Shionogi & Co., Ltd. (SGIOF) Q2 2023 Earnings Conference Call Transcript

Shionogi & Co., Ltd. (OTCPK:SGIOF) Q2 2023 Earnings Conference Call October 31, 2023 9:30 PM ET

Company Participants

Yoshimasa Kyokawa – VP, Corporate Communications

Isao Teshirogi – Representative Director, President and CEO

Toshinobu Iwasaki – Senior Executive Officer, SVP, Healthcare Business Supervisory Unit and Pharmaceutical Commercial Division

Koji Hanasaki – Senior Executive Officer, SVP, Supply Supervisory Unit and Global Business Division

Conference Call Participants

Eiji Ueda – Goldman Sachs

Kazuaki Hashiguchi – Daiwa

Hiroyuki Matsubara – Nomura Securities

Hiroshi Wada – SMBC

Hidemaru Yamaguchi – Citi

Seiji Wakao – JPMorgan

Yoshimasa Kyokawa

Ladies and Gentlemen, time has come to start the meeting. I am Kyokawa GM at the Public Relations of Shionogi Company. Thank you very much for attending the meeting out of your busy schedule. From now we’d like to start the First Half of Fiscal 2023 Financial Results Meeting.

First to let me introduce the speakers today. And first one, Representative Director, President and CEO, Isao Teshirogi, Mr. Teshirogi, nice to see you. And John Keller, the Senior Executive Vice President of R&D, Supervisory Unit, and Toshinobu Iwasaki, Senior Executive Officer, Senior Vice President, Healthcare Business Supervisory Unit, and Mr. Koji Hanasaki, Executive Officer, Senior Vice President, Supply Supervisory Unit and Global Business Division, and Ryuichi Kiyama, Senior Executive Officer, Senior Vice President, Corporate Strategy Division and Takeki Uehara, Corporate Officer, Senior Vice President, Drug Development and Regulatory Science Division and Masako Kudou, the GM at Accounting Department.

Let me explain the procedure today. First of all, Teshirogi, will explain the out view of the quarterly reclosing until the shareholder return according to the gender and then John Keller will explain about output data overs agenda update of the COVID-19 treatment drug. And then after that, we will have a quick question session in the end and you can use the simultaneous interpretation function today. If you were to use a simultaneous interpretation, please find the globe icon on the bottom of the screen to choose to Japanese or English whichever you like.

So, let me start Isao Teshirogi, present please.

Isao Teshirogi

So as Kyokawa explained for R&D for COVID-19 treatment 309309 drug will be explained about Mr. [indiscernible]. Then this morning the always an HIV will be explained by John Keller. And then it shouldn’t be disclosed publicly but I have a kind of a back pain is very severe. So I look very bitter in my face, but it is not showing you the unpleasantness over your question, because of a physical pain.

So let me start off on page four. I guess you understand the number, so I just would like to explain the points only. So JPY 230.5 billion revenue and operating profit before taxes JPY 115.6 billion. So let’s see, it was not good, but this year business is good. And the profit before tax is least and the quarterly profit is JPY 90.6 billion. And as I explained in our revision in April, there is import KPI EBITDA, which is our important to KPI and it is JPY 114.2 billion. So again EBITDA was not good, but it is about three times higher than the last year’s level.

And Page 5 please. So, on the left is fully year and the first year forecast and the progress of ours, is the achievement ratio for the first half is like 106% or 121%. So that’s the kind of ideal first half result that we expect that to attain and for the foreign exchange, it is cheaper and for R&D, the costs has been pushed up but royalty and also the [indiscernible] sales overseas could be beneficial for lower end. So lower end is beneficial for those activities. And that is fairly positive for us.

Page 6, just taking the points only. The force from the left which is first results achievement, the revenue is 106%. And the cost is 88.5%. And you will see the 50% increase of the sales but the cost is just 2% increase only. That is the biggest cause of the big profit in the end. And the increase of sales is brought about by ADHD transfer over to the JPY 5 billion from Takeda and the royalty income was very good. And so those does not have a kind of sort of a cost of manufacturing.

However, the real glows is coming from the Xocova, Rapiacta, Xofluza which is our own development, our own manufacturing, and the costs situation is very good for them. And we have discussed the ratio, which is low, and the royalty and also the out license and also the self-development items the focus of our business model. And those are the points we’d like to make an effort.

For the first half, I should say that we were able to achieve what we wanted to achieve. In a way it’s a good pattern of the business model. For SG&A which is the 95% ratio. And there is the — left hand side of 229. But this was increased to 230, a little bit increase. And the selling general had decreased but R&D increased. So for the second half, we’d like to be more positive for R&D activities into the second half.

And also there is a negative 81 others and out of that the 6.6 — 66 is retirement for 300 people retirement disclosed yesterday. As I understood as for next day, 3 billion negative I guess will be next year’s result. On the other hand, we embark on the new business and the most of the overseas stuff, the capability will have been pleased. So this is the strategic carrier employment which is discussed in management meeting and are far is a carrier with our carrier recruit with the higher age people so the headcount cost would not be really low but for next year’s portion only, I guess, this headcount cost would be little bit decreased.

And third from the bottom is a financial income and a cost 42.5 for the full year and 17.5 for the first half. And dividend for the company is very solid and which is overriding our expectation. And for the second half it would be much better at the current rate 42. I don’t think — it wouldn’t be lower than the 42.5.

And the right hand side of the negative year of 200. But because depend on the last year was very big, and there is the correlation between the settlement between the Gilead and the ViiV, so that the one portion of the dividend was given to us, and 22 billion was updated last year, but for this year, we don’t have that at the solid, this healthy dividend is rotate continuously.

And on the Page 7, which is explained about that. One is the decrease the third one, which is the sales. Last year, we sold the real estate, but this year, no sales, and yesterday’s VOD, the cause of the reduction of those [indiscernible] seller shares. And well, I guess, about 30% of the reduction of those kind of close holding shares is debated. And it wouldn’t be affecting the P&L unwinding the cross shareholding is now debated that we’d like to promote those kinds of financial policies that you have to be aware of.

Coming to the Page 8. The progress ratio over first half and year-on-year ratio, you would see the Ping An in China and Ping Shionogi lie that is minus 6.4%, 6.4%. So existing business is okay, but originally, we hoped to push for COVID-19 related business and that portion was not materialized as we anticipated. However, the progress ratio for the previous half and year-on-year all positive figures except the yen. For royalty, this is positive the 17.6% increase. So almost two-thirds means the positive no doubt about the growth of the existing business. And maybe JPY 14 billion are positive, that’s a very strong royalty income.

And on Page 19, again this is explained. It didn’t mention that the second from the bottom, which is a federal calling U.S. the EU and 6.5 U.S. and 0.4 billion in EU. So exceeding 10 billion in half year for the first time. And the second half would continue that so a little less than 30 billion would be maintain.

However, having said that, the kind of quality — is it the right way that we are selling that much or this kind of infectious disease. So why is it growing as such? Well, we are increasing the country, we are launching for the first time for example, in Italy the amount is not very big. However, there is existing market which is growing and the new market we launched for the first time. So we’d like to aim at a little less than 30 billion.

Now let’s move on to the domestic market. First negative 50, the Xofluza, Rapiacta, most of them had the in the warehouse of the wholesalers. So we went through them. So from the standpoint of SDGs we send — we don’t want to continue this business practice of send a lot of products and get them returned.

The doctors and the wholesalers may not be satisfied 100%, but we will like to go this way and Xofluza the actual use and our sales perfectly matched. So I think this is a very good practice in the area of influenza. [Indiscernible] san, may have to receive lot of complaint, but that’s the way we want to go going forward.

In addition to that influenza and COVID-19 44.4 billion that’s 50 negative from the previous year. So it’s the increase of 50 billion. As to ADHD family 10.1 billion was the last year sales. For this year 25 billion, so it’s the increase of 15 billion. 50 billion increase for influenza and also in addition to that, we have increase in ADHD.

Page 11, including that increase overall as to the sales, all the categories are growing well and increasing. I think we are having a very good start for the first half.

Page 12. In addition to the sales activities, we’ve obtained two picks. This is the inhibitor of β-lactam. With this product, we have enriched our product pipeline and as to S-309309, we’ve had a very good Phase 1 and we are going into Phase 2. We’ve completed enrollment for Phase 2. We will have observation period of six months and have one-month observation period. We would like to have the results as soon as possible.

Page 14. This is the forecast in response to the situation. We’ve had a little bit discussion at the Board meeting, and this is the result of intensive discussion from the bottom, Xocova in Asia, we are continuing to have a conversation with the authority.

We are now after the emergency period. So all those countries are not in hurry and they are thinking that it’s okay to have regular approach. That’s why the review process is slower than our expectation. In the latter half the sales of Korea and China — we are still forecasting sales, but rather than having too much expectation for this year, I think it’s better to have a reset. And we will focus on the respiratory related diseases in Japan. And if you do you recall in the U.S. and also royalties.

I think those things would compensate the situation. So JPY 450 billion is going to be our forecast for revenue. We maintain this forecast and that will be the starting point. The Board meeting as well, we discussed that we may be better — it might have been better to increase that figure. However, this is the first year for 2030 revision. So we wanted to have a rather conservative figure and make sure that we exceed that figure. That’s how we got approval at the Board meeting.

In addition to that, Xocova in China, we are working with [indiscernible] in Shanghai, therefore SG&A is very big, was very big. But that had been reduced, it was halved. So the SG&A have been reduced, and that would be transferred to R&D. That’s the basic thinking. This is the forecast for the latter half. 5.5% up for the sales and the operating profit will be 0.7% up. And that’s how we’re going to achieve the record high figure for both of them.

Page 16 is the breakdown. If SG&A and other items may stand out negative 11.0 for SG&. And as to cost it’s also negative for China and Korea, if we are going to go to this market, the cost of sales goes up. But that is not going to be the case. So SG&A and also the cost will go down. Of course we have to be prepared for the U.S. and Europe and China we have to prepare for those markets. So we have to consider that. But still, it’s minus 11 billion. This is going to be the forecast for the whole year.

Page 17, is the breakdown of the forecast. As to Japan, the after October there was a very big Xocova expectation in China and Korea. And Japanese expectation was very — assumption was very small, but for this year according to October trend, we don’t think that antivirus products won’t go to zero. Of course, because of the reduction of the spread of the infection, there maybe some decrease, however, from October to December, we may have the tense wave. And if the tense wave comes, we are expecting to have this figure.

So that’s why it’s 24 plus for domestic infectious diseases and for overseas Ping An and Korea and other Southeast Asia Xocova will be negative. Royalty positive and Shionogi B.V, if you do recall positive. So it’s minus 13.5. That’s going to be the starting points, and we are going to make sure that we can exceed those figures.

Page 18. This is about domestic market. The 88.6 for COVID and influenza. This is almost the same as the first half. As to October, it’s not only us, but COVID-19 has come down. But influenza is spreading very rapidly. By combining those two, we want to achieve JPY 44 billion.

That’s all about the revenue and others. Today, we have Iwasaki and Hanasaki on the stage. So if you have any questions, we are happy to answer those questions.

We have the 75 share buyback, but separator from that or dividend, it is to be increased constantly. And for six months this for example last years the 75-yen dividend in the end of last year. And recording that we consider that is a base minimum line. We’ve been continuing that for over 12 years. So this 75 would be mid dividend and this is increased by 15 yen. And so from this, as you know, in case business is good, the year-end dividend would to be debated it be or to see the possibility of further increase all the time.

And so for this time again, I think dividend is hoped to be higher than that solely for kind of a legacy explanation for the business without the end our idea for the full year business. And next, we will explain about the update on COVID-19 treatment and update of 309309 drug.

I will continue to explain, first of all for Xocova the COVID treatment, which you’re prepared, describes of the results of the trial. The first one is a global Phase 3 study in U.S., EU, Africa, India, well, over 2000 cases are registered and so far, mostly in Asia and in Japan are the one Phase 3 study which was approved emergently its already over.

And then the second one is inclusive over high risk patient. This trial, the registration is almost over, and the enrollment would be over. So by the end of December, the enrollment of the cases will be complete. And we are in the final stage. Bigger update is that as I have already mentioned that the efficacy for longer COVID. The primary endpoint is time until the resolution of the symptom. So that’s the primary endpoint.

However, for longer COVID, there still is need remaining. So the second key endpoint is set. Actually having the drug would minimize the risk of a longer COVID or not. And each country we will implement a study and we are in the final stage of haggling with the FDA for that point.

And I think the follow up under the blind the situation will continue and then after that the data will be explained those extension time. And of the prevention study in many countries, is it possible to suppress the onset of COVID-19 symptom in close contact, which again is over 2000 enrollment. So the existing drug has never achieved blessing of that effect. So that is very highly expected and we’d like to continuously prevailing the environment that this drug can be used globally, and enrollment is on the way favorably. And together with the Phase 3 study on the top line, I hope that this winter we’d like to complete the enrollment.

And the third along the top of which is the pediatric trial, mostly in Japan we prepare the smaller tablet for the school children will take it. So I think school student will start to get the disease until the adult and there is no drug available or tablet available for pediatric. So I — we are in the clinical study to enable to deliver that drug.

And the final one, there are many doctors expecting the vacancy of Xocova in hospital. So using this Xocova as an add-on in the hospital, which will promote the early discharge of a hospitalized patient out of the hospital and that is conducted globally as well.

On the next page. So the new data coming up so far is about the Long COVID. I said it is vilified in a global Phase 3 study. On the battleground, we have the Phase 3 study semi-ager [ph] in three months in six months. Well, the Long COVID risk is reduced as more compared to the one which does not have our drug. So I think Long COVID suppressing risk is obvious.

And as against the placebo, we confirm the 25 reduction of Long COVID. And there are many reports about the loss of concentration thinking ability and also the fatigue, forgetfulness, so forth, those symptoms are in a Long COVID patients. So they have reduced significantly, like by 68% and by 72% respectively those risks are minimized with our Xocova, and that should be verified in upcoming trial. So far in Japan, it has been used in kind of a normal clinical practice and we’d like to collect the safety and efficacy information and the kind of intermediate report is available.

So far the safety is confirmed in a clinical trial and clinical daily clinical practice there is no new safety concerns identified. For the effectiveness efficacies features not to compare it with the placebo, but the efficacy is almost equivalent to the one which we would take in a clinical study for example, the time necessarily for recovery to the normal temperature and hospitalization and is just a for out of the world 1,584 cases hospitalized. But there is no this case. It is to read at a safety but for efficacy, we were able to provide I think the high quality data.

Furthermore, well new data, which is about the taste and smell disorder, as you know in COVID the taste and smell will be lost. It is not in fact the COVID is virus is not infecting the taste and smell, but there is the expansion of those symptoms underneath that cell level. So the function of taste and smell decreased. So, as much as soon as soon as possible, it is necessarily to prevent the expansion of the virus. And as you see when in the glove, the interest level is showing the less smell disorder as compared to the placebo on the bar graph.

And the right hand side, without any symptom. The first, day one and day two, this is actually two stages. So to some extent it appears but in the later stage was this Xocova treated patient dramatically those taste and smell disorder decreases as against the placebo. So basically, without any treatment of drug the COVID will be cured naturally.

But, I have to say that for the virus shedding as early as possible, which is better to prevent such kinds of disorder of smell. And I would like to focus on the other main activities and achievement in pipeline. Please look at the Page 26, you will see the list of the pipelines. And I can’t explain all of them because of time interest, I just would like to focus the major ones only.

For the infection disease, in addition to COVID-19 treatment drug, the vaccine for COVID-19 which is a top one, its 019 on top is the vaccine and also the XBB 1.5 kind of a mutant one we have a vaccine. And so by acquiring the company, we have a new AMR treatment, and also the collaboration true to the exposures, treatment disease. Yes, we are on good shape of promoting those ones.

And for others, those are the major ones as well. Especially today, I will speak about 309309, which is obesity drug. And for this one, our Phase 1 is already over, and currently in Phase 2. And later I will show you with the data.

On the next slide, which is a situation of vaccine development. As you know, there was a regime recombinant vaccine for COVID is the priority of Shionogi. So far we’ve [Indiscernible]. So, those — so far, we had kind of the superiority in terms of this multidrug resistant bacteria. However, there is some additional data are recommended to present and so far in Vietnam prevent the fiction onset. The Phase 3 study for the prevention effector is already over. And we will add the data from that and the FDA hope to see that data and we are preparing the data for them.

Having said that, for the vaccine for the existing strain, well, messenger RNA is already available. And then now XBB 1.5 strain, those kinds of mutant strain vaccine is now being depleted in this XBB strain vaccine. Clinical trial will be done to approve that. And those two approval results obtained for S-019 and XBB strain, they both could go on the clinical trial. So we will be promoting the vaccine two vaccines in parallel.

And so I hope that the universal vaccine development is to be reported, because those virus changes over time and its very mutant, and though we would like to get the antigen where we can apply for manage this, it’s an animal experiment. But this neutralized antibody could be obtained from those animal experiment. So this vaccine is resistant and having the neutralizing property for any industry. And we repeating the experiment, not just in the injection, but also a kind of a nasal treatment is nasal vaccine is now being developed.

Now it’s about AMR. As Teshirogi mentioned β-lactam and inhibitor, this is the combination treatment and Qpex was obtained by us. Specifically, there are two programs going on. Those are the programs that we want to share. The top one is about 228. This is about cefiderocol, in addition to xeruborbactam. By having this combination for mid to long term, cefiderocol can be used as an AMR, this is scenario, which we have very high expectation, we are going to have a clinical trial for this combination treatment.

The second one is the combination with S xeruborbactam. This is an oral combination drug. This is a pro drug xeruborbactami is an own drug of the company. By combining those two, we can maintain the effectiveness. This is oral medicine. When patients in hospitalized IV is used for prevention of infection, but if we can have anti-AML drug, oral drug, the medical economy will improve as well.

This will be very convenient as antibiotics that we are developing. Already Quebec [ph] had started Phase 1 study. Going forward, we will have global Phase 1 study.

Next, this is about 309 anti-obesity drug. The market has been very active because of the introduction of GLP-1, but our product is not GLP-1, this is MGAT2 inhibitor, this is to neutralize or inhibit the resynthesis of triglyceride at the intestinal epithelial cells. Because of this inhibitor, of course, we can observe the fat, but this is not to observe the fat. By having this process in the body we can have negative feedback of the appetite or energy can be metabolized faster. So, those are the mechanism of action of this drug.

In animal model, we could observe the reduction of the weight and this can add benefit to GLP-1 products. There are various issues around GLP-1, like very expensive drug and also overall might be better and safety is another issue. So we are developing drug which can solve all those problems, the totalability was very good in Phase 1, this is PK profile from one to 300 on a dose dependent manner, there was no measure adverse event and exposure increased proportionally.

Based on this data we’ve already started PLC Phase 2 study in the U.S. This is midsize study with more than 300 subjects, we’ve already completed the recruitment process. And as soon as we get the result we will be able to present the result maybe at around April.

[Indiscernible] announced today that it is [indiscernible] and it is immune focus resurgence area for us of obstructive sleep apnea or OSA. And OSA obviously disrupt sleep and has significant effects on nighttime sleep comfort as well as the following day’s wakefulness and memory. But the consequences are much more severe than that. The cascade of the impact of moderate or severe obstructive sleep apnea includes depression, stroke, heart failure, it really has a significant effect on overall lifespan as well as quality of life, reducing survival rate after eight years by about 60%.

Next slide please. The reason that obstructive sleep apnea has not been addressed by a drug to date and no trials have been successful to date, or that it’s very complicated disease. There’s upper airway obstruction, unstable breathing, upper airway dilator, muscle unstable sleep components, all arousal threshold, all of which have their own sub components. For example, obesity is known to be a risk factor for sleep apnea, but that only affects the airway obstruction part, the other components are separate. Therefore, these require combination therapies, and also probably patient subgroup selection to choose the best combination.

Next slide, please. We therefore have chosen to go with an expert company in this area one of the very few, and certainly the leading Apnimed, which has the knowledge of translational medicine and clinical experience. Rapidly select combinations and test them in the clinic. They have the knowledge of how patients appear to select the key components in their disease. And they also have the ability to rapidly progress into clinical trials and demonstrate whether these combination mechanisms can truly be effective and in which population they can be effective.

Of course, we bring to the collaboration, our capability, it’s a small molecule drug discovery and development, which Apnimed doesn’t have currently, so that as soon as we identify these mechanisms, not only can we pursue combinations of existing drugs, but we can create better NCEs and progress those quickly into ever better therapies for this critical disease.

Next slide, please. I’d now like to talk about the HIV business. Now, as we’ve — next slide, talked several times, at a presentation on the HIV business by [Indiscernible] recently, they updated the overall medium to long term strategy, increasing their projected growth for the period of ‘21 to ‘26, from originally mid-single digit to 6% to 8%. Clearly this year is outstripping that substantially already, this is an average rate.

They’re also critically updated the long acting formulation progress, looking forward to a future where essentially long acting injectable therapeutics will capture about 30%, or a bit more of the treatment market and projecting 80% or more of the prevention market because of the clear demonstration of superiority for the long acting formulations.

Now, we are as well, I’ll discuss further now progressing every four month formulations moving from our current every two-month formulation. And then beyond that the potential for every six months’ formulation. Again, these periods are both for PrEP prevention and for treatment.

Now, the other piece we added in that presentation was that the IP timeline for our existing drugs Dovato and Juluca for basically though Utegra [ph] base drugs are longer than people may have expected that those drugs extend to every end of ‘29 for Dovato and into 2030 for Juluca.

Furthermore, the long acting portfolio obviously extends not only to 2031, but likely substantially beyond that based on formulation and other aspects of the long acting portfolios technology.

Next slide, please. So for the next period from now to 2021 to 2026, we’re focusing on growing the existing portfolio, Cabenuva for long acting treatment, Apretude for long acting prevention, and Dovato for the best in class oral. Now, by with that portfolio by 2026, it’s projected that ViiV sales will reach 7 billion pounds, and of that to over 2 billion pounds will be from the long acting portfolio. So ViiVs portfolio about one-third by 2026 will already be long acting.

Then looking beyond that for further growth, starting from 202, the ultra-long acting. Every four month, potentially every six month, and also the potential for a self-injection at home format, which is attractive to some patients.

Next slide please. So to talk about how to achieve that, CAB 400, as we’ve nicknamed it, which is the ones per every four months’ formulation of cabotegravir is progressing very well, showing about twice the half-life either in intramuscular or subcutaneous dosing, versus the existing formulation of cabotegravir. That clearly allows every four months potentially even every six-month dosing.

Furthermore, the combinations and the single agent prevention will both be launched before the Dovato cabotegravir patent class well before. Prevention prep by 2026, treatment by 2027. For treatment, as you know, we need two drugs. Right now we have two leading options for the partner drug. First is to continue with a modified version of recovery. The second is ViiVs novel broadly neutralizing antibody N6LS for which a Phase 2B trial is ongoing. A decision will be made next year as to which of those two combinations will be the one selected for pursuit for launch in 2027. Some more detail on CAB 400 itself will be presented at CROI 2024 in March.

Next slide, please. So this slide gives you the overall timeline, again, the critical items here, launching four-month PrEP in 2026, launching four-month treatment every four-month treatment in 2027. And potentially launching every six-month treatment in the ’28, 2030 timeframe probably toward the earlier side of that.

Again, we’re going to be looking at the relative profiles of Q4 and Q6. And once we have Q4 is there a bigger advantage with Q6 that means for kind of commercial and patient need discussion. The other critical — the other interesting item, not critical, is self-injection. Self-injection has been slowed a little bit from some of our former timelines, because it has the complexity of needing a device as well for simple home injection, but it’s also in that same 2028 and beyond timeframe.

So really, the critical launches in the nearer term are obviously every four-month format, treatment and prevention. And so we’re very excited about that. And with that, I believe we’ll close the presentation.

Question-and-Answer Session

A – Unidentified Company Representative

Thank you very much. We’d like to move on to the question and answer and we’d like to accept the question from the floor. And then after that, we take a question from the web participants and you were able to raise the hand by I come, whilst listening to the floor Q&A. And also if you finish the question please put down the hands.

So, from the floor first, I will point out to the person to make question please state your name and the organization which you are from please.

Eiji Ueda

I am Ueda, from Goldman Sachs. First I would like to hear about the Xocova in Japan, prescription ratio and the trend of the share would you please explain for the ratio prescription after October? Would you please update and also the share you have the week and their occasions for presenting data in many chances? So, if there is any change from in clinical situation please let us know?

Unidentified Company Representative

You were a keen judger of domestic business, we will answer your question. The public subsidy is given, I think for the whole 23% and the half of the drug rates by Xocova, but it is just a one month. We are not able to see the impact by the public subsidy. However, it is not a dropping at all.

Now there is highly sophisticated think tank has released data in August, which says that I guess the number will be reduced to one over 10, but not to that extreme, that is reduced to half, I should say what. There is no fixed observation point. I don’t know what is the cause of the deduction, but as against our anticipation, it is not wrong thing. For the future, for example, pediatric prescription, still there is a local public managed subsidy. And so this could be used there.

The influenza treatment we have 92%, however, for COVID we still have just the 10%. So for the treatment of drug of infectious disease as a whole inclusive of safety data and we hope our prescription ratio should be enhanced and we have to appeal efficacy and I think when it is used, the efficacy could be very well felt by the doctors and if doctor does found that efficacy, they will be prescribed more. So we’d like to accumulate the data, yes, clinical study in Japan will be enhancing the prescription ratio.

Eiji Ueda

Also the second point with the COVID 19 vaccine, why it was not approved this time? And in Vietnam, you mentioned that the clinical trial is conducted and it was approved over there, would you please explain the background of that. And for the mutant strain of XBB 1.5 data disclosure, approval and schedule. Would you please explain?

Unidentified Company Representative

I will answer, first, for those existing strain is not approved, but still ongoing. We haven’t had to go over the discussion. But our understanding is that the data for neutralizing antibody that we currently have is not enough for being approved. And also the Phase 3 data, which is prevention sort of data, we start we’d like to — they say that they would like to consider these data all together. And we have already presented the data to them, which I don’t think is betraying their anticipation, I hope that the Regulatory Authority would take those data into the serious consideration.

For the future XBB strain, so the vaccine to cope with this strain is being manufactured. And in this winter, the Phase 3 trial, we have a data to compare the efficacy of the neutralizing body antibody and when those data is approved, I guess this would be successful. Maybe autumn, winter 2024, I hope our vaccine will be used generally. That is our idea.

Unidentified Analyst

Well, thank you. That’s all for me.

Unidentified Company Representative

Is there any other question Hashiguchi san?

Kazuaki Hashiguchi

Hashiguchi from Daiwa. About SGA and also research and development expenses. As compared to the first half in the last half, it’s going to increase by 40%according to your plan. So can you explain — you already explained why they are going to increase as to SG&A because of the reason you just mentioned. I think we are going to see further increase for the next year because therefore the Xocova promotion in the overseas you will have Phase 3 results. And then you will have to pay more for the preparation. Is this correct?

Of course there’ll be okay if you have a big sales. As to R&D. Xocova Phase 3 may be completed and this may be reduced from the next year. If you can elaborate on this point.

Unidentified Company Representative

Thank you for your question. Hanasaki may add to my comment, or John may add to me. But as we mentioned, SG&A especially as the reliever in Asia and the U.S. and also some part of Europe. We have to see when sales will come. It’s not that SG&A will increase one or two years before the sales. So if the SG&A goes up, top line would go up as well.

As to R&D expenses, of course, according to the forecast, sales is going to increase. And along with that, R&D will increase and we want to do new things as well. As to the composition as the reliever, may [indiscernible] part may go down. SCORPIO-HR is very large study and PrEP is going to be big as well. So that path may decrease going forward.

However, we will have 309309 Phase 3 preparation. In addition to that, as John mentioned, a pre meant joint venture that’s going to be a very interesting structure. Sleep Apnea, as you know, we don’t have animal model for sleep apnea, because there is no animal who have sleep apnea. Therefore, we’ll have to think about the mechanism of action for human being. And asked to combinations, we have to see starting from Phase 2A to see if it’s really effective for human being.

The strength of agreement is that the setup of hospitals and setup of FDAs they’re very advanced, they have a very good setup better than anyone else. If the research goes well, and if Phase 2A and 2B, if we obtain content for that phase, we want to go to clinical as soon as possible anti-obesity and also [indiscernible] including those about 20% of the sales we want to spend for R&D and we want to spend them very wisely.

113 billion, John and Uehara are not satisfied because they want more for R&D, because there are so many things that we want to try. The question is how we allocate the resources. As to SG&A [indiscernible], if you have any comment for SG&A?

Koji Hanasaki

Hanasaki speaking. As already mentioned, we will see SG&A while looking at the sales. Our study is going on in the U.S., so we have to deal with the authority. And we have to check the events. And we will think about the salesforce and also SG&A on a step by step basis. Thank you very much.

Kazuaki Hashiguchi

One more thing about COVID vaccination for the approval. You explain the approval process of COVID-19 vaccination, but the issue has been the manufacturing capacity. If you can get the approval, how much can you produce? Is there any update on this point?

Unidentified Company Representative

Hanasaki is in-charge of manufacturing and supply chain. [Indiscernible] we’ve got subsidy from the government. And now finally it’s going to operate XBB 1.5. If it goes well, we are going to manufacture the product there. That’s what I want to think about. One batch is very big, it’s about 5 million to 10 million people. That’s the capacity we will have to have. And for the next winter I think we are going to be capable to doing that.

Hanasaki, do you have anything to add?

Koji Hanasaki

Hanasaki from supply. As to the production of vaccination, now UMN in Akita prefecture we have 500 millimeter tank for clinical trial material. But as Ryuichi mentioned, we have a new factory in [indiscernible] we are going to do the refining and we are also improving all the steps. So, now we can see what we are going to do for the next autumn and winter we are prepared to do a scale up, we are preparing to do the scale up.

Unidentified Company Representative

Any other question? Mr. Matsubara from Nomura Securities please.

Hiroyuki Matsubara

It’s Matsubara from Nomura. Thank you very much for your explanation. I have two questions about the pipeline. First one is 309309. So you said that it is not working on the GLP-1 that some nausea vomiting, of course is okay and also no reduction of the muscle is the right understanding. If there is no such side effect, so I hope that the DPP-4 and other drug combination is better than the combined with GLP-1 I guess. What do you think?

Unidentified Company Representative

Thank you for the question. I couldn’t hear the first part of your question.

Hiroyuki Matsubara

The reduction of the muscle wouldn’t happen or the GLP-1 causes the nausea vomiting, what about those side effects in case of yours 309309?

Unidentified Company Representative

Well, so far we have not seen such phenomena or side effects. In animal toxicity study we haven’t see such a side effect. So, the muscle reduction so far GI disorder coming from MOA is not apparent, and for the combination for the future. So what is the combination partner we’re searching for now, and there are many dangers, which is coming from the repeated experimentation.

Suppose we combine with the GLP-1, in a way we are adding on to the GLP-1, or switching to from the GLP-1 or just presenting for the one who are not [indiscernible] of the two GLP-1. So there are many ways and also as you said that DPP-4 could be one possibility and combining with other MOA is theoretically possible. So suppressing the appetite naturally reduces the muscle, that’s the very natural course of body reaction. But preventing that and the maintaining the muscle volume, I guess this some MOA must be explored to enable that should be developed or understood very well.

So in the inhibition, and the fibrosis is prevented, but is there any indication of expansion or the obese people tend to be the fatty liver and so forth. And a trial experiment, literally we have the liver parameter scanning of course. So the weight loss and because of MOA which could do add some kind of line extension possibility we need to consider.

Let us turn to the second one could. It’s very hard to find the right patient for that drug, yes, actually it’s very hard for radar [indiscernible] we will add the three cases. And now we understand some of them, but others are not yet still we are in rolling.

So the case 26. This is the application submission the third quarter and the follow up over the 52-week patient. So I guess you have to finalize their enrollment otherwise it’s very difficult. For this dystrophic epidermolysis bullosa, yes. Not yet inline little metal finished in a way timeline, it’s very hard. But the target patient number actually is not so many. We don’t need many patients for this bullosa patient. So when we find the appropriate patient, we can go on our trial.

Unidentified Analyst

My name is [indiscernible]. I have a question about infectious diseases in Japanese market. For the first half Xocova went very well. For the latter half, it’s 25 billion to 42 billion. It increased because of COVID 19 and influenza. If you can talk about the breakdown of this increase for the second half the bullosa, you said that you have expectation for the bullosa. If you can talk about — elaborate on the increase of these increase, I think recently COVID-19 is coming down. But you also mentioned that it’s been used more than you had expected.

Unidentified Company Representative

As to the breakdown, we are not going to disclose as we mentioned at the beginning of the year. The reason for that is that influenza is spreading a lot but we are not sure if it’s going to continue until the next year of or if it’s type B comes in. Our target is to spread the coverage of viruses, that’s how we want to hedge the risk for the virus, if it’s only one virus, we will lose sales. We are going to Phase 2 and also for the influenza A, B and many other viruses. And that’s how we been to maintain certain level of sales.

For the last half, including COVID, it’s true that overreacted to the subsidies, so we expecting to see the increase for influenza. If you look at October alone, it’s going to be very strong, Rapiacta is going very well as well. But as to the breakdown, we don’t have any intention to disclose the breakdown.

Unidentified Analyst

I have another question. As to Asia Xocova, this time, you said that you are going to be conservative. But my impression is that we don’t have to be that pessimistic. According to your midterm, 2025 to 2030, you’re planning to have sales. So I see that there’d be no impact on those midterm?

Unidentified Company Representative

You’re right. So I’m sure that you understand the situation. For us emergency approval in Japan. The question is how overseas market understand the Japanese emergency approval if they want to prioritize the regular approval in Japan and FDA. Including that if those things if we can get those approvals, I think the things would move very rapidly. That’s why we are not disclosing the information.

Unidentified Analyst

[Indiscernible] speaking. In the journal it has been said that Xocova administration to the pregnant woman is a little bit problematic. So the share of a treatment in the first is until 23%, but you need to increase that and the ratio of Xocova must be enhanced. And a formal approval is upcoming exterior.

So, how Xocova is used by the doctors. For example, the administration to the pregnant woman was mentioned that how did you are able are responding to such a phenomenon which you explain.

Unidentified Company Representative

Yes, I want to talk about myself. Iwasaki will speak about the sales and also we analyze the charge of a safety management. What kind of measures are taking or safety management? So Iwasaki, first please.

Toshinobu Iwasaki

Before the launch, we knew that should be the point of concern and to be alert. And yes, we have a kind of terrible insert of which was led by the patient and this is a contra indication point. As I see the flow of the patient, before the diagnosis from the doctor or co-medical. They ask, are you pregnant or not, which is the point.

And also the consent form. There is the sentence saying the pregnancy and contraindication for pregnancy is already communicated. So that’s the first gate. After the [indiscernible] go to the pharmacy and here is pharmacy. The pharmacist would explain about that. So our MRs having that material to deliver the message with the drug to the hospital and to the pharmacy. Again, your safety data is update. The information is updated for those safety issues as well.

For safety management, as much as possible, we are calling for the attention and for other less so that the drug administration for pregnancy wouldn’t happen. However, still, there are cases, that pregnant woman had taken our drug, for those patients that there is a follow up of medical consultation service available as [indiscernible] sort of window.

So animal experimentation, there are many cases of teratogenicity calls, that we are making utmost concern or giving a lot. And should we to happen, we’d like to follow up with such patient as much as possible. So the drug couldn’t be used most safely. Well, we consider this is a very important issue. So first thing in the morning, we say that the how many cases it was given, and what kind of information’s are given to the center, and each patient is what week of the treatment schedule they are. And those informations are all summarized and we’ll report to the ministry.

And, yes, we were evaluated very highly for our effort of safety management so that you are making that much effort. Well, yes, in a way they allow drugs where the contraindication interpretation information is not properly given. And so learning from that lesson, well, we think it’s very critically that we should be criticized if there is any kind of instability or one patient who accidentally had taken the drug, despite the pregnancy.

Unidentified Analyst

Thank you very much. One more, the very basic question 309309 obesity drug out of the big GLP-1 market. I am not the expert on this. But looking at page 42, still remember the curse [ph], only those steps. I know this is a different MOA. However, the test way drug is working seems to be very similar. How do you do differentiate that drug? And what kind of effects you can expect from this?

All of this stuff is the one you mentioned.

Unidentified Company Representative

Well, it is two sub less, there is no action of a sub letting all the factor of absorption causing the [indiscernible], no such a vector. So the fact, it wouldn’t go through the GI tract for the MOA looks similar, but very different from all risks factor. In animal experimentation, so the weight loss is observed in the animal but to what extent a human it would express, but it depends on the result. We do like to have a result the data and will for the discussion out of that.

Unidentified Company Representative

The fatty acid is in already incorporated into the intestinal epithelium rather than being blocked from being brought into the testicle epithelium. So it’s not excreted through the GI tract. It’s a change in metabolism inside the cell once absorbed.

Unidentified Company Representative

Page 29 and page 30. About 309 of course GLP-1 has causing social issues and I see that it’s going to increase and looking at page 30 even for laymen, it’s clear that it’s going down. But on the other hand there are three anti-obesity drugs approved in the U.S., but they are not going well. In the case of pill big, there was cause several geneses [ph], but the market itself is very big. However, it’s very vulnerable to adverse events and the hurdle of approval. The difference with the placebo needs to be 5% or 35%. And this time, you’re talking about the combination with GLP-1. The market may be very big, but the hurdle of approval may be very high.

Unidentified Analyst

So, your strategy using combination from the beginning, or you just mentioned GLP-1, because it’s been very active in the market?

Unidentified Company Representative

Once the strategy of research and development or maybe sales. As to anti-obesity drug, there are many unknowns. That’s understanding. As we mentioned before, single mechanism by blocking one things, can we maintain the effectiveness with single mechanism, we don’t have any data at all. For example, hypertensive condition has a lot of reasons, so only one mechanism won’t work. Therefore, it’s a good idea to combine various mechanisms to control a very important condition of obesity. So that’s why we want to look at various mechanisms.

Also, as John mentioned, if GLP-1 can reduce the weight by 25%, for example. Right now, if you stop taking the drug, it will go up again. The question is how we can maintain lower body weight. That’s where doctors interest lies, high safety and affordability and lower body weight needs to be maintained for a long time. And one candidate can be a drug.

In this context, if there are many GLP-1 in the market requirements in terms of the regulation may change. For us, single drug or combination with other drugs. The question is how we can maximize drug, that’s what we are thinking. So far, many companies come to — are coming to us for partnership, but for now, we want to do it alone until Phase 2. But based on the result of Phase 2, and if the result is very good, then we will think about what kind of strategy we are going to develop, that’s the current situation.

Unidentified Analyst

309 is the effective rebound. Is that right?

Unidentified Company Representative

We don’t know yet. The question for any drug is how we can maintain the lower body rate. Recently as to GLP-1 after reducing the body weight, it won’t go up by 100%. Maybe they can maintain 30% of the reduction according to some papers, but it’s not been endorsed yet. There are many unknowns and we have to study further.

Unidentified Analyst

Okay, thank you very much.

Hiroshi Wada

I am Wada from SMBC. I have a question about 309309, again there are two points. In Phase 1, the PK could be seen dose dependency, but what point did you determine the dose for Phase 2. Is there any kind of a sort of the mark point where you can set the dose?

Unidentified Company Representative

So, this is subcutaneous trial so far, but we set the dose necessarily to exhibit the efficacy in the animal experimentation. And the Phase 1 profile is within the profile for that means the kind of sort of within the margin of safety, we set the clinical dose.

Hiroshi Wada

And one more point for MOA and positioning or type of a question. As far as I understand this is to suppress the upper stream of GLP-1. And by blocking the upper stream, it is I guess showing the efficacy by that demo. So that means as effect it would kind of over rough with GLP-1 drug. So how did you differentiate in non-clinical study?

In the R&D meeting, you mentioned that the mouse data of sort of a concomitant use with the GLP-1, but the dose of GLP-1 was not mentioned. What exactly was that drug GLP-1 drug?

Unidentified Company Representative

So in mouse, the dose efficacy dose of GLP-1 is determined, and there is the only factor by your point? Correct. So very sharp. Thank you. As you understand the other feedback when GLP-1 signal is coming in. That’s a wonderful MOA. But as far as I see the non-clinical, the agonistic effect of GLP-1 would effect as a key to reduce the weight, the answer is no.

GLP-1 signal is just a one part and actual absorption suppression and also the energy metabolism would change. There are many complex signals in between the two cause the weight loss. In non-clinical model, actually we repeated the test are still nowadays, but the weight lost by GLP-1 could further be reduced by our drug. And we’d like to bring that sort of a data at later stage. Thank you very much.

So that’s all for the question from the floor. We’d like to ask the web participants.

Hidemaru Yamaguchi

Yamaguchi san from Citi. Do you hear me? I have two questions about 309. This may be a detailed question. In 2023 one January to March used to be the top line but now January to September, so it’s been shifted, or the top line hasn’t been changed?

Unidentified Company Representative

As you mentioned, one month follow up, if that’s included, this may be more realistic. That’s why it’s April to June enrollment has been completed, so after 24 weeks, we will have our last patient out and then 30 days follow up. And based on that we are now saying April to June.

Unidentified Analyst

Okay, thank you very much. And about Phase 1 volunteer’s healthy volunteers. For those healthy volunteers their appetite has been depressed. Is there any signs of — I mean the effectiveness?

Unidentified Company Representative

In Phase 1, the purpose was to look at the blood concentration. So we recruited healthy volunteer obese healthy volunteers. And we’ve weighed their body weight daily. However, as it’s Phase 1, they’re in the hospital and they have regular diet and many of them actually decreased body weight. So it’s very difficult to see the effectiveness. However, we are now looking at very interesting signs of the movement of the markers. So I think it’s not that it’s not effective at all.

Unidentified Analyst

What about the appetite?

Unidentified Company Representative

We don’t have any information about appetite.

Unidentified Analyst

And the second question is about Phase 3. You said that you may have some partnership for Phase 2, for the global market. Are you going to have any partner for Phase 3? Do you have any plan? I think it’s going to be depend on the result. But you don’t have any decision plan yet.

Unidentified Company Representative

You’re right. If we’re going to go Phase 2B, or if you are going to have Phase 3, we don’t know yet. But in any case, it’s going to cost a lot of money. So we have to see the result of Phase 2 first, and then we will make our plan.

Unidentified Analyst

Okay, one another question is about OSA joint venture. This company already has two trials, which are ongoing, and they are going to be excluded, as you mentioned, and including that fact, is there any possibility that you are going to do the — have the sales in the future?

Unidentified Company Representative

So with respect to the structure of the JV, you’re right, those programs are independent and the mechanisms selected for the JV and the types of compounds are different than the lead compounds progressed it up in med. Obviously, we’re very close relationship with the company going forward as a result of the JV. But structurally, those are separate programs. And, again, we chose programs together for the JV that we very much felt that our combined strengths would be best for.

Unidentified Analyst

After the Phase 2 result, whether or not if we are going to go into the market, we are still open. As of now, the question is how we see 109. We are not in agreement 100%. That’s why it’s out of the scope. But if we have a very good result, then agreement may consider us, because we are going to be the best partner. So when that happens, we are going to have another consideration. But as of now, that’s the situation. And the aim is that going to the clinical, as soon as possible. Out of those four approaches the upper respiratory is the main target of many companies. But you are going to take the new approach. You are going to take any decided approach,

Unidentified Company Representative

See, several of these once in combination, different combination therapies. And we will likely select different patient groups based on their sleep patterns as to which of these aspects will be dominant. So it’s both components. So I think we have combinations that include three of these four mechanisms in different ways, different components, in different approaches. You’ll see more later, but the anticipation is to start this program with actually two programs in the development pipeline, and four to six in the discovery pipeline. So it’s quite a deep pipeline when these close out.

Unidentified Analyst

Thank you.

Unidentified Company Representative

We would like to take the last question is Wakao from JPMorgan please.

Seiji Wakao

Wakao from JPMorgan. Time is very limited, I just have one question. 309309 question. The weight loss by monotherapy of 309. So what is the figure that you are looking at as anticipated results? Looking at the data of an animal, I think the weight loss percentage has been different from the two daters. So more than GLP-1 in October the weight loss percentage seems to be lower. But having the explanation so far, we see that the expectation of weight loss could be equivalent to GLP-1 can we anticipate that?

Unidentified Company Representative

So for GLP-1 combination 25% is the ideal weight lost that we have to target that, we have a doubt. So 8% to 10% by the oral drug could be one target for weight loss, combining some of the mechanism and finally, the weight is lost in some ways, how to maintain that lost weight, lose patient, that’s one thing. And just 3% to 5% level the weight loss is not the promising. So 8% to 10% weight loss could be by kinds of middle dose or higher dose.

Well, I guess if we can attain that weight loss percentage, you have a future. So about the oral injection, of course, injection drug makes the big weight loss. But comparing the oral GLP-1 and yours would be equivalent all this. So oral GLP-1 is very difficult to readout, considering their side effect.

So the terrible weight loss and maintaining that by GLP-1 is 8% to 10% as well. That means that the equivalent level weight loss, because our drug is very safe. We don’t have a concern that. I don’t know whether it is comparing the apple versus apple but very difficult to answer accurately. Thank you very much.

Unidentified Company Representative

Thank you very much. So with this, we’d like to close the second quarterly analyst meeting the 2023. Thank you very much for your kind attention. Thank you.