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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
This is Kawaguchi speaking. I would like to give you the results summary and financial review for the third quarter of fiscal year 2018. Please open Page 5. Here is the summary of our consolidated results. The top line revenue has dropped JPY 7.3 billion compared to Q3 in the previous fiscal year. The main reason is the deconsolidation of Kyowa Medex, which used to be our consolidated subsidiary for our diagnostic drug business at the beginning of this fiscal year with revenue of around JPY 9 billion. On the other hand, the core OP has increased by JPY 1.3 billion year-on-year, where the main driver was the biosimilar business, which is taken through Fujifilm Kyowa Kirin Biologics.
The equity and earnings of affiliates were improved significantly year-on-year by more than JPY 3 billion. The bottom line profit for the quarter also improved dramatically by JPY 18 billion. This is mainly attributable to gain on sale of Kyowa Medex shares as mentioned as well as the large increase in other income. In this regard, there is no significant change from Q2. The full year forecast has been revised and details are shown on the next page, 6. We have revised the full year forecast of this fiscal year, and the reasons are threefolds as described on the right. JPY 3 billion from the gains on the equity method. In the other income, we booked gains of JPY 3.4 billion from the reversal of impairment losses. Also, we had gains on sale of fixed assets in the amount of JPY 3.7 billion. These gains were already booked by Q3. However, they were not factored in the initial guidance. Thus, they are the main reasons for the revision in our forecast. Regarding revenue and expenses, there are some ups and downs depending on the item, including technical fees, sales by product and R&D expenses. Nevertheless, we expect to achieve the revised core OP of JPY 54 billion.
Page 7 is the cumulative 9 months profit in Q3, which increased by JPY 18 billion versus the previous fiscal year. The main drivers are the following: first is the gross profit. Although top line revenue was down, we increased gross profit by JPY 1 billion. The improved profitability mainly came from the Bio-Chemicals business.
Regarding SG&A expenses, there are upfront investment for the launch of global strategic products in the Pharmaceuticals business, which is the reason behind the drop in profit. Nevertheless, these are somewhat offset by the improved gain on the equity method. There are 2 reasons for the improved gain on the equity method. First, we signed agreement with Mylan for the license out of EU commercial rights of FKB327 and booked the upfront revenue as well as the milestone revenue upon the launch of the product.
Second, we had a drop in our R&D expenses. So these are the 2 reasons. Others also increased by less than JPY 18 billion due to the 3 reasons in the upper box, namely, gain on sale and valuation of Kyowa Medex shares, gain on reversal of impairment losses and gain on sales of fixed assets in Q3 amounting to approximately JPY 3 billion. As a result, we posted an increase of 9 months profit by approximately JPY 18 billion.
Page 8 shows the breakdown of our results by segment. Both the Pharmaceuticals and Bio-Chemicals businesses have dropped their revenue, while increased their profit, which, in turn, led to the improvement in core OP margin in both segments. Our initial target was to hit 20% margin in Pharmaceuticals and somehow achieved 10% margin in Bio-Chemicals by end of the fiscal year. However, we have already achieved 10% in Q3, which is the result of our efforts paid to improve profitability. Our performance so far is in line with the revised forecast. Now let me explain each business segment in detail. Page 9 is the year-on-year analysis of the revenue in Pharmaceuticals business. Domestic drug was largely impacted by the drug price cut, leading to a drop in revenue year-on-year. While we offset that decline by overseas drug, especially the increase in revenue of Crysvita and technical licensing, including proceeds from the voucher, we were significantly impacted by the deconsolidation of Kyowa Medex as mentioned earlier.
For domestic drug, as you see on the right side, positive factors were the launch of rituximab in January, the release of ORKEDIA in May and the strong sales of the other new products such as G-Lasta. On the other hand, sales of REGPARA dropped due to the presence of a competitive product as well as a switch to our new product ORKEDIA.
Also, the other factors such as the drug price cut and sales decrease of long-listed products gave rather big impact. As for overseas drug, sales of Crysvita, which was launched in April, was JPY 3.6 billion as of the third quarter year-to-date, and that was a big factor for the revenue growth.
Also, Abstral continued to do very well, and sales in Asia continued to grow steadily. As far tech licensing revenue, year-on-year decrease of benralizumab-related revenue, including milestone payment, was more than offset by the proceeds from the sales of burosumab-related Priority Review Voucher. Thus, overall tech licensing revenue grew year-on-year. Page 10 shows year-on-year analysis of Pharmaceuticals business core operating profit. Gross profit remained at the same level with last year as lower sales of domestic drug segment and deconsolidation of Kyowa Medex were covered by the sales growth of overseas drug segment. On the other hand, SG&A increased due to increased selling and launch-readiness expenses for Crysvita and POTELIGEO in U.S. and EU.
By the way, to talk a little bit more about Crysvita-related selling expenses, we are in the profit share scheme agreement with Ultragenyx in North America. 1/2 of SG&A costs spend for selling activities in North America and 1/2 of gross profit generated are the amount that we pay to Ultragenyx and that amount is included in our SG&A. Therefore, if the Crysvita sales grow in North America, a part of SG&A will also grow in proportion. R&D cost decreased by JPY 1.3 billion year-on-year. R&D costs were down temporarily due to the completion of late-stage developments, including POTELIGEO, but are expected to increase again going forward with some new development starting from the fourth quarter. Equity method gain and loss increased by JPY 3.4 billion due to the factors that I mentioned earlier. Page 11 shows revenue of major items. Basically, the trend stayed the same with up to the second quarter except for one point. Switch from REGPARA to ORKEDIA has started, so the level of REGPARA revenue decline was somewhat bigger than before. ORKEDIA revenue was JPY 1.1 billion as of the third quarter year-to-date. Also Crysvita, the third line from the bottom, was very strong with the sales of JPY 3.6 billion. Page 12 shows year-on-year revenue analysis of Bio-Chemicals. Revenue decreased by JPY 2.3 billion year-on-year. Here again, the trend stayed the same with up to the second quarter. Overseas revenue dropped due to the increased competition in certain products, and domestic revenue also decreased due to streamlining of some product lineups. As I mentioned earlier, we are working on profitability improvement of Bio-Chemicals business. Since we are not unnecessarily following the price competition, revenue decrease was because of product mix improvement. Mail order business continued to be in growth trend and especially, Arginine EX continued to grow. Other segment revenue was down, mainly due to the transfer of the plant growth regulator business, and thus, overall Bio-Chemicals revenue was down by JPY 2.3 billion. If you look at core operating profit on Page 13, you can see that gross profit was up by JPY 1.2 billion and improved year-on-year despite of the lower revenue. There were 2 factors for this. First, manufacturing cost decreased due to an increased production shift to overseas, especially to Thailand. Thailand plant operation was still unstable during the ramp-up last year, but now has stabilized and started generating cost-reduction benefit of production transfer to overseas as planned.
The second factor was product mix improvement, which I mentioned on the previous revenue slide, and that has clearly resulted in improvement in profitability. An increase in SG&A was due to increased marketing costs for the expansion of mail order business, where we are seeing a strong sales growth.
This is Satoh speaking. Let me now explain the progress of R&D in the Pharmaceuticals business. Please open Page 15. I would like to first use the next 2 slides to briefly touch on the key development events as of end of September 2018. The box shaded in dark color are the events, which took place during Q3. In Japan, brodalumab is sold under the brand name, LUMICEF. And there has been a steady progress in its development in each Asian countries, i.e., we were able to file in Korea in July and obtain approval in Thailand in August.
On Page 16, mogamulizumab, which is sold in Japan under the brand name, POTELIGEO, is where we saw a significant progress in the development in U.S. and Europe for CTCL indication. In August, we successfully obtained approval in U.S. and more details are on the next page. In September, we received positive CHMP opinion in Europe and have reached a point where we are waiting for the final decision from EMA. From Page 17, I would like to show you 2 topics in Q3. First is approval of POTELIGEO in the U.S. On August 8, 2018, we obtained FDA approval for the treatment of adult patients with relapsed or refractory mycosis fungoides, MF, or Sézary syndrome, SS. In the U.S., we have launched the product in October. I would like to briefly explain the mechanism of action of POTELIGEO on Page 18. This is defucosylated, humanized monoclonal antibody using our proprietary POTELLIGENT technology. POTELIGEO specifically binds to CCR4, which is expressed on the surface of leukocyte. With the enhanced antibody-dependent cellular cytotoxicity, or ADCC activity, it effectively depletes the target cells. In some blood cancer, including ATL or CTCL, the cancer cell highly expresses CCR4. Thus, this treatment by antibody works effectively under such mechanism.
Next, Page 19 is the research and development history of POTELIGEO. We have worked on the R&D of this antibody drug based on the collaboration with Academia, launched in domestic market in 2012 and obtained approval in the U.S. in 2018, making a step forward to the global market. By the way, I believe there are more than 60 types of antibody drug approved globally today, while those discovered by pharmaceutical companies with Japanese nationality are 6. Out of the 6 types of antibody drug made by Japanese pharmaceutical companies, 3 types, namely, POTELIGEO, Fasenra and Crysvita were discovered by our company. While there may be concerns around the R&D capabilities of Japanese pharmaceutical companies, we hope to continue our research and development activities through efforts, including collaboration with Academia. Page 20 describes the second topic. We have been examining the potential obligation of POTELIGEO for the treatment of solid tumors and working on the development for combination therapies with nivolumab for solid tumors. However, since the expected efficacy criteria were not achieved, we decided to discontinue the development based on a collaboration agreement with Ono Pharmaceutical. We now believe that it has become clear that using POTELIGEO for solid tumor is quite difficult.
On Page 21, I would like to talk about one progress we made in terms of an important product pipeline for the future. For KHK4083, we started Phase II clinical studies for the treatment of atopic dermatitis from the 22nd of this month. For this product, we have presented the interesting Phase I data in EADV Congress in September. We hope to present the details of this data in the December earnings' brief. That is all for the R&D review.
I am Murata. I would like to report 1 business topic. As some of you may already know, we have acquired an approval for Darbepoetin Alfa syringe in August this year. Our wholly-owned subsidiary, Kyowa Kirin Frontier, called KKF, which was established in January 2017, was working to acquire marketing approval for the authorized version of NESP in Japan and was able to get an approval on August 15 of this year. In our current ongoing midterm plan, one of our strategic pillars is CSV management, which means more specifically to address the social needs of cutting medical expenses. At the same time, we strive to build stronger expertise in the renal disease area. From these 2 aspects, we positioned this KKF initiative as an important project and have been making rigorous effort.
We expect the switch from the existing NESP to happen rather quickly after the launch of this product. So we are currently making preparation to ensure a steady supply. Target launch timing is the third quarter of 2019. Also, we plan on doing co-promotion between KHK and KKF for this product and allocating a mass nationwide by setting sales force in KKF. That's all from my side.
We will now go into the Q&A session.
This is Yamaguchi from Citigroup. My first question is around the revenue of Crysvita. In the earlier presentation, you mentioned that the revenue is growing extremely well, where Q2 was JPY 0.8 billion, Q3 was JPY 2.8 billion and the recent figure has reached JPY 3.6 billion. So could you elaborate on the reasons of such good performance? Also you have partly revised the full year forecast upwards, but is it due to the upward revision of Crysvita revenue?
This is Kawaguchi speaking. When we mentioned that revenue is growing extremely well, it means performance is largely exceeding the original plan of the company. As for your question on whether the upside of Crysvita is factored in the revised forecast, we have not changed the forecast for revenue and expenses line-by-line. Technical licensing is slightly weaker than initially planned, while the full year target of Crysvita is slightly stronger. We believe these multiple factors offset each other, and so we factored the gain on the equity method as an upside compared to the original plan.
Yamaguchi again. Can I clarify that point. Was it only the gain on equity method, which was factored in the upward revision? Or was the gain on reversal factored as well?
This is Kawaguchi. Yes, that is correct. For the bottom line profit below core OP, the revision factors in the gain on reversal and others.
Yamaguchi again. My second question is regarding Biosame or authorized version of NESP. The expected timing of launch seems to be 3 months ahead of the biosimilar launch date. And I believe there are various considerations and decisions made based on CSV or some other factors when thinking of whether you should continue the project or not. What is your thoughts around pricing? If the government's offered price is 50% of branded drug or 70%, will the launch be decided or not?
Murata speaking. I hear there are various opinions on pricing. The domestic drug price is not decided by the pharmaceutical companies, and we have no particular comment. We have to put into consideration various factors, including domestic medical environment, drug price possibilities, various analysis and business potentials. Based on such consideration, we have reached the decision to launch this drug, and that is what we are preparing for today.
Yamaguchi again. You may not give us the answer, but let me ask this question. Hypothetically, if the price is 50% of branded drug, will the drug still generate a healthy profit for your company?
Murata speaking. We cannot give you details, but based on the analysis of business opportunities from various perspective, we came to the decision to launch the drug. We hope you understand this point.
This is Seki from UBS Securities. I have a comment first rather than a question. You explained on Page 23 that launch timing of the authorized version of NESP or Biosame is Q3. I just want to say thank you for the clarification. Next is a question. You explained that revenue of Crysvita is extremely strong. I was given the impression that sooner or later, you will start giving us the revenue breakdown by region, the U.S. and Europe. So what was the number like? Also, this drug was publicly recommended by NICE of U.K. I believe this is a huge development. What is the reaction in the industry?
Kawaguchi speaking. As for the revenue breakdown by region of Crysvita, we also believe it is necessary to disclose the breakdown and are currently consulting our partnered companies for this timing. As of Q3, this breakdown is still not disclosed, but we hope to disclose by end of this fiscal year and are working with our partners to date.
Murata speaking. Regarding NICE, I will refrain from disclosing the detail of our agreement with NICE. But as for the timing of launch, we are expecting next year or at an early timing, if possible, as originally planned. The process is going smoothly as of today.
This is Seki again from UBS. My next question is on KHK6640, Looking at the academic data, which represented the other day, I got the impression that it is difficult to interpret the outcome due to the inconsistent results shown in 2 indicators of cognitive function. Outside of the small patient group, is there any rational explanation you can give us? Also, I saw in some article that this compound is going into Phase II study. Is the development carried in-house in your company?
This is Satoh speaking. Since it is still in Phase I study today, the patient enrollment is small. We hope you understand this point. Regarding Phase II study, we are internally discussing at this moment, and nothing has been decided.
This is Hashiguchi from Daiwa Securities. First question is regarding AG of NESP. I believe you mentioned earlier that switch may take place quite quickly. Do you mean in both markets, the dialysis and retention, these periods will be short? Or is there a difference between these 2 markets with regards to the timing of switch to NESP AG?
Murata speaking. When it comes to the outlook of each market penetration and those details, we will refrain from answering due to strategic reasons. Nevertheless, for this AG, we believe the switch from branded drug will take place quickly than other AG. This is why stable supply is the biggest challenge, and we are carefully preparing for that end.
Hashiguchi again. When you say normal AG, do you mean compared to the low-molecule AG, is that correct?
Murata speaking. Yes, that is the right understanding.
Hashiguchi speaking. You mean that from the perspective of companywide revenue, the switch to AG should happen faster than low-molecule AG, is that right?
Murata speaking. Yes, correct.
Hashiguchi again. My second question is on the status quo of POTELIGEO in the U.S. What is the pricing today? Also, could you give some comments on your thoughts around your revenue forecast?
This is Kawaguchi speaking. Regarding your first question on pricing, the list price is $3,790 per vial. As for the revenue forecast, we are projecting over several tens of billions of yen at the peak.
Hashiguchi again. Do you mean you will achieve over several tens of billions of yen by just the current indication in the U.S.?
Kawaguchi speaking. Yes, that is the right understanding.
This is Nakazawa from SMBC Nikko Securities. I have a question regarding NESP AG on Page 23. Does this mean you are just going to launch this as Kyowa Hakko Kirin Group alone without any partnership with other companies?
Murata speaking. We're not thinking of partnership as of today, but we expect co-promotional events between KHK and KKF.
Nakazawa speaking. Regarding the renal area, there is an expected launch of an oral drug of HIF inhibitor sometime between today and second half of next year. What is your company's reaction and thoughts on this?
Murata speaking. Although we have to watch the trend of oral drug, we believe that the familiar ESA drug is more effective for the dialysis patients. During retention period, they are expected difference in the usage, but we cannot comment on our particular measures.
Nakazawa again. The patients in retention period may find oral drug more user-friendly. So is there a possibility you will consider low-molecule compound going forward?
Murata speaking. We are considering AG from quality and safety reasons during retention period, but we cannot give you details of our future direction.
This is Wakao from MUFJ. First question is on NESP AG. You mentioned that you are preparing for a stable supply, but I could not quite understand that point. Do you mean, if you launch AG, market penetration may be fast and you have to be prepared for high demand in the market? Can you please explain in detail? Also, I believe that NESP AG and NESP are the same in content, but does it mean that you will carry inventory of NESP in case NESP AG overperforms, while NESP underperforms?
Murata speaking. At this moment, we cannot forecast how fast switch will take place from NESP after the launch of NESP AG. Although swift transition is expected, we do not know how fast it will be exactly. That is why we are focusing today on the market trend and projection. Also, this product comes with many different formulations, so we have to make sure there will be no stockouts by each formulation. There may be concerns around inventory level, but we are more keen on the market projection as we struggle to come up with the right projection.
This is Wakao again. My understanding is that the difference between NESP and NESP AG is just the package and the contents are the same. But is this a wrong understanding? And is it not that simple?
Murata speaking. Correct, it's not that simple.
Wakao speaking again. My last question is on Crysvita. This is exceeding your expectation. But is the U.S. and Europe both overperforming?
Kawaguchi speaking. Yes, it is the right understanding that both Europe and the U.S. are overperforming.
This is Tanaka from Mizuho Securities. My first question is about Crysvita. When you booked JPY 0.8 billion sales in the second quarter, Europe still accounted for bigger portion. Is my understanding correct that U.S. is now bigger in the third quarter now that more patients are covered by insurance in U.S.?
This is Kawaguchi. I cannot make any comments on that since we do not disclose U.S.-EU breakdown. We hope to prepare numbers, so that we can disclose them at the end of the fiscal year.
This is Tanaka again. My next question is on KHK4083. I am quite looking forward to the December earnings session. This time, Phase II with 250 patients have started. I recall that Phase I had about 20 patients. From your perspective, do you think that you were able to get promising data with this number of patients?
This is Satoh speaking. Although only with 20 patients, we were able to get various data, including changes in PD markers. We have compared those changes in PD markers that are considered to be critical in the area of atopic dermatitis between KHK4083 and the preceding development drug. And the results seemed quite promising. That is why we have made decision to participate in the Phase II multinational clinical studies for KHK4083.
This is Tanaka again. What are the PD markers?
This is Satoh. That's biomarkers.
I am Muraoka from Morgan Stanley MUFG Securities. As for Crysvita, I recall that Ultragenyx imply that there were some kind of free samples or something like that in a telephone conference after the results were out. Was there an impact of such things like free samples or inventory on JPY 2.8 billion sales in the third quarter? If so, could you tell the impact by region?
This is Kawaguchi speaking. Free stock is always generated during the period before the new patients are covered by insurance in U.S. So that negative impact is always baked in, in each quarter's result.
This is Muraoka again. Only for the U.S. region, correct?
Kawaguchi. Basically, yes.
This is Muraoka again. I have another question on Crysvita. The third quarter sales of JPY 2.8 billion seems very strong. If you could make comments on the status by region going forward, that will be greatly appreciated? And also, could you tell us any positive factors that may help to accelerate the current strong momentum? Or any risk factors that may cause the deceleration going forward that you're aware of?
This is Murata. It is true that we, and perhaps Ultragenyx as well, are very excited about the current progress. First of all, we are able to recruit sufficient number of patients with a certain speed. And also, those patients stay on the drug on a continuous basis. I am sorry that my comment is rather qualitative, but we are very excited about this.
This is Muraoka again. As for patient recruitment, there was a concern about difficulty in finding adult patients, but is it okay to understand that things are going smoothly, including that point?
This is Murata. Everything is going smoothly.
This is Sakai from Crédit Suisse Securities. I have 2 simple questions. One is about KW-6002 NOURIAST. I heard that submission in the U.S. is planned by the end of the year, and the presentation slide also indicates that. Is this time line correct? Secondly, I also heard that you have already obtained an agreement that FDA will start the review 6 months after the submission, is this also correct?
This is Satoh. I do not have any updates other than the information that we have already disclosed.
Sakai again. You mean that we should wait until the end of December?
Yes.
This is Sakai again. I have another question on rituximab BS. I often hear that this product is performing rather well compared with other biosimilar products. What are the reasons behind it? I also hear that you're giving a particular focus in this area. But I assume what's behind is also related with increased bundled payment. Could you explain to us the background as to why this product is doing so well?
This is Kawaguchi. First reason is that lymphoma or blood cancer, for which this product is used, are often treated in price-sensitive DPC hospitals in many cases. And I think that is a big factor. Also, our meticulous sales approach of providing sufficient explanation helps to gain confidence on this drug from doctors. These 2 points are the major factors, I believe.
Sakai again. Is my understanding correct that this product is 100% used for hospitalized patients?
This is Kawaguchi. No, it is used not only for inpatient, but also for outpatient.
Sakai again. Do you know the split between inpatient versus outpatient?
Kawaguchi. I don't have the data.
Sakai again. If it is used for outpatient, it is not included in the bundled payment, correct?
Correct.
So I'm Yamaguchi from Citigroup. My first question. The third quarter 3 months cost ratio was a lot lower than the first quarter, and the second quarter cost ratio, excluding other revenue was 35%. So even compared with the second quarter, the third quarter cost ratio was down. Was there any reason for this?
This is Kawaguchi. We are not necessarily in the thinking that the cost ratio has changed so dramatically.
Yamaguchi again. Okay, that's fine. Then my second question, you said that you will work on Phase II for KHK4083 for atopic dermatitis. I remember that you have worked on Phase II for other autoimmune diseases in the past. Going forward, will you not work on the development for other indications and focus only on atopy?
This is Satoh. In the past, we have worked on ulcerous colitis, atopy, psoriasis and others in parallel. Please understand that we were trying to determine what should be the priority as the first indication among them.
Yamaguchi again. For atopy, are you going to be on your own if you are to do global studies? Or to collaborate with somebody for the development by signing license agreement?
This is Satoh. We started Phase II in the form of multinational studies. First, we hope to obtain robust POC with these studies. What we are going to do beyond that depends on the data and is not decided yet.
This is Ueda from Goldman Sachs. My first question is about NESP AG. You mentioned about securing stable supply of this product, but do you think that you need to produce more volume than existing NESP in order to take share from the competitive product? And do you anticipate any need for additional CapEx for this?
This is Murata. As I said before, we are trying to put various assumptions in the environment where market is very difficult to forecast. But there is nothing specific that I can share with you. What I can say is that we will invest, if necessary, but for the time being, we are managing to get by with the existing capacity.
This is Ueda again. Another question is about equity method gain and loss. I would like to know the future outlook of FKB. In this fiscal year, you booked a lot of upfront revenue, but from the next fiscal year onward, you will start generating the actual revenue, while R&D costs will peak out. That means that we should expect the profitability to turn positive at rather earlier stage or to be negative again without upfront revenue for a while. Could you give us an indication on this point?
This is Murata. FKB327 was already approved and will be launched in EU. Also the subsequent biosimilar to Avastin, FKB238 is still in the development stage, and we don't expect to achieve immediate profitability. We should have better visibility next year.
I am Kohtani from Nomura Securities. I would like to confirm one point about NESP AG. The original NESP is cultured in a tank, and I believe manufactured at Takasaki plant, while NESP AG is manufactured is something you cannot comment on?
This is Murata. Unfortunately, I cannot comment on manufacturing location.
This is Kohtani again. The product name of NESP AG is injection syringe, indicating that it is a glass-made product. That means that those people who are accustomed to using plastic syringe would have to attach a connector. Do you just not feel any resistance to that?
This is Murata. About formulation, I would like to refrain from making comments as of today.
Kohtani again. My second question is on KHK4083. Rigorous studies are underway for ulcerous colitis right now, which will be completed in November. Are you going to talk about the result data on the December 3 event? Also in the answer to the previous question, you said that you look at biomarkers. Do you also look at a biomarker, which indicate some kind of a effect on memory T-cell? Could you answer these 2 questions?
This is Satoh. As for the studies on ulcerous colitis, not all the tests are complete. So we have no plan to talk about them in the December event. We started Phase II for atopy, so we are thinking to talk about what kind of data that we have as a background. About memory T-cell biomarker, this is a bit difficult in a sense, but we are monitoring how EX40 positive T-cells are acting. So it might be possible for us to talk about that point in the future.