Daiichi Sankyo Co Ltd

TSE:4568

Earnings Call Transcript 2022-Q4

[Sunao Manabe, executive]

Manabe speaking. Thank you very much for joining Daiichi Sankyo's financial results presentation out of your very busy schedule today. I'm going to explain our FY 2021 financial results we announced at 1 p.m. on Wednesday, April 27, Japan time, based on the presentation materials.

Please turn to Page 3. Today, I'm going to cover FY 2021 consolidated financial results, FY 2022 forecast and business update in that order Then Wataru Takasaki, R&D Division Head, will give you our R&D update. At the end, I will explain our 5-year business plan update. We will entertain your questions at the end.

Please turn to Page 4. This is an overview of FY 2021 consolidated results. Revenue increased to JPY 1,044.9 billion, up JPY 82.4 billion or 8.6% year-on-year. Cost of sales increased by JPY 10.3 billion from the previous year. SG&A expenses rose by JPY 33.7 billion, and R&D expenditure increased by JPY 26.7 billion year-on-year. As a result, core operating profit increased to JPY 90.6 billion, up JPY 11.8 billion or 14.9% year-on-year.

Operating profit, including temporary gains and losses, increased to JPY 73 billion, up JPY 9.2 billion or 14.5% year-on-year.

Profit attributable to owners of the company was JPY 67 billion, down JPY 9 billion or 11.8%.

As for the actual currency rates, the U.S. dollar was JPY 112.38. The yen depreciated by JPY 6.32 against the dollar year-on-year. The euro was JPY 130.56. The yen depreciated by JPY 6.86 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 82.4 billion year-on-year. I would like to explain its breakdown by major business unit.

First, in Japan business, sales increased for 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 products contributed as well, but sales decreased for proton pump inhibitor, Nexium, decreased with the end of joint sales promotion with AstraZeneca in September last year.

Sales of Alzheimer's type dementia treatment memory also decreased with the launch of generics in June 2020. So Japan business revenue decreased by JPY 3.8 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 Europe. So revenue increased by JPY 18.3 billion.

Revenue for American Regent increased by JPY 19.3 billion as 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 9.9 billion due to an increase in Lixiana sales in spite of a decrease in olmesartan sales and gain on sales from transferring current products. As for Enhertu and Dato-DXd up-front payment and regulatory milestones related to a strategic alliance, revenue recognized increased by JPY 4.2 billion. We received JPY 17.2 billion quid-related payment from AstraZeneca as consideration of our strategic alliance for Enhertu. Out of the deferred revenue, we booked JPY 3.4 billion as revenue in FY 2021.

We also made the deferred revenue booking of Dato-DXd up-front payment starting from the second quarter of FY 2020. This led to a revenue increase of JPY 2.1 billion. ForEx impact increased our revenue by a total of JPY 28.7 billion.

Page 6 shows positive and negative factors for core operating profit. Let me explain the profit increase of JPY 11.8 billion by item.

As I explained earlier, revenue increased by JPY 82.4 billion, including the increase of JPY 28.7 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 6.5 billion. Revenue increased, but COGS ratio improved by changes in the product mix as sales increased for our in-house products such as Lixiana and Enhertu.

SG&A expenses increased by JPY 22 billion due to an increase in Enhertu-related profit sharing with AstraZeneca, et cetera.

R&D expenditure rose by JPY 17.5 billion because of an increase in R&D investments for the 3 ADCs.

Cost increased by JPY 24.7 billion in total due to ForEx impact. Core operating profit increased by JPY 7.9 billion, excluding ForEx impact.

Next, 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 11.8 billion, including ForEx impact.

Temporary income and expenses decreased profit by JPY 2.5 billion from the previous year. In FY 2020, we booked JPY 15.6 billion temporary expenses as vaccine business loss compensation associated with the termination of vaccine business alliance with Sanofi.

In FY 2021, we booked JPY 3.9 billion temporary income including gains related to sale of fixed assets. When we sold Osaka Logistics Center to Taiyo Pharma Tech in June last year, we also booked JPY 21.5 billion temporary expenses, including environmental expenditures related to former Yasugawa plant and losses related to closure R&D subsidiary, Plexxikon associated with the reorganization of our R&D structure.

Financial income expenses, et cetera, decreased our profit by JPY 9.8 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 FY 2020, et cetera.

As for income taxes, et cetera, in FY 2020, there was a decrease in income taxes due to an increase in DTA attributable to future expected taxable income increase for the 3 ADCs with increasing product value.

In FY 2021, due to the impact of tax credit for R&D expenses and others, the tax rate was lower than usual, but income taxes, et cetera, increased by JPY 8.2 billion compared to the previous year. As a result, profit attributable to owners of the company decreased to JPY 67 billion, down JPY 9 billion year-on-year.

Page 8 and 9 show revenue increase or decrease in Japanese yen by business unit and major product in Japan. Earlier on Page 5, I explained the situation of each unit, excluding the ForEx impact, but here, we are showing the results, including the ForEx impact.

Next, let me explain our FY 2022 forecast. Please turn to Page 11. In FY 2022, we will aim to achieve revenue of JPY 1.15 trillion and operating profit of JPY 105 billion. For revenue, there are negative factors to decrease our revenues such as NHI drug price revision in Japan and termination of joint sales promotion for Nexium. But on the other hand, there are positive factors to increase such as sales expansion of main products, including Enhertu, Lixiana and Tarlige. So we are forecasting revenue increase to JPY 1.15 trillion, up JPY 105.1 billion from FY 2021.

We forecast a decrease in cost of sales by JPY 20 billion as the cost of sales ratio will improve by changes in product mix and others.

SG&A expense is expected to rise by JPY 57.9 billion. Based on an increase in expenses related to Enhertu due to an increase in profit sharing with AstraZeneca.

As for R&D expenses, we are forecasting an increase by JPY 52.9 billion, expecting an increase in 3 ADCs R&D investments. As a result, we're expect the core operating profit increased to JPY 105 billion, up JPY 14.4 billion from FY 2021.

In FY 2021, we booked temporary income and expenses, but we are not expecting such booking in FY 2022 as of now. So our operating profit forecast is the same with the core operating profit forecast figure.

The tax rate in FY 2021 was lower than usual due to the impact of tax credit for R&D expenses and others. But we are assuming the usual tax rate in FY 2022, so we are expecting profit attributable to owners of the company to increase to JPY 83 billion, up by JPY 16 billion year-on-year.

Our currency rate assumptions are JPY 130 against the U.S. dollar and JPY 140 against the euro. We expect that yen's depreciation will have a ForEx impact to increase our revenue by about JPY 55 billion and decrease our core operating profit by about JPY 6 billion.

Due to COVID-19, certain activity restrictions are expected to continue during FY 2022, but the impact on our core operating profit is expected to be minor.

Next, I will discuss business updates. First, I will discuss progress toward achieving maximization of 3 ADCs. Please go to Slide 14. This slide shows the transformation of breast cancer patient treatment that we aim to achieve with in Enhertu. The percentage of HER2-positive breast cancer patients shown in orange is approximately 20% of all breast cancer patients, and the remaining 80% are classified as HER2 negative. Among breast cancer patients classified as HER2 negative, there are patients with low levels of HER2 expression, which we newly defined as HER2 low. It is known that the number of breast cancer patients with HER2 low indicated in purple and green is about twice that of HER2-positive breast cancer patients.

Currently, there are no HER2-targeting drugs for HER2 low breast cancer, and chemotherapy is the standard of care. Our goal is to provide a new treatment modality for patients with HER2 low breast cancer.

In February, the DESTINY-Breast04 study in breast cancer patients with HER2 low, who have been previously treated with chemotherapy meds, primary endpoints, and we plan to submit an application in the first half of FY 2022.

In addition, a Phase III study, DESTINY-Breast06 is underway for the indication of chemotherapy naïve HER2 low breast cancer. By transforming the treatment of patients who couldn't be targeted in the past, we expect to contribute to the treatment of more patients in the future.

Slide 15 shows the breakdown of Enhertu's revenue. In FY 2021, revenue from Enhertu, including the up-front payment and the regulatory milestone payment increased by JPY 37.4 billion from the previous fiscal year to JPY 80.8 billion. In FY 2022, we expect the revenue to be JPY 159.9 billion, an increase of JPY 79.1 billion from the previous year.

In FY 2022, we aim for the product sales of JPY 128.4 billion, which is JPY 63 billion increase from the previous year due to growth in the U.S., Europe and other regions.

The sales performance in each region is explained in the next slide. The regulatory milestone for FY 2022 is expected to be JPY 20.6 billion, an increase of JPY 18.3 billion from the previous fiscal year. In FY 2022, we expect 5 new indications to be approved in the U.S. and Europe.

For breast cancer, we expect approval in the U.S. and Europe for second-line treatment of HER2-positive breast cancer and in the U.S. for chemotherapy experienced breast cancer with HER2 low, as I explained earlier. In addition, we expect approval for the second-line treatment of HER2-positive gastric cancer in Europe and the second-line treatment of HER2 mutant non-small cell lung cancer in the U.S.

Deferred revenue from quick related up-front payment received from AstraZeneca under the strategic alliance agreement is expected to decrease by JPY 2.3 billion to JPY 1.1 billion in FY 2022 as the amount equivalent to approximately 3 years from the time of signing the agreement to the time of confirmation of receipt was recorded in a lump sum in FY 2021 when the up-front payment was confirmed.

Please go to Slide 16. This slide shows the sales performance of Enhertu. Due to market penetration and expansion in the countries where it is launched, product sales of Enhertu are steadily increasing.

First of all, regarding the situation in the U.S., the results of the product sales in FY 2021 were JPY 45.4 billion or $404 million, and we are aiming for JPY 83.1 billion or $639 million in FY 2022.

We are seeing steady growth in our target markets. Our new patient share continues to grow. According to market research, the most recent new patient share in the third-line treatment of HER2-positive breast cancer maintains its leading position. It has expanded to the 40% range. In addition, the market share among patients without brain metastasis, which accounts for 70% to 80% of the breast cancer target market has expanded to the 40% range, while the market share among patients with brain metastasis has remained steadily at approximately 30%.

The share of the new patients in the second-line treatment of HER2-positive gastric cancer is also growing steadily in approximately 30%. Based on the DESTINY-Breast03 study data presented at ESMO, the European Society for Medical Oncology in November 2021, the drug was included in the U.S. NCCN guidelines as a recommended regimen for the second-line treatment of HER2-positive breast cancer, which significantly increased product awareness and the safety data from the DESTINY-Breast03 study has given us the feeling that physicians' concerns about ILD have decreased. And we believe that the product strength of Enhertu is being accepted by prescribing physicians as we planned.

Sales in Europe are also on track with actual product sales of JPY 9 billion or $80 million in FY 2021. We are targeting JPY 23 billion or $177 million in FY 2022.

In Europe, the number of launched countries is expanding. In FY 2021, the product was launched in Germany in February, in addition to the U.K. and France.

The share of new patients in the launch countries is steadily increasing. And we have reached the top share of the new patients in the target markets, including Germany, where the product was launched only recently.

In October last year, the product was included in the ESMO clinical practice guidelines as a recommended regimen for second-line treatment of HER2-positive breast cancer, which has led to a significant increase in the product recognition in Europe.

The results of the product sales in Japan in FY 2021 were JPY 9.6 billion, and we are targeting JPY 16 billion in FY 2022.

New patient share is steadily increasing. According to the most recent market survey the market share in the third-line treatment of HER2-positive breast cancer and HER2 positive gastric cancer has expanded to the 40% and 50% range, respectively, to gain the top share in these areas.

The results of the product sales in the ASCA region in FY 2021 totaled JPY 1.4 billion. We are aiming to achieve sales of JPY 6.3 billion in FY 2022. Product sales in the ASCA region include co-promotion revenues in Hong Kong where AstraZeneca records sales. In January, the product was launched in Brazil, the country in which we record sales.

We will continue to strive for further market penetration and expansion of the number of countries where the product is launched in each region as well as to obtain indications in order to deliver the product to as many patients as possible who need Enhertu.

Next, I will discuss our progress toward profitable growth for current business and products. Please go to Slide 18. Slide 18 shows changes of Lixiana's market share in terms of volume in each country. In addition to Japan, South Korea and Taiwan, Lixiana is growing steadily in Belgium, Spain, Italy and other European countries.

Consequently, the results of the global revenue for FY 2021 was JPY 205.6 billion, an increase of JPY 39.7 billion from the previous year. In FY 2022, we aim to accelerate growth in each country and achieve sales revenue of JPY 237.7 billion. Slide 19 shows the market share of Lixiana in terms of sales amount in Japan.

Although Lixiana sales share declined in the first quarter of FY 2020 due to the reduction of the NHI reimbursement price in April 2020 as a result of the special expansion repricing, it has since increased its share, again, maintaining the top share with 39.3% of the sales as of the fourth quarter of FY 2021.

In August last year, the company received approval in Japan for an additional dosage and administration that allows prescribing of the drug to elderly patients with nonvalvular atrial fibrillation who are at high risk of bleeding, who previously had difficulty receiving oral anticoagulants due to bleeding concerns. Thus, the revenues increased by JPY 15.1 billion from the previous year, bringing the revenue results of FY 2021 to JPY 92.5 billion. In FY 2022, we aim to further expand sales to JPY 104.3 billion, an increase of JPY 11.8 billion from the previous fiscal year.

Next, I will discuss our Japan operations. Please go to Slide 20. In Japan, we are strengthening our product portfolio. In April, we launched Emgality, a first-in-class migraine attack onset inhibitor in Japan from which we have concluded a marketing agreement with Eli Lilly Japan. The sales are steadily increasing.

As explained earlier, Lixiana received approval for additional dosage and administration. In November, we launched Delytact, an oncolytic virus G47 delta product for cancer treatment developed jointly with Professor Todo of the Institute of Medical Science, the University of Tokyo.

Furthermore, in December, the antiplatelet agent, Effient, our mainstay products in Japan, for which a cardiac indication had been obtained, was added for the prevention of recurrence after ischemic cerebral vascular disease, which carries a high-risk stroke.

In addition, a migraine treatment agent, REYVOW, for which we have a marketing agreement with Eli Lilly in Japan received approval in January and was listed on the NHI drug price list in April.

In March, we received approval for a partial change in the manufacturing and marketing approval for Tarlige, a pain therapeutic agent sold for the indication of peripheral neuropathic pain launched in April 2019.

Neuropathic pain is classified as either peripheral or central depending on the site of nerve damage. And based on the results of a study of Tarlige for the central neuropathic pain, approval was obtained to change the indication to neuropathic pain. By delivering Tarlige to all patients with neuropathic pain, regardless of whether it is peripheral or central, we will increase our contribution to the patients and maximize the product value of Tarlige.

Next, I will discuss other initiatives in each region. In Japan, we transferred 7 products, including Acecol, a treatment for hypertension. And in Europe, we transferred 3 products, including Lopressor, a treatment for hypertension in Italy.

In the U.S., we transferred 8 products, including Benicar, an antihypertensive agent. And in ASCA and in China, we signed an agreement to transfer Cravit and Daiichi Sankyo Pharmaceutical Beijing Co., Ltd. We will continue to strengthen our transformation to a profit structure based on new drugs.

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

[Wataru Takasaki, executive]

Takasaki. Today, I'm going to give you our R&D update. Among the 4 strategic pillars of our 5-year business plan, I will explain our major progress in FY 2021 towards maximized 3 ADCs and identify and build pillars for further growth, which are deeply related to R&D and will cover their latest updates.

First, on progress towards maximized 3 ADCs. Please turn to Page 24. The biggest achievement in R&D in the first year of our 5-year business plan was the achievement of results with a potential to transform treatment for breast cancer patients in Enhertu DESTINY-Breast03 and 04 studies. Because of this, FY 2021 marked a major turning point in Daiichi Sankyo's transformation into a global leader in oncology. We feel we got off to a good start to achieve a 5-year business plan.

From next page, I will talk about the latest on DESTINY-Breast03 and 04 studies. Please turn to Page 25. This page shows PFS data from DESTINY-Breast03 study we presented at ESMO 2021.

In patients with HER2-positive breast cancer, Enhertu demonstrated unparalleled improvement in PFS compared to T-DM1 and no grade 4/5 ILD was observed. This data was also published in the New England Journal of Medicine.

We already filed a submission in Japan, U.S. and EU, and regulatory approval is planned in FY 2022. Regulatory submission was also accepted in China in March. Based on DESTINY-Breast03 study, we will launch Enhertu in the respective countries, we have great expectations that this will lead to the transformation of the course of HER2-positive breast cancer.

Please turn to Page 26. DESTINY-Breast04 is a global Phase III study in patients with HER2 low breast cancer previously treated with chemotherapy to evaluate the efficacy and safety of Enhertu versus investigator's choice chemotherapy.

The study met the primary endpoint, PFS in HR-positive HER2 low breast cancer patients and all key secondary endpoints. Enhertu's demonstrated a statistically significant and clinically meaningful improvement compared to the investigator's choice. No new safety concern was observed.

Based on this data, Enhertu was granted designation for realtime oncology review by FDA in February 2022 and granted breakthrough therapy designation by FDA this month in April. Data presentation is planned at ASCO in June, so please stay tuned.

Regulatory submission is planned in the first half of FY 2022. Enhertu is going to be the first and only HER2-directed treatment option for HER2-low advanced breast cancer patients. And we pioneer HER2 low breast cancer as a new clinically meaningful patient segment.

Please turn to Page 27. Breakthrough therapy designation was granted for NSCLC by FDA in May 2020. Data was presented at ESMO 2021 and was also published in the New England Journal of Medicine. Last week, regulatory submission was accepted in the United States based on DESTINY-Lung01 study data. Priority review was granted in the United States and PDUFA date is August 16.

Enhertu can potentially become the first treatment option for HER2 mutated NSCLC and will expand its leadership also in lung cancer, following breast cancer and gastric cancer.

Please turn to Page 28. In addition to the progress of DESTINY-Breast03 and 04 and Lung01 studies I explained earlier, we had various other progress for Enhertu in FY 2021, which is summarized on this page.

Studies, which achieved milestones in FY 2021, such as study initiation, data acquisition, filing acceptance, et cetera, are encircled in orange line box. Launched indications as shown in green.

As shown in this table, you can tell that development in earlier lines of treatment has progressed in HER2-positive breast and gastric cancer and HER2 mutated in NSCLC.

Page 29 shows Dato-DXd's progress in FY 2021. Dato-DXd is positioned as a best-in-class TROP2 ADC. This page shows TROPION-PanTumor01 study data represented the NSCLC cohort data at WCLC and triple-negative breast cancer cohort data at SABCS last year.

Based on the data we obtained, we are actively proceeding with development in NSCLC and conducting multiple studies right now. We started Phase III study in combination with pembrolizumab in NSCLC without actionable genomic mutations in the first-line settings in March.

As for other progress, we initiated TROPION-Breast01 study in HR-positive breast cancer in November last year.

With regards to development in triple-negative breast cancer, BEGONIA study in combination with durvalumab started in May last year. Phase III monotherapy study is also being planned.

Also, 4 cohorts for gastric, esophageal, urothelial cancer and SCLC were added in TROPION-PanTumor01 study. We are also evaluating the potential of Dato-DXd in tumor types other than lung and breast cancer.

Page 30 shows HER3-DXd's progress in FY 2021. HER3-DXd is a first-in-class HER3-directed ADC.

HER3-DXd demonstrated tumor responses in NSCLC patients with multiple EGFR TKI resistance mechanisms in Phase I study. FDA granted Breakthrough therapy designation in December last year.

Right now, HERTHENA-Lung01 study is ongoing as scheduled in EGFR-mutated NSCLC third-line settings.

Phase Ib study in combination with osimertinib was initiated in June last year in the first and second-line settings for EGFR-mutated NSCLC.

Page 31 shows the new study plan for HER3-DXd. We are planning to initiate a Phase III study in EGFR TKI-resistant EGFR mutated NSCLC patients. It's a randomized open-label Phase III study versus platinum-based chemotherapy to evaluate PFS as a primary endpoint. We are planning to start the study in the first half of FY 2022.

From Page 32, I will explain our progress towards identify and build pillars for further growth. In order for Daiichi Sankyo to achieve sustainable growth, it is essential to continuously create products and modalities, which can be the next pillars following the 3 ADCs. We will identify new growth drivers following 3 ADCs and select post-DXD-ADC modalities.

Please turn to Page 33. I DS-7300 and DS-6000 are the fourth and the fifth DXd-ADC under development. The early efficacy signals are being observed in Phase I studies, so they are positioned as rising stars projects, which can be the new growth drivers following the 3 ADCs.

On the next page, I will explain the progress of DS-7300 and DS-6000 more specifically. Please turn to Page 34. This page shows the progress of DS-7300 in FY 2021. Phase I/II study dose escalation interim data was presented for the first time at ESMO 2021.

In February, Phase I/II study interim subanalysis data in prostate cancer was presented at Urology Cancer Symposium, ASCO-GU 2022. Phase I/II study is beginning to show promising early clinical activity in heavily pretreated patients with solid tumors. We are planning to present Phase I/II study follow-up data at an upcoming conference.

Please turn to Page 35. This page shows the future development plan for DS-7300. Phase I/II study is ongoing right now in patients with various solid tumors. Based on the dose escalation part data and high unmet medical needs, we are trying to proceed with development in small cell lung cancer. We plan to initiate Phase II study for SCLC in the first half of FY 2022 to determining the optimal dose. Initially, we are planning to conduct dose expansion part with 3 cohorts for esophageal squamous cell carcinoma, castration-resistant prostate cancer and small cell lung cancer in Phase I/II study, but we changed the tumor type in the third cohort from SCLC to squamous NSCLC.

Slide 36 shows the progress of DS-6000 in FY '21. And DS-6000 is a DXd-ADC targeting cadherin 6, which is highly expressed in renal cell and ovarian carcinomas.

We started the Phase I study for renal cell and ovarian carcinomas in January last year and are now conducting the dose expansion part. The first clinical data will be presented at ASCO this year.

Please go to Slide 37. Technological development of modalities next to DXd-ADC is also progressing. And in FY 2021, we made particular progress in establishing LNP-mRNA technology and accumulated know-how in development and manufacturing experience.

Please see Slide 38. This slide shows the progress of DS-5670 in FY 2021. Currently, the development of booster vaccination is our highest priority, and we initiated the Phase I/II and III study in January. We are aiming to commercialize during calendar year 2022.

Regarding the development of the initial vaccination, we started the Phase I and II study last March. A Phase II study was initiated last November to confirm safety and to determine the dose for the Phase III study using an investigational drug for which the process was optimized to obtain more consistent quality. We are now working to start the Phase III study during the first half of calendar year 2022. We are currently discussing with the authority regarding the study design, country and timing of the study.

Slide 39 shows other major progress in FY 2021.

In oncology, progress included receiving approval in Japan for DELYTACT, an oncolytic virus, filing for approval in Japan for Valemetostat, an EZH1 and 2 inhibitor for adult T-cell leukemia and lymphoma and obtaining data from the QuANTUM first study for quizartinib, a FLT3 inhibitor.

For specialty medicines in conjunction with the additional approvals for Lixiana, Effient and Tarlige, as explained earlier by Mr. Manabe, progress was made in the start of Phase I for 3 other items, and we consistently generated outcomes through our multi-modality strategy in FY 2021. The next slide is information about ASCO for this fiscal year.

Please go to Slide 41. Our IR event related to ASCO will be held virtually from 7:30 a.m. on June 8, Japan time. Our CEO, Manabe; the Global R&D Head, Takeshita; and the Global Oncology Development Head, Gilles Gallant, will be updating the data presented at ASCO and our pipelines.

Slide 43 and after are the future news flow in FY 2022. Slide 43 shows our major presentations at ASCO, ESMO Breast cancer and the European Hematology Association. At ASCO, we will present data from the DESTINY-Breast04 and DS-6000 Phase I studies for the first time. At ESMO breast cancer, we will present data from the Enhertu and nivolumab combination in the and Dato-DXd BEGONIA study. At the European Hematology Association, we will present data from the QuANTUM first study of quizartinib.

Slide 44 provides an overview of future regulatory approvals, expected filings, expected availability of key data and expected timing of pivotal studies in FY 2022. Please note that the time line shown here is only a current projection, is subject to change.

Slide 48 and after is the appendix. Please check back later for a list of milestones and pipelines on those pages.

That's all for my presentation.

[Sunao Manabe, executive]

Lastly, this is Manabe, and I'd like to summarize the progress made during the first year of the current 5-year business plan. Slide 46 shows the 4 strategic pillars of the 5-year business plan for FY 2021 to FY 2025 that we announced last April.

The pillars of the strategy to achieve the FY 2025 target and move into the sustainable growth stage are realization of 3 ADCs maximization, profit growth for current business and products, identification and building of pillars for further growth and creation of shared values with stakeholders.

I'll show you the progress made in the first year of the 5-year business plan in Slide 47.

In FY 2021, which was the first year of the 5-year business plan, each initiative progressed steadily with a focus on the realization of 3ADCs maximization. Regarding, the realization of 3ADCs maximization, significant progress was made in effort to increase the product value of Enhertu with the DB-03 study achieving its primary endpoints and submissions for approval in each region and the DB04 study also achieving its primary endpoints.

Product sales in each region also demonstrated solid growth. In addition, progress in the development of Dato-DXd and HER3-DXd has been on track. We will continue to make efforts to realize maximization of 3 ADCs through effective development investments in 3 ADCs, which will lead to dramatic growth in the latter half of 5-year business plan.

For the profit growth of existing business and products sales of existing products such as Lixiana, Injectafer, Tarlige and Nilemdo grew steadily.

In each of the regions, product transfers and other initiatives are progressing. And the transformation to a profit structure centered on new drugs is also making solid progress. Going forward, we will continue to transform our business structure to one that supports sustainable profitable growth by expanding sales of highly profitable products.

With respect to identifying and building further growth, we have obtained favorable data on DS-7300 and DS-6000 and have positioned them as rising stars of the growth drivers next to the 3 ADCs. We are promoting their development.

The establishment of LNP-mRNA technology has also progressed as well as the efforts to select post-DXd-ADC modality are well underway. We will continue to identify and build pillars for further growth using our proprietary ADC technologies and new modalities.

With regards to creation of shared values with stakeholders, we have made progress to address environmental issues such as our participation in the international initiatives, RE100, a which aims to achieve 100% renewable energy electricity consumed in our business activities. As a response to the pandemic risk development that prioritizes booster vaccination of DS-5670 is also progressing. We will continue to implement initiatives to strengthen the value creation process with our stakeholders.

Each of these initiatives is well underway, and we feel that we have made a good start toward achieving the goals of the 5-year business plan. We will ensure to continue the initiatives for sustainable growth.

That concludes my presentation. We will take your questions from this time on. Thank you very much for your cooperation.

[Operator]

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

[Seiji Wakao, analyst]

Wakao from JPMorgan speaking. First, I want to ask you about DESTINY-Breast04 study results. The details will be presented at ASCO, so I'm looking forward to it. I'd like to know about how you see the data. The results you obtained this time exceeded your expectations? The Phase Ib results are the reference in your assumptions? The patient population is slightly different in Phase Ib study. So there's a possibility that you could get better results compared to Phase Ib. Could you please comment on the level of your assumptions? This is my first question.

[Operator]

Takasaki would like to respond.

[Wataru Takasaki, executive]

First, Phase I study enrolled just HR-positive patients. But this time, HR-negative patients were also included. In that sense, the study was conducted more broadly. As for the data we obtained in both PFS as the primary end point and OS as key secondary endpoints, the study demonstrated significant difference and clinically meaningful improvement in the data.

Regarding numbers in detail, I hope you can listen to a presentation at ASCO, but we think the results we had exceeded our expectations to a certain extent. With this, we think we can change the treatment paradigm for patients with HER2 breast cancer.

As I mentioned in my presentation, we can pioneer HER2 low breast cancer as a new clinically meaningful patient segment. There is a lot of excitement among our employees. We try to actively develop our HER2 oncology strategy.

[Seiji Wakao, analyst]

Thank you I am looking forward to your presentation. Secondly, it may be difficult to ask for your comment, but the stock market is very interested in your patent dispute and arbitration with Seagen. I don't think you can comment on arbitration. But as for the timing, Seagen is talking about mid-2022. Is there anything you can say additionally, like before ASCO or after ASCO, for example, if you can let us know more, that would be great.

With regards to the patent case, post grant review of the 039 patent has been initiated. Last year, I think this post-grant review was rejected. But this time, the post grant review was initiated, so it looked like a positive signal to me. Can I have your view, please?

[Operator]

Manabe would like to respond.

[Sunao Manabe, executive]

First, about the timing of arbitration, the arbitrator has not clarified the timing of arbitration. So we cannot answer your question about the exact timing. Still, our understanding is almost the same with Seagen. As for PGR, we originally requested for review, but it was not initiated. In reality, it was left up to jury. But some items became out of scope. That's why we think the patent office is reviewing again. PGR can be initiated in case of doubt about the patent, relatively speaking. So we think this is a very good sign for us.

[Seiji Wakao, analyst]

Understood. Lastly, about the progress of your 5-year business plan. We explained your 5-year business plan, you said you have a period of active investments initially. And then from around the middle of the 5-year period, you'd enter the stage of profit increase. Profit is expected to increase in FY 2022 and Enhertu is performing well. In the next fiscal year and beyond, there can be a big increase. Any change in the profit increase by now compared to the time when the 5-year business plan was announced. This is my last question.

[Operator]

Manabe would like to respond.

[Sunao Manabe, executive]

In our 5-year business plan presentation, we said we will aim to achieve JPY 1.6 trillion revenue and JPY 600 billion from oncology business by FY 2025. We think we're making steady progress towards that plan. We presented our FY 2022 forecast today. Next fiscal year and beyond, we will continue to progress steadily towards our FY 2025 goals.

[Operator]

Next, Mr. Hashiguchi from Daiwa Securities, please.

[Kazuaki Hashiguchi, analyst]

Hashiguchi from Daiwa Securities speaking. I also would like to ask you whether there is any gap compared to your 5-year business plan. I have 2 questions.

First, about your R&D expenses. In FY 2022, R&D expense is expected to rise by more than JPY 50 billion or over 20% compared to the previous year. There can be ForEx impact as well, but what about the increase in R&D expenditure from your 5-year business plan? Are there any projects where you are increasing or decreasing your investments compared to your initial assumptions? Could you please explain, if any?

[Operator]

Okuzawa would you like to respond.

[Hiroyuki Okuzawa, executive]

As you said, ForEx impact, the impact of the yen's depreciation, in particular, is getting bigger. In FY 2022, we are forecasting JPY 307 billion, out of which ForEx impact can be as much as JPY 22 billion. Without ForEx impact, we are almost in line with the 5-year business plan assumptions. But right now, slightly above compared to the 5-year business plan.

As for the project, we are focusing on the 3 ADCs in principle without any major gap compared to our outlook. As Takasaki mentioned earlier, we are getting a good feel about DS-7300 and DS-6000 as rising stars, so it's now in sight that we would allocate our resources there as well.

[Kazuaki Hashiguchi, analyst]

I have another question about dividends. I think you were talking about dividend increase in line with profit growth in your 5-year business plan. You're expecting profit increase according to your forecast for the current fiscal year, which has just started, but the dividend payment is not going to change from FY 2021. How should I understand that in terms of consistency with the 5-year business plan?

[Hiroyuki Okuzawa, executive]

Also on this point, the first half of the 5-year period is positioned as the period of proactive investments, followed by a profit growth period in the second half. We are making this separation from the beginning. So in FY 2020, the second year under the 5-year business plan, we have not yet reached the stage to increase dividend along with profit increase. That's our understanding from the beginning.

[Operator]

Next, Mr. Yamaguchi from Citigroup Securities, please.

[Hidemaru Yamaguchi, analyst]

Yes, we can hear you. Yamaguchi from Citigroup speaking. I'd like to ask you about Enhertu results and forecast. First, about the results. During FY 2021, changes were made in the real-world settings and the numbers were changed many times, there may be some ForEx impact, but the actual results were better than expected in the United States and Europe, in particular, the results were a little weak in Japan. Could you please explain the reasons behind the difference between the results and the forecast?

[Sunao Manabe, executive]

I think we explained this before when we lowered our forecast in the United States, assumptions about the dosing period under those administered based on body weight during the clinical studies were different in the real-world settings, where the dosing period was shorter and the total dose actually given to a patient was lower. There was a similar tendency in Japan, too. I think that's the reason why.

[Hidemaru Yamaguchi, analyst]

In reality, the results in Europe and the United States exceeded your forecast. What about the factors for the increase with regards to the numbers after the change?

[Sunao Manabe, executive]

In the United States, there is some early impact of the guidelines as well. If effective, even before approval, some people use the drug to a certain extent.

[Hidemaru Yamaguchi, analyst]

What about Europe?

[Sunao Manabe, executive]

I beg you pardon?

[Hidemaru Yamaguchi, analyst]

What about Europe?

[Sunao Manabe, executive]

In Europe, the volume is not so high yet. So please wait for a while. In the United States, there may be some impact of the inclusion of use in the second-line settings in the guidelines, yes, it can be quite significant.

[Hidemaru Yamaguchi, analyst]

Understood. I do not intend to ask you detailed questions about your forecast for FY 2022, but it's expected to double, so we can have high expectations. Up to DB03 is included in the indications?

[Sunao Manabe, executive]

I don't think DB04 is included. DB04 is not included. If you go to Page 15, you can see revenue figures for each indication, so please refer to that page.

[Hidemaru Yamaguchi, analyst]

Yes. But I'm not talking about regulatory milestone payments, but rather about what's in sales. The forecast of JPY 83 billion in the United States, for example, has factored in up to the third line -- sorry. The second line is also included?

[Sunao Manabe, executive]

Yes.

[Hidemaru Yamaguchi, analyst]

HER2 low is not included for now, correct?

[Sunao Manabe, executive]

That's right.

[Hidemaru Yamaguchi, analyst]

But timing-wise, HER2 low could also be included if development goes well as you have breakthrough therapy designation.

[Sunao Manabe, executive]

Yes, we hope so timing wise. But even if that happens, there can be just a small contribution at the beginning.

[Hidemaru Yamaguchi, analyst]

Okay, understood. Regarding DS-7300, we are beginning to proceed with its development in small cell lung cancer. I think it's being treated as a rising star. Tumor types are being determined. As of now, you're likely to do development and marketing on your own? Or depending on the timing or indications, is there any possibility of considering partnering?

[Sunao Manabe, executive]

Right now, we are hoping that we can do in-house development and do everything on our own.

[Hidemaru Yamaguchi, analyst]

As of now, you think that is possible for the current indications, right?

[Sunao Manabe, executive]

Yes.

[Operator]

Next, Mr. Muraoka from Morgan Stanley Securities.

[Shinichiro Muraoka, analyst]

Muraoka from Morgan Stanley. I have a follow-up question on Mr. Yamaguchi's questions. About your FY 2022 sales forecast for Enhertu in the United States? It's great in yen, but it's $639 million. Honestly speaking, I got the impression that this can be extremely conservative as the second-line approval is expected in May. The second-line approval will contribute almost for 12 months, but you are forecasting sales of just $630 million. Please explain the background why just this much?

[Sunao Manabe, executive]

We determine our forecast through discussions with AstraZeneca. Due to the yen's depreciation, if you convert this into yen, it looks like a big amount in yen but not so much in dollars, as you are saying. But we make our forecast by deciding a range. So we don't think we are conservative. We'd like to do our best based on these figures. This is our target for now.

[Shinichiro Muraoka, analyst]

In other words, the second-line indication because of a longer duration will contribute more to the results in the next fiscal year and beyond rather than the current fiscal year, correct?

[Sunao Manabe, executive]

Of course, there will be a higher contribution to the results in the next fiscal year and beyond, but we are expecting some contribution in the current fiscal year as well. Such expectations are included in the figure.

[Shinichiro Muraoka, analyst]

Understood. Also about SG&A expenses in FY 2022, if I calculate by myself, out of an increase in SG&A cost, the portion other than Enhertu related payments may be increasing by more than JPY 40 billion. I understand ForEx impact, but this is a big increase in my view. What factors are increasing SG&A expenses other than ForEx impact on Enhertu?

[Hiroyuki Okuzawa, executive]

In principle, Enhertu profit sharing with AstraZeneca is a factor to push up SG&A expenses. The structure is the same since last year through this year. In addition, there is ForEx impact. Basically, these are major factors.

In order to build Oncology Business, we established commercial and medical organizations starting in the United States, then in Europe and countries in the ASCA region with a broader coverage. So such infrastructure-related spending is increasing as well.

[Shinichiro Muraoka, analyst]

Sorry to ask again, but Enhertu global sales forecast is JPY 52 billion. If you pay half, still JPY 26 billion, but SG&A costs are expected to rise by JPY 57.9 billion. This is a substantial increase. Do you need that much cost to build global footprint in oncology in FY 2022?

[Hiroyuki Okuzawa, executive]

We are building from scratch, for an organization to support future growth drivers, we consider this important.

[Operator]

I'd like to move on to the next person. It's Ms. Kumagai from Mitsubishi UFJ Morgan Stanley Securities.

[Naomi Kumagai, analyst]

This is Kumagai from Mitsubishi UFJ Morgan Stanley Securities. I just have one question. I think that after the success of DB3 and DB4, the commercial potential of Enhertu may have changed since the 5-year business plan was formulated. And I'd like to know if you are planning to update the numerical targets of the 5-year business plan in the future.

[Sunao Manabe, executive]

This is Manabe speaking. We know that the results have been very good. We believe that they are one of the good things happened in the course of achieving the figures in the 5-year business plan. So there are no changes to the plan at this moment.

[Operator]

I'd like to move to the next person. It's Mr. Ueda from Goldman Sachs Securities.

[Akinori Ueda, analyst]

This is Ueda from Goldman Sachs Securities. I'd first like to ask about the assumptions of Enhertu. As you mentioned earlier, at the time of the third line, there was a discrepancy from the real world. In your promotion of the second line this time, should we expect a little bit of a downside risk as it happened with the previous third line? On the other hand, can you tell us whether there is any divergence in your assumptions from the 5-year business plan, including whether you have been a little conservative this time in light of the third line.

[Sunao Manabe, executive]

Well, since the target patients are different, I think it's hard to say. However, in principle, we believe that the administration period and dosage are the same as in the clinical trials, and we are making our sales plan based on these assumptions. At present, we have not made any changes to the current 5-year business plan, and we do not expect that it will change.

[Akinori Ueda, analyst]

Understood. Now my second question is about Page 11 of the presentation material, where you have indicated the assumptions for cost of sales. You listed the factors for increase and decrease of revenue above in relation to the changes of the product mix. Basically, the major factors are the positive figure of Enhertu and the loss by Nexium. But are these factors sufficient to explain the changes? Or are there any other special factors involved? Could you please explain since the range of fluctuation is so large this time?

[Hiroyuki Okuzawa, executive]

Yes, as you said, the improvement in our product mix is due in part of Enhertu. And we think Lixiana is also contributing to the improvement. As you pointed out, Nexium, is a purchased product and has a relatively high cost. So the elimination of Nexium works to a positive direction.

[Akinori Ueda, analyst]

So do I understand it correctly that there aren't really any special factors involved and that a change in those products can improve the cost of goods and the gross margin so much.

[Hiroyuki Okuzawa, executive]

Yes, it's correct to say that it is the basic direction.

[Operator]

I'd like to move to the next person. It's Mr. Sakai from Crédit Suisse Securities.

[Fumiyoshi Sakai, analyst]

I'd like to briefly ask two 2 questions about DB04 and Dato-DXd. My first question is about DB04. I understand that we are supposed to wait until ASCO, but since PSF (sic) [ PFS ] has been a hot topic recently, and I believe HER2 low is an unprecedented case. I'd like to know if you have any data or if you have obtained any data on how far HER2 low can be used? I'd like to ask you my next question together.

Regarding Dato-DXd, while Alpha has been attracting more attention recently, I feel that Dato-DXd has not been talked about that much. I believe the data from Lung01 will be available this year. I think it's a comparison with chemo. It's non-small cell lung cancer. I personally think that the expectations may rise considerably depending on the results. If you have any opinions about this view, I'd like to kindly ask Mr. Takasaki to tell me what you think.

[Wataru Takasaki, executive]

Yes. Thank you. So the HER2 low part, as for DB04, we are looking at about 20% of HER2 positive, less than 40% to 50% for HER2 low and 20% to 30% for HER2 negative. In that sense, we also need to consider the relationship with CDx. we are now working hard on the CDx research. We want to make as accurate diagnosis as possible and determining which HER2 low patients are truly eligible for our drug.

Also, as we accumulate clinical data, we hope to gain momentum to establish the definition of HER2 low by ourselves. As for Dato's Lung01 we initially set up a study without actionable genomic mutation for 01. We're planning to add a study with actionable genomic mutation to evaluate the total potency of Dato-DXd in NSCLC. Since there are also competing products, we'd like to evaluate them in our own way and define the scope of indication in terms of where they can be delivered to patients in our market.

We cannot directly compare with Trodelvy because of the different patient populations enrolled in the clinical studies, but we feel that it has a strong potential, and we hope to develop clinical studies to express that well.

[Fumiyoshi Sakai, analyst]

I guess today's comparison was with docetaxel. Is it okay to assume that you can have it in from the second line?

[Wataru Takasaki, executive]

Yes, correct.

[Fumiyoshi Sakai, analyst]

Understood. Also about the way you measure HER2 low, will that be something like that you will provide it, along with the kit for some part?

[Wataru Takasaki, executive]

Yes. Since we have a partnership, and our plan is to provide it together with the drug.

[Operator]

Muraoka from Morgan Stanley Securities.

[Shinichiro Muraoka, analyst]

According to your assumptions, Inavir is expected to grow tremendously in the sales among your main products, and Effient is also expected to grow considerably. Could you elaborate the nuances in your assumptions?

[Sunao Manabe, executive]

First of all, Inavir, it's very difficult to predict. We have accumulated this much, but I think that there is a considerable risk depending on the outbreak situation of influenza.

And about Effient, the market size is presumably comparable to the size of the cardiac area. That's the reason behind these numbers.

[Shinichiro Muraoka, analyst]

Understood. Inavir dropped a lot in the middle of last year. So I hope that this won't happen again too often. I have one more question. The core operating profit in the guidance and the one based on IFRS happened to be the same at JPY 105 billion this time? Or did I misunderstand something here? I was thinking that the gain from the sale of Benicar in the U.S. will be added during the first quarter in the amount -- well, I don't know, about 100 or something. Because of this, I was thinking that these 2 numbers should be different for the underlying guidance, but what is the background for them being the same?

[Hiroyuki Okuzawa, executive]

This is Okuzawa and I will respond to this. It is our criterion that the profit from the business transfer should be accrued to core operating income and the profit from the U.S. and other countries you indicated is not a onetime event.

[Operator]

I'd like to move to the next person. It's Mr. Kim from Jefferies Securities.

[Naoya Miura, analyst]

I'm Miura from Jefferies. I have 2 questions. My first question is about the forecast for Enhertu this fiscal year. I believe that the approval of the second line for breast cancer will be announced soon. I wonder if you could tell us how you are including the cannibalization of the second line and the third line in your forecast? And what is your thinking here? This one is expected to be approved for other indications in the early line of treatment in the future. So I wonder if you could give us some guidance on how to think about this idea in the future as well.

[Sunao Manabe, executive]

First of all, the calculation is based on the assumption that the standard treatment for the second line will be replaced. Therefore, if our product works well in the second line, it will be used less in the third line, so we have to take this into consideration. I am calculating the amount while taking this into consideration.

[Naoya Miura, analyst]

Can you please give me some more specific answers such as how much the third line will be reduced? Can you provide us with something more in depth so that we can create a model?

[Sunao Manabe, executive]

Unfortunately, I'm not able to answer anything more than that at this point.

[Naoya Miura, analyst]

Sure. My apologies. My second question is I know that the migraine drug, Emgality is doing very well. And I was wondering if you could comment on the current market share of this drug? And what is particularly appreciated by doctors and patients, especially context of similar competing drugs?

[Sunao Manabe, executive]

First of all, Emgality has a brand-new mechanism of action and its effect has attracted considerable attention. The most important thing, I believe, is that it has achieved favorable results. Are you okay with that answer?

[Operator]

I'd like to move on to the next person. It's Mr. Hashiguchi from Daiwa Securities.

[Kazuaki Hashiguchi, analyst]

This is Hashiguchi. I thought you mentioned earlier that you expected the number of eligible patients for the TROPION-Lung01 study, but how has that changed the primary end points. I know that you originally disclosed PFS and OS, but are you going to look at PFS and OS in the basket regardless of whether actionable mutations are present or not? Or for the primary endpoints, will you first verify only with the patients without actionable mutations who were the original target patients?

[Sunao Manabe, executive]

At present, we are considering both PFS and OS as primary endpoints.

[Kazuaki Hashiguchi, analyst]

What kind of population are you going to use to observe PFS and OS? The target number of patient enrollment is 590. Are you going to use this entire population to compare with docetaxel as well as to verify all of them with and without mutation.

[Wataru Takasaki, executive]

I think it's a question about the details of the protocol. At the moment, I don't think we can provide any information, so when the result comes out, we will consider that again. I don't have any details in hand, so I will let the IR department respond to your question later.

[Operator]

It seems that there are no more questions. With that, we conclude our FY 2021 financial results presentation. Thank you very much for your participation.

[Unknown Executive]

Thank you very much.

[Unknown Executive]

Thank you very much.

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