Chugai Earnings: Slight Outperformance, Healthy Pipeline Progress, Shares Near Fair Value Estimate

Narrow-moat Chugai’s 4519 third-quarter earnings were slightly better than expectations on strong overseas shipments of Hemlibra to Roche, which were buoyed by robust demand as well as favorable currency rates. The company is on track to meet its full-year guidance of JPY 1.07 trillion revenue and JPY 415 billion operating profit and may even outperform slightly. We maintain our fair value estimate of JPY 4,860. We view shares as close to fairly valued.

The company highlighted crovalimab (C5 sweeping antibody), nemolizumab (IL-31RA inhibitor for atopic dermatitis outlicensed to Galderma and Maruho), Enspryng (IL-6 sweeping antibody), and orforglipron (nonpeptide oral GLP-1 receptor agonist outlicensed to Eli Lilly) as the next drivers of growth for the short to midterm and reviewed recent clinical trial initiations and results. We have previously highlighted these assets as commercially promising and differentiated in design. Although we had hoped for faster progress on its middle molecule (circular peptide) program, such as LUNA18, the progress reported on these assets gives us confidence in the company’s late-stage pipeline.

Based on phase 2 data, orforglipron has a highly competitive profile compared with other oral GLP-1 drugs, with patients dosed with 45mg daily experiencing 10.6% and 12.4% placebo-adjusted weight loss at weeks 26 and 36, respectively. Although the company does not disclose royalty rates, we tentatively guess that it might be low (such as midsingle digits) given that this drug was outlicensed to Lilly in September 2018 at the preclinical stage. Nonetheless, given the massive potential of the oral GLP-1 market, there is potential upside for the company’s revenue and profit margins if the phase 3 trial confirms the phase 2 data.