Tsumura & Co

TSE:4540

Earnings Call Transcript 2020-Q2

[Unknown]

Thank you very much for participating in this briefing for our second quarter business results for fiscal 2019. We also appreciate your great support for us and Kampo.

In the end of October and on November 6, we published 2 press releases about our China business and announced the financial results on November 6. Today, I will provide the overview of second quarter results for about 15 minutes. Then our CEO, Kato, will explain about growth investment in China and building its business foundations for another 15 minutes. We provided press releases in your handouts, and he will elaborate part of them.

Now I will start my explanation. First, FY 2019 second quarter results. As described on the slide, consolidated net sales were JPY 60.802 billion. Operating profit was JPY 9.776 billion. Operating profit margin was 16.1%. Ordinary profit was JPY 9.856 billion, and profit attributable to owners of parent was JPY 7.037 billion.

The rate of achievement against the plan was as follows: 98.9% for net sales, 120.7% for operating profit, 113.3% for ordinary profit, and 117.3% for profit attributable to owners of parent. On a year-on-year basis, net sales grew 4.3%. Operating profit was up 9.2%. Ordinary profit was up 3%, and profit attributable to owners of parent was down 0.6%. Interim dividend per share is JPY 32, as planned.

Next slide describes key points in the financial results. On a year-on-year basis, while net sales, operating profit and ordinary profit increased, profit attributable to owners of parent declined. Regarding the rate of achievement, net sales were slightly lower than the plan, but all 3 profit items achieved the plan.

Net sales of prescription Kampo products rose JPY 2.341 billion or 4.2% year-on-year. Net sales of OTC medicines increased as well by 15.9% year-on-year. The cost-to-sales ratio stood at 40.9%, up 0.5 percentage points year-on-year. The situation worsened despite decreased crude drug-related costs due to the increased unrealized profit as a result of the increased inventory in intergroup transactions. It was 0.9 percentage points lower than the plan, meaning better than the plan due to a delay in the timing of impact from unrealized profit.

The cost-to-SG&A ratio was 43%, down 1.2 percentage points or improved year-on-year, owing to a rise in sales despite increased sales rebates and R&D costs. It was lower by 2 percentage points than the plan mainly due to a delay in the timing of recognition of R&D costs for profit attributable to owners of parent, as we posted a gain on the sale of investment securities as extraordinary income. In the second quarter of the previous year, it slightly declined by 0.6%. It was higher than the plan by 17.3%.

Next, I will explain factors for changes in operating profit year-on-year. Net sales grew JPY 2.5 billion year-on-year. In that, profit impact from changes in sales was JPY 1.51 billion. Earlier, I said the cost-to-sales ratio increased 0.5 percentage points, and its negative impact on operating profit was JPY 335 million. In its breakdowns, a positive factor is a decrease of crude drug costs of JPY 486 million, and a negative factor is an increase of unrealized profit of JPY 670 million. SG&A expenses rose JPY 349 million with sales increase, and this also worked negatively for operating profit. As a result, operating profit of the second quarter increased by JPY 820 million year-on-year to JPY 9.776 billion.

Next page shows our financial status and cash flow. As for balance sheet, we do not have any significant points to explain. But under the assets items, inventories increased by about JPY 4.9 billion mainly because of strategic increase of purchase. As a result of such business activities, equity ratio rose 0.4 percentage points to 70.6%.

Cash flows are as shown on the slide. For operating activities, it grew JPY 8.6 billion. For investing activities, it increased JPY 4.7 billion by increase or decrease in time deposits, et cetera. And for financing activities, it decreased by JPY 2.5 billion as a result of dividend payment. As a result, cash and cash equivalents increased JPY 10.5 billion from the end of previous fiscal year to JPY 66.8 billion.

This slide shows the road map for realizing our long-term vision. There is no change from the announcement in May 2019, and the third Medium-Term Management Plan is positioned as a stage for growth investment. And we will execute sustainable expansion of domestic Kampo market and build the foundation for the Chinese business with a target of consolidated net sales of over JPY 135 billion. This fiscal year is a critical year for the start of this plan.

Next is the sales of prescription Kampo products. Total sales of 129 prescription Kampo products were JPY 58.141 billion, up JPY 2.341 billion or 4.2% year-on-year. Net sales of 5 drug-fostering formulations were JPY 15.484 billion, up 2.5% year-on-year, and 5 growing formulations were JPY 13.273 billion, up 4.6% year-on-year. Total sales of 119 products other than drug fostering and growing formulations grew 4.9% year-on-year. Under the tough market situation, we made the year-on-year growth of 4.2%. Still, we should grow sales further with Daikenchuto, Rikkunshito, Yokukansan in drug-fostering formulations.

Now I'd like to explain about our sales strategy and initiatives to grow Kampo market for these 3 formulations. First, Daikenchuto. Its indication is for patients who have a cold stomach with pain and a sense of abdominal distention, and it is prescribed in the gastrointestinal domain. We analyze the diseases for which Daikenchuto is prescribed and found out that constipation and paralyzed intestinal tract after surgery accounted for the majority of prescriptions at a ratio of 1:1. But prescriptions for a sense of abdominal distention was still small in number.

The graph on the slide shows data for chronic constipation. Symptoms bothering patients are listed on the left, and the symptoms considered as important by doctors are shown on the right. Doctors replied that number of bowel movements and the consistency of stool are important, but many patients said a sense of abdominal distention is the symptom bothered them most. And we found that it's a serious problem for them. In the growing constipation market activated by new drug launches, we are promoting our initiative to address abdominal distention, as we already started in the second quarter of this fiscal year.

In August 2019, we conducted questionnaire to hear doctors' opinions on abdominal surgery and found out many surgeons regard improving intestinal blood flow and enterobacterial conditions as important in perioperative management. With its action to improve intestinal blood flow, Daikenchuto may be able to satisfy medical requirements in the perioperative management such as early ambulation and early discharge. We have focused on enhancement of enterokinesis as a major benefit so far. But going forward, we will also promote improvement of intestinal blood flow. We will strengthen activities for Daikenchuto by promoting improvement of the sense of abdominal distension as well as intestinal blood flow to grow its sales further.

Next is Rikkunshito. Rikkunshito has various actions such as enterokinesis enhancement and appetite stimulation with established evidence, functional dyspepsia is with complicated pathology. And despite symptoms such as stomachache or feeling heavy in the stomach chronically continue, its cause is not identifiable by gastroendoscopy. Rikkunshito has efficacy for such upper abdominal symptoms which has been proven in a double-blind comparative study. Utilizing evidence materials with proven mechanism, we will continue to execute the targeting strategy and hold academic lectures focused on gastroenterology and offer web lectures. This is a tough area where we need to compete with new drugs, but we will strengthen our activities by new evidence of Hangeshashinto, which is prescribed for digestive system, and strive for enhancing presence as a remedy for upper gastrointestinal diseases.

Next is Yokukansan, the third item of drug-fostering formulations. According to the estimation by The Cabinet Office, in 2025, the number of patients with dementia over 65 years old will increase to about 7 million. For peripheral symptoms of dementia that will be observed in Phase I, II and III of the disease, Yokukansan, Yokukansankachinpihange, Ninjinyoueito, Kamikihito are effective Kampo products. Demand for these products are increasing. And in the second quarter, Yokukansan grew 2.7% year-on-year. But the total of these 4 products increased 8.1% year-on-year.

Next is about our initiative in the Kampo Medicine seminar. We focus on introductory seminar for postgraduates in Kampo Medicine and introductory research seminar for each domain to help many doctors learn about Kampo. In this fiscal year, we started a new initiative that is to hold Kampo Mega Web Lecture in a web lecture by M3 in September. As many as 17,878 doctors participated by viewing the seminar, and this was the largest number in the history of M3. We strongly feel that many doctors are interested in Kampo. We will provide more information to the doctors who participated in the web lecture and continuously follow up the doctors who participated in each introductory seminar for new adoption of our products.

Next page is about approaches to doctors prescribing 10 or more Kampo products. We intend to contribute to establish Kampo Medicine as a domestic business strategy that is to realize the medical practice where 1 in 2 doctors prescribe 10 or more Kampo products. There are 2 approach to do so: That is Western and Kampo medicine approach. For Western medicine approach, we will take evidence-based approach mainly to hospital doctors and specialists with focus on drug-fostering and growing formulations. And for Kampo medicine approach, we will approach private doctors and general physicians by proposing different prescription according to the patient's condition and symptoms. The ultimate goal is to increase the number of doctors prescribing 10 or more Kampo products for establishing Kampo medicine. It is making a progress steadily.

Based on the initiatives explained so far, we identified following key sales measures in the second half. We will focus on Daikenchuto, Rikkunshito, Yokukansan in the drug-fostering formulations. In gastrointestinal domain for Daikenchuto, we will promote benefits to mitigate the sense of abdominal distension associated with constipation and the improved intestinal blood flow in perioperative management and enhance the activities by presentations for multidisciplinary personnel.

For Rikkunshito, we will enhance presence in the upper gastrointestinal prokinetic agent market. In geriatric field, we will propose prescription for various symptoms of dementia mainly by Yokukansan and focus on providing prescription information related to the problems with the elderly regarding eating, sleeping and excretion. Also, we will hold a second web lecture, which attracted many viewers and implement a follow-up plan to provide more information about Kampo properly to continuously provide information to attain sustainable expansion of the Kampo market.

Next, I will explain FY 2019 performance forecasts. The full year forecast for FY 2019 remains unchanged. By executing earlier mentioned measures, we expect to achieve net sales of JPY 125 billion. Regarding profits, we plan to eliminate delays imposed in costs and SG&A and reallocation of resources in focus areas and strive for JPY 17 billion for operating profit, JPY 18 billion for ordinary profit and JPY 12.3 billion for profit attributable to owners of parent. Annual dividend per share is estimated at JPY 64, and EPS is JPY 160 and ROE is 6.0%.

Lastly, I will explain return of profits to shareholders. Interim dividend is JPY 32. And together with the year-end dividend of JPY 32, the annual dividend is expected to be JPY 64. Payout ratio for FY 2019 is estimated as 39.8% based on the forecasts mentioned earlier. Our policy for shareholder return is described by 2 points on this page: That is to increase corporate value through the sustainable expansion of the Kampo business and investments to build business foundations in China; and to ensure stable dividend, considering mid- to long-term profit levels and cash flow.

That is all from me. Thank you. Thank you. Now our CEO, Kato, will take over.

[Terukazu Kato, executive]

Good afternoon. Usually, I cover the whole presentation. But today, I just do the half of it, and I will explain major points about our growth investment in China and building its business foundations in about 15 minutes.

This page shows our vision in China business. This slide was used to explain our vision in February 2018, and there is no major change in the concept. But I need to tell you one thing: As we are setting the clear direction of China business, the Board meeting decided to concentrate all the management resources to Ping An Tsumura Group.

Our objectives remain unchanged: That is to contribute to the health of Chinese citizens and secure stable sources of raw materials for crude drug, including the stable supply of crude drugs for Japan. Today, I explain about strengthening the crude drug business, as announced on November 6, as well as the dissolution and the liquidation of SPH TSUMURA PHARMACEUTICALS CO., LTD. announced in the end of October. I appreciate your understanding that the decision was made in line with the corporate direction.

We had established this joint venture with Shanghai Pharmaceuticals Holding to enter the business of traditional Chinese medicine compound granules before we started the business with Ping An Group. And due to the reason described in the news release in front of you, we made this decision to concentrate all management resources to Ping An Tsumura Group. This will enable us to manage the entire China business with the majority.

Currently, the majority of our Board members are independent outside directors. They are 5 in total. Three are outside directors, and 2 are Audit Committee members. And in September, all directors, including these 5 outside directors, visited China. There were 2 major purposes of this visit: One is to meet Mr. Ma, Chairman and CEO of Ping An Insurance Group; and to meet Mr. Wang, Chairman and CEO of Ping An Good Doctor, which is under the umbrella of the group. Three co-CEOs joined Ping An Group in December 2018 to manage the company with Mr. Ma. One of them is Ms. Jessica Tan, and she joined the meeting. They could exchange ideas about the future business of Ping An Tsumura Group.

Ping An Good Doctor is rapidly innovating an online platform. And in the meeting with Chairman Wang, we could discuss issues such as the sales of traditional prescriptions crude drug pieces we already started and the sales structure for traditional Chinese medicines in the future. Chairman Ma gave us an encouraging message: Century-old Tsumura reaches its youth.

Let me explain the overview of our business in China. Currently, we are focusing on building a stable crude drug platform. This includes the acquisition of Tianjin China Medico Technology announced on November 6. And as already announced, we established a subsidiary, TSUMURA SHENGSHI PHARMACEUTICAL. And its Tianjin plant is under construction to establish manufacturing system with a plan to start operations in 2022. This project is progressing as scheduled.

Another point is to establish a sales system, and we are preparing sales network with business alliance. I'll explain about it later. Analysis research center will be explained later as well.

This slide shows an overview of current capital relationship and sales routes in our China business. Please take a look at the front screen as I explain them in order. We established Ping An Tsumura under the business alliance with Ping An Insurance Group of China, and that is a company for development, investment and management of businesses. As announced on November 6, we decided to take Tianjin China Medico Technology into a group. And as a result, we can acquire their production facilities in Northern China. They sell crude drugs to medical institutions and traditional Chinese medicine companies as well as to overseas. We obtained these existing sales routes as well.

Next is about other subsidiaries of Ping An Tsumura. They are Pingcun Medical, a sales subsidiary; and Pingcun Zhongying, which manufactures products targeting disease prevention and healthy diet under the concept of Yakushoku Dogen. We expect them to utilize network of sales reps of Ping An Insurance or sales routes of Ping An Good Doctor.

We are also building a new sales network with Guangdong Dongguan, which does development by itself. They operate in Guangzhou, South China, and they have many physical stores. And we expect to sell our products through their stores. Lastly, we will establish analysis research center. Our plan is to evolve the platform for crude drugs into a platform for quality assurance of traditional Chinese medicines and crude drugs.

Next slide summarizes my explanation to supply crude drugs for Tsumura and for Ping An Tsumura for China business. SHENZHEN TSUMURA and China Medico will form a crude drug platform to realize crude drug supply as a foundation for all businesses. Expected benefits are described on the right.

I hear some people do not have clear idea about Tianjin China Medico Technology. On the right, we provide a ranking of companies in terms of export value for crude drugs and drug pieces in 2018. Tianjin China Medico Technology ranked first, and the second is Tianjin Tsumura, our 100% subsidiary. China exports mainly to Japan, Hong Kong, Korea and Vietnam, and now we have #1 and #2 companies that export to Japan. This means we are ready to offer high-quality crude drugs to Japan, which sets high standard for quality and management. With that, we can expect benefits described on the left.

Let me summarize my explanation so far. This crude drug platform enables us to supply high-quality crude drug satisfying GACP, the global standard for crude drug cultivation and processing. Tianjin China Medico Technology is for crude drugs in Northern China, and SHENZHEN TSUMURA is for crude drugs in Southern China. We can build a structure enables us to procure and analyze crude drugs by managing as a production site company. In addition, we plan to expand our sales network, as I said earlier.

China is a large country with a large population. So it is not realistic to assign a family doctor to each individual without remote medicine. China does not have regulations like Japan in this area, and we are trying to figure out the best way to supply our products in the steadily growing remote medicine. We aim to provide online medical services as well as off-line services, as there are patients who go to physical pharmacies for consultation on their medication. We will collaborate in both ways and ultimately expect to collect data on patients who will purchase our drugs with electronic or physical prescriptions. We will make full analysis of such data. And following patient's lock-in or their buying trend, we find the value in working with Ping An Good Doctor to provide total online support for patients' health, for instance, by recommendation of health foods.

Next slide shows what we need to take as a next step. As for analysis research center, the fact that Ping An Tsumura is located in Shenzhen is quite important, as we are discussing a possibility to operate this center in collaboration with the Shenzhen City government. Our negotiation has come to the final stage, and we hope to establish this analysis research center with the involvement of the Shenzhen City for larger business opportunities and government endorsement for our business. This negotiation is led by Ping An Tsumura.

I cannot disclose this at this moment yet. But as a next step, we are considering our next M&A. We have studied or negotiated with over 10 traditional Chinese medicine companies as candidates for next M&A and narrowed down the list to 2 candidates. We are proceeding with negotiations with them, expecting to enhance their products and sell them as high-quality products of Ping An Tsumura by switching to crude drugs with high-quality on the crude drug platform I mentioned earlier.

Another action we are going to take is submission and approval of traditional prescriptions. That is all for the overview of our business in China.

Another topic is integrated report. We provided it as your handout. Our basic policy for CSR and sustainability vision are stated, once again, in the integrated report. In September 2006, when I was a general manager of IR, I participated on SRI survey conference in Paris for the first time with the help of President Tsukushi of Good Banker, an SRI survey company. Since then, we have placed much importance on ESG initiatives and provided information about it. In 2012, we were selected as an ESG brand on TSE as a company with a high overall score. So far, we mainly focus on annual report to communicate our ESG initiatives to investors. But going forward, we will use integrated report to communicate with wider audience as well as our website to provide information on CSR activities.

This page describes our basic policy for CSR and sustainability vision. Our business is based on Kampo value chain and characterized by cultivation of crude drugs. For instance, cultivation is done by people living poor areas and ethnic minority people in China. And in Japan, the elderly and handicapped people are cultivating our crude drugs. Also, as some crude drugs are cheese, they can contribute to absorb CO2. We want to contribute to the society in this aspect and with the values not found in new drugs. And we'll continue to provide information about it.

This is my last page to describe major points in the integrated report on the left. One of them is governance system. And from Page 44 onwards, a special feature article for discussion among outside directors is provided. They were involved in decision-making discussions for China business, and they went to China to meet face-to-face with the senior management members of Ping An Insurance Group.

We strive for an organization which can make swift decisions by understanding of actual place, actual thing and actual situation through the 5 senses. I appreciate if you take time to read it.

That is all from me. Thank you.

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