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Edited Transcript of 4540.T earnings conference call or presentation 10-May-19 10:59am GMT

Full Year 2019 Tsumura & Co Earnings Presentation

Tokyo May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Tsumura & Co earnings conference call or presentation Friday, May 10, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Terukazu Kato

Tsumura & Co. - President, Executive Officer & Representative Director

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Presentation

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Terukazu Kato, Tsumura & Co. - President, Executive Officer & Representative Director [1]

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Today, I will present the business results for fiscal year 2018, followed by the Medium-Term Management Plan. First, I would like to give an overview of the business results for fiscal year 2018. Please refer to the presentation material.

On Page 22 of the reference material, the business results and the year-on-year difference is shown.

Here, on this page, the main indices of the Second Medium-Term Management Plan is listed showing the results for the fiscal year under review together with the differences against our plan.

Net sales came to JPY 120.9 billion, slightly above both the plan for the year and the Second Medium-Term Management Plan. Operating profit was JPY 18.5 billion, also exceeding both plans. Operating profit margin of 15.3%, and profit attributable to owners of parent was JPY 14.5 billion, also exceeding both plans. EPS was JPY 190 with ROE of 7.4%.

Next, I would like to summarize the 3-year period of the Second Medium-Term Management Plan, spanning is from fiscal year 2016 to 2018. First, the ROE trend over the past 10 years. The average ROE for the past 10 years was 11.4%; for the 4 years of the First Medium-Term Management Plan, 11.8%; and 7.9% for the 3-years of the Second Medium-Term Management Plan. The ROE for the fiscal year 2018 was 7.4% with negative impact of 1.2% from increasing equity as a result of capital alliance between Tsumura and Ping An China.

This slide shows the annual average growth rate for the 3 drug-fostering formulations, aiming for sales of more than JPY 10 billion in fiscal year 2021, namely Daikenchuto, Yokukansan and Rikkunshito. Sales totaled JPY 18.4 billion at the end of fiscal year 2011, reaching JPY 24 billion in fiscal year 2015, the First Medium-Term Management Plan, with average annual growth rate in value of 6.9% and in volume of 8.5% and JPY 25.3 billion in fiscal year 2018, the Second Medium-Term Management Plan, with average annual growth rate in value of 1.7% and 3.2% in volume.

Please refer to the graph for the trend in annual average growth rate for Daikenchuto, Yokukansan and Rikkunshito. In order to grow the 3 drug-fostering formulations to reach sales of over JPY 10 billion each, we're working on expanding the measures set at the beginning of the Medium-Term Management Plan in accordance with a changing business environment.

For Daikenchuto, we have been conducting activities mainly targeting distention due to post-surgical intestinal disorder. But prompted by the chronic constipation clinical guideline of 2017, we have expanded the scope of our activities to include abdominal pain and bloating due to constipation.

The 3 main factors behind the slowdown of growth during the Second Medium-Term Management Plan were: changes of surgical procedure of cancer from laparotomy to laparoscopic surgery; more shorter hospital stays due to revision of the medical service fees; and rising cases of administration of smaller dosage than the normal adult daily dose of 15 grams.

Yokukansan had been conducting activities independently, targeting BPSD such as psychoneurosis and insomnia in association with nervousness, but we are expanding activities so that Kampo prescription may be used accordingly based on the patient's symptoms.

Rikkunshito had its activities centered mainly in the complaint of unidentifiable upper abdomen discomfort such as gastritis, gastralgia, apepsy or aphasia but had its scope expanded to establish its first-line position as therapy for these upper digestive tract diseases.

Next I would like to explain the progress of the long-term business vision under the Second Medium-Term Management Plan. The theme of the long-term business vision 2021 is to aim to be a value-creation company that contributes to people's health through its Kampo business, making efforts to realizing the 3 Tsumuras seen here: the Kampo company, People company and the Global Niche company.

As a Kampo company, we will aim to contribute to creating a healthcare environment where all patients can receive treatment that includes Kampo medicine, where appropriate, in any medical institutions or medical specialty in Japan. This is in line with our basic sales strategy of establishing Kampo medicine. We are working on relationship marketing so that physicians can deepen their knowledge and master Kampo medicine as customers for life.

To be more specific, we would like to increase the numbers of physicians prescribing 10 or more Kampo formulations to 1 in 2 and have conducted a number of measures as a strategic challenge to expand Kampo market and stable growth.

This graph ranks the top 23 sales company between January and December 2018, excluding specialized generic manufacturers. According to the number of products, they have delivered to a total of more than 30,000 medical institutions and pharmacies. Even compared with some of the major manufacturers, this external survey shows that Tsumura came top with 25 Kampo products.

News for Kampo products exist in various clinical departments, and this survey shows that many medical institutions and pharmacies are making use of our products. Our medical representatives, MRs, visit various clinical departments from dermatology, obstetrics and gynecology to psychiatry to provide medical information, which means that they need wide knowledge about diseases and products to come face to face with physicians. This requires continuous hard work. We are still in the midst of realizing Tsumura Kampo company, but we believe Kampo markets still has room to grow further.

Looking at it from a different angle, the number of physicians prescribing 10 or more Kampo formulations at the end of fiscal year 2011 was about 22,000, growing to 35,000 in the fiscal year 2015 and 38,000 in fiscal year 2018, an increase of 16,000 in the 7 years during the First and Second Medium-Term Management Plan.

Simultaneously, the number of physicians prescribing between 1 to 9 formulation was 154,000 at the end of fiscal year 2011, growing to 183,000 in fiscal year 2015, 193,000 in fiscal year 2018, an increase of 39,000 in the 7 years during the First and Second Medium-Term Management Plan according to our internal survey.

This graph shows the sales volume trends for 129 prescription Kampo products. One unit refers to 1 standard package box. It increased threefold from 7.19 million in fiscal year 2001 to 21.55 million in fiscal year 2018. In value terms, due to NHI price revisions, the growth seems moderate. But this shows that in numerous medical institutions, many patients were prescribed and taking Kampo products, now an indispensable pharmaceutical product for national health care.

In order for Kampo therapy to be disseminated and established, building evidence in Kampo medicine education are essential. Out of the 82 medical schools and universities in Japan, 81 universities provide Kampo medicine education as shown in the bar graph. 79 universities have on-campus lecture training system as shown in the green line, and 79 universities providing outpatient Kampo services as shown in the blue line, showing how much Kampo has penetrated. As a result, in all 4 medical educational model core curriculum, Kampo-related education has been included.

Next, on People company, second of the 2021 vision. To realize Kampo company Tsumura and Global Niche company Tsumura, we have worked actively in nurturing human personnel, who are the foundation of our company starting from the First Medium-Term Management Plan. Through mind reform and education and training provided over the course of 5 years, we have accelerated training of local Chinese executives to take charge of the China business.

Also, we established Tsumura Academy in January 2019, which played the function of continuously turning out management personnel, who are able to implement management based on corporate philosophy as future management executives or management of subsidiaries.

Next, on Global Niche company Tsumura. I would like to refer to development of TU-100 Daikenchuto in the U.S. We have focused our development target to patients with POI, postoperative ileus, only as we had targeted 3 diseases previously and advisory teams here in Japan and in the U.S. as it was evaluated that TU-100 Daikenchuto is a promising therapy for postoperative ileus, one of the unmet medical needs.

And as a secondary outcome, we were able to find new possibilities of Kampo to unravel mechanism of action for Kampo and benefits of Kampo health economics by utilizing new technologies such as system biology, metabolomics, enteric bacteria and big data.

Next, on the China business. As part of the Global Niche company, I will elaborate later but as you can see here, the main topic here is a joint venture, Ping An Tsumura, established in 2018 with Ping An Insurance Group. We have started test marketing over Yakushoku Dogen products and working on a concept of an analytical research center, which had begun early as it was originally planned for the Third Medium-Term Management Plan.

On our strategic initiative of enhancing profitability and maximizing cash flow with optimization of inventories, we saw substantial improvement in cash flow. We conducted issuance of bonds at low interest rates, and share buyback was also conducted.

In addition, we conducted capital increase for capital alliance for the China business. We will continue to make necessary investments into capital spending for domestic businesses, investment and loans for China business and R&D in the U.S.

As you can see on this slide, the inventory assets did not increase during the Second Medium-Term Management Plan even though sales of 129 prescription Kampo products grew. Total inventory is controlled by optimizing raw material crude drugs.

This slide shows capital spending in the 3-years of the Second Medium-Term Management Plan, which came to JPY 27.4 billion against the plan of JPY 33 billion for the new granulated packaging building at Shizuoka Plant and new number 3 SD building at the Ibaraki Plant, mainly due to delay in the building of number 1 granulated packaging building at Shizuoka Plant, CapEx was short of plan by about JPY 2 billion. The spending is for construction of buildings, increasing depreciation and amortization, but it will also realize automation and energy conservation with introduction of robots, improving labor productivity as planned.

Please refer to the reference material for details of our results. That was the overview of the business results for fiscal year 2018.

Now I would like to present the Third Medium-Term Management Plan. The theme of the Third Medium-Term Management Plan for fiscal year 2019 to fiscal year 2021 is creating new values through innovations in Kampo, the next stage. This is the Third Medium-Term Management Plan, the jump stage following hop and step stages for realizing the 2021 vision, our long-term business vision. This is the beginning of drawing a blueprint for Tsumura group to make the jump, bringing us to the starting point for which we are very excited. We will work on our businesses from a higher vantage point going forward. We will practice management based on the management philosophy and corporate mission, and pursue new corporate value creation through innovation following our basic direction.

To embody the management philosophy, we are practicing long-term business vision for what we want to be in 10 years' time. We aim to be a value-creation company contributing to people's health through its Kampo business, realizing the 3 Tsumuras, accomplishing the First, Second and Third Medium-Term Management Plan goals. I feel it has been worthwhile conducting businesses based on our management philosophy and long-term business vision.

I would first like to explain the image I have of the Third Medium-Term Management Plan. Investments will be made proactively into growth areas for sustainably expanding the domestic Kampo market and building the foundation for the China business with a target of consolidated sales of over JPY 135 billion. The future outcome of this growth investment is to contribute to realization of health care, where every 1 in 2 physicians would prescribe more than 10 Kampo prescriptions and to contribute to health of Chinese citizens, which is a strategy of our China business that is to become the most trusted Chinese medicine company to accomplish overseas sales ratio of more than 50%. We hope to put these into action as soon as possible. If domestic and China businesses bear fruits, we will surely see a completely different landscape.

Now let me briefly explain business environment. First point is demographics. It is estimated that population of people aged 65 or over will reach 36.19 million or 29% of the total population in 2020 and will peak in 2042 with 39.2 million or 35% of the total population. According to the MDB Open Data by the Ministry of Health, Labour and Welfare, or MHLW, seniors and women have high prescription ratios for Kampo preparations. Dementia is one of common diseases among seniors, and a new Orange Plan by MHLW estimates that the number of patients with dementia will be 6.31 million in 2020 and 11.54 million in 2060.

Also in the Labour Force Survey by the Ministry of Internal Affairs and Communications in 2018, female employment rate for ages between 22 and 44 already achieved 77%, which is the goal for 2020, and diseases unique to women are expected to receive greater attention so that they can continue working healthily. According to the statistics of National Cancer Center, the number of cancer sufferers is estimated to increase to 3.41 million in 2024 and 3.55 million in 2029, and the number will continue to be over 3 million afterwards. It is said that there should be a mechanism to support cancer sufferers to handle both treatment and working life. Therefore, we want to think over what Kampo can do for them.

Next, let's look at situations in China. It is expected that aging of the population in China will be as fast as Japan. And in 2025, the people aged 65 or over will reach 14% of the total population. It is about 27.7% in Japan, and China is on the way to aging society as well.

In Healthy China 2030 Plan, announced by China State Council, it is stated that in relation to medical care, they're focused on both contemporary medicine and traditional Chinese medicine, normalized and increased traditional Chinese medicine production, and engage in theoretical study and medicine development. And in July 2017, the Medicine Law of the People's Republic of China was enacted and enforced as the first national law. Scale of the traditional Chinese medicine market in China had grown to over JPY 14.4 trillion in 2016. It is expected this market will grow further as Chinese people become more health conscious. That was the brief explanation of business environment and with this background, we set higher numerical targets for our Third Medium-Term Management Plan than the targets of Second Medium-Term Management Plan. That is over JPY 135 billion for net sales, over JPY 19 billion for operating profit and over 6% for ROE. Assumptions we used are as described below. It is not decided yet, but considering the overall rule that NHI drug price is revised every year, we assume price revision in 3 consecutive years, in October for this fiscal year, and exchange rate is JPY 112 to the U.S. dollar and JPY 16.5 to the Chinese Yuan. I am sorry to say this, but at this moment, we cannot include assumptions for M&As of traditional Chinese medicine business in China into our plan.

As I said earlier, we established Ping An Tsumura in June 2018. And since then, we have received various proposals from Chinese companies. And Ping An Tsumura is currently reviewing the proposals and considering how we can develop business with which companies in what sort of framework. Therefore, it is possible these numbers are overachieved depending on the scale, the number, the nature and the mechanism of those future M&As. But it is rather difficult to reflect such possibilities to the targets now.

I will elaborate more on the Chinese business later. Let me summarize our business strategy, again, to realize the long-term management vision. As for domestic business, we must establish Kampo medicine, and for Chinese business, it is contributing to the health of Chinese citizens. It is not only drugs, but there are various other schemes to contribute to Chinese people. We can contribute to their health by developing various products made from crude drugs, such as Yakushoku Dogen products, which are different from health foods. Although we do not implement this currently in Japan, we are considering such a business for China.

Our definition of strategy is with perspective on long-term future to create new markets to increase well-being of people. It is also to help us maximize long-term profit. Domestic business strategy has consistently been establishment of Kampo medicine and contribute to realize that patients can receive Kampo treatment when necessary at any medical institutions and departments. Tactics and measures for this will flexibly change as required. Chinese business strategy is to promote businesses to contribute to the health in wide product categories.

Based on these strategies, we set 5 strategic challenges: First, sustainably expanding the Kampo market and establishing its presence, while contribute specifically to establish the presence of Kampo treatment in national medicine. Second, investing in growth and building business foundations in China. As explained in the briefing on Chinese business vision, we actively invest and build business foundations to achieve net sales of about JPY 10 billion, 10 years from now in fiscal year 2027. Third, improving productivity using new technology. We already introduced robots and will improve productivity further, not only in our production facilities, but also in processing and sorting of crude drugs and various administrative processes by AI, robots, RPA, et cetera. Fourth, fostering a corporate culture through philosophy-based management and developing diverse human resources. We are developing human resources for management to practice philosophy-based management, including group companies in China and the corporate culture for innovation and coaching. Fifth, promoting SDGs through the Kampo value chain. We will work on creating shared values between Kampo business and society.

Let me start with Strategic Challenge 1. Based on the business environment analysis and strategy, we'll concentrate our efforts on the 3 important domains of the geriatric field, supportive care for cancer and the gynecology field, same as the Second Medium-Term Management Plan. Also, we'll conduct a marketing approach based on drug fostering program formulations, growing formulations and formulations associated with the 3 important domains to contribute to treatment for diseases in areas listed on the slide.

There are 2 important factors for establishment of Kampo medicine. One is education of Kampo medicine, and another is evidence building. As shown here, by building evidence for Kampo medicine, the number of Kampo medicines published on treatment guidelines has been increasing, and they are listed in 132 guidelines in fiscal year 2018. We see this as a critical trend as this makes Kampo prescription easier for physicians. We'll continue to improve the quality of evidence.

On this page, I'd like to outline the development of TU-100, Daikenchuto in the U.S. The targeted disease is postoperative ileus, or POI, and advisory teams were formed in Japan and the U.S., in addition to physicians, specialists of statistics and marketing also participated to form the best teams for POI drug development. In this fiscal year, we will conduct a meeting with FDA, develop a master schedule and conduct late Phase II in the next fiscal year and afterwards. After the late Phase II is finished, policies for Phase III and onwards will be decided. In parallel, we are reviewing FDA requirements about formulation design and management of crude drugs.

Next page is about Strategic Challenge 2. For FY 2021 of this Third Medium-Term Management Plan, we plan JPY 240 million, or about JPY 4 billion for net sales in China. Our plan is to sell Yakushoku Dogen product made from crude drugs and Chinese crude drug pieces. Also, during the Third Medium-Term Management Plan, we plan to make active investment to build foundations for traditional Chinese medicine business through M&As and other measures as much as possible.

This page summarizes our Chinese business by category: the Yakushoku Dogen product, Chinese crude drug pieces, traditional Chinese medicines and compound granules, analysis research center and Tianjin Factory of TSUMURA SHENGSHI PHARMACEUTICALS Company Limited. We are currently in preparation for them and making steady progress.

Next is about Strategic Challenge 3: efficiency measures to improve productivity. We'll apply new technologies such as AI, robots and RPA to improve productivity in cultivation and processing of crude drugs, production, sales activities and standard tasks. For cultivation, we'll improve and stabilize yields of crude drugs by cultivation management systems for data collection and analysis.

For processing conducted in high-volume sorting of crude drugs will be automated by AI image recognition. For production, we will continue to save labor in factories by robots and, as a next step, we plan to detect abnormalities of facilities and product failures by AI monitoring. Also we plan to implement sales activity analysis with AI and automation of standard tasks by RPA. Another point is SCM reform, which has been conducted in a phased manner since the first Medium-Term Management Plan. And this medium-term management plan will push it forward to enable total optimization from demand forecast to crude drug commissioning plans. With this reform, we intend to accelerate planning, shorten rolling period and anticipate future risks early as well as optimize inventory placement by bolstering cooperation between business bases in China and Japan.

In this Third Medium-Term Management Plan, we will implement resource distribution, which reflects medium- to long-term management vision such as capital investment for productivity improvement. For existing business, about JPY 22 billion is planned to be invested in domestic factories, research and crude drug facilities as indicated on upper-right.

For Chinese business, investment and lending is planned to be between JPY 50 billion and JPY 100 billion. This includes lending to subsidiaries to build Analysis Research Center and the Tianjin Factory as well as investment in traditional Chinese medicines business, including M&As, which would fluctuate depending on cases. For research and development, about JPY 20 billion is planned for investment in basic and clinical research, development in the U.S. and crude drug cultivation research.

Next is Strategic Challenge 4. Tsumura Academy was established in January 2019 with 2 objectives. That is developing human resources for management and fostering corporate culture, and I am the principal of the Academy. The purpose of this academy is to train and continuously develop human resources capable of practicing management based on the basic philosophy of the group. This applies to the management of group companies and also to foster corporate culture in alignment with our basic direction, tradition and innovation by permeating our philosophy, especially focusing on innovation. As we grow Chinese business, more human resources will be required for group company management. So we will build a structure which enables philosophy-based management.

This is about Strategic Challenge 5. The value-creation cycle at a Tsumura Group is characterized by its unique efforts focused on Kampo value chain. We'll continue to work on creating shared values, or CSV, for society and Kampo business. Our crude drugs are cultivated in a poor village in China and the village is significantly developed. As such, we believe there are many ways to contribute to society by the Kampo value chain.

We set 3 unique initiatives as described here, and I'd like to skip explanation. Our initiatives on SDGs will be explained in the integrated report for this year as Sustainability Vision.

Next page is about our shareholder return policy. Our basic policy is to increase corporate value through sustainable expansion of the Kampo business and investment for growth and building management foundations in China, and we'll ensure stable dividend considering the state of the mid- to long-term profit levels and cash flow.

Next, I'd like to touch on earnings forecast for FY 2019. We forecast JPY 125 billion for net sales, JPY 17 billion for operating profit, 13.6% for operating profit margin, JPY 18 billion for ordinary income, JPY 12.3 billion for net income attributable to owners of parent, JPY 64 for annual dividends per share, and 6.0% for ROE. As an assumption, NHI drug price revision in October is included due to the consumption tax increase. Net sales are estimated to increase JPY 4.090 billion, up 3.4% year-on-year.

Cost of sales is expected to be 41.8%, up 0.9% from 40.9%. Still we expect that will be almost the same as the result of FY 2018 in terms of unconsolidated basis. However, please note, 1 extraordinary factor in this fiscal year. Due to the dissolution of Sichuan Chuancun Traditional Chinese Medicines Company Limited, which was an equity method affiliate, all the transactions will be transferred to our 100 subsidiary SHENZHEN TSUMURA MEDICINE Company Limited. This is expected to generate unrealized gain by increased inter-company profit, and this is estimated to be a 0.8 point increase. This is a temporary increase and will decrease crude drug costs in the medium to long term. That is the reason for tentatively worsened sales cost. SG&A ratio is expected to increase by about 0.8 points to 44.6% with following factors: 0.2 points from NHI drug price revision and 0.5 points from unconsolidated SG&A increase, mainly for research expenses, including about JPY 400 million for TU-100; a little over JPY 300 million for domestic research from the previous fiscal year; JPY 100 million for research in China; and JPY 200 million for research of crude drug cultivation. As a result, research expenses will increase about JPY 1.1 billion in total. In addition, SG&A is estimated to increase by 0.1 point in relation to new businesses in China.

That is all for the brief explanation of earnings forecast for FY 2019. This concludes the explanation of business results for fiscal year 2018 and the Third Medium-Term Management Plan. Thank you.