CMIC Holdings Co Ltd
TSE:2309
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We are starting CMIC HOLDINGS financial results for the second quarter 2019. Thank you for coming today.
We would like to introduce our attendees today, Kazuo Nakamura, CEO of CMIC HOLDINGS; Keiko Oishi, COO of CMIC HOLDINGS; and Wataru Mochizuki, CFO of CMIC HOLDINGS.
Mr. Wataru Mochizuki will speak about the financial results for the second quarter 2019, Keiko Oishi will speak about focus activities in the second quarter 2019, and Kazuo Nakamura will speak about Healthcare Revolution, and we are scheduled to end at 10 a.m.
Mr. Mochizuki now will explain the financial results overview for the second quarter 2019.
My name is Wataru Mochizuki, and let me present the overview of consolidated financial results for the second quarter ended March 31, 2019. Please take a look at this table for business segments and group companies as of the end of March 2019.
Our group consists of total 25 companies that include CMIC HOLDINGS, our holding company; 22 consolidated subsidiaries, including 13 overseas affiliates; and 2 equity method affiliated companies.
Here is a summary for the first half of the fiscal year ended March 31, 2019. To achieve sustainable growth in the health care and pharmaceutical industry at this time of change, CMIC Group is pushing forward Project Phoenix. In addition, to achieve the mid- to long-term corporate value improvement of our group, 2019 to 2021 mid-term plan has started from this fiscal year. That includes focused activity items such as acceleration of PVC model, expansion of globalization and creation of Healthcare business. As a group-wide effort, CMIC continues to develop new business and services.
This is a summary of consolidated income statement. Sales for this first half grew JPY 2.992 billion or 8.9% year-on-year to JPY 36.633 billion. Operating income increased by 16.5% or JPY 407 million year-on-year to JPY 2.879 billion. Ordinary profit increased by 19.6% or JPY 435 million year-on-year to JPY 2.661 billion.
Profit attributable to owners of parent for the second quarter of the current fiscal year was JPY 1.536 billion. The reason for a significant increase of the current net income compared to the same quarter of the previous year is that in the previous second quarter, we had a temporary increase of the income taxes deferred, impacted by reversal of deferred tax assets because CMIC company, a fully owned subsidiary -- CMIC CMO company, a fully owned subsidiary of CMIC HOLDINGS, became a joint venture and reserved from the CMIC Group consolidated tax return filing system. This year, we had no such impact.
Next is the breakdown of nonoperating and extraordinary income or loss for this term. While nonoperating income such as insurance income and others recorded JPY 50 million, nonoperating expenses such as foreign exchange losses, interest expenses and share of loss entities, accounted for using equity method, recorded JPY 268 million. For extraordinary income, we recorded JPY 6 million as gain on sales of noncurrent assets. And as for extraordinary losses, we recorded JPY 174 million as impairment loss and loss on retirement of noncurrent assets. This table shows sales and operating income by segment.
Our CRO business is driving our performance. In the current first half, deficit reduction in the CDMO business is contributing to the group-wide sales and income increase.
This table shows orders received and backlog. While orders received and backlog for CRO business decrease compared to the same quarter of the previous year due to the impact of some large-scale project we had in the previous year, the number of inquiries remained strong. The number of orders received and backlog is growing steadily for other business as well. For CDMO business, only firm orders are included in the orders received and backlog, and the annual order plans proposed by customers are excluded. This shows the trend in consolidated sales and operating income during the consolidated first half. We continue to achieve increase in income and profit for the first half, and operating profit ratio was 7.9%. This shows the trend in CRO sales and operating income.
For this first half, while striving to secure human resources to meet robust demand in clinical services, we're promoting the use of the medical database in cross-marketing surveillance and clinical research support business. For nonclinical services, our laboratories in Japan and United States are further collaborating to provide drug discovery support for advanced medicine, including nucleic acid drugs and regenerative medicine. We have concluded a partnership agreement with Sophion Bioscience, a global pioneer in ion channel-related business, in October 2018 to expand safety pharmacology services.
Sales for this term increased by 7.5% to JPY 19.947 billion. Operating income was JPY 4.306 billion, and operating profit ratio was 21.6%. This shows the trend in CDMO sales and operating income.
In the first half of the current fiscal year, CDMO business is further improving technical capabilities, developing low-cost production structure and enhancing competitiveness through strategic capital investment as a global pharmaceutical drug manufacturing platform that includes formulation design, investigational new drug manufacturing and commercial production. In addition, the new parenteral drug manufacturing facility in Ashikaga, with capabilities to formulate high-potency drugs, has started clinical trial material production and is enhancing the sales activities to manufacture both clinical trial materials and commercial drugs.
In December 2018, CMIC CMO has concluded a share transfer agreement with Astellas Pharma Tech, Astellas' production subsidiary in Japan, to succeed the Nishine Plant business in an effort to improve the oral solid dosage manufacturing capabilities.
Further, in March 2019, CMIC has foreign business alliances with U.S.-based corporation that possess 3DP technology platform and sophisticated flexible dosing tablet technology to introduce new technologies for drug manufacturing.
Sales exceeded that of the same period last year, mainly due to increase of contract production sales in Japan and the United States. While operating loss was recorded due to commercial production startup expenses and increased depreciation cost for the new parenteral drug manufacturing facility in Ashikaga, the loss amount has decreased following the increase of contract manufacturing volume.
Sales of CDMO business increased by 13.8% to JPY 7.724 billion, and operating loss was JPY 147 million. This shows the trend in CSO sales and operating income.
In the first half of the current fiscal year, in addition to the medical representative dispatch service, CMIC Ashfield is providing comprehensive solution that combines multiple communications channels and various services, including the opening of the MA academy, the first private-sector institution to train medical affairs personnel.
Sales exceeded that of the same period of the previous year, thanks to the steady execution of both new and existing projects. However, operating loss was recorded due to the cost generated to meet the increasing demand and take on large-scale projects, including hiring and training costs.
CSO sales increased by 6.2% to JPY 3.701 billion. Operating loss was JPY 33 million. This shows the trend in Healthcare sales and operating income. In the first half of the current fiscal year, we're further strengthening the oncology capabilities in the SMO operations, improving the quality of operations and providing new services. In February 2019, we have concluded a stock purchase agreement with BELL24-Cell Product, Inc. to further enhance our presence in Hokkaido.
As health care information services, we're providing information of clinical trials using the health care portal site HelC (sic) [ HelC+] and starting the self-check screening services for early detection and prevention of aggregation of disease.
In March 2019, we concluded a formal agreement with Sony Corporation for the transfer of harmo, the electronic prescription record service, to enhance the patient support program, including the treatment adherence improvement.
While sales remain unchanged from the previous year, operating income was below that of the same period of the previous year due to the impact of discontinuation and temporary interruption of contract studies in SMO business operations.
Healthcare sales decreased by 0.3% to JPY 3.597 billion. Operating income is JPY 460 million, and operating profit ratio was 11.6%. This shows the trend in IPM, Innovative Pharma Model, sales and operating income.
IPM business provides new business solutions to pharmaceutical companies that combine value chains and marketing authorization licenses intellectual properties possessed by a group. We are mainly delivering development and marketing services for orphan drugs and diagnostics. In our orphan drug business, OrphanPacific Inc. is selling orphan drugs, including products developed in-house. Further, we're strengthening business foundation through provision of IPM platform such as supporting foreign companies entering the Japanese market and providing strategic options to pharmaceutical companies in accordance with their business model changes.
In the diagnostic business, we are working to expand the market and strengthening -- strengthen promotions of the kidney disease biomarker human L-type fatty acid-binding protein, L-FABP, kit developed for the purpose of diagnosing renal disease.
Sales and operating income exceeded that of the same period last year, thanks to the sales increase of the orphan drug business and operating losses decreasing. We are continuing to expand our business scale through provision of new solutions, aiming for a positive turnaround.
IPM sales increased by 32.4% to JPY 1.881 billion. The operating loss was JPY 108 million. We are starting to see the benefit of providing IPM solution that lead to new orders in CRO and other business.
Next, I would like to explain our consolidated balance sheet. Total assets at the end of the second quarter of the current fiscal year increased by JPY 859 million year-on-year to JPY 78.894 billion. This is mainly due to a decrease in investment securities against an increase in cash and deposit and notes and accounts receivable.
Capital investment for the first half of the financial period is JPY 2.021 billion. Depreciation is JPY 1.680 billion, and amortization of goodwill is JPY 140 million. Total liabilities increased by JPY 503 million year-on-year to JPY 45.001 billion, mainly due to an increase of commercial paper issuances.
Total net assets increased by JPY 356 million year-on-year to JPY 33.892 billion. This is mainly due to an increase in retained earnings. Net cash flow from operating activity was JPY 1.744 billion in gain with net income, depreciation and corporate tax payment. Net cash flow from investing activities was JPY 1.687 billion in spending due to outflow of JPY 1.661 billion from acquisition of tangible, intangible fixed assets.
Net cash from financial activities, that's JPY 931 million due to increase in commercial papers. As a result, cash and cash equivalents as of the end of March 2019 was JPY 14.937 billion.
Full year 2019 outlook remains unchanged. Sales forecast is JPY 74.4 billion, 6.5% growth from the previous year. Operating income is estimated to be JPY 4.63 billion, 7.1% increase from the previous year. Ordinary income is estimated to be JPY 4.17 billion, 2.7% increase from the previous year.
Profit attributable to owners of parent is JPY 2.0 billion, 34.4% increase from the previous year. And earnings per share is estimated to be JPY 107.69. This concludes my presentation of financial overview.
Next, Keiko Oishi will speak about focus activities in the second quarter 2019.
Good morning. I will explain our activities in this fiscal term. Last November, we announced a 3-year midterm management plan, which starts in the current fiscal year, to address drastic changes in the business environment such as structural changes in the pharmaceutical industry and diversified medical needs. In a flexible and timely manner, we have determined 3 key focuses of the midterm management plan, namely: one, acceleration of PVC model; two, promotion of globalization; and three, creation of Healthcare business. Allow me to walk you through each activity.
First, acceleration of PVC model. Our PVC model supports the entire value chain of pharmaceutical companies, from drug development, manufacturing to sales and marketing. In addition, we have IPM solution business that combines the marketing authorization licenses to meet the diverse needs of our clients, including pharmaceutical companies. In fact, we're receiving various inquiries from many clients, such as entering the pharmaceutical industry from different sectors, companies with no foothold in Japan entering the Japanese market and out-licensing strategy development support for drugs.
In addition to increasing the comprehensive capabilities of the group by combining value chains, it is critical to strengthen each individual business. CRO is our core business and continues to receive orders from Japanese and overseas pharmaceutical companies. It is expanding their capabilities to take on development projects in the advanced fields such as biopharmaceuticals and regenerative medicine and to provide services utilizing real-world data. For nonclinical service in particular, we see increasing number of projects in advanced fields, which results in more collaboration with academia and increased number of nucleic acids and biomarkers testing through Japan U.S. laboratory collaboration.
This slide shows CDMO business activities. We will succeed Astellas Pharma Tech Nishine Plant in June 2019. The plant is located in the Iwate Prefecture and produces tablets and capsules with approximately 190 employees. Through this succession, we expect: one, stable supply and flexible production of oral solid dosage forms; and two, further enhancement of manufacturing and formulation development capabilities by working with the engineers of a major pharmaceutical company.
CMIC Group has 3 manufacturing plants in Japan, 1 in the United States and 1 in Korea to provide total solution for drug manufacturing.
New parenteral manufacturing building in Ashikaga has started its operation in this fiscal term, and is -- it is now preparing for commercial production. We're enhancing capabilities to manufacture biopharmaceuticals and building efficient production systems in combination with the business feasibility of the bio-manufacturing process study conducted by the joint venture with JSR.
We have partnered with 2 overseas companies that possess unique technology to enhance our formulation capabilities. The first collaboration is the business alliance with Aprecia in the United States, the world's first and only commercial-stage manufacturer of 3D printed pharmaceuticals, 3DP. ZipDose Technology uniquely addresses the unmet needs for designing, developing and manufacturing high-dose pharmaceuticals.
CMIC will provide comprehensive consulting for Japanese pharmaceutical companies, including license agreements and formulation development, in addition to value proposition and information campaign of 3DP. Another partnership is to become the exclusive distributor in Japan for Accu-Break Pharmaceuticals' flexible dosing and tablet technology.
Accu-Break tablets are bi-layer tablets. It's a unique technique in which the top layer contains the active pharmaceutical ingredient and the second layer is inert. The tablet is scored and may be accurately broken into precise smaller doses. This technology is suitable for the development of pharmaceutical drugs that need different dosing by that individual patient and drugs for pediatric and geriatric patient that require frequent dosing adjustments. We believe both technologies are critical for the advancement of personalized medicine in the future.
This slide shows CSO business activities. Their main business, Contract MR service, has recently been awarded large-scale project by foreign pharmaceutical companies and the demand remains strong. However, because sales activities in the industry are transforming, CMIC is pursuing various sales activities using different channels. One of them is the Medical Affairs solution. Medical Affairs require high expertise and specialized knowledge about disease areas. They opened MA academy, the first private-sector institution to train medical affairs personnel, utilizing their consulting and dispatching experience. We will further enhance this area in the future as we continue to receive inquiries from both MR and non-MR.
This slide shows Healthcare business activities. We have acquired a Hokkaido-based SMO, BELL24-Cell Product, that has extensive experience in diabetes, cardiovascular, respiratory, renal and oncology. They also have network with major hospitals and clinics in the region.
Thanks to the acquisition, our market share in the Hokkaido area is now 30%. Since the level of expertise required for development subject -- projects is increasing, we will strengthen our network with medical institutions focusing on specific disease areas and hire experienced personnel with medical expertise to provide timely and high-quality support for clinical trials.
This slide shows IPM business activities. OrphanPacific Inc. was established in May 2012 as a joint venture of CMIC Group and MEDIPAL Group. And the company MEDIPAL Group -- and the company markets 7 products, including 4 orphan drugs.
OrphanPacific also supports portfolio expansion of existing products such as additional indications and formulations, introduction of new orphan drugs and foreign companies entering the Japanese market. Such projects take long time to realize after receiving the initial inquiry. However, since it is a unique solution business, unlike no other, to become a trusted partner to our clients, we proactively take on new opportunities. Number of inquiries continue to increase every year.
Next, I will explain our progress on promotion of globalization, second pillar of our midterm management plan. We have established a subsidiary company in Australia called CMIC ASIA-PACIFIC (AUSTRALIA) to strengthen our CRO business in Asia Oceania. As a result, CMIC now has 14 overseas-based bases in North America, Asia and Oceania. The region is suitable for conducting clinical trials with a variety of races, and many biopharmaceutical companies and bio ventures from all over the world actively conduct clinical trials in Australia. We will continue to expand our global basis to meet diverse development needs by our clients.
This slide is about Healthcare business creation, the third pillar of our midterm management plan. We will succeed Sony's harmo electronic prescription record service next month in June. Harmo is one of the biggest personal health data platforms with approximately 300,000 users and over 10,000 pharmacies nationwide. It is the only electronic prescription record based on innovative technologies, Sony's patent technology that enable feedback to a specific individual via the service while maintaining anonymity by physically separating and managing information. We will strengthen patient support program using harmo to improve drug adherence and patient follow-up during the dosing period.
In addition, we have concluded a technical support contract with Sony to adapt latest technologies and proactively launch health tech business with the aspiration to make contributions to solve issues in the health care arena.
Further, we started providing self-check services under the brand name SelCheck. The first of the series is self-collect HPV test, SelCheck Cervical Cancer. It can be used as gynecological exams and medical checkup options provided by companies and health insurance associations. It is also sold to general consumers starting this April through pharmacies. We hope this kit will contribute to early discovery of cervical cancer. This concludes my presentation of our activities in the first half 2019.
Next, Kazuo Nakamura, our CEO, will speak about Healthcare Revolution.
My name is Kazuo Nakamura, and I will speak about high-level background of the changes in health care in Japan and the rest of the world. Health care people say, "It's revolution, not innovation." And I want to explain why revolution. Japan, as you know, has become a country of longevity, and because of its longevity, we face major issues. This is Japan's mean life expectancy. In 1960s, we had one of the shortest life expectancy among the advanced nations, and now we are a top country, we have become a country with top life expectancy. The first reason is that we have universal national insurance, and we have overcome infectious diseases with antibiotics. And when this health care system was designed back in 1960s, the pension system, universal insurance and long-term care insurance all designed back in 1960s. It is no longer sustainable now that we became a country with longevity, and this is longevity paradox, I call. And in 2050, the average life expectancy is predicted to be over 90 years old according to Nature. And every country on this graph estimates the average life expectancy to be lower than Nature's estimation. But what we see here is that many people live longer than 90 years. And now we have a -- the brain -- science is not catching up with this people living longer. That means we have people with Alzheimer and there will be many elderly people that need social -- that need to be supported socially. And in this era with huge health -- medical expenditure, how we are going to face it? The medical budget and social security and the danger of bankrupt, National Health Insurance cost in red, taxes paid in negative [ balance ], and it will be impossible to continue paying for all medical costs with the National Health Insurance system in the future. How are we going to make it sustainable? One idea is to cut down the medical expenditure. And the first target by the government was the Japanese pharmaceutical companies. In the NHI price base, our sales is JPY 10 trillion. But realistically, this office's data -- this is, by the way, in dollars. This shows the trend -- Japanese pharmaceutical market trend in Japan. The growth, we are not growing, and rather decreasing. And that is predicted by global data, and that is shaking up the pharmaceutical industry.
Let's take a look at the trend in United States. In the United States too, this health care expenditure is becoming a big issue. In the United States, it is highly profitable market for pharmaceuticals in the United States. And the increasing medical expenditure is becoming a huge issue. And the Democrats are saying that the Medicare For All, the centralized management by the government is needed, and the Republican is saying that the medical cost is ever rising and it is no longer affordable by ordinary people. And especially, the West Coast is highly affected because of the political nature as well. And now to cut down the medical expenditures, in addition to cutting down the drug prices, we're -- they're changing the ecosystem of the health care system as well.
Let's take a look at the graph here. The health care spending growth in the United States has exceeded GDP growth for decades. And the health care cost is ever rising. However, there are some people, especially in -- the people in poverty, are not benefited from this health care. And this is the U.S. pharmaceutical market trend. It is still a growing market in United States. However, instead of targeting only pharmaceuticals, we still have a free competition in the United States. And how are we going to cut down the medical expenditure overall? And this is emerging company clinical-stage pipeline in terms of a new drug development. If you look at Phase I, II, III and NDA, the large existing companies, in Phase I it's below 30%. And the new emerging companies, including biotech and many from academia -- originated from academia, the 45.6% Phase I is done by academia alone, and in collaboration, 24.9%. And such number is increasing, and eventually we have -- imagine companies conducting Phase I alone or in collaboration. So in other words, the pharmaceutical drug development is changing, the method is changing, and CRO is supporting such development activities by small companies, unpartnered and partnered. And the role CRO plays will become even bigger in the future.
And on the other hand, let's take a look at providing care outside of our hospitals. Retail clinic and urgent care center, these are the current options outside of hospitals. So for simple diseases, they can be treated at either retail clinical or urgent care. And even for bone fractures and sutures -- wound sutures, they're also treated at these places for more reasonable cost. And this is another new trend, a virtual clinical trial. The clinical trials conducted by hospitals and clinics are costly. That is the reason why we should do it at home, and that is called a virtual clinical trial.
Let's compare conventional and virtual clinical trial. Instead of visiting at the hospital, depending on disease, the subjects can stay at home using IT tools and biomarkers and conducting virtual clinical trials. And this is pretty much focus now the rest of the world. In Japan, because of regulatory and -- regulatory issues, it is not catching up with the rest of the world. But this is another trial, Science 37 NORA platform. The subjects -- they provide a platform to conduct virtual clinical trial while subjects stay at home, utilizing IT systems, wearable devices. And [ the clinics ] also provides platform. The same concept here, subjects stay at home and they have a real-time adherence instructions, for example. This is one of the initiatives to cut down the medical expenditure. If they have to go treat it at the clinic hospitals, they must. However, if they can be treated from home, then here is another option, and this will have significant impact on medical expenditure. And this is our succession of Sony's harmo electronic prescription record service. We concluded a formal agreement for the transfer of harmo. And this is one of our aspiration to contribute to Healthcare Revolution. And yet, we aim to utilize data to solve healthcare-related issues.
And finally, I would like to catch up on CMIC's CREED. And we do promotion of creed, diversity and CSR. And recently, we were -- we ranked 28th in the Nikkei 100 best companies where women play active part 2019. And this is our CMIC's CREED. We are determined to bring innovation to health care so that all people, regardless of age and gender, can live their precious lives according to their will. This is our aspiration as the CMIC Group. Whether in childhood when brilliance has yet to blossom, or in late adulthood when potential has bloomed, we respect every individuals drive to live fully in the moment. We shall sincerely address each and every life. We shall overlook no one. To achieve this, we shall continually challenge ourselves to strive for a better future. We shall transform ourselves, seek new vantage points, turn our unwavering passion into values and continue to contribution -- contribute to individuals and society. This is a core for the Healthcare Revolution. And in addition to this creed, we can utilize new ideas and systems including our virtual clinical trials. And then we handle with care the privacy information to make contributions to the health care ecosystem and the society. Thank you for your kind attention.