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

So good morning, everyone. Welcome to the JPMorgan Healthcare Conference. I'm Seiji Wakao, Japan pharma analyst at JPMorgan. It's my great pleasure to introduce Sunao Manabe, Representative Director, President and CEO of Daiichi Sankyo. And from Q&A session, Dr. Ken Takeshita, the Global Head of Research and Development, we join. With that, I'm going to hand it over to Manabe-san.

Okay. Thank you, Wakao-san. Hello colleagues. Thank you for your strong interest in Daiichi Sankyo. Also, I really appreciate the JPMorgan for providing this good opportunity. I'm very happy to back here since 2020. Because of COVID-19, I was not able to participate in this conference last year, also in 2021. Taking this opportunity, I'd like to share the current status of Daiichi Sankyo. Okay, let's go to Slide #3. And today, I will start with a very brief overview of Daiichi Sankyo, then I will present on ENHERTU, our proprietary how-to direct antibody drug conjugate, ADC, -- then I will take you through our R&D strategy. And lastly, I will cover our shareholder returns. Go to Page 4. Our Daiichi Sankyo one of the top pharmaceutical companies headquartered in Japan, Tokyo. We project revenue of JPY 1.25 trillion for the current fiscal year ending March 31, 2023. The forecast for core operating profit, which excludes our temporary income and expenses from operating income is JPY 120 billion. Japan currently represents 44% of our total revenue. North America and Europe account for 26% and 14% at present, respectively. Our revenue growth outside job Japan, especially in the U.S. is driven by very strong performance of our most important product, the HER2 directed ADC ENHERTU, which I will present in detail later. 35 shows our proprietary DXd technology which is utilized for ENHERTU as well as 6 additional ADC's that follow ENHERTU. Our DXd, including ENHERTU for additional indications are currently in clinical stage of development, and I will discuss them later. There are 7 characteristics that makes our DXd-ADCs unique and competitive. And as shown on the right side of the slide, our payload, linker and direct to antibody which are all unique and very special. Phase 6 show the goal and strategic pillars for our 5-year business plan that started in fiscal year 2021 and run through fiscal year 2025. To achieve our 2025 goal of becoming a global pharma innovator with competitive advantage in oncology and also to shift target further growth, we have set 4 strategic pillars in our plan. The first strategic pillar is to maximize our 3 ADCs. These all DXd-ADCs and ENHERTU TROP2 directed ADC that we call Dato-DXd and the HER3 directed ADC that we call HER3-DXd. We are maximizing ENHERTU and Dato-DXd through our strategic alliance with AstraZeneca, and we will plan to maximize HER3-DXd without a partner. The second strategic pillar is to enhance the profitability of our current business and products in order to secure a source of investment for sustainable growth. The third strategic pillar is to identify and build pillars for further future growth of Daiichi Sankyo. Our target is to identify and advance new growth drivers that follow the 3ADCs. And in the long term, to select post DXd-ADC modalities that will drive sustainable growth. The fourth strategic Pillar is to create shared value with our stakeholders. Of course, our important stakeholders are shareholders and investors, and we will well balance investment for growth and shareholder returns. Next, I will present ENHERTU the most important product to achieve our 5-year business plan goals. Please go to Page 8. This slide shows the sales growth for ENHERTU on a quarterly basis since the first launch in the U.S. in January 2020. A strong market penetration in each regions as well as additional new indications have led to steady growth in sales and the global sales for fiscal year 2022 is expected to triple from the previous year to approximately JPY 200 billion. ENHERTU is now starting to really drive our business on a global basis. Page 9 shows the 3 major achievements for ENHERTU in 2022, the first achievement was transformation of the HER2-positive breast cancer treatment. Based on DESTINY-Breast03 study, which showed unparalleled improvement of progression-free survival as compared to the previous standard of care T-DM1. ENHERTU was approved for HER2-positive breast cancer, second-line treatment in May 2022 in the U.S. ENHERTU has already established a leadership position. HER2-positive breast cancer in the second line setting and beyond in the U.S., and we are currently expanding this indication to other countries and the regions. And secondly, ENHERTU has pioneered HER2 low breast cancer as a new clinically meaningful patient segment. HER2 low is how to expression major as IHC 1+ or IHC 2+ and ISH negative. Based on business of study, which showed significant potential to transform treatment for patients with HER2 low breast cancer. We obtained the first-ever approval for the HER2-directed medicine for HER2 low breast cancer, previously treated with chemotherapy in the U.S. and started promotion in August 2022. HER2 low breast cancer awards previously not targetable with HER2 targeted drug and HER2 low accounts for approximately half of the breast cases, which is more than double the number of HER2-positive patients with breast cancer. The uptake of all the HER2 low breast cancer indication in the U.S. has been very rapid, and we are accelerating expansion of this indication in 2 other countries and region as well. Thirdly, our strategy to expand leadership across other HER2 targetable tumors is also on track. In August 2022, ENHERTU was approved in the U.S. for HER2 mutant non-small cell lung cancer NSCLC based on DESTINY-Lung01 and 02 studies. NSCLC is the third cancer type approved by the FDA, following breast and gastric. In order to deliver ENHERTU to as many patients as possible, we will continue to aim for obtaining approval in real lines of therapy with these 3 cancer types. At the same time, we will strive to expand indication to other cancer types and to maximize the product value for ENHERTU. Next, I will take you through our R&D strategy. Now please go to Page 11. This slide shows our high-level R&D strategy, 3 and Alpha strategy. 3 means the 3ADCs, alpha growth drivers following 3 ADCs, including project that we are positioning as rising staff and new pillars. Please go to Page 12. This shows our R&D strategy for oncology area to expand and extend to deliver our technology to more patients. Currently, we have 7 DXd ADCs that we are developing in breast cancer, lung cancer and many other solid tumors. Basically here what we want to do. We want to transform the treatment of breast and lung cancer with our DXd-ADCs and to expand into earlier patient segments. In addition, we want to expand into many other cancer types, which with high unmet medical needs. In terms of extending the use of ENHERTU, Dato-DXd and HER3-DXd, we have other ADCs coming later on, including next-generation ADCs. This will contribute to the expansion of our DXd-ADC program for many years to come. And we are also unique are quite interested in evaluating our existing pipeline assets to see how they may be combined with other -- with our existing ADC, DXd-ADCs. They will also give us an opportunity to extend our presence in breast cancer, lung cancer, and other solid tumors. Page 13 is a summary of how we think about the entire picture of breast cancer. As for breast cancer, we have 2 major products, ENHERTU illustrated in orange. And Dato-DXd illustrated in blue. You can see that most patient population in breast cancer are covered by the existing clinical trials. We are currently discussing earlier stage clinical trials to address the broader spectrum of breast cancer. In addition, Post ENHERTU space is an important strategic patient population, which Dato-DXd, HER3-DXd and next-generation ADC can be potential treatment options. Page 14 shows how we think about lung cancer. In terms of SCLC with actionable genomic alterations at DXd and ENHERTU are expected to be the new treatment options for EGFR and HER2 mutated lung cancer. NSCLC with actionable genomic alternations HER3-DXd and HER3 ENHERTU expected to be the new treatment options for EGFR and HER2-mutated lung cancer. As for NSCLC without actionable genetic mutation, Dato-DXd the potential new treatment options for a wide range of treatment, including fastline which is covered by 2 studies TROPION-Lung07 and 08. And furthermore, we are seeking an opportunity to run new studies for a area stage of lung cancer, stage 1 through stage 3. Last but not least, we would like to address the small lung cell cancer with DS-7300, which is currently under clinical development for second-line treatment. Page 15 through the combination to expand that the DXd's opportunity, checkpoint inhibitor combinations are starting to yield very interesting in the data. In addition, we have ongoing clinical trials with targeted therapies listed here. And internal assets, which clinical trials are planned to start shortly. Now our stakeholder returns. Please go to Page 17. In enhancing corporate value, investment for growth is always our high priority. With a strongly expanding pipeline, we are aggressive around R&D investment as well as capital investment for sustainable growth. Another high priority is, of course, to enhance shareholder returns and maximizing shareholder value. We will aggressively strive for sustainability through well-balanced investment for growth and shareholder returns. Go to Page 18. Targeted to maximize shareholder value by improving capital efficiency and by enhancing shareholder returns or take account for profit growth driven by 3 ADCs. We have adapted dividend on equity, DOE as a KPI for our shareholder returns and set the target to 8% or more in fiscal year 2025. Following the shareholder return strategy, we have decided to increase the annual dividend for the current fiscal year, in line with profit growth driven by strong sales of ENHERTU, which is expected to exceed our initial forecast. Finally, I will present the target for our 5-year plan. Please go to Page 20. Our target is to achieve consolidated revenue of JPY 1.6 trillion and oncology revenue of JPY 600 billion or more in fiscal year 2025. In terms of profitability, alternative to increase core operating profit ratio before R&D expense to 40%. And to achieve ROE of 16% or more in fiscal year 2025. We are now very confident about achieving this target as value maximization strategies for ENHERTU is on track or even better than we had originally expected. I go to Page 21. This is the positioning of our 5-year business plan for sustainable growth. During the course of this plan, that started in fiscal year 2021 and goes through fiscal year 2025, we will achieve over 2025 goal, global pharma innovator with a competitive advantage in oncology. And we will shift to further growth towards our 2030 vision, which is to be an innovative global health care company, contributing to the sustainable development of society. This is all for me. Thank you very much for your time and attention today. Again, Takeshita, our Head for R&D, and I will happy to receive accept your question. Thank you.

I will start from Q&A session. Okay. So first question from me. So I'd like to know 2023 outlook for your company. So what do you think 2023 will be like for your company? So in 2022 paper trial result for DESTINY-Breast04 was announced and the result of the [indiscernible] build which also significantly boosted the surprise. There are a number of ADC related catalyst this year as well. What kind of do you think 2023 will be for your company?

Thank you, Wakao-san. As you pointed out, last year, we had excellent results in DESTINY-Breast03, there are 4 and others. Also, performance ENHERTU was more than expected. Another 1 is the very favorable outcome out of the dispute between Daiichi Sankyo and. So last year was a great year for us. And this year, we will have top line results from several pivotal studies of Dato-DXd, HER3-DXd and others. Also, we can see more the performance of ENHERTU, thus from my perspective, this year can strengthen our confidence that we can achieve our numerical goal in 2025, just I presented. This is high level of my perspective and Takeshita Could you add some.

Yes, of course, I don't have much to add. As you know, we have a lot of clinical trials going. And in the fiscal year '23, which for us starts in April. We do expect to see more data readouts, first of all, in certain diseases in addition to breast cancer. And we also, of course, expect to be receiving regulatory approvals for various regulatory submissions, which are ongoing at the moment. So I think we continue to expect more to come for this company in terms of new data and new approvals.

Okay. I will take a question from floor. Any questions?

If any please.

First of all, congratulations ENHERTU, it's a fantastic drug. My main question is what will drive your longer-term growth? Is it the technology basis that you continue to invest in ADCs or is it a broader oncology positioning?

Already, we have demonstrated our ADC technology is excellent. So from the short-term perspective, we would like to develop our ADC, which we have right now 7 ADC we have DXd-ADCs . Also, we'd like to expand to other modalities also. Details will be explained by our R&D expert.

So I want to first explain to you that all of the current ADCs are based on what we call the DXd-ADC. This is the payload DXd. But of course, there are 3 major components to an ADC, the binder, the linker and the payload. And by varying, for example, the payload or the linker, you can create new drugs with different properties. And so yes, we are pursuing the DXd-ADC platform, to as many as we can because it's a very proven technology. But in addition, we have many ideas about different linkers with different properties, and also different payloads. Those are really very exciting, really based on the original DXd technology, but also quite different. So we're very hopeful for that.

All right. Any question? Okay.

So I have please. So apparently Daiichi Sankyo has shown tremendous ability to innovate and for example, ADC technologies. My question is, what is your strategy in the business development partnership and a strategy down the road in your next 5-year plan?

Your question is the strategy about DXd development ADC?

External innovation.

Innovation. Well, Internally, we have developed this technology. But in addition to our inside capability, outside capability is also very important for us. Thus, we are now seeking outside innovation, how to incorporate into ours. Ken Takeshita any comments on that.

Yes. So in terms of external innovations, we -- I think you saw in 1 slide, well, how we think about our R&D strategy to what is I think that next time -- is expand in various different directions, expand and extend. Particularly in this "extend" category, we can see that possibly certain drug combinations with a second drug could enhance the activity of a DXd-ADC. These combination partners, we may have in health or they may be external depending on what kind of mechanism of action we are seeking. So in that context, external collaboration is certainly a possibility. And of course, there are many, many other ideas for ADCs that are out there that are being studied by other companies, and those are very interesting for us, too. And I also want to make sure to mention that we are not just an ADC company. We have many, many different interests beyond ADCs. And so we're always interested in external opportunities, that's a good fit for us.

Okay. Any questions? Okay. So I have 1 question. In terms of combination therapy with DXd-ADCs. So given the mechanism of ADC, I think it's possible to combine with various drugs. What do you see at this point? So are there any drugs with more compatible?

Okay. So at the moment, it's more of a scientific discussion as opposed to the clinical because we are still waiting for various clinical data to be reported. But we can already see that these combinations are listed here with a checkpoint inhibitors, especially appear to be very interesting. You can see, for example, from the BEGONIA study that durvalumab combination appears to be very active, much more so than each of the individual agents alone. And the same thing with pembrolizumab combinations that we can see in lung cancer. So there, it's not just a scientifically interesting combination, but we have clinical data to support the idea. And then in terms of other combinations, these could be just based on combining 2 clinically active agents, which is what many investigators do. But if we just think deeply about the mechanism of how DXd-ADCs work. This is basically a DNA damage engagement. So combinations that enhance DNA damaging for example, innovation of DNA repair. That might be a rational combination for us to be pursuing. And so other -- or other agents that alter the genome besides just DNA repair. There are many combinations that are being studied scientifically now research laboratories, and they are bearing fruit actually. And so we're -- those combinations not just in research, but in the clinical setting in the near future.

Okay. Any questions? Okay. So I have a question about HER2 low. First is about market penetration for ENHERTU and HER2 setting. So what is your response of market penetration in ENHERTU and HER2 low setting in the U.S. market? And second 1 is, what do you think of the potential ENHERTU Hormone-positive HER2 low, where the combination with CDK4/6 inhibitors and endocrine therapy is their standard therapy.

Okay. Firstly, I will respond to your question, maybe forward by Takeshita. As I presented here today, the HER2 low indications approval was done just 11 days after our submission. Also, as you know, the Breast04, demonstrating excellent efficacy and safety. And we get [indiscernible] vision at ASCO, as you may know. Thus, the start of performance is well accepted, but well accepted by physicians and patients both. However, now market research is now underway. So I'm shortly, we can provide you the market research of ENHERTU penetration accurately in the future. To the second question, Hormone-positive breast cancer is well treated from the hormone treatment. The server -- option is the patients who received hormonal therapy first followed by our ADCs. And second option is a combination with our ADC and hormone treatment. Any additional.

Yes. So with the hormone receptor positive breast cancer patients, as you know, many of those patients respond quite well to endocrine therapy. So it's really up to us to understand, which patients need that additional help with a drug like DXd-ADC. As you know, even in the hormone receptor positive patient population, it's a very heterogeneous mix of patients. At the patient level. And also, it's in the tumor bed, there's a range of positivity. So I think we really need to try to understand the biology of those patients, and that will be very helpful to understand who among those patients that you mentioned can benefit from the DXd-ADC. So we are -- we have started to do some clinical trials in that area, as you know. First, starting with the patients who have relapsed after endocrine therapy. And that seems to be a good area actually for us based on the preliminary data that those patients appear to be quite responsive to the DXd-ADC. And so we'll pursue this line of investigation.

Okay. Understood. Any questions? So I direct to now Dato-DXd. So regarding the potential of Dato-DXd if successful in lung cancer, Dato-DXd is expected to generate significant revenues, what do you think of the potential of Dato-DXd? Do you think it has the same potential as a ENHERTU in terms of revenue?

Thank you. As I presented today, for Dato-DXd the lung cancer is the most important indication. And firstly, I would like to obtain a second line indication of Dato-DXd and followed by first-line indication. If we obtain first-line indication, the potential would be as same as ENHERTU. Do you think.

No, I don't have anything to add about the revenue question.

So any other questions? Okay. Next about in-house or partnering. So if the HER3 study or HER3-DXd is successful, which is expected by March, HER3-DXd with the first ADC to be marketed independently by the company. So in the ADC area, what is the long-term vision in terms of the ratio of partnering or in-house. Please tell us about this point, it will affect the operating profit margin in long term.

Okay. As you know, now, we started collaboration with AstraZeneca for the first and second ADCs. That so far, our R&D budget can cover to develop following ADCs. However, in the future, if we have excellent result from following ADCs, much more than expected. And if we see our R&D budget cannot cover to -- all over the ADCs. We may seek another opportunity for collaboration and partnership. But currently, we are not actively looking for partnering. This is enough to your question.

Yes. Okay. Any questions from floor.

[indiscernible]

So let me answer the question. So we already presented some preliminary data on the data in the patient population that we're studying. And as you know, the number is about 7 months from a progression-free survival standpoint. And we think that's a very good number, compared to what has been reported in the literature for the controller, including the more recently reported data on the control arm -- from the ESMO meeting recently. And so our level of confidence is still quite high.

[indiscernible]

Okay. Well, so they're both ADC. They have a somewhat different safety profile between the 2, I don't know, we have never done a side-by-side, the head-to-head comparison of the 2 drugs. So it's hard to know whether, which 1 is better or not. I think ultimately, it's going to be what the actual data looks like in similar patient populations and physicians really can decide. And I think from a patient standpoint, it's really good to have options. So it's really a win for patients to have out these 2 choices. But I think it's a bit premature to say, which is better or not. I think both are good. And hopefully, ours is a little bit better for it, but we'll have to see what the data looks like.

Thank you. So any questions? Okay. So I just know about the mid-term plan. So you are leaving your midterm plan, I believe that you will revise up the sale of ENHERTU. Is there any -- are there revisions that you are considering. For example, is there any perspective of increasing R&D expenses, R&D expense during the current midterm plan were about JPY 1.5 trillion.

And so far, our term plan is going very well as planned. On the other hand, as what -- pointed out, our performance is better than expected. So our corporate division is now underway, if we can revise our plan or not, not yet determined, but in the future, in the near future, if we have a good result, I would like to share with you.

Okay. So last -- could you conclude with about 2 catalyst until March. So about confidence of the success to catalyst HERTHENA and Dato-DXd for TROPION-Lung.

Confidence is very high for both of. Yes, of course.

So thank you for your time. So thank you for joining us. I will wrap up this session. Thank you.