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[Foreign Language] This is Kitabatake speaking. I will now explain the results of the third quarter of the fiscal year ending March 2017.
Please open to Page 2 of the materials. This is a broad overview of the third quarter results. As in the first and second quarters, we saw increased revenue and operating income when excluding FX effects.
Year-on-year, sales increased 4%, while gross profit grew 6%. Operating income grew 4%. Similar to the first half, the Cardiac and Vascular companies continued double-digit growth; outside Japan was the main driver of these numbers. Despite experiencing more yen appreciation than the previous year, we see our core business is growing well.
Items listed after operating income involve some fluctuations, which I will explain in detail on the next slide.
Within the extraordinary gains and losses, FX loss improved JPY 2.9 billion in the third quarter due to yen depreciation. An extraordinary loss was the termination of our co-development with ART company, in which we had purchased exclusive acquisition rights and investment securities. By writing off those assets, we realized a JPY 7 billion extraordinary loss. We had been co-developing a bioresorbable drug-eluting stent with ART. I will explain the matter in further detail in a later slide.
In the previous year, we realized a JPY 4.4 billion extraordinary gain through the sale of land in Hatagaya. So with just that and the ART asset write-off, we see a negative swing of JPY 12 billion. When factoring other effects in with these, we saw a year-on-year net income decrease of 27%. However, due to other factors I will later explain, we will not alter our net income guidance at this time.
The next slide shows our operating income variance analysis. In it, we are displaying the operating income calculated before FX negative effect and acquisition-related costs. As I mentioned earlier, our operating income grew 4% when excluding FX effects. When excluding acquisition costs as well, it improves further to 7% year-on-year. The reason for showing operating income before and after acquisition costs is that we have 3 major acquisitions in FY 2017. The Sequent Medical deal was completed and affected those numbers somewhat in the third quarter and we have 2 further acquisitions, which will affect the fourth quarter results more significantly. The next quarter's results will, therefore, be displayed in a similar way.
The operating income trend remains the same as previous quarters, but I will discuss a few changes.
First, improvement by cost reduction. A reduction in costs for the TCVS quality system improvement project continued as did savings due to suspension of the medical device tax in the U.S. Another factor was Ultimaster, which as we have previously announced, began to be sold in Japan in the third quarter of last year. Its effects were no longer present this year, bringing down third quarter year-on-year results. The downward factor marked as SG&A increase due to sales force expansion in the U.S. TIS and neurovascular divisions appears to have gotten smaller compared to previously. However, we have removed from this item acquisition-related costs in order to show them separately and this has resulted in the category only appearing to have a small increase.
In FX, we saw a large increase in negative impact from JPY 4.1 billion in the previous quarter to JPY 8 billion in the third quarter. A view of the FX fluctuations of the third quarter shows yen depreciation in the last half, but the overall trend is for yen appreciation. Therefore, we see a stronger negative effect. Further, yen depreciation in the last half affected inventory valuation resulting in a double downward FX effect.
Looking at sales by region, we see that sales increased outside Japan when excluding FX. In Japan, we had a slight decrease. This was due to the previous year's third quarter Ultimaster launch boost not being present this year.
Next is sales by business segment. There was little change from last time, so I will move on to the next topic.
The next slide begins company results, first with Cardiac and Vascular. The company saw the most negative effects of FX, but the TIS and neurovascular businesses outside Japan continued to grow in double digits, driving the company to solid continued growth when excluding FX.
In business profit, highly profitable access and coronary therapeutic devices were drivers, while the Misago recall and Sequent Medical acquisition costs combined for JPY 2.5 billion in negative impact.
The next slide shows General Hospital results. Sales were more or less flat when excluding FX, but this does not mean there was no growth. As we have previously explained, the company has been reducing low profitability accounts in the EU and Latin America and ended distribution of contrast agents in Japan, resulting in a reduction in sales, but those losses were made up for with growth in other areas.
In business profit, the numbers show that the company has, in this fiscal year, entered into a trend of improvement, although slight.
In Blood Management, one of the most important issues has been how to make up for the reduction in business profitability resulting from price declines, mainly in the U.S. Looking at the fiscal year's quarterly results, we see that business profitability has improved steadily over the year from 12% in the first quarter to 14% in the second and then 15% in the third.
The next slide discusses major topics from the third quarter, but I will move to the next item.
Slide 11 shows the launch status of our FY 2016 new product pipeline; some items are now expected to launch in FY 2017, but most are on schedule. The few that will launch next fiscal year are not drastically late, but rather experiencing slight delays. This includes radioembolization beads in oncology and the distal protection device in neurovascular, which are actually quite close to being on time.
The blood glucose meter for the China market is simply awaiting regulatory approval. The intradermal injection device was not ready for this year's flu season, but will be available for the next.
On the next slide, I would like to explain in greater detail the new IVUS system, which we have not emphasized much previously. We launched the new IVUS system this fiscal year and it includes 3 main improvements from the previous version. The first is that as you can see on the left of the slide, the image resolution has improved greatly. While it may not be readily apparent, we are told by physicians that the resolution improvement has given the product a much higher ability to show calcification on blood vessel walls. The weight of the instrument also decreased 4x, making it much easier to move. The image processing also drastically improved, going from previously processing images in a matter of minutes now to seconds. The new IVUS system, therefore, features not just incremental improvements, but instead leaps and bounds beyond the previous product. We, of course, intend to pursue the top market share in Japan with the new IVUS system and we also expect to see sales synergy with it and Ultimaster.
As you know, Japan sales of Ultimaster began with its launch in the third quarter of the previous fiscal year with sales going very well at that time. Then a competitor's new product was launched and other factors led to it coming back down since that initial third quarter on the market.
Toward restoring market share, we launched the 4-millimeter diameter in August of last year and the 2.25-millimeter diameter in February of this fiscal year in order to expand our product portfolio. By adding to these efforts, the new IVUS system, we hope to create a synergy that simultaneously bolsters the Ultimaster share.
Now regarding the acquisition of the vascular closure device business from St. Jude Medical and Abbott Laboratories.
We finally completed the purchase process on January 20. Since closing took longer than we expected, we were unable to speak much on the deal, but now that it is closed, I would like to offer some more details. There are 3 main points. First is the purchase price. Second is the strategic meaning and importance of the purchase. Third is the expected contribution to sales and income.
On the first point, the purchase price was $1.12 billion, as we have already announced. That amounts to an 8x EBITDA multiple. We feel like this is a very reasonable price.
Regarding the strategic meaning of the purchase, as we have long emphasized, we have pursued and seek to maintain a #1 position in the access devices intervention market. There are 3 areas in the access device market. First is the entry site access stage, which is performed using sheath products. Second is the access to lesions. For example, access to the heart when the lesion is located there. Guidewires are also included in this space. Following these are vascular closure devices, which are used to close blood vessels following intervention procedures. Terumo has the #1 global share in the first 2 areas, entry site access and lesion access.
In entry site closure, there are 2 approaches used. First is transradial intervention, or TRI, where Terumo is already quite strong and has the #1 share. The other approach, known as transfemoral, is an area where Terumo previously lacked any product. However, the femoral closure device has the largest market. That means that despite our focus on access, we were not in the largest vascular closure market segment previously.
This purchase not only places us in the femoral closure market, but gives us an immediate #1 share there. That cements our #1 position overall in the access market and fulfills an important strategic goal. We hope to now further expand our sales in access devices as a result.
The third point is earnings contribution realized from the purchase. The estimated annual sales are over $250 million, as you can see here. In operating margin, we anticipate 30% to 40% when excluding onetime costs and goodwill amortization. These numbers also include the other asset obtained in the purchase, the Abbott Vado Steerable Sheath. Since that product is still in the development stage and not yet on the market, its development costs are a downward factor on margin. However, we believe the purchase will contribute this level of margin even with those costs included.
For FY '16 and part of FY '17, the onetime costs of this purchase will negatively affect profit. There are 3 aspects to this. First is professional fees for the deal, including legal fees and financial advisory fees. Second is step-up inventory. This refers to the price of product inventory included in the purchase. The valuation of such inventory is commensurate with the purchase price meaning that in this case, the inventory cost is very high, having a negative effect on margin, while that initial inventory remains in stock. We initially expected the purchase to finalize earlier and for the inventory to, therefore, be sold off during FY '16, but a small amount now looks to remain into the beginning of FY '17.
Regarding goodwill amortization, we have already announced our transition next fiscal year to the IFRS, or IFRS accounting system, and that will eliminate the need to amortize goodwill thereafter. That is how we arrive at the margins you see here, with onetime costs and goodwill amortization no longer in effect after the beginning of FY '18.
Next, regarding the Bolton Medical acquisition. We are still in the process of finalizing the purchase and hope to do so within this fiscal year. We received 2 important benefits from this purchase. First is that we acquire a TAA stent graft product. Second is that we acquire a product already in the U.S. market and with a sales force there too. Since the deal is still in process, we are unable to discuss here about the purchase price, but I would like to address its strategic importance.
In the cardiovascular market, one trend for surgical approach is toward reduction of invasiveness. This does not mean simply replacing surgery with intervention, however. It is instead a move toward incorporating various means to reduce invasiveness in procedures that straddle the 2 approaches. In the cardiovascular business, Terumo already has both segments, the surgery and intervention. And our growth strategy, which we recently announced as a 5-year mid- to long-term growth strategy, includes having products in this space between them as well. So in that way, the Bolton acquisition fits that strategy.
The next slide is about the end of ART co-development project that I already mentioned when explaining extraordinary gains and losses. We had, to this point, been working to develop a stent using the bioresorbable stent technology of ART and the coding technology of Terumo. However, we learned that the technological hurdles to this development were more significant than we initially anticipated and we were not getting the results we desired. We now see the bioresorbable stent requiring a longer period of time to become mainstream in the market. So we have decided to end the co-development project with ART for the time being. And in conjunction with that, we depreciated the associated assets, which we previously had on the books.
Regarding our DES, or drug-eluting stents strategy, there is no change to that strategy, which we explained in the December 2016 mid- to long-term strategy announcement. We will pursue improvements to Ultimaster along with development of the next generation of metal drug-eluting stents and hybrid stents, while still internally developing BRS, or bioresorbable stent technology, over a longer period and ending at this time the co-development with ART.
Today, both Terumo and Olympus issued a press release announcing the unwinding of our cross-shareholding. We signed a business alliance contract with Olympus in 2001. Since then, we've cooperated on joint businesses and we further strengthened that relationship by entering into a capital alliance in 2005. In addition to our joint ventures, we also collaborated on developing endoscopic guidewires and started a variety of projects. With this strong business alliance, both firms felt that there was no longer a need to maintain a deep capital alliance.
In addition, the recent Corporate Governance Code has placed a greater focus on more effective utilization of assets, providing another impetus to end cross-shareholdings in general. It is important to note though that we will continue to collaborate closely in our business alliance.
The dissolution of cross-shareholdings will include our scheduled sale of Olympus stock by the end of the fourth quarter of FY '16, which will have the effect of creating an extraordinary gain during this fiscal year. The cross-holdings will also drop below 1% of total stock from the previous level of around 4%, meaning a virtual ending of it.
Terumo intends to handle the Olympus sale of Terumo stock by executing a share buyback not to exceed JPY 50 billion. This will be in keeping with our previous share buybacks executed in 2014 and 2015, upon the dissolution of other cross-shareholding arrangements.
Now our final slide. This concerns a revision to our FY 2016 guidance. Business performance remains unchanged from the previous guidance as we have more or less seen the expected FX rates. However, the costs of our 3 large acquisitions in this fiscal year have increased significantly. The costs of the Sequent Medical purchase have been successfully absorbed through operating income growth, but costs from the subsequent 2 acquisitions of the closure device and then Bolton Medical are expected to total around JPY 4 billion. We will, therefore, revise the operating income guidance downward by that JPY 4 billion amount. In other words, when excluding these acquisition costs, our performance is expected to be the same as previously forecast.
Regarding net income, the aforementioned extraordinary loss relating to depreciation of ART assets will be a negative factor, while the sale of Olympus stock will be a positive factor, with the 2 factors largely offsetting to leave net income unchanged at JPY 47.5 billion in this revision.
Thank you for your attention.