CMIC Holdings Co Ltd

TSE:2309

Earnings Call Transcript 2022-Q3

[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 Third Quarter 2022 Financial Results Presentation Meeting.

Today, our CFO, Wataru Mochizuki will explain the financial results overview. We are scheduled to end at 6:45 p.m. after the Q&A session. The video recording of this call will be posted later on CMIC's IR webpage and shall 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 third 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 health care field and promoting support for total disease care initiatives from prevention to diagnosis, treatment and prognosis.

This table shows CMIC Group sites. As of June 30, 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.

Effective this fiscal year, we have changed our reportable segments to pharmaceutical solutions and health care 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 health care 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 local governments.

The year-on-year increase/decrease in 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 midterm business plan priorities: one, advancement of the health care 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 health care 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. With the current increase in a number of people infected in this COVID seventh wave, there is a growing demand for health observation and follow-up as COVID patients [ dealt ].

In addition as a service for local governments, Hokuto City in Yamanashi Prefecture has made it possible for all citizens to view and utilize VRS vaccination records through the harmo vaccine care application, and we are promoting collaboration to provide solutions to the issues faced by each local government.

We are also promoting self-check services for health insurance associations with local governments as well as for individuals. Currently, our self-check products target HPV for cervical cancer and chronic kidney disease, and we are planning to expand the scope in the future to [ frail ], stress, et cetera. As for functional enhancements to harmo, we are planning to upgrade the electronic medication record function this fall, and development for its release is progressing smoothly. This is an initiative for PHR utilization.

In June 2020, CMIC announced its participation in a PHR Service Business Association, tentative name, together with 14 companies engaged in a PHR Service business, including pharmaceuticals, medical devices, health-related apps and insurance. The PHR Service Business Association, tentative name, will study the standardization of effective utilization of data related to health and medical care and the establishment of rules to promote quality improvement of PHR Services.

CMIC will work on challenges with regard to the standardization and portability of information handled in PHR Services with other participating member companies, in order to further promote and improve the convenience of PHRs and to ensure that PHRs can be used more safely.

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 register 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.

DCTs have great interest to pharmaceutical companies, and we are gradually receiving more and more contracts for trials that incorporate elements of DCT. We will also support the implementation of clinical trials using blockchain technology. CMIC provides comprehensive pharmacovigilance services, covering clinical trials and post-marketing activities and has recently introduced Oracle's Argus Cloud Service, a system with a proven track record in both Japan and overseas and together, launched the Argus Safety multi-tenant rental service.

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. Also in May 2022, an exclusive license agreement was signed for the development, manufacturing and marketing in Japan of glycerol phenylbutyrate, Ravicti, for the treatment of urea cycle disorders.

CMIC already markets in Japan, Buphenyl registered, sodium phenylbutyrate, that is a treatment for urea cycle disorders. By acquiring the rights to develop, manufacture and market glycerol phenylbutyrate, which is already approved and marketed in the United States and Europe, we will proceed with clinical trials for this highly convenient drug, especially, for instance, in pediatric patients.

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. In December last year, our core operating company, CMIC Co. Limited obtained Kurumin Certification as a company supporting child-rearing.

Also as ongoing social contribution activities, we support activities, such as Rare Disease Day seminars, award the AIDS Society of Japan prize and cosponsored the International Children's Drawing Contest in this fiscal year. We newly started supporting athletes with disabilities who aim to compete in the Paralympics.

This is an overview of consolidated income statement. Sales in the third quarter of fiscal year were JPY 78,367 million, which was up 34.0% year-on-year by JPY 19,221 million. Operating income was JPY 9,280 million, which was up 159.9% year-on-year by JPY 5,709 million. Ordinary income was JPY [ 104,440 ] million, which was up 179.6% year-on-year by JPY 6,707 million. Profit attributable to owners of parent was JPY 5,932 million, which was up 205.2% year-on-year by JPY 3,988 million.

Earnings per share were JPY 330.30. Effective from the first quarter of the current fiscal year, the company has adopted the accounting standard for revenue recognition. For its impact in the third quarter of the current fiscal year, sales increased by JPY 2,192 million. Cost of sales increased by JPY 1,965 million, and operating income, ordinary income and profit before income taxes increased by JPY 226 million each.

As for the breakdown of nonoperating income loss and extraordinary income loss, foreign exchange gains, et cetera, of JPY 1,314 million were posted as nonoperating income and interest expenses et cetera, of JPY 153 million were posted as nonoperating expenses. For the third quarter, as extraordinary losses, we posted a loss on retirement of noncurrent assets and loss on valuation of investment securities is JPY 79 million.

Total income taxes is JPY 4,258 million, and net loss attributable to noncontrolling interest is JPY 170 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 in COVID vaccine development and vaccination support services, et cetera, and Healthcare Solutions. Orders received and order backlog by segment are shown on the table below.

Orders received increased by 29.8% compared to the same period of the previous fiscal year, and the order backlog increased by 10.1% compared to the same period of the previous fiscal year. The percentage of sales for reportable segments were 72.3% for Pharmaceutical Solutions and 27.7% 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 and vaccination support services, et cetera and Healthcare Solutions.

The following is the sales composition by business segment of Pharmaceutical Solutions. Sales grew in all businesses, reaching JPY 56,977 million, up 13.6% year-on-year, and operating income also increased to JPY 4,139 million, up 13.9% year-on-year. In accordance with the application of the accounting standard for revenue recognition, segment sales and income increased by JPY 1,899 million and JPY 120 million, respectively, compared with the previous method.

The CRO business accounted for 50.9%, the CDMO business, 31.6%, and the Market Solutions business 17.5% of total sales. This is an overview of the Pharmaceutical Solutions CRO business. Sales increased from the same period of the previous year. Although business profit margin declined slightly, the actual profit margin with the impact of revenue recognition excluded increased from the same period of the previous year.

In clinical operations, inquiries for drug development projects increased. This is an overview of the Pharmaceutical Solutions CDMO business. Sales increased from the same period of the previous year due to an increase in contract production volume in Japan. However, EBITDA margin and business profit margin were lower than the same period of the previous year due to the slow recovery of the U.S. business performance.

Domestically, new projects expanded steadily with the need for the stable supply of pharmaceuticals. We are strengthening our sales activities in the U.S. business while continuing to closely monitor the price trends and supply issues and energy, raw materials and so on. This is an overview of the Pharmaceutical Solutions -- Market Solutions business.

Sales increased from the same period of the previous year. As for the business profit margin, despite the acquisition of new projects and steady progress in existing projects in MR dispatch services, it was lower than the same period of the previous year due to the impact of orphan drug manufacturing delays.

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 21,862 million and operating income rising to JPY 6,210 million. The sales composition is 43.8% for the Site Support Solutions business and 56.3% 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 support activities, we are working to promote collaboration with local governments as well as facilitating the use of health care communication channel harmo EHRs and the self-check service business.

Here, I'd like to explain our consolidated balance sheet. Total assets at the end of the third quarter increased JPY 5,488 million to JPY 96,681 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 third quarter of the current fiscal year totaled JPY 5,930 million.

Depreciation was JPY 3,850 million and amortization of goodwill was JPY 16 million. Liabilities increased by JPY 1,053 million from the end of the previous fiscal year to JPY 57,729 million due to an increase in current liabilities, such as contract liabilities.

Net assets increased by JPY 4,435 million compared with the end of the previous fiscal year to JPY 38,921 million due mainly to an increase in retained earnings. Next, I will explain the full year earnings forecast for the fiscal year ending September 30, 2022. The forecast for the full year ending September 30, 2022 incorporates future work related to COVID and the impact of the situation in Ukraine on our business.

For COVID-related operations, we expect therapeutic drug and vaccine development projects will continue and an increase in inquiries from local governments due to another wave of COVID. The situation in Russia and Ukraine has no direct impact on our business as we do not operate any business basis in either country. The impact on our business is expected to be limited to the rise in prices of energy, raw materials, packaging materials and other items.

Based on the above, we have revised up with our full year forecast for the fiscal year ending September 30, 2022 to JPY 106,000 million in net sales, JPY 8,600 million in operating income, JPY 9,200 million in ordinary income and JPY 4,500 million. And net income attributable to shareholders is the parent company in light of continued strong sales of vaccine development and vaccination support services for COVID-19 during the third quarter of the fiscal year.

That is all about an overview of financial results. Thank you.

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