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Q1 2012 Terumo Corporation Earnings Presentation

28/07/2011 - Tokyo, Japan

Yutaro Shintaku, President, Terumo Corporation: (interpreted) I would like to give the explanations on the financial results for the first quarter of the fiscal year ending 31 March 2012.

Transcript of conference call

Presentation

This term is really the very first quarter in starting out our new mid-term plan and in addition to that, this is really the financial settlement of the first time by consolidating the CaridianBCT and Harvest, upon the completion of the acquisitions. This is the figure on the reported basis, as for the net sales, we achieved JPY95.6 billion of the net sales, which grew by 18% versus the same term previous year.

As for the operating income, when the amortization of the goodwill as a result of the acquisition is included, it rose by 9% at JPY17.4 billion. When the amortization of goodwill is excluded, it rose by 18% at JPY 19.3 billion.

As for the operating profit rate, against the net sales, we achieved 20% of the profit rate. As for the ordinary income, since we had to recognize the foreign exchange loss impact of last year, of which we didn’t recognize for this term. As a result it rose by 34% at JPY16.9 billion. As for the net income, it rose by 11% at JPY9.8 billion. As for the exchange rate, we used JPY82 per dollar and JPY117 per EUR, and we saw significant JPY appreciation over the term. As for the ratio of sales overseas, we achieved greater than 53% of the sales ratio in markets outside of Japan, despite the JPY appreciation. As for the BCT, they are consolidated as of 1 April and Harvest as of 1 May.

Now here in this slide, we are showing you the proforma based comparison of the financial results so that you can confirm the actual sales growth when compared to the previous term, upon the completion of the acquisitions. On this basis, when the foreign exchange impact is excluded, our net sales grew by 7% and operating income, when the impact of acquisition of the companies is excluded, also rose by 13%.

Now when I talk about exclusion of the acquisitions impact, it actually means that it is their profit that excludes the newly accrued amortization of their goodwill, as a result of the acquisitions as well as the intangible assets. So in that sense, it is a pretty much apple to apple comparison of the same term previous year and we are achieving in both the top line sales, as well as a profit increase, even on proforma basis.

Now here you see the additional explanations on the performance of CaridianBCT. As for BCT, as I explained at the time of acquisition, it is a company that has been achieving considerable growth on the basis of very strong technology power that they have, and especially for the first quarter, they achieve significant growth of their sales, especially in the therapeutic Aphaeresis area, where they boast of the very high market share and on a USD basis, they achieved double digit growth for both the sales as well as operating profit, versus the same term previous year - a very favorable start.

Now I would like to explain the existing businesses, excluding the acquired companies. So as you can see, this is pretty much the apple to apple kind of comparison of performance. As for the net sales, we achieved the 3% increase, at JPY83.4 billion. Operating income rose by 6% at JPY17 billion. Though we were affected by the earthquake disaster, and JPY appreciation, still we have been able to achieve the growth for both sales, as well as profit.

Next, you see a more thorough look at the performance of the existing businesses. First of all I would like to give you the regional sales. Here in Japan we saw a 4% increase in the net sales compared to the same term previous year. Some products in the hospital businesses, such as infusion products, that there were some concerns - temporarily concerns on the supply, as a result of the earthquake disaster, leading to some decline in the sales compared to the previous year. But for the [inaudible] that we’d lost in May, we achieved a significant growth, which I would like to explain more in detail later on.

As for outside of Japan, we sold 8% increase in the sales, excluding foreign exchange impact. So the interventional system business in all regions we have seen the strong growth driving overall growth, especially in Chinese market, on the local currency basis, saw a significant growth of the sales, achieving 32% of growth.

The background to this strong is really in the overall health care market expansion in China. So not only the third grade hospital, but even in the so-called second grade hospitals, such interventional systems come to be more widely adopted for diagnosis, as well as for the treatment, whereas in America’s market, we saw somewhat stagnant growth at 2% on the local currency basis.

This is possibly because of the decline in the sales in the North American Market, because of the restrictions on the shipment of some specific products, as a result of the settlement that TCVS reached with FDA in the previous term. However, for the interventional system, we continued to see the strong growth and we see no problem in other business areas.

Next I would like to explain the sales achieved in different business segments. First about our hospital business. Here in Japan, as I already explained before, [inaudible] around infusion products, we saw some slight decline in the sales for some specific products affected by the natural disasters. However, in chronic disease market, the main products, such as the same as [inaudible] nutrition products, as well as the consignment business, in the DND business area, contributed significantly to our sales.

For the market outside of Japan, the fusion pumps and syringe grew very strongly in Latin American market and for the hospital business, as a whole, saw a 2% decline in the sales, when compared to the same term previous year and on a local currency basis, the 1% decline in the income.

As for the cardiovascular business, the Nobori drug eluding stand that we launched in May, achieved a very strong growth, expanding the market share, whereas outside of Japan, the Nobori continues to grow strongly in European and Latin American, as well as Asian regions. We believe that Nobori is the product that is quite successful in many markets, and also in American market, the TRI, that enables the wrist access, has come to be widely adopted and currently its penetration is exceeding 10% in this market. We see the very strong growth of such interventional system products leading to the higher growth overall. Sales grew by 14% on local currency basis.

As for the blood system business, we saw some decline in the sales of the blood bags and yet we expect to further recover our sales in the second half. But for this term, we saw on the local currency basis, the 2% of negative growth for this blood system product. But outside of Japan, the automatic blood products system TACSI saw a significant growth in the sales.

As for the health care business, we saw the rebound from the flu epidemic of the year before, but now which is very much settled, leading to the 43% growth in the net sales on local currency basis.

Next I would like to explain about the growth profit rate. It has declined somewhat to 51.6% minus 0.5% versus the same time previous year. But we have seen some impact of JPY appreciation, but going forward with the further globalizations and shift towards the more profitable products and improvement of the cost structures, as well as improvement in the activity that we would like to continue to make efforts to further improve on the growth profit rate.

Next, SG&A. The SG&A total for this term - JPY26 billion - versus the same term previous year, it has declined by 1%. As for the general administrative expense, we were affected by the increase in the volume as a result of the growth. But we have been able to contain that with the operational efficiencies and the JPY appreciations, leading to the rate of general expenses against the sales to 26.2% minus 0.3%, versus the same term previous year.

As for the R&D expense, it was JPY4.3 billion, minus 13% of the same term previous year. Also, last year some of the projects advanced more quickly, leading to more advanced investment in the previous year. Through the year basis, we expect the R&D expense of approximately JPY20 billion, for the existing business and therefore expect from Q2 to Q3, that further increase in the R&D expense.

Now, with this slide, I would like to explain the impact of the acquisitions of BCT on our consolidated balance sheet - though this is before the final audit and we now have a pretty much overall picture, so I would like to share this result with you, since I’m sure that you will be very much interested in this.

On the right hand side you see the consolidated balance sheet as of the end of June. Of course our total value of the Group has risen, from around JPY400 billion, to JPY690 billion, as a result of the acquisitions.

So as you can see that we now have the new varying of JPY220 billion, that is newly added. Also, as a result of the acquisitions, now we have these new additional goodwill as well as the intangible asset. So on top of the existing good will and intangible asset, the goodwill amounted to JPY141.6 billion and intangible asset, JPY124.2 billion.

Now, on the left hand side of this slide, you see the structure of the goodwill that has newly arisen as a result of the acquisitions. As for the acquisitions, the price totaled JPY215.6, including the purchase cost of JPY210, plus some working capital and acquisition related expense.

As for the technology of BCT, that has been valued at JPY117.4 billion, as an intangible asset. Leading to the good will of JPY119.2 billion. There is this deferred tax liability of JPY45.3 billion, which is recognized in line with the recognition of the intangible asset. Of course, on the balance sheet basis, this would also lead to the further increase in the good will.

As for the good will, it is to be amortized over 20 years, and also for the intangible asset. It is in principle to be amortized over 20 years and the foreign exchange rate that is used here is JPY80 per USD.

Next I would like to discuss our consolidated business forecasts for this year. At the time of May and we have announced some performance figures at that time - we have announced the net sales of JPY332 billion on the operating income of JPY65 billion, excluding the acquisitions of BCT and of course in those days we were still - had some unclarity in the wake of the disaster. But now in the month of July and we see further clarity in these forecasted numbers and therefore we have come up with this revised forecasts and that is the net sales of JPY390 billion and operating income of JPY67 billion. Before the amortization of good will, it amounts to JPY74.6 billion. So on the basis of these figures, when compared to the previous year’s basis, we are achieving double digit growth.

But when we look at the revision, just on the existing business basis, for the net sales, this amounts to the revision of JPY8 billion and operating income revision of JPY2 billion.

Now you may wonder why the operating income is not really growing, despite the addition of BCT. But this is because this reflects the amortization of the good will, because the operating income that is newly added as a result of BCT addition, is pretty much comparable to the amortization of the good will that will be required.

Now I’d like to go on to discuss the topics in this quarter. First I would like to talk about the launch of Nobori in the Japanese market as well as the introduction of the new products as the basis of the internal growth. Now this product of Nobori on the 5th May, we were able to launch this product in the Japanese market. We have been able to achieve a very strong growth since launch. For the single month of June, we have been able to achieve the market share of 30% on valued basis.

Nobori was launched initially in the year 2008 and up until last year, it had achieve the cumulative sales of JPY10 billion on global basis. But for this year, adding the Japanese market, we aim the global sales of JPY20 billion on the single year basis. This Nobori based treated is widely covered in mass media and it’s blessed with the very high level of expectations from our customers.

Next I would like to discuss the new products to be launched going forward. Recently some concerns have been expressed on the lack of new products from the existing business field to really support internal growth and we have been working on this over the past couple of years in a very intensive manner, leading to the significant increase in the new product launches.

For this term we expect the 45 new products launches into the market, both in Japan as well as outside of Japan to double the level of the previous ear. For instance, we have Nobori as well as the new embolization coil for the cerebral aneurysm already supporting the growth for this year. Also we expect the new product launches in the hospital businesses and also for the DM field, we are now launching the very first in Japan, the blood glucose meter linked with electronic health records and also the PG Water is another expected due launch, which is the new rehydrating water jelly to be used in the hospitals. We expect a very high level of sales from this product.

Furthermore, the new IV Catheter, as well as the other new exciting products are expected to come and outside of Japan we will be launching the Kymerax precision-drive articulating surgical system and this is another new product in the surgical system to be launched in the European market and also as part of the hospital products for China and Asia, we expect to launch the new infusion plant with the different specifications for the said market. Also, we have this new product coming out of Vascutech to be launched in the European market and we would like to continue to launch new other products and would like to further accelerate these new products in the global market.

Lastly, I would like to share with you the latest topic on China. On 18 July, we received approval for the application we have been filing for the withholding company in China. With this, we can now strengthen our organization in this market by fully integration development, production, sales and distributions. In addition to that, we are newly establishing four sales offices, on top of the current 8 sales offices that we have in this market. Through this, July was the rapid growth of the Chinese market. We believe that we can further accelerate the establishment of the [SERA] and in the fiscal year 2013, we’d like to aim at the total sales of JPY20 billion, double the current level.

We believe that this term is an extremely important year for us in aiming at the tremendous growth expected in the mid-term plan and to achieve the double digit growth rate in a sustainable manner and at the same time we are confronted with the challenges of recovering from the disasters as well as to create an early synergy with the acquired companies and yet we expect a bright prospect for our company and we are going to make all out efforts to try to achieve further growth and performance.

Thank you very much for your attention.

[Break in audio]

Since this is the first presentation made after the acquisition of CaridianBCT and Harvest, so I would like to give some additional information on these companies.

So these are the snapshots from the meetings that we had with the employees of CaridianBCT in Denver United States, where they have their headquarters. Of course there are many employees to this company and therefore approximately 150 to 200 associates gathered together as the - in the Company at the meeting - and so it was a little over a one hour session, repeated over three times. So of course it was really challenging for me to go through the Q&A session for three times. But of course it was extremely important and I tried my best.

So seated right next to me is David Perez, the leader of TerumoBCT and as you can see we have this great passion in discussions in these meetings. Again this company is the Company that has a very solid and very serious culture and people are ready to listen to our discussions very keenly and we really had a good discussions that we all want to challenge new opportunities together with Terumo.

So this is one example as such, so of course when we have decided to acquire this company, we certainly expected all these new undertakings to come out of this company. But it is only recently that we have come to learn all the details and I would like to introduce to you this new business opportunity coming out of the BCT technology and that is one - the therapeutic vaccines for cancer - and of course CaridianBCT is not a pharma-company, so they are not directly involved, but again the world of the therapeutic vaccines cancer, it is only starting out in a revolutionary manner.

One company actually got an approval from FDA last year, for the therapeutic vaccine of prostate cancer and just overnight their share price rose forty fold and currently their market cap is a little over JPY500 billion.

Again, CaridianBCT has been involved with the development of this therapeutic vaccine with this company and that is that from the patients the immune cells would have to be harvested in the very sharp manner and that is achieved with this device called Spectra, as well as the [inaudible] of CaridianBCT. All of the immune cells, especially dendritic cells would have to be harvested and then after antigen introduction, they are to be returned back to the patient.

Of course such an approach has been known for some time, however what has been most difficult was to really embody them into a product and that has been finally achieved with other technologies and approved and we expect the further development going further.

Again, this company plays an extremely important role in this very critical process and so I have high expectations from them.

So that’s the kind of a company that CaridianBCT is and again when viewed from the Terumo Group as a whole, and we also need to look at some of the endeavors made in Terumo Company and that is about the Myocardial Sheath and currently we are having these consultations and clinical trials here in Japan and trying to start the clinical trials before the end of this year and also Harvest Technologies and they are working on the regenerations of the vessels of the lower limbs.

Again in the regenerative medicine field, the various approaches are being developed, very important technologies and devices are currently being developed and therefore going forward, I’d like to explore all kinds of the business opportunities out of these technologies and that’s exactly what three of us - three companies are currently discussing. I’m sure very soon we should be able to deliver to you the outcome of such explorations amongst us.

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