Sosei Group Corp

TSE:4565

Earnings Call Transcript 2021-Q2

[Hironoshin Nomura, executive]

[Interpreted] Good afternoon, everyone. We'd like to start the Explanation Session for the Financial Results of First Half of Fiscal Year 2021 for Sosei Group Corporation. Thank you very much for joining us today despite your busy schedule. I am from IR and Corporate Strategy, my name is Nomura. I'll be the moderator for today.

The first 30 minutes, we'd like to give you a presentation, and the latter 30 minutes we'll be spending to answer your questions.

In the presentation from Sosei, COO, CFO, Chris Cargill, will talk about the financial results for the first half. CEO, Tamura, will give you business highlights. And Chief Medical Officer, Tim Tasker, will give you a presentation on the muscarinic program.

I'm sorry for the short notice, but the presentation material has been uploaded on our web page. Please go to the Newsroom, IR Information, Presentation and Webcast for the presentation material and refer to the material as we give the presentation.

Today, we are providing simultaneous interpretation. On the screen, on the right bottom, you will find a globe mark and this will be the interpretation button. You can choose either English or Japanese. Chris Cargill and Tim Tasker will be speaking in English. So if you choose Japanese, you'll be listening to the simultaneous interpretation. Now I believe the interpretation button is up. In other words, you will be listening to the speakers' original audio.

And in the Q&A session, because of time constraint, we'll have to divide you into 2 groups. [Operator Instructions] In the Q&A session, we will try and answer as many questions as possible when you write in the questions in the Q&A button.

To other listeners, the content of the question will not be publicized.

Now we'd like to begin. Please turn to Page 5 of the presentation material.

[Chris Cargill, executive]

Hello. Is this clear? Can you hear me?

[Unknown Executive]

Yes. Yes. I can hear you.

[Chris Cargill, executive]

Fantastic. Good afternoon, everyone. My name is Chris Cargill, Chief Operating and Financial Officer of Sosei Group Corporation.

Today, I am pleased to report another half of solid progress and sustainable financial performance. In the period under review, half 1 2021, we executed on our list of objectives and made targeted investments to support the expansion and long-term growth profile of our drug discovery business. Revenues were up in the period driven by the achievement of several progress-related milestone events and a larger release of deferred revenue from existing partners.

Operating losses increased slightly. However, this was expected and was a result of planned increases in R&D investment.

Our balanced business model, which emphasizes having multiple partnerships to share costs and risks involved in drug discovery has enabled us to grow revenue, make investments and maintain a robust cash position. In addition, after the period ended, we executed a highly successful convertible bond switch transaction. It was a successful liability management exercise and brought a large number of new international investors to the Sosei investment story. We are well positioned to invest and to expand.

Please turn to Slide 6. We saw encouraging revenue growth in the period offset by planned increases in R&D investments and expected growth in our noncash costs. On the left-hand side chart, revenue totaled JPY 3.1 billion, up from JPY 2.5 billion in the prior corresponding period, the core driver being growth in milestone income from existing partners, which more than doubled versus the prior corresponding period. Milestone income comprised of multiple Phase I clinical start milestones from Pfizer for the MC4 program and Biohaven for the CGRP program plus 3 milestones from Genentech related to our delivery of StaR proteins. In addition, we have releases of deferred revenue from our discovery collaborations. It's worth noting that the prior period had depressed levels of activity because of the start of COVID pandemic in March 2020.

On the middle chart, cash operating expenses, which includes cash R&D and cash G&A costs, totaled JPY 3.6 billion, up from JPY 2.4 billion in the prior corresponding period. However, it is important to note that these were planned increases in costs as detailed at our full year results in February earlier this year. We increased investment in HTL '878, our selective muscarinic M4 receptor agonist program for schizophrenia and dementia-related psychosis. We've already had strong interest in this program and are confident a significant global deal could be achieved in the near term because of the investments that we are making.

And again, it is worth noting that in the prior period, expenses were lower than usual as a result of the start of the COVID pandemic in March 2020. Furthermore, the prior period included a large nonrecurring supplier credit from a major CRO partner.

Lastly, on the right-hand side chart, our operating loss totaled JPY 1.8 billion, up from JPY 1.1 billion in the prior corresponding period. This was because of the increased cash operating loss, but also due to increases in noncash operating costs. In the period, these noncash operating costs included a small impairment to ORAVI. And post the period end, we agreed to switch to a new distributor, and we expect to see modest but improved sales performance for this product in the future. We also had planned increases in stock-based compensation costs as we continued to roll out modernized restricted stock units for eligible employees, which is in line with our strategy to drive greater employee alignment with our shareholders.

Lastly, financing costs were up because of the convertible bonds we issued last year. And again, this cost increase was expected. The prior period also included a realized fair value gain related to the RMF1 Fund. As a reminder, the Sosei CBC business was divested last year.

Please turn to Slide 7. This slide shows the group's P&L breakdown for the 6-month period ended 30 June 2021. On the right-hand side of the slide, our emphasis on partnerships and co-investments continue d to drive a balanced split of revenue by type. This is the key factor driving the sustainable financial profile of the business. On the previous slide, I discussed revenues as well as cash and noncash operating expenses, so I will not cover this again here. We reiterate that the planned increase in costs that you see on this table were expected and are in line with our full year guidance, which remains unchanged from the first quarter.

Our net loss totaled JPY 2.3 billion, which was in line with our net loss result in the prior corresponding period. And the net loss was due to the operating loss, as I described on the previous slide. However, it was mitigated by positive equity-accounted results, which included a gain on our investment in MiNA Therapeutics, which was driven by MiNA's receipt of a $25 million upfront fee relating to an out-licensed deal signed with Lilly in May 2021.

Please turn to Slide 8. This slide highlights the group's balance sheet as of 30 June 2021. And the sustainability of our balanced business model and strategy is reflected in the robustness of the balance sheet. Cash at hand totaled JPY 40.6 billion, an increase of JPY 621 million from 31 December 2020. As you can see in the table and on the chart, the weaker yen in the period drove a reduction in total cash balance when aggregated in U.S. dollars.

And turning to our other financial assets. We positively revalued several of our investment securities, including a significant increase in the value of our new Centessa Pharma shareholding following its IPO in the period.

Please turn to Slide 9. This slide shows our guidance for FY 2021, which remains unchanged. As discussed earlier this year in February at our full year 2020 results, we are making planned increases in R&D investment this year as we seek to accelerate development of both our muscarinic and other high priority programs.

Our guidance for cash R&'D costs remains unchanged and is expected to be in the range of JPY 4 billion to JPY 5 billion. In particular, the investments we are making in HTL '878, our selective muscarinic M4 receptor agonist program for schizophrenia and dementia-related psychosis, are designed to drive significant near-term value inflection for the company.

Our guidance for cash G&A costs remains unchanged and is expected to be in the range of JPY 1.8 billion to JPY 2.3 billion. Our new cloud-based Oracle NetSuite ERP system has completed its Stage 1 implementation and is already driving group-wide efficiencies. We will continue to enhance its functionality going forward.

We continued to make new hires to strengthen compliance, governance and support functions as our aim is to prepare for and then to meet the highest standards of corporate governance in Japan. We are seeking to operate at the same standard as TSE Section 1-listed companies regardless of our listing on the TSE Mothers exchange. We expect these investments will enable us to drive scalable corporate value growth into the future.

Please turn to Slide 10. As I mentioned at the beginning of this presentation, after the period ended we executed an international offering and a concurrent buyback of our previous convertible bonds issued in 2020. The key highlights of this recent deal were: one, it was the largest mid-cap convertible bond raising in the Asia Pacific region since 2015; two, it was a highly successful liability management exercise with 98% of existing investors taking up a new deal; three, we achieved a greatly expanded institutional investor base with 3x more international investors participating versus last year; and four, we lowered our funding costs, extended the maturity of debt and potentially reduce dilution upon future conversion.

The net proceeds of JPY 29.8 billion raise will be allocated as follows: JPY 18 billion was allocated towards the repurchase of the existing 2020 convertible bonds; and the incremental JPY 10 billion of net new proceeds has been added to the JPY 20.9 billion raise last year, and the total funds will be used to fund strategic growth initiatives such as acquisitions and/or investments.

We continue to evaluate strategic growth ideas and are well capitalized to execute when a potential opportunity presents itself.

This completes my financial update. Thank you for your time. I will now hand over to CEO, Tamura-san, to provide an operational update for the period. Thank you.

[Shinichi Tamura, executive]

[Interpreted] This is Tamura. I'd like to talk about the business highlights for the first half of the year.

In the first half, we made excellent progress in our drug discovery. We entered into a new strategic technology collaboration with PharmEnable for AI-driven drug discovery. The goal of this collaboration is to develop new drugs for peptidergic GPCR targets, which have been difficult to discover so far.

We also partnered with Inveni for the discovery of multiple GPCR targets using AI in early June.

We also formed a strategic partnership with Metrion. For the first time, we will apply the SBDD approach to membrane proteins other than GPCRs.

Our partner drug candidate discovered through a multi-target R&D collaboration with Pfizer has entered clinical trials. This is an MC4 receptor antagonist for anorexia. Clinical trials have also started for compound in collaboration with Biohaven for the treatment of CGRP-related diseases. This is the tenth GPCR-targeted drug candidate generated by the group's drug discovery platform to enter clinical trials.

In addition, milestones were achieved by providing StaR proteins for 3 targets selected through a multi-target collaboration with Genentech in 2019.

Orexia, a spin-off company was merged into a newly formed company, Centessa. And in June of this year, Centessa completed its listing on NASDAQ with a market capitalization of approximately JPY 180 billion and JPY 40 billion in funding, thereby increasing the financial assets on the group's balance sheet.

Regarding the coronavirus therapeutics. The target is M protease, which is essential for viral replication. This protease is structurally invariant in various coronaviruses and is expected to be effective against current and future variants. Details will be discussed later.

Next, Slide 13, please. As for our drug discovery achievements and the prospects, we have generated 24 preclinical lead candidates in the past 12 years and 10 of them have entered the clinical stage. Currently, we have 21 preclinical candidates, 10 of which are in the clinical stage. This is the global highest level of any drug discovery as about a company of its size. Based on this track record, we plan to deliver at least 4 lead compounds every 2 years and 2 preclinical candidates every year.

Next slide, Slide 14. You see some overview of our program. If we include compounds at the hit stage, we have more, but the probability of commercialization from that stage is low, therefore, it's not meaningful. We didn't include here. Those that made progress during the first half of the year are marked as new, as explained earlier. Each program is important and there are many things to explain, but there is not enough time to talk about all of them. So I will just summarize the otherwise new ones in the clinical stage.

In terms of A2A receptor antagonist, AstraZeneca is currently conducting a Phase II study in prostate cancer, mainly in triplet combination with PD-L1 inhibitors and chemotherapy. The main readout will be available in and after 2022.

The GLP-1 agonist being developed by Pfizer are currently in Phase I for type 2 diabetes and obesity. Most GLP-1 agonists are injected subcutaneously, and the global market was JPY 1.2 trillion in FY 2020. Novo's product is the only one approved as oral agent and its sales has been increasing rapidly since its launch. But it has some drawbacks such as restrictions on the timing of administration because it is a peptide. On the other hand, our drug is a small molecular entity, which has the advantage of better absorption and lower manufacturing costs. It's a huge market, and I look forward to the progress of its development at Pfizer.

mGlu5 NAM is developed by a company, Tempero, which was jointly established by our company and the VC established by former NVS CEO and others. Target indication is substance use disorder and [indiscernible]. There is a preceding compound, but drug is expected to become best-in-class with data showing much better efficacy.

And the muscarinic agonist were reverted from AbbVie-Allergan. I am most excited about the M4 agonist. Dr. Tim Tasker, CMO, will give you a detailed explanation later.

As for the coronavirus drugs I mentioned earlier, they target the M protease, which is essential for viral replication. 3CL protease is also called M protease and M Protease is also known as a 3CL protease. As mentioned earlier, the structure of this part is unchanged among various coronaviruses. So it is expected to be effective against various variants.

COVID-19 is far from an end. Vaccination is progressing, but so-called breakthrough infections, which occur even after 2 doses of vaccination, are now focus of attention. The emergence of new variants is inevitable and the development, production and supply of new vaccines to cope with them will be a challenge and futile cat-and-mouse chase will continue. If this is the case, the development of a treatment that can be easily administered orally in the event of infection will be as important as vaccine.

There are 3 potential compounds targeting M protease for oral administration. The most advanced is Pfizer's compound and Phase II, III is in progress. The drawback is that it requires concomitant use of HIV drugs to raise blood concentration levels. Shionogi's compounds have recently started clinical trials in Japan. Our compound is a potential clinical trial drug. It shows comparable efficacy to Pfizer's compound and may not require concomitant medication as it maintains high blood concentration levels.

Slide 16, please. This project was carried out from the perspective of ESG, not pursuing greedy profits but from the perspective of social contribution. Once the product is commercialized, we plan to provide it to underdeveloped countries free of charge. If there is any revenue from this program, we plan to invest it into the next ESG project.

In addition to seeking financial support from nonprofit organization and government, we are also looking for partners to conduct clinical trials. We have received this from several companies. This also demonstrated the superiority and versatility of our SBDD technology by identifying a promising lead compound in a short period of time out of thin air.

Slide 17, please. We are the world leader in GPCRs, which are the most common protein drug targets. However, we are not resting on our laurels and we continue to improve our drug discovery efficiency by utilizing the technologies we have accumulated within the company and by acquiring necessary technologies through alliances with other companies that have complementary technologies to maintain our top position. Selecting the right target is the starting point of drug discovery and this is the most important issue for us to develop as a leader in innovative drug discovery, how to incorporate the right biomarkers and big data is a key to efficient drug discovery. Successfully managing this process will increase the value of our pipeline and continue -- and contribute greatly to elevating corporate value, including through alliances. As mentioned earlier, we plan to produce at least 4 lead compounds every 2 years and 2 preclinical candidates every year.

Please turn to Slide 18. As for the strategic growth plan, in terms of revenue generation opportunities, we raised funds for the next round of M&A and added about JPY 10 billion to increase our war chest to about JPY 30 billion. Part of the funds will be used to improve the efficiency of drug discovery and to expand our targets, and we have already entered into a partnership with Metrion, which specializes in ion channels.

In the area of novel technologies, we have partnered with Captor, which has proteolytic induction technology; PharmEnable, an AI drug discovery company; as well as Inveni. We are also in the process of negotiating in-licensing a late-stage development product for the Japanese market.

Next is CMO, Tim Tasker. Thank you.

[Tim Tasker, executive]

Good afternoon. I am Dr. Tim Tasker. I'm the Chief Medical Officer for Sosei Heptares and also the Executive Vice President of Development. Looking forward to telling you about the muscarinic program.

I'll now update you on the progress of our portfolio of muscarinic agonists, which we regained from Allergan last year. Sosei Heptares has discovered a portfolio of multiple novel orthosteric agonists, which are highly selective for the M1 and M4 receptor together with compounds with activity at both of these receptors called dual agonists. These are orthosteric agonists, which act directly through the muscarinic receptor. This is an important differentiation from some other compounds in development elsewhere, which just alter the binding of acetylcholine to the receptor and do not directly stimulate the M1 or M4 receptors.

Our compounds were identified by the use of the Heptares' proprietary StaR technology and our structural studies of the receptor. M1 and M4 are now clinically validated for the treatment of psychosis and cognition because of studies on a nonselective compound, xanomeline, which was poorly tolerated because of effects outside its target. We know the Sosei compounds can stimulate the target without these nonselective effects and will be better tolerated as a result.

There is potential of these compounds in schizophrenia and dementia, but we now believe the M4 compounds have blockbuster potential in schizophrenia, where they will provide effects upon positive symptoms and can be much better tolerated. We have now further invested in the lead M4 compound, 878, and are progressing it to be Phase II ready by the end of this year. There is a second M4 selective compound, which is now Phase 1 ready.

We also now have 2 new compounds in early development, one acting on the M1 receptor and another one, both M1 and M4, which will be ready to start clinical studies that is IND ready by the end of 2022.

Next slide. This portfolio of multiple compounds provides a ready-made neuroscience portfolio of blockbuster potential. We are now in advanced negotiations with multiple global development or co-development partners. Our current intention is to seek a partner able to invest in all the opportunities in order to accelerate their development.

The portfolio is shown in this slide. At the top, the 2 M4 selective compounds, one Phase II ready this year; in the middle, the dual compound targeting M1, M4, IND ready at the end of '22; we also show the M1 compounds in the middle, the older ones, 936 and 318, which we have previously studied in man; and at the bottom, the new M1 compound which will be IND ready in 2022. We're still investigating the toxicity with 318 that led us to place the program on hold and expect to consult with regulatory authorities about our investigations from the end of this year.

Next slide, please. This slide shows important aspects of efficacy and safety for current treatments in schizophrenia. Important areas of efficacy are positive symptoms, the traditional signs of mental disturbance with hallucinations and delusions. Schizophrenics also suffer from negative symptoms with withdrawal from engagement with other people and disturbances of thinking, affecting ability to work, et cetera.

Current antipsychotics act directly upon dopamine receptors and are effective against positive symptoms, but less effective on cognition and negative symptoms. They are also poorly tolerated when used outside the psychotic episode because of effects on muscle control, which are called extrapyramidal symptoms, and weight gain because of effects upon metabolism. Patients often do not like taking them, and most importantly, very often stop taking them, allowing the relapse of their disease.

A new mechanism that is effective, but which is much better tolerated is thought to have real potential by experts in this area. Clinical data on M4 agonist is now becoming available, which show these to be the first major advance in the treatment of schizophrenia for between 30 to 40 years.

I'm going to talk a little bit more about those. A combination product of xanomeline and the Cerevel compound have reported results from initial studies in acute psychosis, which show these agents, which act through the M4 receptor are strongly effective in positive symptoms, but also improve negative symptoms due to the acute illness. It is early days yet, but they also show some benefits in acute effects upon cognition. They are also much better tolerated by patients than the existing older agents.

We believe that the Sosei M4 compounds are the optimal approach to stimulate the M4 receptor and will be effective in psychosis but even better tolerated than the other agents acting through M4. We expect them to show similar strong efficacy. But importantly, we expect better tolerability, which is extremely important in allowing patients to continue taking their treatments.

Next slide, please. This slide summarizes the emerging data for 2 other approaches that activate M4. The Sosei Heptares Phase II-ready 878 direct M4 agonist is shown on the right. On the left is KarXT from Karuna. This is a combination of the older drug xanomaline with an antagonist, which reduces some of the adverse effects of xanomeline, but makes the medicine very complex and prone to the problems that come with the antagonist. In the middle is CVL-231, which is a partial allosteric modulator, or PAM, from Cerevel.

Both KarXT and CVL-231, have presented data showing strong efficacy in acute psychosis in schizophrenia with good separation from placebo on positive symptoms and signs of effects on negative symptoms that result from the improvement in positive symptoms. The date of the data presentations by these 2 companies are also shown on the slide. The findings that these agents, which act through the M4 mechanism are effective in schizophrenia, very strongly validates that M4-acting medicines can control psychosis and strongly supports the potential of the Sosei M4 agonist, 878, in schizophrenia. Both companies' share prices and market cap rose significantly after the release of these results and the data is fueling strong investor and industry interest in the muscarinic class.

Next slide, please. So in summary, the Sosei selective M4 agonist, 878, will be Phase II ready this year. Its orthosteric mode of action is highly differentiated and it is the only such M4 agonist in development with any company. It is the product of Heptares' expertise in structure-based drug design for compounds acting G protein-coupled receptors. The muscarinic M4 mechanism is now highly clinically validated for the treatment of psychosis by data with xanomeline, KarXT and CVL-231 and a substantial base of nonclinical science.

878 has been shown to produce effects through the M4 receptor in animals and in man in our Phase I studies. 878 is an orthosteric partial direct agonist of the receptor. We believe this will result in strong efficacy, but a potentially improved side effect profile compared to the other agents acting through the M4 mechanism. 878 is more selective than KarXT's 2 components.

CVL-231 is a positive allosteric modulator, which works by boosting the effects of natural acetylcholine without directly stimulating the M4 receptor. This is a generalized effect, which makes it difficult to achieve a margin over peripheral effects.

In addition, an orthosteric agonist like 878 does not depend upon the background acetylcholine tone to achieve its effects as a PAM does. We expect that where cholinergic tone is reduced, such as in Alzheimer's disease, a PAM will be ineffective. We therefore expect 878 to be much more effective in dementia-related psychosis than the Cerevel PAM.

So overall of the new fourth-generation treatments in development acting through this mechanism, 878 stands out as a clearly superior approach, and we look forward to the start of Phase II studies in schizophrenia. Thank you.

I'm sorry, I haven't quite finished. We look forward to the start of Phase II studies in schizophrenia working in conjunction with a new partner for the muscarinic portfolio when we have concluded those negotiations. Thank you.

[Hironoshin Nomura, executive]

[Interpreted] [Operator Instructions] And by the way, translation service is available, and you'll be able to choose either English or Japanese by clicking the globe mark that you can find at the lower-right corner on the screen. [Operator Instructions]

The first question is Mr. Matsubara of Nomura Securities.

[Matsubara, analyst]

[Interpreted] This is Matsubara of Nomura Securities. Can you hear me?

[Hironoshin Nomura, executive]

[Interpreted] Yes.

[Matsubara, analyst]

[Interpreted] I have 3 questions. First, muscarinic agonists. Since the start of clinical trials, you add value, increasing the value and then you out-license. But in Page 21, you said that M4 P2 will be starting in 12 to 18 months and also you'll be starting the -- another program by 2022. So what is the actual timing of re-out-licensing of this program?

[Shinichi Tamura, executive]

[Interpreted] So first, about out-licensing opportunity of muscarinic, I would like to answer to your question. As Tim and Chris mentioned, Cerevel data was published just recently. And after Karuna, Cerevel actually showed the rightness of hypothesis of M4. And based upon that, we have been progressing negotiations with a potential partner.

Regarding the partner selection and negotiation, we cannot say when it will be exactly. However, we have potential multiple counterparts showing strong interest and we are now actively negotiating with them. So at the latest, within this year, I think it is highly likely that we'll be able to achieve out-licensing of the program.

[Matsubara, analyst]

[Interpreted] So concerning M4 P2 start or for M1/M4 P2 start, there is a likelihood that you would enter into this out-licensing agreement?

[Shinichi Tamura, executive]

[Interpreted] Yes. Your understanding is correct.

[Tim Tasker, executive]

I'm sorry. If that was a question to me, could it be repeated?

[Hironoshin Nomura, executive]

[Interpreted] Please speak in English or please speak in Japanese.

Nomura Securities asked that question. Regarding the Phase II trial start concerning 878 and including other compounds or agonist. After out-licensing the -- actually, the clinical trials will be starting. So after selecting your out-licensing partner, then you'll be jointly starting clinical trials. Is this understanding correct? That's the question.

[Tim Tasker, executive]

Yes. So the question is will we be jointly starting clinical trials with a partner. Well, the exact arrangements will depend upon which partner we agreed to work with. But it's certainly the case that we expect Phase II studies with partners to begin in the first half of next year, and we are working towards that. We expect that depending upon the size of those studies, that they will be largely conducted by the partner, but we will continue to be involved in supporting with some early stage work. But the exact arrangements will depend on the partner that we decide to work with.

[Matsubara, analyst]

[Interpreted] Understood. My second question, that muscarinic agonist by Karuna, of course, I am sure and I understand that there are concerns about the side effects. But for M4 and M1 plus M4, the dual agonist, what is the superiority you have with these compounds? That is the question.

[Tim Tasker, executive]

Well, the Karuna approach involves the use of a peripheral antagonist. And our compounds have a different pharmacology from the xanomeline components and are more focused centrally by virtue of their partial nature. But in addition to which, the Karuna compound involves a peripheral antagonist, which is a broad spectrum peripheral antagonist, and that is required to control the adverse effects that arise with xanomeline. The antagonist is very broad spectrum and introduces some symptoms of -- due to that element, so particularly constipation and effects upon urinary function. And in addition to which, the dose of the antagonist has to be exactly right and it has to be well absorbed. And although in their clinical trials they achieved that because dosing was in hospitals, in normal clinical use it will be much more difficult for them to achieve that because its absorption is very affected by food.

So there are differences in the way the agonists work, and ours are designed to have less peripheral effects. And secondly, the Karuna compound, Karuna KarXT, introduces difficulties because of the use of the antagonist and getting that -- avoiding adverse effects because of that is quite a challenge as well.

So a single compound is superior. And particularly the studies in schizophrenia now show that the predominant benefit comes through and for rather than the mixed effect that you get with the Karuna compound. That concludes my response.

[Matsubara, analyst]

[Interpreted] Understood. Question is about Page 16, COVID-19 therapeutics. 879 is showing efficacy in various coronaviruses, we understand that. But in animals, I think depending upon species, the time to show effect seems to be much different depending upon the species of animals. Could you explain about this? Could you show the slide.

[Shinichi Tamura, executive]

[Interpreted] Yes. It is true that the top is in vitro. And the third one is in vivo data. And it's same as Pfizer's or we are a little better. And as you said, in the middle this is not the variant but -- well, in terms of interpretation of toxicity, our analysis shows that the toxicity is not a big problem.

[Hironoshin Nomura, executive]

[Interpreted] Thank you very much for your questions. We'd like to move on to the next question from Mizuho Securities, Mr. Tsuzuki, please. Mr. Tsuzuki, can you hear us?

[都築 伸弥, analyst]

[Interpreted] This is Tsuzuki from Mizuho Securities. Can you hear me?

[Hironoshin Nomura, executive]

[Interpreted] Yes, we can hear you.

[都築 伸弥, analyst]

[Interpreted] I would like to ask a question about muscarinic agonists and also about COVID-19. For muscarinic agonist, M4 -- well, for M1, [ 383 ] toxicity result will be available first half of '21. That was mentioned before. Maybe it's my English understanding, but I think you said that you will be having discussion with the regulators by the end of the year for the future. And that is my question.

For M4, shareable data whether -- is to compare them directly with the shareable data, I believe, is very important. In the appendix, in the column effects, I think there was an appendix material that compares the 2. So Mr. Tasker, would you be able to explain this in more detail, please?

[Tim Tasker, executive]

Yes. Concerning M1, we do expect to consult with regulatory authorities starting at the end of this year. That is correct. We currently have a further toxicology investigation in progress for a metabolite that we believe may contribute to this toxicity and that will complete in the second half of this year. And that's the information that we will use to consult with the regulatory authorities. So that is what we're expecting to discuss.

If we could move to the slide that you discussed, then I can just make a comparison with the Cerevel compound and this is a little bit more detail. Let me just find it in English, which allows me to talk to it. But what we're looking at here is a diagram that shows the difference in the pharmacology between the Sosei Heptares agonists and -- 878 and the Cerevel compound.

So the figure in the middle is meant to represent an M4 receptor. And on the left-hand side, there are some statements concerning the Cerevel compound, which binds to a different place on the receptor from 878. So you can see that -- and there are some statements on the right-hand side that described 878.

So 878 directly binds at the -- where acetylcholine binds. So it's acting as a full replacement for acetylcholine. What the Cerevel compound does is it binds to the allosteric site. And the effect of that, it's a different site on the receptor, and this controls the release of acetylcholine if it's there and thus enhances the response to any acetylcholine which is there, whereas 878 is binding where the acetylcholine is.

So just to summarize the differences. A PAM like the Cerevel compound has to have acetylcholine present to have efficacy. And importantly, in patients with dementia-related psychosis, because of their disease and Alzheimer's disease predominantly, they're at the end stage of Alzheimer's disease particularly, then acetylcholine reduce -- release is reduced. And so a PAM has no acetylcholine to work upon and will have less effect. So a PAM is unlikely to be effective in dementia-related psychosis.

And the other point is that this effect of the Cerevel compound modulating the effects of acetylcholine happens all over the body, in the brain and peripherally. And so it enhances the adverse effects of acetylcholine peripherally. And that means that we will get adverse events due to the peripheral effects of acetylcholine.

In contrast, on the right-hand side, 878 is a highly selective partial agonist which directly stimulates the target for acetylcholine but does not need to have acetylcholine there to work. So this is going to be more effective in dementia-related psychosis. It will also better control acetylcholine release to modulate dopamine, which is how the M4 receptor works in schizophrenia. And there will be no unwanted effects from other muscarinic receptors because our 878 is very highly selective to M4. And because it's a partial agonist, that means, if you like, you put your foot on the accelerator. The accelerator doesn't respond as much. It only works when there's a strong signal. So because it's a partial agonist, it drives central effects, but it has reduced effects on peripheral mechanisms which are less well coupled.

So all of these things mean that there will be a much -- the 878 will work in dementia-related psychosis and it is better -- expected to have better separation between central and peripheral effects because of that mechanism. Another factor which we haven't gone into is the fact that the Phase I data shows that 878 is -- reaches high concentrations in the brain and gets into the brain very well.

So overall, we think this is a better way of stimulating the M4 receptor, which does not depend upon having acetylcholine there like Cerevel approach. And we believe that, that will have a better separation between central effects on the brain and peripheral effects, which are giving rise to adverse events. So we believe this will be much better tolerated and more effective in dementia-related psychosis.

I hope that's a little bit clearer from that picture. Thank you. That concludes my answer.

[都築 伸弥, analyst]

[Interpreted] Thank you so much for your detailed explanation. Another question is about COVID-19 therapeutics. Up to 2 weeks, this can be administered. I think it said so in the slide. Why it is possible to administer this up to 2 weeks? Do we have any background supporting data?

[Shinichi Tamura, executive]

[Interpreted] I'd like to answer that question. Although I cannot give you a detailed elaboration, but what I heard from a person in charge is as follows. This PK profile is excellent. And as a result, 2 weeks administration is possible, available. For more details, I will collect the information and let you know later. Thank you.

[Hironoshin Nomura, executive]

[Interpreted] Mr. Tsuzuki, thank you for your question.

In the Q&A chat, including this question, we received many questions and in the various forms, including [indiscernible]. We'd like to try to answer to all those questions. So if you have any questions, please don't hesitate to enter your questions. And somehow, we will answer to your questions later on.

We go to the next question, Citigroup, Mr. Yamaguchi.

[Hidemaru Yamaguchi, analyst]

[Interpreted] Can you hear me?

[Hironoshin Nomura, executive]

[Interpreted] Thank you. Yes.

[Hidemaru Yamaguchi, analyst]

[Interpreted] I have 2 questions first in Japanese. So as you conduct clinical trials and you have been promoting your partnerships and acquisition deals and I'm not familiar with the most recent updates, but regarding your idea about M&A, once again, could you tell what is the company's view regarding M&A? I think it's better to answer this question from Chris.

[Chris Cargill, executive]

Sure. Thank you very much. Thank you for your question. With regard to M&A, as many of you will know, we have conducted a capital raising recently, which has strengthened our capital position so that we are ready when the right opportunity presents itself for us to be able to execute on a unique opportunity.

In terms of the focus of our efforts, these have not changed since we originally announced our intention to pursue acquisitions as part of our strategic growth plan. And the sorts of companies that we are looking to bring into the group companies -- or assets are those that are primarily revenue-generating and certainly have the ability to be cash flow-positive in the near term.

And the reason why we want to do that is, as you will be aware, we've spent a lot of time over the last few years building what we believe is a sustainable R&D model, one where we can make continued investments in our programs and in complementary technologies, but not going down the path of constantly burning like cash holes in the business. So we would like to support the sustainability of the financial profile by bringing in a company that is revenue generating and/or in the near term has the ability to become cash flow-positive.

In terms of the sorts of companies and assets that we are looking at, we are very much focused on the pharmaceutical industry and drug discovery companies. And I can confirm that we have looked quite extensively at some selected opportunities. And I guess that is evident in the increase in cash G&A expenses in our P&L. Some of those increases are related to professional advisory fees such as tax, commercial, legal, et cetera, that we need to spend when we conduct detailed due diligence on companies. Unfortunately, to date, we haven't found something that we think best fits what we are looking for and so the search continues. That completes my response. Thank you.

[Hidemaru Yamaguchi, analyst]

[Interpreted] May I have another question.

[Hironoshin Nomura, executive]

[Interpreted] Yes, please. Go ahead.

[Hidemaru Yamaguchi, analyst]

This is in the original language, so I will speak in English here. About the 878, first of all, the Cerevel data on Phase I looks good. But at the same time, I feel like placebo didn't work well in a sense that the mean change from baseline or placebo is kind of exaggerated on the placebo one because the placebo effect is so weak. Can you make a comment on that one?

And also, can you tell me whether this 878 is the QD or BID setting at this moment?

[Tim Tasker, executive]

So your question is about the placebo response with Cerevel's compound. Yes. Well, of course, they haven't made all the data fully available, so it's a bit difficult to comment on that. But both Karuna and Cerevel very carefully designed their studies to have weak placebo responses.

In the case of Karuna, they did it by only having one dose level compared to placebo. And also they carefully chose a small number of expert sites. And these were wise decisions because, as you highlight, it is important to show the difference from placebo. And I think they did that in order to minimize the placebo response and that's how they showed that strong effect. I think the fact that both companies showed the same says that it was the right strategy to follow and that it was a real result for -- around M4. So we see it as a positive aspect and some learning there about how the studies on 878 should be designed.

The second part of your question was whether or not we're talking about once daily or twice daily with 878. And it's -- that's -- it may be possible to dose once daily. We will have to incorporate. We certainly can be given twice daily, but it may be possible to dose once daily. And that is one aspect which we will probably seek to incorporate into the Phase II studies in order to understand that more completely. And that's something that we're in -- we will consider carefully in discussion with partners. That concludes my answer.

[Hironoshin Nomura, executive]

[Interpreted] Thank you, Yamaguchi-san. The scheduled ending time has already come, but we'd like to extend the time, which is also that we'll be able to respond to 2 more questions. And also for other questions that you gave in chat and so on, we'd like to answer later on.

Next question is Mr. Miura of Jefferies.

[Naoya Miura, analyst]

[Interpreted] This is Miura of Jefferies. Can you hear me?

[Hironoshin Nomura, executive]

[Interpreted] Yes, I can.

[Naoya Miura, analyst]

[Interpreted] I have 2 simple questions. First is a follow-up on Yamaguchi-san's question concerning M&A. We raised the capital of JPY 10 billion this time and you are now searching the targets. Within this fiscal year by the end of December this year, I think you gave us explanations that you will do this acquisition. Is there any changes or not?

And also the transition to -- or moving to prime next year, well, maybe the situation has changed. But compared to the past, do you think that the current situation is more likely that we will be able to achieve this movement to prime?

[Shinichi Tamura, executive]

[Interpreted] Now I'd like to answer first and then if there are any supplement, I think that follows. Chris discussed about M&A. It depends on the counterpart. And in some potential cases, we actually dig deep. And of course, the companies are expensive and more economic companies have some reasons to be cheaper. And of course, we don't have -- we don't want to pay too much.

So depending upon factors, regardless of the [indiscernible] or categories, we have been searching and reviewing various opportunities. And we never know when it will be. But in order for us to ink those deals with our prime transitions, already 6 months have passed. And let's say that we purchased a company of revenue JPY 10 billion, it's going to be half in financing. And we will continue to have milestone income and licensing fees. And in the total, I believe that we'll be able to meet the criteria to go to the prime.

And also muscarinic program out-licensing negotiation has been advancing and I believe that the likelihood or probability of achieving this is high. So having some flexible approach, I believe that it's possible for us to meet the criteria. So my direct answer to you is that most likely, the out-licensing of muscarinic program will take place for us. Then we will meet overall the criteria and we will move to the prime.

And for M&As, we are not in rush. Rather than choosing something not good, we'd like to take time and find best fit one for us.

Chris, do you have any supplement?

[Chris Cargill, executive]

No. That was very well covered. Thank you. I think the theme to emphasize, as Tamura-san said, is that we have dug deep and done extensive diligence in selected situations. One of the elements or aspects of the current market environment more broadly is that asset valuations remain very high. And that might be okay for some, but for Sosei, we are not the sort of company that wishes to be dragged into a competitive auction situation that requires us to acquire a company that these are either overvalued or has a hyped valuation.

So to Tamura-san's point, we're very fortunate we have a muscarinic program to focus on, and we can be patient. Particularly now that we have executed the refinancing deal, we have the time and the flexibility to ensure that we choose the right opportunity to fit into our group. And that means we may not complete something by the end of this year from an acquisition perspective, but we certainly have other value-generating things like the muscarinic program that can certainly help with corporate growth. Thank you. That completes my response.

[Naoya Miura, analyst]

[Interpreted] My second question. As you mentioned, the muscarinic program, the importance is becoming bigger. That is my impression. The Phase II study for M1 agonist, you said that you've been starting that trial by summer of next year. What about the study design for Phase II? Do you have something in mind already? And is preparation ongoing for that study?

Because for central trial, placebo effect may be stronger. And of course, for training of personnel, know-how will be needed. For such a study design, would you be creating that? Or would you be working with your partner who may be specializing in that area to come up with a study design that is going to be having more -- higher probability? So for muscarinic program, you are working on out-licensing, negotiating with a candidate and that you're able to apply a new milestone by next summer. Is that the target and your objective?

[Shinichi Tamura, executive]

[Interpreted] Yes. What you have just said is correct. So Tim, would you like to comment?

[Tim Tasker, executive]

Yes. If you -- I think you're asking about the timing of the M4 program. And yes, we are doing the necessary work to put us in a position where a Phase II study could start in the first half of next year. We think it's important to do that in order to be fully competitive with an important new area. But as you say, we expect this work to be done with a partner and we anticipate that our preparatory work will put us in the position so that the partner can rapidly take this over, perhaps make some modifications to our thinking according to their needs, and we'll need to understand what that is, and then be in a place to initiate the study in the first half of next year. That's our intention, yes. That concludes my answer to that.

[Shinichi Tamura, executive]

[Interpreted] I'd like to add some supplementary comment. When it comes to our study design, we are progressing with negotiation with potential partners. Thank you.

[Hironoshin Nomura, executive]

[Interpreted] Thank you, Mr. Miura. So now in the interest of time, we'd like to take a final question. And I forward to tell you this, but both in Japanese and English this presentation and discussions will be put on the website later on.

Now the final question, Toyo Keizai, [ Mr. Onishi ]. [ Mr. Onishi ]?

[Unknown Attendee]

[Interpreted] Yes, this is Onishi, Toyo Keizai. Can you hear me?

[Hironoshin Nomura, executive]

[Interpreted] Yes.

[Unknown Attendee]

[Interpreted] I have one question for confirmation. Page 21, you have been talking about muscarinic program and you'd like to find a partner for other program in 1 and you said that probability is high to conclude this out-licensing within this year. So 318 toxicity from the end of this year, you'll be having consultation with FDA. But even without knowing that toxicity part, can you negotiate with the counterpart of this out-licensing opportunity?

And Alzheimer's disease is included here. But the surrogate approval, so the first approval was granted in the U.S. Does this impact onto your programs like changing or reducing the interest level in your compound for Alzheimer's disease? These are the points that I'd like to confirm with you.

[Shinichi Tamura, executive]

[Interpreted] Thank you. Would like to ask Tim to respond first and if any supplemental necessary, then I will add something later on. Tim, please.

[Tim Tasker, executive]

Yes. Thank you. So we are in strong negotiations around partnering the entire portfolio. And there are scientific reasons why that -- and commercial reasons why that makes sense. There is very strong interest in M4 and we have tried to explain some of that today. And that is amongst the most important thing that drives a partner interest.

Your question was whether or not any concerns about 318 toxicity might adversely impact upon the negotiations, and there are 2 points. Firstly, we think the problem that occurred with 318 was solely -- was a unique problem for that molecule.

Secondly, we now have a new M1 agonist, which is very different from 318, and that gives -- that allows the potential in Alzheimer's disease for the M1 to be followed. And partners can see that, that is available. And the results of the regulatory discussions will help understand the future of 318, but they do not have a broader impact on the rest of the portfolio. I hope that answers your question.

[Shinichi Tamura, executive]

[Interpreted] If I add something here. Well, regarding Alzheimer's disease, Biogen's agent, that amyloid beta surrogate, by lowering that, I think that it was approved quickly. So surrogate specialized therapeutics for Alzheimer's disease, that might attract more interest in the pharmaceutical industries. And as a result, our Alzheimer's disease program may lose the interest and which may reduce the value of the total programs as you negotiate with the potential partner. For that, I'd like to answer to your question.

Well, MOA is totally different. And surrogate market itself, that's approved and that's causing various discussions and controversies. But at any rate, it is effective only in the early stage Alzheimer's disease. And Biogen's communication, in various stage, they appealed broad indications. However, now it says that it is expected to be effective only for the early disease.

But our compound, as we explained, even without acetylcholine, our compound is effective. So beta amyloid-controlling agent or disease modifiers, even if several of those are approved, once a patient develops Alzheimer's disease, it is not reversible. Therefore, ours should be valuable. And Cerevel's results supported M4 hypothesis.

So Biogen Eisai's compound has been approved. But after 1 year since its approval, there is no lowering of interest level in the industry. But rather, I think that there is a positive impact to our compound. [ Tim has further comment, ] please.

[Tim Tasker, executive]

Yes. Just to follow on to Tamura-san's comment, the approval of the Biogen compound in early Alzheimer's certainly opens the need for treatment that would be better tolerated in patients at the first stage of the disease. And we think that an M1 would be very suitable in that area. So that does broaden the opportunity beyond that of conventional agents in Alzheimer's disease. That concludes my response.

[Hironoshin Nomura, executive]

[Interpreted] Thank you very much, [ Onishi-san ], for your question. Because we have gone over time, we would like to end the Q&A session for today. We have received more than 100 questions and we have had more than 300 participants. As I mentioned earlier, this session can be seen on our website on a later date. And as for the questions that you have sent to chatbox, we will use other means to answer those questions as much as possible.

After the end of the seminar, there will be a survey. We would appreciate it if you could fill in those surveys because it will contribute to betterment of the IR activities, and it will support our business activities going forward.

And with that, I would like to end today's session for the presentation of our results. Thank you very much for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]