Chugai Earnings: Results In Line, Mixed Pipeline Updates, Shares Now Close to Fair Value

Narrow-moat Chugai’s 4519 second-quarter earnings were in line with expectations. We think the company is on track to meet its full-year guidance or even outperform slightly, due to strong sales of Hemlibra to Roche. We maintain our fair value estimate of JPY 4,860. Shares have rallied about 20% since May and are now at an 8% discount to our fair value.

Although the company gave some incremental positive updates on its early-stage pipeline assets in development, one piece of negative news that stood out to us is that Phase I progress for its Luna18 has been slower than expected. The company originally hoped to have proof-of-concept data for this pan-RAS middle molecule in 2024, but now it may be slightly delayed from this. Management cited a slower-than-expected timeline in identifying the maximum tolerated dose in humans, and although it did not provide details, it noted that clinical trials may need to withhold treatment for enrolled patients who were extremely progressed. Proof-of-concept trials in oncology are usually conducted in very late-stage patients, so rapid tumor progression after enrolment is not unusual. Nonetheless, Chugai has touted its middle molecule platform as a promising area in its early-stage pipeline, and we think proof-of-concept data for Luna18 can help drive share price performance even further.

We continue to hold Chugai’s research and development capability in high regard, as validated by innovative drugs like Enspryng (IL-6 sweeping antibody), crovalimab (C5 sweeping antibody), orforglipron (non-peptide oral GLP-1 receptor agonist out-licensed to Eli Lilly), and nemolizumab (IL-31RA inhibitor for atopic dermatitis).