AGC Inc. (5201) Earnings Call Transcript

To start the Life Science business, a briefing of AGC. [indiscernible] act as a moderator. My name is Ogawa, Corporate Communications in IR division. Let me introduce the participants from AGC. We have Mr. Noriyuki Komuro, a Managing Executive Officer and President of Life Science Company. First, Mr. Komuro will present business strategy of Life Science company, and we will have Q&A session. We plan to end at 6 p.m. I hope you will cooperate with us. If you have any questions, please use the Q&A function. So I'll let -- hand the microphone to Mr. Komuro.

Thank you very much for joining us despite your very busy schedule. Let me get started with Life Science business briefing. Please go to the next page. I am sure that you have seen this several times, but in AGC Group as you can see here, we have core businesses and strategic businesses. So we have what we call ambidextrous management. Life Science company is one of the 3 strategic businesses. So from the AGC Group, the high growth and high level of the profits are expected from Life Science company. Let's go to the next Slide. So because of that, in 2023, this year, in January, as you can see here, the Life Science company was established. Until last year, it was within the chemicals, and it was one of the divisions, but with this year, we have become the Life Science company. As you can see at the bottom left, last year, Life Science company sales was JPY 141.8 billion. So it's about JPY 2 trillion at AGC Group, so about 7% of the total sales is what we have in Life Science company. As you can see, the number of the employees globally is about 3,200 as a company. And the Life Science company, mainly, as you can see on the right-hand side, have Biopharmaceuticals using the biology. And the second is the Small molecule Pharmaceuticals & Agrochemicals CDMO business. So those are the 2 major businesses that we have. And the sales, as you can see, Bio is 70% and the synthetic small molecule pharmaceutical & agrochemical is about 30%. Next page. So starting with this year, we became a Life Science company. But as you can see on this page, in AGC, the Life Science as a business has a history dating back to 1973. So about 50 years ago, we started to focus on Life Science and started our business. And on the left-hand side, we have a small molecule synthetic. And on the right-hand side, we have biopharmaceuticals. On the left-hand side, in the synthetic small molecule pharmaceuticals in 1985, the CDMO contract development manufacturing organization business started. And in the biopharmaceutical area in the year 2000, Biopharmaceutical's CDMO business started. So as you see doing the Life Science business, probably you did not recognize that, but inside the company, we do have a quite a long history. So during those years, we have developed and bolstered this Life Science business. Next page. So on this Slide, this is a new Slide, which is not included in your materials. So from now on, the strength of AGC and Life Science, we start talking about that. But before I do that, Q1 results, which were announced recently is shown here. So there were some -- many questions on this. So I'd like to briefly explain the quarterly first quarter results. And after the brief explanation, I'd like to go into the Life Science business itself. So that's why I'm showing you this slide. So as you can see on this slide, Q1 compared to last year, the sales was the same and operating profit was significantly down. And we received many questions on this point. The reason is that as you can see, the COVID related special demand is now gone, and of course, we are offsetting that with other businesses. So the sales remained at the same level as FY '22. And the major growth of the sales came from the U.S. new plant, and because of that, the new plant fixed cost is high. And in terms of sales, it was up or increased, but more than that, the fixed cost was higher. So that part pushed down our operating income. And with the startup of our new plant, there were some breaches or issues, and that was one of the reasons why the profit was down. The new plant starting up, we are struggling with it. But in Q2 and onwards, we expect to make improvements. And if the startup goes well from now on, for 1 year this year, if you look at the full year, probably we would see a major change. So the full year forecast for this year has not changed at this moment. So now, let me talk about the strength of AGC Group. Next page, please. So the biggest characteristic that we have or the strength is, as you can see here, in U.S., Europe and Japan in 3 regions, we have 10 sites. And in those sites, we have high level of services that we are providing at the same time. And in those 3 regions, what we are showing, you see the list of plants in factories. So originally, in the area of the biopharmaceuticals, the bio -- micro bio business, that's what we have. And then the mammalian technology was acquired. And then gene and cell therapy were acquired. So through those M&As, we gained technologies and applied those technologies to other areas. More specifically, in 2017, we acquired CMC and the mammalian technology that we obtained was applied to Chiba in Japan or in Milan, we have acquired the gene and cell therapy technology. And now this is applied in Longmont in the United States or in Yokohama, we are planning the next plan. So the new modalities -- the high-growth modalities are the ones that we acquire and quickly deploy that to different regions or different sites in the world. So basically, that is our growth strategy. Next page, please. So this is our strategy. And in that, we have a flexible production system. And in order for you to understand this, it will require basic explanation at the top -- sorry, the bottom right, if you look at the increase of the number of projects, this is -- it shows the process of pharmaceutical development. So starting with the preclinical and going through the Phase I, II and III and then getting the approval from the regulator and go to the commercial stage. So naturally, as you progress in the process, the required volume of the pharmaceuticals would increase and also the quality management level would also get higher. So as it says here at the top point that synthetic pharmaceuticals at the beginning, early stage, the volume of manufacturing is at the low level. So we'll focus on that. So a small scale like facilities is necessary. And then after the approval, this would be delivered to the patients in the world. So for that, we need a bigger facility. So from the small scale to the large-scale reactors, we have all of them. [Technical Difficulty] Next slide, please. So we have a flexible production system. And with our good track record, we are getting additional orders. And also as a CDMO, we are focused on the sustainable business as well. So let's look at the business environment. Earlier, I touched upon this. But once again, I'd like to talk about our recent business environment briefly. As you see on this Slide, the COVID related special demand is now gone. And bottom right, our Life Science sales trend is shown -- showing the non-COVID and COVID breakdown. And until last year, you can see here, the COVID related special demand was what we had. But this year, there are some remaining, but it's almost gone. And we are offsetting this with non-COVID growth. And what we expect here is as follows. As you can see on the left-hand side, what we do is the synthetic pharmaceutical and the biopharmaceutical and gene and cell therapies. So those 3 areas are that we focus upon. And with or without the COVID-19 in coming years, we expect those 3 to continue to grow. And as you can see, that is our expectation. And in order to win, we take measures. As I explained, we have been taking measures. So the capacity that we have right now and track record, and with those, we'd like to continue to expand our businesses. However, having said that, in the long run or medium term, that is what we expect. But in the short term, currently, the biotech investment inflow has been slowing down. And as you can see at the bottom on the left, shown in red, stock prices has been up and growing above. And from the customers, the funding difficulties are mentioned. So in comparison to the plan that they had, there have been some delays or adjustments. So for example, out of 5 projects, they are reducing it to 3 projects. So we are starting to see such phenomena. And as I said, for this year, the impact of that is something that we are watching very closely, and we have to be very careful about that. Next page. So now I'd like to talk about the future business and growth. So as I mentioned earlier, in each business area, we expect the growth in each area. And for that, we are taking those measures. So first of all, starting with synthetic pharmaceuticals. In this area, our position is that rather than market share, we are in the niche area. So we want to make sure that we can utilize our strength to expand our businesses. And that is our basic way of thinking. But still, gradually, the pharmaceuticals are becoming more advanced and structurally complex and difficult. And because of that, as you can see here, in 2020, increasing the expansion in 2022 to about 10x or 1.3x in Spain, 1.5x in Fukui. So gradually and steadily, we are going into the areas that require a high level of technologies. Next page. For biopharma, again, as I mentioned, we are focusing on our 3 regions. So we are now trying to expand the biopharmaceutical CDMO capacity in Japan, particularly as we showed earlier, we have the [indiscernible], which is large for gene and cell therapy. And so after we acquired Milan, we also have long launched in the United States. That's one site we have there. And we are intending to add another site in Japan, in Yokohama. Currently, we are setting that possibility. Next slide, please. And so this is just for your information. As I mentioned earlier, we have CGT. So we have Yokohama site that we are considering for gene and cell therapy and for new fields and new technologies. And just as one example, we are focusing on the possibility of exosome CDMO. We are actually beginning this already. Our strategy with regard to growth, we are trying to introduce new services that have a large growth potential, and that will be rolled out globally. That's our basic strategy, and so one example is this using exosome pharmaceuticals once the market has a right to size, we can roll out that operations globally. Next, please. So this is the summary chart of what I've already introduced. I won't be able to go into every detail here on this chart. For example, if you look at number 2, this is about getting a JPY 200 billion of sales. The investment [ entering ] has already been decided and with the existing capacity, we are very well capable of getting to sales of JPY 200 billion. And for further growth, we will have to add to this. As you can see, from 2024 and onwards, we are considering further capacity expansion as well as M&A. Next slide please. This is my final slide. And so based on what I've already explained by 2030, we are trying to achieve sales of JPY 400 billion, and we believe that it's very doable. Well, actually, there was another slide, I'm sorry. We talked about this JPY 400 billion in sales, and that's really based on the blue part of this pyramid, the strengthening and expansion of existing businesses, and that almost replicates the tool ability. We are also trying to look at new domains at the top part. So it's not just pharmaceutical and agrochemicals CDMO but other areas such as value chain. We are currently only in the API part, but you would think about further upstream and downstream or more actual drug products. So that would be my brief presentation. Thank you very much for your kind attention.

[Operator Instructions] My first question is about the positioning in terms of the market share and strength in comparison to other companies or competitors?

Well, acquisition of ours in the market, as I mentioned, we have various modalities and various pharmaceutical businesses are what we have. So I'd like to talk about individual business. So the biggest sales comes from mammalian sales. So about the mammalian sales, our position I think going back to Page 10, I think. So as you can see, we have a good track record of the commercialization on the commercial stage. And in the world, if you -- we are #5 or #6 in terms of the number of the drug substance contracts. So we have a good track record. And also on Page 9, I talked about the single-use bags and the capacity of the single-use bag is #2 in the world. So as I said, for us, 70,000 liter is our capacity and [indiscernible] is 20 -- 90,000. So we are #2. So using this capacity with our track record, we are working on this business and that I believe is our strength. And another is the CGT or gene cell and gene therapy and [indiscernible] is the company that we acquired and [indiscernible] was indirect discovery and we -- then went to CDMO. And because of the history, they have a very high level of technology and development capability. And right now, probably they are about a little more than 20 examples, which are approved in the commercial examples of the gene and cell, and 3 out of them are by this company. So last year, they had several PPQ right before the commercialization phase is something that they have. So there are the top runners in this industry and is much trusted by their customers. And I think that is our strength. But this area, unlike the mammalian, there's no clear number that I can share with you in terms of thousands of [ leaders, ] and they do not really disclose the sales side. So objective numbers are difficult to provide, but they are one of the top runners. And the last is synthetic pharmaceuticals, and as I mentioned in my presentation, in terms of capacity and the ranking of the sales, we are not so strong. So China and India utilizing locals compared to those CDMOs meaning our sales is much smaller. But the [indiscernible] chemical because using our chemical technology with AGC, we can focus on the area, so that we can realize the high profitability and high growth. And so that's all I can say about this question. Thank you very much.

Next question. Update on the impact of bioventures and biochemical financing, if there is an impact or not, if there's certain impact to get [indiscernible] strategy. What would figure a review on your current strategy, please?

Thank you very much for your question. I actually just touched upon that earlier. But if you go to Slide 15, please. Actually Slide 10 please. So with that [Technical Difficulty]. No, I am asking for Slide 10. That's largely related to the late stage and you have the professional thing in view. That is not where you have difficulty really in the early phase and that phase [Technical Difficulty] will have a impact on finance difficulty as this. And so if you go to the lower right-hand side, so in the early stage, it's 1/4 of our overall sales. And so that part will be impacted significantly. And also among our customers, well above out of 1/4, start-ups -- the percentage of the start-up is high. As an average of the industry, about 70% to 80% are out of the early-stage start-ups. So as we progress in those projects, the major pharma companies will acquire those start-ups. That is the general trend. So 1/4 is the impact that we expect to see. But quantitatively, what will be the impact? That is something that we are watching closely. And also another thing is that whether we will change the strategy or not. As I said earlier, in the medium to long term in each modality, we expect steady growth. And in each area, we want to make sure that we focus on the area that we can take advantage of our strength. So in a general sense, we are not going to change the strategies. But depending on the economic situations, the timing of the investments might be adjusted. But in a general sense, we are not likely to change the strategy. We are not thinking about it right now. That's all I can say about this question.

Next question is related to the previous question, about AGC sales. What is the percentage of the biotech startups?

You mean the percentage of biotech pensions [indiscernible] our sales?

It is about overall Life Science sales. So including all the synthetic pharmaceutical and others.

Roughly speaking, about 60%, I would say 60% would be the biotech ventures.

On this page, early stage out of 1/4, you say that high percentage is the bioventures, but including all of them.

So early stage, about 80% are biotech ventures, but in the area of the commercial divisions [Technical Difficulty] stage stockholders bioventures is actually percentage is higher because in the past, the bio -- the major pharmas used to acquire those biotech ventures, but there are more bio ventures we would go through until the commercialization phase. So in looking only at the commercializing phase, we can see that -- we can say that the percentage of the buyout expenditures are getting higher.

Let's go to the next question. The next question, related question. So SME Biotech, there is a slowdown of the early-stage projects and so this has a certain impact on your earnings. So vis-a-vis the '23 and '24 sales outlook, what level of the impact is expected? Mr. Komuro, could you answer?

Well, it's not just this year, but next year, if you consider that current monetary market impact and to what extent it would influence, it is really dependent on that. But that is something that I would like to ask the investors. So right now, the impact on our business is something that we are watching very carefully. And that's all I can say at this moment.

Let's go to the next question. What about the slowdown in the market growth because of the flow slowing down into biotech, would you review the CapEx going forward?

Well, that's also related to the earlier slide, Slide 10. And so I keep going back to this, but it's this one quarter in the early phase that is really hit by that phenomenon. And revenue-wise, on we have 3/4 of the sales in the late phase and commercial phase drugs. That's very different. So the investment timing will be decided watching the late phase and commercial phase drugs. So obviously, there will be some temporary ups and downs with regards to capacity utilization. But with regards to large CapEx, that's part of an early phase. Market slowing down does not have a material impact. It may delay things slightly, but that's the extent.

Next question about the SUS, the difficulty of start-up, what are the difficulties, and when do you think that you can collect on the upfront investments?

Well, the single use and SUS, each one of them have different difficulties. But in the case of S-U-S or SUS, one of the difficulties is that -- all can I say it is single use is disposable. So in the case of bags or tubes, they are all disposable. And on top of that, there's a reactor and we connect the tubes, and we would move some things into the [ tanks. ] So it's easy to understand. So it is connected. So how is this connected to another plan? It's very difficult to see. And the facilities, unless you have a full understanding, you cannot operate the facility. And also in order to operate the facility, machine is used and you have to also understand that. So if it is automatically done, of course, you can just look at the screen and -- to operate it. But unless you understand what goes on, it cannot be utilized correctly. And also the facilities need to be maintained, and we have to take care of the contamination. And in the case of single use, it's much easier. So those are some of the difficulties that we face.

So as for the collection of the upfront investment, how long does it take before collection?

Collecting the investment in terms of the profitability, how long the lack of profitability would consider? That is the question, right? I think that the upfront investment is placing a lot of pressure on the -- on that -- on the profitability, right? So it's dragging us. And next year, probably, it would breakeven probably and in 2 years and onwards, it would start to contribute to the profit. That is what we expect.

We'll go to the next question. So what about your capacity utilization. So I understand that you have some difficulty in Q1, that's because you have new SUS, but if you just look at SUB, I don't think your utilization was that different from last year average. So can you give us the quarter-to-quarter development and change breakdown?

Thank you for your question. So you're asking for capacity utilization just for single-use bags. Well, as I said earlier, the special demand related to COVID, let's see what slide we have. Yes, Slide 14. So the COVID-related demand was not SUS, so it was rather single-use bags. So from last year and this year as well, I don't think there's much year-over-year difference. This year is actually a little higher.

Let's go to the next question. So gene therapy and cell therapy. And comparing that against the Mammalian therapy, how -- what is the difference of the profitability?