Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2020-Q2

[Tatsuro Kosaka, executive]

I am Tatsuro Kosaka, Chairman and CEO of Chugai Pharmaceutical. Let me review the first half. First, on the financial results of the first half. Please turn to Slide 3.

Despite the outbreak of COVID-19, we have seen a significant increase in revenues and profits in the first half of this year and are on the right track, making steady progress in IBI 21, our midterm business plan. As January-June period results, we achieved record high numbers in revenues, operating profit and net income with revenues up 14.9%, core operating profit up 38.8%, and core EPS up 39.0% year-on-year, respectively. Reasons for this strong performance include steady exports of Actemra and Hemlibra to Roche and Hemlibra-related income. However, domestic sales suffered a negative growth of 2.6% year-on-year. One reason was because our mainstay products, Actemra and Hemlibra, have their NHI drug prices cut in April. The second reason was the impact of the spread of COVID-19 with Tecentriq and Hemlibra, our growth drivers most severely affected.

Please take a look at Slide 4. As of July 17, our market capitalization stood at about JPY 8.8 trillion, ranking the seventh in the entire country and the first in the pharmaceutical industry. Furthermore, in order to reduce the investment unit price for the company's stock, increase the liquidity of the shares and to further expand the investor base, we carried out 3-for-1 stock split effective July 1. We will continue to strive to meet the expectation from shareholders and investors and to become a top innovator in the health care industry as a leading Japanese company.

Next, I will discuss the impacts on the business and performance due to the spread of COVID-19. Slide 6 shows the summary of the impacts by COVID-19. Although there were no major negative impacts on the half year results, the progress of business activities was affected to a certain extent. Domestically, there was delay in the market penetrations of growth products, such as Tecentriq and Hemlibra due to restraint in sales activities and reduction in the number of hospitalizations and outpatients, making us slightly behind the plan set at the beginning of the year.

On the other hand, in the overseas business, exports to Roche were favorable despite a temporary delay in switching from the existing therapies to Hemlibra. Exports of Actemra to Roche, including those for clinical trials, increased significantly as well. On the development front, we have experienced delays in the start and progress of some clinical trials, but they are expected to be resolved in the future.

In terms of regulatory affairs and drug discovery, we have seen no significant impact by COVID-19. Stable supply of products is the most important, and under the current circumstances, we have been able to maintain a stable product supply system and are determined to make sure that will continue to be maintained.

As for capital investment, construction works for Chugai Life Science Park Yokohama, or CLSPY, have been temporarily suspended, but all were resumed from June with a limited impact on the overall construction period. In terms of expenses, some were curbed due to the cancellation of overseas business trips and self-restriction on domestic sales activities. Thus, the impact of COVID-19 on the performance of the first half was limited, but we could be affected more extensively if the outbreak becomes more widespread and prolonged going forward. Furthermore, there are major social and economic impacts of COVID-19, giving us opportunities to revisit every aspect of our business. We will work to capture the changes in the behavior and values of our stakeholders and move ahead with the reforms, keeping the world with and after novel coronavirus in mind.

Please take a look at Slide 7. We're engaged in development of antibody drugs against COVID-19 in and outside of Japan. Among them is Actemra, for which Roche is currently conducting studies overseas, such as COVACTA study to see the effectiveness of combination therapy with standard of care for patients with severe COVID-19 pneumonia and REMDACTA study to look at the effectiveness of combination with remdesivir.

In Japan, our company is carrying out an open-label Phase III study called J-COVACTA, while consulting with MHLW and PMDA. Based on the result of the clinical study, we are hoping to file for an approval by the end of this year in Japan. Moreover, we're also working with A*STAR, Agency for Science, Technology and Research, of Singapore to develop an antibody drug as fast as we can by applying our antibody engineering technology.

Next, I will explain about the progress of strategic policies for 2020 in IBI 21. In the new midterm business plan, IBI 21, we have come up with 5 strategies under the theme of accelerating corporate and social development through innovation focused on innovative products.

In Slide 10, we have shown the 4 strategic policies for 2020 as presented at the beginning of this year.

Please turn to Slide 11. I will highlight the main achievements in the first half. First, we worked to maximize value of growth drivers. As I said, our growth products, Hemlibra and Tecentriq, were affected by COVID-19 and saw the market penetration lower than expected, but sales steadily increased compared to the year before. In Tecentriq, sales were mostly derived from non-small cell lung cancer and small cell lung cancer. However, we have high hopes for an approval for hepatocellular carcinoma by the end of this year.

Enspryng, or satralizumab as called in its generic name, was approved in Japan in June. We will aim to launch the product promptly after getting it added to the NHI drug price list. We also expect it to be approved in the U.S. and the EU this year so that it will become our next global product following Actemra, Alecensa and Hemlibra.

With regard to the second policy, creating next-generation growth opportunities. As scheduled, we started a Phase I study for STA551, Switch Antibody. As for nemolizumab, the results of the domestic Phase III study carried out by Maruho were published in the New England Journal of Medicine, and domestic filing is planned within this year. A Phase III study for atopic dermatitis is currently underway by Galderma overseas and preparations to initiate a Phase III study for prurigo nodularis are being made as well.

Under the third policy, promoting digital transformation and personalized health care, in March, we filed for approval of FoundationOne Liquid, a liquid biopsy test for blood samples that provides a comprehensive genomic profiling.

On the digitalization front, we came forward with Chugai Digital Vision 2030, where basic strategies are: digital transformation, strengthening of the entire value chain and creation of innovative new drugs using digital technologies. We will execute activities to provide new solutions to transform business and change society.

As specific cases this year, we entered a license agreement with FRONTEO to apply to drug discovery an article search AI system and a system to visualize disease mechanism information in the form of pathway map. We also started joint development with Biofourmis of digital technology to objectively evaluate pain associated with endometriosis.

As for the fourth policy, implementing drastic structural reform and strengthening sustainable platforms. Though my duty as CEO remains unchanged, since April, a new management system was initiated, where as Chairman and representative Director, I take responsibility for important decision-makings that will require resolutions at the Board of Directors' meetings, while Mr. Okuda, newly appointed President and COO, takes responsibility for decisions made on execution of operations of the entire company. We also started so-called job-based personnel system in April.

In regard to ESG-related activities, we expressed support for the statement by Japan Climate Initiative, JCI, and the recommendations by the Task Force on Climate-related Financial Disclosures, or TCFD, in order to help realize decarbonization of society, strengthen governance on measures to fight climate change and conduct scenario analysis of risk and opportunities.

Please move to Slide 12. As was discussed so far, as COVID-19 spread, business progress was affected to a certain extent, but we achieved higher revenue and profits in the first half of fiscal 2020. Although we anticipate to continue to see an uncertain business environment, we will strive to maintain a stable product supply system in preparation for possible second and third waves of COVID-19. Due to the impacts of COVID-19, therapeutic agents and vaccines will be essential to ensure coexistence or prevention of spread of COVID-19 and reopening of the economy. Therefore, as social contributions by the pharmaceutical industry have been drawing renewed attention and expectations for the health care industries are increasing, we will continue to focus on research and development of new therapeutic agents.

Through further promotion and acceleration of digitization, we will work to not just improve the efficiency of the value chain, which is a given, but also to promote AI drug discovery. With the aim of creation of innovative new drugs, we will enhance the capabilities of AI x real-world data x digital biomarkers so that we can pursue truly personalized health care, which can only be realized by Chugai.

We are in the midst of a global pandemic, something totally unexpected but are making steady progress in IBI 21, and we'll continue to work to achieve management plans aimed at medium- to long-term sustainable growth. That is all from me. Thank you.

Next, Toshiaki Itagaki, CFO, will go over the consolidated financial overview of the first half of fiscal 2020.

[Toshiaki Itagaki, executive]

Good evening. Ladies and gentlemen, I am Toshiaki Itagaki. Please turn to Slide 14.

This slide shows the overview, but Mr. Kosaka already discussed this earlier, so let me jump to the next slide and go into more details.

Slide 15 shows financial overview of January to June. Revenues totaled JPY 368.1 billion, up JPY 47.8 billion or 14.9% year-on-year. Revenues are divided into 2, one of which, sales, went up by JPY 23.3 billion or 8.3% year-on-year; and the other, royalties and other operating income, or ROOI in short, grew by JPY 24.6 billion, or 64.9% year-on-year.

To give you the breakdown of each, domestic sales went down slightly by 2.6% due to NHI drug price revisions and the launch of generic drugs, while overseas sales grew significantly by JPY 28.6 billion or 39.5% due to the increased export of Actemra triggered by COVID-19 as well as export of Hemlibra at the ordinary supply price.

Royalty and profit sharing income increased by JPY 23.3 billion due to an increase in royalty income for Hemlibra, and other operating income was pushed up JPY 1.4 billion by an increase in onetime income.

Cost of sales ratio improved by 2.2 percentage points to 42.9% as the share of in-house products in the product mix increased, and the ordinary supply price was -- started to be applied to the export of Hemlibra in fiscal 2020.

As for operating expenses, marketing and distribution expense decreased by 1.8%, mainly due to restraints on sales activities, and general and administration expenses also dropped by 4.8% due to declines in various expenses. On the other hand, investments in R&D increased because of the progress of development projects and reached JPY 52.9 billion, topping a JPY 50 billion mark for the first time for a half year period. As a result, operating profit posted JPY 143.7 billion, up JPY 40.2 billion or 38.8%, with the operating margin reaching 39%. When you subtract financial account balance and income taxes from the operating profit, you will get the net income of JPY 104.5 billion, up JPY 29.4 billion, or 39.1%. This represents our highest-ever revenues, operating profit and net income for any January-June period.

Page 16 shows breakdown of sales of products, a year-on-year comparison. On the left, sales by disease area. Starting from the top, overseas sales exceeded JPY 100 billion for the first time, up 39.5%. On the right-hand side, sales by products. Top 2 growth products were both overseas: Actemra overseas, plus JPY 17.1 billion; and Hemlibra overseas, plus JPY 14.8 billion, respectively. As for Alecensa overseas, sales were down by JPY 3.1 billion or 15.6%. This was due to lower unit export price and the impact of the stronger yen. Export volume actually grew by about 20%.

Going back to the chart on the left, domestic sales, as shown in the middle, totaled JPY 204.6 billion, down 2.6%. At the bottom block, oncology was down 2.1%. By product, Tecentriq and Perjeta, increased, while sales decreased for Avastin, down 12.8%; Herceptin, down 36.8%; Rituxan, down 42.2%; and Xeloda, down 57.4% as they were affected by the NHI drug price revisions and the impact of biosimilar and generic erosions.

Next is bone and joint, down 2.9%. While specific products are not listed in the slide, Actemra sales declined year-on-year as the NHI drug price was reduced by 18.5% due to the market expansion repricing. Renal diseases also declined, down 20.3% with Mircera, down 22.7%. Last but not the least, others, up 7.6%, with Hemlibra domestic sales growing by JPY 7.1 billion. Tamiflu ordinary recorded a decline of 85% as the influenza prevalence was the lowest in 10 years.

Page 17 shows the variance analysis of operating profit increase of JPY 40.2 billion. Second from the left, gross profit from sales increased by JPY 19.5 billion owing to increase in sales, plus JPY 23.3 billion, and improved cost to sales ratio of 2.2 percentage points coming from a change in product mix and export of Hemlibra at a regular price. ROOI increased by JPY 24.6 billion as a combination of an increase in income for Hemlibra and an increase in onetime income. That full amount was reflected in the increase in operating income. Of the increase of JPY 24.6 billion, JPY 15.9 billion was an increase in royalty on the initial shipment of Hemlibra, the so-called royalty 2.

As for expenses, M&D and G&A expenses decreased, while R&D expenses increased by JPY 5 billion. For information, the full year forecast at the beginning of the year projected R&D to total JPY 115 billion, up JPY 12.9 billion year-on-year. The actual for the first half was JPY 52.9 billion, up JPY 5 billion. This was largely in line with the budget.

Page 18 shows the quarterly changes in the structure of profit since Q2 2019. This is a new slide. The top half shows structure of revenues and the lower half, structure of cost and profit. In both cases, we are describing how the second quarter results compare to the same period of the previous year and to the previous quarter, the first quarter of this year. I would not read them all, but in terms of the key points of structure of revenue described in the top half, the second quarter results were characterized by sluggish domestic sales and strong exports, both compared to the previous year and to the previous quarter. ROOI shows the tendency to fluctuate from quarter-to-quarter due partly to event-driven onetime income. As for the structure of cost and profit shown on the lower half, while there were some ups and downs, both cost of sales ratio and expense ratio decreased, contributing to improved operating profit rate.

While breakdown of expenses is not shown here, as shown in the remarks to the right, R&D expenses increased. Going forward, we plan to contain the M&D expenses and shift the resource allocation more towards R&D.

Page 19 shows structural sales by quarter. As in the previous page, highlights of a year-on-year comparison and a quarter-on-quarter comparison is described on the right. Overseas sales tend to fluctuate from quarter-to-quarter depending on the timing of export. The second quarter benefited from an increase in export of Actemra in relation to COVID-19 and the commencement of export of Hemlibra at a regular export price. Quarterly sales exceeded JPY 50 billion, and the rate of overseas sales to total, topped 30%. A significant increase in sales was recorded both year-on-year and quarter-on-quarter.

As for domestic sales, this turned out to be a very difficult quarter in all disease areas, affected by the NHI drug price revisions last October and in April of this year as well as the launch and market penetration of generic drugs and others.

In terms of progress vis-à-vis forecast at the beginning of the year, please turn to Page 20. Starting from the third line from the top, domestic sales. Progress rate of 49.7%, higher than last year's 48%. But considering that downward revisions of NHI drug prices in April would be felt 100% during the second half of the year. Combined with the impact of the market penetration of generic drugs, we actually would have liked to see the progress of over 50%. Partly due to the impact of COVID-19 infection, market penetration of new products and expanded indications was slightly slipping behind our forecast.

Overseas, Actemra export was larger than anticipated, thus a high progress rate of 60%. ROOI, more or less in line with the planned. Cost of sales was also in line with the plan. As for expenses, due to the COVID-19 infection, postponement and cancellation of events concentrated in the second quarter. Accordingly, progress of M&D and G&A expenses was behind the plan. On the other hand, R&D expenses progressed at 46%, almost in line with the plan. In summary, domestic sales were slightly behind, but partly owing to the upside in the overseas sales, revenue and profit were generally making a steady progress. And given that some of the expected expenses were not used, progress of operating income and net income was generally in line with the plan.

This page shows sales per product. Overall, the progress for domestic product sales was faster than last year. However, after NHI price revision in April, 5 products seem to have an even better progress because of advantages they enjoyed in Q1, namely Avastin, Perjeta, Xeloda, Actemra and Hemlibra. Each of these had a price cut of 15% to 27% plus after the NHI price revision in April because of the expiration of innovation premium and market expansion price cut.

Page 26 in the appendix shows the outline of NHI price revision for each product for your perusal. Next Edirol had a high progress rate because of the first half spared the impact of a generic drug, which is scheduled to be launched in August. There were some other products that had a lower progress rate because of COVID-19 impact. Tecentriq was affected in its market penetration. Gazyva had a slower switch from rituximab. Bonviva had a slightly lower progress than planned because it was either ceased or switched to an oral drug because of its inability to increase the prescription frequency from once per month. Hemlibra had a slightly slower progress than forecast because of the delayed switch from existing therapies.

The progress of overseas products depends on the timing of export. Thus, we cannot generally perform a year-on-year comparison for those products. However, Actemra exceeded our forecast with 66.7% progress. Other overseas products were in line with our forecast. To add, we hereby disclose that Enspryng has sold JPY 400 million in actual and is expected to sell JPY 1.6 billion in forecast.

This slide shows a familiar diagram of Hemlibra sales to Roche. Starting from this year, we began exporting at an ordinary supply price. The sales amounted to JPY 15.7 billion for the first half this year compared to JPY 1.6 billion during the same period last year. We were exporting the product at an initial supply price until last year, and the difference with the export price is paid to Chugai as royalty 2 every time Roche generates sales in their territories. The royalty income doubled from JPY 16.9 billion to JPY 32.8 billion in the first half this year.

This slide also includes a cosmetic modification. In a previous diagram, we used to show until year 2021, which gave some of you a wrong impression that royalty 2 might be gone after year 2021. We, therefore, extended the far right column to include years beyond 2021 to accurately convey our message. Please take a look.

That was an overview of P&L. I'd like to present the last 2 slides on balance sheet and cash flow. As shown on Page 23, we maintain a healthy and solid balance sheet. The third line from the bottom indicates the total net assets amounting to JPY 905.9 billion, up JPY 51.9 billion from the end of last year. Lower right, the ratio of equity attributable to Chugai shareholders was as high as 84.5%.

If you could go back to the table on the left, of the JPY 905.9 billion in the total net assets, approximately 70% is maintained as the net operating assets above the double line in the middle at JPY 636.3 billion, up JPY 89.3 billion year-on-year. This is attributable to an increase in net working capital and CapEx as described in the upper right corner. The remaining 30% is maintained as nonoperating assets, mostly in net cash, amounting to JPY 290.7 billion.

The next slide shows changes in net cash versus 2019. Net cash was down JPY 42.4 billion from the end of 2019. If you calculate operating cash inflow by combining the second and third items from the left, JPY 157.6 billion minus JPY 61.4 billion, it gives approximately JPY 96 billion, out of which, we invested JPY 47.2 billion to newly construct R&D and manufacturing facilities.

As a result, the operating free cash flow was JPY 49 billion. We then paid income tax and year-end dividends of JPY 40.6 billion and JPY 50.4 billion, respectively. The remaining net cash at hand stood at JPY 290.7 billion as of June 2020. Last year saw a significant rise in profit, resulting in substantial cash outflow and fixed income tax payment as well as year-end dividends in February and March this year, plunging our net cash. However, it remains in line with our forecast.

That concludes my presentation. Thank you very much.

Next speaker is Dr. Watanabe, presenting the overview of development pipeline.

[Minoru Watanabe, executive]

Please refer to Page 30 of your material. The next 2 slides describe projects under development. Ones in orange are in-house projects, while ones with a star are changes made in Q2. I'd like to summarize major items in later slides.

Please go to Page 32, which shows key news flows in Q2. First, as was mentioned earlier, on Enspryng, an in-house anti-IL-6 receptor recycling antibody, or satralizumab, was approved for NMOSD, neuromyelitis optica spectrum disorder, in June in Japan. It also obtained approval in Canada and Switzerland so far. We expect more approvals in other countries as well. ADC against CD79b, polatuzumab vedotin, filed an application for relapsed or refractory diffuse large B-cell lymphoma or DLBCL. FoundationOne CDx cancer genome profile obtained one additional approval as a companion diagnostics and filed an additional application. As a new pipeline entry, Actemra for COVID-19 pneumonia and Hemlibra for acquired hemophilia A, or AHA, began Phase III study, respectively. I am going to explain the details in subsequent slides.

Meanwhile, developments were discontinued for a combination of Tecentriq and Avastin on renal cell carcinoma, or RCC, a combination of Kadcyla and Perjeta as an adjuvant to treat HER2-positive early breast cancer as well as balovaptan for Autism spectrum disorder because of unfavorable study results. We presented or published study results for some development and launch products at medical conferences and academic journals, which I'm going to explain in detail in later slides.

Page 33 describes our response to COVID-19, which I'm going to skip the details. To give you an overview. First, we began a clinical study of Actemra, both in Japan and overseas, with an expected application by the year-end. Second, we joined hands with A*STAR in Singapore to develop an antibody drug against COVID-19. Third, we actively promote technology transfer to allow a third-party to utilize our epoch-making antibody engineering technologies. These illustrate our multifaceted response to COVID-19.

Page 34 and onwards describe main topics. First, Enspryng was approved to treat anti-aquaporin-4 seropositive NMOSD in both adults and children. Let me add some details here. As the lower diagram shows, the product is the first to adopt our proprietary recycling antibody technology that enables an antibody to repeatedly bind to its antigens unlike ordinary antibodies. This contributes to a significantly longer half life, providing a convenient once-every-4-weeks subcutaneous injection. Positive results were also obtained for both monotherapy and combo therapy with an immunosuppressant. Long-term prevention of relapse and tolerability as well as efficacy for young patients were also confirmed. We are confident that this product is well supported by those rich evidence.

This slide shows an update on nemolizumab, an anti-IL-31 receptor A antibody, which was out-licensed to Maruho in Japan and Galderma elsewhere. Maruho conducted a domestic Phase III study on atopic dermatitis patients and published the results in the New England Journal of Medicine. Primary endpoint was mean percent change in VAS score at 16 weeks. It was shown that the score was down 42.8% in the nemolizumab group compared to 21.4% in the placebo group, suggesting a statistically significant improvement of the score. Moreover, improvements were confirmed in all of the secondary endpoints ranging from change in EASI, DLQI measuring patient QOL and ISI score, measuring the quality of sleep.

This page outlines acquired hemophilia A or AHA, for which Hemlibra began Phase III study. AHA is caused by autoantibodies, which emerge against coagulation factor VIII for various reasons. This is a rare but severe condition with a high mortality rate. Hemlibra is effective regardless of the presence of the autoantibodies against the coagulation factor VIII. Therefore, we envisage that this would be able to serve high unmet medical needs and thus decided to initiate the development in Japan.

Please turn to Page 37, which is an update on overall survival data of Phase III ALEX study with Alecensa, which was presented at ASCO 2020. The 5-year survival rate in ITT in the alectinib group was 62.5%, while the hazard ratio was 0.67 versus crizotinib. Moreover, the crizotinib group was allowed to have a crossover with other drugs, including alectinib. The result of this long-term analysis demonstrated the efficacy of alectinib as the first-line therapy.

As a next topic, Page 38 outlines our vision for the future CIT, cancer immunotherapy, centered around Tecentriq for the entire Roche group. Following the second wave focused on combinations with existing medications, we created a third wave of combining different CITs, whereby we obtain data for a combination with anti-TIGIT antibody, which I'm going to present in the next slides.

Page 39 shows the results of the combination of Tecentriq and tiragolumab, an anti-TIGIT antibody, as the first-line therapy for NSCLC. In the analysis of ORR with the 10.9-month median follow-up period, the clinically meaningful efficacy was shown in the PD-L1 high population.

Page 40 shows the results of PFS analysis, which demonstrated the clinically meaningful efficacy of the combination in the PD-L1 high population as well. To further analyze the efficacies, Japan is joining efforts to begin global Phase III studies in order to further the development of the combination of Tecentriq and tiragolumab.

Page 41 illustrates projected submissions. I am going to skip the explanation for major items, as were already mentioned.

Page 42 shows the current status on the development requests for unapproved drugs and indications. No major updates have been made since January 30. That concludes my presentation. Thank you very much.

[Unknown Executive]

Thank you very much for your attention. Now we'd like to take questions. Today, also present with us is Shinji Hidaka, Vice President and Head of Marketing and Sales Division. The first person to ask questions is Mr. Wakao from Mitsubishi UFJ Morgan Stanley Securities.

[Seiji Wakao, analyst]

Wakao from Mitsubishi UFJ Morgan Stanley Securities. My first question is your prospects for the second half in your efforts to achieve the full year target operating income of JPY 275 billion. The way I looked at the first half is that even though domestic business was slightly weak, that was offset by export of Actemra, enabling you to achieve the plan for the first half at the level of operating income. In the second half, though there is a slight concern about a second wave of COVID-19, I thought the target would be achievable as restrictions on sales activities are being loosened, leading to a recovery in the domestic business, while exports of Actemra staying on the steady increase. I wonder what your take on the second half is.

[Toshiaki Itagaki, executive]

Thank you very much, Mr. Wakao. Itagaki speaking. We're just at the midpoint of the fiscal year, and there are 3 reasons why we say we are on the right track so far. The first is exports of Actemra to Roche. Secondly, the fact that the NHI drug price revisions took place in April benefited us, as we applied pre-revision prices in the first quarter. Thirdly, some of the planned expenses remained unused. In that sense, progress toward the full year budget was a bit better. Now in the second half, what will happen to the spread of COVID-19 is a big uncertain factor, but we believe we can achieve our plan. Having said that, in any case, there are uncertain factors about exports of Actemra to Roche, depending on the results of COVACTA study. And therefore, we will have to remain cautious.

[Seiji Wakao, analyst]

My second question is about what you just referred to, exports of Actemra. Listening to what you explained, I understand that if Roche's sales remain strong, a corresponding amount of exports can be posted in July-September period and beyond and that if COVACTA study proves successful, we can expect additional demand for exports. And am I correct in my line of thought? Or is it the case that your exports were made in the second quarter, not taking into account any impact from COVACTA study? And therefore, if COVACTA study does not succeed, your exports from the third quarter onward will slightly lose momentum. Could you give me more details on this point?

[Unknown Executive]

Obviously, our exports of Actemra to Roche is driven by the performance of Roche's sales of Actemra in its territories. In the first quarter, Roche's sales in its territories, which excludes Chugai's sales in Japan, grew 29% year-on-year, while our exports dropped by 6%. And so there was a significant time lag. However, we exported a lot in the second quarter. And in the entire 6 months, Roche's sales grew by 35%, while our exports went up by 39%. And this is telling us that the gap has been mostly closed. Our initial forecast at the beginning of this year for export of Actemra was an increase of 2.7% for the full year, but now Actemra is being driven by COVID-19. And in the second half, it all depends on the result of COVACTA study. If it is positive, we believe things will go in the positive direction, though we are not entirely sure whether the current momentum will continue.

That said, however, even if it is positive, what is important is the scale of the spread of infection, the ratio of patients becoming severely sick and global prices, all of which are still too uncertain. Therefore, when it comes to the second half, we will need to closely watch how things will play out and figure it out.

[Seiji Wakao, analyst]

My last question is about royalty income for the initial shipment of Hemlibra. In the first half, royalty income was more or less in line with the plan. But if you look at royalty income only for Hemlibra, would you say it is also in line with the plan of the first half? If it is, am I correct in understanding as follows: in the first quarter, Roche's sales were strong? But in the second, they became a bit weaker. But Roche's sales in first quarter were ahead of the plan. They canceled out the weak sales in the second, bringing the Roche's sales of the first half as a whole to be in line with the plan, which, in turn, resulted in the royalty income in line with the plan.

[Unknown Executive]

Royalty income for the initial shipment depends on Roche's sales. Roche has reported in its earnings result on July 23, saying its global sales of Hemlibra was CHF 521 million in the first quarter and CHF 482 million in the second quarter, representing a slight quarter-on-quarter drop in the absolute value. Roche said the impact of COVID-19 was severe in May, but there were slight signs of recovery in June. We received royalty based on those results. And so what we received was slightly different in the first and second quarters.

Now COVID-19 put aside, we did assume certain risks in Roche's sales in making forecast for our royalty income. Therefore, compared to the internal plan put together in that way, royalty income we actually received was not that deviated.

[Seiji Wakao, analyst]

With regard to royalty income for Hemlibra in the second half, according to Roche, there has been a recovery since June. And therefore, I would assume that if Roche's sales remain steady, you can achieve your target of JPY 85.7 billion set at the beginning of this year. Could you share your prospect for the second half with us?

[Unknown Executive]

We agree with what you said.

The next question will be asked by Mr. Hashiguchi from Daiwa Securities.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. I want to ask about Hemlibra. On Slide 6, you clearly stated that as far as overseas markets are concerned, the delay in switching to Hemlibra was temporary, while there was no such description for the domestic market. Was it because the actual performances in Japan and overseas in comparison to your expected plans are different? Or are you implying that what is really happening in Japan and overseas are different?

[Shinji Hidaka, executive]

Hidaka, Head of Marketing and Sales, speaking. I will answer the question on the domestic market. In May, June and July and at present, especially in large hospitals or hospitals where beds for hospitalization for training were reduced, switching to Hemlibra was still being restricted. We will need to wait and see whether there will be some recovery, depending on the subsidence of the infection. But honestly speaking, we have yet to see major signs of recovery.

[Kazuaki Hashiguchi, analyst]

Does that mean you have heard that there are signs of recovery overseas, unlike the situation in Japan?

[Toshiaki Itagaki, executive]

Itagaki speaking. According to Roche, it did see early signs of recovery. It said, in the single month of May, there was a decline. But in June, in terms of the number of new patients or switches to Hemlibra, it has seen quite a bit of recovery. Roche has not disclosed its full year forecast for Hemlibra. And so its comments were not something in comparison with its forecast.

On the other hand, if we, Chugai, are to comment on our progress to our full year forecast, if the patient switch is delayed from what we initially expected, then the lost sales will affect our achievement of full year forecast. Therefore, the difference between Japan and overseas is from which perspective the comments were made. Therefore, to repeat, in overseas markets in May, switches were weak. But in June, they were not as bad as in May, and there were signs of recovery according to Roche.

[Kazuaki Hashiguchi, analyst]

In Japan, what has been the most recent actual number of new patients for Hemlibra per month as a percentage of your initially expected number?

[Unknown Executive]

We would like to refrain from disclosing a specific percentage but significantly lower than the initial expectation.

[Kazuaki Hashiguchi, analyst]

I see. My last question is about Chairman Kosaka's presentation. I think he said that your company will move ahead with reforms, keeping in mind the world with and after novel coronavirus. But I was under the impression that when it comes to specific reforms, many of them are similar to what you already said in the midterm business plan. Therefore, I'm interested to know what, if any, are the new reforms that you're planning to do now that you have the world with and after novel coronavirus in mind, which you never thought about when you put together the midterm business plan?

[Tatsuro Kosaka, executive]

Thank you for the question, Mr. Hashiguchi. Kosaka speaking. What we did not assume in IBI 21 is, first and foremost, the work-style reform, getting rid of paper documents, stamps and seals and face-to-face practices; in other words, transition to paperless practices, use of electronic signatures, greater use of online and web methods. While the declaration of a state of emergency was in place, 98% of our employees in headquarters worked from home. So we will need to review the office space. In marketing and sales division, our sales activities were restrained. We will have to figure out what to do with the space of branch offices as well as how to change the way sales personnel work. Given all these factors, we are currently thinking about what to do.

[Unknown Executive]

Next questioner is Mr. Yamaguchi from Citigroup Global Markets Japan.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi. I have a question on royalty 2 for clarification. During the presentation, you referred to sales to Roche for clinical trials, and I'm wondering if that portion is included in export at a regular price. I also would like to confirm whether that was not part of your original forecast. In other words, was it an increment?

[Unknown Executive]

Well, it's really not a part of royalty 2.

[Hidemaru Yamaguchi, analyst]

Right. I stand corrected. Pardon me.

[Unknown Executive]

Actemra export is twofold: One on a commercial basis and the other on a clinical trial basis. As is the case with other products, export unit price varies depending on the purpose of use. As for Actemra to be used for clinical studies, including COVACTA, it was recorded as export on a noncommercial basis in the first half results. And it is already included in our sales to Roche based on that price.

[Hidemaru Yamaguchi, analyst]

I see. So it's not Hemlibra, just Actemra, correct?

[Unknown Executive]

Yes. That is correct.

[Hidemaru Yamaguchi, analyst]

I see. Pardon my confusion. As for Hemlibra, first, thank you for explanation earlier. It helped me understand better. As for export on a regular price, my understanding is that the sales during the first half were steady and in line with the full year forecast of JPY 23 billion, whereas the royalty portion shown in the lower half appears to be more concentrated in the second half of the year, partly due to the sales factor. But the top half doesn't seem to assume a concentration in the second half of the year. Why is that?

[Unknown Executive]

Vis-à-vis the full year forecast, the progress rate was 68%. This has to do with the timing of shipment because they are shipped on a lot or a bulk basis. So it's not necessarily the case that over 50% is good, but things are going as per the internal plan. To begin with, we are secured with the firm orders covering the period for the upcoming 5 to 6 months. So in that sense, we are shipping in accordance with the plan set at the beginning of the year.

[Hidemaru Yamaguchi, analyst]

I see. My next question is on R&D, regarding the CITYSCAPE study. I think this was taken up at ASCO as well, that the ORR on placebo seemed too low. What is your view on that?

[Unknown Executive]

Watanabe will take that question.

[Minoru Watanabe, executive]

As you have correctly described, it's been pointed out that the controller, the Tecentriq arm, presented poor response rate. Having said that, this in itself was a Phase II study and its target was not necessarily completely the same with other Phase II studies. And this was a Phase II study with a very small population. So I don't think you can simply compare this with others. Having said that, a clear sign has been indicated, that seems to be certain. And therefore, it will be evaluated further in the Phase III study. That position remains unchanged.

[Hidemaru Yamaguchi, analyst]

I see. My last question, the CEO, Mr. Kosaka, referred to digital technologies several times. And you have Chugai Digital Vision 2030, which envisions: number one, strengthening digital platform; number two, optimizing all value chains; and number three, digital transformation for drug discovery and development. And this is to run as a cycle, so to speak. That's the vision. So what is your current stage in this endeavor? Are you mostly in stage 1? Or do you plan to make a major progress, including 2 and 3, to a certain degree, during this period under the midterm business plan? And also, what will be the value of this whole endeavor, 1 plus 2 plus 3 to Chugai?

[Tatsuro Kosaka, executive]

Well, I can only give you a very vague answer, I'm afraid. 1 and 2 and 3 are currently being pursued concurrently, in parallel. In terms of strengthening platform, we are working on enhancing the human resources, the talent and the IT infrastructure. Optimizing all value chains, that's something we definitely need to work on.

R&D, production, sales and marketing and administration, in all of these areas, efficiency needs to be improved through digital transformation, and that effort has started. And what I'm mostly focusing on is in relation to the source of value of Chugai, namely drug discovery, in particular, using deep learning, especially antibody drug discovery, structures and forecasting the clinical efficacy and the safety. We have already started to work in those areas. And further, for middle molecules, using artificial intelligence for drug discovery is what we would like to focus on going forward. So that's the general big picture that we have in mind.

[Hidemaru Yamaguchi, analyst]

I see. So looking from outside, it would become most visible when progress is made in the area of number three, correct?

[Tatsuro Kosaka, executive]

Yes.

[Unknown Executive]

Next questioner is Mr. Muraoka from Morgan Stanley MUFG Securities.

[Shinichiro Muraoka, analyst]

I have a question on Actemra. Three months ago, there was a talk of a plan to increase production by 50%. Can you give us an update on that? And if the COVACTA and other studies succeed, are you going to increase production by 50% as early as in the second half of this year? Is that the kind of momentum we are talking about? Also at the conference call 3 months ago, it was indicated that the rate of use for COVID-19 would be around 19% of the serious cases. So now after several months, what is the actual percentage of serious patients treated with Actemra in Japan and overseas?

[Unknown Executive]

I think it was at the first quarter earnings conference call of Roche that the comment was made that whereas conventionally, final formulation was done only at Chugai, the capacity would be expanded with a view to responding to the COVID-19. And as an example, increase by 50% was mentioned. There is no update on whether it's 50% or 100%. But in the meantime, there has been a technical transfer to enable formulation at Roche and Genentec sites in addition to Chugai's Ustunomiya plant. And we have obtained approval for distribution in many countries. So while it will, of course, depend on the COVACTA results, we have established a supply system to meet the demand to avoid stock-out. I'm afraid that's all we can say for now.

And as for the usage rate, 19% was mentioned most probably because as a real example, in China, 19% of the COVID-19 patients turned seriously ill, and that was quoted. But since then, there has been no figures available to show the percentage of serious cases, and there are no official data. And that being the case, we would like to refrain from referring to that.

[Shinichiro Muraoka, analyst]

I see. In relation to post-corona, Mr. Kosaka talked about the office expenses. On office expenses and e-detailing, if there is going to be a major decision to be made in this area, could that happen within this year or would it be next year? In other industries, there already are some movements to drastically reduce office expenses. So could that be expected at Chugai next year, for example?

[Tatsuro Kosaka, executive]

Thank you for your question. As for expenses, we are in the process of reviewing them. My personal view is that if you try to do this during the -- with corona phase, it's not going to be very effective or relevant, I'm afraid, given social distancing and other various restrictions that may change over time. So rather, we want to work on more fundamental reform with the post corona phase in mind. And there is an issue of office space rental contracts as well. We can't easily change things by the end of the year. So we would like to think it through seriously and thoroughly without haste.

And regarding e-detailing, Hidaka, Head of Sales and Marketing division, will answer.

[Shinji Hidaka, executive]

Yes. As you are aware, in e-detailing, there are things that can be done right now. On the other hand, some of the conventional M&D expense items are becoming irrelevant under the current situation. So using third parties or promoting this within Chugai's website is what we are doing. So the process that does not go through medical representatives, MRs, is feasible right now.

[Unknown Executive]

The next questioner is Mr. Sakai from Crédit Suisse Securities Japan.

[Fumiyoshi Sakai, analyst]

My first question is on an earlier comment made by Mr. Itagaki, a clarification question. Due to COVID-19, activities-related expenses were not used as much. And going forward, you wish to shift to allocate the saving to R&D. If I heard you correctly, that's what you said, that's how I took it. And therefore, there is no major change to the full year figure. That was my impression. Am I correct?

[Toshiaki Itagaki, executive]

Thank you for your question. Maybe I was not expressing myself clearly. From the very beginning, regarding the resource allocation, M&D expenses are to be optimized so as to proactively allocate resources to R&D. That has been the framework of the budget, and this trend continues going forward.

Now with COVID-19, M&D expenses turned out to be way lower than the budgeted amount during the first half of the year. So what are we going to do about the difference? Within the area of M&D, rather than continuing with the conventional methods, shift from those real-world practices to digital approach. And remote approach, including e-detailing, is what we are going to promote. And we will spend more in those areas. Furthermore, on a company-wide basis, promote digital transformation, including R&D. We will make investments in those areas. So on a full year basis, we want to use the budgeted amount in a very effective and efficient way. That is our intent.

So it's rather difficult to describe this clearly. But as a trend for the remainder of the year, M&D expenses would be lower, and we would like to allocate the difference to R&D more proactively. And that direction will remain unchanged the remainder of the year. That is what I meant to say. I hope that helps.

[Fumiyoshi Sakai, analyst]

Yes. My next question is on pipeline. The J-COVACTA, the Actemra study in Japan, the population is only 10 patients, and the number of serious cases in Japan is limited to begin with. But success or failure of this, I believe, will have a major impact on your stock price. But JAPIC only gives us general information, measuring the time it takes for a virus to turn from positive to negative, for example. So what would be the purpose of this study is my question. I feel rather embarrassed to be asking this right now, but what are you trying to evaluate? And with 10 patients, I think, Mr. Kosaka indicated filing during 2020. So can you elaborate on J-COVACTA, including the progress, the time frame?

[Unknown Executive]

Thank you for your question. Yes, the target population of J-COVACTA is 10 patients or so. The global COVACTA is a randomized study involving around 450 patients. In J-COVACTA study, the criteria of the target population, the evaluation items of that global study are being used. So while what can we learn from 10 patients or so could be challenging, when favorable results are obtained in the global study with 450 patients, then we can show that the efficacy would most probably be the same for Japanese patients based on the study in Japan using the same criteria, the same evaluation items. So that is the purpose of this study.

[Fumiyoshi Sakai, analyst]

So what are the items evaluated in the global study?

[Unknown Executive]

As you are aware, serious cases of COVID-19 pneumonia are very diverse. So that will be very well defined and carefully studied on what happens to what type of patients at what stage. There are specific metrics, for example, the rate of patients needing respirators and many others to evaluate the efficacy. I hope that answers your question.

[Fumiyoshi Sakai, analyst]

So I take it that you are considering filing almost at the same time as based on global COVACTA study, correct?

[Unknown Executive]

Of course.

[Fumiyoshi Sakai, analyst]

Depending on the results, as you have repeatedly stressed?

[Unknown Executive]

Yes. Basically when the favorable results are obtained in global COVACTA study, we would like to file without delay in Japan as well. We want to be prepared for that. That is our intent.

[Fumiyoshi Sakai, analyst]

I see. My next question is what you mentioned at the first quarter earnings call, Switch Antibody STA551. I understand Phase I study started in March, but I don't see an update in the clinicaltrials.gov. So when will it be disclosed? I think you said at the last conference call that the mode of action will not be disclosed. Any update on that?

[Unknown Executive]

Thank you for your question. We still want to keep it as nondisclosed at this point in time.

[Fumiyoshi Sakai, analyst]

So when are we going to make it open?

[Unknown Executive]

We believe that there are 2 possibilities. One is when PoC, proof-of-concept, is achieved. And the other is when a paper is issued. We are planning to submit a paper on a journal since this involves the innovative technology of Chugai. We are planning to submit a paper to a journal, and that will be another opportunity. Based on the progress so far, we believe that the latter will come earlier.

[Fumiyoshi Sakai, analyst]

I see. Sorry for taking so much time, but I have another question, my last question. This was picked up in the media community that you are aiming to become the strongest pharmaceutical company in the world. I suppose that it was a comment made at a media gathering of some sort. And I take it that you did not present any new target shares, for example. So can you explain the backdrop to that comment? What are you trying to achieve?

[Tatsuro Kosaka, executive]

This is Kosaka. It so happens that the very person that made that comment is with us today, Mr. Okuda, the President. And I will give him the microphone.

[Osamu Okuda, executive]

This is Okuda speaking. Thank you for your question. It seems you took my message to mean aspiring to become the strongest pharmaceutical company in the world. But our vision is that with 2030 as a target year, aimed to be the top innovator in the health care industry, by which we mean, given that we have strength in the drug discovery capability, we will leverage that capability so that patients in the world will be hopeful that Chugai will provide effective solutions. Or as we proceed with various collaborations, we want the external partners to be excited that by partnering with Chugai, we can jointly come up with innovative solutions or products. So a company that people will have that kind of association, that's what we aspire to be.

We say health care industry because it's no longer just pharmaceutical, but it's a bit larger than that. With new modalities emerging and digital therapy expanding and early diagnosis and early intervention, we are seeing wider range and scope. And with that, not just pharmaceutical companies but new players are coming into the health care field. And even in that landscape, we want to be regarded as the top innovator. That is the aspiration, and that's what I was trying to communicate. I hope that helps.

[Unknown Executive]

Next question is from Mr. Ueda from Goldman Sachs.

[Akinori Ueda, analyst]

This is Ueda from Goldman Sachs speaking. I'd like to ask about cost-to-sales ratio. It increased from Q1. Is it mainly attributable to changing product mix, including increased export and decreased royalty? Or was there any special costs during the period? Could you please clarify? Also, Actemra is surging in response to COVID-19. Is my understanding correct that there is no impact on the shipping price?

[Unknown Executive]

First, regarding the cost-to-sales ratio, we are looking at the cost-to-sales ratio for our products, not in revenue, as our KPI. Thus, the amount of royalty does not matter much. It increased in Q2 mainly because of the drug price reduction.

On the shipping price of Actemra, the price for RA is utilized for the commercial base for the time being. Going forward, however, depending on the retail price for COVID-19, some adjustments may be required to set the shipping price in the future. Of course, we do not know how much the price is going to be. In any case, the shipping price has an intrinsic possibility of certain fluctuation in the future.

[Akinori Ueda, analyst]

My second question relates to Mr. Sakai's question earlier. Pertaining to the development of Actemra to be indicated for COVID-19, based on your earlier explanation, a bottleneck here for domestic application is the progress of the global clinical study. That means any delay in the domestic study is unlikely to delay an application process in Japan. Am I correct in saying that? Also in Japan, it is going to be an additional indication, requiring no NHI price change. Is that right?

[Unknown Executive]

Thank you very much for your question. You had them correctly.

[Akinori Ueda, analyst]

My last question. On antibody drug against COVID-19, on Page 33, I would appreciate if you could comment on the development time line. In addition, neutralizing antibodies are ahead of the race. How are you going to differentiate your development products? Your recycling antibody technology can supplement your strength. Could you please share your view on the matter?

[Minoru Watanabe, executive]

Thank you for your questions. This is Watanabe speaking. Unfortunately, at this stage, we are not able to disclose the details of the antibody yet. Having said that, though, originally, a neutralizing antibody against coronavirus was identified by an immunology facility called SIgN, an affiliate of A*STAR. Chugai's antibody modification technology is helping its optimization. Of course, our strength lies with antibody optimization. As you know, our technology can also produce candidate antibodies in the order of tens of thousands, from which, at best, one can be chosen. Although we cannot comment on the expected time line. If we can say one thing, we are currently working with A*STAR to develop a best and optimum antibody. I apologize for not being able to provide any further detail at this point.

[Unknown Executive]

Next question is from [ Ms. Mochizuki ] from [ Mix ].

[Unknown Analyst]

This is [ Mochizuki ] from [ Mix ] speaking. Mr. Kosaka presented today the impacts of COVID-19, which included that Chugai needs to transform itself and the changing stakeholders' values. How do you assess the changing stakeholders' values? Will the changes further accelerate digital transformation you are undertaking?

[Tatsuro Kosaka, executive]

COVID-19 already introduced significant changes among our stakeholders. Chugai's sales division underwent significant changes a lot. Our own values as well as health care providers' values changed as well. Moreover, we'd like to create a system that can meet the changing values of HCPs. That is our view. Our sales manager is with us today, sitting right next to me, who can provide more detailed changes within the sales division.

[Shinji Hidaka, executive]

Thank you very much, Ms. [ Mochizuki ]. This is Hidaka speaking. Physicians are going to have a whole range of varying demands and needs. Some will be satisfied with e-detailing only, while others will prefer us maintaining the conventional face-to-face detailing. This is just one example of varying needs of doctors that are likely to emerge, and we need to make sure that we have the capacity to address them all. To do so, we'd like to evolve the way our medical sales reps create and establish customer touch points with physicians. In addition, medical sales reps need to upskill information provision capabilities during their e-detailing. Those are the 2 aspects that our sales team would like to work on.

[Unknown Analyst]

IBI 21 states that you will transform how your medical sales reps operate and work. To be more specific, a hybrid detailing is likely to emerge, if we can call it a neutralized model. Am I having the right perception?

[Unknown Executive]

Yes. Exactly so. We'd like to create a hybrid that works best.

[Unknown Analyst]

One last question. On digital transformation, AI-based drug discovery, you recently announced a partnership with AWS. Is that going to change the way you partner with other entities? Does that constitute a step forward in creating a new way of drug discovery? Could you please share your view?

[Tatsuro Kosaka, executive]

This is Kosaka speaking. AWS system was introduced to share internally accumulated data not just with internal employees but with external researchers. While protecting confidentiality and personal information, we'd like to leverage the system to promote exchanges with academia and start-up companies and others so that we can accelerate joint development projects. We, therefore, view it as an important IT infrastructure element.

[Unknown Executive]

We'd like to take one more question before we end.

The last question is from Mr. Kohtani from Nomura Securities.

[Motoya Kohtani, analyst]

This is Kohtani from Nomura Securities speaking. I'd like to ask you 2 quick questions. First, on the COVACTA study, to project the sales of -- sales performance of Actemra, the results of the study are truly important. On July 2, the results of sarilumab, an anti-IL-6 receptor antibody, on COVID-19 were revealed. The study was discontinued because it failed to produce positive results.

By reading their report, those without mechanical ventilation to maintain the baseline showed a negative trend. In my understanding, sarilumab works under a very similar MOA with Actemra. The study designs were similar because both target severe patients only and adopt the same 7-point ordinary scale (sic) [ ordinal scale ].

By examining the effects of remdesivir and other drugs in the past, I have an impression that COVID-19 is a heterogenous virus with still unclear pathology. I think all of these confer your study a high-risk study. To be more specific, how can you differentiate the clinical study of Actemra from that of sarilumab, which recently failed? In particular, does your study include those undergoing mechanical ventilation to protect the baseline? That is my first question.

[Minoru Watanabe, executive]

This is Watanabe speaking. As you pointed out, the 2 are very similar. The drugs and targets are similar. Having said that, though, there are differences. To be more specific, end points differ. The severity of target patients slightly differ as well. We need to study how these will play out. You rightly pointed out that the virus is heterogenous. Thus, we must ascertain how effective Actemra is on what patients by carefully examining and analyzing the results when available. It will not be easy to obtain clear-cut results. In that sense, the study will enroll and randomize 450 cases, which is a significantly large number. We thus expect to generate at least partially clear answers to those questions.

[Motoya Kohtani, analyst]

If a post-analysis demonstrates that Actemra is effective for patients with high baseline IL-6 level, will it suffice? In other words, are you measuring IL-6 at the baseline? Because of the time constraint, this is my last question.

[Unknown Executive]

Thank you for your question. That is certainly an important aspect. Yes, we are measuring the IL-6 level, along with some other biomarkers. We need to examine how the drug would work on all of those markers. To address your question of whether a post-analysis would suffice, we need to study whether a factor composed the original biomarkers we were focusing on and to ascertain the magnitude of the effect as well. So speculation alone cannot fully answer your question at this stage. Thank you very much.

Thank you very much.

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