Daiichi Sankyo Company, Limited

Thank you for waiting. From now on, we would like to open Daiichi Sankyo's FY2026 Second Quarter Earnings Call. And my name is Fujishiro, working as an emcee for today's session covering IELTS and ESL. First of all, about the languages of choice. In this session, we use both Japanese and English. So that you have a simultaneous translation service, click on the globe mark down below on Zoom screen and choose your language. And the original audio, if that is chosen, you can hear the original voice. And on Zoom screen, we are going to match presentation material with a speaker's language. and on live broadcast, we are going to show Japanese presentation, Japanese, English, and those presentation decks are available to be downloaded on the corporate website, IR library earnings call related document. And so today we have four speakers, representative director, president and CEO, Okuzawa, and also Ken Kera, the board member, Global Oncology Business Head, and John Tsai, Global R&D Head, and also Kodama, CFO of the company. First of all, Okuzawa, Ken, John, will give you the overview of their performance. And up until 7 o'clock at the end, we receive questions from investors and analysts. As for questions from journalists, We start receiving, entertaining those questions starting from 10 minutes past 7. And this session is recorded. Please be aware of that. Let's get started. Mr. Okuzawa, the floor is yours now.

This is Okuzawa. Thank you very much for participating in Daichi Sankyo's financial results presentation meeting today. I will now walk you through our consolidated financial results for the second quarter of FY2026 which were announced today at 1 p.m. following the presentation material. Please turn to slide 3. We will cover FY2026 Q2 financial results, business update, and R&D update in this order. Business update will be presented by Ken Keller Head of Global Oncology Business, and R&D Update by John Tsai, Head of Global R&D. We will take your questions at the end of the session. Please turn to slide 4, highlights of the second quarter. Strong growth in our flagship products in Hurtu and Dekoei drove revenue past the 1 trillion yen mark by the second quarter. Progress is on track toward achieving record high full-year revenue. Regarding operating profit, COGS ratio improved, and we are well on track toward a significant year-on-year increase in full-year operating profit. Our consolidated forecast for FY2026 remains unchanged from the forecast announced in July. For your reference, Updated sales projections by product and unit are available in the supplementary materials. This slide provides an overview of our consolidated results for the second quarter of FY2026. Revenue increased by 191.9 billion yen or 19.7% year-on-year reaching 1 trillion 167.2 billion yen. Cost of sales increased by 1.1 billion yen year-on-year. SD&A expenses increased by 96.9 billion yen year-on-year. R&D expenses increased by 23.2 billion yen year-on-year. As a result, core operating profit increased by 70.6 billion yen or 46.9% year-on-year to 221.3 billion yen. Regarding the CMO compensation fee included in the cost of sales, although there was an increase resulting from a one-time payment we made to certain CMOs, foreign exchange assessments and partial reversals of provisions recorded in FY 2025 for calendar years 2026 and 2027 resulted in The one-time payment to certain CMOs was made to resolve any future potential shortfall between our supply plan and minimum purchase obligations, thereby eliminating future uncertainties and risks associated with these contracts in a manner consistent with economic rationality. In addition to the 4.3 billion yen booked in the second quarter, as already informed in the full year projection, 80 billion yen CMO compensation fee related to calendar year 2028 is expected to be booked in the third quarter or later this fiscal year. But because we also expect additional reversal of the provision booked last fiscal year, the total amount projected remains the same. For details, please refer to appendix slide 26. Operating profit, which includes non-core income and expenses, increased 49.6 billion yen, or 34.4% year-on-year, to 193.8 billion yen. Profit attributable to owners of the company rose by 20.7 billion yen to 15.8%. 15.8% year-on-year to 151.5 billion yen. Quarterly EPS increased by 12.67 yen year-on-year to 83.22 yen. Foreign exchange rates reflected weaker yen against both the dollar and the euro. Slide 6, please. From here, I will explain the factors for increase and decrease year-on-year. Revenue grew by 191.9 billion yen year-on-year. Here is the breakdown by business unit. First, Japan business unit achieved sales increases in anti-cancer agents N-Hertu and Deterway and pain treatment Talija. But anti-epileptic agent Bimpak saw generic entry and termination of the co-commercialization agreement. Anti-plagiant agent Epiant also saw generic entry. And oral anticoagulant Lixiana was affected by NHI drug price revision. This resulted in Japan business revenue decrease of 8.3 billion yen. Next are overseas business units, excluding the foreign impact here. In the oncology business, driven by strong growths of NHER2 and DecoVe, Revenue increased by 114.3 billion yen. In American region, iron deficiency anemia therapies, Benofar and Injectifar, and generic injectables sales decreased, resulting in 25.4 billion yen revenue decrease. In the EU specialty business, growth of cholesterol-lowering agents, Nilemto and Mistendi, was offset by a decline in Lixiana, resulting in 800 million yen revenue decrease. In the ASCA business, Asia South and Central America, led by growth in NHER2, notably in Brazil, revenue increased by 11.5 billion yen. In the upfront payment and regulatory sales milestone related to alliance with AstraZeneca and U.S. Merck, Regulatory milestones were recognized for NHER2 approvals in the U.S. for HER2-positive breast cancer neoadjuvant-adjuvant treatment and in Europe for first-line treatment, resulting in 26.6 billion yen revenue increase. The positive impact of foreign exchange on total revenue was 73.9 billion yen. Slide 7 chose operating profit factors for change. As mentioned, the breakdown of the 49.6 billion yen will be shown and revenue grew by 191.9 billion yen regarding cost of sales and expenses. In cost of sales, due to revenue growth, other cost of sales increased by 17.7 billion yen. On the other hand, due to a decrease in CMO compensation fee, the overall increase in cost of sales was limited to 1.1 billion yen. SC&A expenses increased reflecting the increase in profit share with AstraZeneca by 96.9 billion yen. Regarding R&D expenses, due to weaker yen, and increases in R&D investments associated with development progress for 5 DXD ADCs and next wave R&D expenses increased by 23.2 billion yen. Non-core income and expenses mainly due to EU specialty business unit restructuring and increment loss on faculty tax increase by 21 billion yen. Slide 8 explains changes in profit attributable to owners of the company. Operating profit increased by 49.6 billion yen as explained. Financial income expenses, mainly due to the deterioration in foreign exchange gains and losses, were affected by 20 billion yen. Income taxes, reflecting higher profit before tax, increased. by 7.4 billion yen. Following the partial share transfer of Daiji Sankyo Healthcare in July this year, profit attributable to non-controlling interests has been recognized starting this quarter. Consequently, profit attributable to owners of the company increased by 20.7 billion yen year-on-year to 151.1 billion yen. Slide 9 On July 31, 2026, we submitted partial corrections to our FY2025 financial results to the Tokyo Stock Exchange. We take this matter very seriously, recognizing the significance to the reliability of our financial reporting. The issue stemmed from errors in data aggregation processes, and we recognized that no structural issues were found that would compromise the effectiveness of the overall internal control system. Meanwhile, as recent business growth and globalization have made our organization and operational processes more complex, the board of directors is not viewing this as an isolated event but is discussing how to identify and oversee financial reporting risks Thank you very much. is an enterprise-wise transformation program designed to achieve our 2035 vision and the sixth medium-term business plan by focusing on strategic prioritization and resource allocation to fundamentally strengthen our profitability, competitiveness, and organizational capabilities. This program consists of external expense optimization, process transformation through AI, and structural transformation. External expense optimization is optimizing procurement processes based on unified data from a global ERP. Business process transformation through AI is developing multiple concrete use cases. Structural transformation is simplifying our organizational and business operating model. We are advancing the identification of high-impact areas and measures Thank you very much. benefits exceeding 200 billion yen over five years, and any surplus will be reviewed for cash allocation based on comprehensive reviews of our financial standing. I will now hand over to Ken Keller, head of global oncology business, for the business update.

Thank you, Okuzawa-san. Hello, this is Ken Keller. I am head of the global oncology business unit. I'll provide an update on business performance beginning with Inher2. Next slide, please. Inher2 delivered another quarter of outstanding performance. Global product sales reached 464.5 billion yen, an increase of 45.9% year-over-year, or 146.1 billion yen. This performance demonstrates the strength of NHER2 today and the scale of the opportunities still ahead. Growth in the second quarter comes from three clear drivers. First, deeper penetration in existing indications. Second, Expansion into new indications. And third, broader access for patients around the world. Importantly, this growth is broad-based. The U.S. region led with 55% year-over-year growth, followed by our ASCA region at 49%, Japan at 37%, and Europe at 26%. In the U.S., we have launched three important new indications this year. In January, we launched the first-line HER2-positive metastatic breast cancer indication, and this is based on Destiny Breast 09. I'm happy to report the adoption has been impressive. And HER2 has already become the market share leader and the new standard of care. And we expect adoption to continue as physicians gain experience with this regimen. This indication has also recently been improved in China, Japan, and Europe. Based on the strength of the U.S. launch, we see a substantial opportunity and we expect to replicate that success globally. Equally important is our progress in early stage breast cancer. Bringing in HER2 into the early stage curative setting has always been our goal. Since our first approval, In late-stage advanced setting, we felt in HER2's greatest and biggest impact would be in the early treatment setting where cure was still possible. It is gratifying to us and the entire oncology community to now have launched in HER2 in both the neoadjuvant and the adjuvant settings based on destiny breast 11 and Destiny Breast 05 in the United States. I am pleased to share with you that Inher2's adoption is increasing month after month in both settings. Based on the early adoption and the feedback from oncologists, we are confident that Inher2 will soon become the market share leader and establish itself as the new standard of care in both settings. As I stated, these are potentially curative settings, which makes this expansion and our progress especially meaningful, both for patients and for the long-term growth profile of INHER2. We are also making progress in expanding access Following extensive negotiations, I'm happy to report that HER2 has achieved public reimbursement in the United Kingdom for HER2-low metastatic breast cancer after chemotherapy. This provides access to approximately 1,000 patients who have been waiting for a new treatment option. has already transformed the treatment of HER2 positive metastatic breast cancer. As HER2 moves into earlier stages of disease and reaches patients globally, we believe its clinical impact and commercial potential will become even greater. And HER2's overall Q2 picture is one of accelerating growth as its addressable market continues to expand and there is significant headroom and HER2 is nowhere close to the limits of its opportunity. Next slide. Now I'll turn to an update on Datchaway's performance. Datchaway is rapidly emerging as our next major growth driver. Q2 global product sales reached 48.3 billion yen, an increase of 32.6 billion yen year over year. Growth accelerated sequentially during the quarter, and we expect continued momentum throughout the second half of this fiscal year. In the U.S., Marketshare continues to expand in the EGFR mutated non-small cell lung cancer setting. As physicians gain experience with Datroi and their confidence in its clinical profile grows, we expect substantial growth in the coming years. Importantly, the experience gained from prescribing Datroi in this lung cancer indication will serve as a strong foundation as we ready for the top line results of multiple lung cancer trials in fiscal 2027. Our May launch in the first line PD-L1 inhibitor ineligible metastatic triple negative breast cancer setting is progressing very well. Market penetration and new patient starts are increasing every month. Physicians are highlighting three important attributes in their treatment decisions. First, it's Batchelor's unique overall survival benefit, its doubling of overall response rate, and its convenient dosing. At last week's ESMO meeting, We also presented new data on Datchaway's CNS activity in triple negative breast cancer based from our Tropion Breast O2 trial. This is important because up to one-third of patients with triple negative breast cancer eventually develop brain metastasis, an area where there is Significant unmet needs and very limited treatment options. These data showcased the CNS efficacy of Datchaway in triple negative breast cancer patients with baseline brain metathesis. The trial demonstrated that Datchaway significantly improved progression-free survival, response rates, and CNS Disease Control compared to investigators' choice of chemotherapy. The median CNS progression-free survival reached 9.5 months with Datchaway compared to 2.6 months with chemotherapy. This data underscores the potential of Datchaway as a first-line treatment option for triple negative breast cancer patients. Now, I attended ESMO and the physician feedback on these data was highly encouraging. Based on that feedback, we believe these findings further strengthen Daturae's clinical profile and will inform and strongly influence future treatment decisions. Daturae's global expansion is also accelerating. It was approved in Japan on September 16th for first-line metastatic triple negative breast cancer. It achieved public reimbursement in Germany for first-line triple negative breast cancer, supporting European growth. And it was launched in Brazil in August. Datchaway now has multiple growth engines, increasing U.S. adoption, Expansion into additional indications, new clinical evidence, and a growing global footprint. DATCHOI is becoming an increasingly important contributor to oncology growth with substantial potential still to be unlocked. This foundation will position DATCHOI strongly for its upcoming clinical data catalyst and many more. Now I'd like to talk about the recent collaboration with Summit. Our collaboration with Summit Therapeutics is a strategically important step in maximizing the potential of Datchaway. Together with AstraZeneca, we will evaluate Datchaway in combination with Ivonescomab across multiple tumor types, including lung cancer and breast cancers. The collaboration will begin with a Phase III study in first-line triple negative breast cancer. Our ambition is to establish Datue as a backbone of treatment across multiple cancers, and combinations will be an important part of achieving that ambition. DATROY brings a TROP2 directed DXD-ADC together with IVO-Nesquimab's dual targeting of PD-1 and VEGF. This gives us an opportunity to investigate this differentiated treatment regimen across multiple tumor types. We believe the next era of oncology will be defined not only by better individual medicines, but increasingly by the right combinations for the right patients. This collaboration is an example of how we intend to move with speed, use external innovation, and strategically work with partners to maximize the value of our pipeline. Next slide. Daiichi Sankyo has built world-class science. We must now ensure that our commercialization capabilities are equally world-class. Our portfolio is entering a new phase. We will have more indications More markets and more launches to manage. We will have more than 20 registrational trials expected to be read out over the next several years, together with a significant number of early stage assets advancing through our pipeline. At the same time, the pharmaceutical environment is increasingly interconnected, a pricing and many others. This creates an unprecedented opportunity to bring more medicines to more patients. It also significantly increases the value at stake. To capture this opportunity our commercial model will evolve. Effective April 2027, we will operate as one global commercialization organization, bringing our regional businesses and our global commercial functions together under one unified accountability. This change will support faster and better decisions, more efficient resource allocation, It will elevate launch readiness and allow us to build better capabilities to deliver more consistent world-class execution across markets. It will also strengthen collaboration internally between commercial, R&D, and our technology unit. In the new commercialization organization, our responsibility and commitment is to convert our expanding pipeline into sustainable global revenue and operating growth, delivering greater value for patients, Daiichi Sankyo and our shareholders, all with a singular goal of ensuring our medicines reach the right patient at the right time every time across the globe. I'll now turn it over to John Tsai, our Head of Research and Development.