Thank you for waiting. From now on, we would like to open Daiichi Sankyo's FY 2026 Second Quarter Earnings Call. My name is Fujishiro, working as an MC for today's session covering IR and this hour. 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. The original audio, if that is chosen, you can hear the original voice. On Zoom screen, we are going to match presentation material with a speaker's language. On live broadcast, we are going to show Japanese presentation, Japanese, English, and those presentation decks are available to be downloaded on our corporate website, IR Library, earnings call-related document.
Today we have four speakers, a Representative Director, President and CEO, Okuzawa, and also Ken Keller, 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 the performance. Up until 7:00 P.M., we receive questions from investors and analysts. As for questions from journalists, we start receiving and entertaining those questions starting from 10 minutes past 7:00 P.M. 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 Daiichi Sankyo's financial results presentation meeting today. I will now walk you through our consolidated financial results for the second quarter of FY 2026, which were announced today at 1:00 P.M. following the presentation material. Please turn to slide three. We will cover FY 2026 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 four, highlights of the second quarter. Strong growth in our flagship products, Enhertu and Datroway, drove revenue past the JPY 1 trillion 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 FY 2026 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 FY 2026. Revenue increased by JPY 191.9 billion, or 19.7% year-on-year, reaching JPY 1,167.2 billion. Cost of sales increased by JPY 1.1 billion year-on-year. SG&A expenses increased by JPY 96.9 billion year-on-year. R&D expenses increased by JPY 23.2 billion year-on-year. As a result, core operating profit increased by JPY 70.6 billion, or 46.9% year-on-year, to JPY 221.3 billion.
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 a JPY 16.7 billion decrease year-on-year, resulting in a total of JPY 4.3 billion. 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 JPY 4.3 billion booked in the second quarter, as already informed in the full-year projection, JPY 80 billion CMO compensation fee related to calendar year 2028 is expected to be booked in the third quarter or later this fiscal year.
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 JPY 49.6 billion, or 34.4% year-on-year to JPY 193.8 billion. Profit attributable to owners of the company rose by JPY 20.7 billion to 15.8% year-on-year to JPY 151.5 billion. Quarterly EPS increased by JPY 12.67 year-on-year to JPY 83.22. Foreign exchange rates reflected a weaker yen against both the dollar and the euro. Slide six, please. From here, I will explain the factors for increase and decrease year-on-year. Revenue grew by JPY 191.9 billion year-on-year. Here is the breakdown by business unit. First, Japan business unit achieved sales increases in anti-cancer agents Enhertu and Datroway, and pain treatment, Tarlige.
Anti-epileptic agent Vimpat saw generic entry and termination of the co-commercialization agreement. Antiplatelet agent Effient also saw generic entry. Oral anticoagulant, Lixiana, was affected by NHI drug price revision. These resulted in Japan business revenue decrease of JPY 8.3 billion. Next are overseas business units, excluding the foreign impact here. In the oncology business, driven by strong growths of Enhertu and Datroway, revenue increased by JPY 114.3 billion. In American Regent, iron deficiency anemia therapies, Venofer and Injectafer, and generic injectables sales decreased, resulting in JPY 25.4 billion revenue decrease. In the EU specialty business, growth of cholesterol-lowering agents, NILEMDO and NUSTENDI, was offset by a decline in Lixiana, resulting in JPY 800 million revenue decrease. In the ASCA business, Asia South and Central America, led by growth in Enhertu, notably in Brazil, revenue increased by JPY 11.5 billion.
In the upfront payment and regulatory sales milestone related to alliance with AstraZeneca and US Merck, regulatory milestones were recognized for Enhertu approvals in the U.S. for HER2-positive breast cancer neoadjuvant/adjuvant treatment, and in Europe for first-line treatment, resulting in JPY 26.6 billion revenue increase. The positive impact of foreign exchange on total revenue was JPY 73.9 billion. Slide seven shows operating profit factors for change. As mentioned, the breakdown of the JPY 49.6 billion will be shown, and revenue grew by JPY 191.9 billion. Regarding cost of sales and expenses, in cost of sales, due to revenue growth, other cost of sales increased by JPY 17.7 billion. On the other hand, due to a decrease in CMO compensation fee, the overall increase in cost of sales was limited to JPY 1.1 billion. SG&A expenses increased, reflecting the increase in profit share with AstraZeneca by JPY 96.9 billion.
Regarding R&D expenses, due to weaker yen and increases in R&D investments associated with development progress for five DXd ADCs and next wave, R&D expenses increased by JPY 23.2 billion. Non-core income and expenses, mainly due to EU specialty business unit restructuring and impairment loss on Takretexo, increased by JPY 21 billion. Next, slide eight explains changes in profit attributable to owners of the company. Operating profit increased by JPY 49.6 billion, as explained. Financial income expenses, mainly due to the deterioration in foreign exchange gains and losses, were affected by JPY 20 billion. Income taxes, reflecting higher profit before tax, increased by JPY 7.4 billion. Following the partial share transfer of Daiichi 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 JPY 20.7 billion year-on-year to JPY 151.1 billion.
Slide nine. On July 31st, 2026, we submitted partial corrections to our FY 2025 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 recognize 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 in a timely and appropriate manner going forward. We are committed to enhancing the accuracy and reliability of our financial disclosures by regularly evaluating and monitoring both the internal control system itself and the effectiveness of the strengthened operational processes.
Next, I will review the progress of our operational excellence program. This initiative is an enterprise-wide 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 our 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 for profitability and are now in the phase of developing and executing detailed plans for each initiative.
Through these efforts, we will create capacity to invest in DXd ADCs, subsequent BCTs, AI, and other priorities while securing the midterm plan's profit trajectory by delivering the JPY 200 billion cost optimization committed at the plan's announcement. Internally, we have targeted benefits exceeding JPY 200 billion 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 will provide an update on business performance beginning with Enhertu. Next slide, please. Enhertu delivered another quarter of outstanding performance. Global product sales reached JPY 464.5 billion, an increase of 45.9% year-over-year, or JPY 146.1 billion. This performance demonstrates the strength of Enhertu today and the scale of the opportunity 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-Breast09. I am happy to report the adoption has been impressive. Enhertu 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 approved 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 Enhertu into the early-stage curative setting has always been our goal. Since our first approval in late-stage advanced setting, we felt Enhertu'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 Enhertu in both the neoadjuvant and the adjuvant settings based on DESTINY-Breast11 and DESTINY-Breast05 in the United States. I am pleased to share with you that Enhertu's adoption is increasing month after month in both settings. Based on the early adoption and the feedback from oncologists, we are confident that Enhertu 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 Enhertu. We are also making progress in expanding access. Following extensive negotiations, I am happy to report that Enhertu 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. Enhertu has already transformed the treatment of HER2-positive metastatic breast cancer. As Enhertu moves into earlier stages of disease and reaches patients globally, we believe its clinical impact and commercial potential will become even greater. Enhertu's overall Q2 picture is one of accelerating growth as its addressable market continues to expand, and there is significant headroom. Enhertu is nowhere close to the limits of its opportunity. Next slide. Now, I will turn to an update on Datroway's performance. Datroway is rapidly emerging as our next major growth driver. Q2 global product sales reached JPY 48.3 billion, an increase of JPY 32.6 billion 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., market share continues to expand in the EGFR-mutated non-small cell lung cancer setting. As physicians gain experience with Datroway and their confidence in its clinical profile grows, we expect substantial growth in the coming years. Importantly, the experience gained from prescribing Datroway in this lung cancer indication will serve as a strong foundation as we ready for the topline 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 Datroway's unique overall survival benefits, its doubling of overall response rate, and its convenient dosing. At last week's ESMO meeting, we also presented new data on Datroway's CNS activity in triple-negative breast cancer based from our TROPION-Breast02 trial.
This is important because up to 1/3 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 Datroway in triple-negative breast cancer patients with baseline brain metastasis. The trial demonstrated that Datroway 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 Datroway compared to 2.6 months with chemotherapy. This data underscores the potential of Datroway as a first-line treatment option for triple-negative breast cancer patients. I attended ESMO, and the physician feedback on these data was highly encouraging. Based on that feedback, we believe these findings further strengthen Datroway's clinical profile and will inform and strongly influence future treatment decisions. Datroway'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. It was launched in Brazil in August. Datroway now has multiple growth engines, increasing U.S. adoption, expansion into additional indications, new clinical evidence, and a growing global footprint. Datroway is becoming an increasingly important contributor to our oncology growth, with substantial potential still to be unlocked. This foundation will position Datroway strongly for its upcoming clinical data catalysts expected in fiscal 20 27. Next slide, please. 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 Datroway. Together with AstraZeneca, we will evaluate Datroway in combination with ivonescimab 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 Datroway as a backbone of treatment across multiple cancers, and combinations will be an important part of achieving that ambition. Datroway brings a TROP2-directed DXd ADC together with ivonescimab'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 or access decision in one market can influence value in 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 will now turn it over to John Tsai, our Head of Research and Development.
Thanks, Ken. This is John Tsai, and I am going to give you the updates from R&D over the last quarter. Next slide, please. We start with the results of DESTINY-Lung04, where we released these results at the World Congress of Lung Cancer in early September. In this study, Enhertu versus standard of care, which is platinum- pemetrexed doublet plus pembro, demonstrated a statistically significant improvement in progression-free survival with a hazard ratio of 0.63. This is in first-line patients with advanced HER2-mutated non-small cell lung cancer, and the results represented a six-month improvement in median progression-free survival.
In the primary analysis, Enhertu monotherapy reduced the risk of disease progression by 37% and a median progression-free survival of 14.3 months versus 8.3 months for the platinum pemetrexed doublet with pembro. The results were demonstrated and consistent across subgroups, including pre-specified subgroups in patients with brain metastases, smoking status, and HER2-mutated status.
At the time of the analysis, the overall survival was less than 50% mature. While there was no observed overall survival benefit at this early time point, the OS also did not favor Enhertu, but we did see greater use of HER2 therapies in the control arm. Next slide, please. I would like to give you some regulatory updates for Enhertu. First, for DESTINY-Breast09 in the first-line HER2-mutated metastatic breast cancer setting with Enhertu plus pertuzumab, which demonstrated a decreased risk of disease progression or death by 44%. This was approved in China in August, and in September, we received the approvals in Japan and the EU. Next, in DESTINY-Breast05, which is in the HER2-positive early breast cancer adjuvant setting, which demonstrated a reduced risk of invasive disease or death by 53%. This was approved in China and EU in October.
Lastly, for Enhertu, in the HER2 pan-tumor solid tumors, this was approved in China in October, and this was based on four phase II trials across a broad range of solid tumors. With that approval in China, that equates to 10 indications for Enhertu in China. Next slide, please. Now I'd like to go over the updates for Datroway. For Datroway in TROPION-Breast02, which is in the first-line metastatic or unresectable triple-negative breast cancer setting, this was approved in the U.S. in May of 2026. Following that, we received approval in the E.U. in July, approval in Japan in September, and in China in October of this year. For TROPION-Urothelial04, which is in high-risk muscle-invasive urothelial cancer, we started the study, and the first subject was dosed in August of this year. Moving on to I-DXd.
We voluntarily withdrew the filing for the accelerated approval of I-DXd in extensive-stage small cell lung cancer in September. This was based on discussions with the FDA, where the data from our phase II IDeate-Lung01 study did not support an accelerated filing in discussions with the FDA. We continue to enroll patients in IDeate-Lung02, our phase III trial, and the enrollment of this study is nearly complete. Next slide, please. Here, I'd like to share some additional data for R-DXd, which was shown at ESMO just this past week. This is an update of REJOICE-Ovarian01, the phase II/III trial, and the results shared here is from all patients treated in the phase II dose optimization study of the REJOICE-Ovarian01. This is data that has longer follow-up than what was seen before, and the results demonstrated further improvement in duration response, progression-free survival, and patient-reported outcomes.
We also demonstrated efficacy in patients with CDH6 greater than 1% biomarker. Based on this, we're moving forward with the 5.6 mg per kilogram, and these results demonstrated an overall confirmed overall response rate of 49.7%, a median progression-free survival of 7.9%, with a balanced safety profile of 5.8% low-Grade ILDs. To note, there were no Grade 5 ILDs at this dose. Next slide, please. We continue to advance our DXd ADC platform in the ovarian cancer space. You can see here that Enhertu continues to advance in the HER2-positive first-line maintenance study in DESTINY-Ovarian01. In addition to REJOICE-Ovarian01, we also are advancing REJOICE-Ovarian04 in the platinum-sensitive ovarian cancer second-line space. We're advancing REJOICE-Ovarian04 in the platinum-resistant ovarian cancer space in the first-line maintenance setting, and also REJOICE-Ovarian05 in the platinum-sensitive ovarian cancer second-line induction and maintenance patients who are PARP progressors.
These are our advancements in just the ovarian cancer space. Go to the next slide, please. For the news flow in 2026, the majority of these data readouts remain the same. There is one change which is highlighted in blue here. That is the change in AVANZAR, which we'll report out in calendar year first half 2027, and specifically, it will be in the first quarter of 2027 calendar year. One last thing before I conclude my remarks. I'm proud to say that we received the International Prix Galien Award for Enhertu as the best technology product, and this is an award that's given out every two years by the Galien Foundation. This is the second award granted to Enhertu following receipt of the Prix Galien USA Award for Best Biotechnology Product in 2024. We're very proud to receive this honor, and this was received yesterday.
With those, I conclude my remarks. Go to the next slide, please.
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Slide 23 shows the upcoming IR event. on November 25th Japan time, we will host the sustainability meeting. Additionally, we plan to hold an R&D-focused IR event within FY 2026. Details will be announced as soon as they are finalized.
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We will now move on to the questions- and- answer session. Questions can be asked either in Japanese or English, and if you have multiple questions, please ask one by one and not together. We ask you to limit your questions to two questions per person. First, please state to whom the question is directed before asking the question. If you have a question, please press the raise hand button at the bottom of the screen.
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We will move on to the first question.
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Citigroup Securities. Mr. Yamaguchi.
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My name is Yamaguchi. Can you hear me okay? Yes.
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The first question I have is directed to Ken-san. Datroway, TNBC, in that indication, it's doing well. PD-L1, no question about that. Your competitor product got the indication, so Datroway is limited to PD-L1 ineligible, and Trodelvy is easier to use given this. Is it impactful to the performance or not impactful? This is about minute detail. I'm sorry about that. This is my first question.
Thank you very much for the question. In the United States, when we look at Datroway and the triple-negative breast cancer indication, the real drivers of choice today are overall survival, overall response rate, ease of use, and then another factor that comes in there is comfort with the drug and habit. In the United States, our competitor was launched before we were. Today, physicians are gaining experience with Datroway in our new indication. I could say the feedback's very positive. Specifically, your question about, is the broader indication or the lack of it making an impact? Not very much at all. It's more about the comfort of physicians who have been using that competitive product. Now they're trying Datroway, and I think as they try it, you'll see adoption accelerating even further from here.
Thank you.
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The second question to Kodama-san. The CMO payment compensation was explained previously up to Q2. The full-year result, those are not changed. They said it changed. Up to Q2, what is going on? To JPY 80 billion, plus or minus, for the full year, like a long-term expectation is something I would like to ask you.
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Thank you for the question. The CMO compensation in Q2, the status, also for the full year, JPY 80 billion was announced, whether those numbers stay the same or not, that is the question. Slide number 26, probably. Okuzawa already explained. In FY 2025, or calendar year 2026 and 2027, we have reserves. We have forex at play, it fluctuates because of that.
At the end of the fiscal year, it might have negative impact due to stronger yen. On the other hand, part of CMOs in the future, we are making lump sum payment for the future cancellation, so that we are getting additional amount. In calendar year 2028, in terms of the reserve, that is expected to be JPY 80 billion, no change to that number for the time being. Our original assumption was negotiation, that is in progress. We are managing the situation. One additional information is forex, because of the forex situation, the amount might come up or come down.
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Thank you.
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Next question. UBS Securities, Mr. Seki, please.
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This is Seki from UBS Securities. Thank you very much for your presentation. This CMO compensation fee, I have a different question to Kodama-san. I-DXd withdrawal of the application submission means that the supply necessary will become less. Looking at FY 2028, no change, you said just now, which means, because this is a not big indication, not affecting JPY 80 billion, is this the right way to look at it? In the balance sheet, inventory is increasing. Is this commercial inventory? What kind of inventory? I think we had booked for that in the past, but can you explain further?
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Thank you very much for your question. Two questions. One was CMO compensation, I-DXdd withdrawal of the submission impact, plus the other is inventory increase of about JPY 100 billion. You were asking about this content.
CMO compensation fee impact by I-DXd. As you are right, I-DXd, the impact is not that big from I-DXd. In the future, we will be expanding our applications. We are conducting various studies to broaden our applications, considering this aspect, what we had already prepared for. The timing of starting to use what we paid for will be a bit later, but we do not expect any significant or meaningful impact right now. The second question was about inventory. You are right. R&D-related and clinical trial-related inventory, they were expensed when they took place, and the increase in the inventory is basically the commercial inventory. As we may have explained a number of times, for DXd ADCs, the manufacturing period is quite long, and we are preparing for future sales. We are manufacturing for future sales, the DXd ADCs.
Because we are seeing Enhertu sales expansion, we are preparing inventory a bit beforehand. That is why you are seeing start of inventory increase.
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I see. My second question is for John-san.
About AVANZAR and the data. Do the existing data suggest immunotherapy, like in long-term PFS tail? I mean, because we are wondering, AVANZAR delayed readout reflect a slower event accrual beyond the medium, with the medium PFS largely unchanged. Would the Weibull model with the declining hazard over time be a reasonable assumption here? Thank you.
Thanks for your question. It is very helpful. We are eagerly awaiting the results of AVANZAR, just like everyone else. Given that the study continues to be blinded, we do not have the insights specifically around AVANZAR and the curves. I think once the results are available, we will have much better insights. I am sorry that I do not have the details, but because the study is currently blinded, we do not have any insights on what those curves look like. As soon as we have those, we will be glad to share them. Thank you.
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The next question, JP Morgan Securities, Mr. Wakao, please?
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JPMorgan, Wakao speaking.
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I have a question to John.
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AVANZAR.
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The readout is delayed so the event accumulation is getting delayed. On the other hand, AVANZAR clinical study protocol, in that, version three and after, event occurrence has not been changed in the protocol. Is that the right understanding? The previous change was at the introduction of QCS. Is my understanding correct?
Yes. Happy to give you some insights about AVANZAR. As you know, AVANZAR is designed to evaluate both the non-squamous intention-to-treat unselected population and the biomarker-positive population. This is designed to have co-primary endpoints for both PFS and OS. Because OS is an important endpoint for first-line non-small cell lung cancer patients for approval for regulatory agencies around the world, we included OS as one of the co-primary endpoints. The primary endpoint analysis for PFS is timed so we should have sufficient maturity to characterize the overall OS trends. We have not conducted any PFS interims in this trial. This is an exception to the rule of disclosure of interims. We usually do not discuss interim results, but in this specific situation, we are sharing that we did not conduct any interims in this study.
These are some of the insights that I can share regarding the way that we have looked at and evaluate AVANZAR from a study standpoint. Thank you.
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No change to the event rate. I understand you are not conducting interim, but the event occurrence rate, what is going on there? Your assumption hasn't been changed?
That's correct. We have not made any event assumption changes. We continue to advance the study as we originally intended.
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Thank you. The second point.
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That lung cancer and AVANZAR PFS accumulation is lagging behind. TL 07, probably it might happen in that study, but as of now, the readout is expected in FY 2027. In that study, in the assumption, of course, there might be a range, but it is lagging behind a little. TL 07, if there isn't any delay, then a clinical trial design issue was there, or the population or regimen issue. Can you give me some kind of hint why that is the case?
Sure. Thank you for your question. I will reinforce that the primary endpoint analysis for AVANZAR is for progression-free survival, PFS. That should allow us to have sufficient maturity to characterize the overall OS trends. In that respect, that is how we have powered AVANZAR. For TL 07, we continue to progress as we have always intended, and there has been no changes in the design. Overall, we continue to have those timelines with a slight delay in AVANZAR. Thank you.
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Thank you for your answer.
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Next is Morgan Stanley, MUFG Securities. Mr. Muraoka, please.
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Thank you very much. This is Morgan Stanley, Muraoka speaking. First, I want to ask Kodama-san.
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This time, the second quarter results was very good. At the time of the first quarter, without noise, your fundamental business result was great. My question is, what should we expect for the third quarter? I want to confirm what to expect for the third quarter. I know that you do not have quarterly-based guidance, but there is this JPY 80 billion payment. This could take place both over third quarter or fourth quarter, and maybe fourth quarter portion may be bigger. And the usual pattern is that in the third quarter, you would say that profit has already topped the full-year forecast. The fourth quarter would be a bigger core OP loss and end the year not as big of an OP loss than usual years, but is this how I should imagine the year to go?
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Thank you. That is a pretty difficult question to answer. The question was, what to expect in the third quarter and fourth quarter, and when we divide between third and fourth quarter, what is the picture of the PL to expect the split between third and fourth quarter? This is how I understood your question. As Muraoka-san said, the past pattern of Daiichi Sankyo's PL is when we look back, in the fourth quarter, we were weak, both in revenue and with the impact of NHI price revision in Japan, and there is also inventory adjustment.
We had the seasonality and COGS, inventory disposal loss, and valuation loss were usually determined in the fourth quarter. Expenses-wise, in the fourth quarter, expenses were heavy in the fourth quarter. This trend, I think, does continue to apply this year too, but will this mean a loss? I wonder. Comparing between third quarter and fourth quarter, in the third quarter, we book bigger profits and weaker profit in the fourth quarter. This is the trend we also expect. At the end of the year, at the end of the calendar year, like Christmas and beginning of the new year, what is going to be the inventory adjustment? Some years earlier and in other years later, it is a bit difficult to control. For expenses, from the third quarter to the fourth quarter, expenses are expected to increase. This is my expectation.
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Thank you. The JPY 80 billion, this will be heavy in the fourth quarter, is that right? Rather than third quarter?
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As of now, more heavy as a matter of probability in the fourth quarter, but the key is to the CMOs, the 2028 manufacturing plan.
What is the agreement timing of 2028 manufacturing with the CMOs?
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From the calendar year end to the beginning of the new calendar year, the agreements will take place, and how we discuss with the CMOs will be a factor, but what we expect now is more towards the fourth quarter.
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Thank you very much. I have one further question. That is for John Tsai-san. This time, AVANZAR will become next calendar year first half, according to AstraZeneca disclosure, TL 07. AstraZeneca disclosure-wise, also calendar year first half. No change, which means AVANZAR and TL 07 both almost the same timing, I am wondering. Is this the right timing guess? First half of the year means both will possibly be submitted together to ESMO. Is this the expectation and the current scheduling? Can you give me more color?
Sure. Thank you for your question. As you correctly stated, the results for AVANZAR will be in the first quarter calendar year of 2027, and AVANZAR will be around the same time. It will be in the first half calendar year of 2027. So they are timed very closely together. We have not looked at the specific timing for submissions to various congresses, but we will be very prompt in sharing these results at a major congress. We've not decided which congress to share this with, but as soon as the data is available, we will be sharing it at an upcoming congress, so we will not delay. Thank you.
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Thank you very much.
Next question is Tony Ren-san, Macquarie, please.
Oh, can you guys hear me?
Yes.
Okay, perfect. Yeah, great. Thank you. A couple of questions to John. The first one is about the CNS activity of your DXd platform. I was at ASCO as well, and it appears to me that one of your competitors, a leading competitor, they refuse to recruit any patients with CNS disease into their studies, and I think that's your big differentiator. John, could you explain to me how do you think about what makes one topoisomerase I ADC to have CNS activity, whereas another one doesn't? That's my first question.
Yeah, thank you for your question. As you correctly stated, we released results at ESMO of both the CNS activity for Enhertu as well as for Datroway. We've seen very good activity for our DXd ADCs for CNS activity, particularly those patients who had brain metastases. Specific to your biologic question of understanding exactly why this works and what happens with the competitors, certainly we don't comment about why competitors actually have excluded patients from their trial. But we are very happy with the results that we've seen in the CNS activity.
We don't know if this is a bystander effect or what we've seen is that the DXd ADCs have very strong effects in terms of the results that we've seen when you actually are approaching the monoclonal antibody, whether these are around TROP2 patients for Datroway or HER2 patients, because we do know that there's HER2 receptors and TROP2 receptors in various organs throughout the body. As we've seen these results, we do see this activity, and it is a differentiated activity for our DXd ADCs. Thank you.
No, thank you, John. The second question is about ovarian cancer. You obviously are going with a cadherin-six approach, right? We also see some news announcements at ESMO, without data, just topline news about the folate receptor alpha. How do you think about these two somewhat overlapping sub-patient populations in ovarian cancer?
Yeah. The ovarian cancer space, as you noted, has seen really good results, and this is great for patients, both with folate receptor alpha- targeted agents as well as for CDH6 ADCs. We've seen very good results with CDH6. They are differentiated in terms of the results. I think we will find out more as patients begin to see the responses from these two different classes of agents. I'll also note that there are differences in the AE profiles, and I believe this is going to be also another point of differentiation. But I do think that there will be further classification and understanding of ovarian cancer across these different groups and different classes of agents. Thank you.
Do you think one class would be positioned ahead of another?
I think that's to be determined. But as I said, perhaps there may be differences in the AE profile and familiarity of the oncologist of which agents they would choose in terms of treatment. Thank you.
Yes. Thank you, John.
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Next is from Daiwa Securities, Mr. Hashiguchi, please.
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This is Hashiguchi from Daiwa Securities. My first question is for John-san. I-DXd, why did you withdraw the submission or application? With this, the speed of the development compared to GSK with Disitas would be the same or a bit behind? I am wondering. Considering the situation, the competitive environment, how do you view the competitive environment? I-DXd's expected differentiation, could you also explain? What is the differentiation for TROP2, for example? Compared with competition, safety profile is clearly different.
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The plan is reflected in the clinical trial plans. For I-DXd, you are conducting similar trials. Rather, competitors in the conventions, ILD is less they are emphasizing very loudly. As Daiichi Sankyo, what are the strengths? What are the attraction that you can emphasize? Please explain to me.
Sure. Thank you for your question. For I-DXd, as you asked around the withdrawal of the accelerated approval approach, you also noted that the competition has advanced very quickly. In light of the benefit-risk in the discussions that we have had with the FDA, the FDA wanted us to continue with our phase III program, which is almost completed for enrollment. Based on those discussions, we decided to withdraw the I-DXd approach for accelerated approval, and we are advancing with the full phase III program. That is why we decided to actually continue, given that we are almost fully recruited for the I-DXd phase III program. In terms of the differentiation, I think it really comes down to efficacy and also looking at differentiation versus the safety profile. The current advances that were demonstrated at ESMO, not everyone can tolerate the bispecific that is currently out in the market.
As we move forward, we have a number of programs for I-DXd, and we continue to advance them with excitement on moving forward. You did ask a question on differentiation for TROP2. I did not know if you were referring to the non-small cell lung cancer space versus small cell lung cancer space. For the small cell lung cancer space, we are obviously continuing to advance with I-DXd. We also have next steps of combination of gocatamig, which is our DLL3, plus I-DXd for the B7-H3 approach in the first-line small cell lung cancer space. That is how we are differentiating. Referring to TROP2 for non-small cell lung cancer, and you asked about differentiation. The way that we are differentiated there is, we have a number of global non-small cell lung cancer first-line studies that we will be reading out. I did refer to those earlier.
The AVANZAR trial that will be coming out in the first quarter of next year, TROPION-Lung07, which is in the PD-L1 less than 50%, in the TROPION-Lung08 greater than 50%. We also have PD-L1 across the board for EGFR-mutated population, which is TROPION-Lung14, and in the second-line EGFR-mutated patient, which is TROPION-Lung15. That is five global trials in the non-small cell lung cancer space in the TROP2 biomarker, and that is the most extensive first-line non-small cell lung cancer program that has been conducted by any company. That is how we are differentiating between both small cell lung cancer and non-small cell lung cancer. Thank you.
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Thank you. My second question is for Kodama-san. The loss compensation to CMOs. In the first half, there was a reversal to the provision, and in the second half, also, according to the slide 26 image drawing, about JPY 10 billion in reversal. This scale of reversal seems to be expected. For what reason is this reversal occurring? Enhertu and Enhertu sales being strong, and as a result, you are producing more? Is this the right simple understanding for the reversal, or is there another reason? 2028 onwards, the compensation fee? Basically, there will be some acceleration delays in the clinical studies, but rather than that, the bigger impact may be more bigger volume, like Enhertu sales volume that may have bigger sales impact in the short term, in my view. Is this understanding correct?
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Thank you for your questions. CMO compensation fee, one is this Q2 reversal reason, and then the future reasons are for changes 2028 onwards. This is how I understand. The first question, [inaudible] reversal. There are two components. The first component is foreign exchange fluctuation. This is a bigger component. The other component is the change in the provision itself. So, there is what has become fixed so far. In the provisioning, we look at the manufacturing plan and sales to a third party. Once things become visible, we provision, but situations become different and more certain, and what is already determined will be changing. There are some changes in the estimates. These were the factors for changes in the provision, reversals in the provision. What about in the future? Yes, as you say, the commercial production part, what is going to be the production volume is the big part.
In addition, the clinical trials, also there will be CMO production volumes and may be affected. Therefore, the progress of the clinical trials will affect the CMO compensation fee provisions. Before launches, we start production a few years in advance, and if there are changes in the manufacturing plan, the manufacturing volume will change, which means clinical trial situation and progress does affect pretty much. Whether the future new products move ahead in development and move on to the clinical trial stage will also be a varying factor. I hope this answered your question. Yes, thank you very much. Excuse me, just one point. Earlier, Muraoka-san asked about the split between third quarter and fourth quarter and the balance between the two quarters. One thing I forgot to mention is the following.
That is, as you may already know, and maybe obvious, I may not need to state, but Enhertu sales milestone that is planned to be booked in the fourth quarter, this time more than JPY 90 billion, we expect. This part between the third versus fourth quarter will be the big fourth quarter factor to be booked in. Sorry, I forgot to mention this earlier. This point I wanted to add. Thank you.
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The next question.
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Bernstein, Miki Sogi.
Thank you. I have a couple of questions to John. John, you briefly mentioned that the OS is a co-primary endpoint for AVANZAR, and I actually thought that it was a dual endpoint rather than a co-primary. I thought that if the AVANZAR hit positive for QCS positive PFS, that should actually secure the technical success of the trial. It would be great if you can elaborate on that. I have a similar question about TL 07. TL 07 has more arms, experimental arm, a triplet, doublet, and also, of course, it's looking at ITT and QCS positive population for PFS and OS. It seems that it's quite a lot of the primary endpoints. I'm wondering how the design manages the alpha allocation. Thank you.
Yeah, thanks. Specifically on your question around the dual primary endpoint versus the co-primary endpoint, if in either situation where we reach the PFS or the OS, that would be considered statistically significant and positive for us. So, whether you want to call that the co-primary endpoint or dual primary endpoints, in either case, whether that would be PFS or OS, those would be considered positive. On the TROPION-Lung07, in terms of the powering, we don't comment on the alpha and powering for these studies, unfortunately. For us, while we've conducted the three arms as you outlined, we continue to move forward with these studies, and we do think that we have robust patients recruited and sufficient powering for our endpoints. Thank you.
Great. Thank you. One more question. This is regarding your collaboration with Summit for a combination with ivonescimab. You have already included the lung cancer is one area for a potential combination for Datroway. First of all, is it reasonable to assume that you're waiting for AVANZAR and/or the TL 07 data to come out to make a decision? How do you think about ivonescimab's seeming preferred efficacy in squamous rather than non-squamous, in which the Datroway has been developed for non-small cell lung cancer?
Yeah, thanks for your question. As you know, we've seen a lot of positive data in the PD-1, PD-L1 bispecifics, and those have demonstrated really good results. Many of those results are in the Chinese population versus the Western population. We're having really good discussions on advancing these programs, both in breast cancer, also in lung cancer, and other tumor types. Whether we will wait for these results before moving forward, these studies are in the design phase. As we move forward, obviously, the results that we get from our studies will help guide us on how to further improve the approach that we take for all of these studies. So currently, we're advancing in these discussions and collaborations in the design. As the results become available, we will certainly leverage the insights to improve the overall strategy for us in the combinations with ivonescimab. Thank you.
Thank you.
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SMBC Nikko Securities, Mr. Wada, please.
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This is Wada from SMBC Nikko Securities. Thank you. I have a question for John-san. One question.
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Ivonescimab, and yes, combination therapy with ivonescimab. KEYTRUDA and OPDIVO, next generation-wise, there is high expectation, and there is the synergy effect being viewed and is said to become the backbone therapy for cancer treatment. There are various documents provided, and chemotherapies and ADCs, there are a lot of combination therapies taking place. Can Datroway have backbone usage in combination with PD-1 and VEGF?
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What is the mechanism of action, positive points that makes Datroway backbone to be combined with other treatments?
Thank you for your question. What we've seen so far is really good results from PD-1 as the starting point. If we look back for the last five to seven years, the approach many people took was combinations of immunotherapy with immunotherapy, we've not seen very much progress in combinations of immunotherapy, PD-L1 or PD-1 specifically, with other IO agents. However, I think complementary mechanisms of approach for tumor types, such as non-small cell lung cancer, is one that has demonstrated really good effects. What we've seen so far is, in specific populations, the PD-1 plus VEGF, where you are starving the tumor of their vasculature, actually, with immuno-oncology, is a unique mechanism that demonstrated advancements.
Also, what we're testing, we should be able to find out in the very near future, is the TROP2 ADC with a specific cytotoxic payload differentiated from previous ADCs may have effect through Datroway. In this way, complementary mechanisms of immuno-oncology with a VEGF, potentially with a ADC such as a TROP2 ADC, may have the best effect, that may be approach looking at approaching tumor types such as non-small cell lung cancer that would allow us to get the best effect, that's what we're really driving for, that's what we're hoping to get results from in combination with ivonescimab and potentially other PD-1 VEGFs in that class of drugs.
Obviously, some of the approaches that we're going to have to take is to find the right balance of what is the right dosing for these drugs, that's some of the steps that we will be taking based on the results that we see. Thank you.
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Thank you. That is all for me.
Next question is Michael Nedelcovych-san, TD Cowen, please.
Thank you so much for the questions. I have two for John. John, first, just a follow-up on your comments around AVANZAR interim PFS analysis not having been conducted yet. Can you confirm whether that also means futility analyses have not been conducted?
Yeah, thanks for your question. We did not conduct an interim PFS, and the futility we passed, so there are no concerns about futility in this specific patient population.
Wonderful. Very clear. Thanks so much. My other question is actually a follow-up on the commentary around I-DXd filing withdrawal. Can you provide any more details on that decision? Given that the application received priority review and Daiichi and Merck had just experienced a similar issue with HER3-DXd, this came as quite a surprise. You noted that the FDA emphasized the phase III trial, but it had already been initiated, so I am a bit confused as to why the company and the FDA were not already aligned on the potential for accelerated approval. I guess one explanation could be that the phase III trial recruited faster than anticipated, but it looks like the primary completion date on clinicaltrials.gov was actually delayed in August, not advanced. Just any additional detail on how that proceeded would be very helpful. Thank you.
Sure. Happy to give you some additional comments and background on I-DXd. In terms of the I-DXd and the extensive stage small cell lung cancer landscape, as you probably know, the competitive set around the treatment for patients with small cell lung cancer is advancing very quickly. We had good discussions with the regulatory agency. We are almost completed for our phase III program for I-DXd, and in terms of timelines, overall, we are advancing with speed. Given the timelines and some of the discussions that we had with the FDA, we agreed with the FDA that the best approach would be to advance with our phase III results that would become available. That is the background that I can share with you.
Very helpful. Thanks so much.
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If you have any question, please use raise your hand button.
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JP Morgan, Mr. Wakao?
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Excuse me, I would like to ask you another question.
Question for John. Do you think it is reasonable to expect the KEYNOTE-189 regimen to achieve a longer PFS rate than the roughly eight months seen in the original 189 study? If so, what factor could explain that improvement? Thank you.
Yeah. I can't speculate on the results from KEYNOTE-189, but I will say that as we've seen in the general community, physicians have gotten a better understanding of use of immuno-oncology agents such as PD-1 since start of some of these trials. With that, as with any trial that gets into the marketplace, as you get more familiarity, you also understand how to manage the adverse event profiles of these drugs. While the data is blinded for our AVANZAR TL 07 and 08, what I can say is that I do believe that physicians have a better understanding of how to use PD-1 therapies, but that doesn't explain everything in our studies. Our studies are blinded, and I won't comment on the powering or the advancement of our programs, but I can tell you about clinical practice.
Okay, thank you.
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Next is Sogi-san from Bernstein.
Thank you very much. I have another question to John. It looks like the bladder cancer is quite exciting, the opportunity for Datroway. I see that you are already conducting the phase III in second line, as well as you have initiated the adjuvant setting. I have a question for first line. Is it something you are not pursuing because of the strong data coming from the Padcev, KEYTRUDA, or you are waiting for some additional data that could allow you to make decision on the first line?
Yes. For urothelial advancement for overall TROPION-Breast03 and 04, those are advancing. We do have a phase I/II study, and the information will better inform how we will advance in the first-line treatment regimen.
And one more quickly, if I may. Also, we understand that you guys are conducting phase II pan-tumor trials for three ADCs, I-DXd, R-DXd, and HER3-DXd. When are we going to see the data?
Yeah. As with any of our programs, we do the pan-tumor trials to understand where each of these DXd ADCs have the most effect across various tumor types. Because these are early signal-seeking studies, we actually roll out these studies over time as we fully recruit in each one of these tumor types. So, over the next, whether it would be year or next two years, as these patients are fully recruited in each of these specific settings, we will be releasing those results.
Can I expect something starting to come up in next year, 2027?
I will not specifically highlight the timing because we have not disclosed those, but I think we will be sharing those information in the very near future. Thank you.
Looking forward to it. Thank you.
Thank you.
Next question is Tony Ren-san, Macquarie, please.
Yeah, sure. Just another quick follow-up question, again to John. Are you guys planning to promote ADCs based on your modified PBD technology into clinical development? I know there was an earlier announcement in a year. I just wanted to see what's your thinking on that construct right now.
Thanks. We do have advancements in the next generation of ADCs, and our research team, I'm very proud of the work that they've been doing. We do have subsequent advances in looking at whether that's the linker, payload relationship, and different cytotoxic payloads. You will be hearing about them. We are not specifically disclosing any of our payloads, as obviously, for obvious reasons. As soon as that's available, we will share in generality what those are, but we won't be sharing specific details about them. I will say that many of them are moving forward and very close to the clinic. Thank you.
Yeah. Thanks.
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Investor and analyst Q&A session is going to be closed. All the investors and analysts, thank you so much for your time today.
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After this, starting from 10 minutes past 7:00 P.M., we would like to start Q&A with journalists. Please continue to participate in this Q&A session.
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Thank you very much for waiting. We will now start questions and answers with the members of the media. I will be the moderator. My name is Ogiwara from Public Relations. The speakers continue to be Mr. Okuzawa, President and CEO.
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Mr. Ken Keller, Head of Global Oncology, and Mr. John Tsai, Head of Global R&D. Mr. Kodama, CFO. These four speakers. The questions can be raised either in Japanese or in English. If you have multiple questions, please ask one by one and not together. We ask you to kindly limit to two questions per person. If you have a question, please also state first who the question is for and then ask the question. If you have a question, please press the button at the bottom of the screen, that is the hand-raise button.
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The first question.
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Nikkei Journal.
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Mr. Hasegawa?
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My name is Hasegawa from the Nikkei Newspaper. Can you hear me? Thank you.
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Two questions.
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About the commercialization unit inauguration.
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You are at the top level, so you have to be commercially top level in the world. With the organization's inauguration, how to strengthen the commercialization and how you can reach optimal investment decision? Do you plan to increase or decrease the headcount? What is the gist of the change? Could you dwell on the matter more?
Thank you for the question. This is Ken Keller. The benefits of creating one unified commercialization unit is that rather than making decisions that optimize a specific region, we are going to be able to make decisions that really optimize the value of our medicines across the globe. For specific things, we will make decisions in terms of resourcing where our greatest growth opportunities are, where the most patients are that we can help, and we will put our resources behind those growth opportunities. When we look at how the world's changed with international price referencing, it is absolutely critical that we make decisions as a whole for the company. Of course, we will be able to do that as well.
I also believe that in oncology especially, when John's team creates new data and we share it at a meeting like ESMO or San Antonio Breast, that data instantly becomes global. By bringing a group together, we will be able to ensure that we respond the appropriate way, our medical affairs support the trials the right way. There is just so much synergy that will really help us take these great medicines and get them to as many patients as we possibly can, because that is what we are trying to do. Thank you.
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Next is Nikkan Kogyo Newspaper, Mr. Yasukawa.
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Thank you very much. This is Yasukawa from Nikkan Kogyo Newspaper. Thank you.
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My first question is U.S. market. I have a question regarding the U.S. market. It may be a bit ahead in the future and may be uncertain yet.
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The changes in the U.S. market, you are focusing and paying attention to, and there is the upcoming presidential election. What is the expected impact, and how are you gathering information, and what are you paying attention to? Can you inform me?
Thank you for the question. This is Ken Keller again. Next week, the U.S. government has a midterm election where basically Congress and Senate is up for vote in many different places. People are projecting what will happen. I think we are watching what will happen. I think for pharmaceutical companies, ours included, there is one thing that both parties in the U.S. agree upon, and that is a heightened focus on drug pricing. We are monitoring this. We are very close with both physician groups, pharma groups, and whatever happens, we will be in a position to make adjustments and continue on our goal to bring this drug to as many patients as we possibly can. It does go back to the first question, which is, we will have to make decisions globally, no matter what happens in the U.S., and we will be prepared for that.
Thank you very much.
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Next question.
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From the Nikkei Newspaper. Please go ahead.
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Yeah, continue. Yasukawa-san, yes.
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So, about the performance, I'm not sure whether it directly relates to earnings call content, but I would like to know more about the supply chain.
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What kind of risks are there? Given global situation, what is the perception of the risks now? Can you tell me that?
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This is Okuzawa. Day-to-day, in the news, cyberattacks are prevalent, and they are often reported. Of course, inside the company, we are trying to digest available information and thinking about our own system, checking the validity of the system. Global DX team is in place in the company, and cybersecurity experts are employed in the team. We are trying to reinforce, upGrade our cybersecurity capability. We are in pharmaceutical business. Pharmaceutical products, stable supply is the mission given to us. So, that our stable supply and the shipment from the plant and the preparation for the cyberattack, we need to build a robust system. We are paying great attention to that. If there is any vulnerability, then how we can fix it, that is discussed in our day-to-day business. For the time being, we don't have that kind of attack yet.
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Going forward, we would like to be prepared in order to firefight if anything happens.
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Thank you. That's all I have.
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The next question.
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The Nikkei Newspaper, Nakada-san.
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Can you hear me okay? This is Nakada speaking. The first question is about the provision compensation for CMO. That exchange rate assumption, I think you mentioned as a big factor, the forex element. Starting from the third quarter, if yen is strong, then that amount might change. Also, negotiation with CMOs and with clients, those are mentioned in the presentation. What kind of negotiations are ongoing? Those are follow-up questions I would like to ask you.
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That is my first question.
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Thank you for the question.
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Let me answer about the CMO compensation. I would like to answer. In terms of foreign exchange, as you understood, if yen gets stronger, and denominated, the provision will decrease. So the allowance that was posted in the past, if the forex changes, it goes up and down depending on the direction. We have to reflect on that quarter by quarter. The second point about JPY 80 billion, we make a promise about the minimum order quantity and our future production schedule. So those are collated, and we pay for the insufficient part and increasing the manufacturing quantity. Also to a third party, we can allot those vacancy. If CMO can do that, the amount might be decreased.
We are having negotiation with them, how we can deal with that, how we can allot the vacancy to third-party pharmaceutical companies and so on, those are discussed in the negotiations. If things go well, along with assumption, JPY 80 billion as an amount can come down. On the other hand, if things do not go well, then the amount can go up. It depends on the negotiation. Did that answer to your question? Okay, yes. One more question?
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For FY 2025, you had 23%. This year, that is 75% or something. I think it is going to increase overseas ratio of the revenue. Do you have any target?
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So the overseas business ratio, that is coming up. I would like to summarize the question, the future trend and the target numbers, whether there are any of these. Yes, as you understood it, the overseas business ratio is only coming up. Our portfolio and looking at the situation, it will keep going up. That is a forecast. In terms of Daiichi Sankyo Healthcare, it is going to be divested, that will be outside of the consolidation starting from the next fiscal year. That will contribute to higher ratio of overseas business. In terms of the target number, it is not that we have specific target number of the overseas business.
We would like to deliver good product across all areas on the globe, based upon science and technology. As a result, we are hoping that the overseas business ratio can go up, but we do not have any target number by when, how much, and so on. Thank you.
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Thank you.
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Next question. Bloomberg. Hasebe-san, please.
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This is Hasebe from Bloomberg. Thank you.
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My first question is about cost reduction. Over five years, more than JPY 200 billion cost reduction. This includes headcount reduction effect or not? Any headcount reduction or not? Over the media, I saw that possibility, whether there is headcount reduction in the JPY 200 billion. If so, what is the expected number of people being reduced and the reasons?
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Thank you very much for your question. In our operational excellence initiative, over the five-year midterm time period, we are going to reduce JPY 200 billion costs. This is also shown in the midterm slide. Here, we talk about reducing. Are we talking about decrease in the payroll cost here?
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We have now been shifting, pivoting our business over the past five years. Going forward, to match our product lineup, we will right-size ourselves, and we will allocate resources appropriately. We are constantly reallocating resources appropriate for us. As we have informed for this fiscal year's financial results for Europe, [inaudible] and primary care products, the patents will expire, and sales will be coming down. In this picture, there will be some reduction of force as a measure taken by the company. Going forward, in line with the product sales trend and the product life cycle, we will conduct appropriately.
This, in the end, will be included in the operational excellence result. But as of now, do we have specific plan to reduce how many people? No. There will be areas we will be reducing people, but also there will be domains where we will be increasing people and reinforcing. For instance, in the domain of commercial, as Ken explained earlier in the prior part, global perspective will be taken where to spend the costs, and investment judgments will be made from the global perspective.
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Thank you very much. I have one another question also about the newly establishment of the commercialization unit. The pricing and commercialization, you will have global standardization, and in the MFN, there will be need to strengthen looking at the American market, I would think. Is that the main reason for establishing the commercialization unit from April? Is America the main reason?
This is Ken. Thank you for the question. The main reason for establishing the new commercialization unit is to really ensure that the world-class science, our new products, are effectively delivered to all the patients across the globe. So, it is more of an overarching, I would say, goal of ensuring that this great science gets to all the patients. Underneath that, the international pricing and how it is now tied in the U.S. to other countries, the global commercialization unit will make those decisions for us much simpler, much easier, and more robust decision-making.
So, that is absolutely a benefit. But the real goal is to enhance our commercialization so that as these 20 topline results for these registrational trials read out in the next three years, that we are ready to bring these to patients all over the world. So, that is the number one primary goal. Thank you.
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Thank you.
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Next question.
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Thank you for this opportunity. Toyo Keizai, [Inami]. I would like to ask you two questions. The first one, from Bloomberg, there was a similar question about operational excellence. [Non-English content ] on page 10 in the presentation deck, three points are mentioned for optimization methods. Cost reduction effect is like a structural reform, including headcount cut. There are over JPY 200 billion of the optimization effect in order to enjoy that in coming five years. What is the breakdown? I would like to know your policy. How do you achieve it?
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Thank you for the question. Page 10, operational excellence, three items are mentioned. What are those items in the breakdown and the external cost optimization, AI introduction and optimization, and also structural reform? What kind of measures are in place specifically? That is under scrutiny at the moment. Looking at those numbers, we are having a consolation, but nothing has been finalized.
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As an assumption, JPY 200 billion optimization, for example, for FY 2025, it is not that we are going to reduce the amount by JPY 200 billion. Probably it is more about wording in coming five years, we would like to raise the topline to JPY 3 trillion from JPY 2.3 trillion. Given that, things are proportional, increasing, without increase in headcount, and also SG&A should not be increasing in tandem. In that sense, we are thinking about suppression of cost. Of course, headcount might go up and down as part of the structural change. But other than that, with introduction of AI, part of the work can be automated, for example. More high-value-added part can have more humans without increasing the expenses and headcount, and supporting the growth in the topline.
Cost avoidance in the future, suppression of the cost increase, that kind of effect is incorporated, and the target number is JPY 200 billion in that sense. Going back to your question, regarding those three, the breakdown, we are doing deep dive at the moment so that we do not have any specific breakdown. We are not ready to disclose anything like that. Please understand it that way. Thank you. Number two question, Kodama or President Okuzawa, please answer, either of you. We are into the second half of the year, and FY 2027, what kind of positive or negative elements are there? That is the question. One major one is AstraZeneca Enhertu royalty is not going to be there for the next fiscal year, so that the sales, how do you estimate what happens to the sales number with that?
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This is Okuzawa. Let me answer the question. For the sixth midterm business plan, we informed you, these five years in oncology therapeutic area, for the five years, more than 20 new indications, like aiming data must be generated. That was the biggest growth driver in the midterm business plan, as I said. In the second quarter earnings call, Enhertu and Datroway, they are showing strong growth, and that kind of momentum is going to continue. In other words, existent indications, already acquired indications, they are on track of a good growth. On top of that, more than 20 new indications, growth opportunities are added. In coming five years, that is envisioned. On the other hand, today it was mentioned a little, Daiichi Sankyo Healthcare share transfer. Because of that, the company is not included in the consolidation anymore.
So that, like Enhertu, we expect the receipt of the royalty in the fourth quarter this fiscal year. Tentatively, top line might come down, and this can happen as element. That is factored in already. Oncology products, or whether we can supplement the dip or not, maybe in the next fiscal year, there could be additions and subtractions. Basically, the trajectory of growth will continue in coming five years. We are confident about that.
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Thank you.
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Next question. Asahi Shimbun Newspaper, Izawa-san, please.
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This is Izawa from Asahi Shimbun Newspaper. Thank you. America's most favored nation pricing of the drugs. The Japanese pharma companies agreed to raising pharma prices, I saw over the news. What is your policy going forward, and what is the mid-to-long-term management impact? Can you inform me?
Thank you for the question. This is Ken Keller. In terms of most favored nations, our intent is to ensure that these innovative drugs are able to get to patients all over the globe. The key to that is to develop medicines that are truly innovative, that add benefits to the standard of care. When we develop those drugs, it is important that we get the reflected value from it. That is how we will be able to continue to support our investments in R&D. Our goal is to work within whatever healthcare systems exist or whatever they change, get these drugs to as many patients as possible. But it is important that we do that the value is recognized when a great medicine comes to market. That is how you can invest in future products. Thank you very much.
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I have another question. On the other side of that, I think it is the other side of the coin. There is a drug loss issue in Japan. So that we do not expand or make the drug loss bigger, what is Daiichi Sankyo doing? What are your thoughts?
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This is Okuzawa responding. Thank you for your question. For Japan, currently, this MFN. How is the impact of MFN to the Japanese market and to the Japanese patients? We, the pharmaceutical companies, the medical institutions, and the government sector, amongst these stakeholders, there are discussions are starting to become full-fledged. This is my feeling about MFN in Japan. As drug loss and drug lag, negative result may take place as a result of MFN. The negative perspective are also being heard as a result of MFN. There are concerns of negative impact as drug loss and drug lag in Japan. But we consider that the Japanese market is continuing to be most important market for us, we want to contribute to the Japanese patients as we did, and ever more.
To realize this ambition, to the government and to the administration, we are discussing how to avoid the negative impact of MFN, we want to further promote such discussions.
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We have now passed the scheduled time for this meeting. We will be closing this meeting. Thank you very much for your participation.