Commentary on Strategies Message from the President

Mid-term business plan IBI 18 got off to a smooth start toward our goal of acquiring competitiveness at a top global level.
We will execute a strategy of selection and concentration to further accelerate growth
and become a globally successful top pharmaceutical company.
Tatsuro Kosaka
Representative Director, President & COO

Overview and First-Year Progress of IBI 18


Mid-Term Business Plan for Becoming a Top Pharmaceutical Company

Mid-term business plan IBI 18 got off to a smooth start in 2016 as we steadily advanced measures based on the original strategies of the plan.

First, to summarize IBI 18, the priority agenda objectives are “acquisition and implementation of competitiveness at a top global level” and “selection and concentration strategy for acceleration of growth.” By fulfilling these objectives, we aim to become a top pharmaceutical company.

Looking ahead, we project that our operating environment will change even more drastically than it has to date. The global pharmaceutical market is expected to continue growing as the importance of pharmaceutical products increases with the aging of the world’s population. On the other hand, many countries are facing budget pressures due to rising social security costs. In Japan, a new rule for repricing based on market expansion went into effect in April 2016, and an overhaul of the drug pricing system is also on the horizon.

Competition in innovation will intensify due to advances in science and technology including ICT, such as the use of artificial intelligence (AI) to develop innovative drugs, and as a result of the entry of players from other industries into the pharmaceutical industry. In addition, the full-scale participation of major pharmaceutical companies in the field of biosimilars is expected.

Chugai must further evolve its strengths and transform into a globally successful company to continue delivering value to patients and the medical community around the world. In IBI 18, we will enhance our competitive advantages and pursue continuous innovation in drug discovery, development, production, marketing and sales/medical affairs/drug safety, and Company-wide functions.

Solid Progress in Our Innovation Strategy

Next, I will go over our results and progress in the first year of IBI 18. The highlight was the accelerated advancement of our pipeline.

We filed applications for four products, two of which received BTD from the FDA: Alecensa as a first-line treatment for ALK-positive non-small-cell lung cancer, and Actemra for giant cell arteritis. The decision to out-license SA237 and nemolizumab (CIM331), for which Chugai had been leading development globally, to Roche and partner companies paved the way to further their development. We also initiated 10 new development projects, including ERY974 and SKY59, which apply Chugai's proprietary antibody engineering technologies.

As the first project that CPR in Singapore has been involved in from the early stages of discovery, SKY59 is a testament to the evolution of our antibody discovery platform. In addition to these initiatives, we concluded a comprehensive collaboration agreement for research in immunology with IFReC, and made smooth progress in implementing our capital investment plan, as well as production preparations ahead of the launch of emicizumab (ACE910). These and other efforts proceeded as planned or better than planned.

In terms of financial performance, the increase in product sales more than offset the impact of NHI drug price revisions. Core operating profit decreased because of a decline in one-time milestone income, but substantially exceeded the forecast at the beginning of the year. (See “About Core Basic Results” on page 21 for a detailed explanation of Core basis results.)


Progress toward Quantitative Targets for Becoming a Top Pharmaceutical Company (2016)
Progress toward Quantitative Targets for Becoming a Top Pharmaceutical Company (2016)

Japan, a Source of Revenues – Outside Japan, a Source of Growth

To achieve the objectives of IBI 18, to realize our goal of becoming a top pharmaceutical company and to grow globally in the future, we must accelerate selection and concentration of our resources and further enhance our global competitiveness. We are making solid progress toward our quantitative targets for becoming a top pharmaceutical company, but as I mentioned earlier, changes to the drug pricing system and other factors are making the industry environment and competitive landscape increasingly unclear.

In these circumstances, Chugai has clearly positioned the Japanese market as a source of stable revenues and the market outside Japan as a source of growth through the global expansion of products from Chugai research. By enhancing each of these pillars, we will build a strong foundation for future growth.

Our priority agenda objectives for 2017 are “focus on global and domestic growth drivers,” “creation of engineered antibody projects and development of middle-molecule technologies,” and “execution of system reform to provide solutions.”

For our growth drivers, we will continue to concentrate resources on emicizumab and atezolizumab (RG7446). We plan to file applications in and outside Japan for regulatory approval of emicizumab as a potential treatment for hemophilia A. Aiming for the speediest possible launch, we have started to set up of the production system for emicizumab and have begun construction of a biologic API production facility at the Ukima Plant to meet expanding global demand. Atezolizumab is a cancer immunotherapy, a category in which intensifying global competition is expected, and we will concentrate expenditures and personnel on this project to compete successfully in terms of speed.

In discovery research, our goal is to move two engineered antibody projects based on our proprietary technologies into clinical development during IBI 18. In middle-molecule projects, as the creation of a candidate compound moves closer to becoming a reality, we will evolve our compound library and resolve technical issues with the aim of creating an early preclinical project. In basic research, a new laboratory will be established and begin operation from April 2017 at IFReC, our comprehensive collaboration partner.

As for system reform to provide solutions, it is important to establish a system for the global market that is efficient and adapted to conditions in each country. We will quickly implement reforms led by overseas subsidiaries. In Japan, healthcare system reforms will place the healthcare delivery system under the leadership of prefectural governments from 2018. Ahead of these reforms, we will make organizational changes in April 2017 in marketing and sales, medical affairs and drug safety to offer greater expertise while responding precisely to the different circumstances in each region.
(See “About the New System to Provide Solutions in Japan” on page 35 for details about these new organizational reforms.)

In 2017, we are anticipating revenues of ¥520.5 billion and Core operating profit of ¥92.0 billion, both record highs, driven by the solid growth of our major products in Japan and worldwide, including new products such as Alecensa.

Ensuring Rapid Growth after IBI 18

Numerous regulatory filings are planned for 2017. Specifically, these will include filings for approval of emicizumab (for patients with inhibitors) in and outside Japan, for Alecensa in first-line treatment outside Japan, and for two expected indications for atezolizumab in Japan. Many more applications are planned for 2018 and later.

Our goal in IBI 18 is to transform into a globally successful company. The many products with regulatory filings scheduled during IBI 18 will begin contributing to sales after the plan is completed, but we will effect transformation in every facet of our business activities to make IBI 18 a rapid growth phase. With new drug candidates that can offer significant benefits to patients, such as emicizumab, atezolizumab, nemolizumab and SA237, as well as the steady generation of projects by CPR and the creation of middle molecule drugs, Chugai's path to future growth is already in sight.

2017 Sales Forecast (Excluding Tamiflu)
2017 Sales Forecast (Excluding Tamiflu)

Increasing Corporate Value

Innovation for Patients Is the Foundation

The key to accomplishing the objectives of IBI 18 and becoming a globally successful company is the acquisition, development and assignment of global top-level talent to lead value creation activities through innovation.

We have already identified key positions that will be central to value creation, and are establishing the processes for acquiring, developing and assigning people to fill them, and plan to expand the scope of key positions. In addition, we will continue to focus on diversity and inclusion and on the pursuit of productivity improvements, both of which are essential to innovation, in a Company-wide effort to further accelerate growth.

Chugai is committed to innovation, and this commitment is the foundation for increasing Chugai's corporate value. We will strive to grow profits, maximize our presence in Japan and globally and expand our contribution to patients while steadily carrying out organizational reforms. We believe that concrete results such as these will lead to a positive evaluation in capital markets and stable dividends.

With respect to our dividend policy, we will continue to target a Core EPS payout ratio of 50 percent on average based on stable dividends, after taking strategic funding needs and our results forecast into account. In line with this policy, we declared dividends of ¥2.00 per share for 2016, for a payout ratio of 50.7 percent. We use internal reserves to further increase corporate value by making efficient investments to explore future business opportunities, which will lead to greater shareholder value.

I would like to thank our stakeholders for their ongoing support as we continue our relentless pursuit of innovation for patients.

Diluted net income per share attributable to Chugai shareholders after deducting items that Chugai defines as non-core items
Annual Report 2016
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Annual Report 2016
Composition of Annual Report 2016 (Full Version)
  • Message from the CEO
  • Chugai Fundamentals
  • Message from the President (Commentary on Strategies)
  • Chugai's Management (Corporate Governance/Employee Talent)
  • Message from the Deputy Chairman
  • Feature: Innovation in Chugai's Out-Licensing Strategy
  • Interview with the CFO (The CFO Answers Frequently
    Asked Questions from Investors)
  • Chugai's Activities
  • Detailed Report
  • Financial Information
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: Excerpts featured in the Online Annual Report (16 pages out of the 136 pages of the full version)
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