Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Analysis

Hemlibra, Exports Drive Growth Despite Revenue Decline

During the second quarter, revenue declined by 4.6% to JPY 552.9 billion, primarily due to the absence of Ronapreve sales from the last year's COVID-19 supply. Hemlibra exports grew significantly, offsetting this decline and leading to a 13.3% increase in operating profit to JPY 262.8 billion. The company expects record-high profits and net income for the full year. Domestic sales fell by JPY 15.2 billion due to drug price revisions and generic competition, while overseas sales rose by JPY 59 billion, driven by Hemlibra and Actemra. Overall, the core business, excluding Ronapreve, showed robust growth.

Strong Sales and Profit Growth Despite External Challenges

Despite a revenue decline of JPY 26.8 billion (4.6%), Chugai Pharmaceuticals demonstrated solid profitability with an operating profit increase of 13.3%, reaching JPY 262.8 billion. The absence of Ronapreve’s COVID-19 related sales, which had significantly boosted revenues in the past, was a major factor in the revenue drop. However, excluding Ronapreve, the company still achieved positive revenue growth. Cost efficiency and favorable foreign exchange impacts also contributed substantially to the profitability boost.

Robust Performance of Key Products

Hemlibra continued to be a standout product with overseas sales increasing by JPY 59 billion (28.2%). Domestically, though the overall sales saw a decline of JPY 96.4 billion, excluding Ronapreve, the drop was only JPY 15.2 billion. Overseas sales benefited from increased volumes and positive exchange rate impacts, despite some price pressure. Hemlibra’s success was underpinned by its strong, real-world evidence of efficacy and safety, with over 26,000 patients using it globally.

Operational Efficiency Driving Margins

Chugai’s cost of sales declined by 33.9%, marking an improvement in the cost-of-sales ratio from 30.3% to 33%. This improvement was driven primarily by a more favorable product mix, excluding high-cost Ronapreve and introducing products with lower production costs. Additionally, the company managed to keep selling, general, and administrative expenses growth minimal despite inflationary pressures, reflecting diligent cost control.

Strategic Focus on R&D and New Product Launches

Research and development expenses increased by JPY 7.5 billion as the company continued to invest in new projects and early-stage developments. New product launches like Vabysmo for ROP and progressing trials for next-gen treatments indicated a strong pipeline. Hemlibra was highlighted for its continuous, evidence-backed efficacy in treating hemophilia A, stressing its long-term usage data as a strategic advantage against competitors, including new gene therapies.

Positive Outlook and Guidance

The company forecasted record high operating profit and net income for the full year. With the ongoing positive momentum of Hemlibra and Actemra exports and strong domestic sales in certain segments, Chugai appears on track to meet these expectations. Notably, they mentioned the potential for sales figures to exceed initial forecasts, supported by the slow penetration of biosimilars and robust product performance. They expect to surpass the 57% progress rate for Hemlibra by year-end, driven by incremental royalty income following a tiered structure based on cumulative annual sales.

Foreign Exchange and Financial Position

Foreign exchange fluctuations had a positive net impact of JPY 9.7 billion on operating profit, with yen depreciation aiding revenue growth. The company's financial strength was highlighted by an 85% shareholders' equity ratio. Additionally, net cash increased by JPY 76.7 billion over six months, resulting in strong cash and cash equivalents supported by efficient working capital management and controlled investments.

Challenges and Strategic Adjustments

Middle molecule drug development faced delays, pushing the proof-of-concept milestones beyond 2024 into early 2025 or possibly 2026. The company acknowledged these delays as part of the developmental process, with unpredictable elements influencing project timelines. Despite these challenges, progress continued in other non-clinical middle molecule projects and manufacturing technologies, reflecting ongoing adaptation and strategic focus on long-term growth.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for joining Chugai's conference on Financial Year 2024 Second Quarter Financial Results. I am Miyata from Corporate Communications and IR. I would like to serve as your moderator today.

Today, we have an on-site presentation as well as a Zoom Webinar. Today's agenda is on the screen in the venue as well as on the screen of the web streaming.

Today's conference is going to be held in Japanese, but through the Zoom Webinar, you will be able to listen to the simultaneous interpretation in English. [Operator Instructions]

Now, Dr. Okuda is going to present the financial year 2024 second quarter overview and refinement of 5 reforms on TOP I 2030. [Operator Instructions]

[Osamu Okuda, executive]

[Interpreted] I am President, and CEO. First, I would like to look back on the first half performance of the year and I would like to talk about TOP I 2030, our strategy, and refinement of 5 reforms on TOP I 2030. Please turn to Page 5 for fuel material.

So, the first half performance progressed very nicely on track. The revenue compared to the last year was minus 4.6%. And this was a marked improvement compared to the big negative growth of the first quarter of 24.1%. And it's because of the Ronapreve supplied to the government of JPY 81.2 billion in the third quarter of the last year.

And operating profit and net income, despite of the declining, the revenue increased by more than 10%. This is thanks to the good performance of exports to Roche, especially Hemlibra.

Hemlibra export grew quite dramatically. And because of the product mix change, the operating income margin was 47.5%, which is high profitability. So, thus, the progress in the first half was very good, and for the full year, we expect record high operating profit as well as record high net income. Next slide, Page 6, please.

Our core business is nicely growing according to this chart. This is looking at factors affecting the difference of the top line compared to the same period of last year. Excluding Ronapreve, the revenue increased by JPY 54.4 billion or 10.9%.

So, let's go from the left. The domestic sales. New products and mainstay products grew very nicely, but there was a negative impact of NHI drug price revisions. Due to that, domestic sales declined by JPY 15.2 billion.

Overseas sales increased significantly by higher sales volume and ForEx impact surpassing the decline in export unit price. And overseas sales increased by JPY 59 billion. Especially, Hemlibra and Actemra progressed very well in terms of exports.

And other revenue increased mainly due to the increase in Hemlibra-related royalty income as well as one-time income.

As a result of that, our core business grew very nicely except for Ronapreve factor. In the recent years, Hemlibra has contributed to the overall performance of Chugai for some years, and I am putting together the progress in hemophilia A treatment by Hemlibra.

We have solid data of efficacy and safety; evidence has been accumulated for over years. This is the strength of Hemlibra, especially, we have rich real-world evidence. And this gives a sense of comfort to patients and patient families as well as health care professionals. And we consider having such real-world evidence to be very important.

Since the first clinical trial, it's been over 10 years. Overall, across the world, over 26,000 patients are using Hemlibra for the treatment of hemophilia A. And we now have more than 100 papers published, including the data of more than 10,000 patients.

We have real-world clinical evidence, which is very robust in terms of both efficacy and safety. Top right, we are looking at heavy 1 to 4 long-term analysis results. This is our integrated results. More than 80% of the patients had annual bleeding of 0 for a long time.

From the real-world data of the advanced nations compared to the previous treatment, Hemlibra increased 0 bleeding rate, meaning that Hemlibra is providing stable prophylaxis of bleeding events in hemophilia patients.

Also, there was a reduction, a significant reduction of the annual joint bleeding rate, as you can see at the bottom of the slide. And, in terms of safety, we have real-world safety data over a long period of time of over 1,000 patients. And just like in clinical trials, we were able to confirm a very favorable safety profile of the product.

We have always listened to the voices of patients and patient families as well as the health care professionals and worked on improving the convenience of the administration of Hemlibra and going forward, we would like to work on improving the convenience of the administration even further, and we are now working on the development of auto-injector for this product.

Thus, Hemlibra has a lot of real-world evidence for a long time. Based on the experience of the use of this product, we have been able to confirm a high level of satisfaction on the part of the patients as well as the health care professionals. And we do believe that this can lead to further competitive advantage.

We will continue to commit to hemophilia, including NXT007. We would like to continue to increase the value of our portfolio in hemophilia. So, from the next slide, I would like to talk about the refinement of 5 reforms of TOP I 2030.

TOP I 2030 is a 10-year strategy through the back casting from the 2030 vision. And this is a long-term strategy and it has been 3 years since the start of the strategy. So, we thought we should stop here to review the progress so far, and what kind of external environment shifts are taking place, and what kind of execution progress is being confirmed in the internal environment.

And given such review for the remainder of the 7 years, what do we have to do? And how do we have to do things and at what speed in order to achieve the vision of 2030? So, first, on the external environment at the top left, on the left, the value that pharmaceutical innovation brings to society remains unchanged.

This assumption has not changed. But on the other hand, drug discovery and generative AI and digital technologies, we have seen a lot of advancement in those technologies. And due to that, the importance of open innovation has risen even further.

Now, let's talk about the strategy execution of Chugai. R&D output doubling and launch of Chugai product every year globally, without compromising quality, these are the 2 important goals of TOP I.

In these regards, we have been able to confirm a steady progress, and many projects have had some progress. And, of course, we have hit some difficulties, but 5 reforms have been advanced quite steadily.

Looking back on the past 3.5 years, we do believe that we don't have to change the goal and outline of TOP I 2030. We do believe that this is a robust strategy. But at the same time, we do understand this is quite a challenging goal. Business as usual will not be able to lead us to achieving that goal.

But at the same time, on the contrary, we now have quite a lot of confidence in terms of achieving this goal because we can now identify what kind of tactics need to be changed in order to achieve this target through our review this time, meaning that we can now refine the reforms that are required to achieve the target.

Out of the 5 reforms, I would like to focus on drug discovery, development, pharmaceutical technology, which are all very important to achieve the goal of TOP I strategy.

Well, this is about refinement of the function of red reform. We have the 2 important strategic plans, which have not been changed. The red letters represent minor changes.

To the left, global first-class drug discovery. In this plan, we now have maximization of the value of development projects by pursuing translational research and pharmaceutical technologies.

And to the right, in the pillar of futuristic business model, we now have development of PhD solutions. This is redefined. Looking back on the progress of R&D progress, we have defined what kind of challenges need to be overcome. Drug discovery, development, pharmaceutical technology, I would like to look into each modality. First, about the antibody.

The new technology has been advanced. We now have proprietary antibody engineering technology based on which a lot of projects have moved on to the clinical stage, and we are now simultaneously developing different indications.

We are using digital and robotics, and we have been able to improve the efficiency of drug discovery to a certain extent. But we do believe that in terms of the progress of many of the projects, which are in the early clinical stage, we still have some room for improvement.

Next, is the midsize molecule. LUNA-18 oral absorption has been confirmed. Midsize molecule and modality now has a better probability of success. But at the same time, on the other hand, PoC has not been achieved yet.

For midsized molecules, a lot of nonclinical projects have made advancements. They are close to portfolio in. And, in terms of pharmaceutical technology, in terms of the development of that, there has been a lot of progress in terms of difficult midsized molecules with high activity and high difficulty.

But, compared to antibodies, the speed is slower for pharmaceutical technology of midsized molecules. So, we need to create a platform and accelerate the development.

In the past 3.5 years, we now can identify common challenges. We have a lot of the projects which are in the early stage of clinical development, but they are still taking too much time.

We need to accelerate the early-stage clinical development even further. We need to reduce the time of development and improve the probability of success even further and identify the potential of the value as early as possible and concentrate our resources, meaning that the strategic prioritization is required.

And if you think about the long-term growth of Chugai, we need to further polish new modalities in drug discovery, and we should be able to generate molecules at a stage of drug discovery, which are close to perfection as much as possible.

While we have had a number of achievements, the challenges that we have to overcome have become visible. Based on this, we have refined respective reforms. In truck discovery to clarify the direction of reforms, we have revised the descriptions based on our R&D principles.

However, our basic strategy remains unchanged, that is, to pursue the multimodality drug discovery. R&D principle is what articulates the success factors that led to the development of competitive products such as Hemlibra and Alecensa.

This includes technology-driven drug discovery and quality-centric drug discovery. With these 2 as the pillars, we set open innovation as the third pillar. The box at the center shows the direction of each specific initiative and their goals are shown to the right.

As we have always done so, we will commit to the drug discovery, which nobody else that we are able to do more than ever. We will target the molecule, which nobody else could target. We will do the drug discovery, which will realize the MOA, which nobody could ever think of.

One of the examples is middle molecule. To keep our competitive advantages, we will further our technological development.

To double the output, we will select the molecule with high level of completeness as a development candidate. Combined with human predictive technologies, we will aim to achieve high clinical success probabilities.

At the same time, we will leverage external innovations and drive Chugai's unique technological development and drug discoveries. These reforms will not only contribute to doubling the R&D outlets up to 2030 but will also form the foundation for growth beyond 2030.

As you can see, we have refined the reforms and targets for each of the early-stage and late-stage developments. In order for us to be able to make judgments about project values at the early stage, we will create the silence-based appropriate clinical development options, planning, and execution.

As was explained earlier, in the past, it was 2 time-consuming for us to estimate the values of the projects in the early clinical. So, we will set the highly probable go and no-go criteria so as to make agile judgments.

And we will focus resources in the promising projects. And by running this challenge cycle quickly, we'd like to double the output while keeping the quality.

And this is critical in order for us to achieve the TOP I goals. And these are the truck development reforms that have been refined. In pursuit of the global standard, we'd like to refine for the antibody.

And for the middle molecule as well, we will have to pursue that global technology. As for production, not only the cost competitiveness, but we will have to consider the factors of the robust supply system that is, the stable supply factor.

These are the 4 goals shown on the right-hand side. The second development period is that this is the period from the selection of the candidate compounds up to the submission of the clinical trials.

We'd like to benchmark against the top-level companies in the world. And for each of the antibody and middle molecule, we have set these targets up to 2030. So, we will pursue to enhance our competitiveness in all of the quality, speed, cost, and drug development fronts. I have explained about the refinement of the reforms and as for the red functions.

Next slide shows the 5 reform summaries, including the functions other than red. And the portions shown in red are the changes that we have made this time. I will skip the explanations about the functions of other than red.

As for the progress and challenge of each reform and about the refinements, we have attached additional slides, so please refer to the slides as necessary. Based on the refinement, we have revisited the midterm milestones, and I have added some slides at the end.

I will skip the explanations, but we have made the disclosures limited to the following 3. The first one is how was the achievement of the TOP I 2030, the ones that have the strategic importance.

The second one is the one with which the clear endpoints or valuation metrics have been identified. The third one is the ones that investors have a high interest in. This is the last slide.

Reflecting the TOP I 2030, when we reflect the first 3 years of TOP I, we have started to make the focused investment into the R&D under red strip. The number of PC transitions and P1 transitions compared to the past 10 years, the number has increased.

So, we have started to see the signs of changes. But on the other hand, as for the originally anticipated initiatives, we have started to see the gap against the target. So, we will have to accelerate further the rate shift.

As for the pharmaceutical development, this is a long-term effort. So, we may not see the outcomes immediately but with the acceleration of initiatives, we believe that the outcomes will be expanded further.

This slide shows the curve. As you can see, the curve becomes steeper and that reflects the image that I just explained. With the size of our business, it is a very high target to launch the global product each and every year, but we will not only pursue the numbers, we would like to work towards the realization of the sustainable medicine with high level and focused on patients.

We'd like to overcome the unmet medical needs one by one. We'd like to keep producing the values that are truly sold out by patients. So, we will never compromise the high degree of completeness.

Utilizing our science and technological capabilities, we would like to keep producing the innovations to address the challenges, unmet needs, and TOP I includes the I. I stands for innovator and I. And that means that each one of us will own the reform challenges.

Each and every employee will transform themselves in order to do what they are supposed to do and what they are trying to do. And that will create autonomy and that autonomy will become a chain to create the strength and synergy of the organization.

And, after achieving the reforms, we believe that the achievement of our ultimate goals will become visible. So, we'd like to start a new to become the true innovator of the world and do our best towards that end.

That concludes my speech. Now, I'd like to ask Tsukasa Kusano to give a presentation on the pipeline. So, we will change the page of the slide.

[Operator]

[Operator Instructions] Now, Dr. Kusano, please?

[Tsukasa Kusano, executive]

[Operator Instructions] I am Kusano from Project Lifecycle Management Unit. I'd like to give you an update on the development pipeline. Please turn to Slide, Page 24. This shows the second quarter topics.

Regarding loans, approval, and filing, apart from Alecensa approval in China and Sigmart sales approval, other topics have already been announced. PiaSky is the fifth antibody drug developed in-house by Chugai for PNH.

It was launched in Japan ahead of the rest of the world, and it has been approved in the U.S., and it has received a recommendation for approval in Europe.

Mitchga, this has been launched in Japan for the treatment of atopic dermatitis in children and prurigo nodularis. Alecensa has been approved in Europe and China as an adjuvant treatment for ALK-positive early-stage non-small cell lung cancer following the U.S.

As the first ALK inhibitor for this indication, it has begun contributing to the treatment of patients around the world. Avutometinib, in combination with defactinib has begun rolling submissions in the U.S. for the treatment of KRAS-mutated recurrent low-grade serous ovarian cancer.

As for initiation of study, 2 of them are Chugai in-house developed drugs and 2 others are the products developed by Roche. GYM329. For that, the Phase I clinical trial has begun by Roche for obesity.

DONQ52, the clinical trial is to evaluate the pharmacological effects of wheat intake in patients with celiac disease have started. I would like to turn to this later on. ASO Factor B is for IgA nephropathy and global Phase III trials have started. Zilebesiran, this has begun Phase I clinical trial in Japan for the treatment of hypertension.

There are 5 items removed from the pipeline. Tiragolumab and Tecentriq in combination with chemotherapy, which has already been announced. And including this, there are 5 items. PiaSky, an in-house developed drug, this was excluded from the pipeline as a part of the portfolio review of Roche.

For lupus nephritis, the study development was discontinued for this indication. Therefore, this is now removed from the pipeline. And the development of Tecentriq plus Avastin was discontinued the following results from the inbred 050 trial evaluating the adjuvant treatment of hepatocellular carcinoma.

Development of migoprotafib, an in-licensed products from Roche has been discontinued due to the termination of the collaboration and license agreement between Roche and Relay Therapeutics.

Development of pralsetinib also in-licensed from Roche was discontinued due to the expiration of the global collaboration agreement between Roche and Blueprint Medicine. Two items for medical conference have already been announced.

AP 306 and oral phosphate transporter inhibitor already licensed out to Albion Corporation has received breakthrough therapy destination in China for the treatment of hyperphosphatemia in patients with chronic kidney disease.

The major R&D events for 2024 were shown in the previous earnings call and the progress since then is shown in bold and underlined.

Next, I will explain RAY-121, which is being developed for the treatment of autoimmune diseases. This is the first time I am explaining this project, including its mechanism of action. RAY-121 is a recycling antibody that selectively binds to complement C1S to suppress complement pathway BP.

It is expected to be more effective and safer than C3 and C5 and other downstream pathway inhibitors in diseases in which the classical pathway is the predominant contributor of the multiple complement pathways. RAY-121 offers convenience by reducing dosage and frequency of administration through our proprietary recycling antibody technology.

In the P1A study conducted to date in healthy adults, we have confirmed sustained suppression of the complement classical pathway and a favorable safety profile. The newly initiated global Phase Ib basket study, which is about to start for 6 autoimmune diseases is positioned as a flagship study in RAY-121.

This is the first time in the world that such a broad range of diseases have been studied in a single protocol outside of the oncology field. We will pursue the maximization of product values from an early stage through the simultaneous development for multiple disease indications.

Next, I would like to explain about our newly initiated study for DONQ52. DONQ52 is a multi-specific antibody that binds to more than 25 different gluten peptide complexes, which are the main causative agents of celiac disease.

Patient enrollment was completed in May of this year for the P1A and B study to evaluate safety and PK in patients with celiac disease. Again, DONQ52 is among the specific antibodies that binds to more than 25 different peptide complexes, which are the main causative agents of celiac disease.

Patient enrollment was completed in May of this year for the P1A and B study to evaluate safety and PK in patients with celiac disease.

The newly initiated P1C study is a 3-day meat challenge study for patients with celiac disease. It will evaluate pharmacological effects in addition to safety and pharmacokinetics. We will evaluate the inhibitory effect of DONQ52 on the immune response induced by meat ingestion and confirm the usefulness of DONQ52 in celiac disease.

All the submissions are planned. The red stars indicate new additions and green stars indicate projects for expanded indications this year. The year of submissions for some studies has been changed based on the progress of the studies.

Several reference materials are touched below, which we hope you will refer to as appropriate. That concludes my presentation.

[Osamu Okuda, executive]

Thank you very much. Next is from Taniguchi-san talking about financial year 2024, second quarter interim consolidated financial overview.

[Iwaaki Taniguchi, executive]

I am Taniguchi. I am CFO of the company. Very nice to meet you. I would like to give you a presentation for the performance of the second quarter on the core basis.

First, revenue. It declined by 4.6% or JPY 26.8 billion to JPY 552.9 billion. Operating profit increased by 13.3% to JPY 30.8 billion to JPY 262.8 billion. The big factor for revenue decline was because of the absence of supply of Ronapreve for COVID-19 that was booked in the first quarter of last year.

Excluding the Ronapreve factor, the revenue actually grew.

Next, let's take a look at the breakdown of the revenue. First, sales. It was JPY 485.5 billion. This was a decline of JPY 37.5 billion or 7.2%. Looking at different segments or regions, domestic sales, as I said, because of the Ronapreve impact, it was negative JPY 96.4 billion.

Excluding Ronapreve, it was only the decline of JPY 15.2 billion. This decline was due to the NHI drug price revisions and the market penetration of generic drugs. Overseas Hemlibra export was very good. And compared to the last year, it was the increase of JPY 59 billion or 28.2%.

And, other revenue, the Hemlibra royalty income increased and also lump sum income increased. Due to that, all other revenue was JPY 67.3 billion. This was an increase of JPY 10.7 billion or 18.9%.

Next on expenses, cost of sales was JPY 160.2 billion, and this is a decline of 33.9% or JPY 82.1 billion. Because of the elimination of Ronapreve with high cost of sales and relatively speaking, products with low cost of sales now dominant and due to that, the cost-of-sales ratio improved by 30.3% to 33%.

The research and development because of the research projects and early-stage development project moving on nicely, it increased by JPY 7.5 billion. Selling, general, and administration, we pursue efficiency improvement, and we were able to suppress the increase only by JPY 1.6 billion against the backdrop of inflation and labor cost increase.

And other operating income, there was a Bombela transfer of products revenue last year and because of that factor, it decreased by JPY 15.4 billion. Operating profit increased by JPY 30.8 billion to JPY 262.8 billion, and operating margin improved by 7.5% to 47.5%.

Net income increased by 10.6% or JPY 18.1 billion to JPY 189.5 billion. Next is the breakdown of sales increase or decrease. First, oncology domestic market. Compared to the last year, year-on-year, it was a decline of JPY 7.7 billion or 6.1%. And it's due to the penetration of generics, Avastin sales declined.

But on the other hand, Phesgo, which is a new product absorbed such a decline of the sales on Perjeta and Herceptin. And the specialty declined by JPY 88.7 billion or 47.4%. But Ronapreve, which I discussed already, was one of the factors and [indiscernible] also declined.

And due to these 2 products, it was negatively affected. And if you exclude these 2 factors, specialty product sales was more or less the same level, at the same level compared to the last year. NHI price revision impact was there, but new products such as Vabysmo grew quite nicely.

Overseas at the top in gray, the sales increased due to Hemlibra as well as in spring. And as a result of that, there was an increase of JPY 59 billion or 28.2%.

Next, operating profit decrease or increase factors. So, compared to previously, we are giving you more information. Starting from the left, looking at domestic sales. As you can see, NHI drug price revisions were there and Ronapreve's impact were quite huge in terms of the negative impact.

Overseas, export unit price declined, but actually sales volume increased and ForEx exchange positive impact compensated for the ex-export unit price decline, leading to higher operating profit. Then other revenue increase was by JPY 10.7 billion, royalty income of Hemlibra, and other lump-sum income of milestone income and et cetera, are included.

Cost of sales ratio improved due to product mix, and this was a very big positive push factor of operating profit. Next, let's take a look at the costs and profit by quarter. This is a breakdown and development over time.

The timing shift of export timing quarter-by-quarter, there may be some fluctuations. But if you look at only the comparison of the second quarter this year and the second quarter last year, as you can see, operating profit increased by JPY 34.1 billion.

So, as I said already, there are certain positive factors. Export is one of such positive factors. So, if you look at the sales structure of revenue by quarter, as you can see, if you compare only the second quarter year-on-year, because of the export sales increase, as you can see, revenue increased.

The next page, this is looking at the progress against the forecast announced at the beginning of this year.

First, domestic sales. As you can see, the progress to the far right of the last year are described. And because of the Ronapreve, 56.2% was the progress last year, which was quite high. This year, at this point in time, it's 47.7%, which is below 50%. But the sales activities are going to be higher towards the end of the year. So, this is within our expectations.

On the other hand, overseas sales, Actemra and Hemlibra exports are progressing very well. Therefore, we are at the progress ratio of 57.5%. And other revenue at this point in time, it's 45.5%.

Relatively speaking, it may look a little slower. But Hemlibra royalty rate is going to go up depending on the cumulative sales of the year, which is a tiered structure. Therefore, towards the end of the year, the sales or royalty income of Hemlibra is going to go up.

So, more or less, we are on track for expenses as well.

Now, let's take a look at the progress against the forecast for each product. And, of course, there are ups and downs and variations for different products. But overall, across the segment, we are on track in terms of the progress status for the domestic sales.

But on the other hand, overseas, actually, it's 57.5%, as I mentioned already. Bottom right, overseas sales are doing very well. And, of course, there are still some uncertainties remaining. There is a possibility that these numbers exceed our forecast. Next is the ForEx impact.

Since last time, we have renewed the supply content, and we're showing the quarterly assumed rate and actual rate on the right-hand side and we have conducted a more detailed analysis and results are here that foreign currency-denominated expectation and implementation and royalty, 80% of that is hedged through the forward FX contracts in the previous year.

But due to the adoption of the hedge accounting, 20% remaining portion is in an open position. And this is the portion that is exposed to the ForEx fluctuation, and it's the variance from the assumption at the beginning of the year.

As for the assumed rate for Q2, we have seen JPY 3.1 billion positive impact on the operating profit. As for the revenue side where the forward FX contracts is not done, the actual rate was more favorable than the assumed rate.

And as for the Board, FX contracts are allocated to the revenues and costs and the allocated rate changes from month to month. So, for the assumed rate for the quarter and for the full year, there needs a slight variance.

On the left-hand side, the comparison against the actual rate, and this is the ForEx impact. Based on our business structure, the yen depreciation will produce a positive impact in revenues, and that will cause a negative impact on the expenses.

But the net position, we are seeing a significant positive impact. On the operating profit basis, compared to last year, we had a positive impact of slightly JPY 9.7 billion on the cumulative basis or the end of the second quarter. As for the P&L, the total assets stood at JPY 2 trillion, JPY 60.2 billion compared to the previous year.

At the end of the previous year, there was an increase in cash and cash equivalents, and there is an increase in the account receivables. So, it was an increase by JPY 126.1 billion from the end of last year.

As for the net asset as well, due to the net owned capital accumulation due to profit, it stood at JPY 1.7517. As a result, the shareholders' equity ratio remained at a very high level of 85%, and the net cash increased by JPY 76.7 billion from the end of last year and stood at JPY 815.7 billion as of the end of June.

And this slide shows the factors that contributed to the results, the cash in from the operating profit and from here, we deducted the net working capital increase and the decline in the investment decline due to investment.

The operating free cash flow stood at JPY 169.5 billion. And from here, we deducted corporate tax and dividend, et cetera and over the past 6 months, the cash increased by JPY 76.7 billion.

This slide shows the IFA base actual and core actuals, so these are the adjustments made starting this year, the business restructuring expenses. Well, right now, we are working to renew the operation and business core systems company-wide. So, we recorded JPY 3.3 billion as the business reconstruction expenses.

Next is the qualitative and quantitative information for the Chugai-originated global products and the current situations and full-year guidance and qualitative comments are provided just for your reference.

Next shows the major 5 Chugai-originated products and out-licensing scheme to rush, whether or not there is a royalty or the burden of selling and general expenses, I believe that the same information was shown 2 to 3 years ago.

Next is the CapEx at the end. No major change has been observed from the first quarter of this year. The bio-drug substance manufacturing, building-related CapEx and the Ukima actors-related CapEx are included.

As for the R&D CapEx and investments, in order to improve the facilities, we are planning to spend more than JPY 100 billion in terms of CapEx and to respond to the improvement of the environment rated requirements.

That concludes my explanation. Thank you.

We will move on to the Q&A, question-and-answer session.

[Operator]

So, we are joined by Hidaka, who is the Executive Vice President in charge of sales. I would like to request that you limit the number of questions you asked to 2. Thank you for your cooperation in advance. [Operator Instructions]

[Shinichiro Muraoka, analyst]

I am Muraoka from Morgan Stanley. So, my first question is about the company performance. It was a stellar second quarter. And one big factor is the export of Hemlibra and Actemra.

And the third quarter and beyond is there going to be any repercussions? Looking at the numbers of Roche, Actemra may go further up. But Hemlibra, probably not. This quarter looked a little bit weaker for Hemlibra as well. That's my own impression. So, for Hemlibra and Actemra exports, the third quarter and beyond, what are your thoughts?

[Osamu Okuda, executive]

So, first, I'd like to begin. So, in terms of the local sales, I'd like to talk about that. And then our expectations for exports, Taniguchi, CFO, will answer.

So, Hemlibra sales, first quarter of this year in the United States, it was a negative growth. And it's because of the purchasing pattern on the part of the pharmacies. And if you look at the second quarter in the United States, it was a growth of 3%. So, it's quite a steady growth.

And January to June, there was a growth of 1%, plus 1%. Europe and internationally, excluding Japan, U.S., and Europe, the growth of the international market is quite significant, driving the overall growth of Hemlibra. And overall, the growth rate is 7%. So, in terms of the local sales, Hemlibra is growing.

And Actemra, local sales compared to the same period last year, it's a plus 3% growth rate. Europe biosimilars have been launched and in the United States biosimilars have been launched. And how they are going to penetrate the market, it's difficult to read, but they are quite weak.

[Shinichiro Muraoka, analyst]

So, towards the latter half of the year, what would be the biosimilar penetration?

[Osamu Okuda, executive]

This is something that we need to monitor and watch out for. So, these are the local sales.

[Shinichiro Muraoka, analyst]

And what about the exports?

[Osamu Okuda, executive]

And there is a timing shift. So, CFO is going to answer your question. So, first, about Hemlibra, the third quarter and beyond, we do not expect any worsening of the situation.

International sales on inventories needs to be stocked because of the long supply chain and because of the government tendering, there are certain fluctuations.

Therefore, in terms of the exports from our company, we do believe that international sales is going to be quite solid going forward. And as for Actemra, there is a delay of biosimilar penetration. And I think this delay in biosimilar penetration is more than we expected, and our exports are growing accordingly, more than we expected.

So, compared to the forecast, we do not believe we have any concerns to achieve the forecast. So, Hemlibra export, Taniguchi, what you said is, we do not have to be concerned about the sales of Hemlibra or export of Hemlibra.

And for Actemra also, looking at the sales of Hemlibra in the U.S., there may be repercussions going forward, but we don't have to be worried about that. Yes, for exports, we don't have to be worried about Hemlibra or Actemra.

[Shinichiro Muraoka, analyst]

And in 2025 or beyond, that after 6 months, is there going to be any repercussion in 2025 or beyond? Is there such a risk?

[Osamu Okuda, executive]

Well, as for the plan for the next year, we have to work on the plan for the next year from now on.

As for Actemra, of course, the penetration of biosimilars is going to be progressing, which has to be incorporated. But Hemlibra international sales is still expanding. Therefore, I do believe this momentum is going to continue. So, that's our expectation.

[Shinichiro Muraoka, analyst]

No risk of reduced inventory?

[Osamu Okuda, executive]

Well, this is really beyond our time frame. So, we can't really say anything about that, but there is still a trend of volume increase.

[Shinichiro Muraoka, analyst]

So, the second question is about R&D or in-licensing, planning for in-licensing, opt-in Canada of Roche, GLP-1, 2 of them, injectable as well as oral had good results just the other day.

So, what are your plans for opting in those products to the Japanese market?

[Osamu Okuda, executive]

This is often asked question by overseas investors.

[Shinichiro Muraoka, analyst]

So, how are you going to incorporate these products Roche GLP-1 products into your strategy in Japan?

[Tsukasa Kusano, executive]

So, Roche acquired this subcutaneous once-weekly administration GLP-1 and GIP agonist CT388. And once daily oral GLP-1 agonist, CT-996, the Phase I top-line data was announced by Roche.

And for both studies, and this is just a very initial data, but then they look very good, attractive data that is. But having said that, these are as a result of Phase I trials and only the top-line results are being announced as of now.

So, I would really like to refrain from making any evaluation of the potential of these products going forward, we would have to monitor the follow-up data going forward. In terms of licensing in, we can't really give you any details just yet.

But generally speaking, Roche developed products. We have the development marketing first refusal rights in Japanese market. Therefore, we have to consider what is the domestic market for these products and evaluate the products accordingly.

Not just for these products but for all of the products, each product is, well, we can't really give you any answer in terms of the probability of licensing in of those products from Roche.

[Shinichiro Muraoka, analyst]

What about compared to all 4 in terms of GYN maximization, how should we understand these Roche products?

[Tsukasa Kusano, executive]

Chugai developed a product, which has been licensed out to Roche GYM329 or [indiscernible], we have licensed [indiscernible] cooperation. This presents a new treatment option to patients. And these products may create a big value going forward.

We have high expectations for that. And in creating, they have started already and anti-obesity development is in full-fledged now on their side, and GYM329 first, as has been explained already, Roche has started development and we would like to really watch the Phase I data for GYM329.

We would like to tap into the characteristics of GYM329. Latent myostatin is the target. It's a sweeping antibody vessel muscle mass or muscle strength can be improved quite dramatically by that. That is the potential.

And subcutaneous every once in 4 weeks, this presents a lot of convenience. And there is a lot of potential in combination with other incretin. So, there are many different potentials existing for GYM329.

So, Chugai and Roche are looking at a very wide portfolio of products. And for those patients who are complicated with obesity, we will be able to address a wide variety of patients in that regard.

There is such a potential. It's not just about the widening of the access, but type 2 diabetes or myocardial infarction, cardiovascular complications, several vascular complications, all of these can be addressed with this kind of a product.

And those are patients who are waiting for treatment or who have concerns about the event of complications, we may be able to give a lot of value to these patients. So, we'd like to explore a variety of potential together with Roche.

What about the all 4 996. As for all 4, these 2 trials are ongoing right now. And probably next year, the results of the Phase II trials are going to come out. So, let's take a look at the results of this data and evaluate the product.

[Matsubara, analyst]

This is Matsubara from Nomura Securities. The first question is with regard to Vabysmo, when you look at the materials to Roche, the U.S., Europe, the growth is very strong.

But on the other hand, it seems like there is not much growth in Japan compared to United States and Europe. And would those patients that didn't have the efficacy with existing drugs? Well, how are you going to drive the sales in the clinical scenes with this product?

[Osamu Okuda, executive]

Thank you very much for the question. I'd like to explain the Japanese status with regard to Vabysmo. At the end of March, the RPO indication was added. And at that time, we saw a significant change in terms of the revenue curve.

And the revenue growth itself has been driven. And as was mentioned before, this is for patients for whom the existing drugs didn't have any efficacies. But at this point in time, the evaluation of safety has been confirmed. And for those patients who are using it for the first time, this has been adopted widely.

And on the other hand, the long-term safety was Japanese and efficacy-related data with Japanese have started to have been announced at the conferences. And after 2 years, the improvement on efficacy in the I-side is expected to be continued.

So, this is what was not existent in the past. So, I believe that this will contribute to the treatment of RPO continuously in the future.

So we'd like to promote this with that in mind. So, right now, you are seeing more new patients adopting this. Next is with regard to Hemlibra and Pfizer's and the gene therapy, they're delivering results of the clinical trials.

[Matsubara, analyst]

So, will they become a threat to the Hemlibra? So what's your take on that?

[Osamu Okuda, executive]

So, the question asked right now, this is not just about Japan, but this question applies to the global international. As for the point mentioned, SDH, the International Conference, the Phase III data was announced and comparison of the results that come out of different studies is considered as a taboo and this is not appropriate.

But as far as we look at the data, efficacy compared to the efficacy of Hemlibra, this is not seems to be the case. As was explained with regard to Hemlibra, more than 26,000 patients have administered the drug, and the long-term efficacy and safety-related evidence have been established.

And for those patients who are going through the treatment when they are satisfied with the treatment, there is hesitancy shown by the patients to change the drugs. So, Miv-8 going forward, we are not expecting that Miv-8 will cause a huge impact on Hemlibra.

As for the gene therapy, as far as we know, only a small number of patients have been administered the gene therapy, well, have been taking the gene therapy. So, we do not expect that to have a huge impact on our business.

[Kasumi Haruta, analyst]

I'm Haruta from UBS Securities. I'd like to ask you a question about Actemra versus biosimilars. So, biosimilars penetration is a little bit delayed slower than expected. Do you have any further information about that? Why is the delay?

So, IV products are now launched and subcutaneous products are now being approved. So, is that correct? And what about Actemra's exports? Subcutaneous biosimilars are going to come to the market going forward. So, can you give us more details about the Actemra overall situation.

[Osamu Okuda, executive]

So, Actemra biosimilar situation in the market, according to the public information, we are just collecting public information just like you. So, Furesenius Kabi, Fresenius Kabi has developed a biosimilar product, and they have launched Actemra biosimilar for both IV and SubQ.

Back in April of 2024, the product IV was launched in the United States. And as for SubQ, it was July 2, there was a launch date in the United States. As for Europe, last year, at the beginning of November of 2023, IVSC, both IV and SC were launched.

[Kasumi Haruta, analyst]

But which countries in Europe, those products have been launched?

[Osamu Okuda, executive]

We have not been able to confirm that information.

But looking at the situation of Actemra, the penetration of biosimilars is slower than we expected. Biogen, Biocera, biosimilars are there as well, and I think it's on the IV. And in the United States, May of 2024, this product was launched already in the U.S. for IV. And June 24 in Europe, the product was launched. Sorry, that was the approval on June 24th.

So, across Europe, this biosimilar is going to be launched one by one, I think. And Serotonin is yet another company, which has developed a biosimilar product for both IV and SC. They have filed on January 28, 2024, already and in February 2024, they filed already in Europe as well.

So, that's as far as we know. And I think this is only public information. As for exports, our budget or expectations compared to that, we are actually exceeding. And as I gave you an idea of the progress status, our progress is better than our forecast. So, we may actually overachieve the targets set at the beginning of the year.

So, the launch of biosimilars, because of our good results, we are assuming that the biosimilar penetration is slower than we expected. But I would like to refrain from making further comments.

Phesgo start or launch is quite good in Japan as well. In terms of switching, you see it moving forward.

[Kasumi Haruta, analyst]

And globally, Phesgo, transfer to Phesgo has already been over 40% or switched to Phesgo has been already over 40%. Can we expect the same in Japan as well? And our Perjeta has set in. There can be some cannibalization. But with a good penetration of fiscal heart franchise-wise, net-net, I think, is going to be better than before. Is that right? Is that correct?

[Osamu Okuda, executive]

Yes. Switching to Phesgo and whether this is going to be positive, yes, Herceptin and Perjeta are switching from original Hasceptin and Perjeta to Phesgo, or Haceptin+Perjeta biosimilar, switching from that to Phesgo.

So, both can be expected. So, this is going to be positive. And, in terms of switching to Phesgo, it's within the line of our expectation or better than our expectations in line or better.

So, where are we going to be landing? Of course, we have to monitor the situation, whether it's going to be 40% or above, we would like to aim for a little higher than that. And the current situation, depending on hospitals, the situation may be very different.

[Kasumi Haruta, analyst]

So, what are the focus of each hospital?

[Osamu Okuda, executive]

Depending on that, the switching situation may differ from hospital to hospital, some hospitals may switch all the patients to Phesgo, or depending on patients, especially those patients who have, in combination with chemotherapy, it's not just a Phesgo, but chemotherapy infusion time needs to be considered.

Therefore, they would probably like to continue with the conventional infusion. And then the conventional chemotherapy can give outpatient insurance points, but subcutaneous injection cannot keep outpatient point.

So, depending on what's the focus of each hospital situation may be different from hospital to hospital. But the convenience is there, and I think more doctors are feeding the convenience of Phesgo, so we would like to continue to promote this product strongly. Thank you very much.

[Operator]

We now take questions from those participating on Zoom webinar. [Operator Instructions].

[Seiji Wakao, analyst]

This is Wakao from JPMorgan. Regarding the export revenue of Hemlibra, should give us more details if there is? Well, I understand that there is an upside compared to your plan. And quantitatively, how much upside did you see?

[Osamu Okuda, executive]

If there is a tough quarter in the second half, the second quarter progress is very good. So, we are not sure how we can anticipate the full-year revenue.

And the second quarter, the GP margin was very strong. And with regard to this, the export sales of Hemlibra was that because of this that your GP margin was strong in the second quarter.

As for the full year forecast, it has been disclosed, and we said that there is a high profit that we are exceeding this. But in terms of how much we can expect in the third quarter and fourth quarter, we cannot provide you with the details at this point in time. But one thing we can tell you is that we have a strong momentum.

With regard to the cost, for sure, with Hemlibra, well, with the Ronapreve is no longer coming into our revenue and this has improved the GP margin and Hemlibra grew significantly as well.

And with the Hemlibra, the cost ratio improvement was significant. And please let us refrain from giving you the breakdown.

[Seiji Wakao, analyst]

The third quarter and fourth quarter Hemlibra revenue details cannot be provided. But in the second quarter, how much upside did you see with Hemlibra? Can you tell us that?

[Osamu Okuda, executive]

As we mentioned before, the progress rate is 57% for Hemlibra. So, please refer to that information and how much upside we had as of the end of the second quarter, please utilize this information.

So, the progress compared from the previous quarter is equivalent to the upside.

[Seiji Wakao, analyst]

And as part of the President's explanation, the top line revisions as for the middle molecule, where did you see the challenges? Can you elaborate on that once again? Well, I thought I heard the drug development, the QLC data, the timing at which we will be able to see the QLC data will be next year. Is my understanding correct?

[Osamu Okuda, executive]

As for the middle molecule, TOP I 2030 has been started and LUNA-IT study has started. And the overall absorption in humans have been confirmed. And this increased the probability of success with the middle molecule.

On the other hand, in 2024, POC achievement was one of the milestones, but we haven't reached that point. Within 2024, it seems like we are not getting the POC. And it has taken some time, and that was one of the challenges we faced.

But for other projects with the middle molecule, in the nonclinical side, we have certain progress with some of the projects. So, overall, with regard to middle molecule, we have had solid progress.

The other is that the drug development technologies. With regard to the middle molecule manufacturing technologies, we have considered significantly, and we have had solid progress with regard to that.

[Seiji Wakao, analyst]

So, Royal timing as delayed from the original plan, but for the technical side of efforts, there is not much delay. Is that right?

[Osamu Okuda, executive]

Yes. The oral absorption was confirmed. And the concept that we had with the middle molecule was now confirmed, and that was a big progress.

[Seiji Wakao, analyst]

The LUNA 18 is expected to be obtained next year. Is that right?

[Osamu Okuda, executive]

Well, when it comes to when we will be able to obtain the POC, the information is not disclosed at this point in time. As soon as we are ready, we'd like to share the information that we'd like to say that this 2025 or onwards.

So, when you say that this will be in 2024, with some delay, the early timing in 2025 is when we can expect. That was the early explanation. But according to what I have just heard, it could be possible that this will be realized only in 2026.

Well, we have never articulated the clear timing from Chugai, but when it comes to obtaining the early pork or park, this will depend on the progress of the project and the status changes day by day. So, one of the learnings that we had this time is that the best timing of the project is assumed within the team.

So, we have the internal milestone, but there are some unexpected events. So, communicating all of these unexpected events to external parties is something that we'd like to refrain from at this point in time. Thank you very much.

[Unknown Analyst]

This is Soji speaking. I have 2 questions. First, this is on the extension of Wakau's question. Okuda Osamu, in your presentation, you spoke about acceleration of the earnings stage clinical development, and there are challenges there, and you are going to respond to this problem. And what kind of measures are you thinking of in order to respond to this program of the acceleration of the early-stage development?

[Osamu Okuda, executive]

TOP I 2030, we started it, and we have obtained major outcome, which means that from drug discovery to development stage, many of the projects are moved to development stage, 8 of them altogether.

Many projects on the early-stage development are there. But from your perspective, also, I assume that they are not really moving to the next stage, as quickly as we would like to see.

For each project wise, I'm not going to go into the details because of the competition. But we do believe that we need to accelerate each project in the early stage of development. So, what should be done? We have some specific ideas.

So, one is the clinical study design go, no-go decision criteria when designing a clinical trial should be set clear and then conduct clinical trials for us that end.

When the results of the clinical trial are out, we do have scientific assessment to judge whether to go ahead or not. And if the hypothesis that we assume was not really backed up by the results of the clinical study, then we would have to say no.

So, we will have to make that judgment appropriately and earlier than before. And by doing that, we have a lot of projects in the early stage of development right now. And for some projects, we can concentrate more of our resources on some projects and accelerate some of those projects even further.

[Unknown Analyst]

So, may I ask you another question? So, as a challenge, what you have defined is that once the data is out, it's too slow for you to make a decision to move on to the next step. Is that one of the reasons why you think you are too slow?

[Osamu Okuda, executive]

Well, yes, data is obtained in many different homes and go no-go criteria set at the beginning. That has to be more scientific so that we can make a judgment on go no-go more clearly

[Unknown Analyst]

Another one is a question about Hemlibra. So, according to what you said, and looking at the results of Roche, overall sales roles, where I think your export overseas sales actually exceed the actual sales on the ground. And Taniguchi already explained to us that the sales volume alone is not the factor.

But internationally, sales is growing very strongly. And because of that, the inventory is increasing, that's how I understood the comments given by Taniguchi-san. So, if that is correct, or is my understanding correct, to begin with? And if that is the case, over time, international inventory is going to be stabilized, so to speak? Is my understanding correct?

[Osamu Okuda, executive]

Well, local sales growth is exceeded by our export sales. Yes. And if that is the case, yes, it's because of the inventory being built.

But then there are certain differences across different regions. Internationally, our growth is 32%. And internationally, unit prices are lower. But then volume-wise, I think that is well compensated and export sales are really increasing. Well, I think that is the background, but I can't really give you any further breakdown

[Operator]

Next, we will take questions from Mr. Hashiguchi from Daiwa Securities.

[Kazuaki Hashiguchi, analyst]

Oncology innovations. With regard to this, TOP I 2030, this is the first time to hear the explanation about this. Compared to the past, the open innovation, strengthening policy is where I felt difference from the past month.

But after this, I haven't seen conspicuous progress. It's been just 3 years. So, there is not much outcome that is publicized, and that's not a surprise, but the reflection made by Dr. Okuda and the guidelines for the future, he really referred to the open innovations.

And, at this point in time, how do you evaluate the progress to date? And how are you going to take on these initiatives going forward? The reason why you didn't mention this is because the resources internally have been bolstered. So, the necessity of open innovation has come down, and that's what I felt it is about. So, it's my understanding correct?

[Osamu Okuda, executive]

Mr. Hashiguchi, thank you for your question. With regard to open innovation, TOP I 2030, this is one of the 3 key drivers, and we have focused on this for a while.

There are not many deals and projects that we are able to explain to the external stakeholders but with regard to 5 reform, the third pillar for the drug discovery is about this. And external technologies will be leveraged at the same time as the internal technologies and the target molecule technologies and our own technologies will be utilized to expand the scope of drug discovery, and we'd like to make sure this will generate outputs.

Well Chugai Venture Fund, the corporate venture fund was established this year and it started its operations. Well, their activities have already started. And because of this, the start-up in U.S., their information started to come through.

We cannot talk about the future, but based on the information we're getting from them, there could be some projects where we can collaborate, and we may be able to consider providing funds. And as that company rises, then that will create opportunities where Chugai will be able to collaborate.

Right now, we're in July and the JPMorgan Healthcare Conference, well, we actually declared that this is something we're starting. But at this point in time, in terms of the flow of the information from them, we're getting a strong stream of information inflow.

So, going forward, we opened innovation through collaboration with external stakeholders is something that we are expecting to see in the future out of these initiatives.

[Operator]

Thank you. From Bloomberg, Dan, please.

[Unknown Analyst]

Well, I would like to ask you about Inflation Reduction Act, putting a lot of pressure on drug prices in the United States. What kind of impact are you seeing? And presidential election is just around the corner. How is it going to affect your company going forward?

[Osamu Okuda, executive]

Thank you for your question. So, the first question, I couldn't really hear that. Inflation Reduction Act in the United States, how is it affecting our products in the U.S.? Is that your question, I think? About IRA, I think 10 or so products have already been designated and more products are to be added this year.

But so far, none of our products are being affected because of IRA. But depending on the size of the molecules, 9 years or 13 years after those years, price negotiation may start. This is a scheme proposed.

So, the drug discovery and development strategy of our company may be affected to a certain extent, and that has to be kept in our mind in coming up with our strategy. In terms of the presidential election, it's quite a mark the situation.

So, Biden has stepped down from the race. Harris is probably the candidate. So, it's very difficult to see what is going to happen. But the Republicans or Democrats, either way. In terms of drugs, I don't think any positive wind is blowing in that regard. So, I think that's as far as I can say about the presidential election.

[Unknown Analyst]

So, in terms of development, which may be affected going forward in the U.S. and that has to be kept in mind in the long run, right? What you are saying is that the direction of the development? Is that going to be affected or prices?

[Osamu Okuda, executive]

Low molecules with smaller molecular weights, the exclusivity period is only 9 years. So, a price negotiation can take place earlier, much earlier. And this is generally speaking, drug discovery-wise, when we come up with new projects. And if it's bigger molecules like antibodies, is that a better approach? Or are we going to go for more low molecules or midsized molecules? If we have options, which one should we go for? I think that is the kind of consideration we need to have.

And IRA, I wonder whether this law or act is going to be kept intact. Of course, we have to take a look at that. Depending on the rule of IRA, the strategy of drug discovery should it be altered? Is that a good idea? That is a fundamental question. That's why I said it has to be kept at the back of our minds.

There are certain needs on the part of the patients. And if our technology and science can satisfy those needs, we would like to go for it all the time. That's why I said at the back of the mind, it has to be kept.

[Operator]

Sorry, but due to time constraints, we'd like to take the next question as a last question. Mr. Wada from SMBC Nikko Securities.

[Unknown Analyst]

This is Wada from SMBC Nikko Securities. Regarding GYM329, so the development is underway for the indication of VCD that as active [indiscernible] Phase 2, the good results are coming out. GYM329 is also with [indiscernible]. What is the positioning are you aiming at with GYM329. And right now, in Phase I, what kind of data are you expecting out of the Phase I this point in time?

[Tsukasa Kusano, executive]

Mr. Wada, thank you for your question. This is Kusano. I will answer your question. First off, Phase 1 initiated by Roche and led by Roche. Let me briefly explain about this. Roche initiated the study and the healthy overweight people, the PK/PD and safety have been evaluated.

As you know, GYM329 with the combination with the drug, we are progressing the test targeting that. And this time, we are utilizing the healthy overweight adult people to evaluate the PK/PD and safety.

And based on the results of this study, we'd like to determine the endpoints in order for this to move on to Phase II. With regard to the comparison with other drugs, as I mentioned before, GYM329, this is targeting the myostatin, sweeping antibody. This is administered once every 4 weeks.

And activin recipient, there is another antibody for that. But as a result of nonclinical test, GYM329 has confirmed to have the efficacy to increase the muscles. Why we are seeing this result is that myostatin has similar proteins and GDF11 is what it is called.



And the structure is quite similar with this, especially the mature type and active type myostatin. Almost all of them, 90% of the structure is the same. So, for the mature type and active type myostatin and if the antibody targets that, GSF11 is connected.

Activin GOV, the body connects to that and this will be neutralized with them. So, GBFM is captured. GBF11, after neutralized, if there is no problem, then that is okay. But with myostatin, the structure is similar. However, when it comes to increase the muscle, the mechanism is quite different, and it will have the negative mechanism in my opinion.

So, the myostatin GYM329, GTF11 will not be inhibited. So, we can expect a stronger efficacy. That is our hypothesis. We are going to do further studies to validate the hypothesis based on the results of the clinical trials. That's what we are currently thinking.

[Operator]

Thank you very much. With that, we're now approaching the end of the allocated time. So, we'd like to conclude this Q&A session. With that, we'd like to close the earnings call for Chugai Pharmaceuticals for the second quarter of FY 2024.

For those questions which we weren't able to answer, we'd like to follow up individually. Last page of the presentation document shows the email address and phone numbers for your other questions. Thank you very much again for participating in this earnings call.