The 3rd Medium-Term Management Plan1
1. 3rd Medium-Term Management Plan: 3rd MTMP
The Otsuka group had positioned the period of the 3rd Medium-Term Management Plan (MTMP) as a five-year growth phase for advancing in the global market as a unique total healthcare company. Accordingly, we focused on maintaining sustainable growth by working “Existing Business Value Maximization and New Value Creation,” and “Business management with a corporatewide awareness of capital costs” while balancing investment for growth and returns to shareholders. During the period of the 3rd MTMP, although our business was impacted by the external environment, including pandemics, heightened geopolitical risks, and soaring energy and raw material costs, our business grew strongly by leveraging our dual drivers of the Pharmaceutical Business and Nutraceutical Business.
Revenue for FY2023 was over 2 trillion yen, a record high that far exceeded the final year target of 1.7 trillion yen, and the revenue growth rate has been 9.3% on average per year since FY2018. In addition, as a result of our global expansion in the Pharmaceutical Business and Nutraceutical Business, the ratio of overseas revenue increased from 50% to 67%, showing steady expansion. Business profit totaled over 300 billion yen, far exceeding the final year target of 200 billion yen, and the growth rate has been 20.9% on average per year since FY2018, well above the target of more than 10%.
In the Pharmaceutical Business, we were able to maximize business value through the contribution of four Global Products (ABILIFY MAINTENA, REXULTI, Samsca/JINARC/JYNARQUE and LONSURF), which are growth drivers, and new products launched in the past five years. In the Nutraceutical Business, the growth driver Nature Made grew significantly to become a 100 billion yen brand. We believe this is due to the growing trend of health consciousness of consumers and our activities to date have earned the brand high reliability. Meanwhile, we are leveraging the POCARI SWEAT brand strength we have built to increase sales and earnings in the Asia-Pacific region. Due to this growth of Nature Made and POCARI SWEAT and other factors, the ratio of overseas sales in the Nutraceutical Business increased by 9.3 percentage points to 66.0% in 2023 from 56.7% in 2018. Revenue from the growth drivers of both businesses accounted for 87% of the 726.6 billion yen increase in consolidated revenue, contributing significantly to the positive performance of the 3rd MTMP period.
The 3rd MTMP period has been positioned as a period for introducing the practice of “Business management with a corporatewide awareness of capital costs.” Accordingly, we have introduced ROIC management as a financial framework to continue sustainable growth over the medium to long term and to have our stakeholders understand and value our challenge to contribute to society. We have been promoting the introduction of ROIC management and its penetration among group companies. We have made steady efforts to improve asset efficiency, by having our group companies understand the ROIC concept and promoting KPI management to improve ROIC, maximizing business value by optimizing SG&A expenses, and reviewing our cross-shareholdings structure and its reduction and utilizing idle real estate, which have steadily yielded results. The average ROIC over the past five years was 5.9%, exceeding the cost of capital (WACC) of 5.5% originally projected in the 3rd MTMP period. By generating cash through maximizing the value of existing businesses, we were able to increase cash and cash equivalents by approximately 200 billion yen during the period of the 3rd MTMP and to secure shareholder returns and investment for future growth in the 4th MTMP period, while implementing the investment for growth to create new value.
Financial Policy in the 4th Medium-Term Management Plan1
1. 4th Medium-Term Management Plan: 4th MTMP
Financial Targets
The Otsuka group has been investing the operating cash flow before R&D investments generated by its business activities in its pipeline, basic drug discovery technology, brand value of NC products and human resource development, which are all sources of growth, thereby generating new cash to fund future growth. Repeating this cycle of investment and growth has enabled us to achieve growth and enhance our corporate value. Looking at our stock price performance since listing on the Tokyo Stock Exchange, we have seen a steady increase in corporate value, which would imply our management decision to expand business area and to quickly recover from the impact of LOE in the Pharmaceutical Business has been accepted in the stock market.
When we went public in December 2010, many concerns were raised in the market about the US patent expiration of ABILIFY in 2015. To respond to such concerns, since the expiration of the ABILIFY patent, we have diversified our revenue structure by developing 3 Global Products (ABILIFY MAINTENA, REXULTI, and Samsca/JINARC), next-generation products such as LONSURF, as well as implementing the high-margin strategy on NC business. Furthermore, the 3rd MTMP period has been positioned as a preparation period to deal with the patent expirations of ABILIFY MAINTENA and JYNARQUE and this challenge through nurturing the next growth drivers. Through these measures, as well as expanding business and improving earnings through investment for growth, we were able to steadily enhance our ability to generate stable cash exceeding WACC.
In the 4th MTMP period, we will actively make investment for future growth to mitigate the impact from loss of exclusivity on Pharmaceutical Business and we will further develop our diversified business from a capital efficiency perspective. For FY2028 targets, we aim to achieve revenue of 2,500 billion yen, business profit before R&D expenses of 720 billion yen, business profit of 390 billion yen, EPS of 550 yen, operating cash flow before R&D investments of 650 billion yen, and capital efficiency with ROE of 10% or more, and ROIC of 9.5% or more.
＊1 4th Medium-Term Management Plan: 4th MTMP
Cash Allocation
As a result of favorable business profits and efforts to improve asset efficiency during the period of the 3rd MTMP, operating cash flow before R&D investments for the five-year period totaled 2,336.5 billion yen. The generated cash was used for proactive R&D investments totaling 1,181.6 billion yen and growth investment totaling 496.9 billion yen, including capital expenditures for acquiring new pipelines and overseas expansion, while 278.5 billion yen was paid out to shareholders as dividends. Furthermore, cash and cash equivalents increased by 228.3 billion yen to 513.3 billion yen due to stable cash generation not only from Pharmaceutical Business but also from the other business segments particularly Nutraceutical Business.
In the 4th MTMP we plan to secure funds of approximately 3,200 billion yen, which exceeds the amount in the 3rd MTMP period, by adding approximately 200 billion yen in cash and cash equivalents, an increase from the 3rd MTMP period, to the approximately 3 trillion yen in operating cash flow before R&D investments to be generated over the five-year period. About 1.5 trillion yen for R&D is planned to be invested mainly in the fields of psychiatry and neurology, oncology, and cardiovascular and renal disease to advance basic research and late-stage clinical development that will become fundamental technologies for drug discovery in the Pharmaceutical Business. In addition, in the Nutraceutical Business we plan to continuously invest in the development of new products. Of the approximately 500 billion yen in capital expenditures, about half will be used for investment for growth, such as the construction of a plant to increase overseas POCARI SWEAT production capacity, while the remaining half will be invested in the maintenance and renewal of existing facilities in an environmentally friendly manner.
In acquisition of external assets, we will acquire pipelines that will contribute to growth in the 5th and 6th MTMPs, as well as acquire and collaborate on drug discovery technologies to continuously generate pipelines, and expand pipelines in disease areas that can contribute to social issues more broadly, based on our current strengths. From a regional perspective, we will not only expand our global pipeline including the U.S., but also acquire external assets in specific regions such as Japan, Asia, and Europe, taking into consideration the acquisition of pipelines that will allow us to utilize our own sales network.
Initiatives to Enhance Corporate Value
Framework of Financial Strategies to Support New Value Creation Source of Funds for Investment for Growth
In principle, investment 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. To ensure our ability to act in a timely manner on business opportunities when they arise, we are prepared for the risk that financial uncertainty in the market may cause some procurement methods to become unavailable. We are also considering the issuance of green bonds during the period of the 4th MTMP as not only a part of our efforts to promote sustainability management but also new procurement options in addition to the current available ones.
Allocation of Funds for Investment for Growth
At the Otsuka group, we see investment as a vehicle for pursuing innovation that enables us to contribute to society, and will continue to take on investment projects that enhance corporate value and contribute to society. The basic policy for acquiring external assets remains the same: invest in areas that are consistent with long-term strategies and that can generate synergies with existing management assets. As specific examples of reallocation of investments, in the Pharmaceutical Business, we will not only acquire and collaborate on drug discovery technologies that will continuously generate pipelines, and make sustained R&D investments to strengthen products and pipelines in the priority areas of psychiatry and neurology, oncology, and cardiovascular and renal diseases, but also invest in uRDN therapy, a new approach in the medical device business. In the Nutraceutical Business segment, in addition to investments to expand sales channels to new areas, we are investing in brand building by promoting the value of new products and strengthening our supply chain.
Business Management with a Corporatewide Awareness of Capital Cost
We believe that ROIC management, which supports Otsuka’s innovation, is an important measure not only to improve capital efficiency in the short term, but also to contribute to medium- to long-term corporate value. From a financial perspective, we believe that establishing a stable financial framework will make us continue working on “what only Otsuka can do,” which would support driving innovation and eventually result in contribution to society. During the period of the 4th MTMP, we will plan our cost of capital at 6% and fully implement ROIC management. To improve ROIC, maximizing cash return from operations: operating cash flow before R&D investments, and optimizing invested capital will be key measures.
Maximizing Cash Return
As for maximizing cash return, we will set KPI targets according to business characteristics such as therapeutics, clinical nutrition, and medical devices in pharmaceutical business, and for NC business, we will set KPI targets according to business development in growth market areas, and will improve KPI management for promoting business. At the same time, we will also practice cost control, which we have been continuously implementing since the previous MTMP period, and enhancing shared service initiatives in each area.
Optimizing Invested Capital
Optimization of invested capital will be practiced in three main areas: asset efficiency, financial stability and efficiency, and shareholder returns.
(1) Asset efficiency
For asset efficiency, we aim to improve ROA by strengthening control of business assets with a view to optimizing group companies as a whole, including the use of business assets based on stronger investment discipline. We also aim to improve CCC1 by strengthening control of working capital through optimization of accounts receivable and inventory management. As for non-business assets, we will periodically test and reclassify the cross-shareholdings structure to improve the quality of invested capital.
(2) Financial stability and efficiency
We will maintain our R&I rating of AA- or higher and establish financial stability by diversifying financing sources, including the issuance of green bonds when external financing is required, and by practicing financial risk management such as foreign exchange forward contracts. Financial efficiency will be improved by reducing interest-bearing debt as a result of controlling standby funds needed for operations through the use of CMS.
(3) Shareholder returns
While our basic policy for shareholder returns is to make dividend payouts stably and continuously, we carefully consider the amount of dividends, comprehensively weigh issues such as appropriate levels of retained cash for investment for growth, maintain a solid financial standing, and achieve the optimal capital structure.
Thanks to the results from our investment for growth made up to the period of the 3rd MTMP, we have decided to increase the year-end dividend for FY2023, as we are now in a position to expect sustainable growth during the 4th MTMP period. In addition to stable and continuous dividend payments, we are planning approximately 50 billion yen of share buybacks during the period of the 4th MTMP (as of July 2024). We plan to flexibly consider additional approaches for shareholder returns during the 4th MTMP period from various perspectives, including the outlook for sustainable growth after the 5th MTMP period, the upward cash generation from organic growth of business during the 4th MTMP period, and the status of the total return ratio.2
1. Cash Conversion Cycle
2. (Cash dividend + Stock buy-back)/Net profit * 100
December 12, 2024
Executive Director, CFO
