

Gazyva, in the treatment of follicular lymphoma, demonstrated efficacy superior to that of Rituxan and therefore, was approved for its first-line treatment. We signed a sublicensing contract with Roche for Foundation Medicine Inc., or FMI, in order to start activities for commercialization in Japan and, at the same time, filed for approval for FoundationOne CDx, comprehensive genomic profiling assay for cancer-rated genes using a next-generation sequencer which has been granted an expedited review designation by PMDA. Thus, we have been making steady progress in key subjects to achieve the IBI 18.

The biggest milestone in the first half of fiscal 2018 for HEMLIBRA was that we were able to build a system in place in Japan, U.S. and Europe to serve hemophilia patients with inhibitors where there are high, unmet medical needs. At the same time, in the indication of hemophilia without inhibitors which should support our future value maximization in collaboration with Roche, we succeeded in simultaneous filings in Japan, U.S. and Europe. In the U.S., where it was granted a priority review designation, we expect a decision on approval to be made by October 4.

Furthermore, as for HAVEN 3 study, targeted at noninhibitor patients, and HAVEN 4 study, conducted for an extended interval of every 4 weeks, very positive results were presented at the World Congress -- World Federation of Hemophilia, held in May this year, which was a major achievement for us. Our hope is to deliver an innovative drug to patients without inhibitors as soon as possible.

In the first half of fiscal 2018, we achieved a major milestone of launching TECENTRIQ in Japan for the second-line treatment of NSCLC. In addition, steady progress was made in studies for late-stage development to obtain additional indications. In particular, much progress was seen in studies for lung cancer.

IMpower150, a study to assess the first-line treatment in combination with Avastin, achieved its primary endpoint in OS, in addition to that, in PFS, and this positive result was presented at ASCO in June.

Furthermore, steady progress was confirmed in studies for squamous lung cancer and small cell lung cancer. Especially noteworthy is that in small cell cancer, where only limited treatment options have been available for many years, the study for the first time showed superiority of an immuno-oncology combination therapy in both PFS and OS to that of the standard care. On the other hand, we're able to observe steady progress in renal cell carcinoma and triple negative breast cancer. Especially in triple negative breast cancer, where there are high, unmet medical needs, TECENTRIQ for the first time, as an immuno-oncology combination therapy, demonstrated its superiority in PFS to the standard of care.

As part of key activities for future growth, we have been engaged in various initiatives to strengthen current core business and create future business value. Chugai Pharmabody Research or CPR was established in Singapore in 2012. We have decided to extend the operation period by 5 years from the originally planned 10 years with a total investment amounting to SGD 282 million or about JPY 23 billion. I will give you more details on the next slide.

We will also have a new synthetic research building constructed at Ukima Laboratories located in Kita ward, Tokyo, with an investment of JPY 4.5 billion. The reason for this investment is to build a synthetic research facility for small- and middle-molecule APIs with high potency such as anti-cancer drugs for which there are increasing demands in recent years. With an installation of equipment designed to contribute to enhanced R&D efficiency, we're hoping to accelerate the process development of small- and middle-molecule APIs.

Another initiative was the in-licensing of ROS1/TRK inhibitor, entrectinib, from Roche. Based on Roche group's strategy to promote personalized medicine, we expect to be able to contribute in the areas of rare cancers. Entrectinib was granted for NTRK fusion gene positive solid tumors, Sakigake designation from PMDA in Japan, Breakthrough Therapy designation in the U.S. and PRIME designation in Europe. This is the first time for us to receive all 3 of these designations which makes us have high hopes to be able to contribute to treatments of cancer.

As part of the efforts to create future business value by establishing a new dedicated unit, we will work to consolidate the business basis of FMI, the Foundation Medicine in Japan.

We have also entered into an agreement with Preferred Networks, which is known around the world for its AI or artificial intelligence-related technologies on the comprehensive partnership and capital alliance. Our hope is to accelerate innovation by utilizing AI technologies.

With regard to CPR investment, what has been accomplished so far was to contribute to creating multiple-development candidate antibodies such as SKY59 and ERY974 to enable maximization of the value of our proprietary antibody technology since its establishment in 2012. In terms of extended opportunities by antibodies, through the collaboration with IFReC in Osaka, new targets have been discovered through the progress of understanding in human pathology. Among those new targets identified, some are expected to be too challenging to be addressed with conventional antibody technologies, which requires us to develop new antibody technologies for tough targets.

As for purposes of extension, as excellent researchers have gathered in this facility in Singapore, it is greatly contributing to the progress in diversity and inclusion in our R&D functions. Going forward, by matching our technologies with new targets identified through the better understanding of human pathology, we will seek to accelerate the creation of development candidates. In order to secure our competitive advantage, successful development of next-generation antibody technologies will be essential, and we're determined to take on the challenge to develop antibody technologies with high degree of difficulty.

With the aim of accelerating innovation by utilizing AI, we entered into an agreement with Preferred Networks on a comprehensive partnership and capital alliance, where Chugai will make an investment of about JPY 700 million as a subscription of third-party allocation of shares of Preferred Networks.

Furthermore, depending on the deliverables from the joint projects, we expect to pay a certain level of royalties and licensing fees in the future. Preferred Networks is a startup company established in March 2014, and its business comprises research, development and sales of computer software, hardware and network, focusing on IoT and deep learning. It is engaged in joint research projects with Toyota Motor Corporation, FANUC Corporation and National Cancer Center. By integrating Chugai's strength such as position of unique data, including those of research and development, capability for setting business challenges as a pharmaceutical company and broad knowledge and experience in health care and Preferred Network's strengths of deep learning framework, AI development know-how and distributed processing technologies and data science capability, it is our aim to use AI and deep learning in analysis of challenges that cannot be solved by existing technologies, which is expected to result in new insights and value discovery, so that we can continue to create innovative drugs and services and improve productivity.

Currently, we're looking at various projects as insight searches which are designed to explore new values. Projects using nonclinical and clinical data are being studied. One possible example will be new drug research and development using virtual human system. Other projects under study are those aimed at dramatic improvement in efficiency in processes such as drug discovery research, biomarker discovery and clinical development and manufacturing. Among examples considered are development of efficient lead-exploration programs and of injection drug appearance inspection programs in production lines.

So to give you the summary of the results of the first half of fiscal 2018, we have achieved steady financial performance against the full year forecast. Development projects such as HEMLIBRA and TECENTRIQ have been progressing as planned. Key activities for future growth and upfront investments are underway. Thus, steady progress of IBI 18 has been made towards the next mid-term business plan which is expected to start in the next fiscal year. That is all from me. Thank you for your attention.

[Toshiaki Itagaki, executive]

I am Toshiaki Itagaki, CFO of the company. Following President Kosaka's overview of the results of the first half, I will give you more details on the financial performance.

In the year-to-date to the second quarter results, we have posted an increase in both revenues and profits. In revenues, operating profit and net income on both IFRS and core basis, our performance was the highest ever as our first half results. Revenues posted were JPY 285.1 billion, up JPY 32.3 billion or 12.8% year-on-year, marking a double-digit growth.

In domestic sales, excluding Tamiflu, mainstay in-house products such as Actemra, Alecensa and Edirol continued to grow. On the other hand, this was somewhat offset by the impact of NHI drug price revisions in April, resulting in a slight decrease in year-on-year of JPY 300 billion or 0.2%. Overseas sales grew significantly due to the increased export of Actemra to Roche, posting an year-on-year growth of JPY 18.8 billion.

Royalties and other operating income went up by JPY 13.6 billion from the year before, mainly due to the one time income from transfer of long-listed products on HIP list to Taiho Pharma, a deal closed on January 5.

As for the cost-related items, the ratio of cost of sales improved by 0.7 percentage point to 50.3%, down from the previous year due to changes in product mix, which was a result of strong sales on -- of in-house products. Overall, operating expenses increased by JPY 3.1 billion year-on-year, mainly due to the increase of research and development expenses. Operating profits and net income on both IFRS basis and core basis achieved as a result are indicated here, all of which showed significant double-digit growth of as much as around 40%. The operating profit on the core-result basis reached JPY 71.6 billion, up JPY 21.4 billion or 42.6% year-on-year.

On this slide, you can see the core results which we derived from IFRS results by adjusting what we regard as nonrecurring items or noncore items. In the first half on the operating-profit level, we have reversed noncore expense items [ versus ] JPY 5.1 billion. The breakdown is described on the right. Amortization of intangible assets was JPY 600 million, an impairment of JPY 4.4 billion, totaling JPY 5.1 billion has been added back to the operating profit, which brings up the core operating profit to JPY 71.6 billion.

The following slides are based on core results. This is the financial overview. Highlighted in yellow are results for the 6 months under review. Revenues were JPY 285.1 billion, an increase of JPY 32.3 billion or 12.8% year-on-year, a growth of double-digit percent being achieved. Three lines below, domestic sales, excluding Tamiflu, JPY 182.7 billion. Due mainly to the impact of NHI price revisions a slight year-on-year decline was posted, totaling JPY 0.3 billion. One line below, export to Roche, JPY 55.2 billion, up JPY 18.3 billion or 49.6%. Export of Actemra, Alecensa and HEMLIBRA to Roche all increased year-on-year.

Tamiflu sales are divided into 2 groups: ordinary sales and government stockpiles, et cetera. Results remain unchanged from the first quarter results, meaning, during the second quarter, no posting either for ordinary sales or government stockpiles. The total was JPY 8.4 billion, up JPY 2.4 billion year-on-year. Royalties and other operating income amounted to JPY 29.5 billion. One time income and others reported in the first quarter primarily from the transfer of long-term listed products resulted in a large year-on-year increase of JPY 13.6 billion.

Cost of sales ratio, as shown on the right-hand side, was 50.3%, a 0.7 percentage point improvement year-on-year, due to a change in the product mix meaning an increase in the ratio of in-house products. An increase in operating expenses was kept at JPY 3.1 billion. As a result, core operating profit was a JPY 71.6 billion, an increase of 42.6% year-on-year. Operating profit ratio of 25.1% was the highest ever for a half-year period.

Other expenses totaled JPY 1.5 billion, coming from settlement for transfer pricing taxation. This is an item we have been recording since last year. Year-on-year, it increased by JPY 1.1 billion, but that's because the amount during the first half of 2017 was small. During the second quarter of 2017, we reached an agreement on transfer pricing with Roche, and accordingly, previously overprovisioned amount was reversed during the second quarter, which amounted to JPY 1 billion, without which, there would not have been much difference year-on-year. After income taxes, the core net income was JPY 52.6 billion, a large increase of 35.6% year-on-year.

Next slide, changes in sales excluding Tamiflu. You can see sales by disease area on the left and sales by product on the right. Starting with the top left, the blue block represents overseas sales up JPY 18.8 billion year-on-year. On the right, products in blue include Actemra overseas, up JPY 13.8 billion and Alecensa overseas, up JPY 4.8 billion. HEMLIBRA is not shown here but is included in JPY 64.5 billion. HEMLIBRA export totaled JPY 1.2 billion during this period.

Going back to the bars on the left, portions other than the blue block are domestic sales, which decreased by JPY 0.3 billion from the previous year. By disease area, the green portion, oncology, down JPY 0.6 billion. On the right, product whose sales increased were Alecensa; TECENTRIQ, launched in April; and Avastin. Sales decreased for Rituxan, down JPY 3.5 billion, affected by this year's NHI price revision of 26.2%. HER2 franchise, down JPY 1.4 billion. You can see the details at the bottom. Herceptin was down JPY 2.4 billion, again, affected by the NHI price revision of 20.4%. Tarceva sales were down JPY 0.8 billion. Net of increase and decrease in sales in oncology area was down JPY 0.6 billion.

Next purple portion, bone and joint area, up JPY 3.3 billion. Products include Actemra and Edirol. The yellow portion, renal diseases, down JPY 1.4 billion. Products are not shown but sales decreased for Mircera and Oxarol due to the NHI price revisions.

Lastly, but not the least, gray, others, down JPY 1.6 billion. Products are not shown. Main reasons for decline in sales included the impact of the transfer of long-term listed of products to Taiho Pharma.

Here, you can see the Tamiflu sales trends. As I said at the outset, no change from the first quarter results. Ordinary sales, JPY 8.3 billion; and government stockpiles, JPY 0.1 billion. Changes in operating profit, as shown on the left, an increase of JPY 21.4 billion coming from gross profit from sales, up JPY 1.1 billion (sic) [ JPY 11 billion ] and royalties and other operating income, up JPY 13.6 billion.

In the meantime, profit decreasing factors were increase in 3 expense items totaling JPY 3.1 billion. Breakdown is shown on the right. First, increase in marketing and distribution expenses, JPY 1 billion, due to the increase in sales promotion activities mainly for new products and the effects of foreign exchange rates. Our transactions with Roche, export and import from Roche, are based on Swiss franc. As the volume is large, we hedge about 80% of the annual amount in the previous year. So the foreign exchange impact is felt on the remaining 20%. But in terms of expenses, we are seeing here those are related to our overseas marketing and distribution subsidiaries, which cannot be hedged. So at the time of consolidation, when we've translated into the Japanese yen, there are effects of foreign exchange rates. Marketing and distribution subsidiaries are mainly operating on euro. During the 6 months, Japanese yen depreciated against a euro compared to the previous year, which resulted in an increase in expenses on the yen terms. So that's what you see here. R&D expenses increased by JPY 1.6 billion, due primarily to the progress of projects including TECENTRIQ and other clinical studies. General and administration expenses increased by JPY 0.6 billion due to an increase in various expenses, including the pro forma standard taxation.

Here, you can see the financial review for the second quarter, April to June. Trend wise, healthy increase in revenue and profit posted in the first quarter, continued into the second quarter. Revenues were up 8.2% year-on-year. Operating profit was up 22.6%. During the first quarter, as has been mentioned several times already, there was a one time income from the transfer of long-listed products to Taiho Pharma, which pushed up revenue and profit. Compared to that, the growth was more moderate, but a strong year-on-year increase continued in the second quarter.

Here, we are showing the progress against a full year forecast made on February 1, comparing to the progress a year earlier. Revenues, 52.7% this year versus 47.3% last year, which means an improvement of over 5 points. This progress was driven by Tamiflu against a full year forecast of JPY 5.6 billion. Already in the first quarter, the sales totaled JPY 8.4 billion, marking the progress of 150%. Royalties and other operating income, 68.6%, again, coming from the one time income from transfer of long-listed products, which is already included in the forecast, but the big sum recorded in the first quarter naturally makes the half year progress appear strong.

Operating expenses progressed at the comparable rate as last year at 46.8%. Operating profit progress was 66.3% benefiting from special factors, as explained earlier, progress was strong. [ Durably though ] the progress rate was more or less in line with the projection for the first 6 months.

Here you can see the sales progress by product: starting from the left, Herceptin, 51.9%, better than last year; Rituxan, 50.9%, which looks better than last year, but as was explained earlier, there was the impact of the NHI price revisions, which became effective in April. So results in the first quarter were based on the previous higher price, lower price kicked in, in the second quarter. On a full year basis, for 9 months starting in April, the results will be based on the revised lower price. So products affected by the April price revisions tend to present higher progress rate at the half year point. TECENTRIQ sales totaled JPY 1.7 billion against a full year forecast of JPY 3.1 billion. Sales commenced in April. It started off well. Actemra, domestic, 50.3%, again, showing strong sales.

On the right-hand side, Oxarol, 60.3%, reflecting the NHI price revision of minus 8.9%. HEMLIBRA, domestic, 35.7%. Sales commenced in May. So it's 2 months’ worth of sales. Overseas, Actemra, 61.5%; Alecensa, 39%. Actemra progress was slightly better than the forecast. Alecensa progress might appear to be lagging behind but this is due to the nature of the business which applies to all exports. That is, we manufacture in lots and export in response to orders from Roche, so export does not take place on a constant, monthly basis. Depending on the timing of shipment there can be large fluctuations on a quarterly or even half-year basis. Year-on-year comparison also varies. So 39% progress of Alecensa is largely in line with the projection. HEMLIBRA export totaled JPY 1.2 billion against a full year forecast of JPY 2 billion, again in line with the forecast.

Impact from foreign exchange. I would like to draw your attention only to the left chart. This is the impact of difference with the assumed rate. As was mentioned earlier, we hedge 80% of major export and import in our previous year. So the remaining exposure and what cannot be hedged is the impact we feel. During the period under review, the impact on the revenue and the cost and expenses almost evened out with a net impact on the operating income being positive JPY 0.1 billion.

So these were the profit and loss aspects. I have 2 more slides to cover. First, on the balance sheet, comparing the end of June to the end of December 2017. Starting from the left table, third line from the bottom, total net assets were JPY 731.7 billion as of the end of June, which was JPY 38.8 billion more than at the end of December. Assets increased while liabilities decreased. A large decrease on a net basis in fact. As a result as shown as the last point on the right, equity ratio attributable to Chugai shareholders was 83.7% at the end of June, an improvement of 2.5 points from the end of December.

Going back to the table on the left, as to how we use the total net assets of JPY 731.7 billion, right above the double line at the center, you see net operating assets accounting for about 2/3 of that amount, totaling JPY 455.9 billion, up JPY 15.7 billion from the end of December. The remaining 1/3 is net nonoperating assets totaling JPY 275.7 billion, almost all of which is net cash, meaning, investment securities, cash and cash equivalents. Net cash increased by JPY 31.4 billion from the end of December.

In my last slide, I would like to explain how the net cash increased by JPY 31.4 billion. First, operating profit after adjustments increased by JPY 80.4 billion. The calculation is shown on the right-hand side. There's an increase of operating profit on full basis since there's no core or noncore for cash base by JPY 66.6 billion. Then, expenses without cash out are added back such as depreciation, amortization and impairment for intangible assets, et cetera. Then the result is JPY 80.4 billion. Then there is a decrease in net working capital such as account receivable and account payable and inventory, et cetera. This decrease means increase of cash by JPY 2.9 billion. Then, there was a cash out of JPY 17.5 billion for investments, the breakdown of which is JPY 15.1 billion for property, plant and equipment and JPY 2.4 billion for intangible assets totaling JPY 17.5 billion.

Then there were the corporate income tax and dividend paid and overall increase of JPY 31.4 billion to JPY 274.2 billion, net cash as of the end of June 2018. That is all from me. Thank you.

[Yasushi Ito, executive]

Now I'd like to discuss the overview of development pipeline. The first slide show the status of the projects under development in oncology, bone and joint and renal areas. The projects marked with stars have changes since April. They are entrectinib for NSCLC and solid tumors in Phase II; RG6264 for breast cancer for fixed-dose combination and subcutaneous injection; and TECENTRIQ. These are projects in autoimmune diseases, neurology and others. HEMLIBRA for hemophilia A noninhibitor was filed as shown in bottom right.

This slide summarizes the status of HEMLIBRA. I'd like to skip detailed explanation here since Mr. Kosaka already explained this, but I will discuss HAVEN 3 study used for noninhibitor submission and HAVEN 4 study for every 4 weeks dosing, later.

This is the continuation of development status. Anti-CD 20 monoclonal antibody Gazyva was approved with the indication for CD20 positive follicular lymphoma. The approval of Gazyva provides a new treatment option for CD20 positive follicular lymphoma. Its Phase III studies show the superior usefulness over the standard treatment of Rituxan plus chemotherapy.

For TECENTRIQ, Phase III study for adjuvant therapy for head and neck carcinoma was started and as shown on the bottom, in-licensing agreement for exclusive development and marketing right was concluded for entrectinib for ROS1 fusion gene positive NSCLC and NTRK fusion gene positive solid tumors. I will discuss the product profile later.

This is also a development status. Phase III study for Herceptin and Perjeta fixed-dose combination subcutaneous injection was started in July. Administration took about 2 hours to 3.5 hours, including observation period with traditional IV infusion, but dosing of this SC injection requires less than 1 hour only between 35 and 45 minutes, and it is suitable for administration in outpatient clinics. Treatment for adjuvant breast cancer is done in outpatient basis more often recently, so there is needs for shortening of treatment time using subcutaneous formulation. RG7604, taselisib, shown in the middle, has been developed for solid tumors. In ASCO this year, we reported that the primary endpoint was achieved in Phase III SANDPIPER study with HER2 negative ER-positive metastatic breast cancer. The efficacy, however, was not superior to the product already launched earlier and Roche -- and we have decided to discontinue the development.

URC 102 is a URAT1 inhibitor, which we have been developing for gout. Although uric acid level in the blood was sufficiently reduced with the compound, we have decided to discontinue the development, considering the priorities of development portfolio. For Alecensa, we have obtained approval in Taiwan in May for their first-line treatment of A-L-K, ALK positive advanced NSCLC. Update of ALEX study was presented at ASCO this year. Investigator-judged median PFS in ITT population was 34.8 months for alectinib arm and 10.9 months for crizotinib arm.

As for Actemra, 2 submissions were filed. First one was for cytokine release syndrome induced by treatment with CAR-T cell therapy filed in May. The submission was made using the results of Novartis global Phase II study to evaluate the efficacy and safety of CAR-T therapy and other results. Second submission was filed in May for additional indication of adult onset Still's disease. Adult onset Still's disease is an autoimmune disease and an intractable disease, designated by the national government. Standard treatment is suppression of inflammation using corticosteroid, but there were no treatment covered by national insurance for steroid refractory patients and there is a high unmet medical needs.

Global Phase III study was initiated for gantenerumab for early Alzheimer's disease. Targeted population is patients in prodromal phase to mild Alzheimer's disease, where amyloid beta accumulation is confirmed in CSF or in the brain by amyloid PET.

As mentioned by Mr. Kosaka, FoundationOne CDx, which was filed in March, was granted expedited review status in May. We understand that PMDA decided that expedited -- the review was necessary considering medical usefulness.

Next 2 slides show results of clinical trials and conference presentations. First, the result of 2 Phase III studies of HEMLIBRA were presented at WFH, World Federation of Hemophilia World Congress. HAVEN 3 was for hemophilia A patients over 12 years of age who do not have inhibitors to factor VIII. In the global Phase III studies, where HEMLIBRA was administered subcutaneously, once weekly or every other week, patients who received HEMLIBRA once weekly or every other week had a reduced number of treated bleeds, the primary end point by 96% and 97%, respectively, compared with those who did not receive regular administration of HEMLIBRA.

Lower-left graph shows intra-individual comparison of annualized bleeding rate. HAVEN 3 study included 48 patients who had been receiving regular prophylaxis doses of factor VIII before the start of the study and participated in the earlier non-interventional study. The graph compares annualized bleeding rate when they were receiving regular prophylactic doses of factor VIII and after they switched to emicizumab. Annualized bleeding rate before the switch was 4.8x, and it was decreased to 1.5x after the switch to once-weekly prophylactic doses of HEMLIBRA. That is 68% reduction.

HAVEN 4 is a global Phase III study to evaluate efficacy, safety and PK of once every 4 weeks dosing of HEMLIBRA in patients over 12 years of age, who have or who do not have inhibitors. Median of annualized bleeding rate requiring treatment in patients who received once-every-4-week dosing of HEMLIBRA was 0. 56% of the patients had 0 treated bleed. 90.2% had 3 or less bleeds. The lower-right graph compares the trough plasma concentration of emicizumab in HAVEN 4 once-every-4-week dosing with the results of other Phase III studies.

Orange line shows trough values for HAVEN 4 once every 4 week dosing. The trough levels are the same with once weekly and every other week dosing, whose efficacy has already been established. Together with the efficacy for bleeding rate explained earlier, it has been shown that once every 4 week dosing of HEMLIBRA realizes clinically significant bleeding control for hemophilia patients both with and without inhibitors

This is also a result of clinical trials and conference presentation in IMpassion130 study for the first line therapy for metastatic triple negative breast cancer, combination of TECENTRIQ and Abraxane significantly reduced the risk of disease progression or death in both ITT and PD-L1 positive population compared with chemotherapy. This is the first Phase III study in cancer immunotherapy that showed the statistically significant extension of PFS as a first line therapy. As for the other primary endpoint of OS, trend of improvement was observed in PD-L1 positive population. The study will be continued until the next planned analysis time point and statistical analysis will be conducted then. Update of ALEX study for Alecensa in the bottom was already discussed earlier. Numbers are shown here.

This little busy slide shows our overall portfolio in lung cancer. In addition to the Tarceva, Avastin and Alecensa, TECENTRIQ was launched in Japan for advanced or recurrent and resectable NSCLC in April. Also for TECENTRIQ, the results of IMpower150 for first-line therapy of NSCLC and results of IMpower131 for first-line therapy for squamous cell carcinoma were presented in ASCO in June. In addition to that, we announced that IMpower133 for SCLC and IMpower132 where pemetrexed was combined with TECENTRIQ achieved primary endpoints. Incidentally, in IMpower150, Avastin was combined with TECENTRIQ.

Phase III IMpower150 studies showed that combination of TECENTRIQ, Avastin, carboplatin and paclitaxel extended the survival compared with the combination of Avastin, carboplatin and paclitaxel as the first-line therapy of metastatic non-squamous NSCLC, especially in patients who are positive with EGFR mutation and ALK fusion gene, and already received an appropriate molecular targeted therapy as shown in the bottom left. Or in patients with hepatic metastasis combination therapy including TECENTRIQ, significantly improved OS. Thus, TECENTRIQ has been consistently showing positive results in lung cancer area.

So far, there are 6 Phase III studies with positive results and 5 studies are combination studies including IMpower130, in which Japan did not take part. Further, OS results are already available in 4 studies out of 6 studies with positive results. Now entrectinib is going to join this portfolio in lung cancer. I'm going to discuss entrectinib in the next slide.

Entrectinib is an orally bioavailable tyrosine kinase inhibitor that potently and selectively inhibits ROS1 and TRK family. Efficacy for brain metastasis is also expected. The images show the brain metastasis at baseline and after treatment showing the disappearance of metastatic lesion. Entrectinib is being developed for ROS1 fusion gene positive NSCLC and NTRK fusion gene positive solid tumors, and Roche is conducting Phase II STARTRK-2 study. As mentioned by Mr. Kosaka, entrectinib been granted the Breakthrough Therapy designation by FDA and PRIME designation by the EMA for the treatment of NTRK fusion positive solid tumors. Also, it received Sakigake Designation in Japan in March. So the designation was given in all 3 regions.

Top left diagram shows PHC 2.0 strategy. Roche Group has various activities with PHC 2.0 strategy which aims at providing personalized health care for each individual patient, which is more advanced compared with traditional PHC. Entrectinib is exactly in line with this PHC 2.0 strategy since it provides Personalized Health Care for patients with the target gene mutations, although the segment may be very small in size.

Changing the topic, I would like to explain our thoughts for Personalized Health Care in cancer immunotherapy. The slide summarizes the biomarker research that Roche group has been working so far. Biomarker research has a role in understanding the pathology in addition to the establishment of diagnostic methods. IHC for PD-L1 expression on the top is very widely used, as you know.

Next one, T-effector gene signature is a biomarker measured by quantifying the messenger RNA of 3 types of genes, PD-L1, CXCL9 and interferon gamma in tumor tissues. It is getting known that the T-effector signature has a good correlation with PD-L1 expression.

In the bottom 2 sections, TMB is the biomarker about tumor mutational burden and t means tissue and b means blood. Traditionally, tumor tissues were taken and tumor mutational burden was measured but it is recently starting that blood is used for measuring noninvasive blood biomarkers. Roche group has evaluated the usefulness of the marker in the first-line therapy for NSCLC and the results of the Phase IIb first study were presented in ASCO this year.

Interestingly, among these 4 markers, the first PD-L1 expression positive patients and tumor mutation burden positive patients do not completely overlap. So TMB is now expected to become a new biomarker. I'd like to discuss the results of B-FAST study in the next slide.

B-FAST study is a prospective Phase II study for patients in Stage IIIB to IVB NSCLC where TECENTRIQ is administered as the first-line therapy. One of the core primary endpoint is the relationship between bTMB measured by the next-generation sequencer and PFS.

Interim results were presented at ASCO. The bar graph on the right compares the response rate between bTMB high group on the right and bTMB low group on the left. Cut-off value is 16 which was obtained by retrospective analysis of clinical trials in the past including OAK study. Thus, response rate was 6.4 for the bTMB low group and 36.4 for the bTMB high group, showing remarkable increase in bTMB high group.

The graph on the left shows the PFS results. The dark blue line shows the results of bTMB high group and the light blue line, bTMB low group. As you can see, PFS benefit is shown in bTMB high group. Median PFS for bTMB low was 2.8 months, whereas it was extended to 9.5 months for bTMB high group. Currently, B-FAST study is ongoing as a pivotal study and patients are being registered also from Japan. So various works are being done for biomarkers as shown in these 2 slides.

This slide shows projected submissions. Projects already filed this year are Perjeta for breast cancer adjuvant therapy based on APHINITY study and TECENTRIQ for first-line therapy; HEMLIBRA, noninhibitor patients; and Edirol, osteoporosis in China. In addition to these, projected submissions for the rest of this year are TECENTRIQ for RCC in combination with Avastin; TECENTRIQ for breast cancer and Actemra for systemic sclerosis.

Last slide shows the updates on the development request for unapproved drugs and indications. Projects with advances in status since February 2018 is Avastin for cerebral edema induced by radiation necrosis. That is all for me. Thank you.

[Atsushi Seki, analyst]

Seki from UBS Securities. My first question has to do with Rituxan. It's been already 5 or 6 months since its biosimilar was launched. According to IQVIA, it has taken up a share of 16.2% in terms of volume which strikes me as quite a fast erosion. Would I be significantly wrong in extrapolating this rate of erosion of the market share into biosimilars of Avastin in the future? Are there any major differences in assumptions between Rituxan and Avastin?

[Unknown Executive]

It is true that Rituxan's biosimilar is rapidly penetrating into the market. However, compared to other countries such as Northern Europe, its penetration is still lower. Moreover, the approval of a biosimilar of Herceptin was restricted to gastric cancer for its indication. To answer your question on how we view future potential biosimilars of Avastin, we do have various patents and like to address the issue with that in mind.

[Atsushi Seki, analyst]

My second question is about the Board of Directors. Sophie Kornowski-Bonnet is going to retire. I would assume, naturally, she will retire as a Director of Chugai as well. And could we expect the successor to Sophie will be appointed as a new Director from Roche? What kind of changes are we supposed to anticipate?

[Unknown Executive]

On July 26, we held a Board of Directors meeting. Sophie Kornowski-Bonnet is expected to remain sitting on the board until the Annual General Meeting of shareholders next year. After that, someone from Roche will take her over but that will be disclosed at an appropriate timing.

[Atsushi Seki, analyst]

My last question is about SKY59, an antibody for paroxysmal nocturnal hemoglobinuria. Since the resumption of the study, has it been going well? And I would assume you have accumulated a lot of data already and I'm wondering at what timing you're planning to publish the data.

[Unknown Executive]

The study was resumed and has been ongoing without problems. We originally said that the data was going to be obtained at the end of August. We're now trying our best to catch up in the study so we will not be much behind, but the timing of publishing the data will be announced at the appropriate timing.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citi. You have given several comments on the comparison with your company's forecast. On the potential upside in exports of Actemra, though it may depend on your negotiations with Roche, I wonder if you are seeing some indications of an upside in exports for the full year as you interact with them even though you have not changed your forecast.

[Unknown Executive]

First of all, Roche reported its earnings of the second quarter, July 26, where they said there was a 13% increase in the external sales of Actemra. There's a time lag, and so not everything will go in parallel, but Roche said in their comments that steady penetration in the market had been achieved in SC formulation and expansion of indications to include giant cell arteritis was going well, and therefore, they expect continued high growth going forward. Accordingly, though there is some time delay in the number of lots posted as quarterly sales, we are performing quite well against our forecast. What you asked about was our forecast but perhaps I should add some comments to what I said earlier in my presentation. The year-on-year growth rate of overseas sales of Actemra including exports to Roche and our own sales was 44.4% which is quite high, but about 1/4 of this growth benefits from the weaker yen because we have hedged at the time of the depreciation of the yen. So this makes the growth rate higher than it would have been otherwise.

[Hidemaru Yamaguchi, analyst]

My next question is a bit about details, but in Japan, HEMLIBRA was launched. You referred to this in the press conference on July 26 but it was said that there are about 100 patients. But can you tell us how many have been actually administered with the drug?

[Unknown Executive]

That is not disclosed. No. Okay. There are about 5,000 patients with hemophilia A in Japan, of which about 4% or 200 are with inhibitors but we estimate the patients eligible for the drug will be even fewer than that. Having said that, however, even though we did not disclose the number of patients, 1.5 months has passed since launch and the drug has been administered to more patients than we had assumed especially to pediatric patients. There are slightly more than 100 target sites in Japan, of which close to 40% have adopted the drug in only 1.5 months. And key institutions, whose number is quite limited, have already adopted the drug. This means that more than expected patients are on the drug now which, in turn, is reflected in sales figures.

[Hidemaru Yamaguchi, analyst]

I don't intend to ask you a lead question, but does that mean that since you're experiencing such a rapid penetration in patients with inhibitors, once you move to noninhibitors, can we expect the takeoff to be quite smooth?

[Unknown Executive]

That is our hope.

[Hidemaru Yamaguchi, analyst]

The next question is about the performance of TECENTRIQ in Japan. I would guess this includes initial shipments with monthly sales of JPY 500 million to JPY 600 million are being posted which must be overachieving your company's numerical forecast. Could you give us your view on this?

[Unknown Executive]

Let me take that question. As you said, since its launch in mid-April, compared to this year's sales plan of JPY 3.1 billion, JPY 1.7 billion has been achieved in about 2.5 months which is more than we had expected. The reason is because we obtained approval for the second line treatment of non-small cell lung cancer regardless of the status of expression of PD-L1 and regardless of histology, the squamous or non-squamous cancer, which has helped the drug to be prescribed to a broader range of patients than initially expected. Secondly, due to its dosing schedule of once every 3 weeks, physicians in clinical practice say they found it more convenient to use. The third reason may be a secondary one but physicians already had experience of using anti-PD-1, antibody drugs and familiarized themselves with anti-PD-L1 antibody drugs as well. I would guess those are some of the possible reasons.

[Hidemaru Yamaguchi, analyst]

My last question is about FMI, which you mentioned in your presentation, and this will be during the period of next midterm business plan and FoundationOne will be launched next year. I don't know the size of the sales of this business unit but I wonder whether you regard it to represent a sizable portion of your entire business in Japan in your midterm business plan.

[Unknown Executive]

It is very difficult to focus the performance because it's hard to predict what kind of [ initiatory ] price it will be granted, and because there are other comprehensive genomic profiling assays for cancer-related genes in Japan. But our hope is to incorporate it in our next fiscal year's plan.

[Hidemaru Yamaguchi, analyst]

One last question is about gene therapies which are becoming increasingly common outside of Japan. It is hard looking from the outside of the company to see how you're working on them within Roche group. Since you have more than enough cash on hand and they could be potential competitors to HEMLIBRA down the road, I have this vague idea that you, as Chugai, should make investments in gene therapies. Your thoughts?

[Unknown Executive]

Let me answer that question. As you said, there's a high hope that gene therapies could serve as radical treatment for genetic diseases like hemophilia A, but our view at the moment is that it has not been established yet, at least for now, that the efficacy can be maintained for an extended period of time in a stable manner. Having said that, however, we will have a close eye on the technological trends including how technological innovations will take place going forward.

[Kazuaki Hashiguchi, analyst]

Hashiguchi of Daiwa Securities. I have 3 questions. First is a follow-up question on Rituxan. You mentioned countering biosimilar competitors by protection of patents and other intellectual property for Avastin. In the case of Rituxan, without such protections, should we assume that it will be eroded further as more generic antibodies and anti-cancer drugs come along? Is there any characteristics of Rituxan that makes it more prone to erosion by biosimilars?

[Unknown Executive]

Generally speaking, my personal view is that biosimilars, just like little low molecule generics, would eventually account for 70% to 80% of the market. Eventually, those days will come, I think. But in the case of biosimilars, development cost is enormous, and more than anything else, because they are not identical, it takes more time to demonstrate safety and efficacy. That is generally speaking. So you asked without IP protection, would erosion take place at a similar rate going forward. It's really hard to say. But as I said earlier, in the case of Rituxan, we do not have much intellectual property, whereas for Avastin, which is more important, we do have much intellectual property. And I consider intellectual property to be the company's asset coming out of research and development, so we will deal with the situation rigorously.

[Kazuaki Hashiguchi, analyst]

My next question is on HEMLIBRA. You said things are moving very steadily in Japan including that there are notably large cases of children being administered. How about overseas? Anything you can share with us?

[Unknown Executive]

Please contact Roche for details. What I'm hearing is that in the U.S. in particular, things are proceeding very smoothly, covering close to a half of target patients.

[Kazuaki Hashiguchi, analyst]

My last question. Mr. Kosaka, in the last part of your presentation, you said things are proceeding well towards the next medium-term business plan. Can you comment on the current views about the next medium-term business plan? When you briefed us on IBI 18, you said that in the next midterm business plan, Chugai will aim at achieving dramatic growth globally. Also, regarding the core op growth, you said you expected the growth rate to be higher than during the period under IBI 18. However, [ with the year ] [indiscernible] assumptions have changed and also the growth rate during IBI 18 turned out to be higher than your original forecast. So I'm wondering if your vision of higher growth rates over the next 3 years remains unchanged.

[Tatsuro Kosaka, executive]

As for the next midterm business plan, we are in the midst of putting it together as we speak. We will announce the details on January 31 of next year at the time of the fiscal 2018 earnings briefing. Having said that, the basics remain unchanged, in that we will pursue innovation, advanced alliance with Roche and, as was mentioned earlier today, further pursue patient-centric personalized health care. Those will be the focal points.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley MUFG Securities. I have a question on the midterm business plan. I think it was last month when I read an interview on Nikkei of Mr. Itagaki, in which you indicated that R&D expenses are projected to be JPY 100 billion while the SG&A expenses would not increase much. Reading that interview, I wasn't sure if JPY 100 billion for R&D was for fiscal 2019 or 2021. Can you qualify what your intent was in that interview?

[Toshiaki Itagaki, executive]

First, the operating margin. Already last year, we achieved 19.9%. So barring extreme circumstances, we are certain to reach 20%. So for the next 3 years, we will aim at over 20% core operating margin given the current trend. As for the R&D investment, within the framework of business model with Roche, while it is generally said that the R&D cost per drug is JPY 270 billion including Tufts estimates, we want to maintain high efficiency and high productivity. Currently, we are investing JPY 80 billion to JPY 90 billion. For this fiscal year, we spent JPY 44 billion during the first half, which was the largest amount ever for the first 6 months of the year. We want to continue to be aggressive in R&D. JPY 100 billion is a kind of point of reference in that respect. Over a long term, and this relates to an earlier question, while IBI 18 aims at core EPS growth of low single digit at the end of 2018, the beginning of the year forecast already projects over 9%. We hope to maintain high growth next year and beyond and be aggressive in investment for innovation.

[Shinichiro Muraoka, analyst]

What about marketing distribution and other expenses? You said they wouldn't increase that much.

[Toshiaki Itagaki, executive]

I would not go as far as to say not that much. But compared to the top line growth, given that other than R&D, our main expenses, our marketing and distribution in Japan, we will continue with our cost control efforts to maintain high productivity. So I'm hoping we can contain that part of expenses.

[Shinichiro Muraoka, analyst]

I see. A related question. On China, looking at your projected submissions, I see that Edirol has been filed, and in 2019, you expect Suvenyl filing in China. So what's your strategy for China? Anything new over the next 3 years?

[Unknown Executive]

We expect the Chinese market to grow significantly, but as you know, while China is the second largest market in the world, in terms of the products sold, about 90% are generics and new drugs barely account for 10%. But going forward, with economic growth and advancement of the health care system, the market is certain to make a significant growth. In fact, I believe Roche is making one of the largest investments in the world in China in terms of upfront investment. Chugai has entities for marketing and distribution and R&D in China. While we are not thinking of covering the whole of that large market entirely on our own, through appropriate cooperation with Roche, we hope to establish solid presence in that growing market. Our next midterm plan is to reflect that thinking.

[Shinichiro Muraoka, analyst]

So does that mean you would make investment into China over the next 3 years that will translate into a fixed cost in the future?

[Unknown Executive]

Well, we are not considering sizable investment comparable to those of our peers. Rather, leveraging the strategic alliance with Roche, build a structure in which Chugai can enjoy profit in China. That's what we have in mind.

[Shinichiro Muraoka, analyst]

My next question is on export price of HEMLIBRA. 3 months ago, your guidance was no changed for the rest of the year. Since then, PDUFA date has been scheduled for October. So I'm personally imagining that the unit price might be raised by the end of the year or is that my wishful thinking?

[Unknown Executive]

Our guidance remains unchanged. We do not expect any change in the unit export price.

[Shinichiro Muraoka, analyst]

So the guidance remains unchanged?

[Unknown Executive]

Our guidance of not expecting any change remains unchanged.

[Shinichiro Muraoka, analyst]

But?

[Unknown Executive]

There's no but. It remains unchanged period.

[Shinichiro Muraoka, analyst]

Understood. May I ask one more question. It's on gantenerumab and crenezumab for Alzheimer's disease which are attracting attention recently. Can you describe their [ respective ] profiles expected by the Roche group?

[Unknown Executive]

Two anti-amyloid beta antibodies, gantenerumab and crenezumab, are currently under development. They have different characteristics. The first difference is one is subcutaneously injected, while the other IV injected. The other difference is the targets of the antibodies. Amyloid beta aggregation progresses from monomer to oligomer, fibril and plaque. Crenezumab targets early aggregated states, monomer and oligomer, while gantenerumab targets oligomer or plaque states. So the ability to cover a wide range of stages of Alzheimer's disease is the source of differentiation of the 2 as well as the reason of developing both. And there are data coming from our competitors as well which supports the amyloid beta hypothesis and we welcome that.

[Fumiyoshi Sakai, analyst]

This is Sakai from Credit Suisse. I have 2 questions about HEMLIBRA. Yesterday, Roche announced the results and I think sales up to the second quarter of about CHF 36 million or about JPY 5 million was mentioned. In the conference call, their comment was that they have high expectations. But from my point of view, the level seems to be a bit too low. Mr. Kosaka mentioned that we should ask Roche that this is all that they say. So from your point of view, considering exports, do you think this level is in line with the expectation? Or are there any issues? This is my first question.

[Tatsuro Kosaka, executive]

It is difficult to say anything more than the comments made by Roche. I think the cumulative sales was CHF 57 million. If you also consider the growth from the first quarter to second quarter, I believe the sales is in line with the expectations from the viewpoint of a supplier and originator.

[Fumiyoshi Sakai, analyst]

I see. Another question is for HEMLIBRA's HIP in Japan. This time, it is only for inhibitor and documents submitted to Chuikyo Central Social Insurance Medical Council, mentioned peak sales of JPY 5 billion. Needless to say, this drug was high priced. Opdivo may be a precedent in a strange sense. Considering the progress towards the approval for noninhibitor indication or approval for every 4-week administration going forward, have you not discussed about the steps to be taken with the regulatory authority? Because with regard to the new HIP revision system in April, there are discussions about possibilities of HIP revision for every additional indication approval or HIP revision for every quarter.

[Unknown Executive]

Rather than the discussion with the regulatory authority, we follow the market expansion repricing rules and make appropriate assumptions to develop plans.

[Fumiyoshi Sakai, analyst]

I see. One more thing. This is a kind of request since you refer to midterm plan. Regarding the cash flow, there was a detailed explanation about inflow. As for outflow, I'm not asking you to give a breakdown for each single year, but you could give us some ideas, for example, how much is to be spent for return to shareholders, how much is to be spent for strategic investments or how much cash to be retained during the 3 years. I think it is high time for you to show us your idea like this. Mr. Itaya was rather stubborn and it was difficult to convince him. So I would like to ask Mr. Itagaki. What would you say?

[Toshiaki Itagaki, executive]

Thank you for your precious opinion. People say that I am as stubborn as Mr. Itaya but I will give it a thought.

[Seiji Wakao, analyst]

This is Mr. Wakao from Mitsubishi UFJ Morgan Stanley Securities. I have one question. I heard that with the penetration of PD-L1 testing the ratio of ALK testing decreased. Is this a temporary phenomenon due to the penetration of anti-PD-L1 antibodies and less people are getting ALK testing? Is this only temporary? Or with the penetration of PD-L1 and IHC, are there risks for diagnostic testings for driver genes being less frequently used? And will the domestic sales of Alecensa be affected by this trend, could you discuss the current situation?

[Unknown Executive]

Well, I don't think this is temporary. Currently some hospitals do not conduct simultaneous testing and we are strongly recommending simultaneous testing. We believe the situation can be improved.

[Seiji Wakao, analyst]

I see. Currently, the methods are different, gene testing and IHC. In terms of the amount of samples, I suspect simultaneous testing cannot be done, and only IHC is selected because of the insufficient amount of samples. What would you say?

[Toshiaki Itagaki, executive]

You're correct. There are cases where the amount of sample is limited. There are cases where doctors preferentially test the PD-L1 and ALK testing is put off. I think there are multiple reasons.

[Audio Gap]