Astellas Pharma Inc. ($4503)

Welcome, everybody, to Jefferies Global Healthcare Conference in New York. My name is Steve Barker, and I cover Japanese pharma stocks for Jefferies out of Tokyo. It's my pleasure to introduce Astellas Pharmaceuticals this morning, represented by President and CEO, Naoki Okamura, good morning. And also, we have Chief Research and Development Officer, Tadaaki Taniguchi, good morning. So thank you very much for joining us. I think we have some slides, and hopefully, we'll have some time for some Q&A at the end. Okamura-san?

Thanks very much, Steve. I'm Naoki Okamura, President and Chief Executive Officer of Astellas Pharma. Thank you very much for joining us this morning. We just released new 5-year Corporate Strategic Plan or CSP2026 last week. So let me go through very quickly with the material, which the complete set of information will be available at our website. So we have a vision that says we try to turn innovative science into VALUE for patients. And we define this VALUE, all capital VALUE, very clearly, which is outcomes that truly matters to patients divided by the cost to the entire health care system to deliver those outcomes. So Astellas' aim to create and deliver the VALUE for patients. So this is kind of at a glance of Astellas. We achieved record high revenue in FY 2025, which is JPY 2.1 trillion revenue. For your information, our fiscal year runs through -- from April to March next year. So FY 2025 means the fiscal year ended March 31, 2026. So with that, we have a 26% core operating profit margin. It is growing very nicely. We are operating in 70-plus countries in regions, but we are headquartered in Tokyo. We are listed on the Tokyo Stock Exchange, but we believe we are a truly global company, as more than 85% of our revenue comes from outside of Japan. We -- for us, innovation is our lifeline. Therefore, we reinvested 17% of our revenue to research and development for the past 5 years. This is the nutshell of our Corporate Strategic Plan 2026. We are trying to make Astellas, a sustainable growth company by delivering profitable growth and generate cash, reinvest that cash to accelerate our pipeline-led growth. We established a discipline to allocate how we allocate cash, and we continuously enhance our enterprise productivity so that we can create and deliver greater VALUE faster. So we set 4 strategic goals for the CSP2026. As I mentioned, we will try to develop -- deliver the profitable growth and generate sufficient cash to reinvest that to accelerate our pipeline-led growth. We have a very strong discipline to how we allocate cash between investment versus shareholder return. We restlessly enhance our enterprise productivity. Some of the key deliverables to confirm we are achieving those strategic goals. In the research and development area, we are aiming to start 10-plus Phase III or pivotal studies during the CSP2026 period. We say 10-plus, but out of that, 5-plus will come within FY 2027, so in 2-year time frame. In terms of the financial guidelines, we will try to double the sales of the 5 strategic brands, which we -- which I will touch upon later. We try to do recurring cost optimization commitment, JPY 200 billion at the end of the CSP2026. We try to establish the profitability structure of -- we can maintain the 50% core operating profit before research and development. In other words, we try to establish ourselves to maintain the 30% core operating profit after spending 20% on research and development. So this is a very illustrative revenue forecast. This year, FY 2026 is going to be the highest revenue year with JPY 2.2 trillion. We have the XTANDI slightly -- gradually decreasing XTANDI sales. Therefore, we hit the inflection point in FY 2029 to go back to the pipeline-led growth. And as I mentioned, we are aiming to achieve the record high revenue at mid-2030s. So that -- but actually, I would like to emphasize the bold solid black line, which shows that the pipeline -- strategic brands as well as pipeline-led growth has already started. And it continues to go with the strong growth of the strategic brands. And then on top of that, we will have the pipeline programs coming out of our pipeline. So let me go first, this one. When we say strategic brands, we have PADCEV for bladder cancer, IZERVAY for geographic atrophy, secondary to age-related macular degeneration, VYLOY for gastric cancer, VEOZAH for vasomotor symptoms for the menopausal women, XOSPATA for AML. Actually, during the CSP2021, the previous 5-year strategic plan period, the sales of these 5 strategic brands have grown almost 10x. And we are trying to continue the strong growth of those 5 strategic brands to double the sales from those 3 -- those 5. And it is -- of course, the expansion of the geography for the current indication, but at the same time, we are doing the life cycle management type of additional indications or the additional formulation for some of those products. So that we are looking at those as the key growth opportunities. Because the growth strategic brands, weight of the strategic brands used to be 23% back in FY 2025, but it is growing, XTANDI is declining. In 2030, the strategic brands will represent more than 50% of our revenue. And those strategic brands are almost fully owned or internally developed. So it is -- we don't have to pay any royalty or milestone payments to third parties. Therefore, the shift of the weight of those strategic brands, 23% to 50% means we can improve the profitability structure so that we can get to the right-hand side pie chart, you can see the red one core operating profit plus R&D can represent 50% of the revenue. And on top of that, we are committed to continue our cost optimization initiatives and already committed JPY 40 billion in FY '26 and JPY 45 billion in FY '27, we have identified all the measures and initiatives so that we can get to that point. And on top of that, we continue the additional initiatives throughout the period of CSP2026 so that the coming 5 years in aggregate, we are aiming to achieve JPY 200 billion recurring cost optimization target, including the JPY 85 billion (sic) [ JPY 850 billion ] that we have already identified. Let me turn into the research and development. We take a relatively unique research and development approach, we call focus area approach. We start with the biology with the strong disease linkage, try to identify the best modality of the technology platform to address that biology. And finally, we try to figure out which is the best patient population to benefit from the combination of biology and modality. So this is a very busy slide, but when we have the triangle of biology modality and disease, we call it a primary focus. And once we establish the triangle, we believe we can produce multiple projects from that triangle. We have now 4 primary focuses with the value-enhancing BD activities together, we have built up a robust pipeline now. If you look at the pink box at the center of the slides, you have 4 programs coming out of our primary focus that have achieved the clinical PoC and moving into the clinical -- Phase III clinical study or the pivotal study in coming, say, 2 years. And if you -- it's not that obvious, but there's a gray box under the pre-PoC arrow, which is getting closer to the clinical PoC judgment in FY '26 and '27. And if successful, they are moving quickly to the later-stage clinical development. We are hoping to gain JPY 1 trillion revenue in mid-2030s from all those pipeline programs. And I would like to emphasize that sometimes our focus area approach is very fragmented doing this and that separately. But eventually, we are aiming to really establish the franchise. For example, the prostate cancer starting from the XTANDI, and we are moving to the newer innovative products in prostate cancer. We also have established Claudin 18.2 franchise with the monoclonal antibody bispecific and ADC. We are doing the same for the ophthalmology, IZERVAY on the market, but ASP7317, which is the cell therapy targeting the same indication coming into the later-stage clinical study. And we have universal donor cell technology applied cell therapy in the PoC stage. In the R&D, it is critical for us to continuously improve the productivity by integrating the internal and external collaboration. We have introduced a new working operating model, which is empowered small cross-functional team responsible and accountable for end-to-end process of the -- from the drug discovery research to the end of the life cycle. We are quickly embedding the data-driven decision-making. We are increasing the speed of clinical trial execution by internalizing critical capabilities and using all those technologies. And of course, we have been going through -- constantly going through the ruthless prioritization of the programs based on the value that we can create. Value-enhancing BD. When we see that shape like this, people sometimes ask me, would you not go to the BD activities to fill that dip in the revenue curve. But we decided that we don't do that. We call it rescue BD because it's cash for cash flow type of transaction, and there are very limited opportunities for us to add value to those assets. So we are focusing on the value-enhancing BD by proactively strengthening the pipeline that we have now or some technology platform that can really leverage our existing capabilities, so that we can add value after we acquired the asset in our pipeline. This is the disciplined cash allocation chart. This is very complicated. But if you look at the left-hand side, you see the gray bar. We spent in the past 5 years, JPY 4.2 trillion in R&D, strategic investment and shareholder return. But one of the most important strategic investment, which was the Iveric Bio acquisition was funded through the debt financing. Therefore, the net cash that we generated for these investment was JPY 3.4 trillion, that is JPY 4.2 trillion minus JPY 800 billion. If you look at the center of the slide, we are forecasting we can generate JPY 4.3 trillion even with the declining XTANDI revenue. And we are -- we have decided to invest JPY 2 trillion in R&D, reserve the JPY 850 billion for the strategic investment, while we reserve the JPY 750 billion for the shareholder return based on the annual JPY 2 per share dividend increase for the entire 5-year period. So this is a very flexibility-driven strategic plan for us. If something happens to our pipeline, we can use that R&D expense to the strategic investment. If you have more -- if we can generate more cash, we can think about how we allocate that to shareholder return or the additional strategic investment. And we have a very good operating model, end-to-end operating model that I mentioned. We kind of renewed our corporate values and behaviors. We have a good, robust corporate governance structure. So the CSP2026 has been produced through the thorough discussion with the Board and the executive team. And we have a great monitoring ability -- capability from our Board. So let me finish with the key takeaways. We try to make Astellas, a sustainable growth, company by achieving pipeline-led record high revenues by mid-2030s. How we can do it? We deliver profitable growth and generate cash. We invest that to accelerate pipeline-led growth. We establish discipline for how we allocate cash, and we continuously enhance our enterprise productivity. So that concludes my presentation. Thank you very much for your attention.

Okamura-san, thanks very much. So we do have a few minutes for questions. And there's a microphone available. If you'd like to ask a question, please do speak into the microphone because we need it for the recording. But I'd like to ask a question, first of all, to you, Taniguchi-san, about your KRAS strategy, Revolution Medicines has been making headlines earlier this week with the pan-RAS candidate, daraxonrasib in second-line pancreatic cancer. Is this good news or bad news for Astellas' KRAS strategy?

Thank you for the question. I think just to step back, what we're actually working on, particularly looking at pancreatic cancer, which is really predominantly caused by KRAS mutation. In the past, like until 5 years ago, this KRAS or RAS is actually regarded as an undruggable target. But now we have a technology like target protein degradation or molecule that we can tackle with this difficult disease or difficult pathway that we're actually going to be really transforming the way we actually treat cancer like pancreatic cancer. So just looking at our data and the Revolution data, it's pretty much consistent in early stage Phase I or Phase Ib and so on. And also, we're just aware that the headline that they actually finishing the second-line or later-line pancreatic cancer, which is actually remarkable efficacy actually shown in their trial. And what we think is that this is also pretty much encouraging for us that our KRAS product potentially work in first-line pancreatic cancer and we actually already started Phase III trial. Of course, strategically, this is somewhat different because our product, setidegrasib, is purely targets KRAS G12D mutated pancreatic cancer. But of course, their product is more pan-RAS (ON) inhibitor. So degrader versus inhibitor and the target also the difference. So there's some uniqueness that because of this target and particularly focusing on the safety profile, I think our product, setidegrasib is quite clean product, and it's quite encouraging that we can actually easy to combine with the current SoC like chemotherapy. So we just started a Phase III trial in U.S., Japan and Europe, and of course, China. I think this is also very important -- strategically very important product we can actually really bringing the new medicine and new value for the patient in near future.

Can you comment on the timeline for this -- the pancreatic cancer first-line study?

Yes. So of course, we just started up the trial. And good news is that we have a very good uptake from investigator who actually bring to putting more patients in the trial. And our current estimate is that we can have a fast-top line result around 2029, although this is also dependent on how we're actually going to go in terms of the patient recruitment as well as this is an event-driven trial that we need to wait until the time that we have enough event that we can actually analyze the data.

Any questions? Okay. Well, let's keep with the KRAS. You're also developing it for other indications beyond pancreatic cancer, I believe.

Yes. Of course, KRAS G12D mutation is actually occurred around 40% of pancreatic cancer. So initial target is pancreatic cancer. But we also know that around 5% of non-small cell lung cancer is actually have a KRAS G12D mutation, which is 5% of the non-small cell lung cancer. It's not so small, right? Like [ ARK ] is exactly the same 5%. So we think this is also extremely important, the indication that we're actually going to start the second line, non-small cell lung cancer with KRAS G12D mutation this year, and the trial is going to be compared to the current SoC, chemotherapy plus our setidegrasib monotherapy. And obviously, after the treating first line with the checkpoint inhibitor and chemo, there nothing worked except the chemotherapy. So this is also a huge opportunity that we can actually transform the way we actually treat lung cancer in the near future.

And yes, as you mentioned, the -- your asset, setidegrasib is a degrader. Is there something about degraders for this particular target that could potentially have advantages over the traditional small molecule inhibitor approach?

I think it's inhibitor versus degrader. This is quite different. And inhibitors basically inhibit the pathway of any kind of oncogenic molecule, but I think a degrader is really degrades a target protein per se. At least we've shown in the setidegrasib study that approximately 95% of KRAS G12D is actually degraded by setidegrasib. This is quite encouraging. And the uniqueness of a degrader potentially is that we may have quite different resistant mechanism. If you actually, for example, treating the KRAS with inhibitor, we see that many patients have a KRAS amplification after that. But we don't see that, of course, because we degrade the target protein. So I think this is a quite unique target that we can actually use much broader than even KRAS or RAS target.

And of course, you have another KRAS targeting program, ASP5834, also a degrader. What's the strategy there? How does that fit in with the overall RAS strategy for Astellas?

Yes. I mean if you're thinking of RAS overall, it actually have approximately 70% of cancer actually has some sort of RAS mutation. So -- and 5834 is actually have a multi-RAS degrader. So of course, initially, we can actually start with pancreatic cancer, which has approximately 90% pancreatic cancer has RAS mutation. So what we actually hope is that, of course, setidegrasib, is really purely focusing on the KRAS G12D, but we can expand the target with 5834, which is the pan-RAS degrader. So I think this is also strategically very important that we already started the Phase I trial in the U.S. and Japan. And I think we're actually going to accelerate this program as well to moving forward to actually covering much wider range of the cancer to treat it with degraders.

And you also have a very strong strategy in the Claudin 18.2 area. Obviously, you're a leader in this field with VYLOY, which has been growing a lot faster than I think more certainly than I expected. So that's been a great success. Could you tell us about how these 2 follow-up candidates you have in development, how they will fit into the overall strategy, please?

Yes. As you mentioned, VYLOY is quite successful, not only in Asia like Japan or China, but I think growing very quickly in the U.S., particularly because U.S. also have a lot of gastric cancer patients. And so we think that we can continue to lead the Claudin 18.2 targeted product. And as you may know that there are a lot of companies started coming to this space, but I think we have 2138, which is Claudin 18.2 CD3 T-cell engager, which is already showing encouraging data in frontline gastric cancer in combination with checkpoint inhibitor and chemotherapy that we're actually going to start Phase III study targeting first-line gastric cancer. But the differentiating from the VYLOY, VYLOY is really focusing on Claudin high, but we actually can actually expand with the 2138 targeting Claudin low to mid that we actually can differentiate from the VYLOY and 2138. But I think that what I see that the most encouraging data is, of course, one is the durability of the response with this product because this is check -- this is a T cell engager. It's really targeting like an IO as well as we see pretty good safety profile that we're actually showing that. So I think this is also quite encouraging that we can really start a Phase III trial this year. In addition to that, partnership with Evopoint, we have ASP546C, which is a Claudin 18.2, target ADC. And this product is already moving forward to the Phase III in China, but we also actually partnered with Evo, we are going to start -- we already started the Phase II trial to confirm the data coming from China that we can actually produce in U.S., Europe and Japan. Then we actually plan to start Phase III trial globally next fiscal year.

It's exciting. And -- but of course, all of this clinical development, it costs money, Okamura-san. And I was pleased to see Slide 15, where your cash flow situation looks very healthy.

Thank you. Yes, it is. And as I mentioned, we spent JPY 4.2 trillion in the past 5 years. But out of that, JPY 800 billion was debt-financed. In spite of the declining revenue of XTANDI, we believe that we can generate more than JPY 4 trillion in cash for the coming 5 years. And we can -- of course, with discipline, we are going to allocate that cash to different types of activities, but JPY 2 trillion, which is 30% more than the past 5 years. We reserve JPY 850 billion, which is almost $1 billion per year of business development activities, covered by this reserve fund. And on top of that, we can return to our shareholders with the minimum annual JPY 2 dividend increase. So -- it's a very flexible plan. And if we can generate more, we can consider how we can reallocate those generated cash. And we can shift the cash from research and development to strategic investment, including the BD activities. So very flexible plan that we have.

Yes. It's -- I mean, you're heading into a significant LOE, obviously. But as you pointed out, the margins that you'll be earning on the newer products, the core products, which are replacing XTANDI is a lot higher. So you're in a very enviable situation where you can actually expand your margins through an LOE, unusual.

Yes. And it's really fortunate that we have not the single big product, but handful of multibillion-dollar potential products. And on top of the profitability of those strategic brands, we continuously executing the cost optimization initiatives, and we have a very good track record of really achieving our commitment, and we try to continue that momentum for the coming 5 years.

Great. Well, I think we're just about out of time. So Okamura-san and Taniguchi-san, thank you very much.

Thank you very much.