Daiichi Sankyo Company, Limited (4568) Earnings Call Transcript & Summary

Manabe speaking. Thank you very much for joining this meeting despite a very short notice. Based on the presentation slides, I'd like to explain our strategic collaboration with AstraZeneca for DS-1062 we announced in a press release at 3:00 p.m. on July 27 Japan Time. We will entertain questions from the audience after my presentation. Page 3 shows the agenda for today. Please turn to Page 4. First of all, let me talk about the current business environment at Daiichi Sankyo. In our 5-year midterm business plan from 2016, we announced our 2025 Vision to become a Global Pharma Innovator with competitive advantage in oncology. We, as a company, have been united to work hard to achieve this vision. In this process, we made 3 important decisions in 2019. First, in March 2019, we decided to start strategic collaboration with AstraZeneca for DS-8201. Secondly, in October 2019, we decided to make additional capital expenditure in R&D investments for ADCs. Thirdly, we decided to update our R&D strategy to 3 and Alpha in order to allocate resources by focusing on the 3 ADCs, namely DS-8201, DS-1062 and U3-1402. Through these decisions, we believe that we are making steady progress to ensure the achievement of our 2025 Vision. Please turn to Page 5. The value of our pipeline is increasing. We launched our flagship asset in ENHERTU, DS-8201, for the indication of breast cancer in the United States and Japan in 2020. And the product has been penetrating in the market steadily since then. For gastric cancer, we filed a submission in Japan, which is now under review. Also, for lung cancer and CRC, Phase II study results are encouraging and development is progressing steadily. It was granted SAKIGAKE review and breakthrough therapy designation, et cetera. So we believe we are receiving a certain level of high evaluation by the regulatory authorities as well. Also, regarding DS-1062, Phase I study in lung cancer is making steady progress. We also started development for triple-negative breast cancer from early July. Furthermore, due to the expression of TROP2 in many different tumor types, we are having high expectations for wide-ranging rollout into the future. As you can see, the potential of DS-1062 has been up substantially following DS-8201. The most important top priority for us is to leverage the strengths of the 2 projects and proceed with the development in order to maximize the value of both DS-8201 and DS-1062. Page 6 shows changes in Daiichi Sankyo's expertise and organizational strength post DS-8201 strategic collaboration in Japan and U.S., Europe and in commercial and development areas. In development in Japan, the enhancement of our oncology pipeline has led to the enhancement of our expertise in oncology, and we have built good teamwork with AstraZeneca. In commercial, in Japan, with the launch of VANFLYTA and ENHERTU, our commercial strength in oncology has been reinforced. In development in U.S., Europe, the enhancement of our oncology pipeline enabled the acquisition of strong talent in oncology, and we have built good teamwork with AstraZeneca. In commercial, in the United States, with the launch of TURALIO and ENHERTU, commercial organization for oncology has become operational. Based on these factors, we sought in-house development and commercialization of DS-1062 on our own could also be an option for us. Please turn to Page 8. We do think that in-house development and commercialization of DS-1062 could be one of the options, but later, there have been changes in the environment internally and externally. First, with regards to changes in the internal environment, the potential of Alpha project has been increasing substantially. And in addition to the progress of U3-1402, one of the 3 ADCs Phase I studies for DS-7300 and DS-6157, have been progressing smoothly. Also for DS-6000 and DS-3939, preparation is making steady progress towards the early start of clinical studies. In areas other than oncology, in nucleic acid, which we are aiming to turn into technology platform following DXd-ADC, our pipeline has been enriched, focusing on DMD drugs. Also, we have several gene therapies, although they are still in discovery phase. Towards the initiation of clinical studies, we have started preparation for in-house manufacturing of investigational products based on technology we licensed in from Ultragenyx. In this way, we can expect an increase in demand for resources into the future also for the DXd-ADCs and other portfolio to follow. So it's important to be able to allocate resources rapidly with flexibility where necessary. Page 9 shows changes in the external environment. As you know, TROP2 ADC was launched in the United States in April this year. The TROP2 targeting ADC concept was validated, which is also a positive news for us. But with the recent approval of this product, we expect that the speed of life cycle management for the competitive product in new tumor types is going to accelerate. The priority of our ADC technology has been confirmed through DS-8201 by now. We also believe that DS-1062 is our best-in-class TROP2 ADC, but the acceleration of ongoing and planned clinical trials and the expansion of tumor types is extremely critical. Please take a look at Page 11. At the beginning, our plan was to develop and commercialize DS-1062 on our own, but eventually, we have opted for the strategic collaboration for DS-1062. This is to make sure Daiichi Sankyo appropriately responds to changes in both internal and external environment. Page 12, please. This explains the background as to why we chose AstraZeneca. Financial terms, which reflect high valuation of DS-1062, were an important consideration, but I will explain this later. One of the reasons for selecting AstraZeneca was because it is the leading company in lung cancer. They have accumulated abundant experience and high expertise through development and commercialization of IRESSA, TAGRISSO and IMFINZI. We believe working with AstraZeneca will give us an opportunity to accelerate and expand development for DS-1062. As a second reason, we chose AstraZeneca to maximize DS-8201 and DS-1062, while making sure to reduce any potential conflict in the interest of DS-8201. With a different partner from DS-8201, it would have been difficult to optimize priorities between the 2 products, for instance, in terms of development of lung cancer indication or allocation of studied drugs. Also, we would have needed a firewall setup between the 2 products, which would have hindered knowledge sharing between the 2 products and reduced efficiency in activities. Contrary to such scenario, with the same partner, we can optimize our resource usage throughout the life cycles of both products. We also believe development and commercialization of DS-1062 to be more efficiently done. We also have long-standing respectful relationship with AstraZeneca based on trust as we have several alliances in place with the company, including, of course, DS-8201. We thought we could count on AstraZeneca with a sense of assurance even for a very important product such as DS-1062. From Page 14, I would like to give you an overview of our strategic collaboration for DS-1062. We have signed an agreement on global joint development and commercialization of DS-1062 with AstraZeneca. The contract is valid until the end of the commercial life of the product. We will apply the same governance structure as DS-8201 to design and implement strategies for development and commercialization based on joint discussions and mutual consent. Page 15, please. We will have joint development of mono and combination therapies of DS-1062 against TROP2-expressing cancer types, including lung cancer and breast cancer. We will share development costs equally. We can conduct studies on combination therapies with products of other companies. We will jointly promote the product in areas outside Japan and the share profits equally. Here in Japan, Daiichi Sankyo alone will market the product and pay royalties to AstraZeneca. Daiichi Sankyo will book sales in Japan, the U.S. Europe and some other areas, while AstraZeneca will book sales in China and elsewhere. And Daiichi Sankyo will manufacture DS-1062. Page 16, please. These are the financial terms under the contract. Total payments under the agreement have the potential to reach up to $6 billion or JPY 660 billion, with a dollar to yen conversion JPY 110. This is the breakdown. AstraZeneca will pay an upfront payment of $1 billion. We will also receive up to $1 billion for achievement of future development milestones and maximum $4 billion for sales-related milestones. Apart from sales-related milestone payments, the upfront payment and development milestone payments will be booked as revenue over a multiple number of years, given the product's exclusivity period. Page 17, please. Finally, at Daiichi Sankyo, we will continue to be united under our 2025 Vision to be a Global Pharma Innovator with competitive advantage in oncology and that Daiichi Sankyo will maximize its pipeline and corporate value through diverse alliances. I would now like to take questions from the audience. I'm here with Sai, our CFO; and Takasaki, Head of R&D, to take questions. Thank you.

Hello. Wakao from Mitsubishi UFJ Morgan Stanley Securities. First of all, I'd like to know the timing of collaboration for DS-1062 in more detail. You mentioned that you have decided to collaborate due to changes in the internal and external environment. To begin with, you already started collaboration activities even before the data presentation at ASCO 2020. Can I understand that way? Or because you have been able to confirm good data presented at ASCO 2020 and other encouraging data at the moment, you have decided to form strategic collaboration. Could you please elaborate on the timing in more detail?

Manabe would like to respond. Quite early on, internally, within our company, we have been discussing a variety of possibilities. We also responded to a similar question before. Looking at the data we presented at ASCO, we thought that we can discuss the possibilities of collaboration using our data. We will not have additional data until January next year. Based on the currently available data we presented at ASCO, we thought we can fully discuss collaboration. That's how we have proceeded.

Understood. The data presented at ASCO 2020 was data up to March this year. 4 months have passed since March, and I believe AstraZeneca may have also seen some follow-up data as well. If they have seen such data because of the collaboration and you have been able to obtain encouraging results continuously, in line with the progress of the studies since ASCO 2020, that resulted in this collaboration. Is my understanding correct? It's not the case that the data since March is no longer encouraging, and I think the data is trending more in a positive direction. Could you please comment on this point?

Manabe would like to respond. Regarding DS-8201, we are sharing our data because of the alliance we already formed. But for DS-1062, the data we presented at ASCO is open data, so we were proceeding with the discussions based on that data.

Understood. Also, I'd like to ask you about the total milestone payments and the potential of DS-1062. Payments under this agreement will be up to $6 billion in total. This is a big collaboration, equivalent to $6.8 billion for DS-8201. On the other hand, if you look at the breakdown, you can find big sales-related milestones for DS-1062. Should I assume that sales potential is going to be bigger for DS-8201 compared to DS-1062?

There can be a variety of elements under sales-related milestones, but both companies are expecting big sales potential because of $6 billion in total, which is a big amount.

Could you please comment on its potential?

If you look at the amount, the total is almost the same for both products. We believe that expectations are similar. On the other hand, the timing in development is slightly different. For ENHERTU, it was right before the filing. DS-1062 is still in Phase I. So I think there is some difference due to earlier phase. Also, regarding the regulatory milestones, we are aiming to develop ENHERTU in various tumor types already at the time of our collaboration with AstraZeneca. So we set regulatory milestones for each tumor type, respectively. This time, it's going to be mainly for lung cancer. So we'd like to focus on lung cancer first to generate revenues and proceed with the development. Therefore, regulatory milestones are smaller compared to DS-8201.

Well, understood. Lastly, can I confirm your development and collaboration strategy for U3-1402? Based on your explanation, you have the next ADCs and new candidates under development, and your pipeline is being enriched. That's why it's better to collaborate. By collaborating with AstraZeneca, there are many things you can share. I have a good understanding that AstraZeneca is the best partner for you. Also, for U3-1402, there can be collaboration at a relatively early timing, and AstraZeneca can possibly be your best collaboration partner on your first choice. Can I understand this way?

Manabe speaking. Of course, we'd like to maximize all the 3 ADCs. By partnering for the 2 projects, DS-8201 and DS-1062, we believe we can enhance Daiichi Sankyo's capabilities substantially. As I mentioned before, by partnering, we can allocate the feed development costs to other projects. Personally, in my view, there can be many ways to maximize the product value, but in-house development can also be an important option for us to consider.

Understood. Then you will proceed with the development of U3-1402, including the possibility of in-house development as well without any change in your plan, correct?

Yes.

Hashiguchi from Daiwa Securities. My first question. Mr. Manabe is saying that in-house development on your own is possible, but this time, you have decided to choose collaboration due to changes in the environment, as you said in your presentation. Among the internal changes, the potential of DXd-ADC and Alpha pipeline is being enhanced substantially, could you please elaborate on this point? For example, for DS-7300, how much progress in Phase I studies has led to the wording on the slide, enrollment underway, reaching 10 different tumor types to date? What has made you choose collaboration for DS-1062? Around when can you share with us the data behind this decision?

Manabe would like respond, then Takasaki may make additional comments if necessary. First of all, data is becoming available one after another on our ADCs, including DS-8201. We are calling this ADC platform and the probability of success for each is getting higher and higher. Over time, we're expecting good data for DS-8201 as well as for the second and the third ADCs. The fourth ADC and beyond I mentioned before are also entering the clinical stage. The probability of success for DXd-ADC has risen substantially. That's one factor. And also, regarding Alpha project, as I mentioned today, although they are in early stages, but we have a variety of modalities such as gene therapy and nucleic acid. Currently, Daiichi Sankyo's ADCs are in a very good situation at the moment. But we'd like to aim for the future like 10 years later and beyond and allocate our budget to early project as well. Such judgment is part of the changes in our internal environment. When the data is going to be presented? Takasaki san, do you have some information? Due to early stages, I think it can be difficult to explain. Takasaki would like to add.

Regarding the data presentation for DS-7300, we don't have any particular plan about the timing of data presentation for the time being. Recent studies are making steady progress. We like to present data to you at an appropriate timing in the future. That's all from me. That's all from us.

Just one more question. You mentioned that the expansion of tumor types is important in this collaboration. Regarding tumor types you're going to cover for the future, you may develop a plan from now on. But you're going to start a pivotal study in NSCLC without mutation by the end of this year and initiate I/O combo studies by the end of this year, according to the explanation from before. Could you please comment on the potential impact on these plans you have been explaining from before?

As of now, we believe there is going to be no major impact there. It's going to be in line with the schedule.

Yamaguchi from Citigroup. I may not have understood all the details, but the basic structure for collaboration is quite similar between ENHERTU and DS-1062. The structure is almost the same where you're collaborating with AstraZeneca. Is my understanding correct?

Yes. Using the structure for ENHERTU as a basis, we started negotiations. So your understanding is correct.

Understood. The launch of a competitive TROP2 ADC, sacituzumab govitecan, served as a trigger, as I heard. On the other hand, sacituzumab is not successful at all in lung cancer. I'm certain that you're going to be ahead in lung cancer, according to my understanding. You have decided to collaborate with a strong partner in order to further enhance your superiority in lung cancer. Are you going to target tumor types other than lung cancer into the future? In collaboration for ENHERTU, you would proceed by including areas in development which you may not be able to fully cover just by yourself, such as HER2 low expression, which was very easy to understand. But this time, I think you touched on this briefly, but what was your understanding to reach this decision?

Manabe speaking. First of all, TROP2 can be a druggable target. POC was established and validated, which is good news and information for us. On the other hand, there is another product in the lead. But our primary target is lung cancer, as you said. We discussed what can be a good winning strategy, and collaboration came out of that. Personally, as I look at the variety of data, I think ours can be a best-in-class TROP2 ADC.

So you're partnering in order to make sure of that?

Yes. You're right.

One more question, about resource allocation as part of the changes in the internal environment. As was mentioned in an earlier question, it's difficult to say individually as data is not becoming available externally. After developing the 3 ADC strategy, you have more ADCs and good data one after another. By collaborating, not just for the first ADC but also for the second ADC, you can allocate resources to the other projects to follow, including Alpha. Is this a big picture? Correct?

Yes. You're right.

Okay. Among these projects, DS-7300, anti-B7-H3 ADC can be the next ADC with potential of the target, and its value as an asset is likely to increase. That's how you judged? Is it better to understand that the value as a whole has been enhanced instead of a higher value for any particular project?

There can be a variety of ways to think about this. For example, the target population is small for DS-6157. DS-7300 has potential, and it has interesting mechanism of action. So it's included in the slide. I think it's better to say that we have high expectations overall as it's still difficult to judge as of now.

This is Muraoka speaking from Morgan Stanley. My first question is about your deepening relationship with AstraZeneca. This may have gone too far, if you want to take it negatively. My question is, is there any provision in the contract? What restricts acquisition of Daiichi Sankyo shares by AstraZeneca?

I cannot give you details of the contract, but this is a question people often ask. Just generally speaking, Daiichi Sankyo does not resort to any mechanism against hostile takeover because we believe as the management of the company in maximizing shareholders' value and corporate value. So we will continue to focus on realizing our 2025 Vision at any rate.

Are you saying that as long as you can maximize the shareholders' value and the value of this attractive molecule, you can even accept potential replacement of the management at Daiichi Sankyo, if there is an attractive proposition?

I would like to conduct attractive management of the company. That is my goal.

I see. I have another question about the timing of this deal. I fully understand your explanation of shifts in internal and external environment. But if you think about the pure financials, you could have waited until next January to have attractive data to come out to increase the value of DS-1062 further to get even better financial terms. Don't you agree? Trodelvy is just for triple-native breast cancer. At this initial stage, it should not scare you. Please tell me why you didn't wait until January.

I may have told you already back in the end of April during the performance announcement. But our fixed mid-term business plan starts from fiscal 2021, and we wanted to have DS-1062 deal ready for the start. That way, we have clarity of whether we've developed DS-1062 on our own or with a partner. We have better understanding of our budget allocation as to how much we can spend elsewhere. Therefore, we wanted to have this deal before January, if possible, and we pursued discussions with AstraZeneca along this line of thinking.

My last question is about $4 billion sales-related milestone. When can you receive all of this potential amount? Is it when the global sales of the product reaches $5 billion or very close to $10 billion? Any hint?

We only have very rough assumption at this point in time. So I would rather refrain from making any comment based on such assumption.

As the lung cancer product, do you expect this to be 1 of the top 3 product globally?

Well, the higher the better in ranking.

Sakai speaking from Crédit Suisse Securities. First of all, congratulations for your deal with AstraZeneca. Now I'm looking at Page 16. The only amount confirmed is the upfront payment. I'm sorry for asking you this question ahead of your first quarter announcement, but I need this information in my model. Just like in the case of ENHERTU, this amount, JPY 110 billion, this is to be paid in 3 installments: At the signing, after 12 months and after 24 months, each time a little over JPY 30 billion, I think. Is this amount, once it's received, going to be booked evenly over some years? I don't know for how many years. But is my understanding correct?

This is Sai speaking. Yes, you're correct. The booking of the amount is going to be distributed over some years. This fiscal year, just for your information, we assume JPY 110 for a dollar. So for this single year, we expect the revenue amount to be booked around JPY 6 billion.

Are you saying the JPY 6 billion to be booked during the fiscal year ending in March 2021?

Well, it's not for full year. We have 8 months remaining, and that makes the amount to be around JPY 4 billion. Right. So for a full year, it's going to be around JPY 6 billion, and this is going to be equally distributed over some years.

And another quick question on the same page, about development milestone. Mr. Manabe said sales-related milestones are based on rough assumption. But I believe you have pretty good idea about the development milestone, as you should know which cancer types you will develop the product for to come to this amount of JPY 110 billion. So how many cancer indications do you have in mind? Can you share any information about this?

Well, I can't give you any specific number. But if you compare this with ENHERTU and its development stage, you could more or less guess how many indications we have in mind. Well, I say, so that means not too many.

You will continue to advance ENHERTU. Is this correct?

Yes.

This is Mitsui from the editorial team of the Nikkei Biotech. You spoke about objectives of this strategic collaboration. One such objective is to accelerate development of DS-1062 as a competitor product has been launched in the U.S. Does this collaboration affect any development schedule, for instance, of non-small cell lung cancer, which is advanced? If there is any change of schedule, please tell me. And if so, when do you anticipate start of Phase III or -- Phase II or Phase III or approval of lung cancer indication?

As I answered previously, what's been planned already will proceed as planned, more or less. Other than that, we still need to discuss with AstraZeneca as to development of this compound. Once any further plan or resource allocation is fixed, we will let you know.

Recently, you have started a study for triple-negative breast cancer. But for other cancer types you may extend to in the future, you expect to accelerate clinical studies for such new cancer indications that you may plan in the future. Is that what you're saying?

Yes. That is correct.

This is Ueda speaking from Goldman Sachs Securities. I only have one question. You said you expect from this collaboration to optimize the portfolio and accelerate lung cancer development. On the other hand, on July 22, you made an announcement of a research collaboration with a French cancer center. Much of your activities for DS-1062 may still be in basic research, including exploration of biomarkers. Do you think this collaboration with AstraZeneca will contribute to such basic science?

Takasaki will answer this question.

You're talking about Gustave Roussy cancer center. This research center is highly esteemed cancer center in France. It is also well known worldwide. We hope to elucidate mode of action and biomarkers of DS-1062 and U3-1402 with this French cancer center from both nonclinical and clinical aspects. These 2 are the initial joint research targets. This is to the extent I can share with you for now.

So your collaboration with AstraZeneca, you do not picked much from it in terms of basic science. Rather, you expect the collaboration to contribute to development and commercialization of DS-1062. Am I correct?

We would like to discuss with AstraZeneca whether to expand such joint research framework in the future.

This is Mizuno from Tokio Marine Asset Management speaking. It may sound a tricky or rather nuanced question. But you opted for this collaboration to maximize the value. Do you mean to maximize the value of just DS-1062? You mentioned drug discovery of nucleic acid drugs or gene therapies as internal factors which prompted this collaboration. Do you want to allocate more resources to accelerate those as modalities? Is the collaboration decision based on such overall judgment? If your interest is purely to maximize the value of DS-1062, it may have been better to commercialize the product on your own as you do not have to share profits. What do you think?

Manabe speaking. We believe the value of DS-1062 is bigger through the collaboration than when we are alone. Plus, any freed up expenses can be reallocated to Alpha assets, as already explained. But our primary consideration was whether we can maximize the value of DS-1062 through this collaboration.

Understood. Another question is about the 6 ADC, with target undisclosed. If possible, can you tell me whether this is for very limited indications? Or does it have potential to expand just like TROP2 or DS-7300? Is there anything you can disclose?

Takasaki speaking. I'm sorry, but we are not ready to disclose anything about that at this point. We will disclose any information in due course. Thank you very much.