Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2021-Q2

[Osamu Okuda, executive]

I am Dr. Osamu Okuda, President and CEO of Chugai Pharmaceutical. Let me give you the financial overview of the second quarter of fiscal 2021.

Please take a look at Page 5. Revenues from January through June totaled JPY 390.2 billion, up 6.0% year-on-year. The operating profit and net income for the second quarter soared by more than 15% from the year before. We started the first quarter with a drop in both revenues and profit but turning to positive year-on-year growth in revenues and profits for the first half.

Looking at the progress against the full year forecast. Domestic sales and ROI exceeded the forecast made at the beginning of the year. In particular, the growth in ROI was associated with the growth in overseas local sales of in-house products and, therefore, directly contributed to the profits. As a result, both operating profit and net income showed steady growth that surpassed the initial forecast.

As I explained in the next slide, in addition to those factors, there are more upside factors, including Ronapreve and exports of Actemra. With all these factors added together, we expect to increase revenues and profits year-on-year for the fifth consecutive year.

Next, let me explain about the top line upside factors. Please turn to Page 6. This slide shows top line upside factors compared to the initial forecast. In domestic sales, we enjoyed strong market penetration of the additional indication, hepatocellular carcinoma obtained in September last year for Tecentriq. Not shown on this slide, an adjuvant for HER2-positive breast cancer, an indication added to Kadcyla in August last year, also achieved steady market penetration. As for Avastin, market penetration of its partial release turned out to be slower than expected. Furthermore, Enspryng launched last year showed a greater-than-expected 87.5% market penetration.

As was announced in our press release, Ronapreve, an antibody cocktail for COVID-19, received special approval for emergency on July 19 and is expected to be purchased by the Japanese government for use in 2021 under the agreement with the government. Unfortunately, the total amount or volume of the purchase have to remain undisclosed. The entire amount of the sales of Ronapreve is outside of the initial full year forecast and, therefore, will directly become an upside factor for the full year result. Once the actual sales are recorded, the figure is planned to be disclosed as part of others in the primary area.

The initial full year forecast for the export of Actemra has included only a limited amount of COVID-19-related portion. The progress of the export of Actemra for Roche in the first half is slow but in line with the expectation in the initial forecast, as it depends on the export timing. We anticipate an upside to the initial forecast in the second half for the export of Actemra. ROOI has progressed above expectation in the first half due to the growth of Actemra's overseas local sales related to COVID-19.

We expect to see a further increase in the second half, exceeding the initial full year forecast. Thus, revenues are expected to exceed the full year forecast due to the unexpected upside factors.

Next, I will move on to R&D. Please turn to Page 7. As I said, the growth of Tecentriq, Kadcyla and Enspryng has been more than anticipated. In addition, we expect to see launches of new products and added indications for existing products this year and next. Polivy, launched in May indicated for elapsed or refractory DLBCL, has been experiencing a steady market penetration at the initial stage. In July, we launched Ronapreve for COVID-19 in July. Two more new products are planned to be launched by the end of this year. Part of them is FoundationOne Liquid CDx, comprehensive genomic profiling for solid tumors using blood samples. The other is Evrysdi, a drug highly convenient for patients that can be orally administered to a refractory disease called spinal muscular atrophy.

There are several products and added indications filed for approval this year and expected to be launched next year. One of them is faricimab, a new product, which is Chugai's first product in ophthalmology; and the other, Tecentriq, for an adjuvant for non-small cell lung cancer, and both were already filed for approval in June and in July, respectively. By the end of this year, there are 3 more submissions planned, including Polivy for first-line treatment as an additional indication.

We hope that filing of applications for development products with high market potential will contribute to sales growth in the next fiscal year and onward. Yamaguchi will later walk you through the market potentials of the late-stage development pipeline in his presentation.

Please take a look at Page 8. We have a total of 3 treatment drugs and items under development for COVID-19. With this slide, let me share with you how we forecast future infections of COVID-19 in Japan. In our analysis, various highly uncertain factors present, including emergence of variants, vaccination rate, efficacies of vaccines, we have come up with the forecast for the number of infected people based on 2 potential scenarios.

Scenario 1 is what we call high case, where due to the continuous emergence of variants, current number of infected people will continue. Scenario 2 is what we call base case, where a high vaccination coverage and efficacy rate will result in fewer infected people. Between the base and high cases, there is a significant range of expected number of infection cases in Japan from about 200,000 to 1.6 million. Under the circumstances, Ronapreve, a cocktail antibody therapy, was granted special approval for emergency and is expected to contribute to prevent severe progression of the disease as the first drug for mild and moderate COVID-19 and, therefore, to mitigate the risk of shortage of hospital beds.

Actemra is expected to help improve the prognosis of patients with severe COVID-19. AT-527, though not approved yet Japan, is anticipated to prevent patients from becoming severely sick by providing convenience of being an oral administration, early treatment and prescription even for mild cases.

To explain more about Ronapreve, we have reached an agreement with the government to secure the domestic purchase of Ronapreve for the volume to be used in fiscal 2021. The way sales scheme works is that the government will solely purchase Ronapreve and provide a drug to hospitals free of charge. And therefore, Chugai sales of Ronapreve for the -- for this fiscal year will be recorded as government purchase.

In our analysis, the expected number of cases of infection for the entire Japan in the second half of 2021 ranges from $400,000 and 700,000, of which those patients with the risk of severe disease represent about 20% to 40%. Among those, excluded from the cases eligible for Ronapreve will be those that are asymptomatic, which is about 10% to 20%; and moderate to -- or severe diseases requiring oxygen supply. You also need to be hospitalized to be eligible.

Just for your information, the statuses of infection and vaccination rates are different from country to country. And therefore, you cannot make generalized comparison. According to the earnings announcement by Roche for the second quarter, the total sales from the government purchases in Europe, Germany, Italy and France posted CHF 166 million in the first quarter and CHF 317 million in the second quarter with a total of CHF 483 million for the first half.

With regard to infections from 2022 onward, there are so many uncertain factors that it is difficult to make assumptions, but we assume the total number of cases in Japan to range from about $200,000 to $1.6 million. In any case, in order to make sure we can respond to the changes in the demand, we plan to consult with the government about the required supply of Ronapreve from 2022 onward.

Please move to Page 9. Next, let me go over the progress on 2021 strategic policies we came forward with at the beginning of the year. With regard to maximizing value of growth drivers and R&D, as I already explained, sales are making better-than-expected progress and R&D is making a steady progress. As for DX, or digital transformation, by making the full use of AI, digital technologies and robotics, we are in the process of acceleration of DX in the entire value chain.

Actual scenarios of significant acceleration of DX at a fast speed include use of AI technologies in molecular design of antibodies, establishment of digital plants and customer interface platforms using AI. We are also selected as one of DX stocks for 2 consecutive years. Incidentally, we are the only pharmaceutical company to be included in the indices.

In the policy to strengthen business foundation, steady progress has been made as shown in the new personnel system in place and continued inclusion in major ESG indices.

Please take a look at Page 10. In the growth strategy Top I 2030 announced at the beginning of this year, we planned to realize the practices of launching global in-house products every year by 2030 by doubling the R&D output. Especially, midsized molecular drugs have been positioned as a modality to drive our mid- to long-term growth.

On July 26, we made a press announcement that we would build a synthetic API manufacturing building for small, midsized molecule drugs in Fujieda plant. Since this is going to be the third synthetic API manufacturing dealing with cutting-edge equipment and concept in Fujieda plant, we call it FJ3. FJ3 is designed to address the manufacturing functions of small and midsized molecule drugs with high pharmaceutical activity, covering APIs for late-stage clinical trials and early production after launch.

By adding FJ3 to the existing manufacturing building for APIs, FJ1 and FJ2, which is under construction in the Fujieda plant, Chugai will gain the capability to consistently supply API throughout early clinical development to early commercial production, which will greatly strengthen the foundation that supports the rapid development and launch of innovative new drug candidates.

The investment amount of JPY 55.5 billion will be the largest ever in our history of the investments in the manufacturing facility. It is expected to be completed in October 2024 and start operation in March 2025. Thorough consideration is being given in terms of environment and safety.

Next, I will go over Chugai Life Science Park Yokohama. As you already know, it will become our core research center by consolidating the current research laboratories separately located in Gotemba and Kamakura. Due to the temporary suspension of the construction affected by COVID-19 as well as the closer examination of time taken for moving in, the start of the operation of the park will be delayed by around 3 months. Under the new plan, the completion of the construction is scheduled to be in October 2022 and the full operation in April 2023.

Please turn to Page 11. In February 2021, as a result of analysis of the previous midterm environment target and in order to respond to the expectation and demand from society, we came forward with a comprehensive midterm environmental goal 2030 on the fight against climate change, use of circular type resources and preservation of biodiversity.

As shown here, CO2 emissions is planned to be reduced on a phased basis to aim for 0 emission in 2050. By 2025, we will aim for 100% use of sustainable electricity. In other words, CO2 emitted from the generation of purchased electricity or Scope 2 will be reduced to 0. In order to achieve a 60% to 75% reduction in 2030, we will need to reduce the direct emissions of CO2 associated with the fuel construction or Scope 1. And therefore, we will include conversion, rationalization and redesign of our existing facilities.

It will be a challenging target to reduce CO2 emissions to 0 by 2050, and we do not have a concrete path to get there yet. But while closely watching the trend of the development of new technologies effective in reduction of CO2 emissions, we will promote initiatives that are not an extension of the past, including the introduction of new sustainable energy in the future.

Please turn to Page 12. To sum up, we have achieved an increase in ROOI along with the growth of overseas local sales. The year-on-year increase in revenues and profits in the first half was posted. We expect to see an increase in revenues and profits year-on-year for the fifth consecutive year due to the high progress of the first half results and upside factors related to COVID-19. We will see a contribution to sales growth from the next fiscal year onward by continuously filing for approval and launching new products and expanding indications.

The 2021 strategic policies are progressing steadily, and Top I 2030 started well. We have started capital investment to establish a stable API supply capacity for small and midsized molecule drugs.

On the environmental front, we will aim for a 40% CO2 emission reduction in 2025 as the first milestone toward 0 emission in 2050.

That's all. Thank you for your attention.

[Toshiaki Itagaki, executive]

This is Toshiaki Itagaki. I would go over the consolidated financial overview. Please turn to Slide 14. There, you can see the profit and loss results for the first half compared to the same period of the previous year. Revenues were JPY 390.2 billion, up JPY 22.1 billion or 6% year-on-year. In domestic sales, negative impact of NHI drug price revision and generic drug launch were offset by volume growth, resulting in a nearly flat growth year-on-year. As for overseas sales, results were mixed depending on products, but in total, almost the same as in the previous year. Royalties and profit sharing income increased by JPY 29.8 billion with significant increase for Hemlibra. Other operating income was JPY 2.8 billion with a decrease in onetime income.

Regarding the cost of sales, although there was upward pressure on the cost of sales ratio due to the NHI drug price revision in April last year and April this year, the increase in the sales composition ratio of in-house products helped to improve the product cost ratio by 2.8 points to 40.1%.

As for expenses, as various activities are on a recovery trend, marketing and distribution and general and administrative expenses increased by 6.2%. R&D expenses also increased by 13.2% or JPY 7 billion due to the progress in project themes. We plan to increase R&D expenses by JPY 18 billion for the full year. Operating profit was JPY 165.8 billion, a year-on-year increase of JPY 22.1 billion, which happens to be the same as the increase in revenues or up 15.4%. Operating margin was 42.5%. It was the first time for the first half margin to exceed 40%. After financial account balance and income taxes, net income for the first half was JPY 121.7 billion, up 16.5%.

Slide 15 shows the breakdown of changes in sales. By therapeutic area, domestic oncology grew by 9.4%. By product on the right side, Tecentriq and Kadcyla sales grew due to expanded indications. On the other hand, sales of Herceptin, Avastin, Rituxan and Perjeta decreased due to the effect of generic drugs and the drug price revision. Sales in the domestic primary area were down 13%. Sales of Edirol, feeling the generic drugs impact, decreased by JPY 10.7 billion. Tamiflu government stockpiles and Mircera each saw sales drop by JPY 1.4 billion. Meanwhile, sales of in-house products Enspryng, Hemlibra and Actemra grew steadily.

Enspryng, launched last August, has seen steady market penetration and posted sales of JPY 3.5 billion. Hemlibra sales were up 16.1% despite the 15% NHI drug price reduction in April last year due to market expansion repricing. On a volume basis, it has grown by more than 26%.

Overseas, while the total was almost flat, by product, some increased while others decreased. Products whose sales decreased include Actemra overseas, down JPY 22.7 billion. Details are on the next slide. As for products with increased sales, Hemlibra overseas doubled. Excluding the impact of unit export prices, volume increased 2.4-fold. Overseas sales of Alecensa grew by 25.6%. On a volume basis, excluding the impact of unit export prices, the increase was more than 70%.

Please turn to Slide 16. Exports of Actemra to Roche shown in the chronological order from left to right for 2019, 2020 and 2021 and accumulated quarterly from bottom from Q1 to Q2. In the light blue box on the far right, it reached JPY 46.5 billion for the second half, which is the full year forecast less first half results.

First, in 2019, the full year result was JPY 86.5 billion, a growth of 9.9%. In 2020, it was up 52.6%. Since demand for rheumatoid arthritis is generally stable, it is presumed that more than 40 percentage points of last year's increase were due to COVID-19. The numbers in blue are a rate of increase in global Actemra sales by Roche. Given that growth was 8% in 2019 and 39% in 2020, we can see that there was a considerable COVID-related demand in the Roche territory.

While the market growth in Roche territory was 39% last year, our exports to Roche grew much more significantly by 52.6%, indicating they were largely advanced exports. Consequently, exports in the first half of this year were suppressed, totaling JPY 36.5 billion, as shown in the lower right.

When we announced initial forecasts, exports in the first half were generally on firm orders. So the actual result of JPY 36.5 billion, down 28.1% was in line with the forecast. Still, given that Roche territories growth in the first half was 18% and high growth is still continuing, we expect additional export requests to come towards the end of the fiscal year. The full year forecast of JPY 83 billion includes only a limited amount of exports related to COVID demand. So we believe there is an upside potential in the second half.

Slide 17 is a waterfall chart showing the breakdown of changes in operating income. The second, third and fourth bars from the left are factors for the increase in gross profit from sales. The negative impact of the NHI drug price revision and the export unit prices were absorbed by increase in sales volume, resulting in an increase of JPY 7.9 billion.

Next, the increase in royalty and profit sharing income of JPY 29.8 billion contributed directly to the increase in profit. Other operating income decreased as a reaction to a large onetime income last year, resulting in a decrease of JPY 6.2 billion. Increase in M&D and G&A expenses totaling JPY 2.5 billion was due to the recovery trend of remote and real physical sales promotion activities and the sales activities in China. As already explained, R&D expenses increased by JPY 7 billion.

From Slide 18, there are about 3 slides on quarterly changes. The first is the cost structure. Year-on-year comparison and a quarter-on-quarter comparison is described in detail on the right-hand side. Common factors include an improvement in the cost of sales ratio, an increase in R&D expenses and a significant increase in operating profit. M&D and G&A expenses increased over the previous year as various activities were on a recovery trend. No specific comments on a quarter-on-quarter changes as spending usually tends to increase from the first quarter to the second quarter.

Slide 19 looks at the structure of revenues. Despite the drug price revision in April, the second quarter domestic sales performance was better both year-on-year and quarter-on-quarter, thanks to growth in mainstay products and new products. In the overseas sales for the second quarter, Actemra exports declined year-on-year due to inventory adjustments from the beginning of the year, while Hemlibra exports continued to grow. As Hemlibra grew in the Roche territory as well, royalty income continued to grow.

The last quarterly trend is sales by therapeutic area. Please turn to Slide 20. I will mainly explain where the increase and decrease are reversed between the year-on-year change and the quarter-on-quarter change. First, by therapeutic area, sales of primary area decreased year-on-year but increased quarter-on-quarter. The main reasons are as follows: Edirol sales decreased significantly year-on-year due to the launch of generic drugs in the third quarter of last year. But due to production issues on the part of the generic drug manufacturers, demand for Edirol is gradually returning and sales increased over the first quarter.

By product, as already explained, Actemra exports related to provisional COVID demand were suppressed in the first half due to the inventory adjustments, resulting in a year-on-year sales decrease of JPY 16 billion. But quarter-on-quarter, sales were up by JPY 3.1 billion. The COVID portion has not been exported since the beginning of the year but growth continued driven by approved indications.

Now a look at the rate of progress toward the forecast announced at the beginning of the year. Please turn to Slide 21. The first quarter progress was described as nearly in line with forecast but the second quarter saw a steady progress in both revenues and profits.

First, domestic sales progressed steadily and overseas sales were nearly in line with forecast. Details later. As for royalty income, Actemra in Roche territory grew by 18% and royalty income grew by a comparable amount. The full year forecast does not include COVID demand, either for exports or royalty income. So the progress rate appears to be higher. Other operating income was in line with forecast. The progress rate of cost of sales was almost in line with the progress of sales and was generally in line with forecast. Expenses were almost as expected with a progress rate of 45.1%, the same as last year. Led by domestic sales and royalty income, progress rate of operating profit was strong at 51.8%.

Moving on to the remaining year forecast on the next slide. This is a slide that should be considered the highlight of my presentation today. Starting with the revenues on the left. Revenues grew by 6% in the first half. If you subtract the first half results from the full year forecast, the remainder for the second half will be JPY 409.8 billion, a decrease of 2.1%. As the second quarter grew by 17.3% and since we don't see any factors for a sudden slowdown in the second half, we don't expect a decrease in revenues, actually. Operating profit on the right also increased by 15.4% in the first half and by 44.2% in the second quarter. From these results, it is hard to imagine a 6.1% decrease in profit in the second half.

Growth momentum in the first half is expected to continue into the second half. In addition, we can expect Ronapreve and Actemra exports related to COVID demand to resume in the second half. However, as far as we can confidently estimate at this point, neither sales or profit have reached the levels that warrant revision. And so we have kept the earnings forecast unchanged.

Slide 23 is the progress of sales by product. Earlier, I said that domestic sales, steady progress; and overseas sales, in line with forecast. Results by product are mixed. Those that lagged behind forecast included Herceptin, Gazyva and Rituxan in oncology shown in the middle of the left-hand side.

Foundation medicine has made a 30.6% progress. But with FoundationOne Liquid approval in March, we expect growth towards the second half. In the primary area, Hemlibra slightly lagged behind. On the other hand, those that progressed ahead of forecast included in oncology, the mainstay products, Avastin and Tecentriq, the top 2 on the left; and 3 lines below Kadcyla as well as Actemra and Enspryng in the primary area. Especially for Enspryng, the number of patients was larger than expected and the progress was much higher than expected. For overseas sales, the progress rate depends on export timing. So a year-on-year comparison is not very helpful.

As for exports, as many in the first half are on firm order, results were almost as planned, and we expect an increase toward the end of the fiscal year. Actemra expects exports in relation to COVID demand, which are not included in the forecast.

Slide 24 shows the outline of Hemlibra sales to Roche. Exports at ordinary supply price, or royalty 1, started last year. And from this second quarter, shipments have gained momentum in terms of volume. Progress was as expected. Royalty income for initial shipment, or royalty 2, was also in line with the expectation, giving us the confidence of achieving the revenue of JPY 95 billion for the full year. That's all for profit and loss.

Moving on to Slide 25, the balance sheet. Starting from the upper left, net assets as of the end of June was JPY 1,052.1 billion, exceeding JPY 1 trillion for the first time. Due to the increase in inventories and property, plant and equipment, net operating assets increased by JPY 35.8 billion at JPY 681.8 billion, and net cash also increased by JPY 12.6 billion at JPY 391.2 billion. Net cash accounted for about 37% of net assets.

As shown in the lower half, while assets have increased, liabilities have been reduced since the end of last year. So as a result of a reverse leverage effect, the ratio of equity attributable to Chugai shareholders improved to 82.5%.

Here's the breakdown of increase in the net cash since the end of last year. Cash inflow from operating activities totaled JPY 180.7 billion. After an increase in net working capital and investments in the constructions of new R&D and manufacturing facilities, operating free cash flow was positive JPY 123.7 billion. After cash outflow associated with income taxes and year-end dividends, net cash at the end of June totaled JPY 391.2 billion, an increase of JPY 12.6 billion from the end of last year. We plan to use the cash on hand for future investments. Today, we issued a news release on a new capital investment.

This is the status of main investments. There are 4 changes from the previous list. First, we have updated the actual investments. Second, in production area, facilities for prefilled syringe form products at Ustunomiya plant and manufacturing building for antibody API at Ukima plant, referred to as UK3, have been removed as they started operation. And as was referred to earlier, investment amount on new R&D facility has been raised to JPY 128.8 billion, up approximately JPY 300 million for environmental features. And we've added a manufacturing building for APIs of small and midsized molecule drugs, as we announced today. Completion is scheduled for 2024 with a total investment of JPY 55.5 billion.

That is all for me.

[Tetsuya Yamaguchi, executive]

I'd like to explain about our development pipeline. Please turn to Page 34. It shows the topics of Q2. Polivy was launched in May for relapsed/refractory diffuse large B-cell lymphoma. Readout of first-line therapy study is planned in the second half, and we aim at filing by the end of the year based on the results.

Ronapreve obtained a special approval for emergency on July 19 for mild to moderate COVID-19, as mentioned earlier. This is the first regulatory approval in the world. Thanks to close collaboration with the government and the relevant businesses, distribution in Japan started smoothly.

Next is approval. Enspryng was approved in EU in June for neuromyelitis optica spectrum disorder, NMOSD. Thus, it has been approved in the 3 regions: Japan, U.S. and EU. Evrysdi or risdiplam for spinal muscular atrophy, SMA, was approved as the first oral treatment that can be administered at home in June as explained earlier. CellCept was approved with the public knowledge-based application. Additional companion diagnostics functions were added for FoundationOne Liquid CDx that uses blood and the FoundationOne CDx that uses tumor tissue as shown on the slide.

Next is submission. Faricimab was filed for 2 indications, diabetic macular edema and age-related macular degeneration, in June simultaneously. Tecentriq was filed for adjuvant for NSCLC based on the interim analysis of the IMpower010 study in July. Herceptin for HER2-positive salivary gland cancer and Perjeta/Herceptin for HER2-positive colorectal cancer were filed based on the good results for investigator-initiated trials.

Page 35 shows initiations of studies. Global Phase III study was started for Tecentriq as adjuvant for circulating tumor DNA positive muscle-invasive bladder cancer with high risk of recurrence. In addition, global Phase III study as the second-line therapy for HCC, in combination with lenvatinib and sorafenib was also initiated. As for the AT-527, oral RNA polymerase inhibitor, we are participating in the global Phase III study for COVID-19.

ERY974 is an in-house developed bispecific antibody against the glypican 3 and CD3. Phase Ib study was started in combination with Tecentriq and Avastin for hepatocellular carcinoma with high-level expression of glypican 3. Safety and efficacy will be evaluated going forward.

SOF10 is an in-house developed monoclonal antibody against the latest TGFbeta-1 and it entered the clinical stage for solid tumors. This project has already been outlicensed to Roche. I will discuss the details later.

Three projects have been in-licensed from Roche, and their Phase I studies have been initiated. RG7992 is a bispecific antibody against FGFR1 KLB with agonistic action. Overseas Phase Ib study shows the reduction of hepatic fat content, and improvement of hepatic pathology is expected. I will explain about brain shuttle gantenerumab later.

Phase I study with pralsetinib RET inhibitor was initiated for solid tumor. In-house developed RAF/MEK inhibitor, CKI27, which was out-licensed to Verastem, received Breakthrough Therapy designation, BTD, from FDA. The BTD was received based on the results of investigator-initiated study for low-grade serous ovarian cancer in combination with FAK inhibitor.

EOS789 is an in-house developed candidate compound for hyperphosphatemia, and we have concluded a global exclusive option and the license agreement to develop, manufacture and market it with Alebund Pharmaceuticals in China. Unfortunately, we have decided to discontinue the development of ipatasertib, Akt inhibitor for breast cancer. I will discuss the ASCO presentation for Tecentriq IMpower010 study for adjuvant for NSCLC later.

Page 36 shows the positioning of COVID-19 therapies that we are developing. We are developing 3 compounds with different positionings: Actemra, Ronapreve and AT-527. Actemra has received emergency use authorization from FDA and the recommendation in WHO guidelines. I will discuss the overview of Ronapreve that received a special approval for emergency in the next page.

Ronapreve is a capital of 2 recombinant monoclonal antibodies against spike protein of COVID-19 virus, imdevimab and casirivimab. It was originated by Regeneron in U.S., and we in-licensed it through Roche at the end of last year.

In the Phase III studies for mild and moderate I patients with aggravation risk factors, risk of hospitalization or death was reduced by 70% and time to symptom resolution was shortened by 4 days, as shown in the middle of the slide. In addition, nonclinical studies confirmed that Ronapreve is effective for multiple variants, including Delta variant.

Page 38 shows the situation of FDA's Breakthrough Therapy designation, BTD. Roche Group has obtained a total of 38 BTDs, which is the top level in the industry, and 7 of them were originated from Chugai. When you add CKI27 that has just received the BTD and nemolizumab that was out-licensed to Galderma, 9 projects that were originated from Chugai received BTD in total. We believe it is evidence of our high drug discovery capability.

Page 39 shows major licensed-out projects. OWL833, at the bottom, had a major progress. It is an oral non-peptidic GLP-1 receptor agonist and was out-licensed to Eli Lilly, which has a world's top class diabetes franchise. In the Phase Ia study with healthy volunteers, clinical data that support once daily dosing with no food or water restrictions were obtained. Currently, 12-week PoC study in patients with type 2 diabetes is ongoing, and Eli Lilly has announced that if the results of PoC study obtained this fall are good, Phase II study will be initiated in late 2021 or early 2022.

From Page 40, I'd like to talk about 2 projects that have newly entered clinical stage. The first one is SOF10 in-house project. SOF10 is expected to show antitumor effects in the immune excluded segment where immune checkpoint inhibitors are not effective. TGF-beta 1 promotes barrier formation by fibroblast. And as a result, it inhibits the infiltration of T cells into tumors. Latent TGF-beta 1 is activated by proteases or in the integrin pathway.

In nonclinical study, toxicity risk is observed by inhibition of TGF-beta, and involvement of integrin pathway is strongly suggested in toxicity in mice. This compound inhibits the TGF-beta 1 activation via proteases and is expected to avoid -- the toxicity with inhibition of integrin pathway. Phase I study already started in June, and we plan to develop in collaboration with Roche, where we out-licensed the compound.

Page 41 explains about the brain shuttle gantenerumab, RG6102, that was in-licensed from Roche. It is for Alzheimer's disease. Aducanumab has been approved for this indication with fast track in U.S. We are conducting Phase III study for gantenerumab with the same mechanism of action of removing amyloid beta with antibody. RG6102 is a next-generation product intended to improve the brain penetration by applying brain shuttle technology to gantenerumab. Specifically, a part of transferrin receptor binding antibody is bound to gantenerumab to enhance the brain penetration through transferrin receptor-mediated transport across the blood-brain barrier.

In overseas Phase I study with healthy volunteers, RG6102 achieved about 8x higher cerebrospinal fluid plasma ratio compared with gantenerumab. With better brain penetration, we expect that higher efficacy can be achieved compared with gantenerumab or existing anti-amyloid beta antibody.

Page 42 shows the results interim analysis of IMpower010 study of Tecentriq, which shows that this is the first cancer immunotherapy showing efficacy in adjuvant NSCLC. IMpower010 study is a global Phase III study comparing the efficacy and safety of Tecentriq adjuvant therapy with best supportive care in Stage Ib, II-IIIa NSCLC.

Tecentriq reduced the risk of recurrence or death by 34% in hazard ratio in Stage II-IIIa patients, whose tumors express PD-L1 more than 1%. Safety profile was consistent with its known safety profile with no new safety signals. With these results, we filed for approval in July.

Page 43 shows expected market potentials of important new products and later-stage products based on certain assumptions about the competitive situation and additional indications. Please note, there is a high level of uncertainties.

The top half shows the local sales in the global market, including Japan, for in-house projects. We expect Enspryng, nemolizumab and crovalimab will all become blockbusters with peak sales of over JPY 100 billion. Nemolizumab was categorized based on the forecast by Galderma and Maruho, where we licensed out the compound.

The bottom half shows the products in-licensed from Roche categorized based on domestic sales. We expect Tecentriq, Polivy and faricimab will be large products with peak sales over JPY 30 billion.

Page 44 shows projected submissions going forward. Red stars indicate new entries and green stars indicate changes in submission year. The following slide shows the status of development pipelines in 2 pages as well as the status of companion diagnostic indications of F1CDx and F1 Liquid CDx for your reference.

That is all from me. Thank you.

[Motoya Kohtani, analyst]

Kohtani from Nomura Securities. I would like to confirm what is assumed in the market potential of post-PoC projects on Page 43? You said these numbers include expected expansion of indications to some extent. Therefore, I would guess, since it is about post-PoC projects that Enspryng assumes not just NMOSD, but myasthenia gravis and that nemolizumab includes prurigo nodularis and atopic dermatitis as both are already disclosed, while crovalimab includes only aHUS and PNH for the moment.

Is my understanding of the assumptions correct? Or are you assuming only those described in your documents, as has been said conventionally?

[Tetsuya Yamaguchi, executive]

Thank you for your question. Yamaguchi speaking. In the evaluation of the potential there, we did include indications that are planned to go through clinical studies in the future. Therefore, it includes those that have possibilities that you referred to earlier partially. However, for strategic reasons, please forgive us from refraining from identifying the specific names of the diseases included in the evaluation.

Nemolizumab has a rare future indication like prurigo nodularis, and Enspryng includes myasthenia gravis. Though I don't understand why this disease can become the target of the drug, there is data available that implies the potential, and therefore, I'm not that surprised. But the potential shown for crovalimab seems to be a bit small, honestly speaking. If it is started in PNH and aHUS, then this may be the case, but it has been known that complement is involved in rare nephropathies, such as IgA nephropathy all along.

But do I understand correctly that those diseases are not included in the evaluation? It would be difficult to share details, but basically, in terms of possibilities, what you said is correct. As we looked at competitive landscape and development appropriateness, we decided to classify its potential into a 2-star group. One forward, obviously, we will revisit the evaluation if there are any indication expansions that will be realized. So please see this as just our perspective at this moment.

[Motoya Kohtani, analyst]

I feel a bit relieved. My second question is about gantenerumab. I do not believe this diagram has been updated since 2018, when IBI 18 was ongoing. The market potential of gantenerumab was estimated to be more than JPY 20 billion back then, but now it was changed to more than JPY 15 billion for some reason. Usually, when another drug with a similar mechanism has been approved in the U.S., for instance, I would expect the company developing the drug to increase its confidence.

And yet this time, has it been estimated to be smaller as a similar drug has been made available in the market ahead of use? Furthermore, the biggest mystery about gantenerumab is that it is supposed to be subcutaneously administered for the volume of 1,200 milligrams. Usually, the concentration of antibody is about 100 or 200-milligram per milliliter. And the maximum volume that you can administer via subcutaneous injection would be 1.5 milliliter per shot. That would mean that you will need to inject the drug in 4 to 8 different locations. With the 9 months dose escalation required, it could end up being a drug quite hard to use. I wonder if you have difficulty to such favor -- factor in evaluation.

This is my last question. The competitive environment has significantly changed since we have presented a table for market potential last time. And then there was an approval of aducanumab in the U.S. Our approach, however, will be to move forward while confirming efficacy. As it is hard for us to foresee at this moment, how things will play out, including diagnosis, NHI drug price and for what cases, it will be approved and reimbursed, we came up with a potential of more than JPY 15 billion. Am I wrong to assume that it will need to be subcutaneously injected at 4 to 8 locations of the body? Could you give us some comments on that?

[Tetsuya Yamaguchi, executive]

We'd like to decline comment on that.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. My first question has to do with the impact of Ronapreve on the financial performance of your company. When you refer to upside factors on the left top and right bottom on Page 5, you mentioned Ronapreve first followed by Actemra. So am I correct to assume that at this moment, Ronapreve is likely to exceed the initial forecast by a larger amount than Actemra?

[Osamu Okuda, executive]

Okuda speaking. Thank you very much for your question. There is no particular intention behind the order of positions of the description of the 2 drugs on Page 5. You have surmised relationship between Ronapreve and Actemra with an extremely deep insight, but it does not imply or represent the size of the estimates of sales or upside potentials of the 2 drugs.

[Kazuaki Hashiguchi, analyst]

I see. My second question is about the future of Actemra. Conventionally, you have sometimes referred to a possible adjustment to the unit price once it is approved for COVID-19. Now that it was given EUA in the U.S., how do you plan to approach this?

[Toshiaki Itagaki, executive]

Itagaki speaking. In principle, the unit export price will be determined based on the weight average of Roche's sales to the customers in the previous year. Previously, off-label use was done. And more recently, in U.K. and France, physician statements have been issued. And in the U.S., EUA was given. We will be deciding how we should approach based on them in principle from this fiscal year onward. Therefore, we believe there will be no impact this fiscal year.

[Kazuaki Hashiguchi, analyst]

Then I believe your unit export price for the next fiscal year will be determined by how sales of Roche will be. Given the geographic mix of sales regions, we can expect the unit export price to have fallen from previous levels. But are there any cases other than that, where unit sales prices in different regions by Roche has been reduced?

[Toshiaki Itagaki, executive]

We are not in a position to discuss the unit sales price by Roche. And therefore, we would like to refrain from answering that question.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley Securities. My first question has to do with the financial results, including the forecast for the next fiscal year, if I may. It makes sense to me that the operating profit for this fiscal year is likely to exceed the JPY 320 billion initially forecasted, as you said last time and this time. In the next fiscal year, royalty 2 of JPY 95 billion for Hemlibra will be gone completely, and we may possibly have to worry about the risk of biosimilars for Actemra, while Alecensa and Hemlibra are performing extremely well. I also have a little hope that there could be government stockpile purchase of AT-527 in the next fiscal year.

Given all these factors, do you think it will be possible or quite hard achieve a positive year-on-year growth in operating profit next fiscal year? If you can give us at least possible directions you expect, that would be appreciated.

[Unknown Executive]

Thank you for your question. As there are so many uncertain factors for us to predict how we will end this fiscal year, it is too early to discuss how we will look at the next fiscal year based on particular assumptions. What we know for certain is that, in Japan, there will be NHI drug price revisions every year and that we will be affected by generics and biosimilars, while Avastin and Tecentriq are doing well, and Hemlibra is still in its growth pace. Thus, there are both positive and negative factors as well as uncertainties to consider, which will be all put together to work out the plan for the next fiscal year.

[Shinichiro Muraoka, analyst]

I see. That is the kind of answer I had expected to hear. My second question. I took the liberty of mentioning the government stockpile of AT-527 earlier. You're participating in the global Phase III study, whose result is expected to be out at the end of this year or early next year. If things go as scheduled, aside from whether you can incorporate the sales from government stockpile in the forecast in January or February next year, am I going to assume to see naturally the discussion of government stockpile?

Looking back on 10 years ago, when Tamiflu was sold for government stockpile, there was a talk of manufacturing in Japan. Similarly, are you considering a scenario of producing the drop in Japan the properly respond to the demand from the government stockpile?

[Tetsuya Yamaguchi, executive]

Yamaguchi speaking. To give you the conclusion first, nothing has been decided yet. First and foremost, it really depends on the result of the study. Whether the drug will be purchased by the government or not will be somewhat determined by the intention of the government. Furthermore, depending on the near-term status of the COVID-19 infections, the drug may be used for ongoing treatments or may need to be purchased for the government stockpile. We are still at the stage of a blank slate.

[Shinichiro Muraoka, analyst]

But you need to be prepared for manufacturing to some extent, don't you?

[Tetsuya Yamaguchi, executive]

Can you repeat the question?

[Shinichiro Muraoka, analyst]

I do understand what you are saying, but the volume is expected to be so large, but I would guess you probably need to significantly move up the preparation for production. But are you saying those issues are still completely undecided?

[Tetsuya Yamaguchi, executive]

Production will be under the responsibility of Roche, and we have yet to obtain the result of Phase III study. Furthermore, I said earlier that the result of the study could be out in the first half of the next year. But even if the result is positive, it will take quite a bit of time to file for and obtain approval from the authorities.

In this context, depending on how much production capacity can be made available globally, the government may take its own measures. But in any case, currently, we are still at a blank slate. In terms of production, it is our understanding that watching how the result of the study will come out, Roche will consider and make preparations.

[Seiji Wakao, analyst]

This is Wakao from JPMorgan. My first question is related to Mr. Kohtani's question. It is with regard to the peak sales of Enspryng over JPY 200 billion, which is very high. With the current indication of NMOSD, the number of patients is not very high, and so I do not expect such large sales. Am I correct to assume that the contribution from myasthenia gravis indication, for which studies are starting, will be large? Also, I believe it will compete with Alexion's product. What is the advantage of Enspryng in gMG? Is the advantage the dosing regimen? This is my first question.

[Tetsuya Yamaguchi, executive]

Thank you. Yamaguchi here. For this forecast, as you pointed out, not only NMOSD, but also gMG as well as indications further beyond are taken into considerations.

With regard to the differentiation from Alexion's product for gMG, this is something that we need to consider going forward. But since this is an inhibitor of IL-6, the positioning could be very different. That's all.

[Seiji Wakao, analyst]

I understand there are several potential indications. But in the percentage terms, is gMG the biggest one?

[Tetsuya Yamaguchi, executive]

I'm sorry, but we do not disclose it.

[Seiji Wakao, analyst]

Next is about AT-527. You are taking part in the global study, MORNINGSKY study. According to the ClinicalTrials.gov, I believe the study will be completed in August and the results will be available in the first half of next year. For Japanese submission, are you going to use the results of other domestic studies? Also, for the targeted population, there's no restrictions about the aggravation risk factors according to the ClinicalTrials.gov. Are you going to enroll a wide range of patients from mild to moderate disease?

[Tetsuya Yamaguchi, executive]

I'm afraid we do not disclose details of CDP. With regard to the progress of the study, what we can say now is that the results will be available in the first half of next year. As the positioning of an orally available antiviral drug, we intend to target mild to moderate disease. Thank you.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi from Citigroup. The first -- you gave us global explanation about target population of Ronapreve earlier. Patients with aggravation risks, 20% to 40%, asymptomatic, 10% to 20%. I'm sorry, but I did not understand whether it's the target population. Could you explain again?

[Osamu Okuda, executive]

Thank you for your question, Mr. Yamaguchi. This is Okuda. Let me explain again. We estimate there will be about 0.4 million to 0.7 million COVID-19 patients in the second half of this year. There were about 0.57 million patients so far this year, as shown in the slide. Then we estimate that 20% to 40% of them will have aggravation risk factors. There are various aggravation risk factors such as having underlying diseases, elderly patients, et cetera. It is a rough estimate.

Ronapreve will be administered only symptomatic patients. You may aware of the clinical study results, but patients received a drug within 7 days of developing symptoms. In other words, asymptomatic patients are not treated. Such people will be eliminated, and we roughly estimate they account for about 10% to 20%.

[Hidemaru Yamaguchi, analyst]

You mean half?

[Osamu Okuda, executive]

Well, rather, 10% to 20% of all people infected with the virus are asymptomatic. Other patients will further be eliminated. Patients with severe diseases or severer than moderate one written in the packaging insert such as moderate 2 or 3. In addition, administrative notice from MHLW provides that such patients with aggravation risks are basically to be hospitalized. So hospitalized patients, although there are overlaps, it is very complicated.

So what percentage in the end? We haven't calculated, so we don't know, but this is how we estimate.

[Hidemaru Yamaguchi, analyst]

I see. So you look at 20% to 40% of all people infected, minus 10% to 20%, and your target is a part of that remaining population?

[Osamu Okuda, executive]

Yes.

[Hidemaru Yamaguchi, analyst]

Another question. I think you continuously make comments about middle molecules. One of the highlights in the midterm plan, and you have expectations of blockbuster candidate. You have decided to make a large investment in a new plant. From an external point of view, it appears you may have won in the clinical stage this year or not? And that I said, you are making such a big investment and I understand that you have high hopes. What is your plan about announcing the status or explain the technology?

I guess that it will be difficult to see the plant since it will take some time to complete the plant. When are you going to give a strong message about middle molecules as a new franchise? Are you getting more confident? Are you going to announce a compound entering clinical stage or explain the technology this year?

[Osamu Okuda, executive]

Thank you for your question about middle molecules. As we have been saying, we expect the first compound entering the clinical stage this year. So we have been conducting nonclinical studies, and there is no change of our plan. Thus, we will start a clinical trial by the end of this year.

With regard to the external announcement of the overview of these middle molecules, we would like to set up an opportunity at an appropriate time. The investment for FDA 3 at Fujieda is evidence that we have high hopes for middle molecules. Please understand that way.

[Fumiyoshi Sakai, analyst]

This is Sakai from Credit Suisse. Briefly about the table on Page 24 about Hemlibra royalty 2. We don't have to see this table next year. In other words, the forecast of JPY 95 billion in 2021, is it going to end clearly in 2021? I have asked it many times and the time is getting closer. If this clearly ends, the royalty [ cliff ] will be only 1 year in 2022 and the model can be developed based on that. But if it somehow lingers on like a zombie, it could become a kind of risk. Mr. Itagaki, could you make a comment?

[Toshiaki Itagaki, executive]

Thank you, Mr. Sakai. At the beginning of this year, we announced that we focused royalty 2 of JPY 95 billion. The results in the first half is as expected. So we expect that we will certainly receive JPY 95 billion this year. We do not expect the downward revision of JPY 95 billion, that means some of it being deferred to next year. We will certainly receive JPY 95 billion this year.

With regard to the inventory that was shipped at the beginning of the year, which is the basis of this number, we are in a stage to reconfirm the stock level for the second half. If there is any change, we will announce it at an appropriate time, but no changes as of now.

[Fumiyoshi Sakai, analyst]

Now about 30% of the questions at Roche's conference call was about gantenerumab. Roche affirmed that there will be no submission before the completion of GRADUATE 1 and 2 studies in the second half of 2022. I am not going to ask you to confirm it. If you have good results from domestic study as well as Roche's global Phase III studies, is it possible for you to file in Japan around the same time as overseas? Also please confirm that Chugai is the one to file in Japan.

[Tetsuya Yamaguchi, executive]

Yamaguchi here. First, Chugai is the one developing it in Japan, so Chugai will be the applicant. With regard to the timing of submission, as shown in the table on Page 44, it will be in 2023. But the difference in the timing of submission from Roche's will not be very big and the similar data will be used. That is all from me.

[Unknown Analyst]

This is [ Akama ] from Nikkei. I have some questions on Fujieda plant. The new investment that you announced to construct a manufacturing building for APIs of small and midsized molecule drugs. First, what is the planned production volume? Qualitative order production capacity, qualitative response would suffice. Would it be enough to cover all of the intended APIs? That's my first question.

My second question is the significance of manufacturing APIs in Japan. I am assuming that reinforcing the supply chain might be part of the reason. In relation to the U.S.-China conflict and the impact of COVID-19, I believe there is an increase in the number of disruptions in global supply chain. So I'm wondering you are making this investment partly to address such concerns.

[Osamu Okuda, executive]

Thank you for your question. This is Okuda speaking. Your first question is on the capacity of FJ3, the new building in Fujieda plant. FJ3 is for small and midsized molecule drugs covering APIs for late-stage clinical trials and early production after launch. It will have multiple API production lines, and I cannot say exactly how many, but it will have a capacity to cover the early production of a small number of different APIs.

Regarding your second question on the significance of manufacturing and producing APIs in Japan. True, the COVID-19 situation has reminded us of the importance of securing the supply chain. Chugai has 3 main plants in Japan, and we have a plant -- development plans aimed at leveraging the experience and expertise of our staff at respective facilities. Fujieda plant is dedicated to commercial production of small molecule drugs. The plan is to leverage our expertise on high potency APIs of small and midsized drugs -- or midsized molecule drugs. As part of our strategy, are pursuing manufacturing and producing in Japan. That, in turn, will serve to enhance and strengthen our supply chain in Japan, which should protect us from the risk of supply chain disruptions in other parts of the world.

[Unknown Analyst]

I see. May I ask one more question? I believe the supply of generic drugs has resulted in shipment adjustments of Edirol and others. Do you have any measures to counter this issue?

[Osamu Okuda, executive]

Thank you for your question. Your question is in relation to the shipment adjustments of Edirol and others. And you asked whether there are any countermeasures in terms of production or supply.

True triggered by the production and shipment adjustment on the part of the generic drug manufacturers, we are adjusting the supply accordingly. But within the production capacity that we have, we are making efforts to produce and supply in the manner to prevent any inconvenience to patients for health care providers. At this point in time, I cannot give you the specifics, what, by when, for instance. As one of the factors is the recovery of production on the part of the generic drug manufacturers. So I would refrain from commenting on that issue.

[Unknown Analyst]

[ Mitatake ] from Nikkei. I also have a question on the new building at Fujieda plant. The investment amount is JPY 55.5 billion, the biggest investment ever. What is the reason for such a huge investment?

[Osamu Okuda, executive]

Okuda speaking. Your question is on the investment amount of JPY 55.5 billion, the largest ever for Chugai, and you're wondering why, correct?

[Unknown Analyst]

Yes.

[Osamu Okuda, executive]

The biggest reason why the investment amount is so huge is because we are trying to build facilities that can handle high potency, small and midsized molecule drugs. For the handling of compounds with high pharmacological activity or high potency, various facilities to be built to ensure safety of the personnel handling such materials.

Furthermore, to prevent the release into the atmosphere of such high potency APIs, we need to ensure much higher safety measures or containment facilities than ordinary manufacturing facilities, which is the biggest factor that is driving the investment amount. And as was explained earlier, FJ3 should have sufficient capacity or capability to cover the early commercial production, so a certain size is needed. That is another reason that is driving up the investment amount.

[Unknown Analyst]

I see. So I take it that the large amount of investment has to do with the high potency, not midsized molecules? Am I correct?

[Osamu Okuda, executive]

Yes, that will be a correct understanding. Containment features are driving up the investment.

[Unknown Analyst]

I see. A follow-up question. What is the significance of manufacturing midsized molecule drugs for Chugai?

[Osamu Okuda, executive]

Again, Okuda speaking, to answer your question. Earlier this year, we embarked on our growth strategy, Top I 2030. The concept of drug discovery strategy is multi-modality drug discovery. We have a very strong engineering capability in the areas of small molecule drugs and antibody drugs.

In a nutshell, we are very strong in terms of expertise in designing and manufacturing compounds, and we want to leverage that with biology for drug discovery. What we are trying to do is to add midsized molecules to our strength of multi-modality and by combining that with biology, discover innovative new drug candidates. That is our drug discovery strategy. So the success of midsized molecule drugs is crucial for the growth of Chugai.

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