Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2020-Q3

[Toshiaki Itagaki, executive]

Good evening, ladies and gentlemen. This is Itagaki. I will start explaining the slides.

Please look at the second page. It is a financial overview. In the cumulative third quarter, revenue was JPY 576.5 billion. Operating income was JPY 231.9 billion, and both sales and income grew by double digits, which reached record highs for the fourth consecutive year.

Revenue performed generally well with a progress rate of 77.9% compared to the full year forecast. Operating income and quarterly income have been strong, exceeding 80%.

Before getting into the details of the financial results, I would like to touch upon some of the events that have occurred in the last 3 months. Please see the third page. It is a summary of business updates. The events listed in blue are related to the development pipeline.

ENSPRYNG was approved in the U.S. and launched in Japan in August. KADCYLA and Tecentriq have been approved for indication expansion. We will discuss pipelines data in the R&D section. So here, I will focus on events that are in the black.

Over the last 3 months, there has been a lot of talk about ESG and digital. In terms of ESG, we continue to be designated as 1 of the 4 investment index stocks adopted by GPIF in August.

In September, we held an ESG briefing session as we did last year. In the digital field, joint development with Biofourmis began in July. In September, we achieved results such as the introduction of line works and completion of a demonstration test using AI with NTT DATA.

In August, as one company from the pharmaceutical industry, we were selected as a DX brand by the Ministry of Economy Trade and Industry and the Tokyo Stock Exchange in response to these activities. Both ESG and DX are important themes that support our sustainable management base, and we will continue to promote them.

COVID-19 pandemic has various influence disruptively on the sustainability of economic, medical and social life. On the fourth page, I summarized what kind of impact the spread of COVID-19 actually has on our value chain.

There is no significant negative impact on the financial results. In terms of profits, the introduction of Tecentriq and Hemlibra to the market has been delayed due to the self restraint of sales activities and a decrease in the number of inpatients. But the strong exports have fully absorbed the negative impact of the domestic market.

Although some of the activities of each company are affected, it is within the range that can be recovered eventually. Taking this change into development as an opportunity, we'd like to further promote digitalization, change business process and working styles, realize efficiency, productivity improvements and the speed up of each function and value chain.

Now from here, I will enter the detailed explanation of the financial results. Please turn to Page 5.

It is outlined, profit and loss. Revenue posted a record of JPY 576.5 billion, a year-on-year increase of JPY 67.6 billion, 13.3% up. We divide revenues into 2: sales were plus JPY 24.3 billion, growth of 5.5%; and royalties and other operating income was plus JPY 43.3 billion, an increase of 63.3%.

As for the breakdown of each, domestic sales decreased by 6.5% due to the effect of drug price revisions and generics. On the other hand, overseas sales increased by JPY 45.60 billion due to an increase in Actemra exports caused by COVID-19 and shipment of Hemlibra at a regular price, resulting in a significant increase sales of 39.3%.

Next, royalty and profit-sharing income increased by JPY 40.3 billion due to royalty income related to Hemlibra. And other operating income also increased by JPY 3 billion due to onetime income.

Cost of sales improved 2.6 points to 43.1% due to the fact that the sales -- the completion ratio of in-house products is increasing and the export price of Hemlibra too was -- became the regular price from this time. 43.1% is the lowest cost rate in 9 years since 2011.

Selling expenses decreased by 3.9% due to self-restraint in sales activities, while R&D expenses increased due to the progress of development themes, resulting in a total increase of JPY 7.8 billion in expenses. As a result, operating profit was JPY 231.9 billion, a year-on-year increase of JPY 60.8 billion, a significant increase of 35.5%.

The operating margin was 40.2%, the first 40% level in the third quarter. After deducting financial balance and the corporate income tax from this, quarterly net income increased by JPY 165.6 billion, that is plus JPY 41.1 billion and 33% up.

Page 6 shows the breakdown on changes in sales. Looking at the sales by disease area on the left, the top overseas is JPY 161.6 billion, a growth of 39.3%. Looking at the sales by products on the right, the top 1 -- 2 of the increased products were overseas. Actemra overseas is positive JPY 30.4 billion and Hemlibra overseas is positive JPY 18.4 billion. ENSPRYNG overseas recorded JPY 1.6 billion. Alecensa overseas is also listed on the side of reduced sales, but the export volume itself has increased by about 20% due to the export unit price decrease and the impact of the strong yen.

Returning to the graph on the left, as you can see in the note in the center of the domestic sales, sales were JPY 303.2 billion, a decrease of 6.5%. Oncology, in the bottom box, decreased by 6.8%.

In terms of products, Tecentriq, Perjeta and Alecensa, which are shown in the dark orange, increased sales among oncology products with sales decrease by minus 17.3% for Avastin; 39.4% for Herceptin; 40.2% for Rituxan; and 56.3% for Xeloda, which were affected by drug price cuts and biosimilars or generics.

Next, sales in bone and joint area decreased by 9.7%, and the sales in Edirol decreased by 10.7% due to the influence of generics. Sales of Actemra decreased by 7.7% due to the impact of drug price reductions due to market expansion recalculation.

Sales in the renal disease area also decreased by 18.9%. Sales of Mircera decreased by 22.3%. Finally, others grew by 9.6%, with a record JPY 42.1 billion. Sales of Hemlibra, domestic, increased by JPY 7-point billion (sic) [ JPY 7.8 billion ], and Foundation Medicine increased by JPY 1.9 billion, resulting in JPY 2 billion. Sales of Tamiflu ordinary decreased by 85.1% due to the lowest influenza epidemic in the last decade.

Page 7 is a graph showing the breakdown of operating profit, increased by JPY 60.8 billion. The second item from the left is gross profit from sales. Sales themselves increased by JPY 24.3 billion. The cost rate improved by 2.6 percentage points due to product mix and Hemlibra exports at regular prices, and the cost of sales itself decreased by JPY 1 billion. As a result, gross profit increased JPY 25.4 billion.

Next, regarding ROI. ROI increased by JPY 43.3 billion, including royalty income related to Hemlibra and onetime income. The entire amount increases operating income. In other words, out of the increase in operating income of JPY 60.8 billion, JPY 43.3 billion, or about 70%, is due to the increase of ROI.

As for expenses, SG&A expenses were not digested due to the influence of COVID-19, decreased from last year. R&D expenses increased by JPY 10.2 billion. According to the forecast announced at the beginning of the term, R&D expenses are expected to increase by JPY 12.9 billion for the full year. So it can be said that the increase of JPY 10.2 billion in 9 months is almost as planned.

From the next page, we have prepared the graphs showing in -- the transition by quarter. First, Page 8, it is a structure of revenues by components. Domestic sales, which had been the majority so far, reached 47.3% in the third quarter, and sales fell below JPY 100 billion. On the other hand, overseas sales increased steadily, including royalty income, and there was a onetime income of JPY 13.6 billion in the third quarter.

Royalty income and other operating income can be classified into domestic and overseas. Detailed numbers are given on Page 6 of the supplementary material of the brief report, so please see it later.

The ratio of overseas revenue to all revenues was 51.7% in this third quarter. For the first time, a network-making change has occurred in which overseas profits exceeded domestic profit.

Page 9 shows the cost structure. The cost rate has been around 43%. M&D expenses are affected by self-restraint in activities in the third quarter, JPY 16.7 billion, which is as low as 8% of sales. On the other hand, the sales ratio of R&D expense was 14.1% in the third quarter, which is 6.1 points higher than 8% of sales promotion expenses.

In last year's third quarter, the sales ratio for R&D expenses and M&D expenses were 30.8% and 9.5%, respectively, so the difference was 3.3 points. The widening gap means that resource allocation is shifting from M&D expenses to R&D expenses.

Both the amount and the rate of operating income are on the rise. Especially in the third quarter, the increase in income that contributes to operating income such as royalty income and onetime income increased. So the amount and rate of operating income increased.

Page 10 shows the quarterly trend in sales by disease area. In this year's second and third quarter, the ratio of overseas sales reached the 30% level due to the export of Actemra by COVID-19, and the increase in export of Hemlibra export at the regular price.

On the other hand, in Japan, compared to the same period of the previous year, there was provisional demand in the third quarter of last year due to the consumption tax hike in October. And this third quarter was affected by the drug price revision in April this year. It will be negative compared to the previous time.

In terms of the launch of generics and biosimilars and market penetration, the negative impact is increasing as the quarter progresses.

Looking at oncology. Sales decreased by about JPY 10 billion compared to the last year's third quarter. As shown on the right, Avastin decreased by JPY 6.6 billion and Herceptin decreased by JPY 3.1 billion. Sales of bone and joint decreased by JPY 6.3 billion compared to the third quarter last year. And sales decreased by JPY 3.4 billion compared to second quarter. You can see that Edirol, launched in August, is greatly influenced by generics.

Next, I would like to see, on Page 11, how progress is being made against the full year forecast announced at the beginning of the term. First, domestic sales in the third line from the top is 73.7% progress, which is behind last year's 74.1%.

Due to the spread of the corona infection, the market penetration speed of new products and indication expansion is slower than expected. Overseas, Actemra has been exported more than expected, and the progress is quite fast at 96 point (sic) [ 96% ]. And for royalties, et cetera, income related to Hemlibra is progressing slightly slower than expected. Other operating income has already exceeded the full year forecast due to the onetime payment being made earlier than expected.

Cost to sales ratio is generally within expectations. Expenses, R&D expenses, 71.5%, which is comparable to last year, but SG&A expense may end this time with the budget undigested.

Summarizing the above, although domestic sales have been slightly delayed, it can be said that the overall revenue is generally favorable due to the upside of exports. In addition, due to the undigested expenditure, I think it can be said that operating income and net income are strong, which is more positive than steady.

Page 12 shows sales progress. Starting from this year, April, the drug price has been reduced from 15% to 27% due to the conversion of the new drug development premium and the recalculation of market expansion. The progress against the full year forecast should look good, and the sales of the first quarter before the drug price revision, has that much advantage. The affected products, our 5 products, Avastin, Perjeta, Xeloda, Actemra and Hemlibra. Even after deducting that advantage, Avastin and Perjeta are doing pretty well.

On the other hand, there are cases where the switching timing of Hemlibra has been postponed due to the influence of COVID-19, and the progress is delayed. Similarly, there are some products whose progress rate is low due to the COVID-19.

Tecentriq was affected to its market penetration speed; GAZYVA, which was affected by switch from Rituxan; and Bonviva, which was affected by drug suspension and switching to oral medications because the number of prescription days couldn't be extended from once a month.

In these cases, achieving the expected amount has become a little difficult. Overseas, Actemra has already exceeded the full year forecast and ENSPRYNG has also achieved the full year forecast of JPY 1.6 billion in the third quarter. Alecensa and Hemlibra are also making good progress. So I think we can achieve our expectations.

Page 13 is about Hemlibra sales to Roche. First, export sales are shipping at regular price from this year. It was JPY 20.4 billion in the third quarter compared to the full year forecast, JPY 23 billion.

Regarding royalty income, we call it royalty 2, we have the royalty income for the initial shipment. Only that forecast is disclosed, and the third quarter actual result was JPY 52.5 billion, and the progress rate was 61.3% compared to JPY 85.7 billion for the full year, royalty 1 and profit share.

As far as royalty 2, it will depend on Hemlibra sales in the Roche territory. According to Roche, the number of new patients acquired by Hemlibra has stagnated in the second quarter, and it has recently begun to recover, but I think it will be a little difficult to recover the delays so far on a full year cumulative basis. Neither of the royalty 1, 2 and profit per share we receive may reach our full year forecast.

That was all for the status of profit and loss, and I will use the remaining 2 slides to explain about the balance sheet and cash flow.

First, on the balance sheet, we have continued to maintain a sound and robust financial position. As indicated on the left bottom of the slide, as of the end of September, total net assets stood at JPY 925.3 billion, up JPY 71.3 billion from the end of last year.

The ratio of equity attributable to Chugai shareholders was as high as 81.4%. The chart on the top shows the breakdown of the net assets. The net operating assets of JPY 633.6 billion is the assets used for the operation of the business, accounting for about 70% of the net assets. The remaining 30% is net -- nonoperating assets, representing JPY 318.8 billion in net cash.

Page 15 shows factors that increased and decreased net cash. Starting from the second bar from the left, when you subtract from cash inflow the increase in net operating assets and total investments, you are left with JPY 140.3 billion in free cash flow. When you subtract from that amount income tax payable and dividend paid, then you will get JPY 318.8 billion in net cash. This was the first time the balance of net cash exceeded JPY 300 billion as of the end of September.

That is all for the main part of my presentation. There are 6 small pages to follow in appendix, of which Page 22 is the only page I want to explain about.

In 2017, when the export of Hemlibra was started, a similar slide was included in the presentation. Since the export of ENSPRYNG has been started this year, we have put together an updated version.

ENSPRYNG, like the other products shown here, is produced by ourselves and exported to Roche. We receive royalty depending on Roche's sales to customers. Unlike Hemlibra, it is not going to be exported at an initial supply price. And therefore, the royalty received is only for those exported at ordinary supply prices. So there is no royalty payment, royalty 2 payment.

There will be no co-promotion unlike Actemra or Hemlibra, no promotion services unlike Alecensa. In Roche territories, Roche will sell ENSPRYNG by themselves.

That's all for my presentation. Thank you for your attention. Next, Minoru Hirose, Head of R&D Portfolio Management Department, will give you the overview of development pipeline.

[Minoru Hirose, executive]

Thank you. I'm Hirose, Head of R&D portfolio management department. I will talk about the status of development pipeline in the third quarter.

Please take a look at Page 24. This slide shows projects under development in the areas of oncology and bone and joint as of October 22. Those marked with red stars are the projects that have changed from the last earnings report. I will explain more about individual projects, but in oncology, one in-house project started a Phase I study. Moreover, RG6058, or tiragolumab, started a Phase III study in combination with Tecentriq. Tecentriq started a Phase III study in combination with cabozantinib.

Page 25 shows projects under development in areas of renal, autoimmune, neurology and others. In the area of others, an in-house project, crovalimab, started a Phase III study. In neurology, application for approval was filed for risdiplam for spinal muscular atrophy.

Page 26 shows key new flows in the third quarter. In August, ENSPRYNG was launched for neuromyelitis optica spectrum disorder in Japan and was granted approval in the U.S. KADCYLA was approved for an additional indication of HER2-positive early breast cancer as a postoperative adjuvant therapy.

Tecentriq and Avastin were granted approval for the treatment of unresectable hepatocellular carcinoma based on the result of Phase III IMbrave150 study as the first ever immune oncology therapy for HCC.

As for filing, applications for approval were filed for expanded use of FoundationOne CDx cancer genomic profile as a companion diagnostic for larotrectinib for NTRK fusion gene positive cancer and for pemigatinib for FGFR2 fusion gene positive, locally advanced or metastatic cholangiocarcinoma.

Those which have seen phase progress include crovalimab, for which we joined a global Phase III study for Paroxysmal nocturnal hemoglobinuria. More details of the study will be explained later in my presentation. As for RG6171, a selective estrogen receptor down-regulator, we joined a global Phase III study for estrogen receptor positive, HER2-negative, locally advanced or metastatic breast cancer.

As for new projects added to the pipeline, SPYK04, an in-house project, started a Phase I study for solid tumors. We started a global Phase III study for Tecentriq in combination with cabozantinib for renal cell carcinoma, which I will also discuss in more detail later.

We also have joined global Phase III studies for tiragolumab in combination with Tecentriq for Stage 3 non-small cell lung cancer and esophageal cancer, respectively. A total of 4 studies for the combination of tiragolumab and Tecentriq are now underway. We have already announced the top line data of COVACTA and EMPACTA studies for Actemra for COVID-19 pneumonia, led by Roche.

Regarding medical conferences, relevant data was published, which supported a good safety profile and continued effect of ENSPRYNG in reducing severity and risks of relapse for longer-term in neuromyelitis optica spectrum disorder. We also published the result of a study after 2 year treatment using risdiplam for type 1 spinal muscular atrophy, which will be discussed in more detail later.

For others, an application for approval was filed in the third quarter for nemolizumab by its licensee in the Japanese market, Maruho, for atopic dermatitis. STA551, for which a Phase I study for solid tumors was started in March this year, had a paper describing its nonclinical research results published in Cancer Discovery. I will explain about the mode of action of STA551 later. Antibody engineering technologies were licensed out to argenx and Novo Nordisk.

Please turn to Page 27, where you see our responses to COVID-19. In terms of major clinical trials, in addition to Roche-led COVACTA and EMPACTA studies for which top line results were already published, J-COVACTA in Japan and REMDACTA for combination with remdesivir are underway.

Roche is aiming to file for approval overseas based on the result of the EMPACTA study by the end of this year, but it is still carrying out further analysis using the clinical results of EMPACTA study. It is expected to have discussions with the regulatory authorities with regard to the results of the study and timing of filing.

We're also working with A*STAR to develop antibody drug against COVID-19. By using our proprietary antibody engineering technologies, we are seeking to come up with candidate compounds.

Furthermore, we licensed out to Eli Lilly the rights to use Chugai's antibody engineering technologies for their research activities to develop COVID-19 treatments and the rights for the development and marketing of therapeutic antibodies applying the technologies.

Please turn to Page 28. Here, you can see our basic strategy for the cancer immunotherapy as Roche group. After starting with the monotherapy with Tecentriq, we have now obtained approval for combination therapies with the existing medications for non-small cell lung cancer, small cell lung cancer, triple-negative breast cancer and hepatocellular carcinoma, among others.

As for the combination with novel cancer immunotherapies, we are carrying out a global clinical study in combination with tiragolumab. With our in-house compound, STA551, we're working to provide new treatment options in combination with Tecentriq.

Please see Page 29. We have started the Phase I study in March this year for STA551, which is an anti-CD137 agonist antibody, using the switch antibody technology developed by Chugai. We hope that only in the presence of ATP, STA551 binds to CD137 and activates T cells.

It has been known that usually around cancer tissues, mainly due to the disruption of cancer cells, a large amount of ATP is being released, making the concentration of ATP higher than normal tissues or inside the blood. Therefore, we expect STA551 to work as an antibody only when it is in the vicinity of cancer tissues.

For conventional anti-CD137 antibodies currently under development, severe toxicity such as hepatotoxicity has become a main clinical issue, making it essential to provide tumor selective CD137 agonist signal induction. And therefore, we are having high hopes for the clinical effect of STA551.

Please turn to Page 30. As was explained at the slide, for the overall development pipeline we are working with Takeda Pharmaceutical to evaluate a possible clinical effect of the combination therapy of Tecentriq and cabozantinib for multiple tumor types.

Cabozantinib is a multi-kinase inhibitor against VEGFR2 and MET and AXL, among others. Multiple immunological effects are expected to be seen, such as inhibition of regulatory T cells and myeloid-derived suppressor cells through inhibition of VEGF signaling pathway, increasing tumor-infiltrating T cells through inhibition of TAM family, and changed from M2 macrophage to M1 macrophage, which works for induction of inflammation and immune response.

On Page 31, you can see clinical studies for combination therapies with cabozantinib. They are for the second-line treatment of NSCLC and renal cell carcinoma as well as treatment of prostate cancer.

Please turn to Page 32. Here, we have shown 2 global clinical trials started for crovalimab for the indication of paroxysmal nocturnal hemoglobinuria. One is for patients currently treated with complement inhibitors and the other for patients not previously treated.

The primary endpoint for the former is the mean percentage change in LDH levels from baseline to week 25, while for the latter, called COMMODORE 2, the percentage of participants who achieved transfusion avoidance and hemolysis control from baseline to week 25.

Please look at Page 33. This is a summary of 2-year data of FIREFISH study conducted for risdiplam in infants with type 1 spinal muscular atrophy presented at an international academic congress the other day.

Continuous improvement in infant motor function was achieved for the first and second years. At month 24, 88% were alive and required no permanent ventilation and 59% were able to sit without support for at least 5 seconds, demonstrating an excellent clinical effect. Risdiplam is suitable for home care due to an orally-administered liquid, which allows us to hope that we can provide new treatment options for patients and their families.

Page 34 shows projected submissions. Page 35 outlines companion diagnostic indications of FoundationOne CDx cancer genomic profile. That is all from me. Thank you for your attention.

[Unknown Executive]

Thank you very much for your attention. The presentations are over. Now we would like to take questions. And Hidaka, the sales head is also with us. Now I would like to start the question-and-answer session.

[Unknown Executive]

Here is the first question. Mr. Hashiguchi of Daiwa Securities, please.

[Kazuaki Hashiguchi, analyst]

Hashiguchi speaking. The first question is about overseas sales. It seems that progress is high, not only Actemra, but all others in terms of the full year forecast. But how should we understand each future outlook? Could you tell us about the inventory status of Roche, too?

[Toshiaki Itagaki, executive]

Thank you, Mr. Hashiguchi. This is Itagaki. About the export of Actemra, first of all, as you know, due to the influence of COVID-19, we couldn't do anything in the second quarter. But after that, the results of COVACTA study came out at the end of July.

And the result of the third quarter, is concerned to be a pause or a possible inventory adjustment. However, Roche's Actemra sales in the third quarter were announced last week. That was a 27% increase, so I think the momentum is still strong, especially in Roche's international region, including India and South America. The international region total increased by 209% compared to the last year.

Fueled by this, our sales by September were JPY 96 billion, which has already exceeded the full year forecast of JPY 88.8 billion. If the momentum continues until December, annual sales and exports will theoretically exceed JPY 120 billion. I think it will get closer to that.

Alecensa is also doing well. And looking at Roche's external sales, in Europe and U.S. first line, or international, China, it is listed on the reimbursement list, and sales are increasing. Our exports are also affected. The export volume base continues to grow by more than 20%, although the export unit price decreases slightly and there is influence of yen appreciation, but it will be strong, and the forecast can be achieved. Hemlibra's export at JPY 20.4 billion, 89% progress of the full year forecast of JPY 23 billion. For fourth quarter also, we are receiving export orders, so it will exceed our forecast in the end.

Finally, ENSPRYNG exports. It has already achieved the full year forecasts. We are planning to ship the fourth quarter as well, so the full year forecast will be higher. That's all. Thank you.

[Shinji Hidaka, executive]

As for Actemra, looking at year-on-year, Roche's sales in the third quarter are certainly increasing. Looking at the quarter-on-quarter basis. I think it has decreased compared to the second quarter.

Under such circumstances, Mr. Itagaki's explanation now shows that the situation remains high in the second and third quarters. The situation is likely to continue in the fourth quarter. How should we understand the difference of the trends, these Roche sales quarter-on-quarter basis?

[Unknown Executive]

Roche grew from the first quarter, 30%, and the second quarter, 40%. Compared to that, it is third quarter, 27%, and it includes long array indications. It has dropped slightly from the second quarter, but I think the high momentum continues.

Of course, after this, a combination study with remdesivir will be read out at the beginning of the year. Until then, the third quarter momentum will continue in the fourth quarter. Roche's global sales are not something that I want to comment on, but I think it will continue in this year as we have export orders for Roche.

[Kazuaki Hashiguchi, analyst]

Is Roche's inventory at an appropriate level? It will change depending on REMDACTA study, but what do you think about the inventory level?

[Unknown Executive]

Looking at the sales trends by region, the growth of the U.S. was quite high in the second quarter. But the third quarter was a little subdued. And it was in the lower 10% range.

On the other hand, international has risen sharply in the third quarter. We don't think there is excess inventory left in the distribution, perhaps already used as off-label in the marketed areas.

[Kazuaki Hashiguchi, analyst]

As for the pipeline, you introduced a Phase III study of crovalimab, that is comparison with eculizumab. And as a primary endpoint, if no inferiority can be achieved, it will be a study success. Is that the study design?

[Minoru Hirose, executive]

This is Hirose. Your understanding is correct.

[Unknown Executive]

The next question is Mr. Yamaguchi of Citigroup Securities.

[Hidemaru Yamaguchi, analyst]

This is Yamaguchi of Citigroup. Can you hear me?

[Unknown Executive]

Yes.

[Hidemaru Yamaguchi, analyst]

I have 2 additional questions related to Actemra's COVID. First, the domestic COVID study with 10 subjects. The plan is scheduled to be continued until March next year. I think you will get them soon depending on how you do it. Is there a change or guidance on the timing of domestic top line release? Filing is planned next year.

[Minoru Hirose, executive]

This is Hirose. Sorry, we will not disclose the current status and sample size, but I think we will consider our submission in Japan, watching the status of Roche's REMDACTA study.

[Hidemaru Yamaguchi, analyst]

Does that mean that you should consider the situation of the REMDACTA rather than the data of this study itself?

[Unknown Executive]

Well, that's right. That understanding is correct. So it's a combination. I mean, not only this, but the data of REMDACTA next year is a point.

[Hidemaru Yamaguchi, analyst]

Yes, understood. Also regarding Actemra, you talked about U.S. emergency use filing. It cannot be done immediately, but you need to analyze data and negotiate. Please tell me this nuance of your explanation in more details.

[Minoru Hirose, executive]

This is Hirose. As I explained earlier, I heard that we will discuss with authority, including analysis of data.

[Hidemaru Yamaguchi, analyst]

Understood. There was no particular explanation for SPYK04 in the pipeline, but I think it is an oral molecular target agent. Will it be explained in the future? Or will you not explain for a while? Or if you know the mechanism, can you tell or can you disclose it? Or you can't?

[Unknown Executive]

First of all, regarding disclosure, we are sorry at this point in time, but we don't disclose it. We will disclose and explain when it is appropriate to disclose.

[Hidemaru Yamaguchi, analyst]

Understood. Finally, the progress of royalty 2 of Hemlibra is apparently weak, a little over 60%. As you mentioned earlier, this is linked to the weakness of global sales. The growth started again from Q3, but will not achieve for the full year, linked to sales. It's not phasing, but should it be considered that the result will be slightly weaker this time and grow again from the next term onward?

[Unknown Executive]

Yes, that's right.

[Hidemaru Yamaguchi, analyst]

There was also a talk of JPY 30 billion regarding the export of Actemra, but is it difficult to comment on what will happen on a year-on-year basis next year, which will depend on the future development?

[Unknown Executive]

We are [ reticent ] to comment. We have no idea.

[Hidemaru Yamaguchi, analyst]

So you don't know?

[Unknown Executive]

That's correct.

The next question is from Mr. Muraoka from Morgan Stanley MUFG Securities.

[Shinichiro Muraoka, analyst]

Morgan Stanley MUFG Securities. Mr. Yamaguchi asked about exports of Actemra for the next fiscal year, but I would like to ask about so-called royalty 2 in the next fiscal year. Given the momentum at Roche in the third quarter, if you are to draw the arrow of royalty 2 into the next fiscal year, do you expect it to extend until the end of the next year? Or to end somewhere in the middle of the year? Could you share with us your take on that?

[Unknown Executive]

What is certain is that the timing for the sell-through of the inventories from initial shipments has been moved down from what we had expected at the beginning of this year because Roche's sales to its customers has been slower than planned. We have not disclosed when we expect the inventories to run out, but if they do, the impact on our revenues will be significant enough. And therefore, we plan to share the information at the right timing, but the timing is not now.

[Shinichiro Muraoka, analyst]

When you come forward with your guidance for the next fiscal year in February, by looking at the figures presented, we should, of course, be able to tell whether royalty 2 will continue to be received for the full year or stop coming in before the end of the year, shouldn't we?

[Unknown Executive]

Yes. We plan to disclose the forecast for royalty 2 for the next fiscal year, so I would assume that you can get an idea about how it will play out by looking at the volume.

[Shinichiro Muraoka, analyst]

My next question is about SKY59 or crovalimab. Since this is a global clinical trial, do I understand correctly that the global application for approval is also going to be in 2022, not just in Japan?

[Unknown Executive]

You are correct. Those 2 studies have been initiated by Roche and we expect the filing to be made around that timing if everything goes without a hitch.

[Shinichiro Muraoka, analyst]

I see. My next question is about development pipeline again, more specifically, AMY109 for endometriosis. I think I read on a certain website that Phase I study of this compound had been finished in October. Is the result available now? If it is not, then can we expect to hear the results in the earnings report in February next year?

[Unknown Executive]

The study for endometriosis has not been completed yet. It is still ongoing.

[Shinichiro Muraoka, analyst]

Then when will the result become available?

[Unknown Executive]

I'm afraid we cannot tell what timing for now.

[Shinichiro Muraoka, analyst]

I see. My last short question. You said onetime payments of ROOI, worth about JPY 13 billion was received in the third quarter, which I think you said was earlier than expected. Am I not that misguided to think that much of the payment was for the licensing out of antibody engineering technologies to argenx or Novo Nordisk? In other words, if there are more deals to license out antibody engineering technologies, can we expect to see a onetime payment worth this much to be added for every deal that has been made?

[Unknown Executive]

We do not disclose the breakdown of onetime income. So I have to decline comment. I'm sorry.

[Operator]

Next question is from Mr. Ueda of Goldman Sachs Securities.

[Akinori Ueda, analyst]

Ueda from Goldman Sachs Securities. I want to ask about Actemra. Results have come out from COVACTA and EMPACTA clinical trials, with some primary endpoints achieved and others not. Based on those data now available, are there any changes expected in the demand for the drug, for the indication of COVID-19 or in the way the drug is going to be used?

[Minoru Hirose, executive]

Hirose speaking, with regard to the results of clinical trials, for example, in the COVACTA study, we understand that although its primary endpoint was not met. More detailed individual analysis are being carried out and therefore, efforts will be made to look for the types of patients who will benefit from the drug more.

[Akinori Ueda, analyst]

If that is the case, as you mentioned, the sales to customers have been performing well by referring to the earnings results by Roche. Is it correct to say that there have not been any particular changes in the way the drug is used or rated in the clinical practice?

[Unknown Executive]

Your understanding is correct.

[Akinori Ueda, analyst]

I see. Your company recently entered into license agreements for your antibody engineering technologies with Novo Nordisk and argenx. Are those out-licensing deals being made one after another? We could say now that feasibility studies are over, contracts are increasing?

Could you tell us why out-licensing has started to increase recently with some reference to expectations for the future? And as you look at the trend of your revenues, are you expecting to have a new source of revenue by choosing to license out the technologies rather than keeping them exclusively to yourself? Could you share with us your future policies in this regard?

[Minoru Hirose, executive]

Hirose speaking. We started licensing out of our antibody engineering technologies in earnest in April 2019. It just happened that in the third quarter, those deals with the 2 companies were made, but they were not because of feasibility studies or anything in particular.

[Akinori Ueda, analyst]

I see. I would assume you will continue to pursue these deals going forward. And I wonder if you're expecting this to become one of the revenue sources?

[Unknown Executive]

Yes. If our technologies are used to develop new drugs, though we cannot disclose at what timing and how much we will be paid, we do hope that it will become part of our important revenue sources.

[Akinori Ueda, analyst]

My last question is about the domestic sales of Hemlibra. I understand that Roche has seen steady quarter-by-quarter increase in the penetration among patients. Can you share with us how you're looking at the penetration in the domestic market, including any differences from that of overseas markets?

[Shinji Hidaka, executive]

Hidaka, Head of Marketing and Sales speaking. In the domestic market, the number of new patients acquired for Hemlibra hit the bottom in May and June. But in the third quarter, though we have not seen a full recovery yet, we do see signs of gradual recovery and are hoping to stay on that recovery path.

[Unknown Executive]

The next question is from Mr. Sakai from Crédit Suisse Securities.

[Fumiyoshi Sakai, analyst]

Sakai from Crédit Suisse Securities. Can you hear me?

[Unknown Executive]

Yes.

[Fumiyoshi Sakai, analyst]

As most of the questions so far were about overseas business, I would like to ask about the domestic business, more specifically about Avastin and Herceptin.

I don't expect you to answer this question quantitatively and I can tell the impact of NHI drug price revisions, since they were described numerically in the appendix. But to what extent did biosimilars affect the slowdown in sales of the 2 products? I can see the impact on Edirol as its competitor is clearly known, but could you tell us how biosimilars are having impacts?

[Shinji Hidaka, executive]

Hidaka speaking. As for Avastin, the penetration of biosimilars have been within the level of what we had anticipated. Therefore, the biggest impact was from the NHI drug price revisions.

With regard to Herceptin, as you said, the impact from biosimilars has been significant. Their penetration has been increasing, especially since August last year when the biosimilars were granted an approval for dosing schedule of every 3 weeks, severely affecting our business.

[Fumiyoshi Sakai, analyst]

My next question is about what Mr. Itagaki said about how you are shifting your expenses from marketing and distribution to research and development in Japan. If you look at the third quarter alone, the ratio of marketing and distribution expenses against revenues is 8%. But you also mentioned that part of the budgeted expenses was left unused.

Is this structural change in the expenses expected to continue? Or are we supposed to assume that this was a result of the pandemic of COVID-19, only prominently seen in this fiscal year, and things will go back to the normal status from next fiscal year onward?

[Unknown Executive]

In the second and third quarters this year, the pandemic kept us from holding most of the events and activities, which is quite extraordinary, and the numbers reflect that. So we do not expect this situation to continue forever.

However, the way we're engaging the sales promotion activities is going to change as we seek to hit the right balance between remote and in-person engagements. Therefore, as the overall trend, going forward, we are going to shift more resources to R&D.

In the second quarter, there was a sudden excessive shift. And so there could be some swing back, but our future resource allocation will shift toward R&D.

[Fumiyoshi Sakai, analyst]

One last question or clarification. The LOE of Actemra is described in management guidance to be from 2021 to 2022. Is this something that will remain unchanged?

What concerns me is, though I'm not sure what is going to happen to the combination with remdesivir, since it is often used for pneumonia, as shown in Roche's statements, whether prices through Roche could be revised in light of its upcoming LOE. You may say that is not decided, but I want to ask this question, nonetheless.

[Unknown Executive]

Were you referring to the patent when you said LOE?

[Fumiyoshi Sakai, analyst]

Yes, I was.

[Unknown Executive]

Then at this moment, there has been no postponement or change to the expiration date of the patent.

As for the export prices to Roche and royalty payment from Roche, details have not been disclosed previously, and I'm afraid we are not in a position to disclose when or whether prices will be revised or reviewed.

[Fumiyoshi Sakai, analyst]

Then am I correct to understand that even if the use of the drug for pneumonia is increased, it will not immediately affect the revision of its price?

[Unknown Executive]

Yes. After the approval is granted, how to set prices will also be subject to negotiations, and therefore, we do not know yet.

And at that point, if there is anything we can disclose, we will do so as far as we can.

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