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

[Interpreted] I am Tatsuro Kosaka, Chairman and CEO. I'm going to give you the review of 2020 and the general overview of IBI 21, our midterm business plan. Last year, due to COVID-19, the whole world faced an unprecedented crisis. Our company was also hit by the pandemic in each of the value chains as it affected the launch of new products such as Tecentriq and Hemlibra and the products with added indications in Japan. In terms of overseas sales, exports of Actemra to Roche increased and some are used in clinical studies for novel coronavirus pneumonia. Moreover, exports of Hemlibra to Roche has increased steadily but due to COVID-19, the market penetration overseas was slower than anticipated at the beginning of the fiscal year, thus eroding our royalty income. In terms of work related to regulatory affairs, there was no major impact on the timings of applications or approvals. We also made sure our products would be stably supplied, one of our important missions, and we'll continue to maintain this stable supply. Under such condition, for the full year of 2020, we posted revenues of JPY 786.9 billion, up 14.7% year-on-year. Core operating profit of JPY 307.9 billion, up 36.9% year-on-year, thus achieving record high revenue and operating income for the fourth consecutive year. Now I will review the 4 strategic policies we set for 2020. First, on maximizing value of growth drivers, Hemlibra, one of our growth drivers, saw its domestic market penetration lower than expected as COVID-19 slowed down the speed of switching, but achieved a significant growth in overseas revenues. ENSPRYNG was approved in 14 countries, including Japan, and we have high hopes for the future growth, including the expansion of its indications. Tecentriq has been growing its sales steadily since last year, but just like Hemlibra had its market penetration delayed by COVID-19. However, in September last year, approval for an additional indication for hepatocellular carcinoma was granted, leading us to have further expectation for sales growth in the future. With regard to creation of next-generation growth opportunities, preparations are underway for the mid-sized molecule project as planned ahead of the scheduled start of Phase I study in 2021. Under the Antibody project, Phase I study was started for next-generation antibody, Switch Antibody, STA551, for patients with solid tumors in March last year. As for promotion of digital transformation and personalized health care, in March last year, we formulated Chugai Digital Vision 2030, further accelerating our efforts in Dx. Now selected as one of DX Stocks 2020, we were the only one in the pharmaceutical industry who made the list. Due to the impacts by COVID-19, including patient self restriction and hospital visits, FoundationOne CDx failed to achieve its sales plan but succeeding in its expansion of indications. Moreover, we filed for approval for FoundationOne Liquid, a blood-based comprehensive genomic profiling test, and expect to obtain approval by the end of this fiscal year. I will discuss implementation of drastic structural reform and strengthening of sustainable platforms later. Next, I'd like to look back on the progress made in 5 strategies pursued under IBI 21. Let me first go over the business performance in 2019, the year we started IBI 21, and last year. Under IBI 21, while proactively investing in the future growth, we aim to achieve sustainable profit growth and maximization of the corporate value and set the quantitative target of core EPS CAGR, compound annual growth rate, at around 30% for the 3 years between 2019 and 2021. As you can see, we accomplished record high revenues and core operating profit consecutively in 2019 and 2020, posting 49.5% in core EPS CAGR for the 2 years. On the other hand, when you look at the 5 strategies pursued under IBI 21, under the strategy of value creation, we made steady progress in drug discovery, including progress of in-house projects. Midsized molecule and Antibody projects also made a steady progress, as I explained earlier. A global Phase III study was initiated for crovalimab or SKY59 and ENSPRYNG was launched in the U.S. and Japan. In value delivery, we expanded market penetration of growth drivers and accelerated value maximization. Hemlibra, though affected by COVID-19, saw a significant increase in overseas revenues and expanded the number of countries with approval, as I explained earlier. Tecentriq made progress in expanding indications, including first-in-class indications, such as small-cell lung cancer, triple-negative breast cancer and hepatocellular carcinoma. We filed for ROS1 indication for Rozlytrek and obtained approval in February last year, using real-world data as reference data, which is important in promoting personalized health care. We also formulated a new HR system, which is based on the policy of finding the best person for the job according to the talent and the performance instead of finding the best job for the person. The operation of this system was started in April last year. We also established Chugai Business Solution Co., Ltd., which collectively conducts routine common indirect works that can be consolidated and standardized within Chugai Group to facilitate the structural reforms. We were selected to Dow Jones Sustainability Index World, a representative index for ESG, for the first time, demonstrating that our efforts in ESG have been highly recognized. Thus, we successfully achieved IBI 21 goals in the 2 years of 2019 and 2020 on both qualitative and quantitative measures and decided to complete the midterm business plan 1 year ahead of the schedule. As was mentioned in the press release issued earlier, based on the recommendation of the appointment committee at the Board of Directors' meeting held on February 4, it was resolved that Osamu Okuda as Representative Director, President and CEO, as of March 23, take the responsibility to execute company-wide strategies and operations under a new management structure, aimed at rejuvenating the organization. I myself will continue to chair the Board in my capacity as Representative Director and Chairman and take responsibility for making decisions on matters significant enough to require the resolutions of the Board of Directors. To sum up, we have been proceeding with IBI 21, the midterm business plan for the 3 years from 2019. Since without waiting for the final year 2021, we have achieved results exceeding the initial goals of IBI 21 in both qualitative and quantitative measures, we decided that the foundation for further growth has been established. Therefore, we will complete IBI 21 1 year ahead of the schedule with the aim to become a top innovator in the health care industry under the new management structure and based on the new growth strategy, which President Okuda will discuss in his presentation later today. That is all from me. Thank you for your attention.

[Interpreted] Good evening. I am Toshiaki Itagaki, Executive Vice President and CFO. Let me give you the financial results. Please turn to Page 14. Here, you can see the financial overview. Since this was referred to in one of Kosaka's presentation slides, I would like to move to the next slide to go into more details. Page 15 shows the overview of the profit and loss. Revenues came in at JPY 786.9 billion, up JPY 100.7 billion or 14.7% year-on-year. To give you the breakdown of revenues, domestic sales went down by 6.5% due to NHI drug price revisions and the impact of generic drugs. On the other hand, overseas sales posted JPY 224.2 billion, up 48.2% year-on-year, helped by a significant increase in exports of Actemra and Hemlibra. Royalty and profit sharing income increased by JPY 53.1 billion, due to a substantial increase in income for Hemlibra. And other operating income also went up by JPY 3.3 billion, with an increase in onetime income. Cost to sales ratio improved by 2 percentage points to 43% because of higher shares of in-house products in the sales mix and application of the ordinary supply price to exports of Hemlibra to Roche. As for operating expenses, though marketing and distribution expenses decreased due to the restraint in sales activities under COVID-19 pandemic, R&D expenses increased as development projects made steady progress. As a result, the total operating expenses increased by JPY 10.5 billion. Thus, the operating profit reached JPY 307.9 billion, up 36.9% year-on-year, with the operating margin at 39.1%. If you subtract financial account balance and income taxes from the operating profit, you will get the net income of EUR 219.4 billion, up JPY 51.8 billion or 30.9% year-on-year. We set record highs in revenues, operating profit and net income 4 consecutive years now. Page 16 shows the breakdown of increases and decreases of sales. If you take a look at sales by disease area on the left, overseas sales have exceeded JPY 200 billion for the first time to reach JPY 224.2 billion, up 48.2%. On the right is sales by product, where you can see the top 2 products, which achieved the largest year-on-year sales growth, both achieved the results overseas, with Actemra growing JPY 46.1 billion and Hemlibra, JPY 22.5 billion. Export sales of ENSPRYNG, which was approved in the U.S. and other countries last year increased by JPY 5.6 billion. Going back to the chart on the left, domestic sales totaled JPY 409.1 billion, down 6.5% year-on-year. At the bottom of the bar is oncology, which suffered a 4.6% drop in sales. By product, Tecentriq, Alecensa and Perjeta showed a positive growth in sales. On the other hand, those which dropped in sales were affected by the NHI drug price revisions and by generic drugs. They were Avastin, Herceptin, Rituxan and Xeloda. Bone and joint area went down by 14.8% year-on-year. Sales of Edirol dropped by 24.3% because of the impact of generics. Repricing following market expansion, pushed down sales of Actemra by 6%. Renal diseases dropped in sales by 17.3% with Mircera falling by 21.2%. Others increased by 8.5% in sales, where domestic sales of Hemlibra posted JPY 34.1 billion, up 35.3%, and Foundation Medicine posted JPY 2.8 billion in sales, 6x of what was achieved the year before. Ordinary sales of Tamiflu fell by 89.2% as the number of cases of influenza hit the lowest in the past 10 years. Page 17 shows a waterfall chart of the breakdown of the JPY 83 billion increase of the operating profit. The second and third bars from the left indicate the breakdown of the JPY 37.2 billion, an increase of gross profit from sales. You can see how the negative impact on unit price by NHI drug price revisions was offset by the increase in sales volume. Increase in royalty and profit sharing income contributed JPY 53.1 billion, mainly due to the increase in income for Hemlibra. Other operating income, which includes onetime and milestone incomes, rose by JPY 3.3 billion from a year before. Among the operating expenses, as we said, while marketing and distribution and G&A expenses decreased by JPY 900 million, R&D expenses increased by JPY 11.4 billion. Next 3 slides from Page 18 will show numerical changes on a quarterly basis. If I can explain how to see the slides first, on the left, you'll find the actual quarterly results shown chronologically. On the right top corner is the comment comparing the result to the same quarter or the fourth quarter of the previous year. And on the right bottom is the comparison to the previous quarter or the third quarter. And on this particular page is the structure of profit and loss. In other words, the structure of costs. I will not read out individual items but the overall trend shows that the absolute values of cost of sales and all the expense items are on the rise, but the ratios against sales are declining, demonstrating an improvement in profitability. However, if you look at the results by quarter, the values of the operating profit and operating margins have been going up and down. If you look at the revenues mix, you can understand why. And you can find a structure of revenues by quarter on the next page, Page 19. First, other operating income includes onetime income and milestone income and whether you will get the income or not gets decided on event-driven basis. Therefore, there are ups and downs from quarter-to-quarter. And this is the cause for the ups and downs that you saw in the amounts and ratios of operating profit in the previous page. Now royalty and profit sharing income and overseas sales from overseas businesses, and both have been increasing steadily, thanks to the contribution by Hemlibra. Domestic sales at the bottom have gone into a declining trend due to the NHI drug price revisions and impact of generics. Page 20 shows quarterly sales by disease area. At the top of the bar chart is overseas sales, which could go up and down depending on the timing of the shipment. But for the past 1 year, there has been a stable rising trend. The share of overseas sales against the total has also increased to exceed 30% and reached levels comparable to domestic oncology sales. Oncology sales are leveling off due to the natural drug price revisions and the competition from biosimilar products. Moreover, you can see bone and joint and renal diseases have been slightly struggling. These trends have already been reflected in our plans. But let's see how we actually performed as compared to our forecast. Please turn to Page 21. Starting from the third row from the top, domestic sales posted an achievement ratio of 99.4%. Under the COVID-19 pandemic, patients' self restraint on their visits to hospitals delayed the market penetration of new products and products obtaining additional indication. On the other hand, COVID-19 actually helped increase the exports of Actemra more than expected, which resulted in overseas sales totaling 133.1% of the forecast. As for royalty and profit sharing income, sales of Hemlibra by Roche overseas was slightly lower than what was assumed in the forecast, which resulted in lower than plan royalty income on our part, thus achieving only 91.9% of the plan. Other operating income exceeded the forecast as milestone income occurred slightly earlier than forecasted. Cost of sales ratio was mostly in line with the forecast. Due to the restriction on promotion activities under COVID-19 pandemic, operating expenses, including the general and administration expenses, left JPY 4.8 billion of the budget unspent. In R&D, although there was no major delay in the progress of the projects due to the restraint on academic society meetings and business trips, some portion of the budget was left unspent. As a result, the operating profit exceeded the forecast by JPY 32.9 billion, posting an achievement ratio of 112% and surpassing the JPY 300 billion mark for the first time. The next page shows the sales by product as compared to the forecast made at the beginning of the fiscal year. Looking at the sales by disease area on the left, others is the only area that has failed to achieve the forecast. If you look at the sales by product, where light blue indicates the area of others, you can see Hemlibra was behind the forecast by JPY 8 billion. Ordinary sales of Tamiflu was behind by JPY 2.6 billion and Foundation Medicine by JPY 1.7 billion. All of them were affected largely by COVID-19. In terms of the impact by patients restrained on their hospital visits and restriction of promotional activities, Tecentriq in the oncology area was among those affected, falling short of the plan by JPY 7.1 billion. Those products that were ahead of the plan included all 4 overseas products shown in gray and 2 from oncology area, namely Avastin and Perjeta. Page 23 is a page that has become familiar to you: The outline of Hemlibra sales to Roche. Exports were posted at ordinary supply price from 2020 and exceeded the forecast slightly to achieve JPY 24.6 billion. This year, our forecast for exports is JPY 88 billion. After royalty incomes, those for initial shipment or what is called royalty 2 totaled JPY 73.9 billion in 2020. It seems that sales of Hemlibra by Roche outside of Japan was affected by COVID-19, and therefore, our royalty income failed to achieve the forecast. This year, we anticipate JPY 95 billion in royalty 2 income but as you can see, the arrow stops at the end of this year. This means that for now, we expect royalty 2 not to occur next year any longer. Now we have put together a diagram that describes the scheme of the transaction in a way easier for you to understand. Here is the diagram. On the top row is purchase volume, sales volume and stock volume of Roche, while at the bottom row is revenues of Chugai or royalty income and export sales. First of all, between 2017 and 2019, we shipped out products at the initial supply price, and therefore, export sales of Chugai indicated in light blue were not that large. On the other hand, Roche purchased a certain quantity of the products for 3 consecutive years will be at lower unit price. And therefore, it ended up holding a large volume of inventories. The light blue line shows the changes in the stock volume purchased by Roche at the initial supply price. Every time Roche sells the product from the stock it holds, it is supposed to pay Chugai the difference between the initial supply price and ordinary supply price in the form of royalty 2. And you can see at the bottom row, the light gray portion indicates the royalty 2 income at Chugai. Royalty 2 income will be finished by the end of this year. Because as you can see at the top row, the stock volume of initial supply will be reduced to 0 this year. On the other hand, Roche needs to replenish its stock and imports from Chugai, which represents a shipment at the ordinary supply price. This is reflected in the dark blue portion of Chugai Bar chart, which shows our export sales are increasing. We hope this work of our great work will be of some help to you to understand a complex transaction scheme. That was all for profit and loss, and Page 25 describes the balance sheet. The balance sheet shows that we have been maintaining a sound and robust financial position. On the lower left, total net assets increased by JPY 126 billion to reach JPY 980 billion as of the end of last year. One line below this is the ratio of equity attributable to Chugai shareholders, and it was 79.3%, showing that we are maintaining a very high level of equity ratio. Looking at the top chart, you can see trade accounts receivable increased as the business grew and investments in future growth, such as Chugai Life Science Park Yokohama, being made proactively. Net cash increased by JPY 45.5 billion, indicating that financially, we have no problem at all. Now let's take a look at the change in net cash. As of the end of last year, we had a net cash balance of JPY 378.6 billion. Looking at the changes in net cash over the past year, we had JPY 335 billion in cash from operating activities after deducting the increase in working capital and investments in the construction of research laboratories and the manufacturing facilities, the operating free cash flow was JPY 201.2 billion, from which the payment of income taxes and dividends were made and the resulting net cash increased by JPY 45.5 billion. We have been increasing our investments in tangible and intangible assets since around 2018. Of course, to see how we are doing in terms of capital efficiency, we are looking at the ROIC trend on the next page. We have adopted ROIC or return on invested capital as a medium to long-term capital efficiency index and are monitoring it. In the last 5 years, the ROIC has consistently improved. In the ROIC formula, the numerator is operating income after tax, which has grown 3.75x from JPY 59.3 billion 5 years ago to JPY 222 billion last year. On the other hand, the denominator of the ROIC formula is net operating assets, which increased only 1.5x from JPY 431.1 billion to JPY 646 billion in 5 years. As a result, ROIC has risen significantly from 14.6% to 37.3%. In the future, we will continue to increase capital investment, that is investment for future opportunities, but we will do so while giving due consideration to the efficiency of capital. From Page 28, I will give you our forecast for this year. We are forecasting an increase in both sales and profits this year as well, and the sales are expected to be JPY 800 billion. In Japan, we expect to face a difficult environment due to the midyear NHI price revision and the impact of generics but we will continue to grow our overseas business. Cost to sales ratio is expected to be 40%. SG&A expenses will recover to some extent from the slight decrease last year, but the budget is still at a low level. On the other hand, we expect to increase our R&D expenses by JPY 18 billion to JPY 131.5 billion. Our target for operating income is JPY 320 billion with an operating margin of 40%. Next, the forecast for product. Domestic sales will decrease, as I explained earlier, but overseas sales will grow significantly. This is a continuation of the trend from last year. For overseas sales, please look at the left-hand side. Hemlibra overseas is expected to grow significantly, while Actemra overseas is expected to decline by JPY 49.1 billion. Due to the uncertainty in demand against the backdrop of the coronavirus pandemic, we have only included a very limited number in our forecast, which is why we are forecasting a large decrease in revenue. In Japan, sales of products that are affected by generics are expected to decline. On the other hand, some growth in new products and products with expanded indications are included in the positive side of the revenue forecast. From this fiscal year, we have grouped the domestic therapeutic areas into 2 categories: oncology and primary. The relationship with the previous classifications is written on the bottom right. Next, let's take a look at the forecast for changes in operating income, which is expected to increase by JPY 12.1 billion, with a gross profit increase of JPY 17.5 billion, which is a sum of the second and the third bars from the left. This includes the negative impact of the NHI price revision. However, royalty income is expected to increase by JPY 33.4 billion due to revenue from Hemlibra and other products. In addition, onetime income will be negative JPY 18.1 billion due to the fact that there will be few events this year. We will invest aggressively in research activities. So R&D expenses will increase by JPY 18 billion. Next, let's take a look at the list of major investments. There are no particular additions to the list from last year. In terms of capital investment this year, the construction of a new synthetic manufacturing building at the Fujieda plant and the new research laboratory in Yokohama will proceed. Last but not least, I would like to talk about the dividends. Our dividend policy is to take -- to aim for stable dividends with an average payout ratio of about 45%. Based on this policy, we plan to propose a dividend of JPY 55 for the full year of 2020 to the general meeting of shareholders. For this year, we expect to increase the dividend by JPY 5 to JPY 60. That is all from myself. Thank you very much.

[Interpreted] I would now like to explain the status of the development pipeline. In the development pipeline, in-house projects are shown in orange. In-licensed projects from Roche are shown in blue and all other projects are shown in black. The red asterisks indicate the changes made since the previous Q3 results presentation. This page shows the oncology field. Tecentriq's pancreatic adenocarcinoma, HER2-TDB for solid tumors and OBP-301 for hepatocellular carcinoma newly entered into Phase I. In addition, FAP-IL2v, which was in Phase I for solid tumors, has been deleted due to the discontinuation of development by Roche. This page is for non-oncology field. Edirol has been approved for osteoporosis in China. So it has been removed from the pipeline. We have also removed fenebrutinib, which was in Phase I for rheumatoid arthritis as we decided to discontinue its development in Japan in light of the results of the Phase II study conducted by Roche. Now let's take a look at our major development in the fourth quarter. As for the approvals, we have already announced them in the press release, so I will skip the explanation. In terms of filing, FoundationOne CDx has been filed for an additional application for nivolumab and pembrolizumab for microsatellite instability-high. Also entering the pipeline, Tecentriq has started Phase Ib in combination with Actemra or tiragolumab for pancreatic adenocarcinoma. An umbrella study led by Roche is a global study to evaluate the combination of Actemra and tiragolumab in pancreatic adenocarcinoma using the Morpheus platform. We plan to participate in this study from Japan. Now OBP-301 or telomelysin is an oncolytic virus. Following esophageal cancer, we have started a domestic Phase Ib study in combination with Tecentriq and Avastin in hepatocellular carcinoma. As for the anti-HER2/CD3 bispecific antibody, in-licensed from Roche, we have decided to take part in the global Phase I study on advanced HER2-positive cancer types from Japan. As for discontinuation, in line with Roche's development policy, we decided to discontinue 5 development themes. As for the top line results of late-stage development products, faricimab achieved its primary endpoint in both global Phase III studies for diabetic macular edema and neovascular age-related macular degeneration. I will explain these results later. Please refer to the bottom which says others. We are developing nemolizumab for atopic dermatitis. And Galderma started Phase III trial for prurigo nodularis in October. In Japan, Maruho started Phase II/III trial in December. The last line is the COVID-19 antibody cocktail therapy from Regeneron, which was introduced in Japan by Roche. This will be explained in the next slide. This product is an antibody cocktail consisting of 2 neutralizing antibody, casirivimab and imdevimab, discovered by Regeneron. As shown on the left side of the slide, SARS-CoV-2, the virus that causes COVID-19, binds to the ACE 2 receptor expressed on host cells via a spike protein and invades the cells to proliferate. These antibodies, casirivimab and imdevimab, target the spike protein and recognize noncompetitive epitopes. As shown on the right side of the slide, the binding of the 2 antibodies to the spike protein is expected to block the entry of the virus into cells and prevent the development of mutant strains that have acquired resistance. Trials are currently underway by Regeneron for the treatment of inpatients and outpatients and for the prevention of infection for family members who have come to close contact with the infected. This slide shows the results of the interim analysis of the Phase I/II study in patients with mild disease of COVID-19. In this study, we are using an adaptive design to seamlessly proceed with Phase I, II, III, and we are evaluating safety, change in viral load, relief of clinical symptoms and a number of emergency visits during the first 29 days after treatment. Please see the graph. The blue line shows the placebo group. And the red and the green lines show the low and high dose groups, respectively, of the antibody cocktail. The full graphs show the results of analysis in groups with different levels of viral load in blood from low in the left to high in the right. As you can see, the higher the viral load in the blood, the more the antibody cocktail significantly reduced the viral load. This graph shows the time to alleviation of symptoms in the same study. This analysis was done in subjects who were 0 negative before the treatment. The horizontal axis shows the number of days from first dose, and the vertical axis shows the proportion of patients whose symptoms were relieved. Symptom relief was evaluated by scoring symptoms such as feverishness, chills and sore throat, which were reported by patients using a digital tool. Administration of the antibody cocktail shortened the time to symptom at alleviation with the median of 6 days in the low dose group compared to 13 days in the placebo group, a reduction of 7 days. From this study, efficacy is expected in ambulatory patients who were 0 negative using this antibody cocktail. Based on this data, the FDA granted an emergency use authorization for the drug in a high-risk group of outpatients last November. The EMA also announced this month that it will start its own review on a rolling basis. We will work to deliver this antibody cocktail therapy as soon as possible in Japan. Next on faricimab. This therapy has met primary endpoint in pivotal studies for 2 ophthalmology indications. It is the first bispecific antibody in the field of ophthalmology designed to inhibit angiopoietin-2 and vascular endothelial growth factor, which cause retinal diseases. In the Phase III studies of Yosemite and Rhine for diabetic macular edema, both of which were conducted in the same design, the main change in the primary endpoint of best corrected visual acuity score from baseline to 1 year after treatment was non-inferior to that of aflibercept, administered at 8-week intervals. In addition, more than half of patients in the personalized dosing interval group achieved 16-week dosing intervals at 1 year. No new safety concerns have been observed. Here are the results for neovascular age-related macular degeneration. Similarly, we conducted 2 Phase III studies, TENAYA and LUCERNE. The mean change in best corrected visual acuity score at 1 year, the primary endpoint was non-inferior to the aflibercept 8-week interval group. The faricimab arm also achieved dosing at 16 weeks in about half of the treated patients. No new safety concerns have been identified. Details of these studies will be presented at a medical symposium to be held in Miami USA on February 12 to 13. We are planning to file an application for both indications in Japan this year, and this will be our first drug in the ophthalmology field. Now this is our plan for upcoming filings. We plan to submit applications for Tecentriq, for urothelial and ovarian cancer and for ipatasertib for breast and prostate cancers based on study results. Suvenyl and OBP-301 have been rescheduled due to a change in development strategy. Now this is about FoundationOne CDx companion diagnostic. Our CDx is steadily increasing, with 2 new applications approved and 2 more submitted in the fourth quarter. In addition, FoundationOne Liquid CDx, which was filed in March last year, will be discussed at the medical devices and in vitro diagnostic committee on the 12th of this month. My last slide shows the latest update on the project for the application of antibody engineering technology, which was introduced in last year's earnings presentation. As for progress since last year, ENSPRYNG has been launched, STA551, a Switch Antibody, has entered the clinic and 3 more projects have moved from the drug discovery stage to the preclinical stage although the names are not shown. Antibody drug discovery using a proprietary antibody engineering technology is progressing well. And we hope to continue to create innovative new drugs. That's all from me.

[Interpreted] I am Okuda, CEO of Chugai. I'd like to lay out our vision and strategy for further growth in the next 10 years until 2030. To create the new growth strategy for 2030, we first consider the outlook for the changing environment in health care. Key points here are that there are numerous diseases and unmet medical needs yet to be addressed. And pharmaceutical products continue to play an important role in solving health care problems. We analyzed the changing environment from 3 perspectives. First, through the lens of science and technology, modalities are diversifying and evolving to include gene therapy, cell therapy and digital therapeutics. However, the market for pharmaceutical products will not be eroded. Rather, these new modalities are additional and complementary. Our competitive advantage will vary depending on how well we harness digital technology that is advancing day by day. Therefore, digital technology is an additional means for us to add value. On the part of customers, they are embracing digital marketing and digital technology more in the face of pandemic. In the past, we anticipated a risk of a digital giant transforming health care into the information industry. However, health care data integration is so far limited and is unlikely to disrupt the entire industry, at least for the foreseeable future. That is our assumption. Furthermore, from the market perspective at the top, countries around the world are spending huge amounts to deal with COVID-19. This will add more pressure to curb health care costs even further in the future. Therefore, value-based health care, which naturally selects drugs and solutions that have proven truly valuable, will only accelerate. What does this mean for Chugai? We need to further create FIC/BIC candidates with true value and provide proof of value. Our envisioned future is listed under Mission Statement shown on the slide in the right-hand side. We envision to become a top innovator for health care. Then what are our specific goals in order for us to realize the envisioned future in 2030? When created the -- when we created the new strategy, we first identified and defined concrete steps that we aim to achieve. Backcasting from there, we created a new strategy that can take us to the envisioned future. This slide shows the 3 perspectives that compose our vision for 2030. First, with the world's top level drug discovery capability, patients all around the world trust and expect Chugai to be able to deliver new treatments. Second, we can attract passionate talents and players who wish to partner with Chugai to create something new. Third, through continual top level innovation, we'd like to lead in solving social issues and to be considered as a role model by many other businesses around the world. The new strategy pivots on 2 pillars show on the slide. First, to achieve global first-class drug discovery. Second, to establish a futuristic business model. Then we identified 3 key drivers to realize these goals. Namely, RED shift, Dx and open innovation. RED stands for research and early development. It is an umbrella term encompassing drug discovery, early-stage clinical development as well as pharmaceutical early-stage development. We'd like to concentrate our resources on RED, invest more on RED to enhance output. This will allow us to further translational research capability, spanning from drug discovery to proof of concept, where our strength and source of value creation lie. For this, we need to fully utilize digital technology across our entire value chain, including RED, to further drive productivity even more. That leads us to the futuristic business model on the right. Resources saved will be spent on RED to create and develop innovative drugs for patients around the world. This will further enhance and upgrade our value creation engine. In order to enhance efficiency and to ensure our competitive edge in drug discovery, we must carry out digital transformation or Dx. Third key driver is open innovation. With a rapidly advancing drug discovery, science and digital technology, it is increasingly becoming difficult for us to innovate single-handedly. Therefore, we must seek external partnership earnestly. We must buy time through partnership rather than trying to achieve everything in-house. We will create new value by utilizing our own strength. By 2030, we'd like to double R&D output and launch 1 in-house global product a year. That is our vision. Let me introduce the name of the new growth strategy that is TOP I 2030. The letter O depicts the earth, reflecting our commitment to become a top innovator, not just in Japan, but in the entire world. I has a double meaning. I, of course, stands for innovator, but it also means I, myself. The cost value creation is led by people. Each one of the Chugai employee is the protagonist of the organization who aims to realize TOP I 2030. Under TOP I 2030, we will promote the 5 reforms listed here, which I'm going to explain one by one in the subsequent slides. First, under drug discovery. We must first identify a target molecule and what function a new molecule entity should possess. In other words, we conceive a drug discovery idea in parallel with antibodies, midsized molecules and small molecules. Where we excel, we should advance and establish each relevant technology even further. We will also work on the development of new modality. Furthermore, we will create multi-modality system, including ones owned by Roche. To realize a drug discovery idea, we will choose the most appropriate modality from the multiple modalities so that we can generate a clinical development candidate. This is multi-modality drug discovery we envision. We will also incorporate drug discovery ideas and new modalities that we have never come across before through external collaboration. Drug discovery foundation will deploy and further enhance AI and lab automation. Through this, we will drive productivity in drug discovery to double R&D output by 2030. Of the multi-modality strategy, midsized molecule technology holds the key to realize TOP I. Our midsized molecules can reach inside the cell and can be administered orally. It can be conferred a specificity at par with that of an antibody drug. That means they can bind to intracellular tough targets which could not have been targeted by the conventional small molecules and antibody drugs. It is highly likely that midsized molecules, therefore, can contribute to addressing unmet medical needs that existing modalities have failed to address. We aim to start a clinical trial for the first project by the end of this year. In tandem, we'd like to establish manufacturing technology. Furthermore, we would like to expand mid-sized molecule drug discovery projects. Second, development. We'd like to split the phase into 2 stages, early stage and late stage. Early stage is responsible for RED, under which we will begin 2 initiatives. First is improvement of success rate. Based on precise understanding of biological responses and digital technology, modeling and simulation will be created to enhance the success rate of early-stage clinical trials. After the start of clinical trials, line extension, which used to be handled stepwise, will be changed to an application for multiple indications all at once on an early date. By identifying patients' ideal endpoints, we will evaluate and demonstrate the efficacy against the endpoints during the POC stage on an accelerated pace. Meanwhile, the late-stage development poses an opportunity to establish a futuristic business model. We are currently conducting more than 100 clinical trials. By utilizing digital technology, we will drive efficiency in our study operation. In addition, we will upgrade the operation model as well. By 2030, we aim to double our productivity in the late-stage development. Third, pharmaceutical technology. We will aim to achieve 2 different objectives in early-stage development and manufacturing, respectively. Early-stage development is part of RED. We will establish competitive technologies around midsized molecules and highly active substances, cater to our own modalities. Coupling with an enhanced drug discovery output, we will aim to achieve the world's fastest development speed. Meanwhile, with manufacturing, we will pursue cost competitiveness. With our hallmark antibodies, we will save costs by advancing technologies. We will also utilize digital and robotics technology to build smart factories to build cost efficiency. Fourth, value delivery. This involves sales, medical and safety functions, who all deliver value. We will execute 3 major reforms here. First, we will generate evidence conducive to PHC, personalized health care. This includes the development of biomarkers as well as clinical data, which can measure safety and efficacy of a product in each and every patient so that personalized data can be created to help market selection. Second, customer approach. By combining real remote and digital touch points, new customer touch points will be created. We will create customer database and information platform in such a way that optimal set of information is provided to each customer. Third, efficiency. We will shift our resources to ophthalmology and neurology, which are the growth areas. In line with the changing product portfolio, field force will be optimized. Back office function will be outsourced, shift to digital and reduce its workload. Through these reforms, we will realize high level value delivery for patient-centric health care. Fifth, growth platform, which identified 5 items to realize TOP I. First, under people and organization, a new HR system will be implemented. We will also acquire skilled and specialized talent and promote new work styles. Under digital, we will promote the 3 pillars listed here. With environment, we aim high to respond to climate change, for example, achieving net 0 CO2 emission in 2050. With quality, next-generation quality management will be incorporated. Insight business will be explained in the next slide. To summarize, through foundation enhancement and value chain improvement, we will generate more innovation. Next, insight business. Valuable insights can be obtained by analyzing quality data. Such data can then be sold to customers for profit. Major categories are clinical decision support to health care providers and R&D support to buttress pharmaceutical research work. Foundation Medicine and Flatiron business are the typical examples. In this business model, digitalized data are accumulated and analyzed to extract insights. This requires a similar capability with data utilization that is common for all processes in our pharmaceutical business. Therefore, we first operate our pharmaceutical business to examine the technology and then create the capability. Roche is ahead of us and is already running its insight business. Thus, we'd like to harness their know-how and assets as well. We will seek to commercialize the business going forward. We used to create and announce a 3-year midterm business plan. But starting from this year, we stopped the practice. This is because we need to be more agile in reviewing and renewing our strategies and plans. Science, technology and market trends are drastically changing day by day, making a 2-year old plan irrelevant and even outdated in 3 years' time. If a 3-year plan is fixed and resources are rigidly allocated, it then could even narrow our decision-making latitude. It could also stymie sound risk-taking decisions or hamper efforts to seize growth opportunities. For these reasons, the 3-year plan is abolished. Instead, we decided to set midterm milestones for each strategy as the objectives for the immediate future. Doing so will allow us to be more agile in updating the milestones, depending on changing environment and progress status. To achieve both TOP I and midterm milestones, a single year plan will be created and executed. Finally, towards TOP I 2030, strategic policies for 2021 are listed here. First, with key products, Hemlibra, Tecentriq and ENSPRYNG, we will accelerate market penetration. We'd like to successfully launch new products, including risdiplam. Second, continual creation of R&D output, including steady achievement of plans for submissions and approvals, additional indication and enhancement of midsized molecule project. Third, through AI, robotics and digital technology, Dx will be accelerated across the entire value chain. Fourth, business foundation will be enhanced, including HR management. To encapsulate, our environment is changing more drastically than ever before. Amid the fluid background, we envisioned to be a top innovator in 2030. The new strategy, TOP I, will start our journey to realize the vision. TOP I is underpinned by 5 reforms to be executed listed here. Company-wide 2-year plan is abolished to be more agile in reviewing and renewing strategies and plans. 4 strategic policies described here will be promoted throughout this fiscal year. We are committed to enhance corporate value. That concludes my presentation. Thank you very much.

[Interpreted] Yamaguchi from Citi Global Markets Japan. There are 2 questions. The first question is about the diagram that you put a lot of efforts into on Page 24, royalty 2 for Hemlibra. As you showed in this diagram, royalty 2 will be finished by the end of this fiscal year if sales by Roche will go as expected. And from next year onward, there will be exports at ordinary supply price only. In other words, between this fiscal year and next fiscal year, because of the absence of royalty 2 income next year, technically, the total royalty income will go down. This is what we learned this time. Am I correct?

[Interpreted] Itagaki speaking. Thank you for your question. Your understanding is correct. As you said, there are 2 different types of royalty incomes of which royalty 2 payment will not occur next year according to the current estimate, and therefore, the royalty income itself is expected to decrease.

[Interpreted] My second question is about TOP I, which you explained to us. What was presented sounded like something we can expect a lot from. However, when it comes to the question of what you want to achieve quantitatively or how -- what you want to achieve will be reflected in terms of the financial results. What is visible from the outside, such as KPIs, it seems that you are not going to provide them explicitly, though you did refer to them from time to time. Could that be your story, at least from the external point of view?

[Interpreted] Okuda speaking. Thank you for your question. We have been showing KPIs 3 years ahead so far. But in a dramatically changing business environment, we figured that instead of showing KPIs themselves, we should share progress in our R&D pipeline accurately, disclose business plans for a single fiscal year, including numerical goals, and execute the plans steadily, which we believe will be more appropriate way of information disclosure to our stakeholders. In the past, we did provide as a KPI an approximate growth rate of core EPS 3 years ahead. But we decided that it will be better to disclose the R&D pipeline information in a timely and appropriate manner as we have done.

[Interpreted] Just for clarification, there are references to midterm milestones here and there in the new plan. I would assume that single year plans and R&D pipeline information will be formulated every year. But as for midterm milestones, although you may have your internal plan for the number of R&D projects per year, which may be perhaps to launch 1 global product every year, at least externally, you're not coming forward with anything specific, including something quantitative going forward.

[Interpreted] Midterm milestones are set for each function such as drug discovery, development, production and sales and marketing. To give you examples, those include strengthening of clinical trial result prediction platform and reform and efficiency enhancement of clinical operational models, we just set between 2023 and 2025, depending on the project. Or for example, mid-sized molecule project is one of the areas that we focus our efforts on and establishment of manufacturing processes for midsized molecules is one of the midterm milestones.

[Interpreted] I'm Hashiguchi from Daiwa Securities. My first question is about how you plan Actemra's export. I think Roche has given you some forecast for the beginning of this period. How do you reflect the inventory situation at Roche and Roche's customers to come up with this figure? Also, I don't think there is much of a forecast for the latter part of the period. But what adjustments are you considering for the impact of the COVID-19 pandemic and availability of other treatments and vaccines? Please tell us how you think the forecast may change depending on future development?

[Interpreted] This is Itagaki. First of all, the assumption of Actemra's export to Roche is that we should work closely with Roche to maintain a stable supply. Having said that, in the past, Roche's import volume was usually calculated based on future demand. This is called the rolling forecast and firm orders were placed for several months. But the environment is changing very rapidly, and therefore, we are thinking of making major adjustments to shipments while making sure not to close any out of stock situation. To put it simply, there are still too many uncertainties such as what will happen to the COVID-19 pandemic, the development of vaccines and the therapeutic agents and the fact that the results of the Roche Group's REMDACTA study have not yet come out. Also we have come up with these figures based on our understanding that the increase in demand due to the COVID-19 pandemic will be limited. Of course, we will continue to monitor the situation. And if it becomes clear that we have missed our forecast, we will continue to consider whether or not to issue new guidance for Actemra, depending on the situation.

[Interpreted] In that case, is it correct to say that you think COVID-19 can be the reason for an upward revision, but not for downward revision?

[Interpreted] At the moment, the forecast is JPY 83 billion. And from the perspective of demand, mainly for RA, we do not think that we will miss the target at this time.

[Interpreted] My second question is about your approach to shareholder returns or more broadly, cash allocation. I think you have explained this in the previous midterm plan. And I'd like to know if there is any change in your approach to shareholder return in the new growth strategy? And how you plan to discuss this issue with stakeholders going forward?

[Interpreted] First of all, we have no plans to change our dividend policy in terms of cash allocation or the return of profits. In other words, we are considering an average dividend payout ratio of 45% as a target. As for what we'll do with the remaining funds, of course, we will invest in things that will lead to future growth such as manufacturing facilities and research laboratories, which are already in our plans. But we will still need cash for digitalization and the major shift in drug discovery. Therefore, we would like to actively use the cash for future investments.

[Interpreted] What do you think about the method of disclosure in the future? I think you said earlier that you would like to respond flexibly to changes in the situation without being bound by the existing policy. But I wanted to ask you how we should think about the possibility of returning profits to shareholders such as dividends, and in some cases, share buybacks?

[Interpreted] We will not change our dividend policy. So I'd like to decide the amount of dividends based on an average dividend payout ratio of 45%.

[Interpreted] I understand. So you don't anticipate any major changes in this area until around 2030?

[Interpreted] Yes, that is not our assumption.

[Interpreted] This is Sakai from Crédit Suisse. I have not had time to take a close look at Roche's presentation materials. So let me ask you instead. I have 2 questions. In Actemra's forecast for the current fiscal year, overseas sales are expected to decline by JPY 49.1 billion. Have you factored in special demand from COVID-19 and the risk of biosimilars? I think it might be better to ask Roche, but let me know, if you will.

[Interpreted] We have estimated the demand for COVID-19 to be quite limited and low in our JPY 83 billion forecast for this year. In fact, although it may sound like a special demand, Actemra has not been approved for COVID-19. So the actual results for clinical use and others last year were JPY 45.5 billion higher than the previous year and JPY 43.2 billion higher than the forecast at the beginning of the fiscal year. This year's JPY 83 billion is based on that, so the COVID-19 portion is really limited, depending on the future trends. And if exports to Roche fluctuate significantly, we will consider whether or not to issue guidance as necessary.

[Interpreted] Since you have not factored in the risk of biosimilars and since you expect domestic sales to remain flat, is it correct to say that these figures are your estimates for normal times, so to speak?

[Interpreted] Yes, that is correct. Of course, we do not disclose when the patent for Actemra will expire, but at this point, we are basing our forecast on the import rolling forecast based on Roche's demand readings. So we are not considering the impact of biosimilars too much at this point.

[Interpreted] I understand. One more quick question regarding faricimab. I understand that it is being introduced by Roche as an opt-in but I don't think that you will be partnering with anyone on marketing of the product through sublicensing. Is that correct? Is it correct to say that this will be marketed independently by your company? Please let me confirm if it is correct to incorporate this into the model.

[Interpreted] This is Kosaka. Chugai will market faricimab, and we do not intend to sublicense it. Thank you very much.

[Interpreted] This is [ Oskar ] from Jiji Press. On Actemra, additional indication for COVID-19 in Japan was scheduled by the end of last year, but that didn't happen. What is the time line to file for approval? Could you please comment?

[Interpreted] This is Yamaguchi speaking. The timing for the COVID related filing will be determined based on the results for the ongoing Roche study on REMDACTA. In Japan, J-COVACTA study is underway. The results will be announced shortly.

[Interpreted] When is the likely timeline for you to have the results for both of the studies? Is it difficult to indicate when it is likely to be?

[Interpreted] It is contingent on the study results on REMDACTA conducted by Roche, therefore, the timeline is up to the REMDACTA study. We expect to see the results somewhere between the end of Q1 and Q2. We will judge an appropriate timing for filing in Japan based on the study results.

[Interpreted] This is Muraoka from Morgan Stanley. My first question pertains to Regeneron's antibody cocktail therapy for COVID-19. Is this reflected on your forecast for this fiscal year? If not, and if launched by the end of the year, would that be an upside?

[Interpreted] It is not included in the forecast.

[Interpreted] I understand. Am I right in thinking it would be difficult for you to indicate a timeline for this?

[Interpreted] Yes.

[Interpreted] This is Yamaguchi speaking. I'd like to answer the question. We are currently consulting the authority to determine the timing of submission. Nothing has been decided yet at this stage.

[Interpreted] My second and last question. With a new strategy toward 2030, this may be an obvious question to ask, but I'd like to take this opportunity to ask this question of Mr. Okuda, the new CEO. For Chugai to remain innovative, how important is it for the organization to remain an independent listed entity in your view?

[Interpreted] Thank you for your question. I consider it very important for Chugai to remain listed.

[Interpreted] This is Miura from Jefferies Securities. I'd like to raise 2 questions. First, with the REMDACTA study for Actemra, maybe I should ask this to Roche. But the target subject number has been 450, but is now increased to 650. This may have contributed to the delayed announcement of the study results. Could you let us know why you increased the patient number?

[Interpreted] This is Yamaguchi speaking. I'd like to respond. As you rightly pointed out, we increased the number of cases to be studied. The decision was made by Roche. Therefore, we apologize for not being able to disclose any further detail on the matter.

[Interpreted] I understand. My second question involves faricimab, which is also a Roche product. In DME and nAMD, noninferiority was shown compared with EYLEA, and primary endpoint was met. However, no superiority compared with EYLEA was found in the study. Based on the study results, how do you assess its impact on your competitive advantage?

[Interpreted] This is Yamaguchi speaking. Let me answer the question. More than 50% of the patients received the dosing at 16-week interval. This is the first biologic product to achieve that. Thus, it can confirm a huge competitive advantage for us. We'd like to launch this product going forward.

[Interpreted] This is [ Namada ] from [ Mossley Mix ]. In Mr. Okuda's presentation on TOP I, under value delivery reform, you did not mention sophistication of distribution policies. The same item appeared in the strategic policies for 2021 as well. How do you consider advancing your distribution policies?

[Interpreted] This is Okuda speaking. Thank you for raising the question. Distribution policies will be sophisticated in an aim to improve distribution cost efficiency.

[Interpreted] Across the industry, we see an emerging trend among pharmaceutical companies to review their distribution policies. Does Chugai plan to review its wholesale transaction and start at new transactions?

[Interpreted] Pricing must be maintained for us to keep innovating. That is our imperative. So we'd like to focus on that in an effort to reform our distribution advancement.

[Interpreted] Allow me to ask one final question. In relation to customer engagement, Chugai is characterized by its cross-functional alignment between sales, safety and medical functions. However, it will be difficult for any company to fully realize that. Nevertheless, this is stated in the midterm business plan. Could you please comment on how you would like to further drive such cross-functional corporation going forward?

[Interpreted] This is Hidaka, Head of Sales speaking. Thank you for your question. We've been focusing on building a cross-functional team across the 3 divisions to build on our strength. With customers at its core, each division consisting of experts should play an important role, utilizing their own expertise. To do so, we need to work together and share information among ourselves. We'd like to further the efforts. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]