This is Hiroka speaking. Thank you for accessing Daiichi Sankyo's financial result conference call. I'd like to start a presentation regarding the third quarter financial result, which was announced at 1:00 in the afternoon on January 31. Please turn to slide page three. Today's agenda include FY 2017 Q3 financial results, FY 2017 revised consolidated forecast, edoxaban update, and R&D update. After the presentation, we will have a question and answer session. First, I'll go over the FY 2017 third quarter financial results. Please take a look at slide page five, which shows an overview of the FY 2017 third quarter results. Consolidated revenue was JPY 741 billion, up by JPY 6.6 billion. It means 0.9% increase year-on-year. Cost of sales made JPY 13.7 billion, increase year-on-year. SG&A expense decreased by JPY 3.7 billion, R&D expenses increased by JPY 32.1 billion.
As a result, operating profit JPY 93.2 billion, down by JPY 35.5 billion, which is 27.6% decrease year-on-year. Profit before tax is JPY 97.7 billion, down by JPY 34.7 billion. Profit attributable to owners of the company is JPY 72.6 billion, with JPY 15.6 billion decrease, which is 17.7% decline year-on-year. Actual currency rate was JPY 111.71 to a U.S. dollar, which is weaker yen by JPY 5.03 compared to the previous term. EUR rate was JPY 128.53 to a euro, and yen is weaker by JPY 10.44 compared to the previous term. Moving on to slide number six. I will use three slides from here to explain reasons for year-on-year increases and decreases. Revenue increased by JPY 6.6 billion, I would like to give you a breakdown by major business unit. Japanese business includes domestic pharmaceutical products, vaccine, and OTC drugs.
Japanese business grew because anticoagulant agent Lixiana grew significantly. In addition to that, there are other drugs which are center of the sales expansion, such as raloxifene for osteoporosis treatment, Nexium, an anti-ulcer drug, antiplatelet drug Effient, Daiichi Sankyo is watch product like authorized generics of Effient, Telmisartan, olmesartan, and rosuvastatin. On the other hand, some drugs such as anti-hypertensive drug Olmetec revenue are decreased. Daiichi Sankyo Healthcare sales is growing. In summary, Japan business as a whole made JPY 32.6 billion increase in revenue. I will explain about overseas business. These numbers exclude the influence of foreign currency exchange fluctuation. U.S. Daiichi Sankyo Inc. made JPY 54.7 billion decrease in revenue because of a decrease in sales of anti-hypertensive drug olmesartan, antiplatelet Effient, and Welchol, which is hypercholesterolemia and type 2 diabetes treatment drug.
However, U.S. Luitpold's revenue grew by JPY 12.1 billion because of positive contribution by Injectafer, which is iron deficiency anemia treatment drug and generic injectables. Although Lixiana contributed to Daiichi Sankyo Europe's revenue, JPY 900 million revenue decrease was made because of decline of olmesartan sales. ASCA business, which covers Asia and Central and South America, made JPY 3.2 billion revenue increase. Forex impact made by weaker yen was +JPY 14.3 billion in total. Please turn to slide seven, which talks about increase and decrease factors for operating profit. As I mentioned earlier, revenue increased by JPY 6.6 billion, including JPY 14.3 billion positive contribution by Forex impact. I would like to explain about cost excluding Forex impact and special items. Cost of goods increased by JPY 16.1 billion, impacted by changes of product mix caused by the patent expiration of olmesartan.
SG&A increased by JPY 1.5 billion and R&D expenses decreased by JPY 1.3 billion. Cost increased by Forex impact was JPY 12.4 billion in total. The breakdown is JPY 3.7 billion for cost of sales, JPY 5.4 billion for SG&A, and JPY 3.3 billion for R&D expenses. Regarding special items, in the previous term, we booked JPY 10.6 billion for reorganization cost in Europe. For this term, JPY 6.1 billion cost reduction was made by a gain of sales of fixed assets. We also booked intangible asset impairment loss of JPY 27.8 billion because of returning the right of CL-108. Cost increased by JPY 13.5 billion from the previous term. As a result, operating profit is JPY 93.2 billion, which is -JPY 35.5 billion from the previous year. When we exclude Forex impact and special items, a substantial amount of operating profit decreased becomes JPY 23.9 billion.
I would like to use slide number eight to talk about profit attributable to owners of the company. Operating profit decreased by JPY 35.5 billion. With the corporate tax rate reduction because of lowered U.S. tax rate, profit attributable to owners of the company became JPY 72.6 billion, which is decrease of JPY 15.6 billion compared to the same term in the previous year. Please take a look at slide nine. The slide shows revenue increase and decrease for the major business unit. Slide six shows revenue situation of each unit excluding Forex impact, but this slide shows actual number including Forex impact. Because of patent cliff on olmesartan, U.S. Daiichi Sankyo Inc.'s revenue was significantly decreased, but domestic pharmaceutical business in Japan made a steady sales growth compared to the previous term. Daiichi Sankyo Healthcare is also doing well.
In overseas market, Luitpold in the U.S. is making a big sales growth. Please turn to slide 10, which shows revenue increase and decrease of major products in Japan. Major products such as Lixiana, Pralia, and Nexium, sales are on track. More number of long listed products are having difficult time compared to the previous term because of expanded generic products impact. Next is about FY 2017 revised consolidated forecast. Slide 12, please. Revenue is revised up to JPY 950 billion. Although there is a decrease of revenue of ASCA business, we expect JPY 20 billion increase in revenue coming from Daiichi Sankyo Healthcare, Daiichi Sankyo Inc. with currency exchange impact, Luitpold, and Daiichi Sankyo Europe. Sales increase is accompanied by the cost of sales increase. We expect JPY 10 billion cost increase, including JPY 5 billion one-time cost, which we are not able to talk about details.
R&D expenses are revised with the addition of JPY 10 billion because we are accelerating research and development centering oncology. We would like to maintain JPY 75 billion of operating profit and JPY 50 billion of profit attributable to owners of the company.
Next, I am going to present edoxaban update. Since the launch of Lixiana, efforts have been made to maximize its value. In November of 2017, in Japan, we launched OD, orally disintegrating tablet of Lixiana. OD tablets were designed for easy administration, and easy administration is highly evaluated by doctors as convenient, especially for elderly patients. In December of 2017, Lixiana demonstrated non-inferiority in primary endpoint against dabigatran in Hokusai VTE cancer study. Dabigatran is a standard of care in U.S. and E.U. for VTE associated with cancer. In the late-breaking session of ASH 2017, Lixiana was presented as a first DOAC to achieve non-inferiority against dabigatran, which is injected. More VTE patients with cancer may be assured to use the drug without any worries. Next is the status of R&D. Please look at slide 16.
As we presented in December last year on R&D Day, this is our development program for DS-8201. Gastric case is ongoing phase I study. This was presented in ASCO GI in San Francisco. I would like to share that data with you today. Please turn to page 17. Here is phase I study design. At ASCO GI, gastric cancer cases from part one, which is dose escalation part. We also have data from part 2B. This was presented at the meetings. Slide 18. This shows a patient's background. Total of 45 cases and 44 had prior treatment with trastuzumab, which is a standard of care. 24 cases had prior treatment with CPT-11 irinotecan. Please look at slide 19. This table shows response rate. Out of 44 evaluable cases, response rate was 45.5%. Payload for DS-8201 is modified compound of CPT-11 irinotecan.
Patients with prior treatment with CPT-11 also showed response rate which was 43.5%. Estimated median for PFS is 5.8 months. PFS in general for this line of treatment is considered to be around two months, so 5.8 months is very good result. Please turn to Slide 20. This shows tumor shrinkage of DS-8201 and the treatment duration. Vertical axis shows tumor shrinkage. Each bar represents a patient. The lower the bar, the smaller the tumor shrinkage. The pink bar is for patients with prior treatment of irinotecan, yellow for those with no irinotecan treatment. All cases show similar efficacy. Blue bars show treatment duration. The arrows at the tip indicate patients continuing with the treatment. As you can see, 17 patients continue to be treated. Slide 21, please. The vertical axis shows tumor shrinkage. The horizontal axis is treatment duration.
You can see the chronological changes in tumor shrinkage for each patient. Tumor shrinkage was observed from an early period and continued. It may be difficult to see, but the yellow line indicates cases with low HER2 expression. One case showed the same efficacy as a HER2-positive case. Slide 22, please. Here are CT images of a patient who responded to the treatment. This is a case of a 76-year-old gastric cancer patient, a man with liver metastases. He had prior treatment with other drugs. The red arrows show the metastasis from gastric cancer to liver cancer. The lower image shows tumor shrinkage one year after 13 cycles of treatment with DS-8201, administered once every three weeks. This table shows adverse events rated from Grade 1-5, with 5 being the most serious AE.
irinotecan has serious AEs affecting digestive organs, but the 45 cases presented this time had no AEs of Grade 4 or 5 and above. There were two cases of suspected interstitial pneumonia, a Grade 1 and Grade 3, among the gastric cancer cases. These cases will be evaluated further by the interstitial pneumonia adjudication committee. Slide 24, please. Here is a summary of the presentation at ASCO GI. DS-8201 has shown manageable safety and promising antitumor activity in heavily pre-treated subjects with HER2-positive cancer who have been receiving trastuzumab, regardless of prior CPT-11 treatment. Currently, pivotal phase II studies are ongoing with HER2-positive, unresectable cases and metastatic gastric cancer cases to confirm the efficacy and safety of DS-8201. Slide 25, please.
In December of last year, we reported research collaboration with U.S. Memorial Sloan Kettering Cancer Center to conduct a preclinical study to evaluate the combination of DS-8201 and neratinib, developed by Puma, in patients with solid tumors and HER2 mutations. The significance of neratinib in combination with DS-8201 was previously reported on R&D Day, I will use slides today for further explanation. neratinib is a tyrosine kinase inhibitor targeting HER2 and is already launched and available on the market. neratinib blocks the HER2 signal and suppresses cell proliferation and survival. HER2 dual blockage by combination with DS-8201 is expected, and this will be evaluated in the trial. neratinib is also considered to increase internalization rate and may increase uptake of DS-8201 into the tumor, showing a synergistic effect. This hypothesis will also be explored further in the preclinical trials.
As an appendix, the following items can be found: R&D milestone events, major R&D pipeline, out-licensing projects, Inegy update, and abbreviations. Please check later. That is all from me. Now we would like to take questions from you. Thank you very much. We have many people from our company, so we look forward to a Q&A session.
Now, we would like to start a question-and-answer session. The first question is from Mr. Yamaguchi of Citigroup.
Mr. Hirokawa, I understood the sales information regarding FY 2017 revised consolidated forecast. Would you please give me some image, including guidance about the cost of goods, which included special items?
With the increase of sales, cost of sales increase, and there is a one-time cost in relation to the cost of sales. Right now, at this point, I am not able to share the details, but including the one-time cost of sales will increase by JPY 10 billion. Does that mean you include that amount because the cost will be incurred in the future almost for sure? Yes, we included the cost thinking it will be incurred by the end of this fiscal year. Understand. This is one-time, therefore, it will be gone next year.
Yes, after we book the amount this term, this will be gone. I understand. About R&D expenses, I understand you are standing in the phase of increasing the R&D expenses, but there might have been a way to fill the gap to JPY 100 billion caused by asset impairment. Have you thought about that? With the special items, R&D expenses will increase. At the end of the second quarter, we are still hoping to reduce the R&D expenses, but especially for oncology area, R&D activities were reaching a quite advanced stage. Because of that reason, we decided to be on the conservative side to increase a JPY 10 billion without changing initial OP target. I understood. My last question is about interstitial pneumonia of DS-8201. I may be confused. Are these mentioned 2 cases different from the cases which was mentioned at the previous R&D Day? Yes.
I talked about gastric cancer cases, and the previous cases were for breast cancer. There are 1 Grade 1 and 1 Grade 2 cases for gastric cancer trial. Investigators reported interstitial pneumonia and pneumonitis, and of course, these 2 cases will be adjudicated by the adjudication committee. I understand. Has the adjudication committee reached any conclusion about the previous cases for breast cancer? We'll be able to make a report when we have organized information. As the clinical trial proceeds, we receive more information. But the important point is, regarding adverse drug reaction, the adjudication committee adjudicate, and we respond appropriately based on that. I understand. One last question. Allow me to ask a basic question about neratinib. I understand the point of double inhibition of HER2. My question is, if there's any risk of too much inhibition.
It is true that generally, inhibition causes an increase of gene expression, but different from lapatinib, there's a report that neratinib promotes internalization of HER2. Yes, you mentioned that. This is a hypothesis we'd like to confirm by doing the preclinical trial to see if there's a synergy effect created by DS-8201 and HER2 conjugate when it is internalized. Right. I understand. Thank you very much. Next question is from Mr. Seki of UBS Securities. This is Seki. I have 3 questions. The first question is about the R&D expenses. It is increased by JPY 10 billion this term, and it is bottomed up by JPY 30 billion. Therefore, real amount is JPY 200 billion. Should we expect this level to continue into the future? At the R&D Day, a pie chart was distributed, and I'm talking about the dotted line portion.
I'd like to understand how that portion should be interpreted. One of the management issues could be P&L management of R&D expenses. Can JPY 200 billion one of the guide, or should we prepare ourselves for the future increase? This is my first question. Glenn Gormley talked about that at December R&D Day. Daiichi Sankyo is going through a transformation, especially R&D's shifting focus to oncology. It means that the resources shifted to that area. That is currently going on, and asset impairment took place while we are going through this transition. We would like to focus our resources so that we can make progress in oncology as much as possible. Also, Nakayama mentioned that you have a quite good pipeline. For business development, there are JPY 500 billion planned for the midterm business plan. It could be spent if necessary. But there is a ceiling of R&D expenses.
That is our discipline. We like to do a close examination so that expense will not increase very much. For this year, please understand that transition period of shifting focus and asset impairment overlapped to shape this number.
Thank you very much. The amount is not going to increase in the future, isn't it? That is what we like to do. Thank you.
The second question is about DS-8201 gastric cancer. There is one HER2- patient and showed a very encouraging response. Generally speaking, most people would want to see more response of HER2- patient because people could be intellectually curious. At the ASCO meeting, there is one HER2- patient, but there is no new HER2- patient being registered after that. Are there any reasons for that? Is it just because there is no more registration, or is there any other reasons? That is about part II-B on slide 17.
For part II-B, there is trastuzumab pre-treated gastric cancer and HER2 positive. For phase I, part II-B, patients already received Herceptin pre-treatment. That means all patients are HER2 positive, otherwise the treatment had not been indicated. There is one subject with low HER2 because for those exploration period of part I, the subject did not have to be HER2 positive. This subject enrolled the study from that phase, and the study drug was very efficacious. Phase II pivotal study, which is currently going on, we will include a low HER2 subject for the exploratory purposes. There is one subject and the study drug is working very well, we would like to review this case also. To answer your question, please understand that the reason why we have a small number of low HER2 is because of inclusion criteria. Thank you very much.
That means until phase II data becomes available, we will not see any data on gastric cancer patient data with low HER2.
You are right. There is only one subject right now who enrolled when part I trial was going on. The drug is efficacious to the patient just like it is to other subject. We think there is a potential like breast cancer.
I understand. The last and the third question. There will be AACR held in April of this year. Do you have any plan to announce some basic data or any kind of data?
I will have Akahane answer this question because AACR is a research area.
Thank you for your question, Mr. Seki. This is Akahane. We are currently planning to present some of our pipelines, but there is no information we can discuss as of today.
Thank you very much. It is fine.
We move on to the next question from Daiwa Securities, Hashiguchi. Mr. Hashiguchi, please.
Thank you. I am Hashiguchi. I have several questions. First question is concerning the situation of Lixiana. Sales in Japan, compared to the past quarters, seem to be quite favorable. What is the background against this? In the appendix, you have the share indicating smooth growth, the trend, I don't think remains the same for second quarter. There is a new launch of OD tablet, maybe there were some factors in the distribution or shipment, there may be some strength of the product and other factors. Can you comment on the background, please?
Thank you for your question. As for Lixiana, this was developed in Japan, low body weight patients can also be administered adjusting the dosage, we have a lot of data.
This may represent as comfortable and convenient to the doctors. OD tablet. The elderly patients have several medications to take every time, Japanese patients say it is difficult to swallow the tablets and even capsules. Even without dysphagia, people say that it's difficult to take the medication. Orally disintegrating tablet, the bitterness of the medication is covered, once it is administered, immediately it disintegrates inside the mouth. There are many elderlies being treated, the doctors highly evaluate this formulation. It consists of a big portion of the sales, this is another factor for increasing the sales. As for other companies, they are overseas companies, I have no news or information of any company developing orally disintegrating tablet. We think this is a very good situation for us.
That means the sales of third quarter, there is not much basis for evaluating or preparing for the demand. Well, we are growing smoothly, personally, we will be having drug price revision, as for all the tablets, I don't think there will be any problem concerning the purchase. Thank you. Second question, I want to know the situation about Welchol. Until the third quarter, there was not much change in the trend of the sales, the assumption is that you will have lower sales in the future. I don't think there is generic product yet. What is the situation that you foresee, please? As for Welchol, the patent, we already have no patent. If you follow FDA guidance, it is quite difficult to launch generic product.
When generic is going to come into the market, we try to get information, but not for the time being. There is a similar drug, and it is also off-patent, and because of that, there are changes in the sales figures. How it goes down, the sales decreased during the plan for annual figures. The estimate was quite low, but actually it is not so low. Therefore, we revised the figure upward. However, every year, if you look back, there is a tendency of decreasing. That is not changed.
Third quarter and fourth quarter, you're not expecting major change. Is that correct understanding?
Yes. We have no assumption like that.
Thank you very much.
If you have any questions, please use the phone. Next question. From Credit Suisse, Mr. Sakai, please. Thank you. I am Sakai. First, the question that I always ask, if you allow me.
Fourth quarter, there's a tendency that you say the figures are in deficit, and this time as well. Third quarter and fourth quarter and the year, the assumption is deficit in the fourth quarter and this structure is not going to change. I just want to confirm that with you. Yes. Every year it's like that. Until the 3rd quarter, the operating profit tend to go up. Looking at 4th quarter itself, the figures are in red. There's a delay in the implementation of expenses, and we wonder how we can change this, and we had different plans, but again, we have the same tendencies here. Understood. Two other questions regarding R&D. Gastric cancer data. It's early-stage patient, but efficacy has been confirmed. On page 20, there is a table. 17 cases are continuing with the treatment. This is 17 patients. They decided to continue the treatment.
What are the factors for them to continue? What is the selection criteria? Were there any requests from the patients? If you had any criteria, I would like to know that. Yes. The patient, if you look at page 21, tumor shrinkage rate. There is a case where there was no shrinkage and the tumor got bigger. In that case, the treatment will be stopped and the patient will be treated. If there is no worsening and PFS seem to be good, then we will also like to continue with the treatment, which means 70 cases continue with the treatment and PFS median was referred to earlier, but the possibility is that this may be further extended. If the tumor doesn't grow anymore and can continue with the treatment, then we can do so without any adverse reaction.
On page 19, amongst the evaluable cases at 20 cases, PFS 5.8 is a figure that is shown, and this is what you're referring to. Those who have been treated up to now and PFS survival may be short, but for these patients, they continue to survive. At the cutoff point, median 5 of PFS, and there's a possibility that this may be further extended. The tumor is controlled, and it is not growing, and the treatment can be given to the patient. That is why they are being treated. Thank you. One more question. Concerning the follow-up of R&D. Was it during R&D meeting? DS-1062 to non-small cell lung cancer. Currently, the stage is advanced, progressed, as shown in red, but still it's in phase I stage. What is the schedule from now on, and can you give me some information concerning this, please?
We started phase I, what is important, ADC, for example, we have 1062 and U3-1402 breast cancer here in Japan is being investigated. ADC pipeline, we have one after the other, we have large amount of data first for DS-8201, then after that, 1402 and 1062. If we are able to get similar results, we will be convinced with the value of technology, we will be more confident. We want to wait for the data to come out. As for the progress, it may depend on the cancer type also antigen, the speed of development may be different. We are now looking forward to the data to be generated.
Thank you very much.
If you have any questions, please use the phone. There's no further questions, so this is the end of Q&A.