Edited Transcript of 2309.T earnings conference call or presentation 13-May-20 1:30am GMT

Here is the summary for the first half of the fiscal year ending September 30, 2020. To achieve sustainable growth and the corporate value improvement in the health care and pharmaceutical industry at this time of change, CMIC’s midterm business plan starting in the fiscal year 2019 includes focus activity items such as acceleration of PVC model, expansion of globalization and creation of Healthcare business. We are implementing various group-wide measures to execute such activities to achieve the midterm plan. For our shareholders, we have decided to introduce a shareholder benefit program, which will be available to shareholders as of the end of March 2020.

Next, I will explain our focus activities in each business unit. In the CRO business, we are pursuing initiatives in fields where clinical trials are expected to become more efficient, such as virtual clinical trials and the utilization of real-world data. In CDMO business, we are promoting order-taking activities, including the acquisition of orders for large-scale projects at the Ashikaga plant’s new parenteral building, which began operating this fiscal year. In the CSO business, the group continues to train MRs and expand services in the medical affairs field. In the Healthcare business, the group has made progress in initiatives from the previous fiscal year, such as expanding harmo business for electronic medicine handbooks and sales of the [Log Sense] heat stress measurement system. In the IPM business, we are steadily responding to an increase in cases for overseas pharmaceutical companies entering the Japanese market.

This is a summary of consolidated income statement. Sales in the first half of fiscal year 2020 was JPY 38.9 billion, grew JPY 2.3 billion or 6.3% year-on-year. On the other hand, operating income was JPY 1.97 billion, down JPY 908 million or 31.6% year-on-year. Ordinary income for the first half of the current fiscal year was JPY 2.36 billion, down JPY 292 million or 11.0% year-on-year. Current profit attributable to owners of parent for the first half of the current fiscal year was JPY 1.47 billion, remained mostly unchanged year-on-year. Earnings per share was JPY 81.86.

For nonoperating income, we recorded JPY 492 million of share of gain of entities accounted for using equity method. For nonoperating expenses, we recorded JPY 94 million of interest expenses. For extraordinary income, we recorded JPY 5 million as gain on sales of noncurrent assets. And as for extraordinary losses, we recorded JPY 114 million as loss on valuation of investment securities and loss on retirement of noncurrent assets. JPY 674 million was recorded as total income taxes as a result of tax-burden ratio, declined by improved earnings in CDMO business and other factors. And JPY 105 million as loss attributable to noncontrolling interest.

This table shows sales and operating income by segment. Please note that reported segment was partly changed. We compare the percentage change in sales and operating income by segment versus the same period during the previous year using the segments after the changes as the basis. Overall sales in the first half of fiscal year 2020 was driven by the CDMO and CSO business growth. However, operating income was below last year’s figure, mainly due to decrease in profits of CRO business.

This table shows orders received in backlog. Orders received for CSO business decreased due to the impact of some large-scale project we had in the same quarter of the previous year, and we are continuing to receive orders after April. CDMO business grew due to the contribution by CMIC CMO NISHINE, which became a CMIC Group company in June 2019. For CDMO business, only firm orders are included in the orders received in backlog, and the annual order plans proposed by customers are excluded.

This shows the trend in consolidated sales and operating income during the first quarter. We achieved increase in overall sales, but operating income decreased for the first half, and operating margin was 5.1%.

This shows the trend in CRO sales and operating income. Sales were below the same period of last year due to the impact of delay in receiving orders and cancellation/postponement of existing projects, resulting from the effect of the downsizing of development projects and the increase in the level of difficulty. Operating income was also below the same period last year, impacted by reduced operation rates and listing of unprofitable projects. Sales for this term decreased by 4.8% to JPY 17.898 billion. Operating income was JPY 2.93 billion, and operating margin was 16.4%.

This shows the trend in CDMO sales and operating income. Sales and operating income exceeded the same period last year, thanks to increased contract volume in Japan and the sales contribution by CMIC CMO NISHINE Company. Despite the reduction of contract volume following the inventory adjustment by CCU customers in the United States, sales of CDMO business increased by 33.7% to JPY 10.325 billion, operating income, JPY 147 million, and operating margin was 1.4%.

This shows the trend in CSO sales and operating income. Sales and operating income exceeded the same period last year, thanks to the steady progress in MR dispatch projects acquired in the previous period, and the operation rate is maintained at the high level. CSO sales increased by 16.5% to JPY 4.313 billion. Operating income was JPY 437 million, and operating margin was 10.1%.

This shows the trend in Healthcare sales and operating income. Sales were consistent with the corresponding period last year, despite growth in both SMO operations and health care services due to reduction in work volume for some BPO/Staffing services. Operating income is below the same period last year, impacted by lower sales of BPO/Staffing services and prior investment cost to create new Healthcare business models. Healthcare sales was JPY 4.892 billion. Operating income was JPY 262 million, and operating margin was 5.4%.

This shows the trend of 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. In the second quarter of this fiscal year, we are selling orphan drugs, including products developed in-house, further strengthening business foundation through provision of IPM platform such as supporting foreign companies entering the Japanese market, and providing strategic options to pharmaceutical companies in accordance with the business model changes. Those sales were consistent with the corresponding period last year. Due to the effect of cost reduction and commission income, operating surplus was recorded. IPM sales was JPY 1.912 billion. Operating income is JPY 67 billion.

Next, I would like to explain our consolidated balance sheet. Total assets at the end of the first half of the current fiscal year increased by JPY 5.439 billion year-on-year to JPY 85.618 billion. This is mainly due to an increase in cash and deposits and tangible fixed asset of CDMO business against the decreased investment securities. Capital investment for the first half of the financial period is JPY 4.82 billion, including JPY 3.84 billion of CDMO business. Depreciation is JPY 1,990 million and amortization of goodwill is JPY 148 million. Total liabilities increased by JPY 4.543 billion year-on-year to JPY 51.729 billion. Most of the above is attributable to increase in borrowings from financial institutions, anticipating the impact of COVID-19. Total net assets increased by JPY 895 million year-on-year to JPY 33.889 billion. This is mainly due to an increase in retained earnings. The net cash flow from operating activities was JPY 1.574 billion in gain with the increased net income and depreciation and the corporate tax payment. The net cash flow from investing activities was JPY 2.519 billion in spending, mainly due to the acquisition of fixed assets. The net cash flow from financing activity was JPY 3.156 billion due to the increase in borrowings. As a result, the cash and cash equivalents as of the end of March 2020 was JPY 14.332 billion.

Since it is quite difficult to predict the impact of COVID-19 on CMIC Group future business performance at this point, we would like to withdraw for now the full year earnings forecast announced on November 7, 2019. Our future outlook is undetermined. CMIC Group supports pharmaceutical companies and medical institutions through drug development, manufacturing, sales and marketing. The cooperation of medical institution is essential for conducting clinical trials to confirm the efficacy and safety of drug candidate substances and for the collection of safety information in the post-marketing period. However, due to the global pandemic of COVID-19, well, there is an urgent to develop drugs to treat COVID-19. Many pharmaceutical R&D projects have been postponed and canceled with no prospect of restart timing at present in order to prevent the health care system from being overwhelmed. CMIC Group business performance is significantly affected by when COVID-19 pandemic will end because the group has been significantly restricted in its business activities, including its voluntary refrain from visiting to medical institutions. Under such circumstances, it is quite challenging to provide reasonable prediction of the future outlook. We’ll closely monitor the development of COVID-19, and the future outlook will be announced immediately as the reasonable calculation becomes possible.

Following the withdrawal of the future earnings forecast, we would also like to withdraw the fiscal year-end dividend forecast for the fiscal year ending September 2020. Since we have decided that the consolidated earnings forecast is undetermined, we will withdraw the dividend forecast announced on November 7, 2019 and make it undetermined as well. We’ll pay an interim dividend of JPY 5 per share as announced at the beginning of the fiscal year.

This is all for today’s conference call on our financial results for fiscal year 2020.

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Unidentified Company Representative, [5]

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And now our COO, Keiko Oishi, will speak about the business update.

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Keiko Oishi, CMIC HOLDINGS Co., Ltd. – President, COO, Head of BD & Marketing Unit – Operations Unit & Rep. Director [6]

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My name is Keiko Oishi, and I will speak mainly about our core business, CRO operations. In the first half of fiscal year 2020, both CRO sales and operating income were below the same period last year, caused by both the overall CRO market and CMIC’s unique factors.

Starting with the overall market factor, we noticed some trends in pharmaceutical development such as increase in the level of difficulty, downsizing of clinical trials and growing number of global trials. Due to increasing number of highly difficult projects with smaller number of subjects to a more targeted approach, pharmaceutical companies are facing difficulty making go/no-go decisions, which led to more postponement and cancellation of the project that were already contracted. Because of this, the resources secured for the project could no longer operate, which led to low operating rate and decrease in sales and operating income as a result. In addition, the number of global clinical trials in Japan is increasing every year, and CMIC is also involved with such studies which we believe is the result of more projects contracted by the American and European head offices of foreign capital CROs.

On the other hand, as CMIC’s unique factor, those several large-scale projects granted after 2017 are ending this fiscal year. Due to only small-scale projects were newly contracted with some time lag before the start of new studies, CRO operating rate went down. There are 3 focus activities to address such challenge: first, business development activities or enhancement of sales activities; second, strengthening competitiveness in growing fields; third, acceleration of digitalization, which becomes the industry driver in the future.

First, allow me to explain how we enhance the business development activities. While we have included acceleration of PVC model as one of the focus activities for the midterm business plan, we will continue to use a collective force as a CMIC Group, aiming to become the strategic partner for our customers. Since there is increasing need for linkage between nonclinical and clinical studies, collaboration with CDMO business in the commercialization research phase and utilization of post-marketing data, we’ll use our business model to provide flexible and highly specialized services catered to the needs of each client. Specifically in the early phase of new drug development or Phase I or bioequivalence studies for generic drug development, we conduct formulation development, CTM manufacturing, release testing of finished products, clinical trials, blood concentration measurements and stability testing for change of dosage for a route of administration for new active substances. We can compress time line and reduce development cost in the early phase of development by providing end-to-end services, including manufacturing, clinical trial monitoring and laboratory testing services. Also for post-marketing services, micropitting one-stop service that covers marketing consultation, post-marketing clinical trial, commercial protection, MR detailing, AE collection and health economic assessment, we can contribute to improve operational efficiency for our clients. Further, as other initiatives to enhance BD activities, since there is steady increase of inquiries from foreign pharmaceutical companies and bioventures who wish to enter the Japanese market, we promote marketing activities abroad and collaborate with global CROs.

Next, I will speak about how we are strengthening competitiveness in growing fields. CMIC Group supports more overseas clients entering the Japanese market and is involved with increasing number of advanced medicine studies. Thanks to the consulting group specialized in Japan’s regulatory environment, we’ll further enhance their resources and expertise in various areas, including regulatory strategies, PMDA interactions and HTA.

Next, I will speak about post-marketing surveillance and clinical research services. Post-marketing surveillance, or PMS, is steadily growing, driven by increased outsourcing by Japanese big pharma and heightening needs of the pharmaceutical companies with limited internal resources. Post-marketing clinical research is another promising area, and CMIC will focus on post-marketing researches to expand our Healthcare business.

CMIC Group is able to provide seamless service from development to post-marketing phase. We have brought an extensive knowledge for regulatory consulting, monitoring and data management, which is a great asset for this area of specialty as well. Through our service’s low-cost but high-quality, we can increase our client satisfaction and grow ourselves at the same time. We have 18 years experience since 2002 in pharmacovigilance or drug-safety operations. Following the early approval of new drugs, pharmacovigilance market is going strong and expect to grow at this rate. Including the use of RPA, which we have already introduced, we can further improve the efficiency of our operations. We’ll tackle both growth and efficiency improvement.

Finally, let me talk about our initiatives to accelerate digitalization. Japan is less digitalized than Western countries due to regulatory restrictions, but there’s possibility for change. I will explain some of our initiatives in this area. In January this year, CMIC and an assessment company which conducts research and development for digital therapies, started offering simplified big data analysis solutions using AI. CMIC performs data cleansing on pharmaceutical companies’ real-world data and other big data in order to enable simplified analysis. Data cleansing is a process where repetitions, mistakes and inconsistent notation are identified within the database, after which they are deleted, devised or normalized, improving the quality of data and making it suitable for analysis. SUSMED’s automated AI analysis systems are used on the data after CMIC’s data cleansing, which enables sufficient pre-analysis. These solutions are expected to contribute to shortening the time needed to set up clinical trials.

In addition, in the end of April, CMIC and MICIN Company, a leading telemedicine service provider, started offering the first virtual clinical trial system in Japan, equipped as remote medical consultation function. By utilizing the video call function, it is expected that patients who have difficulty in going to medical institution conducting clinical trials will have more opportunities to participate in the clinical trials. Registration of clinical trials will be promoted and any case registration will contribute to reduction of clinical development costs. In addition, this system promotes communication between the study medical institution and the subject, and improves adherence of the study drug with a complicated dosing method. So far, we are lagging behind Western countries in the areas of remote medical consultation and virtual clinical trials. However, triggered by the spread of COVID-19, telemedicine is more widely adopted, which may also accelerate the adoption of virtual clinical trials. CMIC Group will accelerate the initiatives for the future by responding to the needs of our clients to deliver sustainable and stable growth.

This concludes my presentation on our CRO business.

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Unidentified Company Representative, [7]

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And now our CEO, Kazuo Nakamura, will speak about the COVID-19 impact.

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Kazuo Nakamura, CMIC HOLDINGS Co., Ltd. – Founder, Chairman, CEO & Head of Strategy Planning Unit [8]

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Let me speak about how we are addressing COVID-19. As a total health care company, CMIC is combating COVID-19 through clinical trial or manufacturing operations. CMIC Group is committed to maintaining service to support patients and health care professionals while ensuring the safety of our employees. Specifically, while focusing on executing the existing projects, we’re also taking on new work related to COVID-19, which includes the clinical trial monitoring and contract manufacturing of anti-flu drug, Avigan. We started selling antibody test kits for COVID-19 research on May 7 and distributing COVID-19-related information through our electronic prescription network service, harmo, to support our stakeholders.

Speaking about the COVID-19 impact, let me review by business segment, starting with CRO business. Our monitors are now for voluntarily refraining from visiting medical institutions, and there is delay in collecting clinical trial and AE data. We’re also facing temporary suspension of new subset enrollment, postponement and cancellation of new development projects and study subject skipping scheduled visits, which can cause delay of clinical trials. On the positive side, we are contracting new COVID-19-related clinical trials.

Let me now speak about nonclinical CRO operations. Existing analytical and measurement projects are steadily executed with some postponement and cancellation of new development projects.

Moving on to CDMO business. Commercial production is continuing smoothly, but so far, no impact on delivery dates. However, in the future, our supply chain group must ensure stable supply of drug substances. We will closely monitor and follow-up the supply status. On the positive side, we are granted contract manufacturing and packaging of new COVID-19-related drugs, including Avigan.

Speaking of CSO, our medical reps are voluntarily refraining from visiting medical institutions.

For SMO, we see suspension of new enrollment for existing studies and changing or canceling the scheduled visits. On the positive side, they are also contracting new COVID-19-related clinical trials.

For Healthcare, they started sales of the [Log Sense] heat stress measurement system, and launched full-scale sales activities this summer. But the manufacturing plant faced a supply shortage at their manufacturing lines, which resulted in delayed production.

For IPM, they managed to ensure stable supply of their drugs. Under such circumstances, I’ve been thinking what will change with COVID-19. First, our mindset. Health literacy of the general population, including yourselves, has significantly increased. COVID-19 made us realize the appreciation for life and fear of death. Something unimaginable is happening, and you have to protect yourself. Some people are starting to design their own lives. We desperately need treatments and vaccines for this terrifying coronavirus transmitted disease. We may be told not to visit the doctors and hospitals as they’re overwhelmed with the coronavirus crisis.

We have also learned a new way of working, working from home and telework. At the same time, we realized that there is certain work that cannot be done remotely. It includes primary industries such as agriculture and fishery. Our manufacturing plants, analytical labs and animal labs must continue on-site operations. They were excluded from teleworking.

And you have especially realized the importance of money. You cannot feed yourself and families without money, which has become a significant social problem, especially for the poor.

We have also learned that under the emergency situation, our usual way of doing things does not work, which includes the hospitals and other infrastructures. It was clear that Ministry of Health alone cannot establish anything. Emergency use authorization was issued for the drugs to treat COVID-19. And more than anything, we have seen the total collapse of safety and security of life in an instant with the emergence of the new coronavirus.

Now how are we going to change your system to address this new threat? We were caught totally off guard by the invisible coronavirus, but now we have to think about what damage this invisible virus can cause to the mankind, and we must change the social scheme to combat it. What can government, industry and individual do? At the same time, we see the limitation of cooperation and goodwill. When it comes to supply chain, everybody is thinking about their benefit first. We do not receive what we need from abroad under the emergency situation. And unless you have strategically developed the drug to treat your own people, you will not have access to such treatments. How are we going to handle the situation with limited resources? You have to spend your money wisely.

Speaking of lifestyle, now we have to choose the way we work. Lifestyle reform, telework and digitization has made a good progress to some extent. At the same time, we are starting to see some dangers hidden behind digitization, including computer virus, which remains to be a great threat. Again, telework is not suitable for primary and service industries. R&D and manufacturing facilities and human resource services must continue. Supply chain is very critical. If we fail to receive the necessary materials, we cannot continue with our production. We have to secure food and drugs, and we must establish a scheme to prevent heavy reliance on sourcing from abroad. Further meeting is very critical. I am thinking that local communities in Japan are not so rural compared with the rest of the world. You can telework and travel to anywhere in Japan in less than 3 hours. Therefore, we can revitalize local cities and change our lifestyles.

There are many ideas. But in conclusion, I want to speak about what CMIC has done and where it is heading to. I was reminded in the time of crisis that CMIC is a provider of infrastructure. There are some cases where we provided solutions to combat COVID-19 using CMIC’s infrastructure. Take Avigan as an example. We started up the production line, providing monitoring support for the clinical trial, and we can also provide post-marketing surveillance service. We can compress the time line with our infrastructure for drug development. We also have supply chain infrastructure. And most importantly, we have professional talents, especially health care professionals. We cannot train health care professionals with clinical knowledge alone. We need to be trained on ethics and science, knowledge and practice and IT and digitalization. Equipped with such knowledge and experience, our health care professionals can certainly make differences in the society.

Speaking of information, it is important to improve sensitivity when collecting information. We receive information from abroad in a timely manner as well as the current information of medical institutions, new drug development, academia’s research information in Japan. We do have communities. Community with other health care companies, governments, academia and oversea ventures. I felt that we can provide our hardware and software through such communities. This is something we need to strengthen towards post-COVID-19 world, and I have gained confidence that we have very effective tools for the future.

Finally, I would like to read CMIC creed aloud. The creed has been the core policy of the company, and this is a commitment made by all CMIC employees. Our creed: CMIC Group will bring innovation to health care so that all people, regardless of age, gender or race, can live their one and only lives according to their own will. Whether in years when potential has yet to blossom or in later years when the fruits of one’s life are maturing, every individual has an equally earnest desire to live every moment to its fullest. We wish to genuinely answer each and every one of these wills to live. To achieve this, we are aspire to always challenge ourselves for a better future. By evolving and gaining new perspectives, we will create value out of our unwavering determination and continue to contribute to society and humanity.

This concludes my presentation on the coronavirus impact.

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