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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 Toshiaki Sai. Thank you very much for attending Daiichi Sankyo's financial results presentation despite your busy schedule.
I'd like to provide the following discussion by referring to the document of FY 2020 Q1 financial results announced at 1:00 p.m. today.
Please go to Slide 2. For the content of today's presentation, we will be speaking the topics in the following order: actions against the infectious disease of COVID-19; DS-106 (sic) [ DS-1062 ] strategic collaboration; consolidated financial results from Q1 and FY 2020; FY 2020 forecast and business update. After these discussions, Wataru Takasaki, who is the Head of R&D division, will provide updates on our R&D. We will take your questions in the end.
Please go to Slide 3. This slide shows updates on our actions against COVID-19. The first part is about vaccine manufacturing and supply. We started discussions with AstraZeneca in June about the supply in Japan of the vaccine being developed by AstraZeneca and Oxford University. We will receive undiluted solution from AstraZeneca. And our subsidiary, Daiichi Sankyo Biotech is planning to carry out the formulation procedures. The next part is about the development of vaccines and therapeutics. We are part of the initiatives to develop genetic vaccines supported by AMED. Since an increase of the antibody titers was confirmed in the animal experiments, we have positioned this vaccine development as the highest-priority project at Daiichi Sankyo, and we are aiming to start the clinical studies around March 2021.
Also in June, we decided to collaborate with the University of Tokyo, RIKEN and Nichi-Iko Pharmaceutical Co., Ltd. in the joint R&D for Nafamostat Inhalation Formulation for the treatment of COVID-19. Daiichi Sankyo plans to carry out formulation research, nonclinical studies and clinical development using the technology gained through the development of Inavir. The formulation research and the nonclinical studies have been initiated already. After consultation with the authority, we plan to proceed to the clinical studies by March 2021.
Next, I'd like to discuss our strategic collaboration for DS-1062. Please look at Slide 5. As it was announced on July 27, we have decided to move to co-development and co-commercialization of DS-1062 anti-Trop-2 ADC with AstraZeneca. I'm going to skip the detailed description of this part today, but the framework of co-development and co-commercialization is the same as that of ENHERTU. With this strategic collaboration, we will accelerate and expand the development and maximize the product value of DS-1062 as well as that we will respond quickly and flexibly to the growing potential of the succeeding DXd-ADCs and increasing demands for resources in the Alpha project. We will maximize the pipeline values and the corporate values of Daiichi Sankyo.
Next, I'd like to go over the consolidated financial results from Q1 and FY 2020. Please look at Slide 7. Here is an overview of the results from Q1 in FY 2020. The consolidated revenue resulted in JPY 236.9 billion, which was a reduction of JPY 12.3 billion or minus 4.9% year-on-year. The cost of sales decreased by JPY 5.7 billion year-on-year. The SG&A expenses increased by JPY 8.6 billion, and the R&D expenses increased by JPY 7.6 billion. As a result, the operating profit was JPY 34.1 billion, which was a reduction by JPY 22.9 billion or minus 40.1% year-on-year. The profit before tax was JPY 41.4 billion, which was a reduction by JPY 15.7 billion year-on-year. The profit attributable to the owners of the company was JPY 31.9 billion, which was a reduction of JPY 11.5 billion or minus 26.5% year-on-year. For the result of the currency rate, $1 was JPY 107.62, which was an appreciation of JPY 2.28 from the previous year and EUR 1 was JPY 118.47, which was an increase of JPY 5.2 (sic) [ JPY 5.02 ] from the previous year. Now for the impact of the spread of the infection by COVID-19, our sales revenue was affected by declines in sales of some products such as American Regent's injectable iron products and Daiichi Sankyo Healthcare's products. In addition, expenses were affected by a partial restriction of sales promotion activities, et cetera. As a result, the impact on the operating income was minor.
Please move to Slide 8. From here, I will explain the factors behind the year-on-year changes. The revenue decreased by JPY 12.3 billion year-on-year, but I will explain the breakdown by major business unit. First of all, in the Japanese business, which includes domestic medicine, vaccines and health care, the sales of the pain treatment drug, Tarlige, which was launched in April last year, expanded. However, in addition to the anti-ulcer drug, NEXIUM; the direct oral anticoagulant, LIXIANA; and the Alzheimer-type dementia treatment agent, Memary, the sales of the vaccine business and the Daiichi Sankyo Healthcare products declined. As a result, the overall sales in Japan decreased by JPY 10.6 billion.
Next, I'd like to explain our overseas business. The figures here exclude the effects of exchange rate fluctuations. Sales of Daiichi Sankyo, Inc. in the United States increased by JPY 4 billion due to the contribution of ENHERTU, an anti-neoplastic agent launched in January of this year. On the other hand, sales of American Regent in the United States decreased by JPY 8.9 billion due to the decrease in sales of the generic injection in addition to Injectafer and Venofer, which are iron deficiency anemia treatments.
Daiichi Sankyo Europe posted an increase of JPY 6.8 billion due to increased sales of LIXIANA and gains on transfer of long-listed products. Recognized sales by the ASCA business, in charge of Asia and Latin America and by the upfront payment upon contract related to the strategic alliance on Trastuzumab Deruxtecan and its development milestone, increased by JPY 200 million, respectively. On the other hand, the negative impact of foreign exchange was JPY 4 billion.
Next, please turn to Page 9. This page shows positive and negative factors for operating profit. Let me explain the operating profit decrease by JPY 22.9 billion by item. As was explained earlier, our revenue declined by JPY 12.3 billion, including JPY 4 billion decrease due to ForEx impact. Next, I would like to explain expense-related factors excluding ForEx impact and special items. Cost of sales decreased JPY 4 billion, along with revenue reduction. SG&A costs were down by JPY 0.7 billion. While sales promotion expenses for ENHERTU increased, costs dropped due to restrictions on sales promotion activities associated with COVID-19. R&D expenditure was up by JPY 8.2 billion. Costs decreased due to an increase in Trastuzumab Deruxtecan cost-sharing with AstraZeneca but expenses rose due to an increase in 3 ADC R&D investments and also due to oncology development structure enhancement. Cost decrease by ForEx impact totaled JPY 2.3 billion. As for special items, there was a negative impact to increase costs by JPY 9.3 billion year-on-year. I will explain the breakdown of special items later. Operating profit decreased by JPY 12 billion, excluding ForEx impact and special items.
Page 10 shows the breakdown of special items. In the first quarter of FY '19, we booked JPY 1.3 billion restructuring costs in supply chain and JPY 10.6 billion gain on sales of tangible fixed assets. So cost decreased by JPY 9.3 billion in total. A lack of special items in the first quarter of FY '20 had impact to increase cost by JPY 9.3 billion compared to the previous fiscal year.
Next, let me explain profit attributable to owners of the company on Page 11. As I mentioned earlier, operating profit decreased by JPY 22.9 billion, including ForEx impact and special items. Financial income and expenses, et cetera, had a positive impact on profit by JPY 7.2 billion year-on-year. We booked JPY 4.7 billion for the recognition of financial income due to a decrease in contingent consideration at the time of quizartinib acquisition and JPY 3.2 billion for the improvement in ForEx gain losses. Income taxes, et cetera, declined by JPY 4.2 billion year-on-year due to a decrease in pretax profit. As a result, profit attributable to owners of the company reached JPY 31.9 billion, down JPY 11.5 billion year-on-year.
Page 12 and 13 show revenue increase or decrease in Japanese yen by major business unit and by major product in Japan. Earlier on Page 8, I explained the situation of each business unit by excluding ForEx impact. But here, ForEx impact is included in the results for your reference later.
Next, I'd like to talk about our FY 2020 forecast. Please turn to Page 15. We decided to keep our forecast announced in April this year without any revision. The impact of COVID-19 is not reflected in our forecast as it's difficult to predict precisely at this point. But we are assuming that there is no significant change in COVID-19 impact on our business compared to the expectations announced in April. Specifically, in case global activity restrictions are to continue until the fourth quarter, the end of the current fiscal year, we expect a negative impact of 2% to 4% or about JPY 20 billion to JPY 40 billion on our sales revenue. At the same time, expenses are expected to be curtailed due to an impact on our business activities. Therefore, we are assuming minor impact on our operating profit. There is some impact from the booking of upfront payment as revenue and from cost decrease due to development cost-sharing associated with the strategic collaboration for DS-1062, but we are assuming that the impact on a full year consolidated results would be limited.
Next, I'd like to give you a business update. Please turn to Page 17. I'm going to talk about ENHERTU's performance in the United States and Japan. ENHERTU is making a strong market penetration. In the first quarter of FY 2020, we had revenue of JPY 5 billion in the United States and JPY 0.2 billion in Japan. In the United States, the total number of unique outlet purchasing ENHERTU in 6 months since launch is about 1,300. And the number of repeat outlets is about 1,000. ENHERTU's demand units shipped to accounts as of July increased more than 50% from the fourth week of March. We have seen an encouraging increase in demand units. The product is performing in line with the plan we developed before the launch amidst some impact from the reduced visits to medical institutions by patients due to COVID-19. Its new patient share is growing steadily, with about 40% share for new patients in HER2-positive breast cancer in the third-line settings.
In Japan, we launched ENHERTU in May 2020, and we have been providing product information with the highest priority on safety. We have been ensuring good safety management by delivering ENHERTU only to medical institutions that meet doctor and facility requirement.
Next, we will give you our R&D update. I'd like to hand over to our R&D division Head, Wataru Takasaki.
This is Wataru Takasaki. I'm going to provide updates on our R&D. Slide 19 shows today's agenda. Slides 20 and 21 illustrate our clinical development plan on DS-8201. Our focus on the study is highlighted with orange frames in today's discussion.
Please look at Slide 22. A new breast cancer study, the DESTINY-Breast05 study is scheduled to begin in the second half of FY 2020. This is a direct comparative study of DS-8201 versus T-DM1 in patients with high-risk recurrence of HER2-positive breast cancer, who have residual invasive disease following neoadjuvant therapy. Since this is a study with endpoints such as an invasive disease-free survival, the study period is expected to be longer than previous studies.
Slide 23 is also an overview of another new study, the DESTINY-Gastric03 study. This study is Phase I and Phase II studies targeting the second line and the first line of HER2-positive gastric cancer. This is a study where we will confirm the efficacy and safety of various combinations such as DS-8201 single agent I/O of AstraZeneca combination with durvalumab and combinations with other chemotherapeutic agents. The best combination and doses of the drugs will be confirmed in the pivotal study performed after this. This study started in June this year. The data of DS-8201 and DS-1062 presented at ASCO is reproduced on Slide 24 and after.
For gastric cancer, the objective response rate, ORR, which is the primary endpoint of this study and the overall survival, OS, which is a secondary endpoint, were compared between the DS-8201-administered group and the investigator-selected drug-administered group. Statistically significant and clinically highly significant improvements were demonstrated with DS-8201. And in Japan, an application for approval was submitted at the end of April. In May, we received a breakthrough therapy designation as well as an orphan drug designation from FDA in the U.S. We are currently discussing with FDA on our future submissions in the U.S.
Page 25 is the data in lung cancer. We presented HER2-mutant NSCLC cohort data. ENHERTU was granted breakthrough therapy designation by FDA in May.
Page 26 shows our data in CRC. We will conduct a pivotal study in the future and aim for early submission.
Page 27, the DS-1062 data. We decided to start strategic collaboration with AstraZeneca. So the 2 companies are going to discuss and create future development plans together.
Page 29 is our news flow. For DS-8201, our submission for breast cancer was validated with accelerated assessment in Europe in June this year. An approval is anticipated by the end of the current fiscal year. As for gastric cancer indication in Japan, we are anticipating approval in the third quarter due to SAKIGAKE designation.
Regarding DS-1062, we are planning to give an update with Phase I study data at WCLC in January 2021. We are planning to start I/O combination studies from the second half of FY 2020. As for U3-1402, we are planning to present our data in lung cancer at ESMO in September and breast cancer data at San Antonio Breast Cancer Symposium in December. We are planning to start Phase II study in a new tumor type CRC in the second half of FY '20. Please look at these slides for other details later at your leisure.
Page 31 and beyond are appendix slides. You can find our milestone and pipeline project. So please check later. That's all from me. From here on, we are going to entertain your questions. Thank you very much. Now we are going to start the Q&A session.
This is Hashiguchi from Daiwa Securities. I have 2 questions. My first question is about the results of ENHERTU in Q1. I think the explanation was that it was going well according to your plan, however, I believe that there are various points that can influence sales. So I would like you to elaborate a little bit about how each of those was compared to your expectation.
Things such as the competition, the impact of COVID-19, the facilities to deliver patient shares in those facilities and the amount used for patient, in a variety of factors, if you see any vertical deviations from your expectation, can you share that with us?
Yes. What you just asked demands very detailed explanation. But what we have been tracking is the facilities to deliver. Even from that perspective, I can say that the delivery has been as expected or it has been faster than expected. Even under the influence of COVID-19, the demand has not been significantly affected. So we see that to be going very well.
Am I correct to say that COVID-19 has little impact on the number of patients or on which drug to choose?
Yes. After all, I think that the importance of the disease, the importance of treatment and the severity of disease can be divided into categories to some extent, and that they may be divided into categories. Especially in the field of anticancer drugs, treatment is prioritized. So we do not think that it will have any substantial effect.
My second question is about -- actually, I apologize for the same question I asked on July 27, but it's about DS-1062 on Slide 29. I thought there was almost the same slide used during the conference call after ASCO in June. At that time, it was stated that DS-1062 pivotal Phase II study is scheduled to start in the second half of this fiscal year, but that statement has disappeared this time. You mentioned earlier that you will consider your future development plans with AstraZeneca based on the alliance with them. Does that mean that you have decided to conduct a combination study with I/O, but the pivotal study has gone back to the drawing board?
Yes. This is Takasaki. I'll respond to this question. As for the way to conduct the pivotal study, I think there are ways such as Phase II or Phase III, but we still want to consider this point based on the data. As I said before, we'd like to regard the next study as pivotal.
In other words, the description on your slide has been changed since the conference call at ASCO, but your plan itself has not been changed. Do I understand it correctly?
Yes. Our approximate schedule on conducting the next pivotal study based on the data has not been changed.
I'm Wakao from Mitsubishi UFJ Morgan Stanley Securities. I have a few questions about DS-8201 ENHERTU. First, I -- if I remember correctly, there was a HER2-low cohort in the Gastric01 study. For that HER2-low cohort, I thought there has not been any disclosure of the data yet. If you're planning to disclose the data sometime in the future, when would that be? Also, for the first-line study, starting in the near future, I guess it's Gastric03, are you planning to enroll any HER2-low patients? Please respond to this point.
This is Takasaki. I'll respond to this question. I assume your question is that the HER2-low data is included, and when and at what timing will that data be presented? We'd like to present the data at ESMO, but I believe we can present them at a conference in the nearest future.
At ESMO? Okay, I understand. And excuse me, will HER2 low be included in this Gastric03?
Well, HER2 low is not included in Gastric03.
Oh, it's not included. Understood. Then for HER2 low, I shouldn't expect too much about any specific development in the future, correct?
It is currently under discussion.
It is currently under discussion? Okay. I understand. Please tell me one more thing. As part of our COVID-19 infectious disease initiatives, you are contracted by AstraZeneca for manufacturing. My understanding was that you are not earning that much in terms of any profit. However, the volume will be as many as 100 million units. And if you formulate in JPY 100 per unit, you still can make a reasonable amount of money. Are you going to pretty much cover the cost by yourself? Are you doing it in a way that you will cover the cost portion, and you won't even take in profit?
We haven't decided anything about the profit yet. We will make an announcement as soon as the decision is made.
Does that mean that you might be able to have a profit that exceeds the costs?
That profit is also under discussion now. There is nothing I can disclose to you today.
I'm Ueda from Goldman Sachs. The first thing I'd like to ask you is about the impact brought by COVID-19. You mentioned earlier that it has hardly had any impact on your anticancer drugs. Nevertheless, when you look back the past 3 months or the last quarter, is there anything that has become apparent by disease area or by region, for example? Can you share your thoughts on this?
Also in the corporate plan this time, you wrote that there might be a negative impact of 2% to 4% on sales revenue if the current situation continues. It is interpreted as that 3% to 5% in the beginning of the fiscal year ended up in 3 quarters of it at the end of the first quarter. Please tell me if there is no change to this view, in particular.
In terms of where COVID-19 has impacted on the revenue, it is not all that clear, and it is only an assumption. But after all, it is ARI's iron products. The iron injectable preparation has received the largest impact. This is an iron preparation for anemia, and it is rather for a second-line treatment. And we suspect that some patients have switched from injection to an oral drug, which caused a large revenue decreases, especially with Injectafer and Venofer. However, we have been watching the prescription trends on a weekly and a monthly basis, and it's been somewhat on a recovery trend lately.
Unless we look at a little further, we won't be able to see the impact on our future revenues. In any case, that was the largest impact in the first quarter. What is also obvious is a significant impact brought by the disappearance of the inbound sales of health care. That's all.
So am I correct to say that there are not really any changes to the view on the corporate plan?
No changes. After the end of the first quarter, the reduction in the first quarter is within this range of 2% to 4%. You might wonder what the differences are between 3% to 5% and 2% to 4%. It indicates the view that the degree of impact may be slightly smaller than what we originally expected.
Understood. And my second question is about DS-1062. When you presented on the alliance the other day, you mentioned the development in breast cancer. On the other hand, while TROP2 is expressed in many different types of cancer, I don't think the one for breast cancer was included in the graph. What is your view on the ratio, a percentage of the TROP2 expression in breast cancer?
This is Takasaki speaking. Excuse me, I believe you are referring to Page 5 of the slides from July 27. The expression level in case of breast cancer is not described there, but I can assure you that the expression level is high.
Sakai from Crédit Suisse Securities. I have 2 brief questions. Regarding your TROP2 ADC DS-1062, AstraZeneca seems to be commenting that Phase II will be skipped to implement Phase III study, or it could be Phase II/III study. It's also mentioning bladder cancer as another promising tumor type. Is there any link between TROP2 and bladder cancer? I don't have enough knowledge. So I'm not sure. These are my first 2 questions.
Takasaki, would you like to respond?
Regarding your second question about bladder cancer, in the document we presented on July 27, TROP2 expression is high in bladder cancer. So we are considering it as a possible target indication for us. Concerning your first question, as we responded before, we believe that we can implement a pivotal study as the next step based on the results of the ongoing Phase I study according to our plan.
In terms of the time line, we are making steady progress in line with the schedule when the Phase I study results will become available. When we develop a detailed plan through our discussions with AstraZeneca, we'd like to report to you as well.
Understood. May I ask you one more question? About the supply volume of your seasonal flu vaccine, you disclosed a joint venture company with GSK and established a new structure by now. I believe you will be required to ensure stable supply of seasonal flu vaccine this year. What's the status of your preparation? And how much capacity are you keeping with your company internally?
I don't think we are disclosing our capacity information. For the supply of flu vaccines, we'd like to create manufacturing work shifts as soon as possible so that we can ensure supply and shipment. Since last year, we have been moving our production schedule forward. Despite elements of concern due to COVID-19, we'd like to ensure production this fiscal year. For your information, the actual supply volume in FY '19 was 5.21 million units, and the volume in FY '20 is going to be a little more than that, about 6 million units, according to our current plan. So we'd like to manufacture and supply as soon as possible. That's what we are considering as a high-priority item.
Muraoka from Morgan Stanley Securities. ENHERTU is performing well with great results of $46 million. I have a little bit of a concern due TUKYSA from Seattle Genetics, which was approved in April this year for the second-line settings. It may be too early to comment, but what about the upstream impact of its use before ENHERTU? The product is also selling well with $16 million according to the information I saw this morning. Is their presence becoming something like a nuisance to you? Or should I assume that there are many things you can do on your own for the time being? Could you please share your thought and comment on the competitive environment?
If I may jump to conclusion, we'd like to monitor the situation and the trend from now on. Given the fact that their product has the indication only in the second-line settings, we think we should just continue to work on our current plan steadily and expand our product going forward as well. So there is no major impact on that approach. By the way, ENHERTU label in the United States does not prohibit the use in the second-line settings.
Is it actually being used in the second-line settings as well?
It's not described on the product label, but we hear that it's being used in the second-line settings in reality. But we have not captured how much indeed, maybe just a little.
Okay. Let me ask you another question. Regarding the impact of your collaboration for DS-1062 on your FY '20 profit and loss statement, I want to ask you whether the 50-50 R&D cost-sharing is going to start already from August or later.
Sai would like to respond.
We will start 50-50 cost-sharing, which we think would affect the P&L statement, but we are not disclosing the details as of now.
Understood. Lastly, you're also developing vaccine against new coronavirus, which is going to be an RNA vaccine. I'd like to hear your view on the licensure criteria in Japan. According to other companies, there may be a need for data demonstrating an increase in neutralizing antibody titers or there may be a need for larger studies. This licensure criteria in Japan is not so clear and it's evolving, it seems. For the coronavirus vaccine, you're developing, what kind of data will you need to submit for licensure in the first stage or the second stage? What kind of data will be necessary?
Takasaki would like to respond.
We begin with a Phase I study to confirm an increase in antibody titers in healthy volunteers. As for messenger RNA vaccine, based on LNP, we'd like to start the study by March 2021. Later, it will be followed by Phase II with a larger sample size and then Phase III. At what stage, do we file a submission? We need to discuss with the regulatory authorities. But the regulatory authorities are also saying that they want vaccines originating from Japan. So we'd like to work with them in a collaborative fashion and file a submission for licensure at an appropriate timing.
In other words, there can possibly be approval in Japan even if the vaccine does not meet criteria, like the guidance from FDA, setting the 50% efficacy as was showed, based on clinical data, correct?
Of course, it will depend on the data to be obtained. It's difficult to say what kind of forecast we can make as of now. But if safety is confirmed sufficiently, with higher antibody titers, we think we can proceed forward in that process.
Yamaguchi from Citigroup Securities. Can you hear me?
Yes.
There is the so-called DPT-2 trial, a new multi-arm study for ENHERTU. Could you please explain its positioning?
Please wait for a moment. We are checking now.
Okay. Then may I ask you another question in the meantime?
Yes.
You are developing DS-1055 in immuno-oncology I/O. What kind of I/O is it? Something like PD-1 or something to be used in combination, if you can share.
Takasaki would like to respond.
First, about DS-1055, we already disclosed that it's an I/O drug, but we have not disclosed other details as of now. We think we can start Phase I in the near future, so we'd like to announce on a separate occasion.
Next, going back to the earlier question, this is the so-called DESTINY-PanTumor02 study. It's positioned as a basket trial in multiple HER2-expressing tumor types, including bladder, liver, cervical, endometrial, ovarian and pancreatic cancer. We will start Phase II study with about 7 cohorts from the second half of FY '20.
This is going to be one of the studies to look at the possibility of additional indications for other tumor types, correct?
Yes, that's right.
Lastly, about the performance of ENHERTU in Japan. It may be too early to comment, but how do you see its performance in Japan, given the current situation of shipment and the impact of COVID-19?
There's no change in our stance that we are engaging in activities to provide information with the highest priority on safety. Having said so, we have been able to receive very good feedback and evaluations. So I hope you will continue to monitor the situation for some more time.
Understood. You're organizing an R&D meeting annually in December, are you also planning the meeting this year as well?
You're talking about our R&D Day? Yes, we are planning.
Arai from Bank of America Merrill Lynch. I have 2 questions. First about the possibility of breakthrough therapy designation of ENHERTU in CRC. Are you discussing anything with FDA?
We have not filed our submission yet.
Understood. Next, regarding your study for U3-1402 in CRC, what's the background of choosing CRC as the third indication in addition to breast and lung cancer? Do you have some emerging data? Or have you taken into consideration the competitive environment? Could you please elaborate on the strategic background of developing U3-1402 in CRC as the third indication?
We have examined HER3 expression levels in various tumor types, and CRC is one of them included in our future outlook.
What's the expression level in CRC?
Just a moment, please. It's a rough figure, but from the graph, but about 50%.
There seems to be no more questions, we are closing the Q&A session here. Thank you very much. This is the end of the meeting. Thank you very much for joining today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]