Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Analysis

Daiichi Sankyo Q2 Results and Merck Collaboration

Daiichi Sankyo's Q2 financial results showcased a 19.5% revenue increase year-on-year to JPY 726.3 billion. Core operating profit rose 12.4% to JPY 95.3 billion, despite cost of sales, SG&A, and R&D expenses hikes. The net profit for shareholders jumped a significant 66.4% to JPY 97 billion, greatly helped by favorable exchange rates, with the yen weaker against the dollar and euro. A strategic collaboration with U.S. Merck, focusing on 3 ADC products, promises future financial success, potentially bringing in up to USD 22 billion, with USD 4.5 billion in upfront payments and USD 16.5 billion in sales milestones, while Merck will shoulder a considerable portion of the development costs up to USD 2 billion per product.

Accelerated Growth and Strategic Partnerships Driving Performance

Daiichi Sankyo, in its recent financial earnings call, conveyed a strong quarter with a notable year-over-year revenue growth of 19.5%, reaching JPY 726.3 billion. This increase was driven by higher sales from both the Japan business segment and overseas markets, despite some decreases in specific areas such as American generic injectables.

Solid Expansion in Oncology and Collaborative Efforts

The oncology business, particularly with products like ENHERTU and Vanflyta, burgeoned, leading to a robust boost in revenue by JPY 70.7 billion. Strategic collaborations, like the one with U.S. Merck for the co-development and co-commercialization of three ADC products (HER3-DXd, DS-7300, DS-6000), excluding Japan, are pivotal in accelerating product development and maximizing value.

Profitability and Foreign Exchange Impact

The core operating profit rose by 12.4% to JPY 95.3 billion, primarily due to increased revenue, although offset by higher sales, general and administrative (SG&A) expenses, and research and development (R&D) costs. Exchange rates had both a positive impact on revenue and a negative impact on expenses due to the depreciation of the yen.

Forecasting Higher Revenues and Dividends amid Optimistic Market Expectations

For FY 2023, the company revised its revenue forecast up by JPY 100 billion to JPY 1.55 trillion, anticipating growth from ENHERTU sales and deferred revenue from the Merck collaboration. This optimism extends to the dividend forecast, which was increased from JPY 34 to JPY 40 per share.

ENHERTU's Global Sales Surge Fuels Upward Revision

Sales for ENHERTU soared by JPY 93.9 billion year-on-year, prompting a positive revision in the full-year forecast for FY 2023 to JPY 433.6 billion. Market penetration and expansions across different geographies have been very encouraging, with market shares for certain indications reaching approximately 50% or more in the US and leading positions in Europe and Japan.

Legal Developments and Challenges

Daiichi Sankyo faced legal headwinds with the U.S. District Court ruling that favored their defense against a patent litigation. This event marked an important legal success and could have significant implications for protecting their product exclusivity and furthering their market position.

Unwavering Commitment to Innovation and R&D

The company remains resolute in its approach to discovering innovative drugs, which is essential not just for their growth but also for securing long-term sustainability in the highly competitive pharmaceutical industry.

Earnings Call Transcript 2024-Q2

[Koji Ogawa, executive]

[Interpreted] I'm Ogawa. Thank you for taking time out of your busy schedule to attend Daiichi Sankyo's financial results presentation today. I would like to explain the consolidated financial results for Q2 which were announced at 1 p.m. today based on the presentation materials.

Please see Slide 3. This is what I will talk about today, consolidated financial results for Q2, strategic collaboration regarding 3 ADC products, FY 2023 performance and annual dividend forecast, business update and R&D update. I will follow this order. Regarding the R&D update, Takeshita, Global R&D Head, will provide an explanation. And we will take your questions at the end.

Please see Slide 4. This slide shows an overview of consolidated financial results for Q2. Revenue increased by JPY 118.5 billion or 19.5% year-on-year to JPY 726.3 billion. Cost of sales increased by JPY 29 billion. SG&A expenses increased by JPY 66.9 billion. R&D expenses increased by JPY 12.2 billion, all compared to the same period last year. As a result, core operating profit increased by JPY 10.5 billion or 12.4% year-on-year to JPY 95.3 billion.

Operating profit, including temporary income and expenses, was JPY 95.1 billion. That is the same level as the same period last year. The profit attributable to the parent company is increased by JPY 38.7 billion or 66.4% year-on-year to JPY 97 billion. As for the exchange rate performance, $1 was JPY 141. It's a yen depreciation of JPY 7.02 year-on-year, and EUR 1 was JPY 153.38. That's a yen depreciation of JPY 14.66 year-on-year.

Please see Slide 5. From here, I will explain the factors behind the change compared to the same period last year. Revenue increased by JPY 118.5 billion year-on-year. I will explain the breakdown by business unit. First, Japan business, direct oral anticoagulant, Lixiana; anti-malignant tumor agent, ENHERTU; pain treatment drug, Tarlige; and increased sales of Daiichi Sankyo Healthcare drove a revenue increase by JPY 18.7 billion.

Next, I will explain the overseas business units. The figures are presented here, excluding the effects of exchange rates. Oncology business growth in the U.S. and Europe and the launch of the anti-malignant tumor drug Vanflyta in the U.S. pushed up the revenue by JPY 70.7 billion. As for American region, although sales of iron deficiency anemia treatment of Venofer increased, a decline in sales of Injectafer and iron deficiency anemia treatment and other factors led to a revenue decrease by JPY 300 million.

As for EU specialty business, due to growth in sales of Lixiana and hypercholesterolemia treatment on Nilemdo and Nustendi, revenue increased by JPY 6.3 billion. As for ASCA business in charge of Asia and Latin America, due to growth in ENHERTU, mainly in Brazil, revenue increased by JPY 11 billion. ENHERTU and Dato-DXd upfront and quick payment, regulatory milestones and sales milestones were booked last year in a manner that the total amount from the time the contracts were signed until the milestones were achieved was booked as revenue all at once because of this revenue decreased by JPY 13.4 billion. The overall impact of foreign exchange on revenue was JPY 25.5 billion.

Slide 6 shows the factors contributing to changes to core operating profit. I will explain JPY 10.5 billion increase in profit by item. As I explained earlier, revenue, including an increase of JPY 25.5 billion due to the impact of exchange rates increased by JPY 118.5 billion.

Next, I will explain the cost of sales and expenses, excluding the impact of exchange rates. The cost of sales increased due to an increase in revenue by JPY 22.9 billion. SG&A expenses increased due an increase in profit share with AstraZeneca related to in-house to buy JPY 56.8 billion. R&D expenses increased due to an increased R&D investment in 5DXd-ADCs by JPY 5.7 billion. The total cost increase due to exchange rate impact was JPY 22.7 billion. The actual increase in core operating profit, excluding foreign exchange impact, was JPY 7.7 billion.

Slide 7 shows the increase and decrease in profit. Core operating profit was, as was explained earlier, increased by JPY 10.5 billion, including the effect of foreign exchange rates. As to temporary revenue and expenses, due to the effect of the gain on sales of products and subsidiaries in China in the previous fiscal year, it was a decrease of JPY 11 billion year-on-year.

As to financial income and expenses and others, the increase in interest income and the improvement in valuation of investment securities and foreign exchange gains had a positive impact of JPY 11.4 billion year-on-year. Regarding corporate income tax et cetera, while profit before tax increased quarterly tax expense, calculated with the simplified method as well as the impact of the tax effect accounting associated with the transfer of Daiichi Sankyo Espha, contributed to the decrease by JPY 27.9 billion year-on-year. As a result, profit attributable to the owners of the company was JPY 97 billion, an increase by JPY 38.7 billion year-on-year.

Slide 8 and 9 show changes in the revenues of business units and major products in Japan on a yen basis, whereas Slide 5 shows the situation of each unit, excluding the impact of foreign exchange rates, but here, its impact is included.

Next, I would like to give you an overview of the strategic collaboration agreement with U.S. Merck for HER3-DXd, DS-7300 and DS-6000, which was recently concluded on October 20.

Please see Slide 11. Daiichi Sankyo and U.S. Merck will co-develop and co-commercialize HER3-DXd DS-7300 and DS-6000 worldwide, excluding Japan. By collaborating with U.S. Merck, we will accelerate and expand the development of the 3 products and maximize their product value and at the same time, allocate resources quickly and flexibly to the next growth driver after 5 DXd-ADCs, post DXd-ADC modalities and et cetera. Mono and combination therapy for the 3 products will be codeveloped and U.S. Merck will bear 75% of the development expenses up to USD 2 billion for each product and subsequent development expenses will be split equally between the 2 companies.

In terms of sales, the 2 companies will jointly commercialize the products in regions outside Japan and split the gross profit and sales promotion costs and also on equally. In Japan, we are the sole marketer of the product and will pay royalties to U.S. Merck. Revenue is booked by Daiichi Sankyo in all countries and regions where we have footprint, including Japan. And Daiichi Sankyo will manufacture and supply the 3 products.

Slide 12 shows the financial terms. Through this strategic collaboration in total, Daiichi Sankyo will receive up to USD 22 billion or JPY 3.3 trillion at exchange rate of JPY 150 to the U.S. dollar. The upfront payment is USD 1.5 billion for each of 3 products for a total of USD 4.5 billion or JPY 675 billion. The timing and amount of upfront payment to be received for each product is shown in the table.

The upfront payment upon contract execution will be deferred and booked as revenue over multiple years considering the estimated period of exclusivity. In addition to the upfront payment upon contract execution, we will receive R&D expenses-related upfront payment for HER3-DXd and DS-7300 of USD 500 million each for a total of USD 1 billion or JPY 150 billion.

How do we share development expenses and how cash is paid? This is quite complicated. So I will explain that with the next slide. Sales milestone will be up to USD 16.5 billion or JPY 2.475 billion. The sales milestone for each of the 3 products is up to JPY 5.5 billion, which will be booked as revenue in a lump sum in a year of achievement.

Slide 13 describes how R&D expenses are to be shared and how cash is be paid. The ratio of amount paid is the same for all 3 products. As shown in the bottom right, U.S. Merck will bear 75%, and we will bear of the development expenses up to USD 2 billion per product. In other words, U.S. Merck will pay USD 500 million more then when expenses are split evenly. Development expenses exceeding USD 2 billion will be split equally between the 2 companies as shown in the upper part of the figure.

The method of payment of the USD 500 million bond by U.S. milk varies depending on the product. First, regarding HER3-DXd and DS-7300. This is paid upon contract execution as R&D-related refundable upfront payment as lump sum. An amount equivalent to 25% of R&D expenses will be appropriated from this R&D upfront payment every time expense incurs. On the other hand, R&D upfront payment is not paid upon contract execution for DS-6000. U.S. Merck will pay 75% of development expenses each time expense incurs in the future. The accounting treatment of R&D upfront payment will be announced once it is determined, but later when I discuss the full year forecast, it is assumed that an amount equivalent to 25% appropriated from this lump sum payment will be deducted from R&D budget when expense incurs.

Next is FY 2023 forecast. Please see Slide 15. Compared to the forecast announced in April, we expect a decrease of sales of generic injectables at the American region, while factoring in the ForEx impact of the weaker yen, sales expansion, mainly by ENHERTU and deferred revenue from the upfront payment associated with the strategic alliance with U.S. Merck for 3 DXd-ADC products. The forecast is revised upward by JPY 100 billion from the April forecast to JPY 1.55 trillion.

While cost of sales is expected to increase due to ForEx impact, it's expected to increase only by JPY 10 billion due to an improvement in the cost of sales ratio, resulting from changes in the product mix. We expect the SG&A expenses to increase by JPY 60 billion, considering the increase due to ForEx impact and the increase in profit sharing with AstraZeneca following ENHERTU sales growth. R&D expenses are expected to increase by JPY 15 billion, including an increase due to ForEx impact and an increase due to accelerated development of DXd-ADC product lines and a decrease due to the commencement of cost sharing with U.S. Merck for the 3 DXd-ADC products. As a result, core operating profit and operating profit are revised upward by JPY 15 billion to JPY 155 billion and JPY 150 billion, respectively.

Profit before taxes is revised upward by JPY 25 billion to JPY 160 billion, taking into account an improvement in the financial account balance due to rising interest rates in the U.S., et cetera. The current profit attributable to the owners of the company is revised upward by JPY 20 billion to JPY 135 billion, reflecting the upward revision of the profit before taxes. The exchange rate assumptions for the third quarter and beyond are JPY 145 to the $1 and JPY 155 to the Euro. And the ForEx impact of the yen depreciation versus the April forecast is expected to be about an JPY 80 billion increase in revenue and a JPY 6 billion increase in core operating profit.

Slide 16 shows the revised annual dividend forecast. We will increase our annual dividend forecast for FY 2023 from JPY 34 to JPY 40 per share. At the time of the April 2023 announcement, the annual dividend was planned to be JPY 34 per share, an increase of JPY 4 per share over the actual dividend for FY 2022 based on the increased likelihood of achieving the KPIs for FY 2025 by the expansion of sales ENHERTU and other factors.

In October 2023 following the conclusion of strategic alliance agreement with U.S. Marc for the the D DXd-ADC products, Daiichi Sankyo will receive an upfront payment upon signing the agreement. And due to the strong performance of ENHERTU and other products, the consolidated financial forecast will be revised upward. The dividend will be revised to JPY 40 per share, an increase of JPY 6 per share compared the April announcement and an increase of JPY 10 per share compared to the actual dividend for FY 2022. We will continue to improve capital efficiency and further enhancement shareholder returns, aiming to achieve a DOE of 8% or higher in FY 2025, which is a KPI of the fifth midterm plan.

Next, I'd like to discuss our business update. Slide 18 shows the breakdown of ENHERTU's revenue. Product sales for the FY 2023 Q2 year-to-date increase by JPY 93.9 billion year-on-year to JPY 173.4 billion due to growth in the U.S., Europe and other regions. The sales performance in each country and region will be explained later.

Regulatory milestone payments for the FY 2023 Q2 year-to-date decreased by JPY 12.7 billion year-on-year to JPY 4.2 billion due to the impact of recognizing the amount equivalent to the regulatory milestone payments achieved in the previous fiscal year from the time to -- time of contract signing to the time of milestone achievement as revenue in a lump sum amount. As a result, ENHERTU's total revenue, including upfront and related payments in the regulatory and sales milestones for the FY 2023 Q2 year-to-date, was JPY 183 billion, an increase of JPY 81.2 billion year-on-year.

The full year forecast for FY 2023 has been revised from the forecast announced in April to JPY 433.6 billion, an increase of JPY 65 billion from the forecast announced in April due to strong sales.

Using the 2 slides starting on Slide 19, I will discuss the sales of HER2 in different countries and regions. First, let's look at sales performance in the U.S. and Europe. Product sales in the U.S. for FY 2023 Q2 year-to-date totaled JPY 105.9 billion or $751 million, an increase of JPY 50.5 billion year-on-year. The full year forecast for FY 2023 has been revised from the forecast announced in April to JPY 229.5 billion, an increase of JPY 34.4 billion from the April forecast, reflecting strong sales.

The current indications are as shown on this slide. Market share for each indication is also on track with approximately 50% of new patients in the second-line HER2-positive breast cancer treatment, solidifying our leading position. Chemotherapy pretreated HER2 low-expressing breast cancer also holds a top position with new patient share in the mid-50% range. ENHERTU also maintained its leading position in new patient share in the second-line treatment of HER2-positive gastric cancer and the second-line treatment of HER2-mutant NSCLC respectively.

Sales performance in Europe is also on track. Product sales for the FY 2023 Q2 year-to-date totaled JPY 39.2 billion or $278 million, an increase of JPY 25.6 billion year-on-year. The full year forecast for FY 2023 has been revised from the forecast announced in April to JPY 92.8 billion, an increase of JPY 17 billion from the forecast announced in April due to strong sales.

The share of new patients in each market, country and region is also steadily increasing with France and Spain maintaining the top position in new patient share for the second-line treatment of HER2-positive breast cancer at approximately 60% in the mid-50% range, respectively. In the U.K., the new patient share expanded to expertly 50% achieving a top position. The share of the post-chemo new patients with HER2 low-expressing breast cancer is in the mid-30% range in France and Germany maintained a leading position.

As for other progress in October, we received approval for a new indication of HER2-mutant NSCLC for the second-line treatment and beyond, and we have started promotion for this new indication.

Slide 20 shows an ENHERTU sales in Japan and the ASCA region. In Japan, Results of the product sales for the FY 2023 Q2 year-to-date totaled JPY 10.4 billion, an increase of JPY 5.2 billion year-on-year. The full year forecast for FY 2023 has been revised from the forecast announced in April to JPY 21.5 billion, an increase of JPY 1.6 billion from the April forecast, reflecting strong sales.

In August, a new indication of HER2-mutant NSCLC was added for the second-line treatment and beyond. The market share of new patients for each indication is steadily increasing and the market share of new patients for the second-line treatment of HER2-positive breast cancer has grown to the upper 30% range, maintaining the top share. The market share of the post-chemo new patients with HER2 low expression breast cancer also grew to approximately 20%, and it gained the top share. ENHERTU also maintained its leading position in the third-line treatment of HER2-positive gastric cancer, maintaining its market share in the 60% range.

The share of new patients in the newly added second-line treatment of HER2-mutant NSCLC is also steadily increasing. The results of the product sales in the ASCA region for the FY 2023 Q2 year-to-date totaled JPY 17.9 billion, an increase of JPY 12.6 billion year-on-year.

The forecast for the full year of FY 2023 is JPY 37.8 billion, an increase of JPY 8.6 billion from the forecast announced in April as a result of strong sales. Product sales in the ASCA region also included co-promotion revenues in China, Hong Kong and other countries where AstraZeneca recognizes sales. The sales performance in the region is on track with significant revenue growth, especially in Brazil, China and Taiwan. We will continue to strive for further market penetration and expansion in the countries and regions where the product is sold as well as to obtain new indications in order to deliver an ENHERTU as many patients as possible in need of the product.

Next is LIXIANA. Slide 21 shows the changes in the market share of LIXIANA in volumes in each country. In relation to Japan, South Korea and Taiwan, sales have been steadily increasing in Belgium, the U.K., Spain and other European countries. As a result, global revenue for the FY 2023 Q2 year-to-date was JPY 137.7 billion, an increase of JPY 20.4 billion year-on-year. For the full year of FY 2023, we expect the revenue to be JPY 277.3 billion, an increase of JPY 33.4 billion from the previous year.

Slide 22 shows the market share in Japan in terms of monetary value. Although LIXIANA sales share declined in April 2020 due to the reduction of NHI drug prices as a result of the drug repricing for expanded use, it has increased its market share again, maintaining the top share at 45.4%. As a result, the revenue for the FY 2023 Q2 year-to-date was JPY 57.1 billion, an increase of JPY 6.4 billion year-on-year. For the full year of FY 2023, we expect the revenue of JPY 112.9 billion, an increase of JPY 7.7 billion from the previous year.

Slide 23 provides a major update on our patent dispute with Seagen regarding our ADCs. In October of this year, the U.S. District Court the Eastern District of Texas made a first instance decision ordering Daiichi Sankyo to pay Seagen, the damages of $41.8 million determined in the July 2022 judgment plus an 8% royalty on ENHERTU sales in the United States from April 1, 2022, to November 4, 2024, when Seagen's U.S. patent expires.

We are appealing this decision and are considering all legal options with AstraZeneca, including an appeal to the U.S. Court of Appeals for the Federal Circuit. The current ruling will have no impact on the consolidated earnings forecast for this fiscal year. Meanwhile, we have filed a request with the USPTO for review PGR to examine the validity of Seagen's U.S. patent on the grounds that the patent is invalid. The PGR has now been reopened on the grounds that Daiichi Sankyo has presented convincing evidence of patent invalidity and the decision is expected within the next few months. We will continue to consider all measures to protect our rights.

The next part is the R&D update. I will now hand over to Mr. Takeshita, Global R&D Head.

[Ken Takeshita, executive]

Thank you very much for that introduction. And I'm very pleased to be giving you an update on our ADC program, also the next wave program as well as information about our research and development day and news flow for the next few months until the end of the fiscal year '23.

Next slide. So much of the data that we'll be talking about today is recent data that was presented at ESMO. And the first one here is about the expansion of our leadership in the HER2-targetable tumors beyond breast cancer and lung cancer and gastric cancer that you are familiar. Recently, we reported on data from the multiple numbers of indications that we have listed here on the left-hand side as a result of 2 clinical trials, DESTINY-PanTumor02 and DESTINY-CRC01/02. And these 2 trials led to 2 breakthrough therapy designations from the FDA. And it's very important to note here that these results reaffirm the potential of ENHERTU as a tumor-agnostic therapy, and we are currently in discussion with the regulatory agencies towards filing these data.

Next slide. So here are the data from the PanTumor02 clinical trial. And we have listed here over half a dozen different cancer types in the response rates in each category of tumor type. And you'll see that in nearly every single case, except for pancreatic cancer here, every single case, there is a clinically meaningful and durable responses across a broad range of HER2 expressing advanced solid tumors. And this includes, for example, very high response rates that we can see in diseases like endometrial cancer and cervical cancer, et cetera, that you can see here, particularly in those patients who are IHC 3, 3+ positive. We can also see additional good responses in IHC 2+ positive patients as well.

Overall, the -- in the population, the response rate was 37.1%, with a median duration of response of 11.3 months, but that among the IHC 3+ patient population, the response rate was 61.3%, a median of durational response of 22.1 months. These are very important to look at, particularly in the context of the patients who enrolled in these trials, which are patients who had prior multiple lines of therapy, and therefore, had refractory disease in the vast majority of patients.

Next slide. In terms of additional updates on clinical trials for the ENHERTU program, you'll see here listed that, in the recent months, we have obtained approval in Japan for the HER2 mutant non-snow cell lung cancer in the second-line setting. We have also received the recommended for approval in Europe by the CHMP in September. And we did obtain, in fact, approval in Europe for this particular indication in October.

In terms of the DESTINY-PanTumor01 study in the HER2 mutant solid tumors, the data that just mentioned, but the data was presented at ESMO in 2023 just 1 month ago.

Next slide. In addition, I'm going to be giving you an update on our dato program. And the first one here is the lung cancer program, TROPION01. Overall here, we show you the overall efficacy in the second and third line non-small lung cancer patients. This is the data already presented at ESMO 2023. And very important to note here, that this is a part of data, positive clinical trial in which we are reporting on a PFS as part of our interim analysis. And you'll see here that in the ITT patient duration, we can see positive data in terms of statistical significance with a p-value of 0.004, which is less than the prespecified p-value of 0.008. And you'll see numerically that we can see a PFS median of 4.4 months versus the docetaxel control of 3.7 months.

What is very important and quite interesting clinically to note here is the data that's shown on the right-hand panel of this slide. These are setup analysis of progression-free survival in the key subgroups. And I want to draw your attention, particularly to the bottom where it is histology nonsquamous versus squamous patient population.

And what you'll see there is that in squamous patient population, the hazard ratio is 1.38. However, in the nonsquamous patient population, the hazard ratio is 0.63. So therefore, almost a 40% reduction in the progression -- risk of progression in a nonsquamous patient population. This is a very important and in fact, quite impressive hazard ratio in this nonsquamous patient population.

I also want to note here also that the hazard ratio for the patients without AGA versus patients with AGA, the hazard ratio was -- in patients with AGA was 0.38. So therefore, almost a 60% reduction in the risk of progression in patients with AGA compared to patients without AGA with a hazard ratio of 0.84.

Next slide, please. So I'm going to be focusing a little bit more on these histologic subtypes, and you'll see that in the patients with -- non-small cell lung cancer, the data shown on the left-hand panel here, you'll see that PFS is 5.6 months within the data arm at 3.7 months in docetaxel control arm with a hazard ratio of 0.63. And -- so duration response and overall response rates are shown here.

This is a pooled analysis of both patients with and without AGA in the histologic select cell type. And at the bottom, you'll see here that the PFS hazard ratio for the non-squamous patients without AGA was 0.71. So therefore, really what this says is that regardless of whether you have AGA or not in a patient population, there is a meaningful reduction in the hazard ratio based on the data shown here. In contrast, on the right-hand side, you'll see the data for the squamous type non-small cell lung cancer patients. You'll see that the hazard ratio is 1.38.

And so basically, what we see here is that the tremendous amount of concentrated efficacy really in the nonsquamous patient population. So these data have been shown and discussed with the FDA, and we have a discussion ongoing with our regulatory agencies towards a filing of this data. First of all, therefore, that in the ITT patient population, we see a positive statistically significant data in the entire patient population but with a very interesting and very important efficacy, particularly in a nonsquamous patient population.

I also mentioned here that as many of you know, we have simultaneously ongoing right now a clinical trial called TROPION-Lung08. This is a frontline clinical trial in which data is studied -- data DHT is being studied. And we now -- up until now, this clinical trial had enrolled all subtypes of non-small cell lung cancer. And we now plan to amend the protocol to cap the squamous patient population, really to focus, therefore, our efforts on a non-squamous population.

Next slide. I do want to mention here the safety data that we are seeing in the TROPION-Lung01 study in terms of all grades of safety adverse events, grade 3, but with a focus on what we call adverse events of special interest that are listed on the right-hand side, dermatitis, ocular events and ILD. Mucositis and ocular events, we believe, are really related to the TROP2 target because we don't really see that in other types of DXD-ADCs, and you'll see the numbers listed there.

Ocular events and stomatitis are very manageable toxicities with various prophylactics and also a treatment of the emerging toxicities. In terms of the ILD, the numbers are listed here in terms of grades and Grade 3 in worse. What is actually very interesting to note here is that if we do the subgroup analysis of these toxicities as well, you'll see at the bottom here, you'll see that in terms of the nonsquamous patient population, the number of 7 adjudicated drug-related Grade 5 events was out in terms of 4 out of 232 patients or 1.7% for the non-squamous versus 3 out of 65 patients or 4.6% for the squamous patient population.

So there is a suggestion that there is a difference also not just in efficacy, but also safety of the data when classified according to the histology, nonsquamous versus squares.

Next slide. We're going to switch over to a different study called TROPION-Lung05. This is a clinical trial, a Phase II clinical trial, in which data was studied as a single agent in patients with heavily pretreated lung cancer -- non-small cell lung cancer patient population with AGA. So this clinical trial enrolled only patients with AGA type of non-social lung cancer. And you'll see here that in this LUNG-05 study, there's good response rate in the 30s with a very good durations reponse. And -- and this data here, this is a single-line Phase II trial. This complements the data that we are seeing in TL01 in the AGA patient population that we saw in the TL01 study.

Next slide. Finally, in terms of the lung cancer program for Dato, the last clinical trial, I want to mention here is TROPION-Lung04. These are data from an interim analysis in which data when combined with various types of chemotherapy as a doublet or a triplet it's being studied in the frontline setting, previously untreated patients. These are small numbers of patients we are reporting so far, 14 patients at doblet with pembrolizumab and Dato or is a triplet combination in the cohort 4. And you'll see that, however, that the response rates are quite high, 50% in cohort 2 as a doublet and response rate of 76.9% as a triplet. And we also see a very good durability of response in terms of progression-free survival so far. So these are the basis for our initiation of the clinical trials in the frontline setting a TL-07 and TL-08 that I mentioned to you earlier.

Next slide. And finally, for the Dato program, I want to mention to you the TROPION-Breast01 clinical trial. This is a randomized Phase III clinical trial in which data was studied in patients with hormone receptor positive HER2 low or negative breast cancers. And you'll see here our -- the data that we reported recently at ESMO, this is data from our interim analysis, in which progression-free survival was the focus of this analysis. And you'll see here positive data in which the P value is less than 0.0001. The median PFS are shown here as 6.9 months in the experimental arm with dato and 4.9 months in investigator choice control arm. Hazard ratio of 0.63. These are really very good numbers. And of course, we are -- we have communicated these data with the regulatory agencies, and we are proceeding towards a filing.

Next slide. We also want to mention here for the data program data that was presented as part of an AstraZeneca sponsored clinical trial, the BEGONIA trial. And this is -- what we're seeing here is just Arm7 of the BEGONIA trial, in which the combination of durvalumab and data of Dato-DXd is being evaluated in patients with frontline-advanced metastatic triple-negative breast cancer. Here, you'll see that this combination, the 2-drug combination of Dato-DXd plus durvalumab gave a response rate of 79% and the median PFS was 13.8 months. And these are really very meaningful data. When we consider that in the the current standard in which pembrolizumab was studied in KEYNOTE-35study, the median PFS was -- in the study was reported to be 9.7 months. So these are really -- we think that these are very meaningful data and really demonstrates the value -- potential value of data in duveluumab in the setting of triple-negative breast cancer.

Next slide. Finally, we're going to touch on the remainder -- remaining of the da DXt-ADCs. First, the HER3 DXt-ADC program. I show you the data from a pivotal registration study, HERTHENA-Lung01 study. This is a Phase II single-arm study, through which HER3-DXd was studied as a single agent in patients with multiply relapsed EGFR-mutated non-small cell lung cancer. And here, you see the response rates that reported to be 29.8%, median duration of 6.4 months, PFS of 5.5 months. And you can see that efficacy was observed in -- across a diverse mechanism of EGFR TKI resistance.

And I want to remind you here again that these are multiply relapse patients with multiple prior lines of therapy. So we believe that the response rate and duration response that we see here is clinically meaningful and we are proceeding to file the data with regulatory agencies will.

Next slide. Next is an update on our DS-7300 program. This is a DXd-ADC directed called B7-H3. And you'll see here we are starting to show a lot of efficacy of this DXd-ADC in several different tumor types. And going from left to right is small cell lung cancer, esophageal cancer, prostate cancer and squamous type non-small cell lung cancer.

We are in early stages of our clinical trial and signal seeking in our program. But already, you can see activity of 7300 in all these 4 different types of cancer indications. And these are -- these response rates that we are reporting here is particularly meaningful when you consider the number of prior treatments. So again, these are patients who have multiple multiply relapsed disease refractory disease. And despite that, we are seeing very good activity in terms of response rates in these 4 cancer types. So we are very encouraged with these data, and we are proceeding to prepare registration programs or many of these indications.

Next slide. This is an update on our DS-6000 program. This is a DXd-ADC directed against an antigen called CDH6, which is abbreviation for. And here, we have focused our efforts on ovarian because ovarian cancer is a disease that is known to express high levels of CDH6. And here, Again, these are patients with multiple prior systemic regimens here you can see that the median line of biotherapy is 4. And despite that, we see a response rate of 46% and duration response of 11.2 months. So these, we think, are incredibly great efficacy data in patients who are basically fifth-line patients. And so here again, we are very eager to start a registration program that would lead to approval of DS-6000 in ovarian cancer.

In these 3 ADCs that we just mentioned to you, the HER3 program, the DS-7300 program and DS-6000 program. All of these 3 ADCs have additional cancer indications to explore beyond the one that I just mentioned to you. So there's going to be -- likely to be much more cancer indications, cancer types that we will be exploring for these 3 ADCs.

Okay. Next slide. Okay. Finally, in terms of our DXd-ADC program, I do want to mention to all of you that we have received a Prime Minister award at the 6th Japan Medical Research and Development Grand Prize session. And so we are very happy and honored to have received this award from the Prime Minister of Japan.

Okay. Next slide. Okay. In the next few slides, I want to give you an update on the next wave, which is all of our programs beyond the 5DXd-ADCs that we have covered.

Next slide. First is our development status of our COVID-19 vaccine. This is an RNA-based vaccine that we are developing in close collaboration with the Government of Japan really for the benefit of the patients in Japan. And here is our update. We have obtained approval in August for the booster vaccination of the original strength, which is a monovalent RNA vaccine against COVID. In September, we have completed regulatory submission in Japan as a booster vaccine of a monovalent RNA vaccine for the XBB1.5 strain for COVID.

So I do want to mention to you here is that this program represents the first RNA vaccine made in Japan by a Japanese pharma using the cationic lipids originally optimized by Daiichi Sankyo. And we do plan to supply -- start the supply within this year with the OMicron XBB strain monovalent vaccine by the end of this year. And I do want to mention here also that one of our unique feature about our vaccine is that it stored at the refrigeration temperature and does not require freezing.

Next slide. Okay. In terms of more progress on this Next Wave program, the VANFLYTA program, quizartinib, the FLT3-ITD patients with the acute myelogenous leukemia. We have been recommended for approval by the European Union by the CHMP in September. So we hope to receive approval for VANFLYTA in a very near future.

We also have a new program. This is, again, another ADC called DS-3939., This is DXd-ADC directed against the antigen called MUC1. This is intended for solid tumors, and we initiated a Phase I trial of this new program in September of 2023. And finally, we also initiated a Phase I program with DS-1471. This is an anti-CD147 antibody. This is not a DXd-ADC,but just on an antibody, and this is a new antibody and now against the new target. And of course, we are very interested to see how this program turns out also.

Next slide, please. Next slide. Next slide again. I do want to mention to you a little bit more information about our R&D Day for 2023, in which we'll be focusing really on the range and breadth and depth of our R&D program, our pipeline, and that will take place in December -- on December 11, and it will be a virtual event.

Next slide. In terms of the future news flow, I just want to very briefly go over you what's likely to be reported in between now and the end of the fiscal year '23, which is end of March '24. First, in terms of major publications, you can expect here the data from the DESTINY-Breast08 trial. This is a new study that -- or new data that you'll be hearing at San Antonio, in patients who have HER2 low breast cancer who have chemo-naive and post chemo. And this is a Phase Ib clinical trial with various combinations of ENHERTU plus additional agent.

Later that month, in December or so in December at the American of Hematology, you'll see primary analysis from the VALENTINE-PTCL-01 study. This is a study of our drug, the dual EZH2 drug in patients with PTCL relapsed or refractory.

In terms of planned regulatory admissions, on the right, you'll see we hope to be submitting -- filing for both DESTINY-Lung05, which is the HER2-mutated non-small cell lung cancer in the second line plus and also DESTINY-GASTRIC06 HER2-positive gastric cancer in the third line setting, both for China and sometime in the first half of -- second half of the fiscal year '23.

In terms of regulatory decisions, we expect to have a regulatory decision made by the European Union for QuANTUM-First AML AML trial for the program. and also the COVID vaccine from PMDA sometime between now and end of fiscal year '23.

And finally, in terms of key data readouts. We do expect to be seeing data from DESTINY-Breast06 clinical trial. This is a large randomized Phase III trial who are in patients who are chemo-naive and who have hormone receptor positive and HER2 low and breast cancer. And this patient population also includes not just the HER2 low, but ultra low. So this is a very important clinical trial for us.

Next slide. Okay. So this completes my presentation and turn it over to.

[Operator]

[Interpreted] The first question comes from UBS Securities, Harutasan.

[Kasumi Haruta, analyst]

[Interpreted] I am Haruta from UBS. My first question is, and this is looking at only Q2, cost of sales improved for Q2. As ENHERTU sales proportion goes up, cost of sales is going to improve further, I think, having a bigger contribution coming from ENHERTU. And I would like to ask you to what extent this could further improve? For ADC production you are using outside CMOs. And what about the investment level there? And what about the efficiency of CMO producing this drug for you?

[Koji Ogawa, executive]

[Interpreted] Thank you your question about the cost of sales ratio. Basically, ENHERTU is contributing to the improvement of the cost of sales. And as ENHERTU sales is going to go up, which means a better product mix, meaning that cost of sales is going to come down in terms of the ratio to a certain extent in midterm.

In terms of the supply of this product, in April of this year, we already made an announcement that we will have sufficient supply capacity for ADCs to be prepared. We have in-house facilities as well as the external CMO facilities being sort of upgraded with further CapEx investment. Therefore, we will be able to secure enough supply capacity going forward. That's what we believe.

[Kasumi Haruta, analyst]

[Interpreted] So I think cost of sales is going to come down even further or there is further room for improvement of cost of sales, is that right?

[Koji Ogawa, executive]

[Interpreted] Yes, that is right.

[Kasumi Haruta, analyst]

[Interpreted] I have a second question. In the ESMO highlight, I think nobody asked this question so much, but this is about DS-6000 potential. I would like to learn more about that. Now on ovarian cancer is the targeted indication. And in this indication, the folate receptor targeting ADC is there in the competitive environment. And if DS-6000 is going to get more market share in the market folate receptor targeting ADC can be one of your benchmarks potential against a folate receptor-targeting ADC, what is the potential of your compound vis-a-vis competition?

[Ken Takeshita, executive]

Ultimately, it's a data-driven decision in terms of how physicians view DS-6000 versus, for example, the folate receptor-targeting drugs. Right now, we are fairly early in our program. But I think I do want to mention here that -- right now, we do see activity that seems to be at least as good as, if not better than other drugs that are -- the other recent drugs like the folate receptor-targeting ADCs that have been reported for ovarian cancer.

I do want to mention, for example, that so far, we do see a lot of activity of DS-6000 regardless of the expression of the DH6. So that may be an advantage as for our DS-6000 program. But ultimately, I have to say that it really requires us to generate clinical data to be absolutely sure of how our physicians may use the 6000 versus other drugs available in this setting.

[Operator]

[Interpreted] Next question is from Yamaguchi-san from Citigroup.

[Hidemaru Yamaguchi, analyst]

[Interpreted] This is Yamaguchi from Citi. Can you hear me?

[Operator]

[Interpreted] Yes.

[Hidemaru Yamaguchi, analyst]

[Interpreted] My first question is about the share buyback. I believe this is a repeatedly asked question. You're having a very good performance with upward revision of the performance, and there is an increase of the dividend being announced. However, the stock price is not that high right now. And I think this is really a good timing to talk about the share buy back. Are you thinking about this as an option? Right now, it's not happening yet. But is it still an option? This is my first question.

[Koji Ogawa, executive]

[Interpreted] Yes. Thank you very much for your question about the share buyback. As we have been mentioning in the past already, we included in the return to the shareholder policy in the fifth midterm plan. We believe this is an effective way of returning the value to shareholders. And we always consider how possibilities that we can realize that all the time. So when the legal conditions are met, we would like to consider share buyback with an agile manner so that we can -- a better return to the shareholders.

[Hidemaru Yamaguchi, analyst]

[Interpreted] My second question is about filing of. You received the breakthrough designation, so you can already go ahead in, I believe. But I I think it really depends upon the position of FDA. So how is the filing situation of 3D XT right now?

[Ken Takeshita, executive]

Yes, we are proceeding to file the data with the regulatory agencies. And I don't really anticipate major issues at the moment. but we'll have to see exactly what the FDA says. And so once we have submitted the information that the file to the agencies, we will certainly let you know.

[Hidemaru Yamaguchi, analyst]

[Interpreted] And second question is regarding this one is that you didn't write the filing into your news flow for the second half. Is that meaning it's not in the second half or you really don't know at the moment regarding that filing timing? I see a hand to China, and I see has THC, but I don't see here. What's your opinion?

[Ken Takeshita, executive]

I think that's probably an oversight that because we do plan to submit the TL-01 data.

[Hidemaru Yamaguchi, analyst]

[Interpreted] I mean within this fiscal year? .

[Ken Takeshita, executive]

We haven't announced exactly when we'll file.

[Hidemaru Yamaguchi, analyst]

[Interpreted] Okay. That's why you didn't put in, but then. That's right. And finally, regarding , which comes fast, comes fast for filing or breakfast.

[Ken Takeshita, executive]

That's a very interesting and very important to that really relates to regulatory strategy. And I don't think we have actually announced the sequence of how we will file either. But it's a very important question, of course.

[Operator]

[Interpreted] Now next question is from Goldman Sachs, Ueda-San.

[Akinori Ueda, analyst]

[Interpreted] I am Ueda from Goldman Sachs. My first question is about Dato-DXd study. You mentioned the design of the study is going to be modified. Squamous lung cancer patients enrollment is going to be stopped. So going forward, whether the primary endpoint is going to be met or not? Is that going to be analyzed upon the basis of PFS only for non-squamous lung cancer patients? Or are you going to be analyzing all of the patients who have been enrolled so far?

[Ken Takeshita, executive]

So we haven't announced the details of these amendments. So I can only tell you that we're going to restrict a number of patients who had a squamous type and that really our major focus of the clinical trial and really the filing ultimately, is going to be in the non-squamous patient population. Once we're ready to announce the details of the amendment that we can certainly let you know about that.

[Akinori Ueda, analyst]

[Interpreted] My second question is about the study, and it's about the endpoint of the study. It says it's a dual primary endpoint. That is how it is described here. Is this a co-primary endpoint, which means you have to evaluate all of the items in the composite endpoint? Or is this a multi-primary endpoint where if you can confirm just one out of the items, it's considered a success?

[Ken Takeshita, executive]

Now has endpoint, as you mentioned, and at the recent ESMO meeting, we reported on the first interim analysis for efficacy, which is a focus on progression-free survival. There will be a final analysis that really focuses on overall survival. So -- and both of these are designed to be primary endpoints. So that's -- so these are really dual endpoints and positive data. Technically, the positive data with either one of these endpoints is considered to be resulting a positive step. But of course, ultimately, it's not just end point, but also really what is the clinical data look like. And so these are very important points that we will be discussing with the regulatory agencies.

[Operator]

[Interpreted] Next question is from Morgan Stanley MUFG Muraoka-san.

[Shinichiro Muraoka, analyst]

[Interpreted] I am Muraoka from Morgan Stanley. I'm sorry, I may be repeating the same question, but this is again about the share buyback. The stock price is as it is, and of course, it depends upon the external environment, but shareholders who are owning your stock for a long time may be facing a quite a difficult time. So the reason why you didn't buy back your share, although you have raised your dividend is because of the legal conditions as you have mentioned. But what do you mean by that? The legal framework or the legal questions have not been met at this timing? Or even if those legal conditions are metastatic, it's not a good timing for you to have share buyback? I'm asking you this question because I do want you to support the share price.

[Koji Ogawa, executive]

[Interpreted] Thank you for your question. About share buyback, the assumption is that the legal environment should be met -- and this is one of the policy for the return to the shareholders in the midterm plan. So it really depends upon situation. We always have this as one of the options.

[Shinichiro Muraoka, analyst]

[Interpreted] I'm sorry, I'm being very persistent, but the legal situation did not allow you to have share buyback this time?

[Koji Ogawa, executive]

[Interpreted] We are not disclosing the details, I'm sorry.

[Shinichiro Muraoka, analyst]

[Interpreted] Understood. Now next question on Slide 15. And this is about the revision of the guidance I have not fully understood the figures myself yet, I'm sorry. But the U.S. Merck, the deferred revenue is included in here, but still the increase of only this level for the core operating profit because U.S. Merck deferred revenue alone can boost the profit by about JPY 15 billion for half year, right? But excluding that, profit is barely increased. Is it offset by SG&A expenses?

[Koji Ogawa, executive]

[Interpreted] In relation to the collaboration with U.S. milk, as you have just pointed out, one thing is the upfront payment of about JPY 10 billion in size, and this is received upon contract execution and that is included as a top line. And another thing is on R&D expense upfront payment. And how this is going to be booked accounting-wise? This has not been completely decided yet. So as to the financial forecast, R&D expenses have been reduced by about JPY 10 billion. And this is already being factored in. So these 2 factors have already been reflected in this forecast.

[Shinichiro Muraoka, analyst]

[Interpreted] An increase of JPY 60 billion to the SG&A. I am afraid that is too much, even considering your payment to AstraZeneca. The linked compensation that was quite popular in the U.S., it's not a factor, I believe. So it's not really convincing. So can you please elaborate it more in detail this increase of JPY 60 billion in SG&A?

[Koji Ogawa, executive]

Yes, I'm sorry. So about the increase of SG&A. And this is due to the foreign exchange, we have about JPY 45 billion, and that is the impact factored in. And the payment of the profit share is also reflected in here. And in addition, ENHERTU indication expansion and geographical expansion of ENHERTU, cost associated to that is also included in here.

[Operator]

[Interpreted] Next from JPMorgan Wakao-san.

[Seiji Wakao, analyst]

[Interpreted] I'm Wakao from JP Morgan. I have some questions about the timing of OS. According to clinicaltrial.gov, primary endpoint or completion was supposed to be January of 2024 according to the site. But it depends on the event occurring. What is the timing of OS data announcement? Is it going to be expected around February to March of next year? So please make a comment on the timing of OS data coming out. .

[Ken Takeshita, executive]

The OS data analysis is really event-driven as you mentioned. And at the moment, it's difficult to predict exactly when that will be. So we haven't -- we cannot say that it's going to be January or February or March. So you just have to wait for the events to happen, just like the rest of us, really.

[Seiji Wakao, analyst]

[Interpreted] The second question, without -- even without the AGA actionable gene non-square month hazard ratio was 0.7%, what is meaningful? I think said that. So based on this, in your mind, but the first line from these results, I don't think it's changed or because of the data accumulated more, therefore, you are probably improving the confidence for the first line. So any change in the impression based on this data about the first-line therapy? How do you see this right now?

[Ken Takeshita, executive]

01 data is very informative in terms of how we think about the frontline study because we know now that much of the efficacy data is concentrated in the nonsquamous patient population. So by focusing on the nonsquamous patient population for our frontline clinical trials, we believe that we have reduced the risk by focusing on what we think is the most -- the patient population that benefits the most from the drug.

[Seiji Wakao, analyst]

[Interpreted] My last question . Especially EGFR-mutated patients, AGA, it works very well from your own data as well as the data from Merck. I would like to understand the mechanism more. Therefore, if you know, please let me know. As for the results of expression and AGA with or without was there any correlation between the 2? If you do not have the data suggestive of that, when would you be able to obtain such data in the form of presentation or paper?

[Ken Takeshita, executive]

Question about what we know about the mechanism of why there is particularly notable efficacy in the AGA patient population. And right now, we don't have an answer to your question. It's a very interesting question from a biology standpoint. It's not clear to us that whether it's related to TROP2 level of expression, at least if you look at the standard IHC assay, which is what that's the one we have done so far. So we just have to do some more digging to understand what is the molecular basis for the activity of at least the Dato-DXd in the patient population.

[Operator]

[Interpreted] Next question is from Hashiguchi-san of Daiwa Securities.

[Kazuaki Hashiguchi, analyst]

[Interpreted] I'm Hashiguchi. I have 2 questions in relation to the development. The first question is about Dato-DXd and combined with the immunotherapy in the past Phase I study result, I would like to ask a question. And in this study or this one or have been already presented at their conferences. And for the squamous versus non-squamous cells -- and maybe this is the first time you split the means squamous to announce. And this 0H study, the design will be. And in the first-line combination with immunotherapy Phase I study and in the cell carcinoma, had higher efficacy than the cell carcinoma. So based on that kind of difference, you have decided to make this change.

[Ken Takeshita, executive]

The TL-04 clinical trial data. And the question really is, have we done the subgroup analysis of patients who are versus patients who are squamous. And we haven't reported that yet. So you have to -- so please, I hope you're pleased until we have that reported so that we can answer that question for you.

[Kazuaki Hashiguchi, analyst]

[Interpreted] The second question is about the presentation scheduled in San Antonio Breast Cancer. And you are going to announce the part of the cohort of this study and endocrine therapy sensitive patient will be the target. And then a combination with the therapy and there is cohort of combination with the therapy and how to roll the patient. And this the hormonotherapy patient. And what do you -- what is your idea of the possibility of developing drug for such a patient?

[Ken Takeshita, executive]

[Interpreted] So yes, at the San Antonio Breast Cancer Conference, there is a plan to show clinical data from this Phase Ib study combination study that you mentioned. Now we -- I don't think we have actually said anything about which cohorts we are going to be reporting at San Antonio. So I hope that you can wait until we have that information. And then we can talk about what is our strategy going to be based on the data in that particular cohort.

[Operator]

[Interpreted] Next question Mitsubishi UFJ Trust Banking Corporation, Hyogo-san.

[Shinichiro Hyogo, analyst]

[Interpreted] I am Hyogo. I'm the Fund Manager from Mitsubishi UFJ Trust Banking Corporation. So about share buyback, once again, I'd like to ask you some questions. There are some sell-side people who are interested in that as well. So DOE 8% or higher. And this goes above the -- cost. That's 8%. And after Dato-DXd announcement, the share is very fertile. And I think the cost of capital is actually going up. So against the backdrop, I think share buyback is one way too. And of course, canceling that how much is going to go back? But then I think share buyback is one way to reduce the volatility of the share price.

And the stock capital, it's not very clear. DOE 8%, and that is the focus. But if that is the only focus, it is as if you are not really putting the top priority on share buybacks. So could you comment on that?

[Koji Ogawa, executive]

[Interpreted] Thank you very much for your question. So as a company cost of capital is something that we are very much aware of, very much we are conscious of in our management in the fifth midterm management plan. This is about the discipline of finance. Right now, it's 6%. As you have pointed out, data value goes up and down, and this is affected by better value. to a certain extent. But in any case, it's around 6%. And this is something that we are very much conscious of. And as a of shareholder return DOE of 8% or higher 2025 and ROE of 16% or higher. These are very important targets.

And as the management, we are committing to these target numbers. Therefore, it's not as if, as you have pointed out, the share buyback is underestimated. It's not the case because we think that share buyback is a very important effective manner to return to shareholders. Therefore, we always have it in mind as one of the options.

[Shinichiro Hyogo, analyst]

[Interpreted] Data value is one, but also the long-term interest rate is going up. Therefore, if -- well, you have very good pipeline. And if you do DCF, the target price always goes down, that's my idea. Therefore, DOE of 8% when you meet that target beta value. And because of the long-term interest rate going up, the expected return may not be realized for minority shareholders, which is not a good thing. And the deal with the Merck, I think, transiently probably, but this is going to really change the balance sheet because of the cash in. So given all of these factors, please have internal discussion thoroughly.

And with the deal of AstraZeneca, I think the cost structure was not very clear either and to revenue going up. But in terms of the costs, maybe I'm not really understanding it very well. But then oftentimes, the cost was not very clear. And then we often miss the actual performance prediction. Therefore, please visualize it. Probably, this deal is different and the deal is very well thought through and the structure is very well thought through, and it's very interesting. But please visualize the cost structure in order to avoid any misleading situation for the investors. So that's my suggestion in my humble position.

[Koji Ogawa, executive]

[Interpreted] Thank you very much for your pointing out. The interest rates going up in the U.S. and also the interest rates globally, we are always very conscious of those interest rates. And we're not trying to be closed in this country of Japan in terms of KPIs, and we do not always believe that our KPIs are right. So we really have flexibility so that we'll be able to give back to our shareholders in our management.

In terms of deal with Merck, and that is added on top of the deal with AstraZeneca. And more than ever before, the cost structure needs to be clarified in our IR activities, as you have pointed out. So we will continue to make efforts in that regard. The deal has just been concluded. Therefore, as of now, as I have already said, in terms of the impact of this Merck deal, we have the upfront deferred revenue booking, the top line. And also, we have the refundable R&D upfront money being paid of around JPY 10 billion plus/minus, and that's been reflected on the earnings forecast.

And then the development planning will start for the 3 ADC products. The people from the 2 companies are going to work on the details of the development of the 3, what kind of development is going to be done? At what timing? Once that decided USD 2 billion R&D expenses and the benefit of us paying only 25% is going to be quantified in a detailed manner going forward. Therefore, I do hope that I will see our efforts going forward.

[Shinichiro Hyogo, analyst]

[Interpreted] So in terms of the loss -- profit and loss. And of course, we have a lot of expectations for you. But still, the profit loss should be clarified in a better manner. So of course, we needed to endure a certain period. So from the next fiscal year, if we will be able to see that more clearly, that will be good. I'm sorry to have said everything I have said in my humble position.

[Operator]

[Interpreted] In the interest of time, industrial time, the next question will be the last question. Sogi-san from Sanford Bernstein.

[Miki Sogi, analyst]

[Interpreted] The first question is about R&D related question to Takeshita-san. Please correct me if our understanding is wrong, but we understand that there was a protocol amendment for in the middle to accept those patients who have the actionable genetic alteration. So which means that we can assume that there is some enrichment for those populations who are likely to receive better the benefit from the drug, especially toward the end of the study? Meaning that that can actually increase the success for OS. So is it the righting of the understanding? .

[Ken Takeshita, executive]

Yes, that's correct. Great.

[Miki Sogi, analyst]

[Interpreted] And another question is about the financial question. In the presentation, yen depreciation has been mentioned and due to yen depreciation off line and core operating profit impact has been also shared in presentation. And our core operating profit has a negative JPY 6 billion impact due to the yen depreciation. Why?

I asked this because naturally, there is an increase of the cost due to the yen depreciation. That's understandable. But normally, with the increase of the revenue, the impact would be small. Therefore, if you add everything, then the impact will be rather positive rather than the negative. So can you please explain?

[Koji Ogawa, executive]

[Interpreted] The impact of yen depreciation to especially the profit. The development cost overseas is really the major -- the major contributor. And of course, there are other costs incurred overseas. So these are actually plus and minus. So if that is translated into the operating profit, then impact is somewhat offset. So in terms of profit share, the same thing also applies.

[Miki Sogi, analyst]

[Interpreted] understood. One last question. ENHERTU U.S. sales, in EU and in Japan, the growth rate wise, it's in good progress. But in the United States, it seems like it's slowing down a little, but actually, you really have a very quick ramp-up. Therefore, is it within your expectation? Or do you still also feel that this is really slowing down? .

[Koji Ogawa, executive]

[Interpreted] Well, now in H2 in U.S. in the first quarter and second quarter, and on the U.S. dollar, then it may look rather flat rather than growing. That's what you are talking about, I guess. Yes, it's true that ENHERTU in the United States had very sharp growth initially since last year, HER2 positive second line and HER2 the having case. We have acquired or approved so that we in line with that, we had a major growth. And then second line and HER2 and both of them are growing in terms of market share steadily and it's around 50% -- or even more than 50% market share we have obtained. So it's smooth. And there is some seasonality here.

Actually, there is a summer holidays and also the independent day holidays and those may be giving some minor negative impact to this. But in the second line HER2 and further, we expect the growth of the sales and also in the WACC or the wholesale pacing price is actually higher than we have originally expected. Therefore, including this, the whole year forecast will be the -- there is increase by JPY 100 million to the JPY 1,605 million.

[Operator]

[Interpreted] Still some of you are raising your hands, but I'm really sorry that this is the time to close this part of question-and-answer session with investors and analysts. Investors and analysts, thank you very much for your attendance today. Thank you.

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