CMIC Holdings Co Ltd

TSE:2309

Earnings Call Transcript 2023-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 2023 Financial Results Presentation Meeting. Today, CFO Mochizuki will present an overview of the financial results. CDMO Business Head Matsukawa will present an overview of the strategic business alliance with Dai Nippon Printing; and CEO Nakamura will present the future expansion of CMIC, followed by a Q&A session. 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, Wataru Mochizuki will explain an overview of financial results.

[Wataru Mochizuki, executive]

Hello. I am Mochizuki. I will be giving an overview of financial results for the second quarter of the fiscal year ending September 30, 2023. The following is a description of our group's business activities. CMIC Group expanding our business across our pharmaceutical solutions in which we support the development and manufacturing activities in pharmaceutical companies as well as our healthcare solutions to provide services to medical institutions, healthcare professionals, local governments and individuals. 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 business that contribute to total disease care initiatives from prevention to diagnosis, treatment and prognosis.

This table shows CMIC Group sites. As of March 30, 2023, the CMIC Group consists of 27 companies, including CMIC Holdings, the holding company and 24 consolidated subsidiaries and 1 equity method affiliated company, 13 of which are overseas and have 61 sites, including plants and laboratories in Japan and overseas. In the fiscal year ending September 30, 2023, the second year of the midterm plan from 2022 to 2025, we will steadily implement measures [indiscernible] each of these pillars in order to achieve our goals.

First, let me talk about our progress toward evolution of health care business. As for municipal support services, in addition to comprehensive support for COVID control, we have taken this opportunity to begin offering new solutions for municipalities. We are also strengthening our digital platform to improve the health value of individuals through our group companies [indiscernible] Incorporated, OKEIOS Incorporated and harmo. [indiscernible] is developing its business around nanacara, a support platform for epilepsy patients and their families and is looking to leverage this platform to expand its target diseases in the future. We have also initiated demonstration projects with OKEIOS, which is developing a personal data system for the medical and health fields utilizing blockchain technology including Fukuoka University's data health project for instant health checkups and with [indiscernible] University on promoting DX in the medical and health fields.

With regard to strengthening comprehensive support for disease prevention and treatment, from R&D to marketing, we have established our new consulting and navigation unit to strength and support for overseas bioventure companies entering the Japanese market, as well as for companies from other industries entering the healthcare space to better support the diverse needs of our customers. In UFN area, OrphanPacific launched a Phase III study in Japan of glycerol phenylbutyrate. Ravicti, a treatment for urea cycle disorders.

Regarding contribution to a sustainable society, as a company involved in the business of supporting people's life 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. On World Rare and Intractable Disease Day, which is held on the last day of February every year, we have planned and held an awareness raising event across the group this year. We also continue to provide support by co-sponsoring the International Children's Drawing Contest and awarding the AIDS Society prize.

This is an overview of consolidated income statement. Sales in the second quarter of fiscal year were JPY 59,883 million, which was up 15.7% year-on-year by JPY 8,114 million. Operating income was JPY 8,546 million, which was up 48.8% year-on-year by JPY 2,803 million. Ordinary income was JPY 7,665 million, which was up 24.2% year-on-year by JPY 1,495 million. Profit attributable to owners of parent was JPY 6,545 million, which was up 86.8% year-on-year by JPY 3,042 million.

Earnings per share were JPY 377.14. Non-operating income was JPY 0.63 billion (sic) [ JPY 0.063 billion ] and non-operating expenses, including foreign exchange losses of JPY 945 million due to the appreciation of the yen compared to last year were recorded. We recorded a gain on sales of investment securities of JPY 3,349 million as extraordinary gains and extraordinary losses of JPY 86 million. And income tax expense of JPY 4,388 million and a net loss attributable to non-controlling interests of JPY 6 million.

Net sales and operating income by segment are shown in this table. Sales and operating income in both businesses were significantly higher than in the same period of the previous year due to growth in each business in the Pharmaceutical Solutions segment, in addition to municipal support services related to COVID and Healthcare Solutions segment. Orders received and order backlog by segment are shown on a table below. Overall, orders received increased by 1.7% compared to the same period of the previous fiscal year, while order backlogs remained flat year-on-year. The composition of sales in the reportable segments was similar to that of the same period last year, with Pharmaceutical Solutions and Healthcare Solutions accounting for 69.6% and 30.4% of total sales, respectively.

The following is the sales composition by business segment of Pharmaceutical Solutions. Sales grew in all businesses, reaching JPY 43,209 million, and operating income also increased to JPY 3,359 million. The CRO business accounted for 50%; the CDMO business, 31%; and the Market Solutions business, 19% of total sales. This is an overview of the Pharmaceutical Solutions' CRO business. Our sales has increased compared to the previous fiscal year. Due to the steady implementation of projects on order and the increase in utilization ratio, the business profit margin exceeded that of the same period of the previous year, along with the strengthening of comprehensive consulting services with the launch of the consulting and navigation unit, there has been an increase in efficacy and safety evaluation and analysis projects in advanced areas where modalities are becoming more diversified.

This is an overview of the Pharmaceutical Solutions' CDMO business. Sales increased from the previous year due to an increase in contract production volume in Japan. Likewise, our EBITDA margin and profit rate exceeded that of the same period in the previous fiscal year. Domestically, new projects expanded steadily with the need for the stable supply of pharmaceuticals. We are focusing on sales activities in our U.S. business while continuing to closely monitor the price trends and supply issues in energy, raw materials and so on.

This is an overview of the Pharmaceutical Solutions' Market Solutions business. Although net sales increased year-on-year, the business profit margin was lower than in the same period of the previous year, mainly due to an increase in R&D expenses for orphan drugs. We have started Phase III clinical trials in Japan of glycerol phenylbutyrate, Ravicti, a drug for urea cycle disorders, for which we obtained a license for development, manufacturing and marketing in Japan in May last year. Sales and profit have increased with sales rising JPY 18,443 million and operating income rising to JPY 5,892 million. The sales composition is 31.1% for the Site Support Solutions business and 68.9% for the Healthcare Revolution business.

While the number of COVID-related development projects declined, the sales composition of the Healthcare Revolution business increased due to growth in vaccination support. This is an overview of the Healthcare Solutions Site Support Solutions business. Due to a decrease in large COVID vaccine development projects, net sales were lower than in the same period of the previous year but the business profit margin remained at the same level as in the same period of the previous year due to steady progress in projects. Orders are firm and we are also expanding our business to support the clinical trial offers of medical institutions.

Healthcare Solutions' Healthcare Revolution business overview. Continuation of COVID vaccination related services resulted in higher sales and higher business profit margin than in the same period of the previous year. We are expanding our business, integrating disease prevention, health information and DX to expand our healthcare business in post COVID.

Here I'd like to explain our consolidated balance sheet. Total assets at the end of the quarter increased by JPY 3,935 million from the end of the previous fiscal year to JPY 111,525 million, mainly due to an increase in cash and deposits and trade receivables and a decrease in investment securities.

Capital expenditures totaled JPY 3,200 million. Depreciation totaled [ JPY 2,763 billion ] and amortization of goodwill totaled JPY 51 million. Liabilities amounted to [ JPY 64,706 million, ] down JPY 1,614 million from the end of the previous fiscal year, mainly due to a decrease in accrued bonuses and an increase in long-term debt. Net assets increased by JPY 5,549 million from the end of the previous fiscal year to JPY 46,819 million, mainly due to an increase in retained earnings.

Operating cash flow for the period was JPY 2,168 million, mainly due to an increase in funds from quarterly net income and the decrease in funds from bonus payments. Investment cash flow was JPY 267 million, mainly due to an increase in funds from the sale of investment securities and a decrease in funds from the acquisition of fixed assets. Financing cash flow was a net outflow of JPY 114 million, mainly due to an increase in funds from long-term borrowings and a decrease in funds from dividend payments and purchase of treasury shares. As a result of the above, cash and cash equivalents at the end of March amounted to JPY 13,984 million.

Next I will explain the full year earnings forecast for the fiscal year ending September 30, 2023. We have revised our initial full year forecast for the fiscal year ending September 30, 2023 to reflect the results through the second quarter and matters that will affect our future performance. As explained above, the first half of the fiscal year significantly exceeded the forecast made at the beginning of the period due to a significant increase in support services for local governments related to COVID infection and the JPY 3,349 million gain on sales of investment securities as an extraordinary gain.

The full year forecast reflects the fact that as announced on April 17 in a notice of change of CDMO business subsidiary and notice of strategic business alliance with Dai Nippon Printing Corporation Limited, some subsidiaries in the CDMO business of pharmaceutical solutions are scheduled to become equity method affiliates from June 2023. In addition, the shift of the classification of COVID infection to Category 5 under the infectious disease control law [indiscernible] is expected to reduce the number of vaccination support projects which had driven our performance until the second quarter.

Based on the above, we have revised upward our full year forecasts for the fiscal year ending September 30, 2023. Net sales of JPY 105,000 million; operating income of JPY 10,300 million; ordinary income of JPY 9,000 million, reflecting foreign exchange losses in the first half and net income attributable to owners of the parent of JPY 7,300 million, reflecting gains on sales of securities in the first half. Net income per share is projected to be JPY 420.42. That is all about an overview of financial results.

[Kazuo Nakamura, executive]

Thank you. We will continue with an overview of our strategic business alliance with Dai Nippon Printing. My name Kazuo Nakamura and I am the CEO of CMIC Holdings. Allow me to report on the implications of the strategic business alliance with DNP. As you know, CDMOs are an extremely important part of our PVC. However, CDMOs are facing very high demands for financial investments in internationalization, acquisition of new technologies and capital investment.

We thought about what we could do to further develop our business while meeting this demand for funds and decided to partner with DNP as a business partner. We were already involved in many activities with DNP but we decided to form a business alliance because we were compatible in the CDMO field. They fully understood our strategy and we were able to jointly manage the business.

On the other hand, we decided to separate CMIC Bio from CDMO because it is a business that has a high affinity with CMIC Pharma science and CMIC Inc. Our non-clinical CRO laboratories, bio research for animal testing and biotech of other companies. And we want to execute with speed while developing our own business.

Mr. Matsukawa, the Head of our CDMO business will report on the details of this business alliance.

[Makoto Matsukawa, executive]

My name is Matsukawa and I am the Head of CDMO business. The business alliances are described in these items 1 through 4, with 1 being particularly relevant to CDMO business. By combining DNP's packaging technology and materials with CMIC's formulation development technology, we will work together to develop value-added pharmaceuticals and technology for ease of use and high-quality products. Second, we would like to create an end-to-end solution from DNP's API business to CMIC's formulation development and manufacturing, so that we can firmly meet the needs of pharmaceutical companies.

I will not discuss 3 and 4 today because they are not related to CDMO. The new joint venture will be funded by DNP and while maintaining the management structure and organization previously in place, at CMIC CMO, we intend to conduct firm joint management while making use of DNP's abundant contract manufacturing know-how. Naturally, we have agreed with DNP to contribute to the business with the CMIC Group as part of the existing PVC.

Three main initiatives among them are described below: First, we would like to combine CMIC's formulation technology with DNP's packaging technology to develop a user-friendly and environmentally friendly formulation. We are currently working with DNP to develop a liquid formulation of a lyophilized injectable formulation and a product with decarbonized packaging technology that can be stabilized at room temperature. We are actually negotiating with a global GE manufacturer for a technology license for this agent.

There is a high need for this type of agent and we would like to license this type of product. In addition, CMIC CMO has long been collaborating with Aprecia, a U.S. company with 3D printer technology. And with the addition of DNP, we will promote the practical application of formulations utilizing 3D printing technology. The second integrated business from APIs to formulation development and manufacturing will be explained in detail on the next slide.

Third, we have heard that DNP has made considerable progress in automating production at its various plants and we would like to take advantage of DNP's know-how to jointly develop and deploy automated systems in the field of pharmaceutical manufacturing. I will discuss the API business model of CMIC and DNP. For API, the process involves the manufacture of API's intermediates, process development, formulation development and manufacturing using the APIs and packaging. And we would like to develop a one-stop service in collaboration with DNP.

By doing this, we hope to lower the total supply chain cost, while at the same time coming up with a total solution since development is also a race against time. Secondly, we would like to supply APIs in a competitive manner by procuring them from China, India and Taiwan. We would like to work together in this business to realize the supply chain in a sustainable manner. One initiative I will discuss is the flow of new generic product development and manufacturing from API to formulation and manufacturing development. GE manufacturers are developing 15 to 20 new GE products every year. But until now, each manufacturer has had to procure and manufacture APIs on its own, which has placed a considerable burden on resources and costs.

GE manufacturers have been asking us for some time if there is a mechanism that would allow them to do this collectively. This diagram shows a model in which new GE products are made and supplied in a single integrated process from API to formulation and manufacturing by bringing together GE manufacturers, company A to company E. We would like to create an OEM model for GE products that reduces the time and cost from API production to formulation and manufacturing, while at the same time, increasing operational efficiency and creating price competitiveness for GE manufacturers.

From our point of view, we would like to create a platform for an ecosystem where APIs can be procured and [indiscernible] and thus become price competitive. We would like to proceed with the business by selecting products while understanding the needs of GE manufacturers, while reaching agreements with 3 API manufacturers each in India and Taiwan. That is all the explanation from me. Thank you very much.

Nakamura will then explain the future expansion of the project.

[Kazuo Nakamura, executive]

My name is Nakamura, CEO. I will explain the future expansion of CMIC. We introduced our own business model PVC, an evolution of CRO in 2005. PVC's model is to support the entire pharmaceutical value chain. But beyond that, we thought this idea of personalized healthcare will follow. The concept is called PHVC, Personal Healthcare Value Creator. In 2015, we also established CREED to focus on helping everyone to live life to the fullest in their own way. The concept of personal health value, which is the ability of a person to live a full life has been firmly established, replacing the traditional concept of treating illness. We thought that the viewpoint of IKIGAI was important for each individual to live happily from birth to death and considering what kind of business we could create.

Traditionally, we have looked at it from the supply side, such as hospitals, doctors, national and local governments but the landscape is different when we think of healthcare from the individual's perspective. When we thought about work to do, we decided that this was not innovation but revolution and we developed it as a Healthcare Revolution. The project started in 2019. One is the realization of CREED. We also believe that pharmaceutical companies must look beyond curing diseases and focus on health care. And we presented this business model because we believe that an innovative pharma model is needed. Within the company, we have been training people who can produce various health care systems, project managers and people who support them as leaders in the health care revolution. Such training has allowed us to provide municipalities with a new ecosystem of solutions in a changing environment of COVID.

The world has been transformed by COVID but we have been able to demonstrate our presence by providing healthcare professional talents in support of municipalities. COVID has changed the distribution of pharmaceuticals, vaccines were being developed in many countries but the government negotiated and purchased vaccines under development and supplied them to local governments without going through wholesalers. It has made a major change in the traditional pharmaceutical value chain and supply chain. Vaccinations were administered but not at medical institutions but at local municipalities, such as mass vaccinations. The health care professionals, we have been training up to that point, who were part of the Healthcare Revolution we're able to plan and manage and support a major project of vaccination, including venue support for mass vaccination. Vaccine buses, PCR caravans and traveling caravans to various sites.

On the other hand, we could also use our harmo communication channel for vaccination. We were able to provide health care and other support in 45 municipalities. There are many requests from municipalities but we offer a variety of services such as frailty control and digital health. Now that the COVID is coming to an end, we have entered a new phase. From now on, we are looking to achieve this in the form of PHVC. Some examples of PHVC are presented below.

Nanacara is a platform for intractable and rare diseases. This app is a network that can be shared by epilepsy patients, families and doctors and allows recording of seizures developed from the voices of specialists. Patients with epilepsy see both the specialist and the family doctor. This app is designed to resolve gaps in epilepsy care and treat patients as a team. It is used by 25,000 out of the 100,000 pediatric epilepsy patients and in 200 medical institutions. I believe this has become a platform of an epilepsy treatment. This is also an online medical consultation app. They can connect with a physician or pharmacist to receive medical consultation and medication guidance. This is one example but this is how we are creating a platform for the entire stakeholder base to share within health care and long-term care. This pediatric epilepsy treatment app is becoming the de facto standard with 201 medical institutions and 326 physicians participating in this rollout.

PHRs are a hot topic right now. I believe that this will be a very important database or tool when we think about personalized health care. You can imagine how significant it is for an individual to collect information on his/her own medical health and nursing care using digital technology and to use the collected data to provide it to medical institutions as well as to have a database of his/her own health-related information since birth.

In an effort to utilize PHRs, the government, local governments and private companies are focusing on this PHR. In this context, the guidelines for electronic medication notebook have been substantially revised for the first time in 8 years. Most importantly, it clearly states that it is desirable that all pharmacies, clinics and hospitals promote the use of electronic medication notebook services. It was positioned as part of the PHR, not just an electronic medication notebook, it means that health information will be contained within the electronic medication notebook.

Secondary use is also possible. Further development is expected in the future. As one example, we are conducting a demonstration experiment in Rusutsu village and Rankoshi town in Hokkaido, as part of the digital agency's Garden City concept. We are building a system to establish a distribution infrastructure using blockchain technology for various information required. For instance, health checkups and immunization programs and to share the information in real time, among medical institutions and insurers by linking My Number and ID.

There, we are working together with our harmo and OKEIOS, which has blockchain and AI technology. I believe that the model created here will be expanded to other municipalities. As a platform for special diseases and a system within the municipality, CMIC's move is to create a platform for health within the Digital Garden City concept.

Putting these together, where CMIC is headed is that CMIC was born in Japan in 1990 to as a CRO and has become a group that can perform the same functions as a pharmaceutical company and can skillfully handle development work. As a unique business model, we then offer the PVC model of supporting the entire value chain of a pharmaceutical company. Beyond that, PHVC is a business that supports the health value of individuals. Specifically, we will use DX, harmo, blockchain, AI technology, et cetera, to support them and we will do these things with municipalities and in special diseases with medical associations. Once this is completed, I believe it will become a platform that is valuable for pharmaceutical companies to use and at the same time, become a database and we would like to develop our business in such a way.

This concludes my part. Thank you.

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