Daiichi Sankyo Company, Limited

Kazunori Hirokawa - Chief Financial Officer, Executive Vice President

Hidemaru Yamaguchi - Citigroup Atsushi Seki - UBS Kazuaki Hashiguchi - Daiwa Securities Fumiyoshi Sakai - Credit Suisse Shinichiro Muraoka - Morgan Stanley

This is Hirokawa speaking. Thank you for joining Daiichi Sankyo Financial Conference Call today.

I will explain about the first quarter financial results, announced at 1 p.m. today, based on the conference call material.

Please look at Slide Three. I will touch upon following topics.

FY 2017, the first quarter financial results; major management-related updates, including Edoxaban, Japan business, Injectafer progress; and programs for China business growth. Then as R&D updates, I will mainly focus on the representation at annual meeting of ASCO or American Society on Clinical Oncology in June.

And after that, I will entertain your questions. Let me begin by the financial results of the first quarter, FY 2017.

Please look at Slide Five, outline of FY 2017 first quarter financial results. Consolidated revenue was ¥239.1 billion minus 0.8% or ¥1.9 billion year-on-year.

Cost of sales increased by ¥2.5 billion, SG&A expenses ¥1.3 billion and R&D expenses ¥1.4 billion year-on-year. As a result, operating profit was ¥40.3 billion, 14.8% or ¥7 billion decrease year-on-year.

Profit before tax was ¥42.2 billion, ¥3 billion decline year-on-year. Profits attributable to owners of the company was ¥29.2 billion, 4.7% or ¥1.4 billion decline year-on-year.

Currency rate was ¥111.1 to the dollar, ¥2.85 depreciation from -- and ¥122.19 to the euro similar to that of the same period of previous year. Please look at Slide Six.

I will explain about the factors contributing to the increase or decrease year-on-year with three slides. Revenue declined by ¥1.9 billion year-on-year, and its breakdown will be discussed a major business unit by unit.

In Japan business, including innovative business, vaccines and OTC, LIXIANA, an anticoagulant, made a major growth; as well as NEXIUM, an antiulcer agent; and PRALIA, an osteoporosis treatment, Daiichi Sankyo Espha products expanded sales. On the contrary, Olmetec, an antihypertension agent, and others decreased sales.

Daiichi Sankyo Healthcare increased sales also. Altogether, Japan business increased by ¥8.9 billion.

Next, let me explain about the Global business. Numbers here exclude ForEx impact.

Daiichi Sankyo, Inc. in the United States had ¥16.4 billion decrease due to sales decline in Olmesartan, an antihypertension drug, with loss of exclusivity in October last year.

On the other hand, Luitpold U.S. increased ¥4.9 billion through growth in generic injectables and Injectafer, an iron-deficient anemia treatment.

Despite contribution by LIXIANA, Daiichi Sankyo Europe saw ¥1.9 billion decrease due to decline in Olmesartan sales. ASCA business, covering Asia and Central and South America, had JPY800 million growth.

Positive impact by the yen depreciation was JPY1.8 billion in total. Now please look at slide seven, which shows factors contributing to the operating profit variance.

As has been said, revenue had JPY1.9 billion decline, despite JPY1.8 billion positive ForEx impact. Next, elaborating on costs.

Excluding ForEx impact and other special factors, cost of sales increased by JPY1.8 billion through rise in cost of sales ratio, due to the change in the product mix with decline in Olmesartan's sales revenue. SG&A and R&D expenses increased by JPY700 million and JPY900 million respectively.

Increase in expense due to ForEx fluctuation was JPY1.7 billion overall and breakdown-wise JPY600 million on COGS, JPY600 million on S,GA and JPY500 million on R&D. Since there were no special factors on both this and the preceding quarters, operating profit for this quarter was JPY40.3 billion, declined by JPY7 billion or excluding ForEx impact it was JPY7.1 billion net decline.

Next, let me explain about the profit on Slide 8. Operating profit decreased by JPY7 billion, financial income or expenses had JPY4 billion reduction in expenses by ForEx gain.

In addition, income tax decreased due to the decline of the profit before tax, resulting in profit attributable to owners of the company was JPY29.2 billion, declined by JPY1.2 billion year-over-year. Please look at Slide 9.

This is yen-based sales variance by major business units. Numbers on slide 6 excluded the ForEx impacts, whereas here the results include such impacts.

While Daiichi Sankyo, Inc. in U.S.

and Daiichi Sankyo Europe had a negative revenue growth due to Olmesartan patent cliff, Japan business expanded its sales steadily as well as Daiichi Sankyo Healthcare. Overseas, Lutipold in the United States had major sales growth.

Next, please look at slide 10. These are revenue variances for major products in Japan.

Main products such as LIXIANA, NEXIUM and PRALIA have made another good start this fiscal year. On the contrary, however, many long-listed products are struggling more than the same period last year due to extending market erosion by generics.

From here on, I'd like to give you an update on major management topics. First, Edoxaban update.

Please turn to Page 13. This page shows the trend of our sales share in the Japanese market.

Edoxaban's share has expanded steadily to exceed 20% in the first quarter. It's narrowing the gap against the top two products as well.

Turning to Page 14. This shows not our sales share but our share in terms of the number of prescription sheets for new patients.

This is regarded as an important indicator, which leads to future sales growth. Edoxaban has continued to be in top position since March, and its share expanded to 34.2% as of May.

Please go to Page 15. This shows the situation in Germany and South Korea.

Our sales share has continued to expand steadily since launch in both countries. Next on Page 16.

You can find an update on life-cycle management for Edoxaban. Based on the results from ENSURE-AF study, which was completed last year, we received a positive opinion from the European CHMP.

Following this, the pathology and method of administration section of SmPC was updated to clearly describe how to administer Edoxaban to an NVAF or non-valvular atrial fibrillation patient undergoing cardioversion. About 24% of the newly diagnosed NVAF patients are estimated to undergo cardioversion according to some reports.

So we believe physicians can use Edoxaban for such patients with more confidence than ever in the future. Next, I'd like to give you an update on our Japan business.

Please turn to Page 18. In July, PRALIA was approved for additional indication of rheumatoid arthritis on top of osteoporosis.

Denosumab's approval for RA is the first in the world. PRALIA became the first product to have both indications.

About 45% of RA patients are complicated with osteoporosis according to some reports. So we believe that the competitive edge will be enhanced.

We also obtained approval for CANALIA Combination Tablets. This a combination product of TENELIA and CANAGLU tablets, two agents created by Mitsubishi Tanabe Pharma Corporation for type 2 diabetes mellitus.

Daiichi Sankyo will do marketing of the product, while the two companies work together to co-promote CANALIA to provide information to medical institutions. This the first approval of DPP-4 inhibitor/SGLT2 inhibitor combination drug in Japan.

Next, please turn to Page 19. We developed Narurapid and Narusus tablets for cancer pain as unapproved drugs and indications with high medical needs in Japan, and we started marketing in June this year.

We are also strengthening our authorized generic business. We launched authorized generics of Micardis and its combination product in June.

Also, we relaunched Olmesartan OD tablet and Crestor authorized generics in September ahead of competitors' generics. Next, I will give you an update on Injectafer.

Please turn to Page 21. This page shows the trend of monthly revenues of Injectafer and its share in the IV iron market.

The graph on the left shows the monthly revenues of Injectafer. Revenues have been expanding further under the integrated team of Daiichi Sankyo, Inc.

and Luitpold launched in January this year. Most recently, monthly revenues in June reached $26.2 million.

The graph on the right shows our share in the IV iron market. Injectafer has been increasing its share substantially to reach 32.2%.

Our market share, including Injectafer and Venofer, has grown to about 75%. We are hoping that we can expand the market and further increase the share by growing Injectafer.

On Page 22, let me give you an update on Injectafer life-cycle management. As was explained a little during the top management presentation in May this year, we started Phase III study in heart failure patients with reduced ejection fraction complicated with iron deficiency.

We reached agreement with FDA on Special Protocol Assessment or SPA to agree in advance on our study design, primary and secondary endpoints as well as analysis plans. Iron deficiency is said to be a comorbid condition in up to 50% of 5.8 million heart failure patients in the United States.

So we are expecting there are big market potentials. In addition to heart failure, Phase II study is also ongoing to evaluate the efficacy and safety of Injectafer for the treatment of RLS or Restless Leg Syndrome in patients with iron deficiency anemia.

RLS is a disease condition with an irresistible urge to move legs and uncomfortable sensation, such as tingling and itching. Next, let me explain about our programs for China business growth, where our sales is growing in recent years.

Please look at slide 24. We have maintained an expanded alliance with optimal partners for each individual products aiming at building efficient sales and a marketing structure.

Initially, sales promotional activities excluding major cities were done by our partners. In April 2016 and onwards, co-promotion has expanded to major cities towards maximization of product revenue and profits.

As a result, we have achieved 15% year-on-year revenue growth in FY 2016. We will aim at more than 20% growth in FY 2017.

Please look at slide 25. This shows production capacity augmentation in line with China business growth.

New production line for Cravit injectables at Beijing factory began its operation in January 2017. In Shanghai factory, new production facility for solid-formulations is planned to start its operation in FY 2018, where we will satisfy growing demand in China business through these programs.

Now, let me talk about the progresses in R&D. Please look at slide 27.

These are the Phase III study results of mirogabalin, press announced on June 30. We have conducted five Phase III studies globally for three indications.

We have announced this time the result of three studies on fibromyalgia in US and Europe and one study on post-herpetic neuralgia in Japan and Asia. All three studies on fibromyalgia failed to achieve the predetermined endpoints, whilst post-herpetic neuralgia study successfully achieved its intended endpoint.

We plan to announce top-line results of the remaining study on diabetic peripheral neuropathic pain by the end of September. Future regulatory filing strategies and timing will be announced after we obtain this result.

Detailed data will be presented at major academic conferences in FY 2018. Please look at slide 28.

We made presentation on the progress of ADC franchise, one of our focus therapeutic areas at ASCO or American Society of Clinical Oncology in June. We have presented progress in Phase I study of DS-8201, HER2-ADC, a flagship asset of our ADC franchise and preclinical study of its immune-activating capability.

We have also presented the study design of the ongoing Phase I/II study of U3-1402, HER3-ADC. Now I will elaborate on these three points.

Please look at Slide 29. Using ASCO presentation slide, I will explain about the progress of Phase I study of DS-8201.

This is a waterfall chart showing best percentage change of tumor size from baseline or before the DS-8201 treatment. Each single bar represents an individual patient arranged in descending order of percentage of tumor size shrinkage from right to left.

Bars are color coded namely, breast cancer, gastric cancer, HER2 positive, HER2 low and other cancers. Most patients with variety of cancer types saw tumor shrinkage.

The dotted line on the bottom of the graph represents 30% tumor size reduction from base line cutoff value of response of the drug. Approximately half of the patient responded to DS-8201.

Please look at Slide 30. This is a table of overall response rate.

Totally, response rate was approximately 40.2%. 45.7% overall response rate was observed in breast cancer patients with prior treatments with T-DM1 KADCYLA standard of care.

Payload substance of DS-8201 is CPT-11 irinotecan-modified compound. 44.4% overall response rate was observed in gastric cancer patients with prior treatment with CPT-11.

Please look at Slide 31. On this graph, vertical axis represents percentage change of tumor size, and horizontal axis, duration of treatment.

We have confirmed that tumor reduction began at early timing of treatment, and its effect was sustained in addition. Please turn to Page 32.

This graph shows tumor shrinkage and progression-free survival. Median PFS reached 45.4 weeks in breast cancer patients.

About 80% of the patients are continuing with the treatment as indicated with a white arrow at the tip of the yellow bars. So there is a possibility that there can be further prolongation of PFS.

Turning to Page 33. Median PFS reached 27.3 weeks in gastric cancer patients.

About half of the gastric cancer patients are also continuing with the treatment. Please turn to Page 34.

This table shows the incidence of adverse events. As an indicator of severity, events are graded from Grade 1 through 5, and 5 is the severest.

Although hematological disorders and GI disorders were both observed, the incidence of Grade 4 adverse event was very low. No Grade 5 adverse event occurred.

In particular, with regards to GI disorders, often reported with CPT-11 irinotecan, no Grade 4 GI adverse event occurred with our compound. No dose-limiting toxicity was observed.

Please turn to Page 35. This shows the analysis results related to DS-8201's immune activation capability, which represented in a poster session at ASCO this year.

We analyzed the mechanism action of combination benefit of DS-8201 and anti-PD1 antibody by using syngeneic mouse model. Even when tumor cell was re-challenged, it was rejected in mice whose tumor was cured with DS-8201 treatment.

Therefore, we were able to confirm its immune activation capability. This finding suggests that DS-8201 has immune activation capability and may have additional benefit by a combination with immune checkpoint inhibitors.

As the additional benefit in combination with anti-PD1 antibody was confirmed, based on the study results, we will pursue active partnering to confirm combination benefit in human. Please turn to page 36.

This is the Phase I/II study design for HER3 ADC U3-1402 and HER3-positive refractory/metastatic breast cancer, which represented in a poster session at ASCO this year. This study has three parts; dose escalation, dose finding and Phase II parts.

In the dose escalation part, we escalate the dose in stages to confirm the maximum total daily dose. In the dose finding part, we confirm the recommended dose, which will be used in Phase II study.

Cohort 1 dosing in the dose escalation part has been completed by now. Cohort 2 dosing is continuing steadily.

Page 37 shows our future schedule for DS-8201. The next data disclosure timing will be at ESMO in Madrid in September.

We are planning to publish results for HER2-positive solid tumors, including CRC, other than breast and gastric cancer. Also, at the San Antonio Breast Cancer Symposium in December, we will publish detailed data on HER2-positive and HER2 low breast cancer.

As for the schedule of our future pivotal studies, we plan to start global study in HER2-positive breast cancer from the second quarter of fiscal 2017. We will start the pivotal study in Japan and Korea in HER2-positive gastric cancer from the third quarter.

Next, page 38 shows our future schedule for U3-1402. We plan to implement two Phase I studies at the same time.

Top-line results for HER3-positive refractory metastatic breast cancer will be available in the fourth quarter of fiscal 2018. We plan to start Phase I study in EGFR-mutated NSCLC from the third quarter of FY17.

Please turn to Page 39. Lastly, information on Daiichi Sankyo R&D day for the current fiscal year, it will be held on the afternoon of Wednesday, December 13, at our head office building in Nihonbashi, Tokyo as usual.

Dr. Glenn Gormley, Senior Executive Officer, Global R&D Head; and Dr.

Antoine Yver, Global Head of Oncology R&D, Head of Daiichi Sankyo Cancer Enterprise will also attend with our top management. At the end of my presentation slides, you can find tables of major R&D milestone events and major R&D pipeline for your reference.

That's all for me. My colleagues are also attending today.

So we are going to entertain your questions from here on. Thank you very much.

Yes, this is Yamaguchi of Citigroup. First question, first quarter operating profit was ¥40.3 billion.

SG&A expenses were rather soft compared to the whole year forecast. Impact from Olmesartan will emerge, as I understand.

Your company's operating profits progress against the whole year forecast is usually higher according to the number compared to the annual forecast. Please tell me how you evaluated this progress?

Yes, it's true. Progress was nearly 40% on the operating profit basis.

But as you know, we usually -- spending tends to be executed later. And as a result, profit proceeds in the first quarter every year.

Although the first quarter profit proceeds the forecast, we assume more expenses might be executed later in the year, so we won't change the initial annual forecast.

Understood. Two more questions on the pipeline, please.

On quizartinib, at last forecast, interim analysis would take place in the first quarter, and this time interim analysis is mentioned, and top line results will be announced in the first quarter next fiscal year. Do you have any update?

Now let me answer. Interim analysis and utility analysis as a whole were down for quizartinib.

And based on that, Data Monitoring Committee instructed us to carry on the quizartinib trial. Top line results will be announced in the first quarter next fiscal year, as is written here.

Based on the interim analysis, Data Monitoring Committee requested us to continue the clinical trial. Though I'm not that well versed, a trial could be terminated early when results are too good or too bad, right?

But in this case, trial will continue.

Yes, you are right. Understood.

On mirogablin, status of top line was just as you have mentioned?

Of course, there remains more data analysis. But in principle, it looks very difficult to continue global development with this indication.

Is that consistent with your observation, especially in US and Europe?

In Europe and US, we originally thought of fibromyalgia as a first indication, where we conducted three studies on fibromyalgia, and they could not achieve endpoints. And we consider it would be very difficult to file for approval for fibromyalgia indication.

On the other hand, post-herpetic neurology study in Japan has resulted in a good data. Result of diabetic neuropathic pain study will be available by the end of September, and we'll make a decision taking into consideration of the results.

Diabetic neuropathic pain had good Phase II results. We'll decide on the overall strategies considering these results once they are available.

Understood, thank you.

I'm Seki from UBS. I would like to ask you a question about your philosophy on US business as a whole.

We don't know what will happen to CL-108 from Charleston Laboratories, Inc. and I have the impression that Daiichi Sankyo, Inc.

doesn't have many products to sell in the United States. Could you explain your current view on your US business as a whole and being franchise in the United States?

This is my first question.

Regarding our US business and paying franchise, we thought of paying franchise before launching cancer products. But mirogabalin study results were not so good in its first indication of fibromyalgia.

So we have to revisit the approach once again. But the study results in Japan were good, so we can make a judgment on mirogabalin itself based on that study.

We thought mirogablin could be a main pillar of our paying franchise in the United States, but the study results were not so good. So we have to review our way of thinking with regards to our business in the United States, including mirogabalin study results.

And also, regarding opioid in the pain franchise in the United States, FDA held public hearings from opioids on July 10 and 11. So we have a better understanding of thinking behind opioids.

Therefore, we would like to consider further based on these.

Secondly, I have a question about safety regarding DS-8201 results you presented at ASCO this year. I think there was alopecia.

Of course, I don't think this is very settling at all, but the biggest patient population will probably be in the adjuvant settings. According to physicians, alopecia can become one major factor in selecting drugs.

In the adjuvant settings, the annual recurrence rate is around 3%. Is this alopecia preventable by optimizing the dose in the future?

What's your impression?

The sample size was small in the study. So safety data is limited.

And this time, refractory patients, who could not be treated with existing agents anymore, were included. Because of this, there was good data and good response.

But as we said, we believe we have to think about these issues including the dose. But this safety data obtained at the dose, which we believe could be quite effective, suggests that events are rather mild.

When conducting an adjuvant therapy, not only the dose but dose of the regimen are important. Currently, it's once every three weeks.

There can be a difference if you consider the regimen at the same time. But regarding the safety data, as you know well, gastric cancer patients who didn't respond to irinotecan as prior therapy did respond to our compound.

So our product was effective, but there was no Grade 4 GI disorder frequently reported with irinotecan Grade 3, just a little. The incidence of diarrhea was just 0.8%.

So also, in this regimen, side effects can be very mild. We believe we can think about dosing and administration for the adjuvant settings once again.

My last question, you used wording, active partnering for additional benefit with anti-PD1 antibody. What's the current partnering in refractory and adjuvant settings?

It can be difficult for the adjuvant settings as the study can be on a large scale. I read such analyst reports.

We're already discussing these issues internally. At any rate, we would like to make utmost to discuss how to maximize the ADC franchise and its flagship, DS-8201, early.

There can be many different questions, but we will start Phase II study in refractory patients soon. This can be done on a stand-alone basis, but we'd like to consider a variety of things for future potential.

This is Hashiguchi of Daiwa speaking. I have two questions.

Though not explained, according to the reference data set, submission of etanercept biosimilar was decided to be discontinued due to inability to keep stable commercial supply. Phase III is almost completed, and I'm surprised to hear the decision.

I wonder why you couldn't see that much earlier? Please explain why you have made such a decision at this timing?

We must establish commercial manufacturing process of etanercept biosimilar. Originally, the product still has several patents.

Later, as our companies have been granted patents for efficient production, which neither existed at the start of the project nor seemed possible to be granted. This required us to establish commercial manufacturing method, circumventing their patents.

However hard we tried we couldn't reduce cost, and high cost was the bottleneck. In Japan, the price of biosimilar is 70% of the originator product, better pricing than generics.

However, naturally when originator price goes down, biosimilar price will also decline proportionately. They keep going down together every other year or every year, which will be debated from now on.

We couldn't achieve sufficient cost reduction to sustain such price cut. Considering its commercial viability and stable supply, we'll come to such a conclusion.

Understood. My second question is on future data disclosure of 8201.

You said you will present colorectal cancer and other HER2-positive known breast cancer data at ESMO. So do you mean that there will be no update on known breast cancer until San Antonio?

For ESMO, variety of research is being done currently for nonbreast, nongastric cancers. Data from such analysis will be presented at ESMO.

And at San Antonio, we'll make comprehensive presentation on breast cancer studies, including various patient types, HER2 low, for instance. In terms of the data presented at ASCO, and many subjects are still on treatment now.

Further, long-term follow-up will not be specifically presented at ESMO, right? At ESMO, we plan to present data other than breast cancer.

At San Antonio, we'll comprehensively present breast cancer data, including those available later in the future. The abstracts aren't published yet and I can't refer to the specifics now.

But once they are published, please check them out.

I'm Sakai from Credit Suisse. I have two questions about your pipeline.

First, on mirogabalin, what is the learning effect? I am sure you had high expectations.

But on the other hand, I hear that it is now getting more difficult to develop compounds with new mechanism action against pain, including the development of the protocol. You may not have completed the sufficient analysis yet just with top-line results.

But based on the results this time, how do you perceive your paying franchise overall?

That's a very difficult question. First, in pain, endpoints can be very subjective.

If you administer drug for long time in a study, how accurate individual assessment by patients can be in comparison from the previous pain may become an issue. So we have to consider the objectivity of pain endpoints as there can be a lot of variability and noise.

This time, we had three studies in FM, but it might have been better if we had more detailed segmentation of FM as disease condition. FM is a syndrome, and it's not the disease caused by a single pathogenesis.

A patient population with a lot of heterogeneity might have been included. So this may have been an issue together with the subjectivity of endpoint.

On the other hand, we had very clear and beautiful results in PHN. So we have deepened our confidence about the efficacy in pain.

But we are feeling once again that there can be risks associated with non-objective endpoints in long-term clinical studies in pain.

Another question, what's the future development schedule for DS-5141 in DMD or Duchenne muscular dystrophy? Could you elaborate on any specifics if possible, including the situation overseas?

First of all, the Phase I/II study in Japan must be completed to come up with study results. In April this year, the DS-5141 was designated under the SAKIGAKE designation system.

If results are good, PMDA's review could be accelerated. As you can see, at the bottom of Page 40, top line results will be available approximately in the fourth quarter of this fiscal year through the first quarter of next fiscal year.

We are using exon-skipping nucleic acid medicine technologies here. Daiichi Sankyo has unique technologies to chemically modify nucleic acids to enhance stability.

So we believe we can use this methodology to take a challenge on various intractable and congenital diseases. We think making this study a great success is going to be our first step we need to make.

If this Phase I/II study is successful in Japan, you will have consultation meetings with PMDA, and you may file for approval in terms of the time frame?

Of course, yes. This is an intractable disease.

Our compound is designated under the SAKIGAKE system, and we are going to implement Phase I/II study. Even if we try to implement a large scale Phase III study, there aren't many patients.

And this is related to muscular dystrophy-specific exons, so finding could be possible if we have good results.

Understood, thank you very much.

This is Muraoka of Morgan Stanley. Time is limited, so just one question please.

R&D expenses shows good progress. It may exceed ¥1.9 billion, more in the mid and long term looking into the next fiscal year and onwards, since cancer R&D is so expensive.

May I expect the increase of R&D expense in the future?

First of all, R&D expenses made a smooth start. Project cost declined compared to the previous year slightly.

As I mentioned, cancer R&D spending is progressing while we had mirogabalin last term. Cancer will be the main focus from now on.

At the end of the fiscal year, when we compare the forecast with the actual spending, we see that we have a tendency to leave some amount remaining unspent. We want to improve that.

In the longer term, cancer R&D will progress, and then we'll have to revisit the project prioritization with more stringent criteria. As to the maximization, including ADC, we will consider external collaboration, including partnering.

In non-oncology area, if feasible, for instance, when very large scale Phase III study is considered in a certain therapeutic area, we may have to collaborate with external parties.

Understood, thank you.