Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Transcript 2022-Q3

[Operator]

Thank you very much for waiting. We now would like to start Daiichi Sankyo's Conference Call on Fiscal year 2021 Third Quarter Financial Results. We are recording this session today. Thank you for your understanding. Please start the meeting.

[Hiroyuki Okuzawa, executive]

Okuzawa speaking. Thank you very much for joining Daiichi Sankyo's financial results announcement meeting out of your very busy schedule today. I'm going to explain our FY 2021 third quarter financial results we announced at 1 p.m. on Monday, January 31 Japan Time based on our presentation materials.

Please turn to Page 3. Today, I'm going to cover FY 2021 third quarter consolidated financial results and business updates, in that order. Then Wataru Takasaki, R&D Division Head, will give you our R&D update. We will entertain your questions at the end.

Please turn to Page 4. This is an overview of FY 2021 third quarter results. Consolidated revenue increased to JPY 811 billion, up by JPY 72.2 billion or 9.8% year-on-year. Cost of sales increased by JPY 6.8 billion from the previous year. SG&A expenses rose by JPY 26.4 billion. And R&D expenditure increased by JPY 5.3 billion year-on-year. As a result, core operating profit increased to JPY 123 billion, up JPY 33.6 billion or 37.6% year-on-year. Operating profit, including temporary gains and losses, increased to JPY 123.8 billion, up JPY 34.3 billion or 38.3% year-on-year. Profit attributable to owners of the company was JPY 94.3 billion, up JPY 18.5 billion or 24.4% year-on-year. As for the actual currency rates, the U.S. dollar was JPY 111.01. The yen depreciated by JPY 4.99 against the dollar year-on-year. The euro was JPY 130.62. The yen depreciated by JPY 8.25 against the euro.

Please turn to Page 5. From here, let me explain positive and negative factors for revenue compared to the previous year. Revenue increased by JPY 72.2 billion year-on-year. I'd like to explain its breakdown by major business unit.

First, in Japan business, sales of proton pump inhibitor, NEXIUM, decreased with the end of joint sales promotion with AstraZeneca in September last year. Sales of Alzheimer-type dementia treatment, Memary, decreased with the launch of generics in June 2020. But sales increased to direct oral anticoagulant, LIXIANA; pain treatment, Tarlige; anticancer agent, ENHERTU; and migraine preventive drug, Emgality, launched in April last year. In addition, Daiichi Sankyo Espha product contributed as well. So Japan business revenue increased by JPY 3.7 billion.

Next, let me explain our overseas business units. ForEx impact is excluded here. In oncology business, sales of hypertension treatment, Olmesartan, decreased. But anticancer agent, ENHERTU, grew in the United States and was also launched in Europe in February last year. So revenue increased by JPY 11.6 billion.

Revenue for American region increased by JPY 19.4 billion. Our sales increased for iron deficiency anemia treatment, Injectafer, and generic injectables, which were negatively affected by COVID-19 in the same period last year.

Revenue for EU Specialty business increased by JPY 8.8 billion due to an increase in LIXIANA sales in spite of a decrease in Olmesartan sales and gain on sales from transferring long-listed products. As for ENHERTU and Dato-DXd upfront payment and regulatory milestones related to a strategic alliance, revenue increased by JPY 6.2 billion.

We received JPY 17.2 billion quid-related payment from AstraZeneca as consideration of a strategic alliance for ENHERTU and booked JPY 3.1 billion as revenue recognized in the third quarter.

We also made the deferred revenue booking of Dato-DXd upfront payment starting from the second quarter of the previous fiscal year. This led to a revenue increase of JPY 6.2 billion. We can receive ENHERTU quid-related payment from AstraZeneca when we cannot sign an agreement where AstraZeneca gives us rights to commercialize or develop their products, compounds on the development and technologies. As we couldn't conclude an agreement by due date, we received this payment in December last year. ForEx impact increased the revenue by a total of JPY 20.6 billion.

Page 6 shows positive and negative factors for core operating profit. Let me explain the profit increase of JPY 33.6 billion by item. As I explained earlier, revenue increased by JPY 72.2 billion, including the increase of JPY 20.6 billion due to ForEx impact.

Next, I will explain cost of sales and expense items, excluding ForEx impact. Cost of sales was up just by JPY 4.6 billion. Revenue increased, but COGS ratio improved by changes in the product mix as sales increased for in-house products such as LIXIANA and ENHERTU.

SG&A expenses increased by JPY 18.5 billion due to an increase in ENHERTU-related profit sharing with AstraZeneca, et cetera. Costs increased by JPY 15.2 billion in total due to ForEx impact. Core operating profit increased by JPY 28.3 billion, excluding ForEx impact.

Page 7 shows positive and negative factors for profit attributable to owners of the company. As I explained earlier, core operating profit increased by JPY 33.6 billion, including ForEx impact. Temporary income expenses increased our profit by JPY 700 million year-on-year. We booked JPY 2.1 billion gains related to sale of Osaka logistics center as fixed assets to TAIYO Pharma Tech in June last year. In the third quarter, we booked JPY 1.3 billion impairment loss on intangible assets related to tenosynovial giant cell tumor treatment, TURALIO and others, due to a decrease in profitability.

Financial income, expenses, et cetera, decreased our profit by JPY 8 billion year-on-year as we booked financial income of JPY 4.7 billion due to a decrease in contingent consideration of quizartinib acquisition in the previous fiscal year, et cetera. Income taxes, et cetera, increased by JPY 7.7 billion year-on-year due to an increase in pretax profit. As a result, profit attributable to owners of the company increased to JPY 94.3 billion, up JPY 18.5 billion year-on-year.

Page 8 and 9 show revenue increase or decrease in Japanese yen by business unit and by major product in Japan. Earlier on Page 5, I explained the situation of each unit, excluding the ForEx impact. But here, we're showing the results including the ForEx impact. As for FY 2021 full year forecast for consolidated revenue and profit, including core operating profit, we have not changed our forecast we officially announced in October. Compared to the forecast announced in October, SG&A costs are expected to rise a little, and R&D expenditure is likely to decrease a bit. But this increase and decrease is the same amount, so we are maintaining our full-year core operating profit forecast we announced in October. For details, please refer to the reference data we disclosed together with the materials for this meeting.

Next, I'm going to talk about business updates. Please see Slide 11. Slide 11 shows the breakdown of the revenue from ENHERTU. The revenue from ENHERTU, including the upfront payment at the time of contract and the regulatory milestone payment in the third quarter of FY 2021, increased by JPY 26.9 billion year-on-year to JPY 55.7 billion. The full-year forecast for FY 2021 is expected to be JPY 76.6 billion, which is JPY 1.8 billion higher than the forecast announced in October. The full-year forecast for product sales is JPY 61.2 billion, which is JPY 1.6 billion lower than the forecast announced in October. The U.S. and European full-year forecast will be revised upward by JPY 900 million each, while the Japanese full-year forecast will be revised downward by JPY 3.4 billion. The sales situation in each region is explained in the next slide. Also, of the JPY 17.2 billion deferred revenue of Quid-payment received from AstraZeneca based on the strategic partnership agreement, JPY 3.4 billion will be recorded as revenue in FY 2021.

Please continue to Slide 12. Slide 12 shows the sales performance of ENHERTU. The product sales of ENHERTU are steadily increasing due to market penetration in the launch countries. Regarding the status in the United States, the cumulative product sales for the third quarter of FY 2021 are expected to be JPY 31.6 billion or $285 million, and the full year is expected to be JPY 43.9 billion or $400 million. The full-year forecast for sales of foreign currency-denominated products has not changed from the figures announced in October.

Growth in the target markets is favorable. The share of new patients continues to grow, and the share of new patients in the third-line treatment of HER2-positive breast cancer, according to market research, has expanded to the 40% range, maintaining the top share position. In particular, the share of patients without brain metastases, which accounts for 70% to 80% of the target market for breast cancer has expanded to the high 40% range, and the share of patients with brain metastases has also expanded to the high 30% range.

The market share of new patients for the second-line treatment of HER2-positive gastric cancer is also steadily increasing to about 30%. Based on the DESTINY-Breast03 study data presented at ESMO, the European Society for Medical Oncology, ENHERTU was listed as a recommended regimen for the second-line HER2-positive breast cancer treatment in the U.S. NCCN guidelines in November 2021, which has led to a significant increase in product awareness. We also feel that physicians' concerns about ILD have diminished by looking at the data from the DESTINY-Breast03 study. We believe that the product strength of ENHERTU has been accepted by prescribers as we planned.

Furthermore, in January, the filing for the second-line treatment of HER2-positive breast cancer was accepted by the authority. We hope that we can contribute the treatment of more patients in the future. Sales in Europe are also going well. Cumulative product sales for the third quarter of FY 2021 were JPY 4.9 billion or $44 million and are expected to be JPY 7.1 billion or $65 million for the full year. Since the sales up to the third quarter have been higher than initially expected in Europe, we have revised our full-year product sales forecast upward by $9 million from October announcement.

The share of new patients in the marketed countries is also steadily expanding. And France and the United Kingdom each maintained the top share positions in the current target markets. In October 2021, ENHERTU was listed in the ESMO clinical practice guidelines as a recommended regimen for the second-line treatment of HER2-positive breast cancer, which has greatly increased product awareness in Europe as well. Also in Europe, in November and December last year, the authority accepted the filing for HER2-positive gastric cancer and breast cancer for the second-line treatment of each.

Regarding the status in Japan, the cumulative actual product sales for the third quarter of FY 2021 were JPY 6.9 billion, which is forecasted to be JPY 10 billion for the full year. Even in Japan, wherein ENHERTU was launched about 6 months after the United States, we began to see a discrepancy in the actual usage between the initial assumption based on the clinical trial data with a limited number of cases in the current stage of the initial launch. So we have reduced our full-year sales forecast by JPY 3.4 billion from the figure announced in October.

Although we have revised our full-year forecast, we believe that the product strength ENHERTU has been accepted by the market as we expected. The share of new patients is steadily expanding. And the share of the third-line treatment of HER2-positive breast cancer has expanded to the high 30% range. And the share of the third-line treatment of HER2-positive gastric cancer has expanded to the high 40% range according to the market survey. In December of last year, the submission for the second-line treatment of HER2-positive breast cancer was accepted in Japan as well. So we will deliver this drug to as many patients as possible who need ENHERTU.

Slide 13 talks about strengthening the product portfolio of the Japanese business. We received additional approval for the indication of the antiplatelet agent, Effient, which is marketed for the cardiac field in December last year. An additional indication is suppression of recurrence after ischemic cerebrovascular disease, which has a high risk of developing cerebral infarction.

As for REYVOW, we signed a reverse co-promotion agreement with Eli Lilly Japan in August last year. In January of this year, Eli Lilly Japan obtained marketing approval for migraine indication. We aim to contribute to the treatment of more patients by providing new treatment options. We will continue to strengthen our product portfolio for sustainable growth of our domestic business while making effective use of external resources.

Slide 14 talks about the divested products in the U.S. business. In January 2022, we concluded an asset sale agreement in the United States to promote the transformation to a profit structure centered in new drugs. The divested products are Olmesartan and its fixed-dose combinations such as Benicar and the products sold under the product name Welchol, Effient and Evoxac. The total revenue forecast for these products in FY 2021 is JPY 9.9 billion. The new owner is Cosette Pharmaceuticals in the United States, which is scheduled to commercialize those products by July of this year.

As a pillar of the strategy of the fifth midterm management plan, we are aiming to strengthen the transformation to a profit structure centered on new drugs in each region. Through these divested products, we will further expand our profitability in the United States and promote a shift to a business structure that supports sustainable profit growth.

Next, I'd like to talk about the organization of the R&D structure. Please see Slide 15. We have decided to wind down the U.S.-based R&D subsidiary, Plexxikon Inc. Plexxikon is a part of the Daiichi Sankyo Group's research and initial development focusing on small molecules in the cancer and neurological fields. Daiichi Sankyo, Inc. launched the treatment agent tenosynovial giant cell tumor, TURALIO in the United States. And the Roche Group launched the malignant melanoma than agent, Zelboraf, from Plexxikon's discovery pipeline. Plexxikon currently owns an R&D product such as the BET inhibitor, PLX2853. We will transfer some of Plexxikon's R&D products to Daiichi Sankyo and terminate the employment of the employees. The business will end by the end of March.

Temporary expenses associated with the closure of business base and the termination of employment are scheduled to be recognized the fourth quarter of FY 2021. By allocating the reduced costs associated with the closure of Plexxikon to high-priority R&D investment and optimizing resource allocation, we will further strengthen our R&D capabilities for sustainable growth.

Next, our R&D update. I'm handing over to R&D Division Head, Wataru Takasaki.

[Wataru Takasaki, executive]

Takasaki speaking. Today, I'm going to give you an R&D update. First, 3 ADC update. Page 18 shows ENHERTU DESTINY-Breast03 efficacy data we presented at ESMO last year. ENHERTU demonstrated unparalleled improvement in PFS compared to TDM-1 in patients with HER2-positive metastatic breast cancer.

Please turn to Page 19. We presented DESTINY-Breast03 sub-analysis data of patients with stable brain metastases at San Antonio Breast Cancer Symposium last year. The left panel shows PFS in patients with HER2-positive breast cancer with stable brain metastases. ENHERTU showed greater efficacy compared to TDM-1, with PFS 15 months for ENHERTU versus 3 months for T-DM1.

The right panel shows data on intracranial response in brain metastasis lesions. Complete response was 2.8% with TDM-1 versus 27.8% with ENHERTU. ENHERTU showed greater intracranial antitumor response in brain met regions compared to the T-DM1.

Page 20 shows other updates for ENHERTU. As for HER2-positive metastatic breast cancer in the second-line settings, we filed a submission in Japan, U.S. and Europe based on DESTINY-Breast03 data. Our filing was accepted by PMDA and EMA in December last year and by FDA in January this year. We were granted priority review designation in the United States with PDUFA date of May 17.

Also, simultaneous filings are ongoing in multiple countries under Project Orbis, such as Brazil, Australia and Canada. Regarding new adjuvant therapy, we initiated DESTINY-Breast11 for patients with early breast cancer in November last year. For HER2-positive metastatic gastric cancer second-line treatment, our filing was accepted in Europe based on the data of DESTINY-Gastric01 and 02 studies.

In HER2 mutated NSCLC, we initiated DESTINY-Lung04 study in the first-line settings in December last year. So for ENHERTU, regulatory filings for new clinical studies are ongoing in multiple tumor types.

Page 21 is Dato-DXd breast cancer update. The potentially best-in-class TROP2-directed ADC, development in breast cancer is ongoing in triple-negative breast cancer and HR-positive breast cancer. Following ESMO Breast last year, we presented phase I TNBC cohort data at San Antonio Breast Cancer Symposium last year. Data showed encouraging efficacy with ORR at 34% in 044 heavily pretreated patients with TNBC and 52% in 27 patients without prior topo 1 inhibitor-based ADC treatment. Now we are planning Phase III study in TNBC. We initiated TROPION-Breast01 study in November last year for patients with HR-positive and HER2-negative breast cancer.

Page 22 is HER3-DXd lung cancer update. In December last year, FDA granted breakthrough therapy designation for the treatment of patients with metastatic EGFR-mutated NSCLC with disease progression on or after treatment with a third-generation EGFR TKI and platinum-based therapies.

On the right, you can find Phase I data presented at ASCO 2021. Clinically meaningful efficacy was confirmed across multiple mechanisms of resistance to EGFR TKIs. We were granted the first breakthrough therapy designation by FDA for HER3-DXd and the seventh for Daiichi Sankyo.

We initiated registrational Phase II HERTHENA-Lung01 study in this patient population from February last year. Registration plan will be determined by close communication with FDA. Many of the patients with EGFR-mutated NSCLC have resistance to the current treatment options, so new treatment approaches are necessary. We are hoping that HER3-DXd will be a promising treatment option for these patients.

The following slides from Slide 23 describes an Alpha Update. Please see Slide 24. We talked about the development plan for DS-5670 during the financial results presentation for the second quarter. But in light of the current situation, we changed the development plan and decided to give top priority to the development of booster vaccination.

In nonclinical studies, DS-5670 has been shown to induce neutralizing activity against the Omicron variant, and booster vaccination has been confirmed to enhance neutralizing activity against the Omicron variant. In January of this year, we started the Phase I, II and III studies for booster shots to be offered in calendar year 2022.

Initially, we were supposed to start the Phase III study for naive subjects in Africa, et cetera, within this fiscal year. However, due to the worldwide spread of infection with the Omicron variant, we decided to carry on discussing with the authority regarding the Phase III study plan so that we'll be able to initiate the study in the first half of FY 2022. The dose setting Phase II study started in November last year, and we will continue to with the authority regarding the study design, countries and study timing, et cetera, of the Phase III study.

Slide 25 shows the study design of the booster vaccination. A Phase I, II and III study will be conducted on those who have completed 2 doses of either Comirnaty or Spikevax. After confirming the dose, an active controlled noninferiority study will be conducted to compare against Comirnaty and Spikevax. As a primary endpoint, we will verify the geometric mean fold rise of neutralizing activity in blood 4 weeks after administration of the investigational drug.

Please see Slide 26. We presented the Valemetostat data at the American Society of Hematology held in December last year. The registrational Phase II study for relapsed and refractory adult T-cell leukemia and lymphoma showed good efficacy with an ORR of 48%. Based on the results of this study, it was designated as an orphan drug in Japan in November last year and was filed for an NDA in the following month of December.

Slide 27 includes other updates on Alpha. Regarding an update on quizartinib. In November last year, we obtained data from the QuANTUM-First study for the first-line treatment of acute myeloid leukemia with the FLT3-ITD mutation and achieved the primary endpoint. Based on this data, we are planning for regulatory filing and a presentation at the Society of Hematology in FY 2022.

Next, DS-7011 is an anti-TLR7 antibody and has been adopted by AMED's CiCLE. Systemic lupus erythematosus is an intractable autoimmune that causes inflammation and damage to various organs throughout the body. And the Phase I study for this disease is scheduled to begin soon.

Next is about the news flow of this fiscal year. Slide 29 shows key milestones, including key data readouts and the prospect of initiating a pivotal trial in addition to the upcoming presentations at the ASCO Genitourinary Cancer Symposium in February.

This part show in orange is the update from the one shown in the second quarter financial results. At the ASCO Genitourinary Cancer Symposium, we will present data from the urothelial carcinoma cohorts of the ENHERTU plus nivolumab study in the prostate cancer sub analysis data from the Phase I and II study of DS-7300.

Data for the DESTINY-Breast04 study are expected to be available in this quarter as planned. ENHERTU is the first and only treatment option targeting HER2 for patients with advanced HER2 low breast cancer. So we are very excited about the results.

Slide 31 and after are the appendix. We have listed our milestones and pipelines on those slides, so please take a look at them later. That is all for my presentation. From here on, we are going to entertain your questions. Thank you.

[Operator]

We're starting the Q&A session now. First, Mr. Wakao from JPMorgan Securities, please.

[Seiji Wakao, analyst]

Wakao from JPMorgan Securities. First, I'd like to ask you to elaborate on quid-related payment you explained today. This was mentioned in a section on ENHERTU. I might have missed. But it was not clear to me. Could you explain once again, please?

[Wataru Takasaki, executive]

Thank you for your question about quid-related payment. When we cannot sign an agreement where AstraZeneca gives us rights to commercialize or develop their products, compounds under development and technologies, we can receive this payment from AstraZeneca. This is what we included within our ENHERTU strategic collaboration agreement framework.

As we couldn't conclude an agreement by due date, we received this payment in December last year.

[Seiji Wakao, analyst]

This means one of the line extension study plans for ENHERTU is gone, for example? I still don't understand fully. Any impact on the potential of ENHERTU?

[Hiroyuki Okuzawa, executive]

This is not related to ENHERTU itself. This is one of the economic conditions we included within the entire framework for strategic collaboration negotiations.

[Seiji Wakao, analyst]

Okay. Now I understand there is no change in the potential of ENHERTU.

[Hiroyuki Okuzawa, executive]

Correct.

[Seiji Wakao, analyst]

Secondly, about your plan for ENHERTU in FY 2021. First, your sales forecast for Japan was revised downward JPY 3.4 billion. You mentioned in the presentation that the actual product usage was different from your assumptions. Could you elaborate on this, please? What about the situation in Europe and U.S., particularly in the United States? As of the second quarter, you suggested there can be some room for an upside, but you didn't make any revision this time. You're expecting an upside but none? Or there can be an upside from now on? Please explain.

[Hiroyuki Okuzawa, executive]

Thank you for your question about the status of ENHERTU product sales. First, ENHERTU was launched in Japan 6 months after the United States. The usage in the real-world clinical settings has started since and various information has been accumulated. As was the case with United States, based on the limited data at the time of the clinical studies, we developed our initial plan for Japan.

Then the product has been used in the real-world clinical settings, and we examined the actual situation. Compared to the plan based on the information at the time of the clinical studies, we identified some gap in the actual product usage. You can understand, the situation is almost the same with the United States. That was a factor behind the downward revision of our forecast.

As for the United States, ENHERTU has been making very steady progress and achieved the top new patient share in HER2-positive breast cancer in the third-line settings at the 40% level. I mentioned patients with or without brain met regions earlier. Its share is rising to the upper 40% level in patients without brain met and the upper 30% level in patients with brain met lesions. ENHERTU has been making very steady progress.

In the United States, ENHERTU is now included in the NCCN guidelines, which is leading to a positive effect. ENHERTU is classified as a preferred regimen for second-line treatment. This is before the approval of the second-line indication. If a product is included in the NCCN guidelines in the United States, even before the approval of an indication, it may be reimbursed by payers, in some cases. So we are beginning to see some positive effect. But with regards to our full-year forecast, we have not reached the stage to make an upward revision yet.

In Europe, ENHERTU is progressing even better than U.S.. ENHERTU is supported by small practice guideline, so we are enjoying a lot of positive impact.

[Seiji Wakao, analyst]

Understood. The situation in Japan is the same with U.S. In principle, the sales forecast is revised downward for the third-line settings and beyond. There will be no impact forecast for the second-line usage. Is my understanding correct?

[Hiroyuki Okuzawa, executive]

Exactly.

[Seiji Wakao, analyst]

Understood. Lastly, in HER2 low breast cancer, DB04 readout will be available by March. Could you let us know the timing, like, February or March, if possible? Also, about DB06 in chemo-naive patients, I think the timing of primary completion has been postponed. Before, it was by the end of this year, by December this year. But now it's June 2023. Please explain the factors behind. Is this a positive signal as was the case with DB04? Events are not occurring as expected and the treatment is efficacious with a positive signal? Or enrollment is just behind due to COVID-19?

[Wataru Takasaki, executive]

Thank you for your great expectations on DB04 study. But we can just say that the data will become available in the current quarter by March. We cannot disclose the details.

And so DB06, it's an event-driven study. So the timing of the analysis will depend on the status of the event accumulation. In that sense, we are progressing this way without any particular delay based on the general method or proceeding with the study.

[Operator]

Next Mr. Hashiguchi from Daiwa Securities. it.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities. I have a question about ENHERTU quid-related payment. I'm looking at your 2019 press release when you announced your strategic collaboration for ENHERTU. It says contingent payments include $3.8 billion for achievement of future regulatory milestones and other contingencies. Quid-related payment is included as part of this $3.8 billion for achievement of future regulatory milestones and other contingencies? Is my understanding correct?

[Hiroyuki Okuzawa, executive]

Yes, you're right.

[Kazuaki Hashiguchi, analyst]

This time, the right to a certain product or maybe multiple products were not exercised, resulting in this payment you received. Do some products still remain where you may possibly acquire the rights?

[Hiroyuki Okuzawa, executive]

Our negotiation period is already over. We concluded that there will be no such product. So the answer is no.

[Kazuaki Hashiguchi, analyst]

One more question, about expenses associated with your decision to wind down Plexxikon business. You mentioned reorganization expenses are expected to be recognized in the fourth quarter. According to Page 1 of the reference data, temporary expenses are not included in your full-year forecast. Does this mean Plexxikon-related expenses are going to be minor? Or they are not included in your forecast and can possibly be a downside in the future?

[Hiroyuki Okuzawa, executive]

Regarding Plexxikon-related wind-down or reorganization expenses, we are still in the estimation stage right now. But we don't think it's going to be a big amount. That's why it was not included in our forecast this time.

[Operator]

Next, Mr. Yamaguchi from Citigroup Securities.

[Hidemaru Yamaguchi, analyst]

Yamaguchi from Citigroup. Can you hear me?

[Hiroyuki Okuzawa, executive]

Yes, we can hear you.

[Hidemaru Yamaguchi, analyst]

Again, on quid-related payment. This is not related to ENHERTU. But this is so-called quid pro quo agreement where you had the rights to get other products, but you didn't exercise your rights. Is my understanding correct?

[Hiroyuki Okuzawa, executive]

Yes, your understanding is correct. We didn't specify any particular product or technology to negotiate. But within a certain negotiation period, we had the opportunity to evaluate a variety of things to see if we could sign an agreement or not. This is what we have tried to do. Within the negotiation period, we assumed, we didn't find anything we wanted to license in, in particular.

[Hidemaru Yamaguchi, analyst]

Understood. You received the proportional payment for the third quarter and the remaining amount will be paid proportionally, correct?

[Hiroyuki Okuzawa, executive]

Yes, you're right.

[Hidemaru Yamaguchi, analyst]

Understood. Secondly, about the divestiture of long-listed products in the United States. The amount is not so big. But these assets will no longer be on your PL statement from FY 2022? Our product supply seems to continue, so the assets will leave our PL in stages? What about the impact on your PL statement in the United States? Is the financial information on such transactions included somewhere?

[Hiroyuki Okuzawa, executive]

In principle, as you said, these assets will disappear from our PL as there will be no more sales and marketing activities by us. On the other hand, as consideration of this divestiture, gain from transfer of these assets will be booked in FY 2022. So there will be no impact on FY 2021 results.

[Hidemaru Yamaguchi, analyst]

So booking will be made in FY 2022, right?

[Hiroyuki Okuzawa, executive]

Yes, you're right.

[Hidemaru Yamaguchi, analyst]

Understood. Lastly, let me also ask this just in case. Regarding your arbitration with Seagen, is there anything you can comment?

[Hiroyuki Okuzawa, executive]

On this matter, we will disclose when there is an important update. So please wait till then.

[Hidemaru Yamaguchi, analyst]

It's between January and March based on the current outlook, correct?

[Hiroyuki Okuzawa, executive]

Yes, according to the current outlook.

[Operator]

Let's go to the next question, Mr. Muraoka from Morgan Stanley Securities.

[Shinichiro Muraoka, analyst]

This is Muraoka from Morgan Stanley. Sorry to go back to the question of the arbitration with Seagen, but let me just confirm my understanding. I think it was about last fall when the small meeting was held between President Manabe and the analysts. President Manabe spoke with such nuances that regardless of the outcome of the arbitration and the decision made by the District Court in Texas in April, it's not that easy to end and it's not a matter of reconciliation. Do I understand it correctly that your position hasn't changed since then?

[Hiroyuki Okuzawa, executive]

Thank you for your question. As you mentioned, there are currently 2 disputes running in parallel. One is an arbitration proceeding for intellectual property rights related to our ADC technology. And the other is an infringement proceeding regarding Seagen's patent, which is called Texas Infringement Proceeding. Regarding the arbitration, as I mentioned earlier, we are waiting for the result. And if there is any important progress, we will disclose it accordingly.

The other one, which is the Texas Patent Infringement proceeding, has recently undergone a procedure called mediation, in which a settlement negotiation was held, but this has been unsuccessful. So the next step is a jury trial in a Texas court, and the deadline has been set for April 4 this year. We are currently going through various procedures to prepare for it.

[Shinichiro Muraoka, analyst]

So do I understand the nuance correctly that this is not a matter that can be settled so quickly?

[Hiroyuki Okuzawa, executive]

Well, at least with regard to arbitration, we have reached the point where we are finally waiting for the arbitrator's decision. So in that sense, it will not be too long. And I think you said it correctly.

[Shinichiro Muraoka, analyst]

Understood. Also, this is about the timing, and it's difficult. But as for DB04, which you didn't specifically mention previously, this is not listed on the event table either. But will that be in time for ASCO in June or the submission will not make it. How should I take it?

[Hiroyuki Okuzawa, executive]

We haven't made any decision on presentations at academic conferences yet. Once decided, we will share it with you immediately.

[Shinichiro Muraoka, analyst]

Also about quizartinib, I think I read it somewhere in the material that you have been successful for the first-line treatment of AML and you are preparing for the submission, et cetera. But if I remember correctly, it also had a with QT, and you received a CRL a few years ago. Now do you have a prospect that the review by FDA will proceed smoothly this time?

[Hiroyuki Okuzawa, executive]

Right. At the moment, we are thinking that there are no new concerns, especially regarding safety, and we have decided to proceed toward submission activities. So regarding your concerns, we don't think there will be any major obstacles.

[Operator]

Mr. Ueda from Goldman Sachs Securities.

[Akinori Ueda, analyst]

This is Ueda from Goldman Sachs Securities. First of all, I'd like to know the current status of ENHERTU. In your previous explanation, I think you commented that the concerns for ILD were diminished in clinical practice. Could you tell us a little more about the changes occurred there?

[Hiroyuki Okuzawa, executive]

Sure. What I said was only based on my impression and feel in clinical practice. However, as the background, there are specific data of the DB03 study released recently. So I feel that there are sufficient grounds to believe that it has turned into a good impression.

[Akinori Ueda, analyst]

As for my second question, I'd like to know about the COVID-19 vaccine. First, what kind of increase in antibody titer was confirmed in the Phase I study? And what level was that? Could you comment on that?

[Hiroyuki Okuzawa, executive]

I believe this is about the very first Phase I study that we conducted. To this point, we'd like to put together all the knowledge we have accumulated and presented when an opportunity arise. However, we still do not disclose the content of the data at this point. On the other hand, the booster study has just started today in the form of Phase I, II and III. Behind the scenes of this is that the data obtained have proven that this study deserves to be facilitated. Although we are not able to disclose the data in detail, I appreciate your understanding that this is the direction we have set.

[Akinori Ueda, analyst]

As an additional question on this topic, do I understand it correctly that approval can be obtained if this booster study shows noninferiority under neutralizing antibodies?

[Hiroyuki Okuzawa, executive]

Yes, we are discussing with the authority in that direction.

[Akinori Ueda, analyst]

Then does that mean that approval can be obtained even in the form of a single indication of booster only?

[Hiroyuki Okuzawa, executive]

Yes, your understanding is correct.

[Akinori Ueda, analyst]

Lastly, about the timing, and you mentioned previously that it'll be within this year. However, the bar on Page 24 seems to be getting pretty long. What is your current disclosure on the duration of the booster study in the prospect for approval?

[Hiroyuki Okuzawa, executive]

As I indicated in my presentation, we have obtained good evidence in nonclinical trials. So I think we will be able to obtain a solid confirmation from the clinical trials. Regarding Phase I, II and III in the booster study, it flows from the dose-finding study to the active, controlled noninferiority study. This program will flow smoothly and will be put into practice use in calendar year 2022. The outline image of the time line has been fully in place. Although the bar is drawn long, its practical use in the 2022 calendar year is properly in sight.

[Operator]

Mr. Sakai from Crédit Suisse Securities.

[Fumiyoshi Sakai, analyst]

This is Sakai from Credit Suisse. There's only one thing left, but I think I should congratulate you on the Breast03 studies publication on the NCCN guidelines. The guidelines say that it's a recommended regimen in Category 1, but the NCCN guidelines are written so much in detail that I've been having a hard time reading it.

Anyhow, what are the implications of being recommended for Category 1? Naturally, I suppose it has brought a good impact. And as for the other drugs listed here, please let me know the main ones listed in the guidelines. Also, the NCCN guidelines have not been updated yet. I appreciate it if you can let me know if I'm missing something here.

[Hiroyuki Okuzawa, executive]

I think the question is about the status of being listed in the NCCN guidelines and the status of other products. My understanding is that it is definitely recommended at the highest level in the second line of the recommended regimen.

And your next question is about the status of other products. For example, in the case of the first-line pertuzumab, trastuzumab and docetaxel are categorized as one in the recommendations.

[Fumiyoshi Sakai, analyst]

How about the second-line?

[Hiroyuki Okuzawa, executive]

Regarding the second line, it is in ENHERTU. Previously, T-DM1 was included before in ENHERTU. But now that ENHERTU has become Category 1 of the recommendations, T-DM1 has been changed to the Category 2A of the recommendations.

[Fumiyoshi Sakai, analyst]

That means that the category has gone down?

[Hiroyuki Okuzawa, executive]

Correct.

[Fumiyoshi Sakai, analyst]

I see. Were the guidelines themselves updated in November?

[Hiroyuki Okuzawa, executive]

Yes, they were.

[Fumiyoshi Sakai, analyst]

Okay. I'll take a look at them later. As for the category in terms of its way of use, it's recommended as the one at the very top?

[Hiroyuki Okuzawa, executive]

Yes, that's correct. Although it's still in the pre-approval stage, it's already at the top of the guidelines.

[Operator]

Mr. Akama from Nikkei Inc.

[Kenya Akama]

I'm Akama from Nikkei Inc. I have 2 questions. First of all, I'd like to ask Mr. Okuzawa about what the impact of the spread of Omicron has been. I think Injectafer has a much higher sales progress rate in the United States this year than the previous year. But can you tell me how it has been impacted? Also on the positive side, please tell me if there is an increase in sales of Loxonin.

[Hiroyuki Okuzawa, executive]

Yes. Regarding Injectafer in the United States, the society has been recovering quickly from COVID-19 this term. And even compared to other countries, the situation was that patients had returned to the hospitals in the number of visits recovered in the first half of this fiscal year, which allowed us to achieve even higher sales performance than before. There was a positive effect that the results for the first half of this fiscal year were higher than the results for the first half of FY 2019 before the outbreak of COVID-19.

[Kenya Akama]

How about the impact of Omicron?

[Hiroyuki Okuzawa, executive]

Right. Omicron is not recognized as a particularly negative factor. And sorry, I think the second question was about Loxonin's situation in Japan. As for the current status, the results are almost the same as the previous year. There was a time when Loxonin had a slight increase related to side reactions after vaccination, but it has calmed down for now. So the result of Loxonin this term is about the same as that of the previous year.

[Kenya Akama]

Do you expect to see another increase of demand after the third booster shots?

[Hiroyuki Okuzawa, executive]

Well, I can't really tell you one way or the other. But during the fifth wave, it's true that there were many situations where it was used for such side reactions. So there may be such a possibility for the current sixth wave.

[Kenya Akama]

I have one more question. I would like to ask Mr. Takasaki. You mentioned that clinical trials for vaccinated subjects were delayed. In fact, how is it delayed by the expansion of Omicron? Is it delayed because the CROs are stuck? Or is it delayed because you can't find naive subjects in the first place? And in fact, please tell me if it is unlikely that the clinical trial for naive subjects will end in calendar year 2022. What's the possibility?

[Wataru Takasaki, executive]

Thank you for your question. Mr. Akama, there are 2 ways to go with the spread of Omicron. First, I think the number of naive patients is decreasing. The other is that due to the Omicron infection, there is a scheduling problem and a sense of tightness in medical institutions where clinical trials will be actually conducted. So I think that the level of difficulty has increased a little due to these 2 factors.

We have been talking with the regulatory authority about how to conduct the clinical trials. We are still not ready to tell you what and when we will be doing. But we'd like to start the clinical trial by following the booster study as closely as possible. I'm sorry that we don't have a clear time line yet, but there is no change in our process of diligent discussions with the regulatory authority.

[Operator]

We have reached the time to end the QA session. Thank you for your participation in today's session. This concludes today's meeting, and thank you all for your attendance.

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