Progress in the Third Medium-Term Management Plan
Overview of the Plan
The period of the Third Medium-Term Management Plan is positioned as a five-year growth phase to “Advance in the Global Market as a Unique Total Healthcare Company.” In the Pharmaceutical Business and the Nutraceutical Business, we will maximize existing business value and create new value, and conduct business management with a corporatewide awareness of capital cost, and thereby maintain sustainable growth while at the same time making investments for growth and ensuring returns to shareholders.
Progress in the Middle Year (Fiscal 2022) of the Third Medium-Term Management Plan
Although our business was impacted by a variety of external factors that were not anticipated when the Third Medium-Term Management Plan was formulated, such as the COVID-19 pandemic, soaring raw material and energy costs, and sharp exchange rate fluctuations, we were able to overcome these issues by harnessing our strengths as a unique total healthcare company that operates diverse businesses, including the Pharmaceutical Business, which is essential for daily life, and the Nutraceutical Business, which contributes to good health.
We achieved revenue of 1,738.0 billion yen for the year, a 16.0% increase of 16.0% over the previous year from higher revenue in all segments as well as in the four Global Products in the Pharmaceutical Business and the three Major Brands and three Nurture Brands in the Nutraceutical Business. Business profit increased significantly to 174.9 billion yen, up 11.3% from the previous year, by controlling SG&A expenses as planned while securing aggressive R&D expenses, and we are confident that we will achieve our goal for fiscal 2023, the final year of the Third Medium-Term Management Plan. Going forward, we will continue to closely examine the impact of the external environment, such as financial instability and exchange rate fluctuation risks, on our business, and by responding flexibly, we aim to achieve the goals of the Medium-Term Management Plan.
Plan for Fiscal 2023
In 2023, the final year of the Medium-Term Management Plan, we plan to achieve record revenue of 1.8 trillion yen, a year-on-year increase of 62 billion yen, thanks to the growth of the four Global Products and the Nutraceutical Business. With regard to the four Global Products, we achieved our sales plan of 480 billion yen for the final year of the Medium-Term Management Plan two years ahead of schedule, and we are now aiming for a new revenue target of 636.5 billion yen. In the Nutraceutical Business, Pocari Sweat is also growing faster than the market growth rate, especially in Asia, and further expansion of sales areas is underway. Nature Made continues to grow, achieving revenue of 100 billion yen in 2021, ahead of the initial plan.
Although SG&A expenses will increase due to aggressive growth investments in new products and new areas and higher co-marketing expenses, business profit is projected to increase 35.1 billion yen from the previous year to 210.0 billion yen due to higher sales and lower SG&A ratio of already-launched products. Even in the midst of a drastically changing external environment, we aim to achieve growth beyond the Third Medium-Term Management Plan by demonstrating our true value as a unique total healthcare company.
Cash Flow
Despite various external factors, during the period of the Third Medium-Term Management Plan, we have been generating stable operating cash flow as a result of strong business profits and efforts to improve asset efficiency. We also issued corporate bonds for the first time and diversified our funding sources. Although we will allocate this acquired cash for growing investments such as aggressive R&D investments in enhancing R&D capabilities and capital expenditures for expansion into new areas, as well as for shareholder returns to maximize the value of existing businesses and create new value, we secured this cash as internal reserves. This was secured to reduce borrowings in anticipation of future growth investments and future interest rate hikes, as well as to address funding risk due to financial instability. This was secured to reduce borrowings in anticipation of future growth investments and future interest rate hikes, as well as to address funding risk due to financial instability. In fiscal 2023, REXULTI, which was approved in North America in May for the treatment of behavioral disorder (agitation) associated with Alzheimer's disease, and the approval of the ultrasound renal denervation (uRDN) system, were important milestone events for our Pharmaceutical Business, and we have now secured funding. We will continue to invest flexibly in response to growth opportunities, while balancing cash allocation to return profits to shareholders in line with profit growth.
Measures for Enhancing Corporate Value
（1）ROIC Management
One aim of the Third Medium-Term Management Plan is to embed a commitment throughout the group to focus on: maximization of existing business value as well as new value creation in our core businesses of pharmaceuticals and nutraceuticals while being conscious of capital costs in our business operations. This commitment will lead to maximizing cash returns from existing business, allocating that generated cash to reinvest in future growth areas, and to appropriately making stable and ongoing shareholder returns.
The period of the Third Medium-Term Management Plan is positioned as a period for introducing cost of capital-conscious management practices, with the cost of capital (WACC) set at 5.5% for the Otsuka group as a whole, so as to secure stable business returns that exceed the cost of capital. Currently, we are focusing on the penetration of ROIC management, and have begun ROIC-conscious investment planning and programming throughout the Group. We believe that embedding a commitment to ROIC management is an important measure not only for improving short-term capital efficiency, but also for increasing corporate value over the medium to long term. We believe that building a stable financial foundation to continue practicing Otsuka's corporate culture of "what only Otsuka can do" from a financial perspective will lead to contributions to society through the creation of innovation. Specific individual practices and fiscal 2023 initiatives are described on the next page and beyond.
Maximizing Revenues from Existing Businesses
As part of our initiative to maximize the value of existing businesses and create new value, which is the framework of our Third Medium-Term Business Plan, we will maximize revenues from our two core businesses: the Pharmaceutical Business and the Nutraceutical Business. The Pharmaceutical Business is allocating appropriate human capital and expenses to maximize revenue from the IV business and other therapeutic drugs, in addition to further expanding revenue from the four Global Products. In addition, as we diversify our products and pipelines, we are getting development and marketing rights and increasing royalty income through licensing agreements with other companies. In the Nutraceutical Business, we will accelerate growth by further expanding the business of the three Major Brands, and promoting the value of the three Nurture Brands. In addition to the promotion of brand value, we will expand business in areas newly entered during the Third Medium-Term Management Plan.
Cost Efficiency in Existing Businesses
As to launched pharmaceutical products, we have set selling, general and administrative (SG&A) expense ratio targets and seek to make efficient use of costs by carefully controlling expenses. The SG&A-to-sales ratio achieved its target of 29% during FY2022, which was set for the final year of the Third Medium-Term Management Plan, and we will aim to further improve it in FY2023.
In the Nutraceutical Business, amid aggressive investment by competitors, we are striving for efficient, disciplined control of costs through unique methods of communicating product value.
A Close Eye on the Balance Sheet
Looking at invested capital from the assets perspective, we
will emphasize efficient management of operating assets,
strive to maintain appropriate inventory levels, control
working capital, strengthen management of fixed assets,
and promote periodic verification and reclassification of cross-shareholdings. Meanwhile, we will continue to address the issue
of non-operating assets, either by finding ways to make effective use of them in our businesses or by selling them off.
From the financing perspective, we will stabilize our financial base so it is not affected by financial instability, and improve capital efficiency by reducing interest-bearing debt. If external financing is required, we will do so on a case-by-case basis based on a comprehensive assessment of the cost and time required to access the funds, balance in terms of debt-to-equity ratio and other metrics, and credit rating. In this way, we will ensure the optimal balance between interest-bearing debt and shareholders’ equity in our capital structure.
2023 Initiatives
Because fiscal 2023 is the final year of the Third Medium-Term Management Plan, it is an important year for not only working to achieve its targets, but also for the planning of the Fourth Medium-Term Management Plan. We will further promote ROIC management, incorporate it into the Fourth Medium-Term Management Plan, and prepare for the full-scale operation of ROIC management. In FY2023, in addition to maximizing revenue, we will continue to work on further cost efficiency, visualization of the profit structure of each business and product, consideration of management indices suitable for the Otsuka group in the future, and efficient asset and liability management with an awareness of the balance sheet. In addition, we will work on the development of KPIs linked to the ROIC tree in preparation for the implementation of ROIC management in the Fourth Medium-Term Management Plan.
（2）Framework of Financial Strategies to Support New Value Creation
Corporate Department Initiatives
The corporate department supports cost optimization at indirect departments and smooth business operations by enhancing the business foundation group-wide. While strengthening governance through a management structure that encompasses our operations in multiple regions—Japan, North America, Europe, Asia, and China—we are also looking to expand shared services, strengthen our IT platform, promote intragroup financing, and increase efficiency of procurement functions. One example of intragroup financing is our adoption of a cash management system. Increasing the efficiency of funding between Otsuka group companies across regions, reduces the need for external borrowing, reduces interest payments, and contributes to our ability to generate cash.
Source of Funds for Investments for Growth
In principle, investments for growth are funded through the reinvestment of cash returns generated from businesses, and funds within the Otsuka group are effectively used across business segments, using funds from the cash management system in Japan, North America, and China. Where external procurement of cash is required, we are always prepared to implement the full range of options, including commercial paper, corporate bonds, bank loans, and share issues. So as not to miss out on business opportunities, we are prepared for the possibility that financial instability may make some procurement methods unavailable,
Allocation of Funds for Growth Investments
Because the Otsuka group values contributing to society through innovation, our basic policy is to continuously examine investment projects that will enhance corporate value and contribute to society, and to make timely investments. To this end, the Group uses cash generated from the organic growth of existing businesses and allocates investment funds by prioritizing each project that will contribute to the future growth of the Otsuka group as a whole, with a focus on the Pharmaceutical Business and the Nutraceutical Business. For example, in the Pharmaceutical Business, we are not only making sustained R&D investments to strengthen our products and pipelines in the priority areas of psychiatry and neurology, oncology, and cardiovascular and renal diseases, but also in the medical device business, which offers new approaches, such as ultrasound renal denervation therapy. In the Nutraceutical Business, in addition to investments to expand sales channels to new areas, we are investing in brand building by promoting the product value of our three Nurture Brands and in strengthening our production and sales systems.
Financial Stability through Conglomerate-Style Management
Due to the existence of patent cliffs, the Pharmaceutical Business is a highly volatile business, with revenues declining sharply after the expiration of the exclusivity period. In order to reduce the impact of this volatility, it is necessary to continue to bring new drugs to market through sustained investment in R&D. However, R&D investment requires large amounts of cash, and success is not guaranteed. Otsuka Group is able to continue its investment activities and reduce the impact of patent cliffs not only through the cash generated by its existing Pharmaceutical Business, but also through the stable cash generated by its non-pharmaceutical businesses, particularly its Nutraceutical Business. We believe that diverse business development is an advantage of conglomerate-style management from a financial perspective, as well as the synergy effect of creating innovation across business domains.
（3）Shareholder Returns Policy
Our basic policy for shareholder returns is to maintain stable dividends. While emphasizing the continuity and stability of dividends, we carefully consider the amount of dividends, comprehensively weigh issues such as appropriate levels of retained cash for investments for growth, maintain a solid financial standing, and achieve the optimal capital structure.
During the period of the Third Medium-Term Management Plan, earnings fluctuated due to various external factors, but we secured stable operating cash flow and paid stable and continuous dividends. We will consider further shareholder returns, taking into consideration the balance between the results of the Third Medium-Term Management Plan, our financial situation, and our growth investment plans for the Fourth Medium-Term Management Plan.
July 12, 2023
Executive Director, CFO
