Chugai Pharmaceutical Co Ltd

TSE:4519

Earnings Call Transcript 2021-Q3

[Osamu Okuda, executive]

I am Osamu Okuda, President and CEO of Chugai Pharmaceutical Company. I will give you the overview of the third quarter of fiscal 2021. Please take a look at Slide 5. Revenues totaled JPY 677.5 billion for the period of January through September, up 17.5% year-on-year. The operating profit and net income showed more than 25% increase from a year before, respectively, achieving a significant growth in both revenues and profits for the third quarter.

Domestic sales were affected by the NHI drug price revisions and more penetration into the market by generics, but steady growth was achieved by mainstay products such as Tecentriq for which we obtained an additional indication for hepatocellular carcinoma in September last year as well as by new products, including Ronapreve, a COVID-19 treatment drug for which supply to the government was started after its special approval for emergency in July.

In overseas, sales growth was driven by an increase in Hemlibra as anticipated and more than expected increase in Alecensa. The year-on-year decline in exports of Actemra to Roche was in line with our original forecast. ROI achieved a close to 25% jump mainly due to royalty and profit sharing income based on growth in overseas local sales of Hemlibra. Based on these results and outlook that significantly exceed our assumptions at the beginning of the fiscal year, we have made significant upward revisions to our full year forecast to JPY 970 billion in revenues, JPY 400 billion in operating profit and JPY 293 billion in net income, bringing the EPS up to JPY 178. With this revised forecast, we expect to see a record high earnings result for this fiscal year. And though there are large uncertainty factors, we are aiming for the record highs in the next fiscal year as well.

On Page 6, we have shown the breakdown of the difference between the original and revised forecasts. In domestic sales, the supply to the government of Ronapreve has been started with the sales of JPY 82.3 billion, expected to be recorded. Moreover, in addition to Tecentriq, Avastin and other mainstay products, Polivy and Enspryng are expected to exceed our original forecast, thus bringing in a total of JPY 119.3 billion more as an upside.

In overseas sales, an increase in COVID-19-related demand is likely to enable Actemra's exports to Roche to exceed the forecast by JPY 17 billion, while Hemlibra and Alecensa are both expected to surpass the original forecast. ROI is expected to be in total, JPY 19.5 billion ahead of the forecast due to growth in overseas local sales of Actemra and Hemlibra. As a result of all these, the topline figure has been revised upward by JPY 170 billion or 21.3%.

On Page 7, you can see the R&D overview. In R&D, progress has been seen in new products, COVID-19 treatment drugs and in-house early development products. Polivy, which was launched in May this year for relapsed or refractory diffuse large B-cell lymphoma, or DLBCL, has been achieving more than expected market penetration. In the clinical trial conducted by Roche, a significant improvement in progression-free survival, or PFS, was successfully demonstrated over the standard treatment for untreated DLBCL. For the first time in 20 years, we plan to file for approval as a first-line treatment by the end of this year.

Evrysdi, launched in August this year, is the first oral drug for spinal muscular atrophy, SMA, indicated for age groups from infants all the way to adults. It has been used more than we have assumed, especially by patients who had not been on drug therapies before for their SMA or by patients who had, had no opportunities for treatment because it was difficult for them to receive treatment by other drugs for reasons such as their age and sclerosis.

FoundationOne Liquid CDx, launched in August this year, is a liquid biopsy-based comprehensive genomic profiling, CGP, test for solid tumors, the first of its kind in Japan, and enables offering CGP test for those patients for whom tests using tissue specimens was not an option. Decisions on treatment policies based on the status and treatment phase of each patient have now been made possible.

Next, I'd like to discuss progress of development products related to COVID-19. Ronapreve, an antibody cocktail therapy since its special approval for emergency in July, has been mainly used for preventing mild to moderate COVID-19 from progressing to severe disease. Last week, we filed for special approval for emergency to add indications for prophylaxis and treatment of asymptomatic COVID-19. The submission also contained an application to add subcutaneous administration. AT-527, an oral RNA polymerase inhibitor is now in the global Phase III study, while preparations are underway for Actemra to be filed for approval by the end of this year. By launching to the market, those development products covering from prophylaxis to severe disease treatment as soon as possible, we hope to make further contribution to our fight against this infectious disease.

Last but not least, I will explain about in-house early development products. LUNA18 is an orally administrable cyclic peptide molecule created by Chugai's unique midsized molecular technology called APOLLO, and the clinical study was initiated in October this year. Details will be given by Yamaguchi later. We have 10 other early development products created by our unique antibody engineering technologies currently in Phase I studies, including STA551 designed for solid tumors using Switch Antibody technology. In order to further accelerate the development of these antibody projects, we have decided to construct a new biopharmaceutical API manufacturing building named UK4 and announced the decision today. UK4 is a facility specializing in production of investigational drugs for first-in-human clinical trials of antibody projects. By using UK4, we are determined to work harder to facilitate the development of antibody drugs expected to continue to evolve going forward, so as to deliver the fruits of our innovations to patients around the world.

Please turn to Page 8. Finally, I would like to share with you the current status of our company with regard to the revision of market segmentation by Tokyo Stock Exchange scheduled in April 2022. We received the results of its initial assessment from the Tokyo Stock Exchange on July 9, 2021, and confirmed that our company complies with the listing criteria, for the prime market in the new market segment. After the resolution by the Board of Directors, we will proceed with prescribed procedures related to the application for the selection of the new market segment. That's all for me. Thank you for your attention.

[Toshiaki Itagaki, executive]

I am Toshiaki Itagaki. I will give more details on the financial results. Please take a look at Page 10. I would like to compare the results of the last and this fiscal year. Revenues came in with JPY 677.5 billion, up JPY 101 billion or 17.5%. Looking at the breakdown. In domestic sales, the negative impacts from NHI drug price revisions and generics were offset by growth in sales volumes of Ronapreve and mainstay products, bringing about a 19.6% or double-digit growth. In overseas sales, the dip in sales of Actemra was made up for by the increase in Hemlibra and Alecensa, resulting in an 8.9% growth in total. Royalty and profit-sharing income totaled JPY 135.4 billion, up 52% due to a significant increase in income for Hemlibra.

On the other hand, other operating income end up with just JPY 3.4 billion because of a decrease in onetime income. As for cost of sales ratio, despite the pressure to push it up due to NHI drug price revisions, thanks to the increased share of in-house products in the sales mix, the figure improved by 1.2 percentage points to 41.9%. With regard to operating expenses, M&D and G&A expenses went up by 7.6% due to the recovery trends in various activities, while R&D expenses also rose by 14.5% due to progress in development projects. As a result, the operating profit was JPY 290.7 billion, up JPY 58.8 billion or 25.4% with operating margin at 42.9%. If you subtract financial account balance and income taxes, you would get the net income of JPY 209.7 billion, up 26.6%.

Page 11 shows the breakdown of changes in sales by disease area. Starting from the left bottom, the domestic oncology area grew by 12.8%. In terms of sales by product on the right, Tecentriq and Kadcyla showed a positive growth based on the addition of indications. Polivy, launched in May, achieved sales of JPY 3.5 billion. Foundation Medicine with the addition of FoundationOne Liquid posted JPY 1.5 billion in sales. Herceptin and Rituxan, on the other hand, dropped in sales due to generics and NHI drug price revisions. Domestic primary area increased by 28.3%. By product, Ronapreve, granted special approval for emergency in July, recorded JPY 42.8 billion in sales. In-house products such as Enspryng, Hemlibra and Actemra steadily grew their sales. Enspryng, launched in August last year, made steady progress in its market penetration, resulting in the sales of JPY 6.2 billion. Hemlibra overcame a 15% cut in its drug price due to market expansion repricing last year and achieved a 19.1% growth. In terms of volume, the growth rate was about 26%.

On the other hand, Edirol, with the emergence of generics, suffered JPY 6.7 billion decline in sales. Mircera and Tamiflu for government stockpile also saw a drop in sales. Lastly, overseas sales increased by 8.9%. Hemlibra for overseas grew by 187%. Given that its unit export price dropped, the growth in terms of the sales volume should have been about 240%. Alecensa for overseas went up by 24.8% with a volume growth of more than 70%. Actemra for overseas declined by 34.9%, which is a result of large shipments made last year in relation to COVID-19. Details will be given later in a separate slide.

Page 12 shows the breakdown of the changes in the operating profit. The bars up to the fourth from the left represent the breakdown of the increase in gross profit from sales. Negative factors of NHI drug price revisions and export unit prices were canceled out by increasing sales volume, enabling to land us with a net increase of JPY 48.5 billion. The increase in royalty and profit sharing income grew by JPY 46.3 billion with its full amount contributing to the total operating profit.

Other operating profit suffered JPY 19.2 billion decline due to the absence of the huge onetime income posted last year, which pushed down the operating profit by that amount. M&D and G&A expenses increased by JPY 4.7 billion and R&D expenses rose by JPY 11.9 billion. In summary, the growth in gross profit based on the increase in sales volume and royalty income brought about a positive profit growth of JPY 58.8 billion.

Starting from Page 13, there are about 3 slides that describe quarterly changes. First, Page 13, structure of cost and profit by quarter. Comments on year-on-year and quarter-on-quarter changes are shown on the right. What both have in common is an increase in the cost of sales ratio, which is due to the posting of the sales of Ronapreve in this third quarter. Since Ronapreve is purchased externally, it has higher cost of sales ratio. Operating expenses increased in both M&D and G&A expenses and R&D expenses, but the respective cost to sales ratios describe -- or decreased due to the increase in revenues. Operating profit grew significantly, keeping the profit margin high at 43.5%.

Page 14 shows the structure of revenues. Domestic sales, overseas sales and royalty and profit sharing income all grew in the third quarter, both year-on-year and quarter-on-quarter. The component ratios remained favorable, both for domestic sales and overseas sales. The ratio of domestic sales increased to 55.4% due to the recognition of Ronapreve sales in this third quarter.

The last of the quarterly changes is Page 15, structure of sales by area. Oncology, primary and overseas all exhibited very strong performance in the third quarter. Sales of individual products are shown -- are as shown on the right. Normally, I would now proceed to describing the progress against the initial forecast. But this time, since the progress has been much better than the initial forecast, we have revised the full year forecast.

Please turn to Page 16. Starting from the top, the revenues forecast has been revised from JPY 800 billion to JPY 970 billion, up 21.3%. Pursuant to the timely disclosure rules, we have announced the forecast revisions. The main reasons for the revisions are: In domestic sales, supply of Ronapreve to the government. In overseas sales, larger exports of Actemra due to COVID-related demand and in ROOI, higher royalty income on Actemra and Hemlibra as well as onetime income not included in the initial forecast.

In cost of sales, we have raised the cost of sales ratio by 3.4 points, reflecting a change in product mix from the original forecast. In expenses, we've increased M&D and G&A expenses by JPY 3.5 billion, reflecting the impact of the weaker yen and the increase in enterprise tax payment due to the increase in profits. Accordingly, operating profit has been revised to JPY 400 billion, 25% higher than the original forecast. Year-on-year, revenues are now projected to increase by 23.3%, operating profit by 29.9% and net income by 33.5%. We are projecting a record high for the fifth consecutive year. Dividend forecast has been revised to undecided in light of significant changes in the business environment. Interim dividend of JPY 30 per share has already been paid. Year-end dividend will be decided after the fiscal year-end.

Page 17 shows waterfall charts for the new operating profit forecast of JPY 400 billion. The left chart compares with the original forecast and the right comparing with the previous year. In both cases, there is a big contribution from increase in gross profit from sales. The next couple of pages describe the revised sales forecast.

Page 18 shows domestic sales of oncology products. Major changes include Avastin, up JPY 19.6 billion and Tecentriq, up JPY 10.6 billion. The main reason common to both is the better-than-expected market penetration of hepatocellular carcinoma. The new product, Polivy, is also gaining market penetration faster than expected. And thus, we have revised the forecast from JPY 3.5 billion to JPY 6.1 billion.

On Page 19 is the revised product sales forecast for domestic primary area and overseas. In the domestic primary, we have newly added Ronapreve sales of JPY 82.3 billion. Ronapreve sales are recorded not when we sign a contract with the government, but when we deliver the purchase products to the government. JPY 42.8 billion recorded as actual by the end of September is the amount already delivered by September. We are forecasting additional delivery of JPY 39.5 billion for the fourth quarter for a full year total of JPY 82.3 billion. Hemlibra sales have been revised downward by about 20% because the original forecast was ambitious. Edirol sales have been raised, reflecting a temporary increase in demand due to shipment adjustments by competitors and others. Enspryng forecast has also been revised upward given steady growth in sales.

Overseas, Enspryng sales have been revised downward, but Actemra, Hemlibra and Alecensa are performing strongly, and the total export forecast for the 3 products has been raised by about JPY 33 billion. Details of Actemra and Hemlibra will be explained in separate slides.

Please turn to Page 20. The way this chart is formulated is the exports of Actemra to Roche are shown in chronological order from left to right with respective quarterly breakdown starting from the bottom. And the figures in both -- the figures on blue on both sides of the bars represent rate of increase of Actemra sales by Roche. First, the full year amount shown on the top of the bars, which grew by 9.9% in 2019 and then jumped to 52.6% in 2020, an improvement of about 43 points. It is presumed that this mostly came from COVID demand. In the meantime, the rate of increase in the sales in the Roche territory, shown in blue, only improved by 31 points from 8% in 2019 to 39% in 2020.

What this indicates is that last year's exports from Chugai to Roche were preceding the actual demand increase. And the effect of this is being felt this year. In addition, with the start of global vaccination since the beginning of this year, Roche embarked on inventory adjustment, which has had an effect of significantly suppressing exports from Chugai. As you can see on the far right, our exports have decreased by 35.9% during the cumulative 9-month period as a result. However, following the spread of Delta variant, overseas demand has been increasing again since August and September with concerns over a temporary tight supply and demand in the U.S. and other countries and regions. Therefore, we are projecting exports to amount to JPY 38.5 billion in the fourth quarter, which will be the highest ever, exceeding last year's level for a full year export of JPY 100 billion for this year.

Page 21 outlines Hemlibra sales to Roche. Export sales shown in the upper half were JPY 60 billion for the 9 months, which was about 3x the amount for the same period in the previous year. Since the progress has been better than original forecast, we raised the full year forecast by 10% from JPY 88 billion to JPY 96.9 billion. Next, the lower half, royalty income for initial shipment, the so-called royalty to income. We have revised it upward from JPY 95 billion to JPY 96.5 billion in light of the fact that the state of inventory covered by royalty 2 was different from the assumption as well as an increase in unit price. In addition, we are now forecasting that the amount carried over to the next year will be in the range of JPY 5 billion to JPY 10 billion.

On Page 22 is the conceptual image of this. Please look at Chugai's revenue in the lower half. The revised part is the gray portion of this year. Royalty income from initial shipment, the royalty 2 income, which has been revised upward from JPY 95 billion to JPY 96.5 billion. And the blue bar representing export sales at ordinary supply price have been revised upward from JPY 88 billion to JPY 96.9 billion. And for next year 2022, we are projecting royalty 2 income of between JPY 5 billion and JPY 10 billion as well as further increase in the export sales represented by the blue bar, the total of which is expected to be as high as this year. And therefore, we believe this will more than make up for the anticipated royalty 2 clip.

In addition to Hemlibra, Tecentriq is performing well and new products such as Polivy, Enspryng and Evrysdi are expected to continue to see market penetration. In addition, we are expecting approval and launch of faricimab. And although we can't say for sure, there could be upside potential for Actemra and Ronapreve sales in relation to COVID. For those reasons, we feel confident about pursuing another record high results next year, and we believe that the likelihood of achieving it is strong. That is all for the profit and loss.

Page 23 is the financial position. Starting from the top, total net assets at the end of September amounted to JPY 1,090.6 billion. As for the breakdown, net operating assets increased by JPY 62.2 billion to JPY 708.2 billion due to increase in inventories and property, plant and equipment, and net cash increased by JPY 18 billion to JPY 396.6 billion. As shown below, while assets increased by 10%, liabilities were kept almost flat during this period, improving the ratio of equity attributable to Chugai's shareholders to 80.6%.

Page 24 shows the breakdown of the increase in net cash from the end of last year. First, operating profit after adjustments totaled JPY 312.6 billion. Subtracting the increase in net working capital and payments for the construction of new R&D and manufacturing facilities, operating free cash flow was positive JPY 219.8 billion. Cash outflows associated with income tax and year-end dividends and this year's interim dividend payments were JPY 105.5 billion and JPY 98.3 billion, respectively. All in all, net cash increased by JPY 18 billion from the end of last year to total JPY 396.6 billion at the end of September. We plan to use these cash on hand for future investments.

The start of major investments is shown on Page 25. Today, we announced the construction of an antibody API manufacturing building at the Ukima branch, which will be the fourth manufacturing building there, referred to as UK4. That has been added to the slide, the third line from the top. The construction is scheduled to be completed in September 2023 with a projected investment amount of JPY 15.3 billion. One line above is the third API manufacturing building at the Fujieda plant, FJ3, announced in July. Construction has begun. The second line from the bottom, Chugai Life Science Park Yokohama, is also under construction for the completion slated for October next year.

That concludes my part of the presentation.

[Tetsuya Yamaguchi, executive]

This is Yamaguchi. Let me explain the situation of the development pipeline. Page 34 shows Q3 topics. First, 2 new products were launched in August. First one is FoundationOne Liquid CDx. This is a cancer gene panel test, which is the first blood-based comprehensive cancer profiling for solid tumors in Japan, and it is also companion diagnostics for multiple cancer therapeutic drugs. Second is Evrysdi for spinal muscular atrophy, which is the first oral drug that allows treatment at home. As for approval, Rituxan received the approval for systemic sclerosis in September. As for filing, Actemra was filed for COVID-19 pneumonia in Europe. Later, I will discuss the details of additional indications of Ronapreve, Enspryng for generalized myasthenia gravis and LUNA18 that is a midsized molecule project.

The Phase III study was started for RG6171, giredestrant, as an adjuvant for breast cancer. With regard to the top line results of late-stage development products, Polivy achieved the primary endpoint for untreated DLBCL in Phase III POLARIX study. In POLARIX study, the combination of Polivy and R-CHOP was compared with the standard treatment of R-CHOP therapy. Regarding the primary endpoint of progression-free survival, Polivy arm demonstrated a statistically significant and clinically meaningful improvement. We will file for additional indication for the first-line treatment based on these results by the end of this year.

As for medical conference, data from pivotal SAkuraStar and SAkuraSky studies of Enspryng was presented at Congress of the European Committee for Treatment and Research in Multiple Sclerosis. The full year data showed sustained relapse reduction in anti-aquaporin antibody-positive patients of NMOSD, neuromyelitis optica spectrum disorder. In addition, orphan drug designation was granted for Hemlibra for acquired hemophilia A. Nemolizumab was out-licensed to Maruho for domestic development and marketing rights for pruritus in dialysis patients. As for OBP-301, Telomelysin, it was agreed to terminate the exclusive license agreement with Oncolys BioPharma, which was made in April 2019.

Next slide, please. LUNA18 entered the clinical stage as the first midsized molecule, which is a new modality. This slide shows Chugai's unique technology for midsized molecules. Multi-modality strategy is one of the TOP I 2030 strategy and midsized molecules are most important targets. APOLLO is the name of our unique midsized molecule technology, which stands for artificial, peptidic orally available, limitlessly localizable omicron. From a uniquely constructed unnatural amino acid containing peptide library, it is possible to create all of the available drug candidates with high target specificity, having both membrane permeability and metabolic stability. With this, it is possible to target intracellular and extracellular targets that have been difficult to approach with small molecules and antibodies.

Next slide, please. I would like to explain about LUNA18, the first midsized molecule project. LUNA18 is a RAS inhibitor and a Phase I study for solid tumors started this month. We expect antitumor effects on a wide range of RAS altered cancers. RAS is a low molecular weight GTPase and is activated upon binding to GTP. It is involved in signal transduction of RAF/MEK/ERK and PI3K/AKT networks, playing an important role in cell differentiation, proliferation and survival. RAS gene alteration is the most common oncogenic gene alteration detected in cancer cells. LUNA18 is a circular peptide molecule developed with APOLLO technology and can be administered orally. It inhibits protein-protein interaction between RAS and GEF and retains RAS in an inactive state. It shows inhibitory effects on growth of tumor cells with various RAS gene alterations. Anti-tumor effects can be expected against RAS altered cancers with no therapeutic drugs available yet.

Next slide, please. I would like to explain about additional indication of generalized myasthenia gravis, GMG, for Enspryng. Phase III study for Enspryng for GMG was started this month. It is expected that Enspryng's IL-6 blockade suppresses pathogenic autoantibody production. GMG is an organ-specific autoimmune disease against the molecules on the postsynaptic membrane on the neuromuscular junction. It is characterized by painless muscular loss with easy fatigability of skeletal muscle. It starts initial symptoms of ptosis and diplopia and 85% is accounted for by generalized myasthenia gravis with cervical limb weakness, dysphagia, breathing difficulty, et cetera. It has been reported that 80% of MG are acetylcholine receptor antibody positive, and about 7% are muscular specific kinase antibody positive.

The estimated number of MG patients in Japan was 29,210 according to the national epidemiological study in 2018. Although there is no data to directly verify the effectiveness of Enspryng against GMG, it has been reported that the IL-6 level in GMG patients are higher than normal and that there is some correlation between disease severity and IL-6 level in the peripheral blood in patients with acetylcholine receptor antibody positive patients.

Next slide, please. Let me explain about the 3 therapeutic drugs being developed for COVID-19. The figure in the bottom half summarizes the concepts about COVID-19 severity and treatment based on approaches to pharmacotherapies for COVID-19 by the Japanese association for infectious diseases. COVID-19 starts from asymptomatic stage and progresses from mild to moderate as the virus proliferates. Depending on the disease states, therapies with likely efficacy are defined. Top half of the slide shows 3 drugs, Ronapreve, Actemra and AT-527. They cover the whole spectrum from asymptomatic to severe, and we believe that they can contribute to all stages of COVID-19 treatment. Ronapreve has already been received special approval for emergency for patients in mild to moderate 1 stage who do not require oxygen therapy. And we have filed for additional indications of prophylaxis of infection for people in close contact as well as prevention of onset for asymptomatic patients. Together with this filing, additional formulation of subcutaneous injection has been filed in addition to the already approved IV injection.

Next slide, please. This slide explains about the studies used for filing for additional indications for Ronapreve. REGN-COV 2069 study is a study for prophylaxis and for asymptomatic COVID-19. In prophylaxis of infection, risk of symptomatic infection was reduced by 81%, achieving the primary endpoint. In addition, in cases where symptomatic infection was observed, the duration of symptoms was reduced from 3.2 weeks to 1.2 weeks. In another cohort of asymptomatic patients, the risk of developing symptoms was reduced by 31%. No new safety signals were observed. The 20145 study is a Phase II study to investigate dosage and administration. In patients without risk of progressing to severe disease, significant and similar reduction in viral load was observed in all doses between 300 and 2,400 milligrams. In addition to these 2 studies, Japanese Phase I study to evaluate safety, tolerability and PK in Japanese was used for filing.

Next slide, please. Page 40 shows projected submissions as usual. Red stars indicate new entries. Enspryng's additional indication of GMG and giredestrant breast cancer adjuvant were added to submissions in 2024 and beyond. Also, Ronapreve was added as filed. Green stars indicate changes in submission year. Hemlibra with acquired hemophilia A was brought forward from 2022 to 2021, thanks to the smooth progress of the Japanese Phase III study. RG6264 is the fixed-dose combination of Herceptin and Perjeta and it was pushed back to 2022 because of our filing strategy.

Next slide, please. These 3 pages show the progress of Phase I study for our in-house developed products. Please understand that disclosure may vary due to our development strategy, and please refer to them as appropriate. Today, I would like to explain only about GYM.

Please go to Page 43. GYM329 is a sweeping antibody that binds to latent myostatin, and it has already been outlicensed to Roche. It inhibits upstream myostatin signaling that suppresses muscle growth and hypertrophy and is expected to be effective in neuromuscular diseases involving muscle atrophy and muscle weakness. As Roche announced, Phase II/III study for combination with Evrysdi for spinal muscular atrophy is scheduled to start in Q1 2022.

Next 2 pages show projects under development. Page 46 shows FoundationOne CDx companion diagnostic indications.

Page 47 shows FoundationOne Liquid CDx companion diagnostic indications. There are no changes from the Q2 conference call.

That's it for me. Thank you.

[Motoya Kohtani, analyst]

Kohtani from Nomura Securities. I have 2 questions. Firstly, I'd like to ask about how to look at Ronapreve next year. Former Prime Minister Suga in a TV show said that the government procured Ronapreve for 500,000 doses at JPY 310,000 per dose. The initial plan to buy 200,000 doses was increased as the government thought it should buy as much as it could. Simple math shows a total of JPY 155 billion, but the sales recorded by your company this time was JPY 82.3 billion. I was wondering why there is this gap? Is there some portion, which cannot be delivered this year and carried forward to next year?

Furthermore, at least 1 oral COVID-19 treatment drug is expected to be launched early next year, with its price set at around several tens of thousands of yen per dose at the highest, which should put your antibody cocktail drug priced at JPY 310,000 per dose as well as Actemra, a new company, in a disadvantageous position next year. That said, you said you will be able to aim for record high earnings next year. And so I guess your assumption is to see a continued growth in Ronapreve and Actemra next year. Could you give us more thoughts on Ronapreve next year?

[Toshiaki Itagaki, executive]

Thank you. Itagaki speaking. the deliveries and the unit price of Ronapreve cannot be shared with you due to our nondisclosure agreement in the contract. Therefore, we do not have any particular comments to make about figures, such as 500,000 or 310,000. However, please note that sales are recognized not based on the contract, but at the time of the deliveries of the product. So the full year forecast represents the sales from those to be delivered to the government by the end of the year. As for the next year onward, we're still in the process of putting together the plans and so we are not in the stage to make any particular comments on how next year is expected to perform, much less are we in a position yet to comment on our products relative to the competition.

[Motoya Kohtani, analyst]

Then am I correct to understand that at this moment, you do not have any deliveries already contracted, but delayed into next year?

[Toshiaki Itagaki, executive]

The forecast is based on the volume that can be delivered by the end of the year within the scope of what is in the contract. I'm afraid that is all I can say. As for the record high earnings, we are aiming for next year, I would like to defer the answer to President Okuda.

[Osamu Okuda, executive]

Okuda speaking. I will add to that, whether the government will decide to make additional purchases next year or not, it's quite hard to predict. However, if you look at the government's document on the overall picture on the initiative to ensure safety ahead of possible next expansion of infection, it describes securing the supply of treatment drugs as one of the measures to take assuming the worst-case scenario with the sixth or possibly more infection waves in mind.

Obviously, oral drugs are expected to be launched as well as other antibody drugs. However, we understand that this document shows that in the event that there is another round of increase in infections, the government regards it important to have different treatment options available and working. Therefore, though there are a lot of uncertainties, we hope it makes sense to you as well to expect that there is a possibility of additional purchases next year.

[Motoya Kohtani, analyst]

I see. My second question is about LUNA18. In short, it inhibits the source 1 protein from binding to RAS, though I don't know which RAS you're talking about, preventing GTP from being activated as shown in this diagram, in my understanding. What I want to ask is the following: If you say this drug is targeted at patients with RAS genetic alterations, would it be effective in patients with all kinds of mutations such as KRAS G12C, G12D and G12V? Can you give more insights into it?

[Tetsuya Yamaguchi, executive]

Thank you for your question, Yamaguchi speaking. You can consider it to be a pan RAS inhibitor.

[Motoya Kohtani, analyst]

Is it correct then to say that it will be effective in all these mutations I mentioned earlier and does not bind to the wild type?

[Tetsuya Yamaguchi, executive]

I apologize that my earlier response was a bit insufficient. We have observed in this compound the activity to inhibit a wide range of RAS alterations in addition to the wild type.

[Seiji Wakao, analyst]

Wakao from JPMorgan. First, I want to ask about the record high earnings mentioned by Mr. Kohtani. Listening to your response, my understanding is that there will likely be additional purchases of Ronapreve and that Hemlibra is expected to be almost flat based on the chart that you showed us today, which make you believe that you will be able to achieve record high profit next year. Am I correct? If there are any other factors that you have assumed, could you please let me know?

Also, Mr. Itagaki said, there could be an upside in relation to COVID-19. Does that mean that you think there may be an upside on top of what you forecast for government purchases at the moment, depending on the situation of infections. Could you tell us more about the record high profit? And if the impact from COVID-19 turns out to be fairly large next fiscal year, do you think your earnings may end up being flat in the year after next? Or do you foresee continued positive growth in next year and the year after next?

[Osamu Okuda, executive]

Okuda speaking. Thank you for your question. We discussed the government procurement of Ronapreve, its deliveries and possible additional purchases next year. In addition, we have our in-house product, Actemra. Depending on the situations of COVID-19 infections around the world, we could expect to post export sales of Actemra. Looking at the current situation, as announced by Roche, Actemra is being used so much so that its supply is not catching up with the demand. It probably is hard to say that this situation will subside next year. Therefore, our position is that the demand for exports of Actemra is expected to be continued next year.

With regard to Hemlibra, your understanding is correct. We are now in a position to be able to foresee resolution of what we call royalty 2 cliff. The rationale behind that is that the growth of Hemlibra in the U.S. and Europe. As was announced by Roche, the market share has increased from 29% to 31%, with commensurate growth in sales. In addition, we have been seeing growth in our core businesses. As I said about the forecast for this fiscal year, the mainstay products in the domestic market are growing this year, and this is expected to continue next year and onward, Tecentriq, Polivy, Enspryng and Evrysdi, our new products. And from next fiscal year, it will be Tecentriq used as an adjuvant for lung cancer and faricimab a drug in ophthalmology, which will be added. If you include all these, you can expect a very solid growth in domestic sales. Given this whole context, we believe we are in a position to be able to declare that we will seek to achieve record high profits next fiscal year.

You also asked about the year after next. It is even more difficult to predict it than to do so for the next fiscal year. Obviously, there are many different possible situations, but I hope you are able to understand the fundamental aspects of our business. Therefore, I would like to decline making comments about the years after next.

[Seiji Wakao, analyst]

I now have a much better understanding. My second question is about Actemra, which you mentioned in your answer. In 2021, the total sales of Actemra is expected to be smaller than the year before. Since Roche sales to their customers have been so strong, I had thought there could be more exports expected in the fourth quarter. Looking at the export value next fiscal year, it looks a bit smaller than what you would expect from -- versus local sales. Am I correct to say that this was simply because you exported too much last year and that the forecast for the fourth quarter does reflect large local sales to some extent? And can you say that if the situation of the infections remains the same, the scale of the sales is expected to be about the same in 2022?

[Toshiaki Itagaki, executive]

Itagaki speaking. I would like you to look at Slide 20 for me to answer your question on the exports of Actemra. Even if we forecast JPY 100 billion in 2021, you would say this is still a 24.2% drop from the year before. I believe that is what you're asking about. In 2020, we shipped out a substantial volume in advance to Roche. Just to give you an idea, this shipment amounted to 12 to 13 percentage points of the growth ratio. Since this represents 12 or 13 percentage points of the sales in 2019, roughly speaking, this will be translated into slightly more than JPY 10 billion in value, which means when you compensate for that part of the sales of JPY 132 billion last year, approximately JPY 10 billion plus was the amount preceding the actual demand. So the actual sales for last year should have been JPY 122 billion. That will be the baseline. For this year, we are projecting JPY 100 billion with a [ backlash ] impact of JPY 10 billion from last year. So after the compensation, it will be JPY 110 billion. Do you follow?

And furthermore, unit export price of Actemra is constantly reviewed and there is also an impact of exchange rate. And the combination of the 2 has had a negative impact of about 10% this year. So when you take that into consideration, it will be about the same between 2020 and 2021. So if you look at it this way, the numbers do make sense. And about next year, it's really hard to say, but as President Okuda said, it is not likely that COVID-19 will be brought under full control, all of a sudden. And considering that the current demand is very strong, we do have a great expectation for next year as well.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. My first question is on the export of Hemlibra to Roche. On Page 22, export sales at ordinary sales price as represented by blue bar is projected to be JPY 96.9 billion this year. And the graph indicates that for next year, you are expecting a possibility of doubling that amount. In the meantime, currently, sales by Roche is not growing that fast. So are you expecting sales growth by Roche to accelerate next year? And also the inventory level at Roche right now is low. And so are you expecting that Roche may try to build up the inventory next year? Can you give us the backdrop -- background to your export projection for next year?

[Toshiaki Itagaki, executive]

Thank you. This is Itagaki speaking. For this year, there still is the inventory of initial shipment remaining, and the order coming from Roche reflects that fact. Whereas for next year, that factor would be gone. So the order from Roche should reflect the actual projected demand, so as to maintain a stable inventory. So the blue portion of the bar, the volume of shipment at ordinary supply price, is expected to grow. That is our expectation.

[Kazuaki Hashiguchi, analyst]

I see. So that would mean that what is projected for 2021 is exceptionally low. And that's what you are projecting for 2022 is based on the assumption that order would reflect the final sales without any anomalies. Is that a correct understanding?

[Toshiaki Itagaki, executive]

Yes, we are expecting that with a certain lead time, order would be placed in anticipation of expected demand and that our export sales would materialize accordingly.

[Kazuaki Hashiguchi, analyst]

I see. My next question is on GYM329. I understand that you are to start Phase II/III study. Does that mean data that would show the efficacy in patients are already available? And when do you plan to disclose those data? And why is it that you are pursuing combination therapy from the very start as opposed to single agent therapy?

[Junichi Nezu, executive]

Thank you for your question. This is Nezu from R&D portfolio division. First, GYM Phase I is ongoing to verify the safety. And separately, development on the single agent therapy is currently being considered. In the SMA study, additional efficacy to Evrysdi is observed in nonclinical setting. So the rationale is there. Further study will be conducted to verify that.

[Shinichiro Muraoka, analyst]

This is Muraoka from Morgan Stanley MUFG Securities. I have a question on CIM331, nemolizumab. In Japan, I think it should be on the Pharmaceutical Affairs and Food Sanitation Council Committee deliberation by now. So is it being delayed somewhat? That's my first question, although it might be hard for you to comment on it. And also regarding the global studies for atopic dermatitis and prurigo nodularis, can we still expect that result should be out soon?

[Tetsuya Yamaguchi, executive]

Thank you. This is Yamaguchi speaking. First, regarding the review in Japan. We cannot make any comments here. But in terms of the timing of application, the filing, we cannot deny that there is some delay. But towards the approval, deliberations are continuing. And regarding the global studies, they are proceeding as per the planned time line, albeit with some impact of COVID-19. That is with regards to global study on atopic dermatitis and prurigo nodularis.

[Shinichiro Muraoka, analyst]

I see. So that would mean that even with some delay in the deliberations here in Japan, that is not an indication of a serious issue. Am I correct?

[Tetsuya Yamaguchi, executive]

Thank you for that follow-up question. It's not that safety or efficacy is being questioned. So you are right, there is no serious issue.

[Shinichiro Muraoka, analyst]

I see. Another question about demand for Actemra. I know that sales were strong in the third quarter, and I can also understand your assumption that demand will continue to be strong next year. But in advanced countries, the pandemic situation has calmed down quite a bit. So if we are to expect a growth next year, that would have to come from elsewhere emerging economies because that's where the infection is expected to continue. So do you have basis for your growth projection? Because there is a gap between the way I perceive the situation and what you have presented.

[Osamu Okuda, executive]

This is Okuda speaking. Thank you for your question. In some countries, the vaccination rate among the population is rather high and there are others where the vaccination rate remains somewhat stagnant at around 50%. We find that when economic activities are resumed, new cases of infections go up, for instance, in U.K. and the situation is similar in the U.S. And what this indicates is that some countries are transitioning into a mode where a certain number of new cases is being accepted, while trying to promote economic activities. And even with the full effect of vaccination, there still are possible breakthrough infections. So in light of these factors, in industrialized societies as well as the state of infection remaining in countries where the vaccination rate is low, we can expect continued demand for Actemra of a certain level. I think that will be a reasonable projection. Of course, as you have indicated, it's very hard to make a precise projection so we don't know which way it will turn out. But at a certain probability, we expect the demand to continue.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citigroup Global Markets Japan. My first question may sound somewhat redundant from our earlier questions, and I apologize for that, the Hemlibra sales to Roche. You are now projecting that the royalty 2 cliff would most probably be resolved. I think this was the first time you indicated that. At the same time, you are aspiring for yet another record year overall next year, I presume with a growth in existing business and Actemra. Now what's still not clear to me is whether the plus or minus of Ronapreve for this year and next year is already incorporated in your projection when you say that you aspire to achieve the best results ever next year. Can you elaborate on that.

[Toshiaki Itagaki, executive]

This is Itagaki. Thank you for your question. Included in the assumptions for our aspiration is a certain level of infectious disease in Japan and many other factors. So based on a certain level of demand, 0 is not likely. And although I can't give you the specifics, even with some uncertainties, we feel that achieving another record high is reasonably within our reach.

[Hidemaru Yamaguchi, analyst]

I see. A follow-up question. You are projecting JPY 5 billion to JPY 10 billion as royalty 2 income on Hemlibra in 2022. Where does that come from?

[Toshiaki Itagaki, executive]

In the original forecast made at the beginning of the year, we projected a receipt of JPY 95 billion as per the contract this year and that, that will be the end of the story. The way royalty 2 income is calculated is of the inventory of products delivered in the initial shipment, the difference in value that can be calculated from the Roche territory sales is paid to Chugai. But depending on the countries where the sales are made, the unit selling price varies. That's one factor. So we made a full analysis on how much of the initial shipment is likely to be sold when, where and at what unit price and updated calculation accordingly. In total, we are projecting an increment of JPY 6.5 billion to JPY 11.5 billion, a part of which is assumed to be pushed into next year.

[Hidemaru Yamaguchi, analyst]

My second question is a simple one. A midsized molecule, LUNA18, looks very interesting. You just explained about midsized molecule very briefly. But previously, you said that you would have an explanation meeting for midsized molecules. Do you have a plan to hold such a meeting?

[Toshiaki Itagaki, executive]

Yes, we plan to hold an explanation meeting towards the year-end. We will let you know the details later.

[Junko Otsuka]

This is Otsuka from Jiji Press. I have questions about submissions and approvals. First is about AT-527. The study results announced by Atea was mixed, and thus Atea is going to revise Phase III study plan, causing a major delay of the schedule. Your plan of submission for AT-527 is unchanged and still in 2022. The year 2022 is a long time. Could you discuss more specifics about the submission timing and whether there was any change?

Another question is about Actemra. You plan to file by the end of the year, but it is already the end of October now. So if you can discuss a little more about schedule or idea, please tell us.

[Tetsuya Yamaguchi, executive]

Thank you. This is Yamaguchi. With regard to the results of Phase II study of AT-527 announced by Atea, it is still early days after the announcement. So we will study the data in detail going forward. We also understand there will be additional data to be available. So we will examine the data and then discuss about ongoing Phase III study among us, including Roche. Given such situation, we have not yet considered the revision of the submission timing yet. With regard to the submission of Actemra, as you know, it has already been filed in EU. Thus, we will file for approval in Japan by the end of this year. I can only use this expression by the end of this year. But it is only short time left. We are already discussing with PMDA for the submission. That is the current stage. That is all.

[Junko Otsuka]

Will you be requesting special approval for emergency?

[Tetsuya Yamaguchi, executive]

Yes, we are currently thinking of asking for special approval for emergency.

[Unknown Analyst]

This is [ Yamada ] from Nikkei. I'd also like to ask you about AT-527. Other companies such as Merck are developing oral drugs. Under such circumstances, there may be some concern that the commercialization may be delayed for this drug. I appreciate if Dr. Okuda can discuss his view about the impact, including the competitiveness and profits because of the delay of the development.

Another question is about midsized molecules. Thank you for your explanation. I appreciate it if you can discuss the development schedule going forward and about the possible timing of its becoming a drug.

[Osamu Okuda, executive]

Thank you for your question about AT-527, Mr. [ Yamada ]. This is Okuda. Various pharmaceutical companies are working for development of therapeutic drugs for COVID-19. The development of drugs sometimes goes smoothly, but can be challenging in other times. The data from the Phase II studies by Roche are being analyzed in detail, as Mr. Yamaguchi mentioned earlier. What happens when you perform detailed analysis, you will have better understanding of what kind of patients are responding and what is happening to the virus, et cetera. Then you will have understanding how we should modify the design of the ongoing global Phase III study to succeed in the development. That is what we are working on right now. So we are not considering modifying the submission timing at this stage. And I don't think it is the right time to start thinking about the impact on revenue.

[Tetsuya Yamaguchi, executive]

This is Yamaguchi. Before answering to your question about LUNA, I'm sorry, but I need to make a correction. Regarding the Actemra submission asked about by Mr. Otsuka from Jiji, it is a usual submission for additional indication. I mixed up the request for special approval of emergency for Ronapreve and the submission for additional indication of Actemra by the end of this year. I am sorry about the confusion.

With regard to the development schedule of midsized molecule that you asked, unfortunately, we are not able to disclose the schedule. But since this is an inhibitor of RAS, it may be helpful if you think about development schedules for such compounds. If you wanted to know midsized molecules in general, we would like to move a variety of candidates to the clinical stage going forward. The actual schedule may vary depending on the target indications. That is all.

[Fumiyoshi Sakai, analyst]

This is Sakai from Credit Suisse. As for the midsized molecules, the slide says they were constructed from a peptide library. The slide also has an illustration of expected drug discovery mechanism. My impression is that you can obtain many compounds from the library. And I think there are several candidates for ion channels shown here and that you have already narrowed down target cells. Will you be discussing the details at the explanatory meeting at the end of the year? But I appreciate if you can give us some comments at this time.

Also, as for LUNA18, I believe Roche must have the first refusal right. In the past, your policy was that you don't start the opt-in or opt-out negotiations with Roche before obtaining POC. But my impression now is that you are starting negotiations at an earlier timing. Please tell us the stage of the negotiation about LUNA with Roche.

[Tetsuya Yamaguchi, executive]

Thank you. This is Yamaguchi. With regard to the first point of peptide library, I regret that we do not disclose technical part. As for the first refusal right for Roche, you mentioned that we are bringing the in-license and out-license timing forward. But that is not necessarily the case. We make decisions project by project basis. We are not able to disclose the situation about LUNA18. Please excuse us.

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