Earnings Transcript for 4568.T - Q4 Fiscal Year 2022

Hiroyuki Okuzawa: This is Okuzawa speaking. Thank you for attending Daiichi Sankyo's Financial Results for briefing despite your busy schedule. I now explain our financial results for FY 2022 announced at 1

Ken Takeshita: Thank you very much. And it's a privilege for me to give you an update on research and development activities for fiscal year 2022. Next slide, please. So as a summary, I want to mention that we have made major advances in ENHERTU program. This has, of course, become a very important treatment of breast cancer, particularly in the subgroup of these patients who are HER2 positive and also HER2 low. But we can also see that we are making major progress in other HER2-positive targetable tumors. In addition, we are making steady progress in the other two ADCs listed here, the Dato-DXd program and the HER3-DXd program. And previously, in many of these other investor calls, you have heard me refer to the alpha program. This includes all the pipeline drugs outside of the 3 ADCs. And today, I will update you on how we are doing in terms of alpha program, including new therapies for hematological cancers. But I also want to mention that we are slowly transforming and transitioning the term alpha to -- so that because you can see the rising stars, the DS-7300 and 6,000. And probably starting with our next meeting, we will be talking about the five ADCs and not 3 ADCs and alpha will remain the -- all the pipeline drugs outside of the five ADCs that we have in our active clinical trial pipeline. Next slide. So here today, I want to update you on our progress on the 3 ADC program. Next slide, please. First, I would like to tell you about DESTINY-Breast03 study. And this is the major study that compared our in her to the old standard ADC called TDM-1. And this was an incredibly important study for us because it really established not just the ENHERTU program but really gave us a huge amount of confidence in our entire DXd ADC technology because it really beat the old standard ADC, the TDM1. You can see here the overall survival. The hazard ratio was 0.64. PFS hazard ratio was 0.33. So we're really talking about reducing the risk of death by 36% and reducing the risk of progression by nearly 70%. And the 21% of the patients achieved ACR with T-DXd is quite unusual, however, when patients were treated with T-DM1. So we were very, very encouraged with this detail. And this, as you know, led to approvals for her to in U.S., Europe and Japan, and of course, more recently in China in February '23. Next slide. This is a slide about our DB04 study. This is the major study that received a tremendous amount of attention at the last year's ASCO meeting. This is the randomized study of ENHERTU in this new patient segment, which we call HER2 low breast cancer. And you can see here again that ENHERTU is compared to standard of care chemotherapy of investigator's choice. You can see here again that the efficacy is really tremendous for both progression-free survival and overall survival. And of course, as you just heard ENHERTU was approved for this particular patient population in U.S. and Europe already and also recently approved in Japan in March of '23. Next slide. So, we are marching ahead in this HER2 low patient population. We consider that we are pioneers in this new patient population. And I want to remind you that we have currently ongoing at DESTINY-Breast06 clinical trial in which patients who are HER2 low and chemotherapy naive are being compared against chemotherapy of investigator choice. So this is a randomized study intended for registration. If the data is positive, and we are expecting to see the data sometime in the first half of fiscal year '23. Next slide. In addition to breast cancer, we are making tremendous progress in other cancers. You can see here that we are already approved for HER2-positive gastric cancer and also in some countries for a HER2-mutant NSCLC in the second line. It's approved in the U.S., and we are expecting approval sometime in the current fiscal year. We are also making great progress in other cancers, which are HER2 positive. And you will be hearing more about the data at this year's ASCO occurring about a month from now in both in the colorectal cancer and this other study that's listed here on the lower right-hand corner, the PanTumor02 study HER2 expressing solid tumors. So please look for our data at the ASCO meeting. Next slide. Here on this slide, I would like to tell you a little bit about what else are we doing in ENHERTU? I think you'll see that in HER2 has become one of the most important drugs in breast cancer. And in our research laboratories, we can see that the activity of ENHERTU can be further enhanced with some of our pipeline agents. And you will -- and we are starting to explore this possibility that the research data translates into further clinical benefits in these breast cancer patients treated with ENHERTU in combination with a pipeline agent. And we are studying currently or about the study, a combination of ENHERTU with a new drug called which is an EZH2 inhibitor and also with another drug called DS-1103, which is an anti-SIRP-alpha antibody. We are seeing very interesting activity in animal models with both of these combinations, and we are very excited to be doing these combination studies in clinical trials now. Next slide. Now I'm going to turn over to the Dato program, and I would like to give you an update first in lung cancer. In fiscal year 2022, we initiated TROPION-Lung07. This is a Phase III randomized study in patients with low PD-L1 expression in the frontline setting. And we initiated this study based on very, very promising data from our initial study of the TROPION-Lung02 study. I think you are aware that in the -- in the TROPION02 study, we really demonstrated very good response rates for both the doublet as well as a triplet in this patient population, and that really led us to conducting the TROPION-Lung07 study. And I want to remind you that it is a sister study to get another Phase III randomized study called TL08, TROPION-Lung08 study, which is studying the activity of Dato in PD-L1 high patient population. So between TL07 and TL08 we have covered the entire spectrum of NSCLC patients without actionable genomic alterations the AGA. Next slide. I want to remind you that we are -- in addition to the frontline studies, we are making very good progress in the relapsed refractory setting for non-small cell lung cancer in the second line and plus patient population. The TROPION-Lung01 study is a randomized Phase III study of Dato-DXd versus docetaxel in patients who have been previously treated with -- for their advanced or metastatic NSCLC, and we are expecting the data sometime in the first quarter of our fiscal year '23. The other study, TROPION-Lung05 study that's listed here is a Phase II study, and we have seen a data from that study. It's a supportive data for our main regulatory study 101, and so TL05 alone is not sufficient for registration and is really data used to support our main study, which is the TL01. But the TL05 study will be presented at future betterment. Next slide. In terms of the Dato-DXd breast cancer program, I think you're aware that we have already presented some data on this. And in fiscal year 2022, we started two new studies, TROPION-Breast02 study which is a Phase III study in PD-L1 ineligible frontline triple-negative breast cancer patients. This is a randomized study comparing Dato-DXd versus chemotherapy of investigators choice, and this -- we're very excited to be in the frontline setting with TROPION-Breast02. We also want -- I also want to mention TROPION-Breast03 study, which is also a new study for 2022, in which Dato-DXd is being studied in the adjuvant setting. This is a collaboration with the cooperative group swag in the U.S. This is a 1,000-patient study, and this is a study that started in December '22. I do want to make sure to mention our TB-01 study. This is a very important study, and we are expecting to see some data from this study in fiscal year '23, the first half. So, very excited to be looking forward to that study. Next slide. HER3 DXd. This is the third study. I mean, third DXd-ADC we have in our program. And our initial registration study is HERTHENA-Lung01, also known as HL01. We have obtained the data, and we are -- we can see that we can see that the drug shows good evidence of efficacy with durable responses. We are planning to show the data at an upcoming lung cancer conference. I think it's going to be later this year and not at ASCO, but we'll be showing the data at an upcoming meeting. And I want to try to anticipate some of your questions and tell you that -- we are in active discussions with the regulatory agencies on this study data. I think the data looks quite promising and clinically meaningful. So please the weight for us to show you the actual data and also to hopefully give you an update on our regulatory discussions with the regulatory agencies worldwide. Next slide. Okay. Now in terms of the -- our pipeline drugs beyond the 3 ADCs, next slide. This DS-7300 is another DXd ADC in which the target is an antigen called B7-H3. This was used to be called rising stars. But in the future, I think we're going to be including in this as part of our five BDC program because we are at the point now where we can update you to say that we are seeing very good results with small cell lung cancer and we have initiated a focused program leading towards registration of 7300 in small cell lung cancer. And in addition to small cell lung cancer, the opportunities for this drug is quite wide because the target antigen is widely expressed in many other cancers besides small cell lung cancer. We have yet to fully explore the range of activities for 7300 in cancers other than small cell lung cancer. So we're -- so please wait for us to see more data in more cancer types beyond small cell lung cancer. Next, DS-6000 is our fifth DXd-ADC. It is directed against a cancer target called CDH6. And so far, we are seeing very good activity in ovarian cancer. And that -- so, we are initiating a focused program in ovarian cancer, but as with the other a rising star ADC 7300, DS-6000 also has yet to be fully explored in many cancers beyond ovarian cancer. So, we are very interested in broadening the range of indications that we can study. With both of these drugs, we can see that the expression isn't completely dependent on the level of expression. So like with ENHERTU, we are now studying patients who have lower levels of expression of these target antigens for both 6000 and 7300. And it will be very interesting to see what the clinical data shows. Next slide. In terms of our hematological programs, quizartinib, we have reported the data already. So we have very good overall survival improvement. And we are expecting regulatory action from various regulatory agencies worldwide. And I think we're very close to getting approvals for quizartinib in various countries around the world. I do want to mention that in the U.S., the FDA did request a special REMS program, which extended the PDUFA date by three months. But we don't foresee any problems with the FDA other than to submit an acceptable REMS program. Next slide. This is just a brief slide to show that we have yet another drug for hematological cancer called ATLL, which stands for adult T-cell leukemia lymphoma. This is a drug that is -- this is a disease that is really unique for Japan and very limited parts of the world, but we can see that activity here for EZHARMIA in ATLL is quite good. And on top of that, we have a pivotal registration program going on in PTCL, which stands for peripheral T-cell lymphoma, which is a disease that is not restricted to Japan, but also found in other parts of the world, including the U.S. and Europe. I do want to mention again here that EZHARMIA also represents a very important strategic opportunity as a combination drug with DXd-ADCs, including HER2 -- you'll see here on the right-hand side, a program in breast cancer as a combination with ENHERTU as part of a much bigger plan for this EZHARMIA drug. Okay. Next slide. DS-5670. This is our Daiichi Sankyo original RNA vaccine for COVID. And this is really intended for approval and commercialization in Japan. And we are really focused now on the development of our booster vaccine, and we have submitted for regulatory approval of our vaccine for boosters in January of 2023, and we hope to receive a regulatory action on our submission in the near future. And we are also currently studying and developing additional vaccines, including the mutant strain vaccine as listed here on the lower right-hand corner of this slide. Next slide. There is a summary of many other programs we have in our Alpha program, YESCARTA, DS-9606 in oncology, the vaccine program that I mentioned to you beyond just the COVID vaccine. We have the FluMist. We also have an RSV vaccine Phase II program going on. And in specialty medicine area, this is a non-oncology disease indication. We do have very early programs in addition to some mature ones, Tarlige is a much mature program, really now focused on China development, at 1211 and 2325, these are very early Phase I studies that are really going to be very important for these new specialty medicine programs. I do want to mention that 5141, this is an anti-sensor oligonucleotides drug intended for DMD, patients, Duchenne muscular patients. We have stopped development of this drug because of the difficulty in submitting an NDA with the current data set. However, since we -- there are no alternative treatments available in Japan currently, we do intend to provide treatment opportunity to those patients who are still on treatment in a clinical trial and who desire to continue to be treated with this experimental agent. Next slide. Okay. And finally, in terms of more coming events from an investor standpoint, please anticipate that we will have an ASCO highlights for you in '23 for the ASCO. This will take place in -- on June 6, Japan Time, June 5 U.S. time. Next slide. In terms of the news flow for the coming year, this is a summary of what you can expect in terms of major publications, regulatory decisions, key data and also planned pivotal study initiation. And so this really completes my portion of the presentation. Thank you very much.

Hiroyuki Okuzawa: From here, I Okuzawa will explain five-year business plan update. Please turn to Page 47. You can find FY 2025 targets and four strategic pillars to shift to sustainable growth stage. I will use the following two pages to explain the progress for the two years since FY 2021, when our five-year business plan started. Please turn to Page 48. As for maximizing 3 ADCs, a huge progress was made in maximizing the product value of ENHERTU. In DB-03 and DB-04 studies, we obtained data substantially exceeding our assumptions under the five-year business plan. And indications of HER2-positive breast cancer, second line and HER2 low breast cancer post chemo were approved. We also obtained approval for a new indication of NSCLC, the third cancer type following breast cancer and gastric cancer. DB-03 and DB-04 study results were highly appreciated by health care professionals and had sales were expanding at a rapid pace exceeding the initial plan. In addition, studies for additional indications such as DB-09 study for HER2-positive breast cancer first line are also progressing at a rapid pace exceeding the initial plan. The product value of Dato-DXd and HER3-DXd has also been greatly enhanced over the past two years. Steady progress has been made for pivotal study for launch. Also, multiple Phase III studies are initiated aiming for additional indications after launch. The development of the two products is progressing at the speed exceeding the initial plan. Regarding profit growth for current business and products with additional dosage and administration sales of LIXIANA with enhanced product value are expanding steadily. Also in each country and region, sales of Tarlige, Injectafer, Venofer, et cetera, are growing steadily, contributing to enhancement of creating sources of investments for sustainable growth and shareholder returns. Transformation of business structure focused on percentage drugs is also making steady progress. We have launched new drugs such as Emgality and Ezharmia. Product divestiture after Loseecusivity in each country region is progressing and profitability is being reinforced. Please turn to Page 49. Identify and build pillars for further growth. The development of emerging candidates for new growth driver, rising stars following 3 ADCs is making progress. In Phase I studies of DS-7300 and DS-6000, we obtained interim analysis data, which showed early efficacy signals in multiple cancer types, increasing the potential of both products. Furthermore, there is steady progress to select post-DXd-ADC modalities. We started clinical studies of the second-generation ADC DS-9606. Create shared value with stakeholders. In line with profit growth, we decided to increase annual dividend per share for FY 2022 to strengthen shareholder returns. Actions against pandemic risks are also progressing. We found regulatory submission for original strain booster vaccination for DS-5670. Also to promote environmental load reduction across the value chain, we joined RE100, a global initiative aiming to use 100% renewable energy for electricity consumed in business activities. We are also making progress in initiatives for environmental issues. We converted electricity consumed in basis in Japan to renewable energy. By deepening the understanding of the three core behaviors common across the group through workshop by management and employees and organizing penetration of core behaviors, we are fostering one DS culture for all employees to work vigorlessly eyond national and cultural borders. As I explained, the four strategies in the five-year business plan are making steady progress. We are becoming more confident about the achievement of FY 2025 targets. Next, I will explain our outlook for achieving KPIs in the five-year business plan. Page 50 is our forecast of achieving FY 2025 KPIs as of now. We are expecting revenue to exceed our target of ¥1.6 trillion by ¥400 billion to reach ¥2 trillion. A main factor for the increase is revenue in oncology, which is forecast to exceed the target of over ¥600 billion by about ¥300 billion to increase to ¥900 billion or more. Along with the revenue increase, we also expect cost of sales and SG&A costs to increase as well, but we will continue efficient and effective spending. For core operating profit ratio before R&D expenditure, we will continue to aim for achieving our target of 40%. As the development of our pipeline is making steady progress, we will actively execute investments for sustainable growth. By aiming for cash allocation with a good balance with shareholder returns, we expect ROE and DOE to achieve the respective targets of 16% and 8% or higher. The currency rate assumptions as of April 2023 for KPIs, ¥130 against the U.S. dollar and ¥140 against the euro. Page 51 is the forecast of oncology revenue. With the revenue growth of net and Dato-DXd, exceeding the initial plan and the progress of 3 ADC development oncology revenue in FY 2025 is estimated to be over ¥900 billion. This graph is an image of the revenue expansion during the five-year business plan. For ENHERTU, we are envisioning sales expansion in the breast cancer market based on the DB03 and DB04 study results accelerated studies to expand indications, such as DB09 and DB11 to drive product sales and regulatory milestone payments and sales milestone increased by product sales expansion, exceeding initial plan to increase the revenue substantially. As for Dato-DXd, we will aim for launch of the indication of NSCLC in the second-line settings and beyond. Sales are expanding from broader target patients compared to the initial plan. Also, with accelerated OCM driving sales expansion, such as TL08 and increased regulatory milestone revenue, we are expecting revenue to exceed the initial plan. Page 52 is about profit share increase for ENHERTU and Dato-DXd. The graph shows an image of profit share expansion during the five-year business plan. Along with the growth of product sales of ENHERTU and Dato-DXd in countries and regions where we book our revenue, except for Japan, profit sharing with AstraZeneca based on the strategic alliance is expected to increase. SG&A expenses are estimated to go up. In addition to the profit share increase, cost increase is expected due to the indications where we were not expecting approval during the five-year business plan initially. So SG&A cost is expected to increase compared to the initial plan. But by executing other spending more effectively and efficiently, we will aim to achieve our FY 2025 goal of 40% core operating profit ratio before R&D cost. Page 53 is 3 ADC launch plan. Studies highlighted in red box are the studies where we did not expect approval during the five-year business plan initially. Due to the cost increase from these studies, R&D expenditure is expected to exceed the initial plan but all of these studies are indispensable important studies to realize the maximization of the 3 ADCs aiming for early approval and promotion start, we trying to make proactive investments in R&D. Page 54 shows our R&D strategy. Due to the increasing potential of growth driver candidates after the 3 ADCs namely the DS-7300 and DS-6000, we revised our R&D strategy from April 2023 and beyond from three and over to five DXD ADCs next wave. To realize sustainable growth, we will make proactive R&D investments for promising pipelines other than the 3 ADCs as well. Page 55 shows the cash allocation to investments and shareholder returns. The source for cash allocation during the five-year business plan includes Cash in hand at the start of the five-year business plan and the addition of the operating cash flow before R&D expenditure for five years. This is expected to increase to ¥3.1 trillion up by ¥300 billion compared to the initial plan due to steady sales expansion of ENHERTU and current products. Based on the increased source for cash allocation and the pipeline progress, part of the cash to be allocated flexibly to investments for growth and shareholder returns will be used for R&D expenditure and CapEx for further growth into the future. About ¥1.8 trillion, which is ¥300 billion more than the initial plan will be allocated to prioritize investments for DXd-ADC. About ¥600 billion, which is ¥100 billion more than the initial plan will be allocated to CapEx focused on enhancing ADC supply capabilities. We will implement proactive growth investments for sustainable growth with cash allocation, well balanced with shareholder returns, we will continue to aim for achieving our target of 8% or higher DOE. Over the past two years, we have obtained extremely positive data from ENHERTU clinical studies. Product sales and milestone revenue are expected to exceed the initial plan substantially. Centering on the clinical studies to expand indications for ENHERTU and Dato-DXd, DXd-ADC clinical studies are progressing at the pace exceeding the initial plan. In order to realize FY 2025 targets and 2030 vision, we will continue to commit to shareholder returns we promised. And at the same time, we will spend necessary SG&A cost for future growth, aim for revenue growth and invest into R&D so that we can realize sustainable growth. Daiichi Sankyo will contribute to the enrichment of quality of life around the world by continuously taking a challenge on providing innovative solutions. Last but not the least, I will talk about FY 2023 forecast. Please turn to Page 59. We are targeting revenue of ¥1.250 trillion and core operating profit of ¥140 billion in FY 2023. There are factors to decrease the revenue such as NHI drug price revision in Japan but sales of main products such as ENHERTU, LIXIANA and Torija will expand. So we are forecasting sales increase by ¥171.g billion year-on-year to ¥1.450 billion. Along with revenue increase, cost of sales is expected to rise by ¥50.9 billion. SG&A expenses are expected to increase by ¥79.9 billion, according to our forecast due to an increase in unheard related profit sharing with AstraZeneca. R&D expenses are forecast to increase by ¥23.3 billion due to an increase in five DXd ADC's R&D investments. As a result, core operating profit is expected to rise by ¥17.4 billion year-on-year to reach ¥140 billion according to our forecast. We are expecting the booking of ¥5 billion temporary expenses for FY 2023. So, we are forecasting operating profit of ¥135 billion, down by ¥5 billion from the core operating profit. Profit attributable to owners of the Company is expected to increase by ¥5.8 billion year-on-year to ¥115 billion, assuming the tax rate of 14.8% due to the impact of tax credit for R&D expenses and others according to our forecast. The currency rate assumptions are ¥130 against the U.S. dollar and ¥140 against the euro. Page 16 shows annual dividend increase in FY 2023. Sales of ENHERTU, the most important product during the five-year business plan are expanding with a higher likelihood to achieve major FY 2025 financial targets. So, we decided to increase dividend payment this fiscal year again following the previous fiscal year. We plan to increase annual dividend per share by ¥4 from ¥30 in FY 2022 to ¥34 in FY 2023. We will continue to improve capital efficiency and further enhance shareholder returns. We will aim to achieve FY 2025 target of 8% or higher DOE. From here on, we are going to entertain your questions.

Operator: The first question, Citi Group Securities, Mr. Yamaguchi, please.

Hidemaru Yamaguchi: So, this is Yamaguchi from Citi. I ask some brief questions. The presentation was really diverse. Current fiscal year SG&A is expected to grow about ¥80 billion. As ENHERTU sales increased payment will be made to AstraZeneca. But excluding AG payment, there is still some significant increase. What is the nature of the cost? In addition, down the road, excluding fixed AstraZeneca SG&A payment is SG&A trending up or it will go down gradually including infrastructure investment, tell me the trend in SG&A?

Hiroyuki Okuzawa: Thank you for the question. As you understood in SG&A, the SG&A and AstraZeneca profit share are included. First, AstraZeneca profit sharing, in territories where the product sales meet 40% of payment is incurred. Therefore, please estimate the figure around there. Other than that, as you understood, we are establishing oncology commercialization infrastructure in many countries. By now, U.S. and Europe went in advance and created sales infrastructure and along with indication expansion, promotional investments were made, which are reflected in SG&A in the previous year. In the future, as indications increase, promotion investment will be made as necessary. On the other hand, regarding the infrastructure our two major strategy oncology area, breast cancer and lung cancer are there. We have created breast cancer infrastructure working with AstraZeneca by now. From now in lung cancer with Dato-DXd at the core, to co-promote with AstraZeneca in 50-50 setting, Lung cancer cells infrastructure establishment is assumed, which is factored in the future SG&A. However, as it is a kind of fixed cost in a so with the completion of the infrastructure, it will not keep increasing. Please understand it that way.

Hidemaru Yamaguchi: My second question is about According to Mr. Takeshita's comment, the information is not shared in ASCO. So I infer WCLC is likely. I know it is difficult to disclose the top line result. But it is tough to know whether the results were bad. From Mr. Takeshita's comments, I felt the results were in line with your expectation. Is it correct?

Ken Takeshita: Yes. I can answer that question. So we can't really disclose to you yet the actual clinical data, but we are very happy with the data. We think it's clinically meaningful. I hope that's the answer for you.

Hidemaru Yamaguchi: Yes. Regarding -- yes, the one follow-up question for that is that, people are worried about because the FDA is now changing a stance a little bit to the cautious stance to approve the drug based on the single-arm study. Did you talk to FDA or you are still happy with talking to the USD about this single arm study because it's a breakthrough designated. So people are a bit worried about, is there anything kind of changing U.S. FDA stance may have an impact on this potential filing of DXd?

Ken Takeshita: It's a bit difficult for me to give you the details of where we stand on our regulatory conversations that we're having. I think I can really tell you, though, that the FDA and other agencies still believe that it's important to bring drugs to patients is very high unmet medical need. And I want to remind you that with this HER3 DXd clinical trial, the clinical trial, these are patients who had two prior lines of therapy. So these are really third-line patients. And there's really no treatment available for these patients. And so I think that's a very important part of the conversation here.

Hidemaru Yamaguchi: Finally, regarding TROPION-Breast01, which was we're supposed to be -- come out a little bit earlier, but it sounds like it is expedited as far as the top line data just for some? Is there any reason behind it? Or is it in line with your original plan?

Ken Takeshita: I'm really happy that you asked that question. So the time line for that study is earlier than planned. It turned out to be a very popular study from an enrollment perspective. And so, we are very happy with that.

Hidemaru Yamaguchi: Right. Because of the environment is quicker, that's why the top line comes out quicker, right?

Ken Takeshita: That's correct.

Operator: Next, JPMorgan Securities, Mr. Wakao from JPMorgan, please.

Seiji Wakao: Tell me about Slide 56. You extended investment period a little and this fiscal year became part of the investment period. On the other hand, not sure if this next fiscal year or fiscal year after the next, you will move to profit growth period what are their definitions? Also FY 2025, absolute operating profit amount is up or down from your previous targets, increase in R&D expense and growth in the top line the absolute amount does not change that much. That's what I felt. Tell me about the number?

Hiroyuki Okuzawa: Thank you for your question. So between investment period, and profit growth period regarding what are the changes and how they are implemented. As shown in the 3 ADC launch plan slide, in the initial midterm plan, we had 3 ADCs new indications planned for the five years. Compared to the plan, we have greater number of indication expansion studies as presented. From that viewpoint, we are at the middle of our current midterm business plan because we are in FY 2023. If we followed our original clinical trial plan, R&D investment would have been still down around now. On the other hand, in the background of still increasing R&D investment, the expectation of approvals in the five-year period, and the prospect to have five ADCs rather than 3 ADCs, new growth drivers are there. Given that, we continue to invest in R&D that these are change in the situation from 2.5 years ago. So we are still in investment period because of the reason. Regarding the other question about FY 2025 absolute profit amount, core operating profit ratio before R&D is about 40%, which stays the same. We are confident about the number. On the other hand, we need to do the math. By now, ¥1.6 trillion was a base amount but it's now 40% of ¥2 trillion. In that sense, before R&D expenses the investment basis as an absolute amount is up compared to the original midterm business plan numbers. That is a factor. How much of that base is a marked for R&D investment? And how much is retained as earnings are then considered as the background to set this KPI in the current midterm business plan, we have stated the management will make allocation decision looking at the pipeline progress that is still ongoing. In the future, we intend to make decisions that way. FY 2025 profit forecast in our midterm business plan two years ago and updated FY 2025 absolute amount for cash, if you compare current forecast is not inferior at very least, I note.

Seiji Wakao: R&D budget was changed from ¥1.5 trillion to ¥1.8 trillion, an increase of ¥300 billion. It's not a small amount. This time shift from 3 ADCs to five ADCs, in addition, you invest in next wave. General thought is that early-stage projects are not very expensive. So that I assume that you decided to conduct large-scale clinical studies. Is my idea correct? In other words, as HER2 low adjuvant study or other extensive, large-scale study implementation is already envisioned.

Hiroyuki Okuzawa: Thank you for the question. Basically, 3 ADC product value maximization contribution is our first strategy. New growth driver is our third strategy. We intend to focus on those. Basically, your understanding is correct. Especially regarding ENHERTU, DB03 and 04s excellent data are received very favorably by health care professionals. With heightened expectation of the product not only in clinical practice use, but also in clinical trials, motivation to actively participate in at indication expansion clinical trials are enhanced, resulting in an acceleration of the clinical trials moving up the time line that is a status quo.

Seiji Wakao: I'll ask just a simple question. I suppose DS had a big expectation about TROPION-Lung01. So it has not changed.

Hiroyuki Okuzawa: Correct.

Operator: Next, Mr. Hashiguchi from Daiwa Securities, please.

Kazuaki Hashiguchi: Hashiguchi speaking. I have a question about the core operating profit ratio before R&D expenses. As FY 2025 financial targets of our five-year business plan, this time, you have made a substantial upward revision of your revenue forecast from ¥1.6 trillion to ¥2 trillion, but the margin has not been changed. How should I understand this? Could you please explain again?

Hiroyuki Okuzawa: You're asking why we are not changing the 40% margin before R&D cost?

Kazuaki Hashiguchi: Yes.

Hiroyuki Okuzawa: Usually, when revenue increases, margin improves in many cases. Yes. This was one of the main KPIs in the initial midterm business plan. And also, this 40% core operating profit ratio before R&D expense has been really set up as a KPI. As I said before, we regard this as a source for continuous R&D investments. While the top line revenue increases if it's going to be at the same ratio, the absolute amount of the source is going to be bigger. We'd like to use the bigger source of money to allocate to promising pipelines more than 2.5 years ago. In order to secure such a source of money to contribute to the enhancement of sustainable growth and sustainable corporate value of Daiichi Sankyo we would like to maintain the same 40% ratio also for the top line revenue target of ¥2 trillion.

Kazuaki Hashiguchi: This is the core operating profit ratio before R&D expenditure. So I don't think an increase in R&D cost cannot be a reason for this. What do you think?

Hiroyuki Okuzawa: Sorry. Could you repeat your question, please?

Kazuaki Hashiguchi: This is the core operating profit ratio before R&D expenditure. So I don't think an increase in R&D cost cannot be a reason for no change in the margin, in my view. What do you think?

Hiroyuki Okuzawa: Let me explain a bit. On behalf of Okuzawa, regarding your question, revenue increase mainly consists of ENHERTU and Dato-DXd sales increase. As Okuzawa explained, profit sharing with AstraZeneca is about 45% of revenue. Profit margin before R&D cost vis-à-vis revenue increase is much lower compared to other usual products. In addition, cost to put infrastructure into place for lung cancer and new indications are also included in our assumptions. So at this stage, we cannot expect usual profit increase along with the revenue increase. That's why we are maintaining the same 40% margin. I hope you understand this way.

Kazuaki Hashiguchi: Okay, understood. One more question. About DS-5670, you mentioned that the data did not demonstrate non-inferiority to community in the development of primary vaccination. What do you think is the reason why? In the future application to various pipelines, could you please share your view on the competitiveness of your messenger RNA technology based on the results you presented.

Ken Takeshita: Yes. So let me just very briefly comment on this question. Yes, for the original monovalent vaccine, it did not show not inferior, but I wonder, of course, whether that particular clinical trial, and that vaccine is really relevant to Japan anymore since the vast majority of patients -- people in Japan have been vaccinated. And we have, as you know, obtained very good data on the subsequent program. And in fact, we have submitted that for approval. So from a standpoint of how does that non-inferiority clinical trial negative data impacts the entire RNA vaccine program I think that because we have more positive data in other settings with other vaccines and including the mutant vaccine that we are currently developing. We remain very confident in our RNA vaccine technology, not just for COVID but also its further applications in other infectious diseases and possibly beyond that.

Operator: Next, Mr. Muraoka from Morgan Stanley, MUFG Securities, please.

Shinichiro Muraoka: Hello Muraoka from Morgan Stanley. Can you hear me?

Hiroyuki Okuzawa: We can hear you.

Shinichiro Muraoka: I have a question about the math behind your five-year business plan. ¥1.8 trillion R&D expenditure your budget this fiscal year is ¥360 billion. If I subtract that amount, ¥850 billion remains. In FY 2024 and '25, at this pace, ¥400 billion and ¥450 billion, respectively, spending like this will come to my mind, looking at your numbers. Calculating this way is not far away from your plan, roughly speaking.

Hiroyuki Okuzawa: Thank you for your question. As you said, this is exactly the world of math. ¥1.8 trillion will be spent over five years subtracting the amount we already used for the past two years as well as the amount we are planning to use in FY 2023, we will spend the money in FY 2024 and '25, at the level, as you mentioned.

Shinichiro Muraoka: Understood. Also, regarding R&D, you're going to present DESTINY-PanTumor02 data at ASCO. I'm looking forward to ASCO presentation, but you didn't mention filing with FDA in your presentation today. What's your plan for submission?

Ken Takeshita: So, I don't want to yet comment on what we will do with the PanTumor data. I think I just want to -- because we have not made that information public. But it is a very important piece of data in many other cancer types, which happen to be HER2 positive. And that's a very important consideration in terms of interaction with the FDA. And I hope to give you more update on this after ASCO and after our regulatory plans have been finalized.

Shinichiro Muraoka: Thank you. Finally, I have a brief question. CapEx will be increased by ¥100 billion in the five-year business plan. Is this because of ForEx. I'm sure the volume is increasing. If that's the case, is it due to ENHERTU or you need to manufacture Dato-DXd more to invest into Dato-DXd? Now that you come to know that you're planning to invest more into Dato-DXd actively. Could you elaborate on this, please?

Hiroyuki Okuzawa: Our plan to increase CapEx by ¥100 billion includes CapEx for ADC and vaccine-related facilities. That's one point to note. As for ADC, as we announced our initial plan 2.5 years ago, we plan to spend ¥500 billion to be able to address the supply during this five-year business plan period. This time, we're increasing CapEx forecast by ¥100 billion to be able to handle an increase in demand for ADC in FY 2026 and beyond. I hope you can understand this way.

Operator: This is going to be the last question. Mr. Ueda from Goldman Sachs Securities, please.

Akinori Ueda: Ueda from Goldman Sachs Securities speaking. I have just one question. On Page 51, you have shown us a graph of revenue increase from ENHERTU, Dato-DXd and HER3-DXd. I want to confirm the changes. Earlier, you explained major factors increased from the initial plan shown on the right-hand side. In reality, there may be ForEx impact as well. What are the major changes in particular? Also, there seems to be a smaller expectation for HER3-DXd right now. Are you doing probability adjustment? Promising data you obtained recently is not factored in? Are there any such factors behind? Could you elaborate on your assumptions, please?

Hiroyuki Okuzawa: You were asking about Page 51, where we are showing revenue to increase from ENHERTU, Dato-DXd and HER3-DXd. Our initial target was ¥600 billion, but we are increasing this by ¥300 billion to ¥900 billion. Roughly speaking, increase from ENHERTU will be about ¥250 billion. About ¥40 billion increase will come from Dato-DXd. Combining the two, about ¥290 billion, the rest will come from other oncology products. That's the breakdown of ¥300 billion. As of 2025, ENHERTU on a stand-alone basis is expected to exceed ¥600 billion according to our forecast. Could you please repeat your question on HER3 once again? Dr. Takeshita commented earlier that he's confident about HER3-DXd as promising data has been obtained. That is not factored in. So HER3 revenue is very small here.

Akinori Ueda: HER3 revenue is too small to see in my view. What's your assumption here?

Hiroyuki Okuzawa: Thank you for your question. In our future interaction with the regulatory agencies, we will be able to clarify such assumptions more. We'd like to discuss with you at an appropriate timing. Thank you for your understanding.

Akinori Ueda: Understood. That's all for me. Thank you very much.

Hiroyuki Okuzawa:

Operator: Now it's time to finish. We are closing Q&A session with investors and analysts. We thank you all for joining this meeting today. Thank you very much.