Daiichi Sankyo Company, Limited (OTCPK:DSKYF) Q1 2022 Earnings Conference Call July 29, 2022 2:00 AM ET
Company Participants
Hiroyuki Okuzawa – Head, Corporate Planning and Management Division, CFO
Wataru Takasaki – Executive Officer, Head, R&D Division
Conference Call Participants
Hidemaru Yamaguchi – Citigroup Securities
Seiji Wakao – JPMorgan Securities
Shinichiro Muraoka – Morgan Stanley MUFG Securities
Fumiyoshi Sakai – Crédit Suisse Securities
Naomi Kumagai – Mitsubishi UFJ Morgan Stanley Securities
Kazuaki Hashiguchi – Daiwa Securities
Hiroyuki Okuzawa
Okuzawa speaking. Thank you very much for joining Daiichi Sankyo’s Financial Results Presentation out of your very busy schedule today. I’m going to explain our FY 2022 First Quarter Financial Results we announced at 1 p.m. on Friday, July 29th, Japan time based on our presentation materials.
Please turn to page three. Today I’m going to cover FY 2022 first quarter consolidated financial results and business update in that order. Then Wataru Takasaki, R&D Division Head will explain R&D update. We will entertain your questions at the end.
Please turn to page four. This is an overview of FY 2022 first quarter consolidated results. Revenue increased by ¥16.2 billion or 6.2% year-on-year to ¥280.3 billion, cost of sales decreased by ¥10.5 billion from the previous year, SG&A expenses rose by ¥15.1 and R&D expenditure increased by ¥20.9 billion year-on-year.
As a result, core operating profit decreased by ¥9.3 billion or 21.3% year-on-year to reach ¥34.4 billion. Operating profit including temporary gains and losses decreased by ¥11.4 billion or 24.9% year-on-year to ¥34.4 billion. Profit attributable to owners of the company was ¥18.9 billion down by ¥16.4 billion or 46.5%.
As for the actual currency rates, the U.S. dollar was ¥129.57. The yen depreciated by ¥20.8 against the dollar year-on-year. The euro was ¥138.10. The yen depreciated by ¥6.15 against the euro.
Please turn to page five. From here, let me explain positive and negative factors for our revenue compared to the previous year. Revenue increased by ¥16.2 billion year-on-year. I’d like to explain its breakdown by major business unit.
First, in Japan Business, sales increased for direct oral anticoagulant, Lixiana and pain treatment, Tarlige. In addition, Daiichi Sankyo Espha products contributed as well. But sales for proton pump inhibitor, Nexium decreased with the end of joint sales promotion in September last year. Sales from vaccine business also declined, so Japan Business revenue decreased by ¥18.1 billion.
Next, let me explain our overseas business units. ForEx impact is excluded here. In Oncology Business, sales decreased for hypertension treatment olmesartan, where we signed a product transfer agreement in the United States in January this year, but anticancer agent, Enhertu grew in the United States and Europe. So revenue increased by ¥8.8 billion.
Revenue for American Regent increased by ¥0.7 billion as sales decreased for iron deficiency anemia treatment, Injectafer, but sale increased for iron deficiency anemia treatment, Venofer and generic injectables.
Revenue for EU Specialty Business increased by ¥2.8 billion, getting on sales from transferring long listed product decreased, but Lixiana sales increased. As for Enhertu and Dato-DXd up-front payment, et cetera, related to a strategic alliances. Revenue recognized increased by ¥3.1 billion. We booked ¥2.8 billion as regulatory milestone related to the approval of Enhertu for HER2 positive breast cancer in the second line settings in the United States in May this year. ForEx impact increased our revenue by a total of ¥17.3 billion.
Page six shows positive and negative factors for our core operating profit. Let me explain the profit decrease of ¥9.3 billion by item. As explained earlier, revenue increased by ¥16.2 billion, including the increase of ¥17.3 billion due to ForEx impact.
Next I’ll explain cost of sales and expense items excluding ForEx impact. Cost of sales decreased by ¥14.2 billion, revenue increased, but COGS ratio improved by changes in the product mix as sales increased for our in-house products such as Lixiana and Enhertu.
SG&A expenses increased by ¥7.9 billion due to an increase in Enhertu-related profit sharing with AstraZeneca, et cetera. R&D expenditure rose by ¥14.4 billion because of an increase in R&D investments for the three ADCs. Cost increased by ¥17.4 billion in total due to ForEx impact. Core operating profit decreased by ¥9.1 billion, excluding ForEx impact.
Next, page sevene shows positive and negative factors for profit attributable to owners of the company. As I explained earlier, core operating profit decreased by ¥9.3 billion, including ForEx impact. Temporary income and expenses decreased profit by ¥2.1 billion from the previous fiscal year. In FY 2021, we booked ¥2.1 billion temporary income as gains related to sale of Osaka logistics center to Taiyo Pharma Tech. But in FY 2022, we are not booking any major temporary income or expenses.
On July 19th U.S. time, the U.S. District Court for the Eastern District of Texas has entered judgment on the jury verdict finding that Enhertu infringes Seagen’s U.S. patent and awarding Seagen $41.8 million in damages.
We are dissatisfied with this ruling and are continuing to vigorously defend our rights and explore available remedies to contest. We have not booked provision for damages in FY 2022 first quarter and consolidated forecast figures.
Financial income, expenses, et cetera, decreased our profit by ¥6.2 billion year-on-year, due to deterioration in ForEx gains and losses, and investment securities valuation gains or losses, income taxes, et cetera, decreased by ¥1.3 billion year-on-year due to a decrease in pretax profit. As a result, profit attributable to owners of the company decreased by ¥16.4 billion year-on-year to ¥18.9 billion.
Slides eight and nine show changes in revenue of business units and major products in Japan on the yen basis. Slide five earlier explain the status of each unit, excluding the impact of foreign exchange rates, but these slides show the results including the impact of foreign exchange rates.
Next, I will discuss the business update. Slide 11 shows the breakdown of Enhertu’s revenue. In the first quarter of FY 2022, Enhertu’s revenue, including upfront payments and regulatory milestone payments increased by ¥21.4 billion year-on-year to ¥37.4 billion. For FY 2022, we expect an increase of ¥79.1 billion year-on-year to ¥159.9 billion, with no change since the April announcement. Product sales in the first quarter of FY 2022 increased by ¥18.4 billion year-on-year to ¥31.3 billion due to growth in the U.S., Europe and other regions.
The sales situation in each region is explained on the next slide. Development milestones for the first quarter of fiscal 2022 were ¥3.4 billion, an increase of ¥2.8 billion from the same period last year. In May of this year development milestone of ¥2.8 billion was recorded following the approval of a second-line treatment for HER2 positive breast cancer in the United States.
Next, please see slide 12. I will use two slides to explain the sales performance of Enhertu in each region. First, I will show you the performance of Enhertu in the United States and Europe. Due to steady market penetration and an additional indication the product sales of Enhertu in the U.S. and Europe are growing steadily.
In the U.S., product sales in the first quarter of FY 2022 were ¥20 billion or $155 million and we are targeting at ¥3.1 billion or $639 million for FY 2022. As for current indications, in addition to the third-line treatment of HER2 positive breast cancer and the second-line treatment of HER2 positive gastric cancer, the second-line treatment of HER2 positive breast cancer was newly added in May of this year. Market share growth in each indication has also been favorable with the most recent new patients share in the third-line HER2 positive breast cancer treatment in the 40% range, maintaining the number one position. The market share of new patients for a second-line HER2 positive breast cancer treatment, which is launched in May is already in the 30% range and that of new patients were second-line HER2 positive gastric cancer treatment has also grown to the 40% range, giving it the number one position.
As a major progress, in May of this year, we obtained approval for the second-line treatment of HER2 positive breast cancer and started promotion. Based on the DESTINY-Breast04 study data presented at ASCO, the American Society of Clinical Oncology in June, the drug was included in the U.S. NCCN guidelines as a recommended regimen for the treatment of low HER2 expression chemotherapy experienced breast cancer. We believe that Enhertu’s product strength has been steadily accepted by prescribers as we had planned.
Sales performance in Europe is also on track, with sales of ¥6.7 billion or $52 million in the first quarter of FY 2022. We are targeting ¥23 billion or $177 million in FY 2022. In addition to the third-line treatment of HER2 positive breast cancer, the second-line treatment of HER2 positive breast cancer was added to the current indications in July this year.
The share of new patients in the countries where the product is marketed is steadily increasing, with the U.K., France and Germany maintaining the top share of new patients in the third-line treatment of HER2 positive breast cancer most recently. As a major progress in July this year, we obtained approval for the second-line treatment of HER2 positive breast cancer and started its promotion.
Slide 13 shows the sales performance of Enhertu’s in Japan and the ASCA region, due to steady market penetration and expansion of the countries and regions where Enhertu’s is launched and HER2 product sales in Japan and the ASCA regions are growing steadily.
Actual product sales in Japan for the first quarter of FY 2022 were ¥2.4 billion and the company aims to grow sales to ¥16 billion in FY 2022, with the addition of a second HER2 positive breast cancer indication expected in the second half of the year. The current indications are the third-line treatment of HER2 positive breast cancer and a third-line treatment of HER2 positive gastric cancer. The market share of new patients for each indication is steadily increasing with the market share of HER2 positive breast cancer third-line treatment and HER2 positive gastric cancer third-line treatment growing to the 50% and 60% levels, respectively, and each has achieved a top market share. As a major progress in June of this year, it was included in the breast cancer guidelines as a recommended regiment for the second-line treatment of HER2 positive breast cancer.
Product sales in the ASCA region for the first quarter of FY 22 totaled ¥2.2 billion. The product sales in the ASCA region include co-promotion revenues in Hong Kong, where AstraZeneca also record sales. The target in FY 2022 is ¥6.3 billion.
The current indication is that third-line treatment of HER2 positive breast cancer, and in June this year, the second-line treatment of HER2 positive breast cancer was added in Brazil. Sales are expanding in Brazil, Hong Kong and Taiwan, where the product was launched in April.
We will continue our efforts to further penetrate the market in each region, expand the number of countries and regions where the product is available and obtain new indications in order to deliver the product to as many patients as possible in need of Enhertu.
Slide 14 presents our initiatives regarding profit growth in existing businesses and products. First, let me talk about our Japanese business. In June we launched REYVOW, a migraine treatment for which we have a distribution agreement with Eli Lilly Japan. We launched the new dosage form OD tablets in May for our hypertension treatment drug MINEBRO, which we have been marketing since 2019. We are making good progress in strengthening our products portfolio in Japan.
Next is about our European business, in June, we signed an agreement to divest the antiplatelet agent Efient. We will continue to strengthen the transformation to the profit structure based on new drugs.
The next part of the presentation is on the R&D update. I will hand it over to Mr. Takasaki, Head of R&D Division.
Wataru Takasaki
Takasaki speaking. Today I’m going to explain our R&D update. First an update on three ADCs. Please turn to page 17. Thanks to the success of DESTINY-Breast04 study, we were able to pioneer HER2 low breast cancer as a new clinically meaningful patient segment and demonstrate that Enhertu has the potential to become a standard-of-care.
Enhertu met the primary endpoint and all the key secondary endpoints in the global Phase 3 study for patients with HER2 low breast cancer previously treated with chemotherapy. Enhertu is the first and only HER2 directed therapy to demonstrate a survival benefit for patients with HER2 low breast cancer.
In June this year, Enhertu was listed in the U.S. NCCN guidelines as a preferred regimen for HER2 low breast cancer previously treated with chemotherapy. About 50% of all the breast cancer patients are now reclassified as HER2 low.
As for regulatory submission status in each country, our finding was accepted in Japan and EU in June this year. Also in July, our finding was accepted in the United States and priority review was granted, with PDUFA date of November 26th. We are planning to file also in China in the second quarter of the current fiscal year.
Please turn to page 18. Using two pages from here, I’d like to show you DESTINY-Breast04 study efficacy data represented during a Plenary Session at ASCO. First, PFS data, this panel shows PFS in patients with HR+ HER2 low breast cancer, 49% reduction in the risk of disease progression or death versus chemotherapy and median PFS was 10.1 months, compared to 5.4 months with chemo.
The right-hand side shows PFS in all patients, with HR+ or HR- HER2 low breast cancer, 50% reduction in the risk of disease progression or death versus chemo and median PFS was 9.9 months, compared to 5.1 months with chemo.
OS data is shown on page 19. The left shows OS in patience with HR+ HER2 low breast cancer, 36% reduction in the risk of death versus chemo and median OS was 23.9 months, compared to 17.5 months with chemo.
The right panel shows OS in all patients with HR+ or HR- HER2 low breast cancer, 36% reduction in the risk of death versus chemo and median OS was 23.4 months, compared to 16.8 months with chemo.
Page 20 shows a development plan for HER2 low breast cancer. We are now conducting DESTINY-Breast06 and 08 studies in earlier lines of HER2 low breast cancer than DESTINY-Breast04 study and further development in earlier cancer is also under discussion.
Page 21 shows DESTINY-Breast06 and 08 study designs. DESTINY-Breast06 is a Phase 3 study in chemo naïve HR+ HER2 low breast cancer. The study was initiated in August 2020. DESTINY-Breast08 study is a Phase 1b study in HR+ or HR- HER2 low breast cancer. The objective of the study is to confirm safety and preliminary efficacy in combination with various drugs. We started the study in January 2021.
Page 22 is DESTINY-Breast03 Enhertu versus T-DM1 safety data update presented at ASCO this year. At ESMO last year, we presented data as of May 2021 and this year at ASCO, we presented data as of September 2021, about four months from ESMO presentation. No new safety signals were observed. No Grade 4 or 5 ILD occurred. The data has reinforced the established favorable benefit risk profile of Enhertu over T-DM1 in HER2 positive breast cancer.
Page 23 is about FY 2022 approval status for Enhertu. For HER2 positive breast cancer second-line indication we obtained FDA approval in May based on priority review, breakthrough therapy designation and real-time oncology review program. We obtained approval also from EMA in July. Approval was also obtained in the countries joining Project Orbis in Brazil, Australia, Israel, Canada and Switzerland in the first half of FY 2022.
From page 24, let me explain Dato-DXd. This page shows BEGONIA study interim data presented at ESMO Breast Cancer Symposium in May. BEGONIA is a Phase 1b/2 study for triple-negative breast cancer first-line for combination with durvalumab.
Responses were observed regardless of PD-L1 expression and confirmed ORR was 74%. Evidence of strong synergy was confirmed between Dato-DXd and durvalumab which supports our further development in TNBC.
Please turn to page 25. Let me talk about two new clinical studies for Dato-DXd. First, TROPION-Breast02 study, like BEGONIA study, this is also a study in TNBC first-line. The study was initiated in June in patients who are not candidates for PD-1, PD-L1 inhibitor therapy. Secondly, TROPION-PanTumor02 study. This is a Phase 1/2 study in NSCLC and TNBC in [inaudible] subject. The study studied in July.
From slide 26, we will discuss HER3-DXd. We presented data on breast cancer and non-small cell lung cancer at ASCO this year. This slide first shows data from the breast cancer Phase 1/2 study, which evaluated three cohorts, the first cohort was hormone receptor positive in HER2 negative breast cancer, the second was TNBC and the third was HER2 positive breast cancer. All cohorts demonstrated clinically significant and sustained anti-tumor efficacy. The efficacy has been seen across a wide range of HER3 expression levels.
Slide 27 shows data from cohort two of the non-small cell lung cancer Phase 1 study. We presented data on EGFR mutated non-small cell lung cancer at ASCO last year. This time, however, the data are for non-small cell lung cancer patients without common EGFR mutations. A shows the anti-tumor efficacy in patients with genetic mutations other than common EGFR mutations and B shows the anti-tumor efficacy in patients without genetic mutations. The efficacy was confirmed in both patient groups.
From slide 29, I will give an update on Alpha. First, I’d like to introduce the status of the rising stars which are the projects that we have positioned as a potential growth driver next to three ADCs.
The first one is DS-7300. Based on the results of the Phase 1/2 study, part one, we have selected advanced small cell lung cancer as a promising indication. Advanced refers to a type of cancer that has spread beyond the extent that it can be treated with radiotherapy or surgery and for which there is a high unmet need. A Phase 2 study was initiated in June to establish the optimal dose for the treatment of advanced small cell lung cancer.
Continuing to slide 30, which reports on the progress of another rising star DS-6000. Interim results from the Phase 1 study show that DS-6000 is generally well tolerated and has demonstrated preliminary efficacy in patients with heavily pretreated advanced platinum resistant ovarian and renal cell carcinoma. These data were presented at this year’s ASCO. Enrollment of patients with ovarian and renal cell carcinoma is currently underway in a dose expansion part of the study.
Please see slide 31. We have introduced our DXd-ADC program and we are pleased to announce that five of our researchers have been awarded the six Bioindustry grand prize by the Bioindustry Association of Japan for the development of the new generation antibody drug conjugate DXd-ADC technology. This award is given for outstanding achievements that have contributed significantly to the development of bioindustry and are expected to continue their contribution in the future.
The first time award was given to a Nobel Prize laureate Dr. Tasuku Honjo. And this is the first time for a single company to receive the award and we are very honored that the future potential of our DXd-ADC technology. In addition to HER2’s past achievements that have revolutionized cancer treatment has been so highly recognized.
Please see slide 32 for progress on oncology products within ADCs including Quizartinib in the QuANTUM-First study. This is a Phase 3e study for the first-line treatment of patients with acute myeloid leukemia with FLT3-ITD mutations. The combination group of Quizartinib and standard chemotherapy demonstrated a two-fold OS prolongation compared to the control group. Based on these results, we plan for regulatory submissions in Japan, the U.S. and Europe in the first half of FY 2022.
Slide 33 shows the progress of DS-5670 and COVID-19 vaccine. A dose finding Phase 2 study is underway regarding the frequency of the first dose. To-date, no major safety issues have been observed and sufficient induction of immunity has been confirmed after the second dose. We are considering conducting a Phase 3 study in Japan in the first half of this fiscal year.
Slide 34 shows the development of booster vaccination. Part 1 of the Phase 1/2/3 study has been completed. Data have been obtained, showing efficacy comparable to better than that of the approved Messenger RNA vaccine in neutralizing activities after four weeks of vaccination in both adults and the elderly. No serious adverse reactions at the injection site or systemic ones were observed.
Based on these results, we have started Part 2 in May. Part 2 will be an active control non-inferiority study of an approved vaccine. Through this program, we will continue our efforts to establish a domestic production system for COVID 19 vaccine.
Please see slide 35. I will introduce DS-2325, a newly initiated clinical trial. The target disease is Netherton Syndrome a rare inherited disorder of the skin. This disease is caused by mutations in SPINK5, a gene encoding LEKTI, a serine protease inhibitor protein expressed in the skin. In Netherton Syndrome loss of LEKTI function causes increased activity of the serine protease KLK5, resulting in ichthyosis and atopic dermatitis.
DS-2325 is expected to improve the symptoms of Netherton Syndrome by suppressing the activity of KLK5. A Phase 1 study was initiated in June to evaluate the safety, operability and pharmacokinetics of the drug in healthy adults.
Slide 37 shows the upcoming news flow for FY 2022. At the World Conference on Lung Cancer in early August, we will present early interim data from the TROPION-Lung02 study of Dato-DXd. We will present the latest data with a cut off in May of this year. Also, please look forward to ESMO in September, where we will present an update on the Phase 1/2 study of DS-7300.
Other information shown includes the expected regulatory decisions, the planned regulatory submissions, the expected key data readouts and the planned pivotal study initiation. Please note that the timelines shown are current estimates and are subject to change.
Slide 38 onwards is the appendix. Please check back later for the milestones and pipeline lists.
That’s all from my presentation.
Question-and-Answer Session
A – Hiroyuki Okuzawa
Now Q&A session, we’d like to entertain your questions. First, Mr. Yamaguchi from Citigroup Securities, please.
Hidemaru Yamaguchi
Yamaguchi from Citigroup speaking. Can you hear me?
Hiroyuki Okuzawa
Yes. We can hear you.
Hidemaru Yamaguchi
Thank you. First, I have a question about your assessment of the first quarter results as a whole. In particular, gross profit margin seems to be trending much higher than your full year forecast. You sold some businesses and products, but if these one-off factors are excluded, your gross profit margin is almost in line with your full year forecast. Could you please comment on the good performance of your gross profit margin? This is my first question.
Hiroyuki Okuzawa
Thank you for your question. There are various factors. The previous of the topline results was a little less than one-fourth of the full year forecast. But on the other hand, there was little improvement of COGS by 5.6 percentage points year-on-year. The growth of our in-house product such as Lixiana and Enhertu was reflected positively in the product mix according to our analysis.
As for costs, the progress of SG&A expenses and R&D expenditure is around 23%, 24%. As for core operating profit level, we think we are achieving a decent percentage figure according to our analysis.
Special items are included in the gross profit margin. I now have a good understanding about the good product mix as you explained. There is no special item for topline figures. We no longer have Nexium and we are affected by the NHI drug price revision. There are such negative factors. Still, we think we are doing quite well.
Hidemaru Yamaguchi
Right. Understood. Secondly, about Enhertu, if I ask you everything, it may be confusing. So I want to ask you about your results and the progress against your full year forecast. Japan made it weak, but an additional education is expected, given future growth, US is quite strong and the same is true in Europe in my view. Regarding the results and your forecast excluding ForEx impact, could you please comment by region for Japan, U.S. and Europe? Thank you.
Hiroyuki Okuzawa
We feel that Enhertu is growing very steadily as a whole. This growth will accumulate towards the second and third quarters and the end of the current fiscal year. Design wise it’s going to be heavier later in the fiscal year. That’s one thing I can say.
As for Japan, in comparison among the regions, the progress is a little bit weaker, but in autumn and around November we expecting approval of the second-line breast cancer indication. So we are planning a bigger growth from that timing and beyond in the second half to reach ¥16 billion.
In the United States, even prior to the approval of the second-line indication, Enhertu has been prescribed a lot with the NCCN guidelines. What about HER2 low breast cancer? We will identify from now. Due to an advantage of U.S. specific guideline based preapproval prescription, we can expect a lot for the future.
In Europe and ASCA regions growth is more than expected. In Europe, Germany is outstanding, given the status of prescription in the United States and other launched markets, as well as a steady flow of clinical data presented at various Congress meetings, expectations went up high prior to approval and then post-approval, prescriptions have been increasing a lot.
We understand that’s also the situation in Brazil as well. So we think Europe and ASCA regions are performing higher than expected. We are keeping the same annual product sales guidance as a whole from April for now. But depending on the future situation of HER2 low in the United States and other factors, we could possibly expect an upside. So we are confident that you can expect a lot from a conference call on our FY 2022 first half financial results presentation.
Hidemaru Yamaguchi
Understood. That’s all for me. Thank you very much.
Hiroyuki Okuzawa
Thank you very much. Next, Mr. Wakao from JPMorgan Securities, please.
Seiji Wakao
Wakao from JPMorgan speaking. Thank you for your time.
Hiroyuki Okuzawa
Thank you.
Seiji Wakao
I have three questions. First, about DESTINY-Breast08 study you presented today. This study is going to complete in August next year according to the clinicaltrials.gov. When will this data become available? Based on the results you will go into new Phase 3 studies? If my understanding is correct that you will check the results and then start Phase 3 studies in earlier lines of therapy?
Wataru Takasaki
We could hear you on and off. Sorry, could you repeat your question once again.
Seiji Wakao
I want to know the timing of DESTINY-Breast08 study data availability and also the timing of Phase 3 studies in more lines of therapies, including first-line and combination with hormonal therapies or CDK4/6 inhibitor maybe, I don’t know which combination it will be. Based on Breast08 study results, you will initiate Phase 3 studies. Is my understanding correct?
Wataru Takasaki
Thank you for your question. We are now discussing our plan including the sequence or order of the studies. As we mentioned, we are planning to aim for earlier lines of therapy including the ones not yet described on the presentation slides. As soon as we finalize entire plan, we will share that with you can.
Seiji Wakao
Can I understand that Phase 1b results will become available next year?
Wataru Takasaki
For now we assuming next year and beyond.
Seiji Wakao
Understood. Secondly, I want to ask you about your way of thinking behind TROPION-Lung02 study you are going to present at WCLC and TROPION-Lung08 study initiated based on Lung02 study. In Lung02 study according to the abstract, you were able to confirm the adorn effect on top of KEYTRUDA plus chemo. In Lung08 study combination of Dato-DXd and KEYTRUDA is being studied. Two drugs here instead of triple regimen, because you are more confident of better efficacy with these two agents compared to KEYTRUDA plus chemo based on Lung02 study data. Is my understanding correct?
Wataru Takasaki
We are planning 08 study with PD-L1 expression of 50% or higher in the first-line settings with pembrolizumab. I think your question is how 02 study results are reflected in your design of 08 study? We included as many options as possible in 02 study, so we watched the data on results as we proceed and we will incorporate that in interpreting 08 study data.
Seiji Wakao
Understood. Thank you. Lastly, I would appreciate your comment on arbitration with Seagen. According to Seagen’s conference call this morning, a decision is expected in mid-2022. So there seems to be no change in the timeline. Do you have the same understanding about the timeline?
Wataru Takasaki
We cannot clearly say when will be the concrete timing of a decision in the arbitration case? If there is an important progress, we will disclose at an appropriate timing. So please wait until then.
Seiji Wakao
It’s not taking a longer time compared to before, correct?
Wataru Takasaki
Right. That’s not the case. It’s up to the arbitrator. There is nothing in particular required from our side and we are just waiting right now.
Seiji Wakao
Well understood. That’s all for me. Thank you very much.
Hiroyuki Okuzawa
Next, Mr. Muraoka from Morgan Stanley MUFG Securities, please.
Shinichiro Muraoka
Hello. Muraoka from Morgan Stanley speaking. Can you hear me?
Hiroyuki Okuzawa
Yes. We can hear you.
Shinichiro Muraoka
Thank you. I feel that Enhertu sales are accelerating steady. Regarding $15.5 million in the United States, for example, how was sales accelerating in April, May and June? If you can give me numbers, that’d be great. Is it an increasing trend or still with ups and downs? I appreciate numbers if possible. But give me an image if you cannot disclose numbers.
Hiroyuki Okuzawa
Thank you for your question. As you said, sales are going steady. In that sense, you can understand that there is a smooth increase month-after-month. But, sorry, we are not disclosing specific figures.
Shinichiro Muraoka
I wonder if the approval of the second-line in May has accelerated significantly and if it can be considered that it has already accelerated sufficiently from around that time?
Wataru Takasaki
After all, the second-line approval is a big trigger. In that sense, the speed has increased tremendously and I hope you can understand that the growth based on the guidelines before approval is accelerating a little.
Shinichiro Muraoka
Thank you. With that the guidance for this fiscal year, right now we are at ¥105 billion in core operating profit. As it was mentioned earlier, I feel that there is room for an upside in Enhertu. Although expenses are also rising very early this year, I feel that even taking into account of the increased expenses, there’s further upside in profit if you can receive your change with the growth of Enhertu or am I jumping to a conclusion too quickly.
Hiroyuki Okuzawa
In the area of FDA, there is the factor that the profit share with AstraZeneca will increase in proportion to the sales of Enhertu. In R&D, we had a solid start for the first quarter. Our R&D team is working very hard and we expect steady progress in the clinical development of three ADCs and the rising stars for which we have a lot of work to do. In that says it is difficult to expect much of a downturn in the expense side of the business and our major expectation is to make a margin by raising the topline.
Shinichiro Muraoka
Understood. Thank you very much. I just want to ask one quick question about the November 26th PDUFA for HER2 low, when it is approved at this time, can we assume that the diagnostic agent for HER2 low is fully available at that stage. As for the diagnostic agent, we are currently trying to create a definition of HER2 low and we’re working to make it available in time? As I recall, the partner Roche has also prepared for this and there shouldn’t be any problem making it available.
Wataru Takasaki
Correct. As you mentioned, we have a partnership with Ventana, a Roche Group company to develop companion diagnostics for IHC2+, ISH- and IHC1+ breast cancers and we are planning for regulatory submission in time.
Shinichiro Muraoka
Understood. Thank you. That’s all for me.
Hiroyuki Okuzawa
Let’s move on to the next question. Mr. Sakai from Crédit Suisse Securities. You have the floor.
Fumiyoshi Sakai
This is Sakai from Crédit Suisse. As you just mentioned, the definition of HER2 low is going to be defined through an agreement with the FDA. You have given us a figure of 50% of new breast cancer patients and if we include HER2+ patients, we can cover about 70% of them according to a simple addition. Please tell me if I understand it correctly.
Wataru Takasaki
Yes. Your understanding is correct.
Fumiyoshi Sakai
Okay. Thank you very much. I would also like to ask two more questions on page 37 in the section of future news flow. I’m rather arbitrality thinking that the TROPION-Lung01 of Dato-DXd would have more impact. I believe this was mentioned by President Manabe during the fourth quarter presentation, that it will be completed by October 22nd. Sorry, I can catch that. Well, but I think that’s what he said. I believe the patients are still being recruited. If so, I’m not sure if the data readouts for the second half will be ready in time. There was a case where the readouts were delayed in the past. So I’m a little concerned about that. Can you explain where you stand at this time?
Wataru Takasaki
As stated in the news flow, it’s scheduled to be in the second half of this year. But since this is an event-driven study, we will not know for sure until its closer to that time. For now, we have not changed our target to be in the second half of the year.
Fumiyoshi Sakai
Do you know when the last patient in will be or you don’t know yet?
Wataru Takasaki
We are not in a position to disclose this information at this time.
Fumiyoshi Sakai
All right. I understand. I like to ask one last question briefly to Mr. Okuzawa, due to the depreciation of the yen, other companies are experiencing elimination of the unrealized, which is quite transient. But it is a factor that causes the cost of sales to fluctuate. In the case of Daiichi Sankyo, we don’t hear much about this, but do you think there is a possibility that this part of the cost will increase in the process of sales growth in HER2 in Europe and the United States. For example, how is Daiichi Sankyo managed in such a situation and also could you tell me how much of this elimination was in the first quarter? Thank you very much.
Hiroyuki Okuzawa
Sales of in HER2 are progressing very well and the inventory may accumulate in the U.S. and other countries. On the other hand, we are currently following accounting procedures in our internal worlds and we are taking sufficient care to avoid any oddities in this area. Although, I do not know the situation of other companies, we do not expect that the further depreciation of the yen will we have a significant negative impact on our cost of sales this fiscal year.
Fumiyoshi Sakai
Is that something that you can address by hedging since you mentioned accounting?
Hiroyuki Okuzawa
I am sure that there are various situations at other companies, but we are proceeding in accordance with the accounting method we are currently using. And as far as we are concerned, nothing of the kind you are concerned about is likely to happen.
Fumiyoshi Sakai
I see. Understand. Thank you very much.
Hiroyuki Okuzawa
Thank you very much. Let’s move on to the next question. Ms. Kumagai from Mitsubishi UFJ Morgan Stanley Securities. You have the floor.
Naomi Kumagai
I’m Kumagai from Mitsubishi UFJ Morgan Stanley Securities. Can you hear me?
Hiroyuki Okuzawa
Yes. I can hear you.
Naomi Kumagai
My first question is on Enhertu, the PDUFA for HER2 low expressing breast cancer is November 26th. Is that in the $639 million U.S. plan for this quarter or is it that you are thinking conservatively, partly due to the off-label use?
Wataru Takasaki
First of all, as to whether or not low HER2 expression is included? The answer is that, it is included to a certain degree. In the case of the U.S., we have to carefully monitor how many prescriptions will be made in accordance with the guidelines until November before the approval.
That is exactly what the oncology business unit is currently trying to determine the situation in the field. If the PDUFA date in November is followed by approval, we can expect to see an acceleration in the speed of the process as was the case with a second-line.
Naomi Kumagai
Understood. How about non-small cell lung cancer? Is that in there?
Wataru Takasaki
Yes. That is also included to a certain extent.
Naomi Kumagai
Understood. Also, I didn’t think I was given a due date for PDUFA other than it is in a second quarter. When we will let be? It’s for non-small cell lung cancer?
Wataru Takasaki
For NSCLC, it’ll be August 16th.
Naomi Kumagai
August 16th. Thank you. One last point, I recall that the transfer of long-term sales in the U.S. was that the transferee would start selling in July. But I’m not sure if that is happening at the time. Am I correct in assuming that the gains from the transfer will come in after the second quarter, please confirm?
Hiroyuki Okuzawa
I believe we had previously given guidance for July. But there has been a slight delay and we are now expecting it to be in August. We assume that profits will come in in the second quarter.
Naomi Kumagai
Understood. Thank you very much.
Hiroyuki Okuzawa
Thank you. It’s almost time for us to finish. So I will let the next question be the last one. Mr. Hashiguchi from Daiwa Securities. You have the floor.
Kazuaki Hashiguchi
This is Hashiguchi. Hello. In the first quarter, I believe the tax rate is a little higher. It seems a little higher than your forecast for the full year. What are the factors behind this and could you tell me if your full year forecast has changed? That’s all. Thank you very much.
Hiroyuki Okuzawa
As you pointed out, the tax rate for the first quarter is a bit high due to the calculation of the tax credit. However, after the second quarter, the tax rate will return to the normal rate. So we expect that the tax rate will be around 20% for the entire year.
Kazuaki Hashiguchi
Thank you very much.
Hiroyuki Okuzawa
Thank you very much. So this is the end of the QA session. Thank you for your attendance today. This concludes today’s meeting. Thank you all for your participation today.
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