Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Transcript 2019-Q2

[Sunao Manabe, executive]

My name is Manabe. Thank you very much for coming to Daiichi Sankyo's top management presentation despite your busy schedule. In my following presentation, I will explain the FY 2018 Q2 financial results announced today by following the content in the handout.

In today's discussion, I'm going to cover the following topics in the order of FY 2018 Q2 financial results, FY 2018 consolidated forecast, business update, revised target for 5-year business plan and R&D update. After my presentation, Glenn Gormley, the Global Head of Research and Development, will provide you with an update on the R&D. We will also take your questions after our presentations.

First, I'd like to explain the FY 2018 Q2 financial results. This shows an overview of the FY 2018 Q2 financial results. The consolidated revenue was JPY 446.9 billion, which is down by JPY 22.5 billion or 4.8%. The cost of sales showed an increase of JPY 9.6 billion. The SG&A expenses decreased by JPY 11.4 billion and the R&D expenses decreased by JPY 29.9 billion over the last year.

Consequently, the operating profit resulted in JPY 58 billion, which is up by JPY 9.2 billion or an increase by 18.9% year-on-year. The profit before tax was JPY 58.6 billion, which was an increase of JPY 7.4 billion year-on-year. The profit attributable to the owners of our company was JPY 44 billion, which was increased by JPY 9.7 billion or an increase of 28.4% year-on-year.

As for the currency exchange rates, $1 turned out to be JPY 110.27, which was JPY 0.8 appreciation than last year while euro became JPY 129.84, which was a JPY 3.55 depreciation than last year.

Please go to Slide #6. I'm going to use 4 slides to explain the factors which caused increase and decrease in the year-on-year comparisons. The revenue was decreased by JPY 22.5 billion year-on-year.

Let me go over the breakdown by main business unit. First, the business in Japan, including the domestic pharmaceutical products, vaccines and the OTC-related products, expanded the sales of the direct oral anticoagulant, LIXIANA; and the osteoporosis therapeutic product, PRALIA; as well as the Daiichi Sankyo Espha's products such as the authorized generics of olmesartan and rosuvastatin.

On the other hand, due to the impact of the expanding generic products, the antihypertensive drug, Olmetec, suffered from a significant reduction of the revenue. The revenues of NEXIUM and Loxonin also declined due to the impact of the NHI price revision. The skin care products at Daiichi Sankyo Healthcare were performing well. However, the revenue declined due to the reduction caused by the changes in accounting treatment. The overall reduction of the revenue in the Japanese business was JPY 14.8 billion.

Now let me explain about the overseas business. The impact of ForEx is excluded from what is listed on this page. Daiichi Sankyo Inc. in the United States reduced its revenue by JPY 19.9 billion due to the generics entry into the areas of the hypercholesterolemia and type 2 diabetes treatment drug, Welchol; the anti-platelet agent, Efient; and the antihypertensive drug, olmesartan, back in May. On the other hand, Luitpold in the United States has increased its revenue by JPY 6.5 billion due to the growth of the iron deficiency anemia products, Injectafer and Venofer.

Furthermore, the ASCA business in charge of the Asian and the Latin American regions increased its revenue by JPY 1.9 billion. The revenue increased due to the depreciate yen amounted to JPY 200 million in total. This slide shows the causes for the increase and the decrease of the operating profit. The profit was increased by JPY 9.2 billion. I will explain each of the items. As I mentioned before, the revenue declined by JPY 22.5 billion, which included the JPY 200 million of the increased revenue impacted by the ForEx.

Next, with respect to the expenses after the ForEx impact and the social items are excluded, the cost of sales increased by JPY 3.7 billion due to the impact of the changes in the product mix, driven by the patent expiration of olmesartan. The SG&A expenses dropped by JPY 8 billion due to the effect of the cost reductions in the United States. The total cost decrease due to the ForEx impact was JPY 400 million. As for the special items, their cost decreased by JPY 27.6 billion year-on-year. The actual reduction of the profit after the ForEx and the special items were excluded turned out to be JPY 18.9 billion.

This is the breakdown of the special items. In Q2 FY 2017, although the cost of sales decreased by JPY 6.1 billion due to the gain on sales of fixed assets, because of the intangible asset impairment loss pertaining to CL-108, the cost year-to-date is up by JPY 24.1 billion. In Q2 FY 2018, there's JPY 3.5 billion of gain on sales of fixed assets year-to-date. As a consequence, the cost went down by JPY 27.6 billion year-on-year.

Next on profit. Operating profit, as explained, including the impact of ForEx and special items, increased by JPY 9.2 billion. For financial income and expenses, in Q2 FY 2017, the [ GPN ] made a positive impact, but in Q2 FY 2018, the appreciation of the yen made a negative impact, increasing the expenses by JPY 1.8 billion. Meanwhile, income taxes due to the impact with tax rate reduction in the U.S. decreased by JPY 2.8 billion. As a consequence, profit attributable to the owners of the company stood at JPY 44 billion, up by JPY 9.7 billion year-on-year.

Slides 10 and 11 show the yen-based revenues of the major business units and the major products in Japan.

Slide 6 show the revenues by unit, excluding the ForEx impact. Here, the revenues are shown, including the ForEx impact.

Next on FY 2018, consolidated forecast. On revenues, the total is unchanged, but the breakdown has been revised. For Japan, in addition to the JPY 6 billion of upward revision, thanks to the brisk performance of LIXIANA, including the gain on transfer of the long-listed products, the forecast was revised upward by JPY 15 billion. Daiichi Sankyo Healthcare, as explained, having been impacted by the decrease due to the change in accounting treatment, the forecast was revised downward by JPY 5 billion. Due to the impact on Welchol by the generics entrant, forecast of Daiichi Sankyo Inc. was revised downward by JPY 13 billion. And thanks to the strong performance of Injectafer, forecast of Luitpold was revised upward by JPY 3 billion. The total remains unchanged at JPY 910 billion.

For SG&A expenses, due to the change in accounting treatment at Daiichi Sankyo Healthcare, decrease by JPY 5 billion is projected. And for R&D expenses, along with the acceleration of R&D efforts focusing on oncology, additional JPY 5 billion is budgeted; operating profit, JPY 78 billion; and profit attributable to the owners of the company, JPY 55 billion shall be maintained.

Next on major business updates. First, I will discuss LIXIANA direct oral anticoagulant. In the Japanese market, it has been growing steadily, increasing the sales share. As of the second quarter, the sales share achieved 30.7%, getting very close to the product with the largest sales share. Reflecting this strong performance, as explained, the forecast was revised upward by JPY 6 billion, updating the full year target to JPY 60 billion.

In this slide, in addition to the trend in the Japanese market, the trends of the volume-based share in other markets are shown. Looking at EU, the business has been steadily growing in Belgium, Germany, Italy and Spain. And finally in the U.K., we see the upward trend in share. Looking at Asia, business is brisk in Korea and Taiwan. Also in Brazil, edoxaban was launched in August this year.

I'd like to continue to explain the status of the Luitpold business in the United States. This graph illustrates the IV iron market in the United States. The Injectafer continues to expand the share, which has grown to be 42.6%. It has increased the points by 2.5 since the data as of May was reported previously in Q1. This favorable trend was taken into account and we made an upward revision of $18 million, setting up a new goal of $372 million per annum.

Now I'd like to shift the focus of the discussion of the revised target for 5-year business plan which was announced in 2016. This shows the current progress of 5-year business plan. Edoxaban has been growing its share in each country and has gained its momentum beyond the initial target. It is expected to achieve the goal early. Luitpold in the United States has been also maintaining its high-level growth. The oncology business has been enriching the value of the pipelines, including DS-8201.

We are currently preparing for the applications and the launches of quizartinib and pexidartinib. On the other hand, the pain business in the United States suffered from the return of the right of CL-108 and the failed development of mirogabalin, which became the major causes of not reaching the initial goal. Our business in Japan has been growing steadily so far, but the business environment is becoming unpredictable due to the fundamental reform of the drug pricing system. In general, we concluded that it will be difficult to achieve our initial target for the 5-year business plan of JPY 165 billion operating profit by FY 2020.

In the area of oncology, we have invested heavily on the 3 pillars: the ADC Franchise, the AML Franchise and Breakthrough Sciences, and we are beginning to see the results. I will explain the potential of the ADC franchise in the next slide. Since the market launch of quizartinib and pexidartinib is on the way next year, AML and Breakthrough are demonstrating a significant progress.

Our ADC technology is deemed to have established the platform technology that produces many development products. The ADC franchise will expand by using this platform as the core. As for our flagship asset, DS-8201, as it has been announced in international conferences and press releases, promising clinical data has been accumulated, and we are beginning to see a potential for the product to become an effective choice for many patients.

The clinical data of U3-1402 were presented for the first time in June this year. It now has a potential of becoming a first-in-class drug supported by the high-quality data. Furthermore, since we were able to obtain good clinical data from different ADCs such as DS-8201 and U3-1402, we are now convinced that our ADC technology is a platform technology. We have an increasing expectation for DS-1062, DS-7300, DS-6157, DS-6000 and TA-MUC1, which applies the same ADC technology.

As you can see, the ADC franchise value has been increasing, and we concluded that now is the time for an opportunity to make a promising investment from which we can expect a high return in the future. In the current revised target for 5-year business plan, we will give priority to the investment that maximizes the potential of the ADC franchise.

It's also true that we have a choice of sticking to the initial profit target and aggressively cut down the R&D cost. However, instead of being fixated on the initial profit target and by increasing the investment on the oncology business, we will accelerate our growth in the future.

This is the original 5-year business plan. Our original target was to have JPY 1.1 trillion of revenue, JPY 165 billion of operating profit, 3 to 5 late-stage pipeline products with peak sales of more than JPY 100 billion and the ROE of 8% or more by FY 2020. As a result of the current revision, the FY 2020 target will be reduced to the revenue of JPY 960 billion and the operating profit of JPY 80 billion.

The oncology business will contribute to the revenue eventually, and the revenue will increase to JPY 1.1 trillion and the operating profit will be JPY 165 billion. Our new goal is to achieve the initial target by a 2 years delay. We will also aim to realize more than 8% of ROE in FY 2022 and have late-stage products with more than JPY 500 billion in total of the expected revenue at peak time.

The numerical targets are to be revised, but the strategic target shall remain unchanged and aiming at establishing a foundation for the sustainable growth. We would remain engaged in growing edoxaban, growing as #1 company in Japan, expanding the U.S. businesses, establishing oncology business, continuously generating innovative medicine, changing SOC and enhancing profit generation capabilities.

For 2025 Vision, global pharma innovator with competitive advantage in oncology, we shall further accelerate our transformation.

This is a set of midterm measures to accomplish our strategic targets. First, focusing resources on oncology business. By increasing R&D and capital investments to maximize pipeline value, we shall promote partnering. Also, we shall make the best use of business development investments for oncology business. For growth acceleration, [ transmission ] to oncology-centered business portfolio shall be pursued.

Next, for revising the regional strategy in the U.S., LPI business growth and acceleration of oncology business establishment shall be our focus. And in Japan, EU and ASCA, edoxaban shall be maximized. And including acquiring new product along with the growth of base business, we shall accelerate oncology business establishment.

For enhancing profit generation capabilities, we shall reduce investments in non-oncology business and promote further cost reduction initiatives and will continue liquidating noncore assets and cross shareholdings.

This shows the cash allocation image for 5 years from FY 2018 to FY 2022. R&D investments shall be increased with more allocation to oncology, and we shall make the best use of business development investments to enhance oncology business.

On shareholder returns, since FY 2016, annual ordinary dividends of JPY 70 have been maintained, and we have acquired our own shares in FY 2016 and FY 2017 worth JPY 50 billion, respectively. We have decided to maintain the total return ratio of 100% or more as our target from FY 2016 to FY 2022 for 7 years. These are the revisions in the fourth midterm management plan.

Next, I will discuss how we shall focus our management resources to oncology business. We will increase our investments in oncology, especially to maximize the potential of our ADC franchise. For R&D investments, to date, the plan for the 5-year period from FY 2016 to FY 2020 has been to prioritize oncology with JPY 900 billion of allocation. Going forward, during 5 years from FY 2018 to FY 2022, we will allocate investments more to oncology, and with additional JPY 200 billion, a total of JPY 1.1 trillion will be invested in oncology and ADC in particular.

For the purpose of enhancing oncology business, we have been steadily pursuing preparatory efforts, including manufacturing preparedness. For the next 5 years, over JPY 25 billion of capital expenditures will be budgeted. With accelerated and enhanced investments in oncology, we shall grow our revenue in the future.

We will grow our revenue in oncology business in FY 2022 to JPY 150 billion. With products such as DS-8201 and U3-1402, in FY 2025, the revenues shall grow significantly to JPY 500 billion, and we will aim at further enhancing our corporate equity.

This is my last slide. In order to expand our investments in oncology business during 5 years, JPY 1.1 trillion of R&D investments will be made, aiming at attaining JPY 500 billion of revenues in oncology business in FY 2025. For FY 2020, the numerical target in terms of revenue is revised downward to JPY 960 billion and operating profit to JPY 80 billion. But today, I presented the targets for FY 2022 operating profit of JPY 165 billion, ROE 8% or more, late-stage pipeline value of JPY 500 billion or more and maintaining a total return ratio at 100% or more. They are all perceived as the management commitment.

For 2025 Vision, Global Pharma Innovator with Competitive Advantage in Oncology, we will further pursue our transformation.

This concludes my presentation. Now R&D Global Head, Glenn Gormley, is ready to update you on our R&D efforts.

[Glenn Gormley, executive]

Thank you, Manabe-san. My name is Glenn Gormley, and I'm the Global Head of Research and Development at Daiichi Sankyo.

This afternoon, I would like to provide you with an update on the R&D oncology pipeline that we expect will accelerate the growth of our oncology business and provide new life-saving and life-altering treatment options to patients around the world.

I will start with a summary of our antibody drug conjugate franchise; I will then focus on DS-8201, which is the largest driver of value in our portfolio; followed by an update on several other late-stage oncology assets, including quizartinib and pexidartinib; and I will conclude by highlighting the anticipated timing for the release of new data between now and R&D Day in December.

Our ADC franchise continues to expand and is progressing rapidly across all phases of research and development. DS-8201, U3-1402 and DS-1062 are all clinical stage assets, with DS-8201 being the most advanced in several potential indications. The remaining 4 assets are in preclinical or discovery phases of investigation. Beyond this list, we have an active business development effort to identify new assets with the potential to be transformed into life-saving drugs using our ADC platform technology.

Here is a brief summary of the assets in our antibody drug conjugate franchise other than DS-8201, which I will cover in more detail in a few minutes.

U3-1402 is a first-in-class ADC, utilizing our own HER3 antibody, clearly demonstrating that the process used to develop DS-8201 is a true platform technology applicable to other targets. Our Phase I studies in breast and non-small cell lung cancer are progressing as planned. We anticipate providing an update of the breast cancer data at the San Antonio Breast Cancer Symposium and a first look at the non-small cell lung cancer data at ASCO.

DS-1062 is our TROP2 antibody drug conjugate. Our Phase I study in non-small cell lung cancer is progressing on track, and we anticipate being able to present data at ASCO. DS-7300 is our B7-H3 ADC which should enter Phase I in 2019. And finally, we've recently disclosed the target of our newest ADC, DS-6157, directed against GPR20, which we believe could be effective in the treatment of gastrointestinal stromal tumors, known as GIST.

We have committed to an extensive development program for DS-8201 that includes breast, gastric, colorectal and non-small cell lung cancer as well as multiple combination studies with checkpoint inhibitors. In our breast cancer development program, we have observed that many patients traditionally classified as having HER2-negative breast cancer will respond to DS-8201. Once this unique activity is confirmed, it may provide a new and exciting therapeutic option for these patients.

We have recently presented new data from our Phase I trial in patients with non-small cell lung cancer and colorectal cancer, which I will highlight in a few minutes. We have made great progress in our breast cancer program, including the completion of enrollment into DESTINY-Breast01, our pivotal trial in patients with HER2-positive breast cancer who have failed TDM-1.

And we've started to enroll patients into two Phase III studies, DESTINY-Breast02, evaluating patients with HER2-positive breast cancer who have failed TDM-1; and DESTINY-Breast03, evaluating patients with HER2-positive breast cancer as second-line treatment versus TDM-1. And we are now preparing to initiate a landmark Phase III study in patients with HER2 low disease.

In addition to our ongoing nivolumab combination study, we recently announced that we have entered into 2 new collaborations: one with Merck in the U.S. that will test the combination with pembrolizumab; and one with Merck KG in Germany and Pfizer that will test the combination with avelumab and a DNA damage response inhibitor.

The design of our Phase I study with DS-8201 is summarized on this slide. The study consists of a dose escalation phase, which established the pharmacologically active dose level, followed by a dose expansion phase in several different patient populations. I would like to highlight the data that was recently presented from Part 2d of the study, evaluating the cohort of patients with HER2-expressing or HER2-mutated non-small cell lung cancer and colorectal cancer. These data were presented at the World Conference on Lung Cancer and at ESMO.

The demographics and baseline characteristics of the patients enrolled in Part 2d with non-small cell lung cancer, which you can see on the left table; and with colorectal cancer, which you can see on the right table, are summarized on this slide. It is worth noting that both the non-small cell lung cancer and the colorectal cancer cohorts included many patients who had received multiple prior therapies, shown in the red boxes. And in the colorectal cancer group, 7 of the 20 patients enrolled had no detectable HER2 by immunohistochemistry, shown in the green box.

On this slide, the efficacy of DS-8201 in the treatment of patients with HER2-expressing or HER2-mutated non-small (sic) [ non-small cell ] lung cancer is shown in 2 ways. The graph on the left shows the percent change from baseline in tumor size. The blue bars indicate the presence of an exon 20 insertion, and the green bars indicate a single base pair substitution. The gray bars indicate missing data. The graph on the right shows the duration of response, with the dash lines indicating the presence of mutated HER2 and the solid lines indicating no mutation or missing data.

The chart at the bottom indicates that in the patients with mutated HER2, the overall response rate was about 73% and the progression-free survival was about 14 months, which is highlighted in the red boxes.

Here is a CT image from a 23-year-old female with stage IV non-small cell lung cancer and an exon 20 HER2 mutation. Her baseline skin is on the left and her skin after 4 months of treatment with DS-8201 is on the right. She experienced a 45% shrinkage of the tumor mass in her lungs, indicated by the red circles on the scans, and was evaluated to be a partial responder. It is data like this that gives us hope that DS-8201 could be an important drug for many patients with non-small cell lung cancer.

On this slide, the efficacy of DS-8201 in the treatment of patients with colorectal cancer is shown in the same way as the previous non-small cell lung cancer slide. The graph on the left shows the percent change from baseline in tumor size, and the graph on the right shows the duration of response, with the dash lines indicating the presence of mutated RAS in the tumor.

The overall response rate was about 16%. However, in a subset analysis in patients with HER2-positive disease, the overall response rate was about 27%. Further investigation is ongoing in a Phase II study that is actively enrolling patients.

The most frequent treatment-related adverse events that were reported in 20% or more of the patients across all tumor types from Part 1 and Part 2 combined is shown in this table. We observed that most of these adverse events were evaluated as low-grade and were generally GI or hematologic in nature. The most frequent adverse events that were evaluated as Grade 3 or higher were mostly hematologic.

The adverse events of special interest across all tumor types from Part 1 and Part 2 combined is shown in this table. Once again, we observed that most of these adverse events were evaluated as low-grade. There were 5 fatal cases of ILD or pneumonitis observed across all tumor types, but there was only one case of Grade 5 pneumonitis in the non-small cell lung cancer cohort. And this case was evaluated and determined to be unrelated to study drug by the independent adjudication committee that looks at all cases.

As you know, the ongoing Phase II pivotal and Phase III studies are evaluating the efficacy and safety of DS-8201 in patients with HER2-positive metastatic breast cancer or either hormone receptor-positive or negative. However, based on the emerging data from Phase I presented at ASCO, there also appears to be a significant treatment effect in many patients with low levels of HER2 based on immunohistochemistry and in-situ hybridization assays.

In response to this data, we are developing a Phase III program that will evaluate 3 groups of patients with HER2 low metastatic breast cancer. One group will be classified as having hormone receptor-positive cancer with no prior treatment with a CDK inhibitor. A second group will be classified as having hormone receptor-positive cancer and a history of prior treatment with a CDK inhibitor. And the third group will be classified as having hormone receptor-negative cancer.

Another important component of our development strategy for DS-8201 involves the combination of an antibody drug conjugate with a checkpoint inhibitor. The rationale for this combination is illustrated on this slide. When DS-8201 binds to cancer cells that express the HER2 receptor, it results in cell death and the release of cancer cell antigens. These antigens can activate T-cells, which then attack the remaining cancer cells. The combination with a PD-1 or a PD-L1 inhibitor is designed to prevent immune suppression, which can interrupt this cycle by inhibiting T-cell function.

The strategy to combine DS-8201 with a checkpoint inhibitor is supported by recently reported preclinical data in a mouse model with human HER2-expressing tumor cells, demonstrating a significant survival advantage with the combination, shown in the purple line, compared to DS-8201 or a PD-1 inhibitor alone, shown in the red and blue lines.

Based on this data, 3 studies will be conducted in multiple tumor types to identify the most effective combination in each indication. The nivolumab combination study is now underway in patients with breast or bladder cancer, while the pembrolizumab and avelumab studies are in the planning phase.

The design of the pembrolizumab combination study is outlined on this slide. A dose escalation phase will evaluate patients with HER2-expressing breast cancer or HER2-expressing or HER2-mutated non-small cell lung cancer. This will be followed by a dose expansion phase, where 4 separate cohorts will be used to explore the safety and efficacy of treatment in specific patient populations.

The design of the avelumab combination study is outlined on this slide. There are 3 parts to this study consisting of: Part A, which will evaluate DS-8201 plus avelumab in dose escalation and expansion cohorts; Part B, which will evaluate DS-8201 plus a DNA damage response inhibitor also in dose escalation and dose expansion cohorts; and Part C, which will evaluate the triple combination of DS-8201 plus avelumab plus a DDR inhibitor once the recommended expansion doses are known from Parts A and B.

I would now like to provide you with a brief update on 3 other important members of our oncology portfolio. The submission of the quizartinib registration dossier based on the results of QuANTUM-R is on track in our 3 primary regions. The Japan submission, where we've been granted orphan drug designation, occurred on October 17. The U.S. NDA rolling submission, where we've been granted breakthrough designation, has already started. And the EU MAA submission, where we've been granted orphan drug designation, is also on track to be filed by the end of the year.

Our plans to submit the pexidartinib NDA in the U.S. for the treatment of patients with TGCT remains on track for the second half of fiscal year 2018. We have been granted orphan drug and breakthrough therapy designation in the U.S. and orphan drug designation in the EU.

And finally, we will start clinical trials in Japan in the second half of fiscal year 2018 with the CAR-T agent, axicabtagene, which has been granted orphan drug designation for the treatment of certain types of B-cell lymphoma.

Between now and our next R&D Day in mid-December, we anticipate releasing new data at several conferences. You can anticipate seeing information from our evolving AML franchise at the American Society of Hematology in San Diego, including new data on quizartinib.

You can also anticipate an important update on DS-8201 at the San Antonio Breast Cancer Symposium, which will include updates on the HER2-positive and HER2 low programs, as well as an update on ILD based on the adjudication committee evaluations.

We also expect to provide an update on the U3-1402 breast cancer program.

And finally, I would like to announce that we will hold our next R&D Day on December 12, here at our corporate headquarters. As we have in the past, we plan to update you on new data and the progress of our most important oncology programs. I sincerely hope you will join us for this event.

Thank you for your attention.

[Hidemaru Yamaguchi, analyst]

I'm Yamaguchi from Citigroup. I have 2 questions regarding the 5-year business plan. My first question is that, it says that you will reduce investments in non-oncology and you will sell noncore assets. In order to achieve your financial target in 2022, putting aside your decision of what to sell, you need to get these initiatives rolling at least by 2020 to reach your target in 2022. What do you think about it?

[Toshiaki Sai, executive]

I believe your question is about our idle assets, including real estate. We have been working on them as necessary and we will work as hard as we can towards 2022. We will continue doing so.

[Hidemaru Yamaguchi, analyst]

So you're not saying that you will prioritize the business lines other than oncology within your company. And you will eventually sell these businesses? That is not what you're saying?

[Toshiaki Sai, executive]

I mentioned real estate just as an example. It is our intention to consider selling our assets from many different angles, including a variety of franchises.

[Hidemaru Yamaguchi, analyst]

So real estate is just an example?

[Toshiaki Sai, executive]

Yes.

[Hidemaru Yamaguchi, analyst]

My second question is about the target of JPY 150 billion of the oncology revenue in FY 2022, which you mentioned in your presentation. The number is higher than before. If possible, can you let us know the breakdown of this figure, including, for example, quizartinib, pexidartinib, DS and others? I'll really appreciate it.

[Toshiaki Sai, executive]

I'd like to refrain myself from telling you these figures. However, that would include RANMARK, of course. And pexidartinib is included as well. Quizartinib is included as well. DS-8201 is also included in some part of it. I just would like to refrain from commenting on the figures. I'm sorry.

[Hidemaru Yamaguchi, analyst]

Understood. And I don't mean to make fun of it, but please take a look at the diagram on Page 21. You have a scale in this diagram. I'd like to know if this scale is a serious scale. DS-8201 is outrageously large, you see. Is this coming from a true scale? Or is this just in the image?

[Toshiaki Sai, executive]

Well, it's just an image. However, DS-8201's launch time is getting close, and I believe this diagram takes that into account.

[Hidemaru Yamaguchi, analyst]

Understood. Lastly, I apologize for my ignorance, but I haven't been able to understand that GIST is cured by GPR20. I'm not asking about the mechanism, but can you tell me if this ADC is your first-in-class? I'm asking about DS-6157.

[Glenn Gormley, executive]

Yes. I don't think that DS-6157 will be a first-in-class. I'm not sure. But we have specific targets that we think will be very unique for our platform. So our antibody drug conjugate system is being tested now in a number of tumors. We'll identify the most effective, but it's very early to know.

[Hidemaru Yamaguchi, analyst]

But it is GPR20 antibody plus ADC, right?

[Glenn Gormley, executive]

Yes.

[Kazuaki Hashiguchi, analyst]

I am Hashiguchi of Daiwa Securities. I have 2 questions. The first question is simple. As of FY '22, one of the numerical targets you defined is the JPY 500 billion or more of the value of the late-stage pipeline. For example, DS-8201 will have been launched by then. That's my assumption. DS-8201 indication yet to be approved at that point in time, is part of this JPY 500 billion? Or DS-8201 compound is not part of this JPY 500 billion at all?

[Sunao Manabe, executive]

The former is the case. Depending on the indication, DS-8201 is part of this amount. Yes.

[Kazuaki Hashiguchi, analyst]

My second question is with regard to your plan. How you are going to sell and market the oncology for that? You have discussed a lot about the development, including today, and the launch timing is upcoming, I understand. So how are you going to establish your sales preparedness? And what about the cost for that effort? And I understand, this JPY 165 billion is also taken into that consideration.

[Sunao Manabe, executive]

As you pointed out, the launch timing is upcoming, including for quizartinib and pexidartinib. So based on that launch timing, in each region, we are trying to enhance the sales structure and sales network. In Japan, Daiichi Sankyo sales capabilities are quite strong, so we are looking at how we are able to shift that capability into the oncology area in overseas, in the U.S. as well. We have already started the process of hiring the human resources of key positions and also planning to enhance the headcount of MR and MSL, who will be in charge of actual promotion. Same goes with the EU. We are going to establish a sales subsidiary in EU. And along with the launch timing, we are already enhancing the preparedness.

[Kazuaki Hashiguchi, analyst]

Does that mean that you are going to pursue this effort in an organic approach?

[Sunao Manabe, executive]

Of course, there are different possibilities. But for the time being, we will have the launches of quizartinib and pexidartinib, which are not that substantial in scale. But as we grow our business, I'm sure there will be more options.

[Atsushi Seki, analyst]

I'm Seki from UBS. Thank you for your explanation. In the enhancement of the profit generation capabilities, if I remember correctly, you've discussed this matter 0.5 year ago, and you further gave us an update on this today. However, I have a feeling that we haven't been able to see anything specific yet. Is that because this matter is still under discussion and there is another party to get involved, but this will be made clear some time in the future? Or are those 3 bullet points describes pretty much everything?

[Joji Nakayama, executive]

We are currently trying to enhance the profit-generation capabilities from many different aspects, including formation of partnerships with others. Since the other parties are involved, it is correct to say that this is an ongoing matter.

[Atsushi Seki, analyst]

My second question is about the pie chart, where you indicated the breakdown of investment. I was surprised to see that the business development investment stays as JPY 500 billion. My impression is that, since the R&D investment is JPY 1.1 trillion, which is enough for the R&D, thus, you still have this JPY 500 billion remained. Or are you trying to save this JPY 500 billion just in case if anything happens, and that ultimately resulted in JPY 1.1 trillion of investment? Is it true that you have a wealth of pipelines at Daiichi Sankyo and you probably want to spend whatever you are able to spend? What do you think?

[Toshiaki Sai, executive]

We try to be as flexible as possible for that matter. What you just said is correct, that it is very likely that this will be applied to the R&D.

[Atsushi Seki, analyst]

My last question is about Page 45, and I'd like to ask this question to Dr. Gormley. So I think in June, at the ASCO conference call, so you presented the scope of the [ fifth ] -- scope of the trial will be only HER2-positive and HER2 low. But today, so you included HER2- and the HER2 low expressers as well. So I wonder if you have any interesting insight for the HER2 and the low HER2 expressers?

[Glenn Gormley, executive]

Yes. So you're right. Since the ASCO presentation, our thinking about the potential in HER2 low has expanded. Our early data gives us confidence that in the HER2 low hormone receptor-positive sector, we may be very effective. We also think there's a strong possibility that we could have good efficacy in the HER2 low hormone receptor-negative group. We haven't showed you enough data to convince you of that, but we are, obviously, by our boldness in our presentation, signaling that we think this has fantastic potential in this area where patients have no alternative.

[Unknown Analyst]

I am [ Irida ] of [ Iyaka K Sight ]. My name is [ Idaka ]. As for the high-level image of your business, looking at the current situation, you are relatively more competitive in the Japanese market. And in the overseas markets, I understand that you have difficulties. That's my impression. Regarding this impression, COO Manabe, CEO Nakayama, what is your comment on that? And as for the target of FY '22 in the midterm plan, regarding the revenue breakdown among Japan, U.S., EU and Asia, what is the breakdown that you envision? I'd like to understand the current breakdown and the future breakdown. This is my first question. And I will ask you another question later.

[Sunao Manabe, executive]

Revenue breakdown among Japan, U.S. and EU. Japan accounts for over 60% today. Compared to the time prior to the patent expiration of olmesartan, the U.S. market breakdown has dropped very significantly. And this is the reason, partially, why our business is having difficulties. And the same goes with the pain business in the U.S. The U.S. market is our largest pharma market in the world, so it is a must to have a presence in that market. In order to enhance that, we are going to enhance the oncology business in the U.S. as well as we have discussed today. As for the breakdown of our revenue for FY '22, I will not mention any specifics. Japan accounts for 60% today, which shall go lower. Personally, it shall be 50% and the rest should come from outside Japan. I'd like to ask the comment of CEO Nakayama.

[Joji Nakayama, executive]

COO Manabe made a fair comment. As you say, we have difficulties in the U.S. market. So in FY '22, I would like to see the order reversed. So as soon as possible, we would like to achieve the revenue level, which will give us a certain level of presence. And Europe is an important market in terms of oncology. Of course, we are going to pursue this effort in Japan as well. But I'd like to see the situation will be reversed compared from today.

[Unknown Analyst]

Another question is with regard to edoxaban. There is a restriction in usage by FDA. This restriction will stay in the future. In order to remove such restriction, have you been making any approach?

[Toshiaki Sai, executive]

We have been continuously making approach to FDA. But in reality, it is very difficult. This is our perception. Unfortunately, midterm, we are not able to expect so much of revenue from the U.S. market regarding LIXIANA and [ edoxaban ].

[Unknown Analyst]

My last question is with regard to the pain business in the U.S. You have returned back the rights of the product and you have difficulties in the development activities. So you have series of difficulties in that arena. In this area, there's this abuse issue, which has become an issue in the society, and this poses you a risk. As for your pain business in the U.S., are you going to maintain your declaration that you will pursue this business? Or is it about time that you fade out from this market? Are you thinking about that possibility?

[Joji Nakayama, executive]

Let me answer. As you say, abuse has become a very significant issue in the society. And under the Trump administration, this has become an important agenda. So the business environment is becoming tougher. And we believe that this is going to offer strong value to the patients. And based on that, we have been pursuing development. But of course, we understand the external environment being changing, and we want to make sure to carefully monitor and observe the situation.

[Unknown Analyst]

How about withdrawal from the market or slowing down your report?

[Joji Nakayama, executive]

We have not come to that level, but we are closely and carefully monitoring the situation.

[Unknown Analyst]

I'm [ Sakata ] from the editorial department of [ Mix ]. I'd like to ask you about your Japan business in relation to the 5-year business plan. You mentioned that the Japan business is becoming more unpredictable than before. I'd like to know exactly what part of Daiichi Sankyo you believe is becoming more unpredictable than before? The word unpredictable or opaque, if you will, is a fuzzy word. Where in your business do you feel the inconvenience? My another question is that I don't believe you indicated this in your 5-year business plan, but you have the highest number of MRs in Japan. You have about 2,200 MRs. Are you planning to keep this number of MRs in the future? I believe you mentioned an optimal number of employees. Can you share your thoughts about this? Are you considering an early retirement program? I appreciate your comments on these 2 points.

[Sunao Manabe, executive]

First, about your question of unpredictability. The major issue here is the drug price revision. In our case, although NEXIUM was expanding its sales, we were subject to repricing. In this time around, in the second quarter, we are experiencing an impact of JPY 25 billion or JPY 26 billion, which will be JPY 40 billion of impact per year. If the drug price revision happens every year, the impact will presumably continue for a long time. We do take that into account to some extent, but that's a significant matter. Generics are also increasing their penetration, which will be another impact on us. Another aspect of the drug pricing is that we still don't know what we are supposed to do with a high-priced drug. Our CAR-T product will be the target. Due to all these factors impacting on our business, I think it has been more unpredictable than before. We do have 2,200 MRs, and I get this question very often. But if you look at our current portfolio and the products, sales per MR is quite efficient. Because of that, the MRs are doing well in sales. And we are #1 in Japan. However, while we are shifting from the current products to oncology products, the sales structure will change. We also need to consider the preference of medical affairs and MSLs. We need to consider how long the current products can enjoy their exclusivity and we need to discern when the cancer drugs will be launched. By observing these factors carefully, we can reconsider the number of MRs and enhance the sales structure and MSLs.

[Unknown Analyst]

You're not considering the implementation of an early retirement program?

[Sunao Manabe, executive]

No. Not at this point in time.

[Akinori Ueda, analyst]

I am Ueda of Goldman Sachs. My first question is with regard to the MTP explained on Slide #25. As for the revenue and profit production going forward toward FY '20, revenue will go up by JPY 50 billion, with a profit increment by JPY 2 billion only. I'd like to understand the idea behind. For R&D investments, you will spend JPY 1.1 trillion for 5 years compared to the current annual budget of JPY 215 billion, it will not be that increase. You're going to be flexible in using the business development fund and also you're going to prepare the structure for oncology business. So do you have an assumption that cost will go up quite substantially? Or is this is the conservative indication that this is a minimum that you are going to spend? Is there any idea how you are going to use the R&D expenses for 5 years?

[Toshiaki Sai, executive]

Compared to revenue, operating profit growth is quite limited. I think this is what you meant. The product mix has been changing. And also, we are going to make substantial investments in the R&D efforts. There are 2 aspects. There is no one specific factor behind this.

[Akinori Ueda, analyst]

If that is the case, you talked about the business development fund and you will be flexible. So if you are actually going to divert some portion to R&D activities, is there a possibility that the profit level goes down?

[Toshiaki Sai, executive]

It depends on the progress of the R&D activities. We would like to be flexible in that sense. But I cannot deny that there will be no revision of the bottom line on profit level, but we are going to make sure to pursue our commitment in terms of the shareholders return.

[Akinori Ueda, analyst]

Does that mean that this projection of sales and profit is based on the best case scenario?

[Toshiaki Sai, executive]

Yes.

[Akinori Ueda, analyst]

My other question is with regard to the total return ratio. Your pipeline has become so richer. And where do you prioritize in terms of investment shall be considered? And for now, up until FY '22, you are committing to have 100% or more of the total return ratio. What is the background of this commitment?

[Toshiaki Sai, executive]

In the fourth midterm plan, we have committed that we will deliver 100% or more of the total return ratio. In the meantime, including DS-8201, we have seen the progress of our R&D efforts. We will make substantial investments in R&D activities. And we are confident that we are able to fulfill the commitment of total return ratio of 100% or more. And we are now extending to FY '22. And as for the revenue and operating profit for FY '21 and FY '22, because of the launch of the anticancer agents, compared to the current level, we can very much expect that the profit level will go higher than today. In this context, we are going to make substantial investments in R&D activities. And we are going to fulfill this commitment of total return ratio of 100% or more. There was no particular trigger behind this, but we are going to maintain our policy, and this shows [ our bit real ].

[Joji Nakayama, executive]

If I may add. Overall, we were looking at the relevant profit level and how much investments we shall make for R&D efforts. We have had rounds of discussions internally. The position is that if we are to have thorough R&D efforts, that will generate more corporate equity. So for FY '22, we wanted to achieve this level with substantial investments in R&D activities. And at the same time, what can we do to shareholders? We wanted to have more solid policy and we wanted to maintain that policy. So as we've been saying, 100% of total return ratio shall be maintained. So as a result of these 2 aspects, we have come up.

[Yo Mizuno, analyst]

My name is Mizuno from Tokio Marine Asset Management. I have 2 questions. I understand well that the previous data demonstrate a great potential for HER2 low, but I'm wondering what the expectation will be among oncologists and the breast cancer community? To me, targeting HER2 low just doesn't ring the bell. The previous part inhibitor and the CDK inhibitor enjoyed a lot of excitement after the results from the pivotal trials came out. So what is the level of excitement with HER2 low? I'd rather want to know the perception by the community rather than your company's point of view.

[Glenn Gormley, executive]

So as we have presented the data from our HER2 low patient population, the external community is becoming very excited about this option. As you know, there's very little option for HER2 low patients. And if this drug can continue to demonstrate 50% overall response rate, that will be a great contribution. As we indicated, the design of our trial will look at patients who have been treated with a CDK and those who have not been treated with a CDK in the past because we think that's an important question to answer, which I think is actually part of what you are asking. And we've gone so boldly as to say the third arm will be in the hormone receptor-negative group. So HER2 low hormone receptor negative is a component of triple-negative breast cancer. And if we can demonstrate activity and clinical benefit there, the opportunity for this drug in HER2 low patients, we think, is tremendous. On top of the data that we're already showing you in HER2-positive breast cancer, that continues to get better each time we take a look. And I just showed you the 75% overall response rate in metastatic lung cancer with a mutated HER2. You've seen the breast cancer data in the past. You just saw the colorectal cancer showing 25% overall response rate. So each time we've tested very difficult tumors with this drug, we're getting encouraging data. Now all of that needs to be confirmed, of course. We know that. But the outside world is becoming very excited about this program.

[Sunao Manabe, executive]

May I add a few things here? What Glenn said is absolutely right. But for HER2 low that Daiichi Sankyo has been working on, previously, treatment by Herceptin and Kadcyla didn't work. It was a common sense that they didn't work. But I thought it would create a huge impact when I heard about ADC for the first time. And the target patients will be increased from 20%, which was the target for ADC previously, to 60%. Of course, we still have CDK, but I believe what we have here will create an even larger impact.

[Yo Mizuno, analyst]

About lung cancer and HER2 or HER2 low -- including HER2 low, are these people outside EGFR or MK? Or do you include people who have developed resistance?

[Glenn Gormley, executive]

I think your question [ about ] the non-small cell lung cancer trial, is that right?

[Yo Mizuno, analyst]

Non-small cell lung cancer. Yes.

[Glenn Gormley, executive]

Great. So there, we're looking at the potential of using the drug in the HER2-mutated community. We know that when patients with non-small cell lung cancer are treated traditionally with EGFR TKIs, that as they fail those therapies, there's an upregulation of HER3. And the patients who develop these mutated HER3 receptors, we think, we believe, internalize the HER3 receptor more rapidly than the nonmutated. That we still need to work out. But the data is around mutated versus nonmutated rather than HER2 versus HER2 low. That's the approach we're taking in the breast cancer part. But when you combine the opportunity to look at lung cancer and breast cancer with this drug, and then remember that the I/O combinations that we just presented, where I/Os have been very effective in lung cancer and other places, bladder cancer is a real opportunity -- we hope, although we don't have the data yet, a real opportunity to be even more synergistic in those populations by combining 2 very novel, very exciting mechanisms.

[Fumiyoshi Sakai, analyst]

I would like to ask one question. You have not discussed much today regarding HER3. In the past, you mentioned that the turnover in the cell is so fast. Compared to HER2, it is easier to set this as target. And I understand that the expression rate is 20% among the breast cancer patients. I'd like to confirm some points. First of all, compared to HER2, the faster turnover in the cell has been proved or not? And also, as for this expression rate of 20% among the breast cancer patients, is there any overlap with HER2 expression? This is what I wanted to clarify and confirm.

[Glenn Gormley, executive]

So what our data suggests is about 50% of metastatic breast cancer patients express the HER3 receptor, but at different levels, IHC 1, 2, 3. And we do not yet know what the cutoff might be for activity, but it's a very high expression in metastatic breast. If you look at HER2, which was the other part of your question in metastatic breast, there, only 20% of the traditional HER2-positive patients, which means IHC 3+ and the IST-positive -- IHC 2+ IST, is only about 20% are positive. But now, if you can include the HER2 low, that's about 50%, 20 plus 30. So we're thinking now that probably about half of metastatic breast, in one combination or another, contain both of those receptor targets. And what we need to do now is figure out which of these agents make the most sense in that population, and where would it make more sense to diversify and go into other targets rather than compete. That hasn't been worked through, but I anticipate that Antoine Yver, when he's here at the R&D Day in December, will have a lot to say about that.

[Fumiyoshi Sakai, analyst]

I am Sakai of Crédit Suisse.

[Shinichiro Muraoka, analyst]

I'm Muraoka from Morgan Stanley. I only have one question about the total return ratio of 100% by 2020. If I back calculate from the profit level, even with the current stock price level, it sounds like you will acquire your own shares in a level of JPY 10 billion or JPY 20 billion according to my calculation. Is it correct to assume that you will acquire your own shares even with the current stock price level? I just want to confirm my understanding.

[Joji Nakayama, executive]

All I can say is that I cannot confirm that here. We can only work on it by looking at the circumstances.

[Shinichiro Muraoka, analyst]

In other words, the total return ratio you indicated this time is irrelevant to the stock price level?

[Joji Nakayama, executive]

I won't say it's irrelevant, but we will take both into consideration.

[Yasuhiro Nakazawa, analyst]

I am Nakazawa of Nikko SMBC Securities. As for midterm plan, R&D investments have increased from JPY 900 billion to JPY 1.1 trillion cumulative basis. And for this fiscal year, you have an annual budget of JPY 215 billion. As for the usage of R&D budget, COO Manabe mentioned that you are strongly committed to the operating profit of JPY 165 billion for FY '22. What will be the trend of the R&D expenditures with the next 3 years -- I mean, with the years when you will use the most in absolute terms, and after 5 years, will it go down in amount? I am glad to understand the image.

[Sunao Manabe, executive]

It's a difficult question. JPY 1.1 trillion is divided by 5 will be what? For example, it will not be evenly distributed, as you mentioned. As for the studies that we have planned, including DS-8201, we need to make investments in these efforts. After that, according to the calculation, JPY 200-plus billion will be needed every year. That will continue. And as much as possible, we would like to have the JPY 1.1 trillion providing enough fund, but if we run out, we won't be flexible in using JPY 500 billion of business development budget. But we want to do first what we have to do in short term. Have I answered your question?

[Yasuhiro Nakazawa, analyst]

So you will have the high level of requirement in terms of the R&D budget for the next 3 years?

[Sunao Manabe, executive]

Well, we will do what we need short term, and after that, we will explore different possibilities.

[Yasuhiro Nakazawa, analyst]

In this context, DS-8201 and the ADC franchise upcoming. For example, in the partnering activity, you might be able to have licensing fee from the partner. It's like Eisai's LENVIMA model. Have you incorporated that kind of assumption in here?

[Sunao Manabe, executive]

JPY 1.1 trillion is our own budget. And we have increased the indications. And if we have no programs under the ADC franchise, this amount might not be enough. There is no concrete plan yet, but it's possible that we make licensing out of some program out of our ADC franchise. So the question is how we should utilize the R&D investments.

[Joji Nakayama, executive]

But overall, as we mentioned, we are going to be rather active in delivering the ADC franchise. So we have increased the budget for R&D activities. But as you know, the business development cash and R&D expenses have different impacts on the profit and loss performance. So intentionally, we have set the profit target to lower, showing our intent that we will not try to improve the profit level at the sacrifice of R&D expenses.

[Unknown Analyst]

I'm [ Kojima ] from [ Pharmacoeconomics News ]. For the new drug, you're saying that you are going to concentrate on cancer. However, for other areas, such as generics, OTC and vaccines, you didn't touch upon these. And I would like to know about your future policy.

[Joji Nakayama, executive]

Well, this time today, I decided not to talk too much, but rather, I wanted to focus something important. In this case, it's cancer. That's what I wanted to talk about. And with respect to what we're going to do about the individual businesses, we're still not in the stage of making an announcement about that. But as you can see it on Page 20, we're going to convert ourselves into the new business portfolio focusing on cancer. And that is the direction that we want to take in the future. And we'd like to consider our businesses along that line, and we'll take some actions.

However, I'd like to refrain myself from talking specifics about what we're going to do.