CMIC Holdings Co Ltd

TSE:2309

Earnings Call Transcript 2019-Q3

[Wataru Mochizuki, executive]

Thank you for participating amidst your busy schedule today. My name is Wataru Mochizuki, Chief Financial Officer. Let me present the overview of consolidated financial results for the third quarter ended June 30, 2019, in accordance with the disclosed presentation materials.

Please take a look at this table for our business segments and group companies as of the end of June 2019. Our group consists of total 28 companies that include: CMIC HOLDINGS, a holding company; 25 consolidated subsidiaries, including 14 overseas affiliates; and 2 equity method-affiliated companies.

Here is a summary for the third quarter of the fiscal year ended June 30, 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 focus activity items, such as acceleration of PVC model, expansion of the 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 the third quarter grew JPY 3.231 billion or 6.3% year-on-year to JPY 54.855 billion. Operating income increased by 0.3% or JPY 12 million year-on-year to JPY 4.028 billion. Ordinary profit decreased by 4.3% to JPY 162 million year-on-year to JPY 3.643 billion. Profit attributable to owners of parent for the third quarter of the current fiscal year was JPY 1.909 billion. The reason for 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 CMO company, a fully owned subsidiary of CMIC HOLDINGS company, became a joint venture with DBJ and withdrew 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. For nonoperating income, we recorded JPY 73 million of rent income and others. And for nonoperating expenses, we recorded JPY 458 million of interest expense. Share of loss of entities accounted for using equity method and foreign exchange losses. For extraordinary income, we recorded JPY 7 million as gain on sales of noncurrent assets. And as for extraordinary losses, we recorded JPY 109 million as impaired loss -- loss on retirement of noncurrent assets and other.

This table shows sales and operating income by segment. All business segments, including CRO, showed sales increased in the cumulative third quarter of this fiscal year, while CSO business saw decrease in profit. Deficit reduction in the CDMO business is contributing to the group-wide sales. And income increased at almost the same level as the previous fiscal year.

This table shows orders received and backlog. While orders received and backlog for CRO business decreased 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 in backlog and annual order plans proposed by customers excluded.

This shows the trend in consolidated sales and operating income during the consolidated third quarter. We continue to achieve increase in sales and profit for the third quarter, and operating profit ratio was 7.3%.

This shows the trend in CRO sales and operating income. In the third quarter of the current fiscal year, we are supporting overseas companies entering the Japanese market and nonhealth care companies entering the health care sphere, promoting measures such as sophisticating development needs, including biopharmaceuticals and degenerative medicines. We are striving to secure and train personnel to meet robust demand in clinical services. Further, we are promoting business in Asia and Oceania region, a growing market for drugs and medical devices, by establishing a local affiliate in Australia. For non-clinical services, our laboratories in Japan and the United States are further collaborating to provide drug discovery support for advanced medicine, including nucleic acid drugs and degenerative medicine.

We have concluded the 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 4.4% to JPY 29.199 billion, operating income was JPY 5.962 billion and operating profit ratio was 20.4%.

This shows the trend in CDMO sales and operating income. In the third quarter 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, investigation on new drug manufacturing and commercial production. In addition, the new parental drug manufacturing facility in Ashikaga, with capabilities to formulate high-potency drugs, has started the clinical trial material production and is enhancing the sales activities to manufacture both clinical trial materials and commercial drugs.

In March 2019, CMIC has concluded business alliance agreements with U.S.-based corporation that possess 3DP technology platform and sophisticated flexible dosing tablet technology to introduce new technologies for drug manufacturing and improve our formulation technologies. In June 2019, CMIC CMO has succeeded the Nishine Plant from Astellas Pharma Tech, Astellas' production subsidiary in Japan, and CMIC CMO NISHINE Co., has started its operations to increase the manufacturing capabilities for the oral solid dosage, our main dosage form.

Sales exceeded that at 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 start-up expenses and increased depreciation costs for the new parental drug manufacturing facility in Ashikaga. The loss amount has decreased following the increase of contract manufacturing volume.

Sales of CDMO business increased by 9.7% to JPY 11.858 billion, and operating loss was JPY 156 million. This shows the trend in CSO sales and operating income. In the third quarter of the current fiscal year, in addition to the medical representative dispatch service, CMIC Ashfield is providing comprehensive solution that combines multiple communication channels and various services, including the opening of MA Academy, the first private sector institution to train medical affairs personnel. Sales exceeded that at the same period of the previous year, thanks to the steady execution of both new and existing projects. However, operating profit was below that of the same period last year due to the preceding cost generated to take on new project. CSO sales increased by 5.8% to JPY 5.795 billion. Operating profit was JPY 100 million.

This shows the trend in Healthcare sales and operating income. In the third quarter of the current fiscal year, we are further strengthening the oncology capabilities in the SMO operations, improving this quality of operations and providing new services. In April 2019, BELL24-Cell Product, Inc., now SSI-CP Co., became a group company to further enhance our presence in Hokkaido. As health care information services, we are providing information of clinical trials using the health care portal site, starting the self-check self-screening services for early detection and prevention of aggravation of disease.

In June 2019, we succeeded harmo, the electronic prescription decor service from Sony Corporation to enhance patient-support programs, including treatment adherence improvement and to create health support business utilizing technologies. Sales and operating income both exceeded those of the same period of the previous year, thanks to the steady execution of new projects. Healthcare sales increased by 4.9% to JPY 5.7 billion, operating income was JPY 703 million and operating profit ratio was 12.3%.

This shows the trend in IPM 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 our group. They're 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 are strengthening business foundation through provision of IPM platforms, such as supporting foreign companies entering the Japanese market and providing strategic options to pharmaceutical companies in accordance with the business model changes.

In the diagnostics business, we are working to expand the marketing strength and promotion of the kidney disease biomarker, Human L Type Fatty Asset binding protein, L-FABP kit, developed for the purpose of diagnosing renal disease. Sales exceeded that at the same period of the previous year due to sales increase of orphan drugs. We are continuing to expand our business scale through provision of new solutions, aiming for a positive turnaround. IPM sales increased by 17.0% to JPY 2.695 billion. Though operating loss was JPY 199 million, we are starting to see the benefit of providing IPM solutions 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 third quarter of the current fiscal year increased by JPY 2.643 million year-on-year to JPY 80.677 billion. This is mainly due to increase in inventories and fixed assets following the acquisition of CMIC CMO NISHINE Co. Ltd. and decrease in cash and deposits. Capital investment for the cumulative third quarter of the financial period is JPY 2.681 billion, depreciation is JPY 2.626 billion and amortization of goodwill is JPY 245 million.

Total liabilities increased by JPY 2.539 billion to JPY 47.037 billion, mainly due to an increase of commercial paper issuances. Total net assets increased by JPY 103 million to JPY 33.639 billion. This is mainly due to an increase in retained earnings and decrease due to acquisition of own shares.

This concludes my presentation of financial overview. Thank you for your kind attention.

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