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Thank you very much. My name is Sai. Thank you very much for attending Daiichi Sankyo's financial results conference call despite your busy schedule. With respect to the financial results for the third quarter of FY 2019, we will go through the presentation material.
Please see slide Page 2. This is today's agenda item. We will cover FY 2019 Q3 financial results, FY 2019 forecast and business update in that order. After that, from Takahashi, Director of R&D division, will talk about the R&D update. We would like to have a question-and-answer session after the presentation.
Please see slide Page 3. First of all, this is the overview of financial results for the third quarter of fiscal year 2019. Consolidated revenue rose 7.7% to JPY 757 billion or with JPY 54 billion increase year-on-year. Cost of sales declined JPY 8.6 billion year-on-year. S&G expenses increased JPY 9.7 billion, while R&D expenses declined JPY 5.6 billion. As a result, operating income increased by 60.3% or JPY 58.5 billion to JPY 155.6 billion. Profit before taxes increased JPY 62 billion year-on-year to JPY 160 billion. Profit attributable to owners of the company was JPY 134.3 billion, year-on-year increase of 70.4%, which is JPY 55 billion.
In terms of actual exchange rate, it was JPY 108.67 to $1. The yen appreciated by JPY 2.48 from the previous fiscal year. EUR 1 was JPY 121.05, up JPY 8.44 from the previous fiscal year.
Please see slide Page 4. This section describes the factors behind the year-on-year change. Revenue from sales increased JPY 54 billion from the same period last year. The breakdown for each of the main business unit is as follows. First, in the Japanese domestic business, including vaccines and health care, we increased sales. This increase was contributed by direct oral anticoagulant, LIXIANA; anti-influenza agent, Inavir; and the pain treatment agent, Tarlige, which just launched in April last year. Also, sales of the Daiichi Sankyo Espha products, including authorized generic, increased also. Overall sales in Japan increased JPY 29.3 billion.
Next, we will explain our overseas businesses. This section excludes the ForEx impact. Daiichi Sankyo Inc. in the United States, sales declined by JPY 4.2 billion because of sales decrease of Welchol and Effient, a treatment for hypercholesterolemia and Type 2 diabetes an anti-platelet agent, respectively. On the other hand, sales of American Regent Inc. increased by JPY 11.9 billion because of the growth of iron deficiency anemia treatment agent, Injectafer, and generic injections. Daiichi Sankyo Europe made JPY 6.4 billion sales increase because of sales expansion with LIXIANA, despite declines in sales of olmesartan and Effient.
Next is about the ASCA business, which is in charge of Asia in Central and South America. In China, sales rose JPY 10.3 billion, mainly with Cravit and olmetec and ASCA Business as a whole, sales increased by JPY 14.7 billion.
In March 2019, we signed contract with AstraZeneca for DS-8201, Trastuzumab Deruxtecan, and we recognized JPY 8 billion upfront payment in the development milestone associated with approval of the U.S. for the period up to the third quarter. ForEx impact was minus JPY 12.2 billion in total.
Next, please see slide Page 5. This section presents the factors behind the increase and decrease in operating income. We will explain item by item of the increase in profit of JPY 58.5 billion. As explained earlier, sales increased JPY 54 billion, including minus JPY 12.2 billion due to the impact of foreign exchange. Next, I'd like to explain expenses, excluding the impact of foreign exchange rate and special factors. Cost of sales increased as a result of higher sales revenue, but the cost ratio improved dramatically through the product mix, resulting in JPY 7.7 million increase. SG&A expenses increased by JPY 21.4 billion due to the establishment of a cancer business structure in the U.S.
Despite the impact of Trastuzumab Deruxtecan, cost-sharing with AstraZeneca on the expenditure decreased just by JPY 3.7 billion due to cost increase by the enhancement of our oncology project development structure. Cost decreased by a total of JPY 9.1 billion due to the ForEx impact. Special items decreased the cost by JPY 20.8 billion compared to the previous year. Operating profit increased by JPY 40.8 billion, excluding the ForEx impact on special items.
Page 6 is a breakdown of special items. For FY 2019 third quarter year-to-date, we booked JPY 1.3 billion restructuring costs in supply chain and JPY 3.8 billion impairment loss for MorphaBond and RoxyBond related intangible assets, but we also had JPY 18.8 billion gain on sales of subsidiary due to the transfer of Takatsuki Plant and cost decreased by JPY 10.6 billion due to the gain on sales of tangible fixed assets. Therefore, costs fell by JPY 24.3 billion. As a result, cost declined by JPY 20.8 billion year-on-year.
Next, on Page 7, let me explain our profit attributable to the owners of the company. As I explained earlier, operating profit increased by JPY 58.5 billion, including ForEx impact and special items. Income tax, et cetera, increased just by JPY 6.6 billion as the tax rate declined due to the introduction of the consolidation taxation system. So quarterly profit attributable to owners of the company rose to JPY 134.3 billion, up JPY 55.5 billion year-on-year.
Page 8 and 9 show our yen-based revenue for major business units and major products in Japan. On Page 4, I explained the situation of each unit by excluding the ForEx impact, but Page 8 and 9 show the results, including the ForEx impact.
Next, I'm going to talk about the revision of our FY 2019 forecast, so please turn to Page 11. We are revising our FY 2019 revenue forecast upward by JPY 15 billion to JPY 970 billion, as product sales are increasing steadily in Japan and the United States, and also, the timing of the U.S. approval and the launch for ENHERTU was earlier than initially expected. As we are expecting cost of sales to increase by JPY 5 billion due to revenue increase, we are making an upward revision of operating profit by JPY 10 billion to JPY 135 billion.
Due to the impact of the introduction of the consolidation taxation system, et cetera, we are expecting income taxes, et cetera, to decrease by JPY 10 billion so we are making an upward revision of our full year forecast for profit attributable to owners of the company by JPY 20 billion to JPY 110 billion.
Next, I will give you a business update. Please turn to Page 13. DS-8201 was approved in December 2019, at the record speed of first-time to human to U.S. approval just in 4 years and 3 months. It has been launched in January under the brand name ENHERTU. We are delivering this product to patients as a new option for third-line settings and beyond. We'd like to accelerate our development, not only in the United States, but also in other countries and also for other indications as well so that we can deliver this drug to more patients as soon as possible.
Page 14 shows a breakdown of DS-8201 revenue. We had about JPY 20 million FY 2019 Q3 year-to-date product sales in the United States. That is shown as 0 due to the rounding of the numbers. Year-to-date sales totaled JPY 8.1 billion after adding upfront payment and regulatory milestone payment. We are forecasting JPY 12.7 billion revenue for FY 2019, including product sales of ENHERTU in the United States. For your reference, total consolidation received on receivable was JPY 162.7 billion.
Next is our R&D update. I'd like to hand over to Head of R&D division, Wataru Takasaki.
This is Takasaki. Today, I'd like to talk about the update of R&D. Slide 16 shows today's content. The Slide 17 is about top line results in gastric cancer trials for DESTINY-Gastric01, which had been implemented in Japan and South Korea for DS-8201. This study was controlled, double blind study, and this is the first study to obtain comparable data with the control group for DS-8201. The results are shown in Slide 18.
As we have already issued the press release on January 27, ORR objective response rate, which is the primary endpoint of the study. And in the interim analysis of the secondary endpoint of OS, overall survival, the DS-8201 treatment group showed statistically significant and clinically meaningful improvements compared with the investigator-selected treatment agent group. There are no new safety concerns in this study.
For interstitial lung disease, ILD, and pneumonitis, most drug-related cases are Grade 1 or 2. Grade 3 occurred in 2 subjects and Grade 4 occurred 1 subject. No Grade 5 death was reported. Based on the result of this study, we plan to file for approval in Japan in the first quarter of fiscal 2020. Details of the results are scheduled to be presented at ASCO.
Slide 20 is a new R&D strategy introduced on R&D day in December. Today, I'd like to focus on specialty medicine among Alpha. Slide 21 is the medium- to long-term vision of specialty medicine. Our goal is to provide innovative pharmaceutical products in the specialty medicine field for patients suffering from diseases with no effective therapies or therapies which is not sufficient enough. And this is also our overall goal for R&D.
I'd like to introduce to you later about the pipeline for rare disease, which has been expanding from fiscal 2020 onward. This -- they will go into the clinical phases one after another.
First of all, we aim to become a world-class innovator in rare diseases after FY 2025. In the future, we aim to become the world-class innovator in specialty medicine.
Slide 22 describes the direction of specialty medicine. We target diseases with high unmet medical needs in the absence of effective therapies. Our policy is to apply various modalities we possess to various etiologies. The target diseases and the target areas are rare diseases with a single gene mutation, diseases with high unmet medical needs, such as central nervous system. Today, I'd like to introduce to you a number of rare disease projects.
In Slide 23, we're going to introduce project using ENA, which is modified nucleic acid using Daiichi Sankyo's original technology. Our ENA has a higher affinity for DNA and RNA than other nucleic acids. They are also excellent nuclease resistance. Because of these features, we expect strong efficacy. There are 6 projects using ENA technology, including DS-5141, which is currently undergoing Phase I and II trials. We expect this technology to become the next platform technology after DXd-ADC.
Slide 24 is a summary of Duchenne Muscular Dystrophy, which is a target disease of DS-5141. To achieve the primary efficacy endpoint of DS-5141, we are currently conducting a 48-week dosing study. Top line results are expected to be obtained by the end of 2020. We will not go into the details of the disease itself.
Slide 25 shows mechanism of action of DS-5141. Patients with DMD have an Exon 44 deficiency. DS-5141 skip Exon 41 during splicing to correct the reading frame and induces production of incompletely functionalized dystrophin proteins.
In the 12-week study, clear skipping activity was observed. As mentioned earlier, we are currently confirming whether the primary endpoint can be achieved in the 48-week study.
Slide 26 is an overview of the target disease of DS-4108, glycogen storage disease Ia. We are conducting joint research of DS-4108 with Kobe Gakuin University, the National Center for Child Health and Development and Hiroshima University. Glycogen storage disease type Ia causes fasting hypoglycemia and enlargement of the liver because of a congenital defect in gene function. There is no approved medication for this disease and strict diet is used. Although glycogen storage disease type Ia is born in 1 out of 100,000, the number of patients with mutations in the targeted gene of the DS-4108 is even more limited.
Page 27 shows DS-4108 mechanism of action. It corrects the aberrant splicing and induces production of normal protein.
On Page 28, I'd like to talk about 2 rare disease project and 1 nonrare disease project. First, on DS-1211, a TNAP inhibitor. Target disease is pseudoxanthoma elasticum or PXE. Due to genetic mutation, this disease causes skin lesions, visual impairments and cardiovascular diseases. No approved medical therapy is currently available. The estimated number of patients is 160,000 in Japan, U.S. and EU5. Phase I study is now ongoing.
Page 29 is about DS-6016, an anti-ALK2 antibody, a collaborative research with Saitama Medical University. When this project was adopted for support under CiCLE program of AMED in August 2017, we issued a press release to explain. Target disease is Fibrodysplasia Ossificans Progressiva, FOP, due to mutation of genes responsible for osteogenesis, bones are formed in tissues where bones are not normally formed. Osteogenesis worsens with age, and total mobility assistance is usually required in people aged 40 and above. No medical therapy is currently available. This is a very rare disease, with the estimated number about 80 patients in Japan and under 300 in the United States. Preclinical study is ongoing right now.
Page 30 is about DS-7011, an anti-TLR7 antibody, a collaborative research with the Institute of Medical Science, The University of Tokyo. This is not a rare disease project, but I'd like to explain today as it was adopted for support under CiCLE program of AMED in December 2019.
Target disease is systemic lupus erythematosus. SLE is an autoimmune disease that causes systemic symptoms such as fever and malaise and inflammation of joints, kidneys and skin. Although an approved drug therapy is available, this is a disease still with high unmet medical needs. Preclinical study is ongoing right now.
Page 32 shows upcoming news for 3ADCs. The contents are not so different from what we presented during R&D Day in December, but we'd like to make just one correction. During R&D Day, we said that we are planning to make updated data presentation at ASCO this year regarding the progress of Phase I study in combination of DS-8201 and [ Innovan ]. But given the progress of the study and the data to be presented, we decided to look for a different congress to present at a more appropriate timing. For the rest, please refer to the details later at your leisure. Page 33 shows upcoming news for Alpha. No change has been made from before, so please refer to this data.
Page 34 and beyond are appendix slides, including our R&D, major milestones and major R&D pipeline. So please check later. That's all for me. Thank you very much.
From now, we'd like to entertain your questions. The first question is from Mr. Hashiguchi of Daiwa Securities.
There are 3 questions. First, you postponed the announcement at ASCO of the combination of 8201 and [ Innovan ]. Could you comment on that background of what kind of information do you have at this time? Is the information not at the level that anyone agrees it is a good information?
The schedule was changed, not because of the result, but the schedule itself has not sufficiently scrutinized at the planning stage. That means change of the schedule is not the sign that the result is not really good.
You're right. I see. My second question concerns the project using ENA nucleic acid modification technology. I think there is a rather passionate comment that you're hoping this technology becomes the next platform after DXd. When you announced the progress of the Phase I and II studies of 5141, the lead project in April 2018, I did not have a strong impression that data was so strong. But your response has changed considerably since then due to the consideration of increased dosing or extending the dosing period.
Thank you very much for the question. As I explained in the presentation, we have seen good skipping action. It is a factor that has greatly increased our confidence. This is the result of a 12-week study. On the other hand, we are getting a certain level of expectations about the protein, which is the primary endpoint, and nonclinical data shows that our DS-5141 is properly delivered to the heart. With these comprehensive information, we are convinced that this will become our next platform.
I think the 3-point you just mentioned are also mentioned in 2019. The sign you're getting is not better than it was at that time, isn't it?
Our data will be accumulated in the future, and you will be able to obtain clear data from now on. However, the data for competitor's skipping drug are emerging and we are convinced that we can exceed them when compared.
I see. Finally, the development strategy for 1062 is as follows. I'm afraid. I always ask the same question, but will you develop it on your own or collaborate with others? In my understanding, both options are being considered as candidates. And when the most of the result of Phase I will be available around the time of ASCO, you will think which way you're going, is this understanding correct or have you decided the direction?
I am Sai. Mr. Hashiguchi is right. Looking at the data, we are seeing in the future, we would like to decide around the summer. That's what we've been thinking about, and there is no change about that.
Then we'd like to take the next question. Mr. Sakai from Crédit Suisse Securities.
I'm Sakai. I have 2 simple questions. First, the consolidated taxation system was adopted this time. I think this is targeting 100% subsidiaries in Japan. How many companies are covered by this consolidated taxation system? I understand that tax rate became lower because of that because somewhere, you have recorded a deficit. Could you tell us more about the details? As a result of lower tax rate, I think that EPS will change slightly if we expect the tax rate to remain at the same level of 18% for the next fiscal year. First of all, let me confirm whether my understanding is correct.
Thank you for your question. The number of domestic subsidiaries under consolidated taxation system is estimated to be 9. Since we can allocate this profit to the loss carry-forwards that we had, we booked deferred tax asset this time. And as a result, the tax rate declined. In terms of next year, there is no effect for the next fiscal year.
I see. So therefore, the deferred tax asset are being removed from the balance sheet. Deferred tax assets were booked for current fiscal year and included in negative tax expenses. That doesn't happen next year. So there is no tax revenue next year. So does that mean that the tax rate for the next fiscal year returned to about 20% like the rate in fiscal year 2016?
Without special factors, the rate will return to some extent. But we cannot say at this point whether it is 20% or not.
I see. It's only in Japan, but it cannot be targeted overseas subsidiaries, isn't it?
Yes, it is only for domestic subsidiaries.
I see. Another simple question is about ENHERTUA, which made just about JPY 1.8 billion or JPY 2 billion, I'm not sure. It was just launched. But if they started slow, your competitors are showing some defensive strategies against ENHERTU franchise, even today, it's like a defensive barriers. Have you gotten any feedback from clinicians?
I can only make qualitative comments.
That is fine.
We completed preparations for the full sales. Feedback has been obtained from clinicians and health care institutions and positive results have been received. Therefore, we determine that we had a good start, and we want to look at our future developments.
How many specialized sales reps were employed by Daiichi Sankyo Inc?
We refrain from disclosing the number of sales reps. So therefore, AstraZeneca input of manpower will not be disclosed for the time being, such as manpower per hour. We don't disclose such information.
Next, Mr. Wakao from Mitsubishi UFJ Morgan Stanley Securities.
Wakao speaking. My first question is about third quarter product sales results. I'd like to know more about Inavir. Sales were larger compared to the previous year as you're gaining some market share from other companies as well. What was your market share in the third quarter? What's your situation vis-à-vis your competitors. I believe you are making good progress against FY 2019 plan, what about your outlook for the fourth quarter?
As for Inavir, between April and December, the market grew year-on-year. The market expanded more than 20% based on the latest NHI drug price. That's one of the reasons behind. Amid the overall market growth, Inavir in particular, was doing well and increased its market share. Our market share almost doubled year-on-year to more than 40%. The market expansion and our market share increase have been the reasons for the good performance of Inavir.
If I may add, we launched nebulizer formulation in December last year. We think this was also a contributing factor.
Understood. Sales will be bigger in the January-March period due to seasonality. So the product is making good progress against the company forecast. Can I understand this way?
Yes.
Okay. Next on ENHERTU, DS-8201 in Japan. You filed your submission for breast cancer in September last year. As for gastric cancer, you're going to file sNDA in the first quarter of fiscal year 2020 in Japan. Should I understand that the timing of approval is going to be earlier for breast cancer?
Takasaki speaking, we cannot comment on the sequence or the timing of approval at this moment.
Okay. DS-8201 received SAKIGAKE designation for gastric cancer. So I think there can be SAKIGAKE premium. According to the current time line, I think you may be able to aim for it. Do you think that's also a possibility?
Yes. We're negotiating and consulting with the regulatory authorities on gastric cancer and the SAKIGAKE review, so we expect some acceleration. But as I said before, we cannot comment on the sequence of approval right now.
Okay. Next on DS-5141, there were questions earlier, but it was not so clear to me. You have good expectations about 5141 against the 2 competitive products shown on Page 24. But actually, there are other competitors as well, such as Wave Life Sciences and Nippon Shinyaku. Nippon Shinyaku, in particular, has good data. Have you seen their data? And do you have good expectations against these competitors? Do you feel your compound is not so bad compared to these products?
What you're comparing against was not so clear to me.
Earlier, I was talking about the Exon skipping drugs as a comparison. Does that include NS065 data from Nippon Shinyaku as well?
As far as we have seen, the publicly available information on dystrophin protein induction rate, we don't feel they are strong competitors for us. That's what we mean by our comments earlier.
Next, Mr. Yamaguchi from Citigroup Securities.
Yamaguchi from Citigroup speaking. Can you hear me?
Yes.
I have 2 additional questions about 5141. According to announcements before, not from your company, but from the industry, I heard that the manufacturing process is complicated because of the structure. Some time has passed since I heard this, but costs have come down as to be commercially acceptable, is this still a challenge? I appreciate your comment on this first.
As you said, we are fully aware of the cost challenge. We have been able to reduce our cost compared to before, but we don't think it's enough. We don't know the timing yet, but we are discussing a variety of things in the manufacturing field, so that we can reduce our costs as much as possible.
Understood. I think you said Phase I/II data will be used to file by the end of this fiscal year, are you going to file based on that data? Other companies are also filing based on Phase I/II data in many cases these days. What's your planned time line?
No decision has been made in consultation with the regulatory authorities. We think it's going to be data-driven, but we also would like to consider a way to enable filing based on Phase I/ II data.
Okay. There was no direct mention today, but what about the progress of oncolytic virus DS-1647.
Thank you for your question. Clinical studies were already completed by now. We are discussing the manufacturing time line and the timing of filing. Manufacturing has some difficulties. According to the current time line, it's going to be by the end of the current fiscal year.
Understood. And also on confirmation about ENHERTU. Due to a black box warning, I think there is an ongoing program to prevent ILD. Are you doing this carefully? I think AstraZeneca has a certain program. Are you using it to check for marketing? Are you working on this carefully?
This may also be a bit qualitative, but there's a mention of the feedback before we are receiving very good feedback. On the other hand, we're also receiving questions about ILD. We are sharing data with the users of the medical institutions. Including this, we are making a good start.
Understood.