CMIC Holdings Co Ltd
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Earnings Call Transcript

Earnings Call Transcript
2022-Q2

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Operator

[Interpreted] 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 2022 Financial Results Presentation Meeting. Today, we have CEO, Kazuo Nakamura; COO, Keiko Oishi; and CFO, Wataru Mochizuki, with us.

First of all, our CFO, Wataru Mochizuki will explain the financial results, and then CEO Nakamura will present the Healthcare business outlook, followed by a Q&A session.

We are scheduled to end at 11:45 after the Q&A session. The video recording of this call will be posted later on CMIC IR webpage and should be available to view on demand.

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

W
Wataru Mochizuki
executive

[Interpreted] Hello. I am Mochizuki. I will be giving an overview of financial results for the second quarter of the fiscal year ending September 30, 2022. The following is a description of our group's business activities.

CMIC has positioned the current fiscal year ending September 30, 2022, which marks the 30th anniversary of its founding as the first year of its third founding in addition to promoting drug development and digitalization based on new drug discovery platform technologies. CMIC is expanding its business domain into the healthcare field, and promoting support for total disease care initiatives from prevention to diagnosis, treatment and prognosis.

Next table shows CMIC Group sites. As of March 31, 2022, the CMIC Group consists of 25 companies, including CMIC Holdings, the holding company and 24 consolidated subsidiaries, 13 of which are overseas, and have 61 sites, including plants and laboratories in Japan and overseas. In fact, in this fiscal year, we have changed our reportable segments to pharmaceutical solutions and healthcare solutions.

The Pharmaceutical Solutions segment consists mainly of the CRO business, which provides development support to pharmaceutical companies, the CDMO business, which provides manufacturing support. And the Market Solutions business, which conducts sales and marketing and orphan drug development, and sales. The Healthcare Solutions segment consists mainly of the site support solutions business, which provides support to medical institutions and health care professionals and the Healthcare Revolution business, which provides support to individuals and to local governments. In a previous fiscal year, this segment corresponded to the Healthcare business. The year-on-year increase/decrease and percentages of results by segment shown in today's materials are comparisons based on the classification after the change.

This fiscal year is the first year of our midterm plan, fiscal year 2022 to 2025, which was formulated in November 2021. We have begun to address our midstream business plan priorities: one, advancement of the Healthcare business; two, strengthening of comprehensive support for disease prevention and treatment from R&D to marketing; and three, contribution to sustainable society through businesses that are highly beneficial to society.

First, let me talk about our progress toward -- progress in the Healthcare business. We have continued from the previous fiscal year to make comprehensive efforts, including the provision of call centers, physician and nurse referrals and antigen test kits, along with handling COVID vaccination and PCR test support services. In addition, as a service for local governments, Hokuto City and Yamanashi Prefecture has made it possible for all citizens to view and utilize VRS vaccination record through the harmo Vaccine Care application, and we are promoting collaboration to provide solutions to the issues faced by each local government.

With regard to strengthening comprehensive support for disease prevention and treatment from R&D to sales, we have entered into a partnership with Science 37 to promote Decentralized Clinical Trials, DCT and speed up drug development is an initiative to speed up and improve the efficiency of drug, and medical device development. Science 37 is a company with one of the largest DCT platforms in Europe and the United States, providing digital solutions such as telemedicine and e-source to medical institutions and study subjects.

Through this partnership, CMIC will expand opportunities to win an increasing number of DCT projects. In addition, in the bioanalysis business, we are actively engaged in supporting drug discovery in advanced areas where modalities are becoming increasingly diverse, such as next-generation biopharmaceuticals and gene therapy drugs regarding contribution to a sustainable society, as a company involved in the business of supporting people's lives and health. The CMIC Group places a high priority on ethics and science, and is proactively developing human resources who can play an active role in these areas and providing opportunities for them to do so.

In the first half of the fiscal year, our core operating companies CMIC obtained Kurumin Certification as a company that supports child-rearing in December of last year. As ongoing social contribution activities, we support activities for seminars of Rare Disease Day, awarded the 18th AIDS Society of Japan price and co-sponsored the 13th International Children's Drawing Contest.

This is an overview of consolidated income statement. Sales in the second quarter of fiscal year were JPY 51,769 million, which was up 34.0% year-on-year by JPY 131,123 million ((sic)) [ JPY 13,123 million ]. Operating income was JPY 5,743 million, which was up 166.1% year-on-year by JPY 3,584 million.

Ordinary income was JPY 6,169 million, which was a 160.5% year-on-year by JPY 3,800 million. Profit attributable to owners of parent was JPY 3,503 million, which was up 186.6% year-on-year by JPY 2,281 million.

Earnings per share were JPY 194.07. Effective from the first quarter of the current fiscal year, the company has adopted the accounting standard for revenue recognition. The amount of impact for the current quarter is as follows.

For the second quarter of the current fiscal year, sales increased by JPY 1,263 million. Cost of sales increased by JPY 1,193 million, and operating income, ordinary income and income before tax adjustment increased by JPY 69 million each. As for the breakdown of nonoperating income loss and extraordinary income loss, foreign exchange gains, et cetera, of JPY 530 million were posted as nonoperating income, and interest expenses, et cetera, of JPY 104 million were posted as nonoperating expenses for the quarter under review.

As extraordinary losses, we posted a loss on retirement of noncurrent assets of JPY 51 million. Total income taxes of JPY 2,631 million, and net loss attributable to noncontrolling interests of JPY 17 million. Sales and operating income by segment are shown in the table below.

Sales and operating income increased significantly from the same period of the previous year due to substantial growth into the vaccine development and vaccination support services, et cetera, in Healthcare Solutions. Orders received, and order backlog by segment are shown in a table below.

Orders received increased by 47.7% compared to the same period of the previous fiscal year. And the order backlog increased by 17.9% compared to the same period of the previous fiscal year. The percentage of sales for reportable segments were 70.7% for Pharmaceutical Solutions and 29.3% for Healthcare Solutions. The composition ratio of Healthcare Solutions increased compared to the same period of the previous fiscal year due to significant growth in vaccine development for new coronavirus infections in vaccination support services et cetera in Healthcare Solutions.

The following is a sales composition by business segment of Pharmaceutical Solutions. Sales increased 9.7% year-on-year to JPY 36,820 million, with growth in all businesses. On the other hand, operating income decreased in the CRO and CDMO businesses in accordance with the application of the accounting standard for revenue recognition. Segment sales and income increased by JPY 1,113 million and JPY 40 million, respectively, compared with the previous method, the CRO business accounted for 51.0%, the CDMO business, 30.6%, and the Market Solutions business, 18.4% of total sales.

This is an overview of the Pharmaceutical Solutions CRO business. Although sales increased year-on-year, the business profit margin declined year-on-year due to lower profitability of some projects in the nonclinical operations of the CRO business. In clinical operations, inquiries for drug development projects increased.

This is an overview of the Pharmaceutical Solutions, CDMO business. Although sales increased year-on-year, the business profit margin was lower than in the same period of the previous year mainly due to a delay in a recovery of business performance in the U.S. In Japan, new projects are steadily expanding due to the need for a stable supply of products.

This is an overview of the Pharmaceutical Solutions Market Solutions business. Sales increased from the same period of the previous fiscal year, and the business profit margin was on par with the same period of the previous fiscal year. In order to dispatch services, new projects were acquired and existing projects are progressing steadily.

The following is a breakdown of the sales composition of the Healthcare Solutions business. Both sales and operating income increased significantly, with sales in both businesses rising to JPY 15,262 million, up 185.4% year-on-year, and operating income rising to JPY 4,182 million, up 2,650.4% year-on-year.

The adoption of the accounting standard for revenue recognition resulted in JPY 150 million increase in sales, and a JPY 29 million increase in segment income compared with the previous method. The sales composition is 43.0% for the Site Support Solutions business and 57.0% for the Healthcare Revolution business. The composition of the Healthcare Revolution business increased due to vaccination support.

This is an overview of the Healthcare Solutions Site Support Solutions business. Sales were significantly higher than in the same period of the previous year, and the business profit margin also increased. Development of vaccines and therapeutic drugs for new coronavirus infection and call center projects are increasing. To expand our business domain, we are strengthening collaboration with academia in addition to medical institutions.

Healthcare Solutions Healthcare Revolution business overview. Sales were significantly higher than in the same period of the previous year, and the business profit margin was also at a high level. There was a significant increase in vaccination support services for new coronavirus infections and other services. Taking the opportunity of vaccination, so forth, we are working to promote collaboration with local governments, and expanding the functions of harmo as a healthcare communication channel.

Here, I'd like to explain our consolidated balance sheet. Total assets at the end of the second quarter increased JPY 6,035 million to JPY 97,228 million from the end of the previous fiscal year mainly due to increases in notes and accounts receivable, property, plant and equipment and cash and deposits.

Capital expenditures for the second quarter of the current fiscal year totaled for JPY 4,182 million. Depreciation was JPY 2,533 million. Total liabilities amounted to JPY 60,218 million, up JPY 3,512 million from the end of the previous fiscal year mainly due to increases in long-term debt, lease obligations and provision for our bonuses.

Operating cash flow for the first half of the current fiscal year was a net inflow of JPY 4,011 million mainly due to an increase in funds from net income. Investment cash flow was a net outflow of JPY 3,682 million, mainly due to the acquisition of tangible fixed assets in the CDMO business. Financing cash flow was JPY 906 million mainly due to an increase in funds from proceeds from borrowings. As a result of the above, cash and cash equivalents at the end of March totaled JPY 10,395 million.

Next slide will explain the full year earnings forecast for the fiscal year ending September 30, 2022. The outlook for the fiscal year ending September 30, 2022, incorporates the outlook for future business related to COVID-19, and the impact of the situation in Ukraine on our business.

With regard to business related to COVID-19, while therapeutic drug and vaccine development projects are expected to continue large-scale vaccination projects, which have driven the company's performance during the first half of the current fiscal year, are expected to decline. As for the impact of the situation in Ukraine, although the Group does not operate basis in either Russia or Ukraine, the cancellation or postponement of clinical trials in both countries delays in procurement and raw materials, medical equipment and other materials due to logistical disruptions, and other factors may cause changes in our plans for contracted projects.

In addition, higher energy and logistics costs, including the effects of yen depreciation and inflation could have an impact on profits. Based on the above, we have revised up with our full year forecast for the fiscal year ending September 30, 2022 to JPY 97,000 million in net sales, JPY 7,600 million in operating income, JPY 7,800 million in ordinary income and JPY 3,900 million in net income attributable to shareholders of the parent company.

In light of continued strong sales of vaccine development and vaccination support services for COVID-19, during the first half of the fiscal year. That is all about an overview of financial results.

Next, our CEO, Nakamura, will explain the outlook for the health care business.

K
Kazuo Nakamura
executive

[Interpreted] My name is Nakamura. I am going to talk about the outlook for Healthcare, which I call Healthcare Revolution. I use the word revolution, not innovation. One of the main reasons for this is that, I, myself, focus not only on a separation of illness and health, but also on a person's ability to fulfill his or her full potential as a person.

I also use the term Healthcare Revolution because it includes the idea of what health care should be centered on the individual, and how the social system can be improved in this context. As for changes in CMIC's business model, we started in 1992 as the first CRO in Japan. Then in 2005, the Pharmaceutical Affairs Law was revised, and contract manufacturing was officially approved. So we started our CDMO business and connected the entire value chain, developing our PVC model as a professional group that can contribute to maximizing the value of pharmaceutical companies.

At that time, we were already looking at the concept of PHVC, the professional group that could contribute to the new era of health care, and we are now preparing for this concept and promoting PHVC as our third foundation. CMIC has started to develop its Healthcare Revolution business based on Our CREED with a key concept of everyone can live their one and only lives according to their own will. We thought about health value, providing healthcare services based on the health value of each individual and providing solutions for the purpose of living and well-being even in amidst of illness.

Rather than the preconceived notions of treatment, prevention and presymptomatic medicine based on conventional medical care. From birth to death, there are many different stakeholders. Insurance companies, the healthcare industry, pharmaceutical companies, local governments, academia, medical institutions and pharmacies, patients and even companies must support healthcare because health is an important theme.

In promoting the Healthcare Revolution, we have created a new in-house training and certification system called Healthcare Professionals to certify our employees and health care professionals to support health and purpose in life and to create a system to respond to emergencies such as the recent pandemic.

We have about 8,000 employees, including doctors, nurses, pharmacists and other specialists, but it is important to further develop such talents. We are thinking of creating a system to develop health care talents that have never existed before, to fill in missing gaps in society and to provide support in combination with digital technology.

The world is now in the midst of a pandemic following the confirmation of a new coronavirus in December 2019, and although it appears ending, the situation is still unpredictable. COVID vaccine was set to be the solution for the pandemic, but unfortunately, Japan was not a leader in vaccine development.

The Japanese government negotiated directly with overseas companies supplying vaccines and distributed them to local governments and medical institutions. This was a different approach from the conventional value chain and supply chain, but we believe the impact was very significant. I believe that this change in a value chain and supply chain will have a significant impact on the future development of pharmaceuticals and the supply chain.

As for our efforts to combat COVID-19, we provided support for vaccinations and mass vaccination sites and on vaccine buses, PCR testing caravans that included children and vaccination rounds for medical institutions. We also introduced a system to check vaccination types and interval using harmo, a secure system that separates personal information for vaccination information and to send out and receive information from those who have received the vaccine.

In the process of promoting vaccination on a large scale, we found some problems and issues that were difficult to solve with the conventional system. This is a case of municipal support. Even before the COVID outbreak, we signed comprehensive cooperation agreements with local governments. In addition to vaccination support, we provide a wide range of services to municipalities, including antigen PCR testing, epidemiological surveys and call centers.

We are discussing the use of harmo as a vaccine care system for pediatric vaccines and various other vaccinations that may occur in the future. The number of municipalities contracted with harmo services is 40, and 22 municipalities have introduced harmo. In terms of how Japan's health care services were viewed during the COVID era, the fact that Japan had 1 of the lowest cumulative death tolls in the world and the fact that vaccination went smoothly and antibodies were produced is praise around the world.

I believe this is due to the high health care awareness of the people and that the COVID was well controlled. On the other hand, issues such as many patients were not hospitalized despite the large number of available beds, and the exhaustion of medical personnel also emerged. Another side issue has emerged such as the decrease in a number of cancer diagnoses due to reluctance to receive medical examinations, and the increase in solitary deaths.

It has also been pointed out that the social ecosystem is not running well. As for future challenges, we also need to be prepared for contingencies, and we also need to secure healthcare service workers and personnel to be able to take on new healthcare initiatives. We also need to improve efficiency through digitization, and we feel that data-driven decision-making is critical.

To realize personalized healthcare, we are considering a system that connects harmo and healthcare communication channel within the healthcare system so that it can be used more efficiently as a database. Harmo was developed based on a philosophy of, together, we can create a system that enables us to take better care of our loved ones and to help our loved ones live, their own precious lives. We want to support health care for everyone, including children and the elderly with harmo, the development of health care centered on harmo.

First, we digitized the paper medicine. Notebook next, we believe that it can be used for COVID vaccine care, pediatric vaccine care, et cetera. We believe that it is possible to solve issues related to medicines. And by utilizing data, we can achieve a value cycle. Furthermore, we are now developing software to expand data and use cases as a channel that can maximize Ikigai, Purpose in Life.

Among the existing businesses in the CMIC Group, we believe that the harmo system will create value for the future. We believe that clinical trials can be streamlined, that the drug data obtained through harmo can be used as a useful reference in drug formulation development, and that it can also be used in market access. Although, we may not be able to generate profits immediately, we are developing harmo with an eye on the future with the aim of creating a social ecosystem and adding value to our existing business.

That concludes all presentation. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]