CMIC Holdings Co Ltd

TSE:2309

Earnings Call Transcript 2021-Q2

[Operator]

Thank you very much for taking time out of your busy schedule and joining the conference call today. We are now starting the CMIC Holdings Second Quarter Financial Results Presentation meeting. Today, we have CEO, Kazuo Nakamura; COO, Keiko Oishi; and CFO, Wataru Mochizuki with us. First of all, CFO Mochizuki will speak about an overview of financial results; and then CEO, Nakamura, will present developments on our business, followed by a Q&A session.

We're scheduled to end at 11:00 a.m. The video recording of this call will be posted later on CMIC's IR web page and be available to view on demand.

Now our CFO, Mochizuki, will explain our overview of financial results.

[Wataru Mochizuki, executive]

Hello, I am Mochizuki, and I will be giving an overview of financial results for the second quarter of the fiscal year ending September 30, 2021. This table shows our business segments and corresponding group companies as of the end of March 2021. CMIC Group consists of 26 companies in total, which include CMIC Holdings that is a holding company, 24 consolidated subsidiaries, including 13 from overseas and one equity method affiliated company.

These are the main initiatives of the current term. In this term, CMIC Group is executing the focus activities in the mid-term plan, which are the acceleration of our PVC model, the promotion of globalization and the creation of a Healthcare business in order to achieve sustainable growth and increase our corporate values in the drastically changing medical and pharmaceutical industry.

Regarding the creation of a Healthcare business, in particular, as part of our Healthcare Revolution project started in July last year, we are creating new businesses that will contribute to maintaining and improving personal health and developing our talent in the health care arena, partly for the purpose of responding to COVID-19 infection.

Regarding our main business activities in the first half of the fiscal year ending September 30, 2021, we are focusing on contributing to COVID-19 countermeasures in the initiative of Healthcare Revolution. We are providing support for local governments to prepare their vaccination systems by utilizing CMIC Group's human resources, call centers and health care communication channel, harmo-based vaccine management system.

Up to now, we have started to provide such a support to local governments in Tokyo and other areas, including comprehensive partnerships with the Yamanashi Prefecture and 7 municipalities in the Mt. Yotei foothills in Hokkaido.

With regard to the creation of business that contributes to maintain personal health, we will launch in June 2021 and operates the MONET LABO—HEALTHCARE, a medical MaaS Mobility-as-a-Service business development program with MONET Technologies Inc., which was jointly established by SoftBank Corp., Toyota Motor Corporation and others.

For the acceleration and the streamlining of drug developments, we have started a demonstration experiment of clinical trial using harmo as well as a project to support the upstream of development, including support for establishing a business model of digital therapeutics.

In addition, we have assigned a joint research agreement on blood cancer with the National Cancer Center Japan and are promoting a new drug development in the blood cancer area where there are many recurrent and refractory cases.

In our IPM solution, which is a unique business solution combining value chains and marketing authorization licenses and others possessed by CMIC Group, 2 orphan drugs involved by our group company, OrphanPacific Inc., received a manufacturing and marketing approval in January this year and NHI price listing on April '21.

In addition, in order to respond to business environment changes in a more agile way, we implemented changes of executive management in April, including the repeal of the executive officer system. Furthermore, we have introduced and launched the health care professional certification system with the aim of developing group's talents in the health care arena.

Furthermore, in November last year, we acquired International Standard Certification with regard to ISMS, or information security management system, for us to continue to strengthen information security. Also in December, we received a letter of appreciation from the Ministry of Economy, Trade and Industry as a company that contributed to the increased production of medical supplies in the COVID-19 pandemic.

This is an overview of consolidated Income statement. Sales in the first half were JPY 38.645 billion, which was at the same level as the same period of the previous year. Operating income was JPY 2,158 million, which was up 9.5% year-on-year by JPY 187 million. Ordinary income was JPY 2,368 million, which was the same amount as the same period of the previous year. Profit attributable to owners of parents was JPY 1,222 million, which was down 17.4% year-on-year by JPY 257 million. Earnings per share were JPY 67.58.

For nonoperating income and expenses and extraordinary income and losses, we recorded a JPY 326 million of foreign exchange gains and others for nonoperating income and JPY 116 million of interest expenses and others for nonoperating expenses. Furthermore, we recorded a JPY 58 million in income for extraordinary income and losses altogether, JPY 1,004 million for total income taxes and JPY 199 million as profit attributable to noncontrolling interests. As a result, profit attributable to owners of parents in the consolidated cumulative second quarter was JPY 1,222 million.

This table shows sales and operating income by segment. Sales were JPY 38.645 billion with the IPM and the CRO businesses going down and the health care and the CDMO businesses going up. On the other hand, operating income was JPY 2,158 million, which was above the same period of the previous year due to factors such as an increase in the CDMO business.

This table shows orders received and backlog by segment. Orders received went up by 9.7% in total year-on-year due to an increase in the Healthcare business, CSO business and others. Backlog also increased in all the segments.

This shows the trends in consolidated sales and operating income. We achieved an increase in operating income, but the sales decreased compared with the same period of the previous year, and the operating margin was 5.6%. This shows the trends in CRO sales and operating income. For the clinical services in CRO business, we are proposing new clinical trial models, including the streamlining of clinical trial process by using harmo and working to improve the expertise and technical capability of our talents.

For the nonclinical services, our laboratories in Japan and the United States are in collaboration to actively provide a drug discovery support for advanced medicine including nucleic acid drugs and regenerative medicines. Sales were below the same period of the previous year due to the weakness in orders for clinical operations in the previous consolidated fiscal year as a result of the spread of COVID-19 infection. Operating income was below the same period of the previous year due to a decrease in revenue from the clinical operations despite an increase in nonclinical operations. CRO sales were JPY 17,567 million, operating income was JPY 2,813 million and the operating margin was 16.0%.

This is about CDMO business. We are focusing on a larger scale commercial production project that is scheduled to start production in the fiscal year ending September 30, 2022, the launch of new facility and the production line in the United States, and hence the acquisition of new projects. CDMO sales were above the same period of the previous year due to an increase in contracted production volume. Operating income was above the same period of the previous year due to the increase in sales despite a prior investment costs for the contract manufacturing business of biopharmaceutical APIs. CDMO sales were JPY 10,505 million, and the operating income was JPY 270 million.

This is about CSO business. Sales and operating income in this segment remained at the same levels as the same period of the previous year, despite a slight decline in the operational rates in the MR dispatch services. CSO sales were JPY 4,190 million, operating income was JPY 435 million and the operating margin was 10.4%.

This is about Healthcare business. Sales were above the same period of the previous year due to growth in the SMO operations and others. Operating income was also above the same period of the previous year due to the increase in sales, which absorbed the impact from prior investments for creating new Healthcare business. Health care sales were JPY 5,300 million, operating income was JPY 341 million and operating margin was 6.4%.

This shows the trends in IPM sales and operating income. In this fiscal year, we are selling orphan drugs, including products developed in-house, while strengthening the IPM business foundation by supporting foreign companies entering the Japanese markets and proposing strategic options through the provision of IPM platform.

In January this year, we received the manufacturing and marketing approval in Japan of ORLADEYO Capsules, 150 milligrams, for the suppression of the onset of attacks in acute hereditary angioedema. At the same time, these part for the intravenous infusion, 1000 milligrams, of Grifols Therapeutics LLC received the manufacturing and marketing approval in Japan, in which we have provided support towards the approval as an appointed marketing authorization holder, and will support its marketing. Both products have received NIH price listings.

Sales were below the same period of the previous year due to a decline in sales volumes of some products. On the other hand, operating income was at the same level as the same period of the previous year due to the efforts to reduce costs. IPM sales were JPY 1,473 million, operating income was JPY 63 million and the operating margin was 4.3%.

Here, I'd like to explain our consolidated balance sheet. Total assets at the end of the first half increased by JPY 2,484 million compared with the end of the previous consolidated fiscal year to JPY 92,002 million. This is due mainly to an increase in notes and accounts receivable trade and tangible noncurrent assets in the CDMO business and the decrease in cash and deposits. Meanwhile, total tangible and intangible fixed assets investment in the first half was JPY 3,879 million, depreciation was JPY 2,508 million and the amortization of goodwill was JPY 10 million. Total liabilities increased by JPY 1,053 million compared with the end of the previous consolidated fiscal year to JPY 56,559 million. This is due mainly to an increase in accounts payable facilities and in long-term debt and a decrease in short-term borrowings and commercial papers. Total net assets increased by JPY 1,431 million to JPY 35,442 million. This is due mainly to an increase in retained earnings.

These are the cash flows. Cash flow from operating activities in the first half was JPY 2,089 million in revenue. This was mainly due to an increase in cash flow due to profit before income taxes and depreciation and the decrease in cash flow due to an increase in notes and accounts receivable trade and the payments of the total income taxes. Cash flow from investing activities was JPY 2,730 million in expenditure. This was mainly due to the acquisition of tangible noncurrent assets. Cash flow from financing activities was JPY 1,412 million in expenditure. This was mainly due to a decrease in loans. As a result, cash and cash equivalents as of the end of March 2021 was JPY 10,589 million.

This is an outlook for this. The impacts associated with the spread of COVID-19 infection on our business are anticipated to include delays in collecting data and others due to restrictions on visits to medical institutions and the decrease in contracted of production volume due to decreased sales of pharmaceuticals as a result of the priority measures to prevent the spread of the disease and the state of emergency. In the meantime, we will strive to enhance order-taking activities for clinical trials and post-marketing surveillance projects related to the COVID-19 infection and expanded support of services for vaccination activities by local governments.

While there is no clear end insight to the spread of COVID-19 infection, based on the information available at this point in time, there are no changes to the consolidated earnings forecast for the fiscal year ended September 30, 2021, announced on November 6, 2020. If there is expected to be an impact on our business performance in the future, we will disclose it promptly. That is all about an overview of financial results. Thank you.

[Kazuo Nakamura, executive]

I am Nakamura, CEO. I'd like to speak about the current status of developments on our business, especially the ongoing Healthcare Revolution 2.0 as well as some of our future prospects. First, the Healthcare Revolution 2.0. Indeed, Healthcare Revolution 2.0 was initiated in July 2020, following the spread of COVID-19, in order to advance the preceding Healthcare Revolution 1.0.

Here is the evolution of CMIC. As you are aware, CMIC was born in 1992 as the first CRO in Japan. At that time, we aim to be a team of clinical operation specialist for the pharmaceutical companies. And later in 2005, proposed the business model pharmaceutical value creator, in which CMIC would have become a service provider that could support the entire value chains of pharmaceutical companies and contribute to the maximization of their values based on the horizontal division of the labor business model rather than a vertically integrated one.

At that stage, we introduced the concept of pharmaceutical value. Then finally, in response to the question of what individual health values are, we came up with the concept of personal health value creator, which refers to a team of professionals who can contribute to the health care of new era, who are personalized to health care as well as disease prevention and treatment development. Therefore, our services have also shifted the direction from providing conventional support for pharmaceutical companies to supporting individual health values.

In fact, the reason why I used the term Healthcare Revolution instead of innovation is the following. As you are aware, health care itself faces the major problem of medical costs. So from the perspectives of how much money government has to support health care, the bundling of nursing care and medical care, the value of treating diseases in an aging society and also all people can live their one and only lives according to their own will, which is the value that we have discovered. This is definitely not innovation, but revolution. And this is why we decided to launch a Healthcare Revolution project.

In 2005, we proposed the concept of personal health value creator. This concept of personal health value is exactly embedded in CMIC's CREED established in 2015. We shifted our concept from treating diseases to all people can live their one and only lives according to their own will, thinking about what we could do within this concepts and landed firmly at the business direction of this Healthcare Revolution 2.0 project.

As you are aware, the pandemic has been ongoing globally since last year. What this has made me feel is that the world is going to drastically change because of this pandemic. Unlike the Spanish flu that happened 100 years ago, in this age of human interaction, business interaction and instant information exchange on the Internet, I thought that the idea of global project for COVID-19 vaccination would also be a big project in Japan.

The COVID-19 pandemic made us think about what we should do and what we could do in the midst of the social environmental changes, economic environmental changes, corporate environmental changes, employment and working style changes and most importantly, personal lifestyle and value changes. And we immediately set up of providing COVID-19 vaccination support, supporting the development of treatment medication, and in some cases, engaging in the contracted manufacturing of new products.

Indeed, the environment surrounding health care had been drastically changing. As you are aware, Japan is the only country whose pharmaceutical market is becoming smaller compared with any other developed countries due to the annual revision of drug prices for new drugs. Under such circumstances, one of the things we learned from COVID-19 vaccination development was that Japan lagged behind in response.

While vaccination has started over the path to vaccination is almost clear in many parts of the world, Japan is about to start now. Now the question is what we can do with this time loss? Or to put it another way, the loss of the time we have? In the midst of vaccination going on a global scale, countries bartering to secure vaccines, the development of treatment medication and behind these, the acceleration of digitalization, which is a huge challenge, Japan with a lost time and other aging society, which in a sense has lost its vitality, maybe finding itself more on the losing side in the world. For this reason, I have a strong conviction that the conventional common sense has been overturned, and we have shifted from living harmony to living hybridity. And if we don't establish a new business model, we will lose the competition in the world.

Within this context, these are CMIC Group's COVID-19-related activities. First, for information communication, we gathered and released COVID-19-related information officially announced by the governmental institutions via the harmo smartphone app. Next is testing. We were convinced from the beginning that PCR testing should be done intensively. We decided to conduct intensive PCR testing together with our partner company as it happened and do intensive testing at nursing care facilities centering our Setagaya Ward, and in some cases, at children's houses. We haven't ever done this before. Assigned staff to intensive testing and decide what to do next with the return to measurement results. We also supported some of the antibody and antigen kits that were simple and usable for research purposes.

In development support, we provided support for the implementation of clinical trials and PMS in CRO business for contracted IMP manufacturing in CMO business and for clinical trial operations for medical institutions in SMO business. With regard to vaccination support, actually, we had already entered into health care-related partnerships with some local governments, including Yamanashi Prefecture and some parts of Hokkaido.

In order to support smooth vaccination rollout through the partnerships with local governments, we provide a call center services, support local government system setups, created a flow manual, support vaccination site setups and among others, help information management in which we use harmo Vaccine Care with corona, which is the COVID-19 vaccination information management system that enters and aggregates vaccination information and enables long-term post-vaccination follow-ups.

As reported on TV today, now that a vaccination has started, in reality, we are facing a big problem of the national system being deficient. In response to this, indeed, our system is being used in conjunction with the national system, providing more efficiency and more importantly, enabling follow-ups.

Regarding the characteristics of vaccination support business for local governments, we have been exploring for about 3 years what we can do within and how we can provide a comprehensive support for local governments by utilizing our clinical trial support experiences. We consulted with various groups within the local government and discussed about nursing care and medical care and health care. As an extension of it, for vaccination support at this time, we provide support for the overall vaccination operations, such as creating a manual, providing call center services, introducing HCPs, dispatching health care human resources and utilizing our health care communication channel, harmo.

The system operations of harmo Vaccine Care have already been proven stable. This is because the system has already been in use in an infant vaccination demonstration experiment in Kawasaki City. This project has proven that the system makes it possible to avoid errors in vaccination interval, vaccine mix up, et cetera as well as to enter and aggregate vaccination information very quickly using bar codes and monitor progress in real-time. This is why we are using harmo at this time as well.

COVID-19 vaccination has just started and vaccination requires preparations, implementation and follow-ups, which are very important. As we specialize in drug development, we understand that it is not enough to just give vaccine shots and that post-vaccination follow-ups are critical. Unfortunately, the government is focusing on patient registration right now. They are really focused on vaccination per se, but not on post-vaccination follow-ups yet.

As for an outlook for harmo Vaccine Care with corona, there is a possibility that an unadvanced reaction may occur sometime after the vaccination. For this, we are planning to release a smartphone app this summer that enables follow-ups based on the vaccines exact lot numbers.

This Reuters article mentions that the possible allergic reactions were reported with a specific lot of Moderna vaccine and therefore, providers were recommended to pause vaccination from lot number, 41L20A. As we can see from this as well, it is important to send out notifications to people who have received a COVID-19 vaccine shots and detect the signals from them. And our health communication channel, harmo Vaccine Care, is indeed equipped with such a function. This will be enabled also on smartphones this summer.

Here, I'd like to present some of our local government support business cases. In this business, it is important to provide a detailed services that reflect the local environment. As a first step, we signed a comprehensive partnership with the Yamanashi Prefecture, in which we are supporting them in various ways by using the vaccine care system within the prefecture. We are also cooperating with a large-scale pharmacy stores of the drug store chain, Sun Drug. And I believe that this Yamanashi model has been quite successful, also providing PCR testing support.

In the Tokyo metropolitan area, we provide support for PCR testing services or vaccination in Setagaya Ward, Ota Ward, Koto Ward, Suginami Ward, Akishima City and Fussa City. On the other hand, I don't know if it is appropriate to call them a depopulated area, but we have signed a comprehensive partnership with 7 towns and villages in the Mt. Yotei foothills, which consists of our world-class resorts in order to support the vaccination. The other areas with flags are the places where we are currently preparing to provide support.

As you are aware, the 7 towns and villages in the Mt. Yotei foothills consist of the world-class resort of Niseko. It is a place that is depopulated in the other seasons. But during the winter months, the population increases dozens of times where the world's top-class wealthy people gather, most of whom are non-Japanese. Providing nation support in such an area makes us think how our system should be adopted for people from overseas and how vaccination should be provided for such people.

So we are providing the support as a demonstration experiment in a sense as it makes us think about how future health care and its structure should be with not only Japanese people, but also people traveling or moving from overseas.

As I mentioned earlier, we support the smooth implementation of vaccination. As for what will happen in the post-vaccination times, I just anticipate that something revolutionary will happen in the health care arena triggered by the pandemic. Indeed, at this time, the shortcomings of the U.S. health care system have become apparent. In the U.S., medical care is provided through a medical insurance. So there are those who do not have an insurance. While for those who do have an insurance, they are required to go to a designated hospital and take a designated medication, which clearly shows that the health care system is not designed based on individual choices. Under such circumstances, I believe that the global battle against the pandemic will continue even after vaccination started. We will have to follow up on emerging variants, vaccination rates, vaccination efficacy, whether antibodies have been produced or not, and whether the antibodies produced or disappear or not and so on.

Then the needs to address local governments challenges. What we found out clearly at this time with regard to local governments is that the most of the news reports are focused on the Tokyo metropolitan area. When visiting local areas, we find that there are no hospitals, no access to hospitals, no doctors or only one doctor who is very aleatory. We just think about how health care should be in such a situation and realize that many challenges remain, which I believe there should be ways to address.

Then comes the individual health and disease awareness raised. I think that the level of health care literacy has been elevated at this time with a variety of information available. In this context, it is important to provide health care that is recipient-centric rather than the conventional provider-centric health care. The last one is the scope of activities of health care professionals. Conventionally, they include specific patients within health care such as doctors, nurses and the pharmacists. And their activities have been quite siloed. However, now we need a health care professional talent who look at the health care in general and address the challenges accordingly. CMIC is trying to cultivate such health care professional talent to support health care through our in-house qualification system and by introducing various new technologies.

This is one of our business deliverables. We do not have any intention to focus less on our existing businesses just because we do Healthcare Revolution 2.0. Indeed, all existing businesses, including CRO, CDMO, CSO and SMO businesses will be to a great extent involved in health care. And the information from there will be very important for pharmaceutical companies as well. Therefore, I believe that the pharmaceutical companies need to shift from the conventional pharma model to the innovative health care pharma model that is cognizant of health care.

One of the things we found out at this time was that Pfizer did not use the conventional supply chain for their vaccines. If it were the conventional supply chain model for drugs, Pfizer would probably conduct a clinical trial and obtain approval through its branch office in Japan and distribute drugs from the branch offices to medical institution through a wholesaler. At this time, however, this model was changed globally to the one through a relationship between the national government and the pharmaceutical company, where the pharmaceutical company supplies drugs to the national government, which then supplies them to local governments and this has created a huge confusion. This is because the local governments have never handled drugs, don't have professionals and this vaccine was very difficult to handle. Now the concerned parties finally understand this problem.

In this context, we were among the first to introduce a system that determines where the vaccine is supplied based on the lot number and enable us to communicate information to those who have been vaccinated and collecting information from them. As we can see, pharmaceutical companies will also no longer be able to do their business unless they take local governments, individual people and local residents into serious consideration. This is expected to become the mission of pharmaceutical companies. Therefore, I believe that the Healthcare Revolution 2.0 that we are currently working on will be very unique and add value to our existing businesses.

Regarding the value chain, I touched upon the time loss element earlier. And for better or worse, Japan is very slow in approving vaccines. This has revealed a challenge in the approval system in cases where there is a pandemic or infectious disease going around in the world. In such a situation, in a sense, what is critical is an agile approval system or even agile development where the data is collected, the risks and the benefits are assessed by looking at the data from a scientific perspective, and the drug is approved based on such data as well as data is collected continuously through usage and accordingly changed how the drug is used where necessary. I wonder what we can do about this, and this is a very revolutionary indeed.

The pandemic at this time has made everything gotten to be agile. However, being agile in the conventional system is quite challenging. Therefore, we'd like to support pharmaceutical companies with our know-how and systems, including how we can change the conventional supply chain.

Next is the reform of the health care system. With that the success totally depends not only on the conventional supply side of hospitals, clinics and medical institutions, but also on what the recipient side is thinking and in what situation they are. What has been clear is that there are people who cannot go to a hospital in reality as well as there are cases where there are no hospitals even when people wish to visit or there are no doctors and hence, hard to provide a health care. For this, with the advancement of technology and our digital systems moving forward, I believe that it is possible to set up something like health care stations that can provide health care support in a way that is different from hospitals, clinics and doctors. And in this context, we are thinking of creating a business using our Selcheck, a screening device that allows individuals to self-check their disease risk easily.

Lastly, I'd like to mention generating human resource value in the Healthcare business. CMIC Group has been focused on new drug development, while also involved in manufacturing, preclinical research and others. And in various ways, we have been involved in the front line of it. I am proud to say that we have very talented people with us, and we realize that we need people who can engage in health care, in general, and work in agile manner. So we have introduced the health care professional certification system and are currently providing training accordingly. That is all for myself. Thank you very much.