Chugai Pharmaceutical Co., Ltd. (4519) Earnings Call Transcript & Summary

[Interpreted] I am Tatsuro Kosaka, President and CEO of Chugai Pharmaceutical. Let me dive into 2019 results and 2020 strategic policies. First of all, I will go over the new management team announced to the press last month. After the resolution at the Annual General Shareholders' Meeting at the end of March and at the Board of Directors' Meeting on the same day, we'll move to the new management organization. Chairman Nagayama will become Honorary Chairman and Special Adviser and will be dedicated to external activities. I will become a Representative Director, Chairman and CEO. And as a Representative Director, President and COO, Dr. Osamu Okuda will be newly appointed. Dr. Okuda is present at this meeting today, so I urge you to ask him difficult questions later. Now on the 2019 financial results. We have achieved a significant year-on-year increase in income and profit with revenues growing at 18.4% and core operating profit at 72.6% year-on-year, respectively, posting record-high revenues and operating profit for 3 consecutive years. This was led by strong HEMLIBRA-related revenues in Japan and overseas and favorable market penetration of new and major products, such as TECENTRIQ. Let me highlight the main achievements in 2019. Based on the concept of accelerating corporate and social development through innovation focused on innovative products, or Eco CSV, we have come up with 5 strategies. On the first strategy, value creation, we have obtained approval of HEMLIBRA for hemophilia A without inhibitors in EU, which resulted in registrations for all major indications in Japan, U.S. and Europe. ROZLYTREK was approved for NTRK-positive solid tumors, helping to promote precision medicine. Furthermore, we filed for approval for ROS1-positive non-small cell lung cancer. And the decision was made to approve an additional indication at the Committee on Drugs of MHLW on January 29. As for nemolizumab, Maruho, our domestic licensee, achieved primary endpoint in domestic Phase III study for atopic dermatitis, while Galderma, our licensee for overseas markets, was granted a breakthrough therapy designation for PN, or prurigo nodularis, a dermatological disease in the U.S., and started a Phase III study for atopic dermatitis. As a result, we were granted breakthrough designation for 5 of our in-house products with 8 indications in the U.S. For Telomelysin, an oncolytic viral drug, we have concluded an exclusive licensing agreement with Oncolys. We also filed for approval for satralizumab in NMOSD, neuromyelitis optica spectrum disorder, in Japan, U.S. and Europe. OWL833 is a GLP-1 receptor agonist to treat diabetes and has been licensed out to Eli Lilly, who started Phase I study for the compound. As for value delivery, HEMLIBRA achieved a steady penetration among patients, including those without inhibitors. We also expanded indications for TECENTRIQ to include small cell lung cancer and triple-negative breast cancer in addition to non-small cell lung cancer last year. Fortunately, HEMLIBRA reached the blockbuster status. It is now in its third year or 2 years and 2 months since its launch, to be more exact, having achieved CHF 1,148 million in markets excluding Japan, and sales exceeding JPY 100 billion. In advances in personalized health care, FoundationOne CDx Cancer Genomic Profile was launched in June last year and has been in line with the plan in terms of the number of contracts and samples. Moreover, we established digital and IT Supervisory Division last year, headed by a female executive officer who was a digital area expert hired last year in order to build an organization ready for AI and digitalization. Under human capital and structural reform, 2 long-term listed products were divested so we could focus more on new products. We also decided to outsource pharmaceutical products' logistics operations to Mitsubishi Logistics and packaging operations for drug products and the investigational products to Bushu Pharmaceuticals so as to dedicate our resources to value-added manufacturing functions. An early retirement incentive program was implemented while the design of a new personnel system was completed. And it is expected to be implemented in April this year. In terms of strengthening sustainable platforms, we held an ESG meeting for the first time in June last year. And we were selected for Dow Jones Sustainability Asia/Pacific Index, a representative ESG index. In conclusion, we are on track with steady progress made to address key issues. Now let us move on to targets and strategic policies for 2020. What we will focus on is maximizing value of growth drivers and creating opportunities for future growth while reinforcing the establishment of a business platform for mid- to long-term sustainable growth so that we can achieve IBI 21. This slide summarizes business environment changes and our opportunities and risks in one page. As part of the trends of remarkable advances in life sciences and digital technologies, we're witnessing advances in cell and gene therapies and nucleic acid drugs as well as penetration of AI and other digital technologies in society. Under the trends of fiscal pressure, due to a shift in demographics, further pricing pressure and rapid penetration of biosimilars and generics, spawned forecast for the domestic pharmaceutical market to suffer a negative growth or remain flat at best. There's also a greater demand and expectation in society for sustainability. In this context, we have come up with the 4 priorities for 2020 as shown on the left. The first of the 4 priorities is maximizing value of growth drivers. In HEMLIBRA, we will seek to capture further market penetration by facilitating a switchover from factor VIII agents while increasing the number of countries where it is approved in overseas markets. As for TECENTRIQ, we will aim to increase our market share through indication small cell lung cancer and triple-negative breast cancer on top of non-small cell lung cancer. Filing for approval for hepatic cell carcinoma and several other indications is scheduled this year. With regard to satralizumab, we will seek to obtain approval globally and achieve rapid market penetrations. Under the policy of creating next-generation growth opportunities, a middle molecule project, we hope to make sufficient preparations this year to start a Phase I study next year. In our antibody project, Switch antibody is expected to move to a Phase I study this year. For nemolizumab, as I said, Maruho is expected to file for approval for atopic dermatitis in Japan while Galderma will start a global Phase III study for prurigo nodularis and proceed with a Phase III study for atopic dermatitis outside of Japan. Crovalimab, or SKY59, will be taken to the start of a global Phase III study for PNH. To promote digital transformation and personalized health care, we will file for approval for FoundationOne Liquid biopsy. In order to build digital infrastructure, we will acquire an internally trained human resources. We also hope to accelerate collaboration with external partners, including Roche-preferred networks. As part of the efforts to implement structural reform and strengthen sustainable platforms, we will implement and manage the new HR system scheduled to be introduced in April while aiming to achieve higher scores in Dow Jones and other ESG indices. Moving on to the outlook of growth during IBI 21. As for growth factors driving IBI 21, the earnings structure, with domestic sales serving as source of revenue and overseas expansion of in-house products as source of growth, will remain unchanged. Risk factors include the severe domestic environment which will be made up for by the global expansion of in house products so that we can achieve sustainable growth. This diagram shows trends of revenue structure in Japan and overseas. With the global growth of in-house products such as HEMLIBRA, ALECENSA and ACTEMRA, overseas revenues are increasing, resulting in a split of domestic and overseas revenues of 65% and 35% last year. This year, the domestic revenues are expected to go down further to 56% while overseas revenues are expected to be up to reach 44%. Now on the outlook for 2020. In the domestic market, TECENTRIQ and HEMLIBRA are expected to grow, but sales are forecasted to drop by 5.9% year-on-year. There are 3 reasons for this. The first reason is NHI drug price revisions. Avastin and Xeloda are expected to be subject to loss of innovative drug premiums and PERJETA, HEMLIBRA and ACTEMRA subject to market expansion repricing. The second reason is the impact of biosimilars on Avastin and Herceptin. The third is the launch of generics of EDIROL. However, due to expected increase in HEMLIBRA-related incomes, we are forecasting record-high revenues and operating profits for this year again, following last year, with revenues expected to reach JPY 740 billion, and core operating profit JPY 275 billion in 2020. Next I will discuss the revision of IBI 21 quantitative target. Reflecting the 2019 results and expected business expansion over the coming years, we upgraded the target for core EPS CAGR from high single digits to around 30%. Since there are variable factors hard to foresee, such as the degree of penetration into overseas markets of HEMLIBRA and impacts of the price revisions in midyear scheduled next year, we have chosen the expression around 30%. As for the dividend policy, we decided to pay JPY 92 per share as the year-end dividend for 2019, of which JPY 48 is for ordinary dividend and JPY 44 for special dividend. Adding the interim dividend of JPY 48 to this will result in the total annual dividend for fiscal 2019 of JPY 140 per share. As for 2020, if we do not account for the stock split scheduled on July 1, we plan to pay JPY 150 per share for the full year. As a new dividend policy, we will change the conventional payout ratio of 50% to 45% on average in comparison with core EPS, so that we'll be able to provide stable allocation of profit. There are 2 reasons for this change. Firstly, further pressure to reduce drug prices, as well as the emergence of biosimilars and generics, are likely to make the domestic market even more challenging. In overseas, with the advent of innovative new drugs, the positions of marketed products keep changing all the time in an increasingly globalized market. That would bring about fluctuations in the financial performance of the company. However, we're determined to provide stable dividend despite that. Secondly, in order for us to continue to grow sustainably in the future, we want to secure enough financial position to fund strategic investments, including capital investments, R&D pipeline, drug discovery, manufacturing technologies and digital technologies. To sum up, we are able to make a great start in the first year towards achieving the goals of mid-term business plan. We hope to make 2020 a year to focus and reinforce a business platform with a view to sustainable growth over the mid- to long term. That is all from me. Thank you for your attention.

[Interpreted] Good afternoon. I am Toshiaki Itagaki. This is a slide of executive summary, which was already explained by President Kosaka. So I would like to begin my presentation from Page 22 by going into more details. First, on financial overview. Revenues posted JPY 686.2 billion, up 18.4% year-on-year. Sales went up by 11.6% with both domestic and overseas sales performing well. As for royalties and other operating income, royalty income for HEMLIBRA increased, leading to the growth of JPY 52.4 billion in royalty and profit sharing income. On the other hand, other operating income decreased by JPY 7.1 billion due to the absence of the onetime income from the transfer of 13 long-term listed products recognized in 2018. Cost of sales improved by 4.6 percentage points to post 45.0% due to changes in the product mix. Operating expenses increased by JPY 8.6 billion due to the increase in investments in research and development. As a result, operating profit totaled JPY 224.9 billion, up 72.6%, with the operating margin standing at 32.8%. If you subtract financial account balance and income taxes, you will get the net income of JPY 167.6 billion, up JPY 70.3 billion or 72.3% year-on-year. Page 23 shows the breakdown of the increase and decrease in sales. On the left, you can see sales by disease area, where at the top, indicated in light blue, is the overseas sales of JPY 151.3 billion, up 18.3% year-on-year. Over to the right is year-on-year changes in sales by product. Overseas sales of ALECENSA went up by JPY 15.8 billion, which was the second-largest increase in sales. Overseas sales of ACTEMRA grew by JPY 7.7 billion or 9.6% year-on-year. Domestic sales indicated in the middle totaled JPY 437.6 billion, up by 9.4%. At the bottom of the bar, shown in green, is the oncology, which marked a 6.6% growth. By product, the third from the top, PERJETA, the one below, TECENTRIQ, and the bottom one, GAZYVA showed growth. The biggest decline of 44.1% was posted by RITUXAN. It lost the innovative drug premium in April 2018, when we saw a 26.2% drop in its NHI price. In addition, it was affected by the switchover to another of our products, GAZYVA, and the launch of a biosimilar product. Xeloda was also affected by generics and went down by 36%. Tarceva faced more intense competition and suffered a 45.8% decline. The purple portion, bone and joint, grew by 7.9%. By product, the third from the bottom, EDIROL, as well as ACTEMRA, made contributions. The yellow portion, renal diseases, fell by 4.7%. No specific products are mentioned on the slide. But Mircera and Oxarol saw a slight decline. Lastly, the gray portion, or others, showed a significant growth of 44.3%. By product, domestic sales of HEMLIBRA achieved the largest growth at JPY 22.2 billion. Slide 24, various analyses of operating profit. On the left-hand side, gross profit from sales increased by JPY 57.8 billion. Among royalties and other operating income, royalty from Roche on HEMLIBRA and others and other income were up JPY 45.4 billion. The same amount was reflected as an increase in operating income. Operating expenses are divided into 3 items. With better-defined budget allocations, marketing and distribution expenses were reduced by JPY 200 million. R&D expenses increased by JPY 7.9 billion with steady progress in projects. The amount exceeded JPY 100 billion for the first time. General and administrative expenses were up JPY 900 million in relation to an increase in value-added portion of corporate taxes, following higher profit. Slide 25, financial overview for the fourth quarter, October to December. Revenues were up 15.7% year-on-year and operating profit was up 98.5%, representing a continued strong growth momentum. But domestic sales, third line from the top, increased only by 3.7%, positive growth but momentum somewhat being lost. Next slide shows changes in sales. For the domestic market, others including HEMLIBRA represented positive growth. But the remaining 3 areas all declined year-on-year in the fourth quarter. By product, Avastin down 13.4% due to launches of biosimilar products by 2 companies in December. Xeloda and RITUXAN continued to feel the impact of generic and biosimilar products. Herceptin turned to negative growth in the fourth quarter. A biosimilar product with once every 3 weeks dosing schedule, the so-called B method, was approved in August and impact is beginning to be felt. For 2020, in addition to such difficult environment, NHI drug prices will be reduced as a result of the loss of innovative drug premiums and repricing for market expansion. So we expect the domestic market to become even more challenging. Before going any further on 2020, let me go back to 2019, financial overview versus the revised forecast announced on October 24, 2019. As for the revenues, revised forecast was raised from the original forecast by JPY 87.5 billion at JPY 680 billion. The actual exceeded that revised forecast by JPY 6.2 billion. The reason was, as shown on the right, overseas sales increased, mainly reflecting an increase in export of ALECENSA to Roche due to difference in timing of export. And royalty and profit sharing income increased, as income for HEMLIBRA sold by Roche to third parties progressed better than the forecast. As for operating profit, the revised forecast was raised by JPY 7.5 billion to JPY 218 billion. The actual exceeded this revised forecast by JPY 6.9 billion. Moving on to sales for the full year versus forecast. As mentioned earlier, top line on the right, ALECENSA overseas exceeded the forecast by JPY 3.3 billion due to difference in timing of export. Tamiflu (ordinary) also did better than the forecast, which had been put together by estimating the size of prevalence and competitive landscape. Still, the actual exceeded the forecast by about JPY 1.2 billion. The rest was as you can see. That's it for operating results, the profit and loss. Moving on to balance sheet and cash flows, we have a slide each. First the financial position, the balance sheet. In a nutshell, we managed to maintain strong and sound financial position. Left chart, third line from the bottom, total net assets were JPY 854 billion as of the end of 2019, an increase of JPY 97.5 billion from 2018 year-end. The last item listed on the right, equity ratio attributable to Chugai shareholders as of the end of 2019 was kept at a high level of 80.6%. Going back to the left chart, let me explain the makeup of JPY 854 billion in total net assets. Approximately 2/3 were held as assets for operating purpose; that is, net operating assets, or NOA, shown right above the double line around the center, which totaled JPY 547 billion, an increase of JPY 41.7 billion year-on-year. Main reason is noted on the right at around the center: an increase in property, plant and equipment due mainly to the investment in Chugai Life Science Park Yokohama. The remainder of our total assets, the remaining 1/3, were net nonoperating assets, fourth line from the bottom, of which net cash totaled JPY 333.1 billion as of the end of 2019. The next slide shows the year-on-year variance of net cash, the cash flows. Between the 2 blue upward arrows on the left, cash increase amounted to around JPY 250 billion, representing cash inflow from operating activities. Total investment amounted to JPY 70 billion, of which, as the third item on the right notes, property, plant and equipment totaled JPY 53 billion, as we made aggressive investments into various R&D and production facilities. Operating free cash flow was net inflow of JPY 181.4 billion. After income tax payable, et cetera, dividends paid and others, net cash totaled JPY 333.1 billion. In summary, of operating free cash flow approximately half was allocated to social cost; namely, tax payments and to capital cost for shareholder return. Remaining half was retained internally for future investments. Next is on ROIC, return on invested capital, which we use as efficiency metrics as part of medium-term KPIs. Core ROIC as of the end of 2019 was 31.9% as shown at the bottom right. The denominator used in calculating ROIC; namely, net operating assets, which was mentioned in balance sheet, increased significantly due to aggressive strategic capital investment in R&D facilities and others. But the numerator, the core operating profit after taxes, increased at a larger rate, so the core ROIC continued to increase year-on-year. The point here is that the core ROIC of 31.9% far exceeds WACC, weighted average cost of capital, the return expected by capital providers. This indicates that we are successfully and efficiently managing the company, exceeding the cost of capital. Moving on to forecast for 2020. Revenues are projected to be JPY 740 billion, up 7.8%. Operating profit is forecasted at JPY 275 billion, up 22.3%, which represents a new record high for the fourth consecutive year. Domestic sales are forecasted to decline by 5.9% due to the impact of NHI drug price revisions and competition from generic drugs and others. On the other hand, we expect significant increase in exports and royalty income. Cost of sales ratio is projected to improve further to 43.4%. Among operating expenses, R&D expenses are to increase to JPY 115 billion. Operating profit is projected to be JPY 275 billion with operating margin of 37.2%. EPS is projected to be JPY 366 on the basis of excluding the effect of the stock split of 3-for-1 effective July 1, so as to allow year-to-year comparison. Next slide shows the variance analysis of operating profit. Year-on-year increase will largely rely on increase in royalty and other income. As for gross profit, we expect domestic sales to feel a significant impact of NHI drug price revisions, which will weigh in heavily on growth in gross profit and domestic sales. Using the next slide, I would like to describe the expected situation in Japan. First the top item on the left, overseas sales expected to increase by 11.3%. By product, second from the top on the right, HEMLIBRA expects growth. Among those listed as sales decline expected, you can see ALECENSA overseas around the middle. Volume is projected to increase, but with lower unit export price we expect sales to decline. Domestic sales expect a decline of 5.9%. By product, Avastin down JPY 22.3 billion due to a full-year impact of competition from biosimilars as well as the loss of innovative drug premiums; EDIROL, down JPY 10.6 billion, assuming launches of generic drugs in the middle of the year; Herceptin, down JPY 7.5 billion due to the full year impact of a biosimilar product approved in August of last year for a so-called B method dosing schedule; Mircera, down JPY 6.8 billion, impacted by authorized generic drugs and others. Skipping one line, RITUXAN down JPY 5.6 billion with yet another launch of a biosimilar product in January and others. Xeloda down JPY 4.9 billion due to the competition from generics added with the loss of innovative drug premiums in April; and Tamiflu (ordinary) down JPY 4 billion, as a rebound to a significant volume in 2019. There are products for which growth is expected. For example, HEMLIBRA sales in Japan are growing. But due to the expected reduction in NHI drug prices following repricing for market expansion, we held back the growth rate projection to 67.1%. In addition, sales growth drivers PERJETA and ACTEMRA will be subject to repricing for market expansion this year. So while the volume increases, unit price will be lower, meaning very difficult outlook for the domestic sales while the overseas sales are in the growth phase. And we are seeing in-house products beginning to account for larger proportion of total sales. We also see increase in royalty income. All of this points to a significant change, beginning in our earnings structure. Here on this slide, we are plotting changes in cost-to-sales ratio, operating expenses ratio and operating margin. Operating margin exceeded the operating expenses ratio in 2019. And this trend is expected to be more pronounced going forward. While operating expenses ratio has been coming down slightly, we still -- we will steadily increase R&D expenses, which for 2020 are budgeted to total JPY 115 billion, up 12.6% year-on-year. Aggressive posture on R&D investment remains unchanged. The next slide, Slide 36 I believe, will be most popular, which outlines HEMLIBRA sales to Roche. This is the updated version. As for export sales, up until the end of 2019, we were exporting at initial supply price. The actual sales in 2019 totaled JPY 3.3 billion, exactly the same as the revised forecast. This year, export at ordinary supply price will begin, projected to total JPY 23 billion. Royalty income for initial shipment, or what's commonly called royalty 2 for 2019, was projected to be JPY 40 billion. And the actual was better at JPY 41.7 billion. For 2020, it is forecasted to double to JPY 85.7 billion. The arrow is extending into 2021 and beyond because we do not expect the rest of inventory supplied to Roche at initial supply price to be completely drawn down by the end of 2020. And then there is this so-called royalty 1, ordinary royalty income and profit sharing income, the amount at which we do not disclose. We expect increase to continue here. The next slide shows the current status and plan for major investments, which we always update at this time of year. Three new additions from a year ago. First is Chugai Life Science Park Yokohama, which features building of state-of-the-art R&D site. Cost information is added. As announced in May of last year, total cost is JPY 127.3 billion, scheduled to be completed in 2022. Second, comprehensive collaboration in research activity with IFReC. It's been 3 years since it began, but as it will continue to 2027, we've decided to add to this chart. Third, construction of a new synthetic manufacturing building at Fujieda plant, totaling JPY 18.2 billion. Construction began last year, to be completed in 2022. I've got 2 more slides to cover. Here, you can see our basic profit distribution principles and dividends. We have been aiming for a consolidated dividend payout ratio of 50%, which is revised to 45% from this fiscal year, as explained by Mr. Kosaka earlier. And annual dividend for 2019, we will propose to the Shareholders' Meeting JPY 140 per share, with a special dividend at the end of fiscal year. For 2020, we forecast raising by JPY 10 to JPY 150 per share. Core payout ratio on a 5-year average basis is 47.4% and 45%, respectively. Effective July 1, our stock will be split 3-for-1, so the year-end dividend will be JPY 25 per share, not JPY 75. But since the number of shares will triple, the total amount of dividends received by each shareholder will be the same. Lastly but not the least, the stock split as announced last week. The purpose is to reduce the investment unit price for the company's stock, which at over JPY 1 million for some time, far exceeded the Tokyo Stock Exchange guideline of JPY 0.5 million. With the record date of June 30 and the effective date of July 1, we will split stock 3-for-1. We hope the split would increase the liquidity of the stock and further expand the investor base. That concludes my presentation. Thank you for your kind attention.

[Interpreted] I am Ito. I will give you an overview of development pipeline. This is our pipeline in the areas of oncology, bone and joint and renal. Any changes from October last year are marked with a red star. In the box of oncology Phase I, 2 projects have been added. One is RG7461, an anti-fibroblast activation IL-2 fusion protein. And the other one is RG6058, tiragolumab. I'll talk about more details of RG6058 later. TECENTRIQ and Avastin combinations are now tested under Phase III for both hepatocellular carcinoma, postsurgical adjuvant in IMbrave050 and small cell lung cancer. Next slide is for autoimmune, neurology and others. Last year, in November, we filed for an approval of satralizumab also in Japan for neuromyelitis optica spectrum disorder. As it is designated as orphan drug, it will go through fast track. We are expecting the review to move ahead smoothly. With the Japan filing, it is now being reviewed in all 3 regions: Japan, the U.S. and the EU. The next 2 pages are for key news flows in the fourth quarter or later. Development activities for HEMLIBRA in Taiwan are on track. Regarding approval of TECENTRIQ for first-line treatment of non-small cell lung cancer, in combination with other antitumor agents, the product packaging side has been changed partially in its clinical study path for unresectable advanced or recurrent non-small cell lung cancer, IMpower132 study for TECENTRIQ in combination with carboplatin or cisplatin plus pemetrexed and IMpower130 study for TECENTRIQ in combination with carboplatin plus nab-paclitaxel were added. I've already touched on satralizumab filing in Japan. Nemolizumab for pruritus associated with prurigo nodularis received breakthrough therapy designation in the U.S. The designation was granted to nemolizumab, among other agents, from our own discovery pipeline, such as ACTEMRA, ALECENSA, HEMLIBRA and satralizumab. We also received orphan drug designation for polatuzumab vedotin in Japan for diffuse large B-cell lymphoma, or DLBCL. As for late-stage readouts, risdiplam had positive readouts from Phase II/III studies. First, in SUNFISH study for type 2 or 3 spinal muscular atrophy, or SMA, in pediatric and young adult patients aged between 2 and 25, the study's Phase III part met its primary endpoint of change from baseline in the MFM-32 scale after 1 year of treatment with risdiplam compared to placebo. Also, positive top line results from the pivotal part 2 of the FIREFISH study, evaluating risdiplam in infants aged 1 to 7 months with type 1 SMA, were announced. The primary outcome measure of the study was the proportion of infants sitting without support for at least 5 seconds at 12 months of treatment, assessed by the Gross Motor Scale of the Bayley Scales of Infant and Toddler Development. We plan to file risdiplam for approval as an oral treatment for SMA during this fiscal year. The Phase III IMvigor010 study, evaluating TECENTRIQ as a post-surgery adjuvant monotherapy treatment, unfortunately did not meet its primary endpoint of disease-free survival compared to observation, in people with muscle-invasive urothelial cancer. As for medical conferences, I'll give you more update later on IMbrave150 study of TECENTRIQ plus Avastin in hepatocellular carcinoma and PERJETA's APHINITY study. We also presented FeDeriCa study results on subcutaneous fixed-dose combination of PERJETA plus Herceptin and COMPOSER, a Phase I/II study results of crovalimab, an anti-C5 antibody. This is a slide to guide you through our strategy at Roche for establishing TECENTRIQ as standard of care in major tumor types. During the first wave, TECENTRIQ was first launched as a second-line monotherapy for non-small cell lung cancer based on OAK study results. It is now shifting to the second wave, where TECENTRIQ is combined with existing agents such as Avastin for non-small cell lung cancer, triple-negative breast cancer and hepatocellular carcinoma, which I will introduce with the next page. Based on the results of IMpower130 and the IMpower132 studies, TECENTRIQ's combination therapies are expanding their scopes. We've also begun the third wave, where immune doublets are tested for higher cure rates towards the fourth wave for personalized therapy. The ultimate goal of TECENTRIQ is to cure cancer. iNeST in Roche pipeline, that is individualized NeoAntigen Specific Therapy, fall into the fourth wave category. This is the most recent second wave results. This data was presented in ESMO Asia last November. IMbrave 150 study was conducted for first-line therapy in unresectable hepatocellular carcinoma. It is a Phase III study testing TECENTRIQ, which is chemo-free, combined with Avastin compared with the standard of care sorafenib monotherapy. The graph shows the result of one of the primary endpoint; that is, overall survival. The blue line representing the combination of TECENTRIQ plus Avastin, compared to the orange line for sorafenib monotherapy, reduced the risk of death by 42%. The result was both statistically significant and clinically relevant. PFS was a co-primary endpoint. Risks of disease progression and death were reduced by 41%. No unknown safety signals were observed in this combination therapy. We plan to file for approval during 2020. This study demonstrated improved outcome compared to sorafenib for the first time since the launch of sorafenib in 2008. Based on these results, TECENTRIQ is now subject to real-time oncology review in the U.S., raising our expectation for early approval. In the third wave for immune doublets, we've started a clinical study for RG6058, or tiragolumab, anti-TIGIT human monoclonal antibody. TIGIT is an immune checkpoint receptor expressed on NK and T cells. By inhibiting TIGIT, NK and T cells' immune response can be restored or maintained. Tiragolumab uses a different pathway than TECENTRIQ to do so. Therefore, by combining the two, additional treatment effects can be expected. The next slide shows breast cancer portfolio of Roche Group by modality and subtype. As you can see, the breast cancer portfolio is expanding across different modalities and subtypes. In the top part, for HER2-positive breast cancer, Herceptin, PERJETA and KADCYLA are already in the market. To add, a Phase III study is ongoing for TECENTRIQ in early HER2-positive breast cancer. Roche pipeline also has RG6194, HER2 and CD3 bispecific antibody. On the other hand, in the bottom part for triple-negative breast cancer, TECENTRIQ received approval in September last year as the first immune checkpoint inhibitor for PD-L1 positive triple-negative breast cancer, based on IMpassion130 results. An Akt inhibitor, ipatasertib, is now studied not just for triple-negative breast cancer but also for hormone-positive HER2-negative breast cancer in Phase III. In the middle part, for hormone-positive cancer, PI3K inhibitor and the SERD are also in the Roche pipeline on top of ipatasertib. In HER2-positive breast cancer, Roche Group has made important contributions to establishing standard of care across different lines of treatment for metastatic breast cancer, starting from second line and moving to first line in more early stages of cancer. Last December, results of the second interim analysis, with a median follow-up duration of 6 years of APHINITY study for postsurgical adjuvant therapy in HER2-positive early breast cancer, were announced. For the total study population, the combination with PERJETA compared to the comparator regimen reduced risks of breast cancer recurrence and death by 24%. Just like in the first interim analysis in the high-risk lymph node metastasis subgroup, the combination with PERJETA compared to the comparator regimen reduced risks of recurrence and death by 28%, which is an indication of high efficacy. By adding PERJETA, the proportions of subjects without recurrence were 87.9% versus 83.4%, which is an improvement of 4.5 percent points in 6 years. TECENTRIQ's indication was expanded for unresectable recurrent triple-negative breast cancer, as you can see on the left-hand side. This indication was obtained against the background of triple-negative breast cancer patients being defined by lack of actionable targets with only chemotherapy as option. It was an extension of indication based on IMpassion130 study for the combination with albumin-bound paclitaxel. Now IMpassion131 study with paclitaxel combination is ongoing. Ipatasertib is being studied in IPATUNITY130 study as a first-line treatment of triple-negative breast cancer with genetic abnormality in PI3K/Akt pathway confirmed by Foundation Medicine's F1CDx panel. That is shown in the middle of the slide as PHC approach. Further to the right, IPATUNITY170 study has started to test TECENTRIQ combined with ipatasertib plus new agent for all comers, regardless of PI3K/Akt pathway abnormality or PD-L1 expression status. The next slide is a list of projects for applied antibody engineering technologies by different stages, starting from drug discovery until launch. In addition to recycling antibody, sweeping antibody and bispecific antibody, one project of Switch antibody will move to clinical stage this year. We also pursue licensing activities for our antibody engineering technologies on the slide. The next slide is on projected submissions. We will actively follow-on review processes in Japan, the U.S. and the EU for satralizumab while expanding indications of TECENTRIQ. In addition, we plan to have a lot of submissions in 2020, such as risdiplam for spinal muscular atrophy, polatuzumab vedotin for diffuse large B-cell lymphoma and ipatasertib for breast cancer. The final slide is to explain our response to the development requests for unapproved drugs and indications. That's all from me. Thank you for your kind attention.

[Interpreted] Hashiguchi from Daiwa Securities. My first question has to do with the change in your dividend policy. You said you want to secure a financial position to fund strategic investments. Could you give us more details of the investments? In other companies, we often see deals to acquire development pipeline or modalities and technologies. But your company has a history of having built a rich pipeline and new technologies through your organic efforts. So what sort of investments are necessary for your company? In the meeting to explain your long-term vision, you seem to have emphasized the need to address the concept of beyond the pill. If you are to pursue such a strategy, is there any possibility to see a change in the way you make investments?

[Interpreted] Thank you for your question on investments. What has already been decided is, first of all, Chugai Life Science Park Yokohama with JPY 127.3 billion in investments. As for middle molecules, at Fujieda plant a manufacturing building for APIs will cost us JPY 18.2 billion. At Ukima plant, JPY 4.5 billion has been set aside for a synthetic researches building for middle molecules. In my presentation earlier, I talked about investments broadly, but further capital investments will be required for middle molecules. And it is true, as you said, that when it comes to development pipeline, since we have the first refusal rights to develop and sell Roche products in Japan, we can expect new items to keep coming in. Having said that, however, as in the case of the licensing agreement from Oncolys, if there are good opportunities, we would like to be more aggressive in, in-licensing. As for research pipeline, again if we find something worthwhile, we'd like to make investments from early on. In terms of drug discovery, we certainly have 3 pillars: small, middle and large molecules. But we always keep an eye on other new modalities. And if necessary, or if some modalities are likely to change overall drug discovery trends significantly, we'd like to make bold decisions to make investments. Furthermore, we have started to focus on digital technologies, where we hope to make investments comparable to those companies at the forefront in health care. In digital technologies, we're still at the stage of building internal infrastructure. But we would like to make investments there as well. For each of these investments, at the time decisions are made, we would like to let you know through press releases.

My second question is about HEMLIBRA and its most popular page, Slide 36. I need clarification on the definition. Are the ordinary supply price mentioned at the right top and the ordinary supply price used to calculate the royalty income for initial shipment the same? What you call Royalty 2 is, I would assume, the difference between the royalty on the initial supply price at the left top and the royalty that would have been paid if the shipment have been made at the ordinary supply price at that timing. Are the 3 ordinary supply prices used to derive JPY 41.7 billion in 2019, JPY 85.7 billion and JPY 23 billion, respectively, the same?

Quite a good question. A shipment price or export price is determined by taking the weighted average of Roche's selling prices to the third parties in different countries in the previous fiscal year and applying a certain percentage to the value. Now in the case of price used in the lower arrows, such as JPY 41.7 billion in 2019, Roche sold the product to external parties in 2019, and you can apply a certain percentage to the value to derive the shipment price. We had already exported that volume at a lower price. There's a time lag, but suppose we have sold that volume at JPY 3.3 billion, then we would be entitled to the difference between JPY 41.7 billion and JPY 3.3 billion. Therefore, even in the same fiscal year, the prices referred to in the calculations may be slightly different. In shipment price calculation, we used the weighted average of the selling prices to the third parties in the previous year, and therefore, technically, the unit prices used are slightly different even in the same year.

So the prices used to derive JPY 41.7 billion and JPY 85.7 billion are different, but are the prices used for JPY 23 billion, JPY 85.7 billion, the same?

No, they are different.

Then the prices used for 2021 and beyond will also be different?

Correct.

Will they be going down?

We cannot tell if the price will go down. But what they are referring to is different. JPY 23 billion is based on the weighted average of Roche's selling price to the third parties in 2019, but JPY 85.7 billion is -- though it is for the same 2020 based on the difference between the average of the Roche selling prices to third parties in 2020 and our lower price at which we had already exported. Therefore what is being referred to is different.

My last question is about risdiplam. There are 2 products for SMA that precede your product, which are very different in their characteristics. How do you expect your product to be positioned in Japan? I would guess, depending on the way physicians will look at the product and the health insurance reimbursement policy, it may be positioned differently in different countries. What is your thought?

As you said rightly, a gene therapy, an intrathecal injection drug and ours, an oral drug, are very different from one another. That will be the answer to your question. Intrathecal injection is quite a difficult procedure, and while performing the procedure twice a year repeatedly, if I remember correctly, would be quite a burden on patients. Oral administration would provide great benefit to patients. Compared to the gene therapy, the target patient population is different. The gene therapy is indicated for type 1 alone, with available data only for infants. What differentiates risdiplam is that we have data, a broad range of patients, including those of type 2 and type 3 and of up to 25 years of age. In the case of nusinersen, an intrathecal injection drug, it was approved with the data of pediatrics and adolescent patients, again, a different age group from ours. So risdiplam is more advantageous in that it covers patients of broad age groups, and being an oral drug allows for more convenient administration. Having said that, however, if the gene therapy provides a radical treatment, it will be used as such going forward. But from a more holistic perspective, we expect quite a number of patients who will choose risdiplam over others.

So you are not considering a positioning specific to Japan for now, in particular, are you?

What has been launched in the market so far is nusinersen alone. And the gene therapy has yet to be approved. Therefore, it will be difficult to tell exactly how things will play out.

[Interpreted] Sakai from Credit Suisse. Pardon me to say, if my understanding is correct. I have a question, Slide 36. I don't know if Mr. Itagaki deliberately tried to confuse us. But since we don't have data on weighted average, what's important for us in making the calculation is how much Chugai makes as royalty income on external sales by Roche. Mr. Kosaka said that Roche's HEMLIBRA sales, excluding Japan, were CHF 1,148 million, and I'm assuming that the corresponding portion was JPY 41.7 billion, the actual for 2019. Roche does not announce the guidance on this year's HEMLIBRA sales, but if I apply the royalty rate of 32%, Roche's sales are calculated to be around JPY 200 billion. Am I on the right track?

Yes, you are. You see, while the royalty income is associated with the sales in the same year, and so you can link vertically, the export on initial supply price is not for the same year but the weighted average of the previous year. The weighted average of the retail price of the previous year. So there is a time lag there. But for the latter, the royalty income, your formula is correct.

I see. So if Roche sells more than JPY 200 billion this year, your royalty income will increase as well, correct?

Yes.

I see. Next question is not directly related to this briefing, but Roche in its earnings briefing conference call referred to RG7413 etrolizumab, which I believe competes with HUMIRA and ENTYVIO, and commented that it has great expectation on that project and further went on to say that the analysts are not paying enough attention. Roche is in Phase III now. Any plans for clinical development in Japan by Chugai?

[Interpreted] This is Ito speaking. We have been following our guidance on disclosure of Chugai's domestic development pipeline. My first 2 slides were put together accordingly, so you can judge from that.

It is for ulcerative colitis, right?

Yes. And we are aware of that development effort.

I see. My last question is on HEMLIBRA penetration among non-inhibitor patients, which seems weak in Europe. And why is that? Can you also talk about the status, including Japan?

Your question is why does Europe appear weak, and the situation in Japan. First, in Europe, reimbursement systems and rules vary from country to country, and time required before being listed varies from country to country. So compared to the U.S. and Japan, penetration among noninhibitor patients may appear somewhat weaker in Europe. But going forward, with an increase in countries where it is added on the reimbursement price list, noninhibitor should progress in Europe as well. In Japan, sales of noninhibitor HEMLIBRA are progressing firmly. Primarily for cases where keeping vein open is difficult, primarily pediatric patients, switching to HEMLIBRA quickly proceeded. Initially, we assumed that HEMLIBRA would primarily be administered to patients with frequent bleeding, but it turned out that, in addition, it is being administered to a part of patients with less frequent bleeding, which resulted in higher sales than expected in 2019.

[Interpreted] This is Kosaka speaking. Let me add a comment. Roche during its conference call commented on its patient share in the U.S. For your information, in Japan, the patient share was approximately 18% as of the end of last year.

[Interpreted] Muraoka from Morgan Stanley MUFG. I also have a question related to Slide 36. I think one can make various assumptions in doing the math, but I would like to check and see if my understanding is correct. Among the 3 mainstay products for export, namely ACTEMRA, HEMLIBRA and ALECENSA, in terms of royalty rates that you receive from Roche, I'm guessing that in the descending order, HEMLIBRA comes at the top, ACTEMRA distant second and ALECENSA pretty low. That is low, relatively speaking, because they all enjoy high rates. Am I way off in assuming that's the order amongst three?

I'm afraid we cannot answer that question. We cannot comment on exact royalty rates and we cannot disclose which is higher than which.

But am I correct to assume that there is a difference amongst the three?

As an independent company, we negotiate and agree with Roche on the supply price, royalty and other conditions on a product-by-product basis, just as with other companies, based on a principle of third-party transaction. No difference in how terms and conditions are set. We cannot disclose which is higher or the order, for that matter.

But you do take into consideration the contribution rate in your development efforts, right?

Right. Factors such as how competitive the product is and the timing of contribution from Roche, generally at a pre [ pock ] phase, we look at all those factors.

I see. My next question is on R&D expenses, which is raised by JPY 12 billion for this year. What about beyond that? I guess it's more of a next medium-term plan question. But will you continue to increase R&D by JPY 10 billion to JPY 15 billion each year? In other words, by 10% to 15%, somewhere along that line?

We cannot comment on the amount. But R&D is most important lifeline for us. And we will continue to make aggressive investment on R&D, including the use of digital technology in drug discovery and clinical studies. In addition, there is the new Life Science Park in Yokohama. While the completion is 2022 and they will not become operational until 2023, depreciation and amortization will increase.

In the meantime, I take it that the intensive investment phase for TECENTRIQ and the like will soon be completed. Correct?

Well, yes, in that there is a need for a turnover in the development portfolio. Still, we plan to continue to increase the absolute amount.

[Interpreted] I'm Wakao from Mitsubishi UFJ Morgan Stanley. President Kosaka explained that a CAGR in the midterm plan is now revised upward. I think you said that it is now raised to around 30%. It is around 30% because of uncertain factors. What may be those factors for upside and also for downside? I can imagine upside factors may include HEMLIBRA selling more than expected. Downside factors may include penetration of biosimilars faster than expected. Could you tell me your views and assumptions?

Reasons for the upward revision from the original high single-digit to around 30%, include higher-than-expected market penetration of TECENTRIQ and HEMLIBRA in Japan. For overseas, what we call RO1, that is royalty revenue, can be cited as a reason for the increase to around 30%. Of course, we have a mean, a base case and an upside case. There is a range. It is because of HEMLIBRA more than TECENTRIQ. The speed of market penetration of HEMLIBRA in overseas markets is quite unpredictable. If the performance exceeds the mean scenario, it will be positive, not just on the top line but also on the bottom line. The opposite is also true. Another uncertain factor is about Japan's NHI price revision in non regular timing, whether that's for all products or not. If it turns out to be tougher than expected, it is a downside risk. These are the factors for having a range. About the speed of market penetration of HEMLIBRA, last year was more than expected because you had a new indication for noninhibitor.

Compared to last year, I imagine your forecast accuracy is better this year in Roche Group. Do you still think there may still be an upside?

Even so, Roche made announcement yesterday that for the fourth quarter it was 21% in the U.S. There are a lot more patients unaddressed. We want to cater to such patients more. This makes it too early to say things with accuracy for the next year.

I see. Turning to Page 36. As there are still initial supplies, I assume export at ordinary supply price during this year is still slow. Can I assume that export at ordinary supply price in big volume will start in full fledge about a year before royalty income for initial shipment dwindles to end? I guess my question is about when export at ordinary supply price will fully kick in, vis-à-vis the timing of losing royalty income for initial shipment?

If you compare the top and the below, the supply needs to be shipped with lead time to meet future demand, whereas royalty income is received for what is selling now. In between the two there is a timing gap. Exports are shipped with lead time, meaning ahead of the actual demand in the future. This means, for some time these two lines overlap with each other. When we lose royalty income for initial shipment, that is when there is no more initial supply stocks at Roche. Therefore, export at ordinary supply price has to go before that happens. At least for this year, I can assure you that there is such overlap. As expected from before, the initial supply volume is more than we assumed, I guess.

Finally, turning to Page 54. Introducing some antibody projects, you said one project of Switch Antibody moves to clinical stage during this year. There are 6 Switch Antibodies on the page. My question is about probabilities of those 6 moving to clinical stage. Are they high? What would be the pace of those many projects going to clinical phase?

At the bottom of the slide, you see discovery, preclinical, clinical and launched. Those projects are listed according to these different stages of development. Rather than all these projects moving at the same pace, depending on preclinical research or GLP tox results, some of them move to clinical phase. Some may be faster or slower than other, depending on the project.

Yes, I understand. If this year, one Switch Antibody project goes into clinical phase and there is also one new technology in preclinical phase, then it may go to clinical phase next year. Is that a kind of pace I should assume?

Just like usual research projects, they go step-by-step. Some may produce results better than expected, others not, therefore the pace may not necessarily be uniform. But I think your assumption is right.

[Interpreted] I'm Yamaguchi from Citi. My first question is about HEMLIBRA's market share in Japan, you said 18% is the patient share. Is that number reflecting the number of patients on HEMLIBRA at this point in time rather than based on the number of patients who use the product for the entire year?

I think it is based on the number at this point in time, and inhibitors account for more than 80%. Some patients, especially more elderly patients can be quite conservative. And there are other factors, and patients are few. If this number doubles this year, the share reaches close to 40%.

Looking at those factors in and outside Japan, how much more do you think you can gain?

I wish somebody can tell me that. I'd rather not to give you my answer.

Another question, which I think you will not answer, but I have to ask anyway, is that the royalty 2 arrow is getting shorter little by little. When is it going to end? You said that it is not going to end during this year, then when?

We have a short tail extending to 2021. This is due to a lack of space. This does not mean it is going to end in 2021.

That's what I thought, but JPY 40 billion plus JPY 80 billion, altogether JPY 130 billion, is already counted. Isn't that a bit too much? Is it going to normalize during 2021? Or you don't know that yet?

Of course we have an assumption. It depends on Roche's selling price to the third party. That timing will fluctuate based on that.

I see. Could you take one more question, please. With NXT007, you are also trying to form a bispecific area. Genetic therapies are now taken into Roche Group, which brought a balance to their portfolio. What about Chugai? What are you going to take in from Spark Therapeutics and when? Are you having thorough discussions about it internally?

I expected that question. Roche closed the deal with Spark Therapeutics at the end of last year. Product selection is going to start in the future. Hemophilia franchise expansion will be an important point to consider. Rights are yet to be sorted out. We will see what can upgrade our hemophilia franchise.

[Interpreted] I'm Arai from Merrill Lynch Securities. I have one question on HEMLIBRA and another one on satralizumab. About HEMLIBRA, can you go to Page 36. Excluding royalty income for initial shipment, there are 2 running or ordinary royalty lines. Royalty rates against the market price, are they different this year than last year? As there are 2 lines, if the weight between the 2 shifts, royalty rates may be different this year than last year, or are they quite constant? Any views?

You are talking about royalty income in the middle, right? It is based on our contract. Depending on the amount of sales, royalty rates may go up in some contracts, others have those rates constant. There are different contracts for different products. Then you may be asking, what about HEMLIBRA. I can't answer that question.

Okay. As for satralizumab, is it going to have the same business scheme as HEMLIBRA?

If you are asking whether satralizumab will be shipped at the initial supply price, well usually, what we discover, we manufacture, export and get margins. We also receive royalty against the sales of products. If that is a general scheme, yes, we have the same scheme for satralizumab.

Is it factored into this year's plan?

I wouldn't say what is factored in where. But at least we know we filed last year, and this year we expect approval, although we don't know exactly when. But for their initial stocking, we need to plan. Therefore, a certain export amount is included in overseas others. For Japan, a certain amount is included as is in the Other category.

[Interpreted] I'm Miura from Jefferies Securities. I just have one question. It's about SKY59 from your own pipeline for PNH or crovalimab. Our U.S. research team conducted a survey with key opinion doctors. They think crovalimab will compete very well with Alexion's Soliris and ULTOMIRIS with 50 versus 50 market share. Your product will be a subcutaneous once-a-month self-injection type, while ULTOMIRIS is for every other month an intravenous administration. I believe, because your product has such convenience advantage, doctors say 50 versus 50, how do you see such competitive advantage? What do you think are the potential in the market?

As you've pointed out, the competitors' products require bimonthly or biweekly intravenous administration, while our product is subcutaneous self-injection. We take this as a substantial advantage within SKY59, so I agree with you.

A Phase III study will start this year for SKY59. Looking at ULTOMIRIS' track record, it will be completed within 1 year or so. Is my understanding correct?

It's not easy to say when it is going to finish, but we will follow a normal course of development.

[Interpreted] I'm [ Kawataka ] from Chugin Asset. This may be a layperson's question, but the new coronavirus is spreading. How do you see the situation now as a player in this industry? Does the outbreak present any business opportunity for Roche Group?

Unfortunately we, Chugai, does not develop treatment nor vaccine for the new coronavirus. We are, of course, implementing necessary responses to take care of our employees and their families, such as sending masks and disinfectants, but we don't have treatment or a vaccine specific to the new coronavirus. [Statements in English on this transcript were spoken by an interpreter present on the live call.]