Terumo : "Q&A Session at the 5-Year Growth Strategy with a 10-Year Vision"(288.1 KB)

Among the information that Terumo discloses, the forward-looking statements including financial projections are based upon our assumptions using information available to us at the time and are not intended to be guarantees of future events or performance. Accordingly, it should be noted that actual results may differ from those forecasts or projections due to various factors. Factors affecting to actual results include, but are not limited to, changes in economic conditions surrounding Terumo, fluctuations of foreign exchange rates, and state of competition. The market share information in this presentation is partly derived from our own independent research. Information about products (including products currently in development) which is included in this material is not intended to constitute an advertisement or medical advice.

Terumo Corporation

December 20, 2021

Q&A Session at the Announcement of

5-Year Growth Strategy with a 10-Year Vision (FY2022-FY2026)

Outlined below are the Q&As from the Announcement of "5-Year Growth Strategy with a 10-Year Vision" on December 16, 2021.

Questioner 1: The first question concerns page 7 of Mr. Osada's presentation, where he talks about how much growth there will be in the area of access expansion, mainly with the increase of the radial approach. The quoted figure for expected increase for these was JPY40 billion and JPY25 billion, respectively.

On page 9, the forecast increase in proportion of the radial approach is mentioned, and I think that's reasonable. However, I think that lower extremity arteries and cancer treatment are probably not such a simple matter. I think there are 2 factors behind this. 1 is the shift from hospitals to ASCs, or day surgery centers, where endovascular catheterization is performed. The other is the question of using a wrist approach in ASCs. Therefore, I think the thing that will show the trend best is the use of the lower limb artery approach.

The reason I say that is that the figure for ASCs in the US is already 25%, so if the wrist approach doesn't spread here, other places may be difficult. In the financial results for some other companies, there is talk of using peripheral treatment in ASC, that is, using a wrist approach. However, we are not able to see any specific movement when we look at hospitals. Has your company seen evidence of a shift from hospitals to use of a peripheral approach at ASCs?

Also, the growth of your company's access products in the past has been due to your dedicated products for the radial heart procedure, or TRI. This time, you already have Destination, Glide Sheath Slender, Progreat, and so on in the lower extremity arteries, so we know that they will grow, but this time, you have therapeutic devices. Last time, there were no stents or balloons specifically for the wrist. Since this is now available, please tell us how much of a positive impact it will have on the expansion of access products, especially focusing on peripherals. Has growth in this area already started, and if so, how much growth has there been?

Terumo (Osada): Thank you very much. As you mentioned, the transition to ASCs has started in the US. Even before that, we recognized the development of this tailwind. All countries, including those outside of the US, are facing tight medical finances, and this is creating an opportunity for the radial technique, which not only shortens the hospital stay, but also reduces complications such as bleeding.

Among the information that Terumo discloses, the forward-looking statements including financial projections are based upon our assumptions using information available to us at the time and are not intended to be guarantees of future events or performance. Accordingly, it should be noted that actual results may differ from those forecasts or projections due to various factors. Factors affecting to actual results include, but are not limited to, changes in economic conditions surrounding Terumo, fluctuations of foreign exchange rates, and state of competition. The market share information in this presentation is partly derived from our own independent research. Information about products (including products currently in development) which is included in this material is not intended to constitute an advertisement or medical advice.

In addition, we are facing a shortage of medical staff due to the coronavirus pandemic. I believe this is an area that the radial approach can contribute to.

Overall, the number of lower extremity interventions and surgeries has been increasing. In addition to this, the ratio of radial procedures will increase, and we believe that this is an overall structural situation that will grow. We call this radial approach to the lower limbs "Radial to Peripheral." Our strength in the area of R2P is that we will be expanding our product line to include vascular access, deeper lesion access, and the treatment products that you just mentioned. In addition, we own the patent for this R2P technique. And it protects a technique that uses a combination of parent and child catheters.

From a technical point of view, the success rate of the operation can be improved by using thinner catheters or M-coating all over the catheter, which makes it easier to reach the periphery, and less likely to kink. The fine manufacturing processes required to produce these products would be extremely difficult for other companies to imitate. I believe that no other company can match them.

We are also conducting clinical studies in Japan and the US. What we are trying to do is to collect data on the extent to which complications have been reduced and the success rate of the procedure has increased.

In addition, from a performance standpoint, the products used in R2P actually have a high unit price in the US. The unit price is higher than that of the products for femoral approach. This will support the bottom line in terms of business performance.

As I said, the radial ratio is in the 20% range, but the coronary artery ratio is 60%, 70%, and 80%. On the other hand, the reason why the percentage is low is that long catheters are made for the lower limb blood vessels. It is possible to make a long catheter, but the longer the catheter, the more difficult it is for the doctor to operate. In particular, it is difficult to push, rotate, and cut down on lesions with strong calcification such as SFA and BTK with a long catheter. So in R2P, simpler cases will be the main focus, and we anticipate that the radial ratio will increase.

On the other hand, I believe that difficult cases, such as the ones I mentioned earlier, will still be carried out mainly through a femoral approach.

Even for the coronary arteries, at the beginning of the year 2000, we did not expect the radial approach to be so widespread. It is now between 60% and 80%. We are working on these peripheral approaches with the expectation that use of the radial approach will continue to increase.

I hope I have answered your question.

Questioner 1: As a follow-up, you mentioned a clinical trial comparing femoral and radial approaches in terms of bleeding rate or bleeding events. Do you know specifically when the results of that trial will be available?

Among the information that Terumo discloses, the forward-looking statements including financial projections are based upon our assumptions using information available to us at the time and are not intended to be guarantees of future events or performance. Accordingly, it should be noted that actual results may differ from those forecasts or projections due to various factors. Factors affecting to actual results include, but are not limited to, changes in economic conditions surrounding Terumo, fluctuations of foreign exchange rates, and state of competition. The market share information in this presentation is partly derived from our own independent research. Information about products (including products currently in development) which is included in this material is not intended to constitute an advertisement or medical advice.

Terumo (Osada): I can't give you a clear answer on that yet, but the trial is in the registry. Progress is being made both in Japan and the US. We expect to be able to release the result in 2022 at the earliest.

Questioner 1: Understood. Moving on to the second question. Let me go back to page 7, which shows the overall picture of sales and operating income for innovation. In the section covering the launch of new products, I can appreciate the figure for stroke, for example. However, JPY30 billion for aortic aneurysm treatment after launch seems like quite a steep goal. Of course, there is a base in Europe and Japan with stent grafts, but that doesn't exist in the US. Considering that most of the growth will probably be in the US, how much of this JPY30 billion can be divided between thoracic, abdominal, and open stent grafts?

One of the most difficult things in creating a forecast is how to consider Thoraflex Hybrid. The reason is that this is a Japanese technique, so it was very well received in Japan. However, it is very difficult to predict whether American specialists will use it in the same way as in Japan. I'd be grateful if you could comment on this.

Also, I'm sorry, but just 1 more point. In the area of lower extremity arteries, I think this is the first time hearing about veins from your company. On page 12, there is a peripheral vascular embolization plug, which I think is a diversion of the WEB for varicose veins. Could you tell us about the forecast market size of this product? This is my last question.

Terumo (Osada): Thank you very much. The stent graft business, as you mentioned, is one of the key drivers for GS26. Our strength is that we are the only company that can supply thoracic, abdominal, hybrid, and surgical grafts as a set.

It is difficult to give a clear breakdown of the JPY30 billion, but the main part will be thoracic. The Relay Pro, a promising new product for the thoracic segment, has been approved in Japan and the US, and is now ready for full-scale marketing.

Its thin profile is one selling point. It comes in 19 to 23 French, which is thinner than those of other companies. Although a competitor does offer some 18 French products, we believe that our products are superior. Specifically, the fabric thickness and the stent wire thickness is the same level as that of the existing stent graft.

In addition, when the catheter is raised, it might cause a cerebral infarction if a blood clot jumps out. By making it a soft sheath, it is expected that there is less risk of ischemic stroke.

In some products, the tip of the stent graft is not covered with material, so there are bare metal parts sticking out. However, we have an assortment of non-bare products, where no metal is exposed. This is said to be effective in cases of dissection. It is said that the bare stent induces dissection, so the launch of this non-bare product will allow us to use it for dissection as well. We are considering expanding its indications to cover dissection in the near future.

We are not that aggressive in the number of hybrids we have in the pipeline. It is difficult to

Among the information that Terumo discloses, the forward-looking statements including financial projections are based upon our assumptions using information available to us at the time and are not intended to be guarantees of future events or performance. Accordingly, it should be noted that actual results may differ from those forecasts or projections due to various factors. Factors affecting to actual results include, but are not limited to, changes in economic conditions surrounding Terumo, fluctuations of foreign exchange rates, and state of competition. The market share information in this presentation is partly derived from our own independent research. Information about products (including products currently in development) which is included in this material is not intended to constitute an advertisement or medical advice.

predict how much hybrids will expand in the US and Japan. However, we are the only company that has both surgical grafts and stent grafts. We have combined them and are actually marketing them in Europe. In Europe, we have about 80% of the market share, and it will be released soon in the US. It will also be launched in Japan.

We have an expectation that the number of cases will be highest in the US, then Japan, and then Europe. Even so, we are not very bullish in our sales targets.

For veins, the product is not utilizing technology of WEB, but AZUR Plug.

Questioner 1: And how about the scale of sales?

Terumo (Osada): I can't give a specific estimate on sales, but within GS26 as a whole, we would not expect it to be very large. You can think of the expected value as an add-on.

Questioner 1: Thank you very much.

Questioner 2: In the waterfall chart on page 12 of the President's presentation, I see the analysis of the increase/decrease in operating margin. The target is to improve the operating margin by at least 2.5% over the next 5 years. If you break this down roughly, is it correct to assume that the gross margin will be around 2% and the SG&A ratio will be almost flat?

Terumo (Muto): I will answer. As you said, it is divided into cost and SG&A. In this diagram, the business mix is the cost of sales, and pharmaceutical affairs is also included in the cost of sales. Some SG&A expenses are included, so with net 2%, 1% is cost and 1% is SG&A expenses. With net 3%, 2% is cost, and 1% is SG&A due to profit improvement.

Questioner 2: I understand. Thank you. If we do that, the current gross profit margin for the current fiscal year is probably 53% to 54%, although we don't have any guidance. We will add the 2%, so I think we are looking at a gross profit margin of around 56%.

Terumo (Muto): That's right. I think it would require some effort to achieve that.

Questioner 2: I think the gross margins of your overseas competitors are in the range of 60% to 65%, so the figure is still relatively low compared to your competitors. Where do you see the difference?

Terumo (Muto): I think it's in the business and product mix. In the Cardiac and Vascular Company, I think we have secured a gross profit margin that is comparable to our overseas competitors. The level of the General Hospital Company and Blood and Cell Technology

Among the information that Terumo discloses, the forward-looking statements including financial projections are based upon our assumptions using information available to us at the time and are not intended to be guarantees of future events or performance. Accordingly, it should be noted that actual results may differ from those forecasts or projections due to various factors. Factors affecting to actual results include, but are not limited to, changes in economic conditions surrounding Terumo, fluctuations of foreign exchange rates, and state of competition. The market share information in this presentation is partly derived from our own independent research. Information about products (including products currently in development) which is included in this material is not intended to constitute an advertisement or medical advice.

Company is a little lower than that of Cardiac and Vascular, but I think the weighted average of these factors gives us this level.

Questioner 2: Also, regarding the expenses. On a per-region basis, I think that most of the growth in sales will come from the US. Also, on a per-product basis, I think that therapeutic products will also increase. Both of these are areas where the so-called cost base will be relatively high.

For example, in terms of R&D expenses, the ratio of R&D expenses to sales used to be 5% to 6%, but it has expanded to 7% to 8% in the last 4 years to 5 years. If the number of therapeutic products increases in the future, should we assume that this 7% to 8% cost ratio will further expand toward, say, the 10% level? Or do you think expenses will stay relatively flat, even while the weighting shifts toward therapeutic products?

Also, regarding SG&A expenses, since inflation in the US has increased, there is a concern that if the percentage of sales in the US increases, the cost base will also inevitably expand. Could you comment on that?

Terumo (Muto): I think the trend is as you say, but the current assumption for GS26 is 8% in terms of development costs, for example. I think the mix is having an effect here as well.

In terms of SG&A expenses, it is true that labor costs in the US will be high, but if we look at sales and profits to match those costs, I believe that overall SG&A expenses will remain at the current level.

Questioner 2: I understand. Thank you.

The second question is about the KPI for profitability. This time, you mentioned that you are going to use ROIC, and I think you were talking about bringing the current 8% level to 10%.

If it is possible, I would like to know how you see ROIC for each company. What I am particularly concerned about is the hospital company. I think this is related to CDMO, but the cumulative investment of nearly JPY80 billion over the 5 years makes it a very asset-heavy segment. My impression is that the ROIC is probably far below what it should be.

In that case, it seems to me that the Company is not providing much shareholder value to the Company-wide average, which is probably around 8%.

Terumo (Sato): I'll let Muto give you the detailed figures, but to put it simply, in the case of ROIC, it is assumed that the figures will not be that bad because this industry is relatively healthy and has high margins.

In our case, we are not really worried about it. If you look at factors that are lowering ROIC, the main factor is goodwill. That is, goodwill from past acquisitions. Therefore, if you look at our competitors, which were mentioned earlier, they are actively engaged in acquisitions. Even high margin companies have very low ROIC.